----------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10 - Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended September 26, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the Transition Period From __ to __
Commission File Number 0-19084
PMC-Sierra, Inc.
(Exact name of registrant as specified in its charter)
A Delaware Corporation - I.R.S. NO. 94-2925073
105-8555 BAXTER PLACE
BURNABY, BRITISH COLUMBIA, V5A 4V7
CANADA
Telephone (604) 415-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes ___X____ No _______
Common shares outstanding at October 29, 1999 - 68,055,672
------------------------------------------------
<PAGE>
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated statements of operations -
- Consolidated balance sheets -
- Consolidated statements of cash flows -
- Notes to consolidated financial statements -
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -
Item 3. Quantitative and Qualitative Disclosures About
Market Risk -
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K -
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Sep 26, Sep 27, Sep 26, Sep 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues $ 71,601 $ 42,105 $ 181,877 $ 116,375
Cost of revenues 14,770 10,035 38,832 28,138
-------------- -------------- -------------- --------------
Gross profit 56,831 32,070 143,045 88,237
Other costs and expenses:
Research and development 16,863 10,085 44,105 24,027
Marketing, general and administrative 10,347 7,400 29,494 20,796
Costs of merger 866 - 866 -
Amortization of deferred stock compensation 591 417 1,683 567
Amortization of goodwill 313 327 939 588
Acquisition of in process research and development - - - 39,176
Impairment of intangible assets - 4,311 - 4,311
-------------- -------------- -------------- --------------
Income (loss) from operations 27,851 9,530 65,958 (1,228)
Other income, net 2,063 631 4,200 2,055
Gain on sale of investments - - 26,800 -
-------------- -------------- -------------- --------------
Income before provision for income taxes 29,914 10,161 96,958 827
Provision for income taxes 10,471 5,632 29,470 16,469
-------------- -------------- -------------- --------------
Net income (loss) $ 19,443 $ 4,529 $ 67,488 $ (15,642)
============== ============== ============== ==============
Basic net income (loss) per share $ 0.28 $ 0.07 $ 0.99 $ (0.24)
============== ============== ============== ==============
Diluted net income (loss) per share $ 0.25 $ 0.06 $ 0.90 $ (0.24)
============== ============== ============== ==============
Shares used to calculate:
Basic net income (loss) per share 69,914 65,843 68,165 65,040
Diluted net income (loss) per share 77,324 70,244 74,586 65,040
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
Sep 26, Dec 27,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 70,404 $ 38,507
Short-term investments 103,209 50,893
Accounts receivable, net 31,411 26,227
Inventories 6,545 3,617
Prepaid expenses and other current assets 4,764 4,045
Short-term deposits for wafer fabrication capacity - 4,000
-------------- --------------
Total current assets 216,333 127,289
Property and equipment, net 39,795 32,452
Goodwill and other intangible assets, net 16,761 19,629
Investments and other assets 7,512 4,500
Deposits for wafer fabrication capacity 19,120 19,120
-------------- --------------
$ 299,521 $ 202,990
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 13,736 $ 8,964
Accrued liabilities 18,455 14,694
Deferred income 27,308 12,517
Accrued income taxes 17,483 13,897
Current portion of obligations under capital leases and long-term debt 2,074 5,111
-------------- --------------
Total current liabilities 79,056 55,183
Deferred income taxes 2,752 2,851
Noncurrent obligations under capital leases and long-term debt 1,627 5,894
Special shares convertible into 2,201 PMC common stock (1998 - 2,518 shares) 7,217 8,387
Stockholders' equity:
Common stock, $0.001 par value, 200,000 shares authorized 68 63
67,973 shares outstanding (1998 - 62,830)
Additional paid in capital 202,231 191,071
Deferred stock compensation (2,281) (1,822)
Retained earnings (accumulated deficit) 8,851 (58,637)
-------------- --------------
Total stockholders' equity 208,869 130,675
-------------- --------------
$ 299,521 $ 202,990
============== ==============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
----------------------------
Sep 26, Sep 27,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 67,488 $ (15,642)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of plant and equipment 12,350 7,791
Amortization of intangibles 2,649 1,899
Amortization of deferred stock compensation 1,684 567
Gain on sale of investments (26,800)
Acquisition of in process research and development - 39,176
Changes in operating assets and liabilities
Accounts receivable (5,184) (3,287)
Inventories (2,928) (403)
Prepaid expenses and other (648) (1,303)
Accounts payable and accrued expenses 12,020 (1,075)
Deferred income 14,791 3,651
Net liabilities associated with discontinued operations - (301)
------------- -------------
Net cash provided by operating activities 75,422 35,384
------------- -------------
Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments 50,893 43,442
Purchases of short-term investments (103,209) (52,306)
Proceeds from refund of wafer fabrication deposits 4,000 4,000
Purchase of investments (4,630) -
Proceeds from sale of investments 28,628 -
Purchase of intangible assets (411) -
Payment for purchase of Integrated Telecom Technology, Inc.,
net of cash acquired - (27,165)
Purchase of other in process research and development - (1,419)
Purchases of plant and equipment (19,693) (18,005)
------------- -------------
Net cash used in investing activities (44,422) (51,453)
------------- -------------
Cash flows from financing activities:
Proceeds from notes payable 1,818 305
Repayment of notes payable and long-term debt (2,095) (491)
Principal payments under capital lease obligations (7,027) (3,735)
Proceeds from issuance of common stock 8,201 11,136
------------- -------------
Net cash provided by financing activities 897 7,215
------------- -------------
Net increase (decrease) in cash and cash equivalents 31,897 (8,854)
Cash and cash equivalents, beginning of the period 38,507 27,906
------------- -------------
Cash and cash equivalents, end of the period $ 70,404 $ 19,052
============= =============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PMC-SIERRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Summary of Significant Accounting Policies
Basis of presentation. The accompanying financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules or
regulations. The interim financial statements are unaudited, but reflect all
adjustments which are, in the opinion of management, necessary to present a fair
statement of results for the interim periods presented. These financial
statements should be read in conjunction with the financial statements and the
notes thereto in the Company's Annual Report on Form 10-K for the year ended
December 27, 1998. The results of operations for the interim period are not
necessarily indicative of results to be expected in future periods.
Inventories. Inventories are stated at the lower of cost (first-in, first out)
or market (estimated net realizable value). All figures are in thousands.
Sep 26, Dec 27,
1999 1998
Work-in-progress $ 3,553 $ 1,761
Finished goods 2,992 1,856
------------ ------------
$ 6,545 $ 3,617
============ ============
Recently issued accounting standards. In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Statement will require the recognition of all
derivatives on the Company's consolidated balance sheet at fair value. The
Financial Accounting Standards Board has subsequently delayed implementation of
the standard for the financial years beginning after June 15, 2000. The Company
expects to adopt the new Statement effective January 1, 2001. The impact on the
Company's financial statements is not expected to be material.
NOTE 2. Business Combination.
In September 1999, PMC acquired Abrizio, Inc. a fabless semiconductor company
that specializes in broadband switch chip fabrics used in core ATM switches,
digital cross-connects, and terabit routers. PMC issued approximately 4,352,000
shares in PMC-Sierra stock and stock options in exchange for all of the equity
securities of Abrizio.
The transaction was accounted for as a pooling of interests under Accounting
Principles Board Opinion No. 16 and qualified as a tax-free exchange.
Accordingly, all prior period consolidated financial statements presented have
been restated to include combined results of operations, financial position and
cash flows of Abrizio as though it had always been a part of PMC.
<PAGE>
No adjustments were necessary to conform Abrizio's accounting policies, however,
certain reclassifications were made to the Abrizio financial statements to
conform to PMC's presentation. The results of operations for the separate
companies and the combined amounts presented in the consolidated financial
statements for the most recent quarter prior to the merger and the applicable
three and nine-month periods from the prior year are shown below:
Nine Months
Three Months Ended Ended
-------------------------- -------------
Jun 27, Sep 27, Sep 27,
1999 1998 1998
Net revenues
PMC $ 59,287 $ 42,105 $ 116,375
Abrizio 600 - -
------------ ------------ -------------
Combined $ 59,887 $ 42,105 $ 116,375
============ ============ =============
Net income (loss)
PMC $ 39,242 $ 5,405 $ (14,259)
Abrizio (2,273) (876) (1,383)
------------ ------------ -------------
Combined $ 36,969 $ 4,529 $ (15,642)
============ ============ =============
During the quarter ended September 26, 1999, PMC recorded merger-related
transaction costs of $866,000 related to the acquisition of Abrizio. These
charges, which consist primarily of investment banking and other professional
fees, have been included under costs of merger in the Consolidated Statements of
Operations.
NOTE 3. Sale of Investments
During the quarter ended June 27, 1999, the Company recognized a pre-tax gain of
$12.3 million related to the disposition of its investment in IC Works, Inc.
("ICW"). ICW was purchased by Cypress Semiconductor, Inc. ("Cypress"), a
publicly held company. As part of the purchase agreement between ICW and
Cypress, the Company's preferred shares in ICW, with a nominal book value, were
exchanged for 923,600 common shares of Cypress which, at the time, had a fair
market value of approximately $8.6 million. The Company then sold 831,240 of the
Cypress common shares resulting in a total pre-tax gain of $ 12.3 million. The
remaining 92,360 Cypress common shares are subject to certain escrow
restrictions, are not available for sale in 1999 and are carried at the nominal
book value of the Company's original investment in ICW.
During the quarter ended June 27, 1999, a Company's investee, Sierra Wireless
Inc. ("Sierra Wireless"), completed an initial public offering ("IPO") in
Canada. As part of this IPO, the Company's investment in non-voting preferred
shares of Sierra Wireless were exchanged for 5.1 million common shares of Sierra
Wireless, of which 1.7 million shares were sold as part of the offering for a
pre-tax gain of approximately $14.5 million.
Immediately subsequent to the IPO, the Company held 3.4 million common shares of
Sierra Wireless, representing approximately 24% of Sierra Wireless' securities.
Accordingly, commencing in the third quarter of 1999, the Company has commenced
accounting for its investment in Sierra Wireless under the equity method of
accounting. The common shares of Sierra Wireless held by the Company are subject
to certain resale restrictions and are not available for sale during 1999.
<PAGE>
NOTE 4. Segment Information
The Company has two operating segments: networking and non-networking products.
The networking segment consists of internetworking semiconductor devices and
related technical service and support to equipment manufacturers for use in
their communications and networking equipment. The non-networking segment
includes custom user interface products. The Company is supporting the
non-networking products for existing customers, but has decided not to develop
any further products of this type.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on revenues and gross margins from operations of the two segments. The
information on reportable segments is as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------ --------------------------
Sep 26, Sep 27, Sep 26, Sep 27,
1999 1998 1999 1998
Networking
Net revenues $ 66,417 $ 36,274 $ 168,894 $ 96,736
Cost of revenues 11,891 6,920 31,792 17,808
---------- ---------- ----------- -----------
Gross profit 54,526 29,354 137,102 78,928
Non- Networking
Net revenues 5,184 5,831 12,983 19,639
Cost of revenues 2,879 3,115 7,040 10,330
---------- ---------- ----------- -----------
Gross profit 2,305 2,716 5,943 9,309
Total gross profit $ 56,831 $ 32,070 $ 143,045 $ 88,237
========== ========== =========== ==========
NOTE 5. Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
Sep 26, Sep 27, Sep 26, Sep 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net income $ 19,443 $ 4,529 $ 67,488 $ (15,642)
============ ============ ============ ============
Denominator:
Basic weighted average common
shares outstanding (1) 69,914 65,843 68,165 65,040
------------ ------------ ------------ ------------
Effect of dilutive securities:
Stock options 7,363 4,364 6,376 -
Stock warrants 47 37 45 -
------------ ------------ ------------ ------------
Shares used in calculation of
net income per share 77,324 70,244 74,586 65,040
============ ============ ============ ============
Basic net income per share $ 0.28 $ 0.07 $ 0.99 $ (0.24)
Diluted net income per share $ 0.25 $ 0.06 $ 0.90 $ (0.24)
<FN>
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic net
income per share.
</FN>
</TABLE>
<PAGE>
NOTE 6. Stock Split
On April 30, 1999, the Company effected a two-for-one stock split in the form of
a stock dividend. Accordingly, all references to share and per-share data for
all periods presented have been adjusted to reflect this event.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investors should read the following discussion in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I - Item 1
of this Quarterly Report, and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations in the Company's 1998 Annual Report on Form 10K. The
terms "PMC-Sierra", "PMC", "our company" and "we" in this filing refer to
PMC-Sierra, Inc. and our subsidiaries.
Some statements in this report constitute "forward looking statements" within
the meaning of the federal securities laws, including those statements relating
to:
- - revenues;
- - gross margins;
- - gross profit;
- - research and development, and marketing, general and
administrative expenditures;
- - capital resources sufficiency; and
- - Year 2000 preparedness issues.
Our results may differ materially from those expressed or implied by the
forward-looking statements for a number of reasons, including those described
below in "Factors You Should Consider Before Investing in PMC-Sierra." We may
not, nor are we obliged to, release revisions to forward-looking statements to
reflect subsequent events.
<PAGE>
Results of Operations
Third Quarters of 1999 and 1998
Acquisition
- -----------
In September 1999, we acquired Abrizio, Inc. a fabless semiconductor company
that specializes in broadband switch chip fabrics used in core ATM switches,
digital cross-connects, and terabit routers. We issued approximately 4,352,000
shares in PMC-Sierra stock and stock options in exchange for all of the equity
securities of Abrizio.
The transaction was accounted for as a pooling of interests under Accounting
Principles Board Opinion No. 16 and qualified as a tax-free exchange.
Accordingly, all prior period consolidated financial statements presented have
been restated to include combined results of operations, financial position and
cash flows of Abrizio as though it had always been a part of PMC.
Net Revenues ($000,000)
- -----------------------
Third Quarter
----------------------
1999 1998 Change
Networking products $ 66.4 $ 36.3 83%
Non-networking products 5.2 5.8 (10%)
---------- ----------
Total net revenues $ 71.6 $ 42.1 70%
========== ==========
Net revenues increased by 70% in the third quarter of 1999 compared to the same
quarter in 1998. Our networking revenue increased 83% in the same periods, which
more than offset the 10% decline in non-networking revenues.
Networking revenues increased as a result of additional demand for our
customers' broadband equipment, an increase in our customers' purchases of our
standard merchant market chips over internally designed chips, and our
introduction and sale of chips addressing additional network functions.
Third quarter 1999 networking revenue increased 21% over second quarter 1999
networking revenue of $55.1 million. We believe that the large percentage
increase in sequential quarterly networking revenue will not be repeated in the
fourth quarter.
Non-networking revenue declined consistent with our 1996 decision to exit all
non-networking product lines. We expect non-networking product revenue to be
less in the fourth quarter of 1999 than in the third quarter of 1999.
<PAGE>
Gross Profit ($000,000)
- -----------------------
Third Quarter
----------------------
1999 1998 Change
Networking $ 54.5 $ 29.4 85%
Non-networking 2.3 2.7 (15%)
---------- ----------
Total gross profit $ 56.8 $ 32.1 77%
========== ==========
Percentage of net revenues 79% 76%
Total gross profit grew 77% from $32.1 million in the third quarter of 1998 to
$56.8 million in the same quarter of 1999. Consistent with our results in past
quarters, the increase in sales of higher gross margin networking semiconductors
more than offset the decline in gross profit due to the reduction in
non-networking revenue.
Gross profit as a percentage of net revenue increased in the third quarter of
1999 over the comparable period in 1998 as our higher gross margin networking
products comprised a greater percentage of total revenue.
Our networking gross profit as a percentage of net revenue is high relative to
the overall semiconductor industry because our products are complex and are sold
in relatively low volumes. We believe our gross profit as a percentage of
revenue will decline as our products mature and if our customers purchase in
greater volume. We expect networking gross margins to decline if reductions in
production costs do not offset decreases in the average selling price of
existing networking products.
Non-networking gross profit as a percent of non-networking revenue declined in
the third quarter of 1999 compared to the same period in 1998. Further
reductions may occur in the future.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
Third Quarter
------------------------
1999 1998 Change
Research and development $ 16.9 $ 10.1 67%
Percentage of net revenues 24% 24%
Marketing, general & administrative $ 10.3 $ 7.4 40%
Percentage of net revenues 14% 18%
Costs of merger $ 0.9 $ -
Amortization of deferred stock compensation $ 0.6 $ 0.4
Amortization of goodwill $ 0.3 $ 0.3
Impairment of Intangible assets $ - $ 4.3
Research and Development ("R&D") expenses of $16.9 million in the third quarter
of 1999 increased 67% over the third quarter of 1998. We incur R&D expenditures
in an effort to attain technological leadership from a multi-year perspective.
This has caused R&D spending to fluctuate from quarter to quarter. We expect
such fluctuations, to occur in the future, primarily due to the timing of
expenditures and changes in the level of net revenues.
<PAGE>
Marketing, general and administrative expenses incurred in the third quarter of
1999 increased in dollars but decreased as a percentage of net revenue compared
to the third quarter of 1998. In the short term, many of the marketing, general
and administrative expenses are fixed, causing a decline as a percentage of net
revenues in periods of rapidly rising revenues and an increase as a percentage
of net revenue when revenue growth is slower or declining.
We incurred $866,000 in merger costs related to the acquisition of Abrizio in
the third quarter of 1999. These costs related to professional services rendered
by our investment bankers, attorneys and auditors.
We recorded a $591,000 charge for amortization of deferred stock compensation in
the third quarter of 1999 compared to a $417,000 charge in the prior year's
third quarter. Deferred compensation charges arose when, prior to the merger,
Abrizio issued stock options at exercise prices lower than the deemed fair value
of the underlying stock. We are amortizing these amounts using the accelerated
method over the vesting period. We expect these non-cash charges to decline in
future periods.
During the third quarter of 1998 the Company recorded a charge of $4.3 million
for the impairment of intangible assets acquired in its acquisition of
Integrated Telecom Technologies. No further impairments have occurred.
Interest and other income, net
- ------------------------------
Net interest and other income increased to $2.1 million in the third quarter of
1999 from $0.6 million in last year's third quarter primarily due to higher cash
balances available to invest and earn interest and reduced interest expense due
to a lower level of capital leases. Other income for the third quarter of 1999
includes $241,000 related to the Company's 24% equity interest in Sierra
Wireless, a Canadian public company.
Provision for income taxes
- --------------------------
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations.
First Nine Months of 1999 and 1998
Net Revenues ($000,000)
- -----------------------
First nine months
------------------------
1999 1998 Change
Networking products $ 168.9 $ 96.8 74%
Non-networking products 13.0 19.6 (34%)
----------- -----------
Total net revenues $ 181.9 $ 116.4 56%
=========== ===========
Net revenues of $181.9 million in the first nine months of 1999 increased 56%
over the comparable period in 1998. A 74% increase in our networking
semiconductor revenue more than offset a 34% decline in non-networking products.
<PAGE>
Gross Profit ($000,000)
- -----------------------
First nine months
------------------------
1999 1998 Change
Networking $137.1 $78.9 74%
Non-networking 5.9 9.3 (37%)
----------- -----------
Total gross profit $143.0 $88.2 62%
=========== ===========
Percentage of net revenues 79% 76%
Total gross profit for the first nine months of 1999 increased in both dollars
and as a percent of net revenues compared to the same period in 1998. Although
the gross margin from each of our individual product lines declined, our
aggregate gross profit percentage increased because we derived a much higher
percentage of our sales from our networking products.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
First nine months
--------------------
1999 1998 Change
Research and development $ 44.1 $ 24.0 84%
Percentage of net revenues 24% 21%
Marketing, general & administrative $ 29.5 $ 20.8 42%
Percentage of net revenues 16% 18%
Costs of merger $ 0.9 $ -
Amortization of deferred stock compensation $ 1.7 $ 0.6
Amortization of goodwill $ 0.9 $ 0.6
Acquisition of in process research and development $ - $ 39.2
Impairment of intangible assets $ - $ 4.3
R&D expenses increased in both dollars and as a percent of net revenues in the
first nine months of 1999 compared to the same period last year. We made a
strategic decision mid-year in 1998 to increase our targeted spending on R&D to
address additional market opportunities for our products.
Marketing, general and administrative expenses increased in dollars but declined
as a percentage of net revenues in the first nine months of 1999 compared to the
same period in 1998. In the short term, many of the marketing, general and
administrative expenses are fixed, causing them to decline as a percentage of
net revenues in periods of rapidly rising revenues and to increase as a
percentage of net revenue when revenue growth is slower or declining.
Amortization of deferred stock compensation charges increased to $1.7 million in
the first nine months of 1999 compared to $0.6 million for the same period in
1998. Deferred compensation charges arose when, prior to the merger, Abrizio
issued stock options at exercise prices lower than the deemed fair value of the
underlying stock. We are amortizing these amounts using the accelerated method
over the vesting period. We expect these non-cash charges to decline in future
periods.
<PAGE>
Goodwill amortization increased to $939,000 in the first nine months of 1999
from $588,000 in the comparable period in 1998. The increase is related
primarily to our 1998 acquisition of Integrated Telecom Technology, Inc.
The acquisition of in process R&D and the impairment of intangible assets both
relate to technology acquisitions detailed in the Company's 1998 annual report
on Form 10K.
Interest and other income, Net
- ------------------------------
Net interest and other income increased from $2.1 million in the first nine
months of 1998 to $4.2 million in the same period in 1999 due to the same
factors that increased net interest income for the three months ended September
26, 1999.
Gain on sale of investments
- ---------------------------
During the second quarter ended June 27, 1999, we realized a pre-tax gain of
approximately $12.3 million as a result of the disposition of our investment in
IC Works, Inc. ("ICW"). ICW was purchased by Cypress Semiconductor, Inc.
("Cypress"). As part of this purchase, we received Cypress common shares in
exchange for our investment in preferred shares of ICW. We subsequently sold
831,240 Cypress common shares. See Note 4 of the Consolidated Financial
Statements.
We also realized a pre-tax gain of approximately $14.5 million in the second
quarter of 1999 related to our investment in Sierra Wireless Inc. ("Sierra
Wireless"). During the quarter, Sierra Wireless completed an initial public
offering in Canada. As part of this initial public offering, we exchanged our
investment in non-voting preferred shares of Sierra Wireless for 5.1 million
common shares, of which 1.7 million were sold as part of the offering for a
pre-tax gain of $14.5 million. See Note 4 of the Consolidated Financial
Statements.
Provision for income taxes
- --------------------------
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations. Approximately $20.7 million of the gain on sale of
investments recorded in the second quarter of 1999 relates to investments held
in the United States. The tax effect of this gain was largely offset by our
United States net operating loss carryforward. The second quarter 1998 write-off
of acquired in process research and development as well as the goodwill
amortization in both years are not deductible for tax purposes.
<PAGE>
Liquidity and Capital Resources
Cash, cash equivalents and short term investments increased from $89.4 million
at the end of 1998 to $173.6 million at September 26, 1999.
During the first nine months of 1999, operating activities provided $75.4
million in cash and included $12.4 million of depreciation, $2.6 million of
amortization of intangibles and $1.7 million of amortization of deferred stock
compensation. Our year to date investing activities used $44.4 million and
includes $52.3 million of net purchases of short term investments, $28.6 million
in proceeds from the sale of equity investments, and $19.7 million spent on
plant and equipment purchases. Our financing activities provided $0.9 million,
as debt and lease repayments of $9.1 million were less than the $10.0 million in
proceeds from issuing common stock and notes payable.
Our principal source of liquidity at September 26, 1999 was our cash, cash
equivalent and short term investments of $173.6 million. We also have an unused
line of credit with a bank that allows us to borrow up to $15 million provided,
along with other restrictions, that we do not pay cash dividends or make any
material divestments without the bank's written consent.
We believe that existing sources of liquidity and anticipated funds from
operations will satisfy our projected working capital and capital expenditure
requirements through the end of 1999. We expect to spend approximately $12
million on new capital additions over the balance of 1999.
Our future capital requirements will depend on many factors. These include the
rate at which we develop products or acquire businesses, products or
technologies. If we do not own or generate sufficient resources to fund our
operations, we may be forced to raise additional funds through public or private
debt or equity financing. If we issue additional equity, we will reduce the
percentage of ownership of our current stockholders. In addition, additional
issued equity may have a senior interest to the stock of our current
stockholders. If sufficient funds are not available, we may be required to
delay, limit or eliminate some or all of our activities.
Year 2000 Computer Systems Issues
The approach of the year 2000 presents significant issues for many financial,
information, and operational systems. Many systems in use today may not be able
to interpret dates after December 31, 1999 appropriately, because such systems
allow only two digits to indicate the year in a date. As a result, such systems
are unable to distinguish January 1, 2000, from January 1, 1900, which could
have adverse consequences on the operations of the entity.
Our State of Readiness
We have designated specific individuals to identify and resolve year 2000 issues
associated with our internal information technology (IT) systems, our internal
non-IT systems, and material third party relationships. By September 26, 1999,
we had identified our non-compliant software and systems and had completed our
year 2000 compliance procedures. The costs of these procedures were immaterial.
<PAGE>
We use commercially available standard software for our critical operating and
design functions. Our primary software vendors have provided program updates
that are intended to rectify the year 2000 issues related to their software. We
upgraded all primary software by the second quarter of 1999. In addition, by the
end of the third quarter of 1999, we had implemented an enterprise-wide software
system for operational reasons. This system is year 2000 compliant.
We identified secondary design and operating software that was not year 2000
compliant. We installed or developed patches or workaround solutions for this
software during the first three quarters of 1999 and are continuing to install
patches from software suppliers such as Microsoft as they become available.
We identified other technology we use, such as semiconductor testers, which were
not year 2000 compliant. These systems do not interface with our critical
operating applications. We concluded modifying or replacing them in the first
three quarters of 1999.
The total cost of the software upgrade for our primary operating and financial
applications, the cost to purchase and install our other non-critical software,
and the cost for the modification and replacement of our other technology was
immaterial.
Our or third parties' computer systems may fail in the year 2000, which could
delay our product development and manufacturing
Our greatest year 2000 exposure comes from our product manufacturing, packaging
and delivery suppliers. Our worst case scenario would be if one or more critical
suppliers fail to become year 2000 compliant and fail to develop acceptable
workaround solutions. The majority of our product manufacturing, packaging and
delivery is outsourced to two wafer fabrication companies, three assembly
companies and one shipping company, respectively. These suppliers are generally
much larger than our company and we have little influence on their year 2000
preparedness schedules. While we have received written communication from our
critical suppliers that they have developed an action plan to address their year
2000 issues, we cannot be certain that these plans will be implemented or be
effective.
If our suppliers are unable to manufacture our products as a result of year 2000
issues, we may be forced to find and qualify other year 2000 compliant
suppliers. This qualification process could take six months or longer. We may
not find sufficient capacity quickly enough to satisfy our production
requirements, as we would expect that the many other companies with
manufacturing models similar to ours would be vying for production capacity.
We are also exposed to customers who may not be year 2000 compliant. If one or
more of our customers' operations is interrupted due to year 2000 issue
non-compliance, our revenues from these customers could be materially impacted.
Our Contingency Plans
While we do not have a formal contingency plan, we are monitoring our critical
suppliers to ensure they complete their year 2000 plans as scheduled. We would
implement a formal contingency plan should any of our critical suppliers
indicate that there would be any delays resulting from their own year 2000
plans. Such a plan could entail contacting and qualifying other potentially year
2000 compliant suppliers and stocking additional inventory to cover short term
operating needs. We can not ensure that this contingency plan would be effective
or completed in a timely manner.
<PAGE>
FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA
- ---------------------------------------------------------------
Our company is subject to a number of risks - some are normal to the fabless
networking semiconductor industry, some are the same or similar to those
disclosed in previous SEC filings, and some may be present in the future. You
should carefully consider all of these risks and the other information in this
report before investing. The fact that certain risks are endemic to the industry
does not lessen the significance of the risk.
As a result of these risks, our business, financial condition or operating
results could be materially adversely affected. This could cause the trading
price of our common stock to decline, and you may lose part or all of your
investment.
If One or More of Our Customers Changes Their Ordering Pattern of Our Products
or If We Lose One or More of Our Customers, Our Revenues Could Decline
We depend on a limited number of customers for a major portion of our revenues.
Through direct, distributor and subcontractor purchases, Lucent Technologies
(including Ascend Communications) and Cisco Systems each accounted for more than
10% of our fiscal 1998 revenues. We do not have long-term volume purchase
commitments from any of our major customers.
Our customers often shift buying patterns as they manage inventory levels,
decide to use competing products, are acquired or divested, market different
products, change production schedules or change their orders for other reasons.
If one or more customers were to delay, reduce or cancel orders, our overall
order levels may fluctuate greatly.
If our customers use our competitors' products instead of ours, suffer a decline
in demand for their products or are acquired or sold, our revenues may decline
Our expenses are relatively fixed so that fluctuation in our revenues may cause
our operating results to fluctuate as well. Demand for our products and, as a
result our revenues, may decline for the following reasons outside our control.
As our customers design next generation systems and select the chips
for those new systems at an increasingly frequent rate, our competitors
have the opportunity to get our customers to switch to their products
more frequently, which may cause our revenues to decline
The markets for our products are intensely competitive and subject to
rapid technological advancement in design tools, wafer manufacturing
techniques and process tools. The identification and capture of future
market opportunities are necessary to
offset the rapid price erosion that characterizes our industry. We may
not be able to develop new products at competitive pricing and
performance levels. Even if we are able to do so, our completion of
product development and introduction of new products to market may not
be in a timely manner. Our customers may substitute use of our products
with those of current or future competitors.
We typically face competition at the design stage, where customers
evaluate alternative design approaches that require integrated
circuits. Our competitors have increasingly frequent opportunities to
supplant our products in next generation systems because of shortened
product life and design-in cycles in many of our customers' products.
<PAGE>
Our competitors are major domestic and international semiconductor
companies, many of which have substantially greater financial and other
resources than us. Emerging companies also provide significant
competition in our segment of the semiconductor market. Our competitors
include Advanced Micro Circuits Corporation, Broadcom, Conexant
Systems, Cypress Semiconductor, Dallas Semiconductor, Galileo
Technology, Integrated Device Technology, IBM, Intel, Lucent
Technologies, Motorola, MMC Networks, Newport Communications, Infineon,
Texas Instruments, Transwitch and Vitesse Semiconductor. Over the next
few years, we expect additional competitors, some of which also may
have greater financial and other resources, to enter the market with
new products. In addition, we are aware of a number of venture-backed
companies that each focus on a specific portion of our broad range of
products. These companies collectively could represent future
competition for many design wins, and subsequent product sales.
We must often redesign our products to meet rapidly evolving industry
standards and customer specifications, which may delay an increase in
our revenues
We sell products to a market whose characteristics include rapidly
evolving industry standards, product obsolescence, and new
manufacturing and design technologies. Many of the standards and
protocols for our products are based on high speed networking
technologies that have not been widely adopted or ratified by one of
the standard setting bodies in our customers' industry. Our customers
often delay or alter their design demands during this standard-setting
process. In response, we must redesign our products to suit these
changing demands. Redesign usually delays the production of our
products. Our products may become obsolete during these delays.
If demand for our customers' products changes, including due to a
downturn in the networking industry, our revenues could decline
Our customers routinely build inventories of our products in
anticipation of end demand for their products. Many of our customers
have numerous product lines, numerous component requirements for each
product and sizeable and very complex supplier structures. This makes
forecasting their production requirements difficult and can lead to
inventory build of certain of their suppliers' components.
In the past, our customers have built PMC component inventories that
exceeded their production requirements. Those customers materially
reduced their orders. This may happen in again.
In addition, while all of our sales are denominated in US dollars, our
customers' products are sold worldwide. Any major fluctuations in
currency rates could materially affect our customers' end demand, which
could in turn cause them to reduce orders, which could cause our
revenues to decline.
Since we develop products many years before their volume production, if we
inaccurately anticipate our customers' needs, our revenues may not increase
<PAGE>
Our products generally take between 18 and 24 months from initial
conceptualization to development of a viable prototype, and another 6 to 18
months to be designed into our customers' equipment and into production. They
often need to be redesigned because manufacturing yields on prototypes are
unacceptable or customers redefine their products to meet changing industry
standards. As a result, we develop products many years before volume production
and may inaccurately anticipate our customers' needs. There have been times when
we either designed products that had more features than were demanded when they
were introduced to the market or conceptualized products that were not
sufficiently feature-rich to meet the needs of our customers or compete
effectively against our competitors. This may happen again.
If the recent trend of consolidation in the networking industry
continues, our customers may be acquired or sold, which could cause
those customers to cancel product lines or development projects and our
revenues to decline
The networking equipment industry has experienced significant merger
activity and partnership programs. Through mergers or partnerships, our
customers could seek to remove redundancies in their product lines or
development initiatives. This could lead to the cancellation of a
product line into which PMC products are designed or a development
project on which PMC is participating. In the cases of a product line
cancellation, PMC revenues could be materially impacted. In the case of
a development project cancellation, we may be forced to cancel
development of one or more products, which could mean opportunities for
future revenues from this development initiative could be lost.
If there is not sufficient market acceptance of the recently developed
specifications and protocols on which our new products are based, we
may not be able to sustain or increase our revenues
We recently introduced a number of ethernet switch products which
function at gigabit and fast ethernet speeds. Gigabit ethernet involves
the transmission of data over ethernet -protocol networks at speeds of
up to one billion bits per second. Fast ethernet transmits data over
these networks at speeds of up to 100 megabits per second. While
gigabit and fast ethernet are well established, it is not clear whether
products meeting these protocols will be competitive with products
meeting alternative protocols, or whether these products will be
sufficiently attractive within their own market spaces to achieve
commercial success.
Some of our other recently introduced products adhere to specifications
developed by industry groups for transmissions of data signals, or
packets, over high-speed fiber optics transmission standards. These
transmission standards are called synchronous optical network, or
SONET, in North America, and synchronous data hierarchy, or SDH in
Europe. The specifications, commonly called packet-over-SONET/SDH, have
only been recently developed, and it is not clear whether they will be
widely adopted by the telecommunications industry. In addition, we can
not be sure whether our products will compete effectively with
packet-over-SONET/SDH offerings of other companies.
A substantial portion of our business also relies on industry
acceptance of asynchronous transfer mode, or ATM, products. ATM is a
networking protocol. While ATM has been an industry standard for a
number of years, the overall ATM market has not developed as rapidly as
some observers had predicted it would. As a result, competing
communications technologies, including gigabit and fast ethernet and
packet-over-SONET/SDH, may inhibit the future growth of ATM and our
sales of ATM products.
<PAGE>
We anticipate lower margins on mature and high volume products, which could
adversely affect our profitability
We expect the average selling prices of our products to decline as they mature.
Historically, competition in the semiconductor industry has driven down the
average selling prices of products. If we price our products too high, our
customers may use a competitor's product or an in-house solution. To maintain
profit margins, we must reduce our costs sufficiently to offset declines in
average selling prices, or successfully sell proportionately more new products
with higher average selling prices. Yield or other production problems, or
shortages of supply may preclude us from lowering or maintaining current
operating costs.
We may not be able to meet customer demand for our products in a timely manner
or at all if we fail to secure adequate wafer fabrication or assembly capacity
or if we do not accurately predict demand
We rely on a limited source of wafer fabrication, the loss of which
could delay and limit our product shipments
We do not own or operate a wafer fabrication facility. Two outside
foundries supply all our semiconductor device requirements. Our foundry
suppliers also produce products for themselves and other companies. We
may not have access to adequate capacity or certain process
technologies. We have less control over delivery schedules,
manufacturing yields and costs than competitors with their own
fabrication facilities. If the foundries we use are unable or unwilling
to manufacture our products in required volumes, we may have to
identify and qualify acceptable additional or alternative foundries.
This qualification process could take six months or longer. We may not
find sufficient capacity quickly enough, if ever, to satisfy our
production requirements.
We depend on third parties in Asia for assembly of our semiconductor
products which could delay and limit our product shipments
Sub-assemblers in Asia assemble all of our semiconductor products. Raw
material shortages, political and social instability, assembly house
service disruptions, currency fluctuations, or other circumstances in
the region could force us to seek additional or alternative sources of
supply or assembly. This could lead to supply constraints or product
delivery delays which, in turn, may result in the loss of customers. We
have less control over delivery schedules, assembly processes, quality
assurances and costs than competitors that do not outsource these
tasks.
We depend on a limited number of software suppliers, the loss of which could
impede our product development
A limited number of suppliers provide the computer aided design, or CAD,
software we use to design our products. Factors affecting the price,
availability or technical capability of these products could affect our ability
to access appropriate CAD tools for the development of highly complex products.
In particular, the CAD software industry has been the subject of extensive
intellectual property rights litigation, the results of which could materially
change the pricing and nature of the software we use. We also have limited
control over whether our software suppliers will be able to breach technical
barriers in time to fulfill our needs.
<PAGE>
We may be left with obsolete inventory if our forecasts of demand for our
products prove inaccurate
We attempt to forecast and maintain a level of inventory in anticipation of
demand for our products. Anticipating demand is difficult because our customers
face volatile pricing and demand for their end-user networking equipment. If our
customers were to delay, cancel or otherwise change future ordering patterns, we
could be left with unwanted inventory.
The recent series of earthquakes in Taiwan could disrupt the order patterns of
our customers, which in turn could lower our revenues
Recently, Taiwan suffered a series of major earthquakes. One of our two silicon
wafer suppliers, TSMC, and many of our customers' suppliers are located in
Taiwan. Many of these suppliers, including TSMC, were either damaged or left
without power for an extended period of time. As a result, we or one or more of
our customers' suppliers may become unable to provide our customers with the
components they require to manufacture their equipment. This may lead one or
more of our customers to reduce their production levels and component orders
until a sufficient supply of the components they need becomes available. This
could materially lower our revenues.
We are subject to the risks of conducting business outside the United States to
a greater extent than companies which operate their businesses mostly in the
United States, which may impair our sales, development or manufacturing of our
products
We are subject to the risks of conducting business outside the United States to
a greater extent than most companies because, in addition to selling our
products in a number of countries, a significant portion of our research and
development and manufacturing are conducted outside of the United States. This
subjects us to the following risks.
We may lose our ability to design or produce products, could face
additional unforeseen costs or could lose access to key customers if
any of the nations in which we conduct business impose trade barriers
or new communications standards
We may have difficulty obtaining export licenses for certain technology
produced for us outside the United States. If a foreign country imposes
new taxes, tariffs, quotas, and other trade barriers and restrictions
or the United States and a foreign country develop hostilities or
change diplomatic and trade relationships, we may not be able to
continue manufacturing or sub-assembly of our products in that country
and may have fewer sales in that country. We may also have fewer sales
in a country that imposes new communications standards or technologies.
This could inhibit our ability to meet our customers' demand for our
products and lower our revenues.
If foreign exchange rates fluctuate significantly, our profitability
may decline
We are exposed to foreign currency rate fluctuations because a
significant part of our development, test, marketing and administrative
costs are denominated in Canadian dollars, and our selling costs are
denominated in a variety of currencies around the world. In addition, a
number of the countries in which we have sales offices have a history
of imposing exchange rate controls. This could make it difficult to
withdraw the foreign currency denominated assets we hold in these
countries.
<PAGE>
We may have difficulty collecting receivables from customers based in
foreign countries, which could adversely affect our earnings
We sell our products to customers around the world. Payment cycle norms
in these countries may not be consistent with our standard payment
terms. Thus, we may have greater difficulty collecting receivables on
time from customers in these countries. This could impact our financial
performance, particularly on our balance sheet.
In addition, we may be faced with greater difficulty in collecting
outstanding balances due to the shear distances between our collection
facilities and our customers, and we may be unable to enforce
receivable collection in foreign nations due to their business legal
systems. If one or more of our foreign customers do not pay their
outstanding receivable, we may be forced to write-off the account. This
could have a material impact on our earnings.
Our business strategy contemplates acquisition of other companies or
technologies, and these transactions could adversely affect our operating
performance
We recently acquired Abrizio, Inc. in exchange for approximately 4.35 million
shares of PMC common stock. Abrizio, now a California subsidiary of PMC, designs
high speed switching chips for core network applications. At the time of the
acquisition, the design wins Abrizio products had achieved in customer equipment
had not yet generated revenue. These or any follow on products may not achieve
commercial success. This acquisition may not generate future earnings.
Our strategy is to acquire additional products, technologies or businesses from
third parties. Management may be diverted from our operations while they
identify and negotiate these acquisitions and integrate an acquired entity into
our operations. Also, we may be forced to develop expertise outside our existing
businesses, and replace key personnel who leave due to an acquisition. An
acquisition could absorb substantial cash resources, require us to incur or
assume debt obligations, or issue additional equity. If we issue more equity, we
may dilute our common stock with securities that have a senior interest.
Acquired entities also may have unknown liabilities, and the combined entity may
not achieve the results that were anticipated at the time of the acquisition.
The loss of personnel could preclude us from designing new products
To succeed, we must retain and hire technical personnel highly skilled at the
design and test functions used to develop high speed networking products and
related software. The competition for such employees is intense and we do not
have employment agreements in place with these key personnel. We issue common
stock options that are subject to vesting as employee incentives. These options,
however, are effective as retention incentives only if they have economic value.
<PAGE>
If we cannot protect our proprietary technology, we may not be able to prevent
competitors from copying our technology and selling similar products, which
would harm our revenues
To compete effectively, we must protect our proprietary information. We rely on
a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We hold several patents and have a number of
pending patent applications.
We might not succeed in attaining patents from any of our pending applications.
Even if we are awarded patents, they may not provide any meaningful protection
or commercial advantage to us, as they may not be of sufficient scope or
strength, or may not be issued in all countries where our products can be sold.
In addition, our competitors may be able to design around our patents.
We develop, manufacture and sell our products in Asian and other countries that
may not protect our products or intellectual property rights to the same extent
as the laws of the United States. This makes piracy of our technology and
products more likely. Steps we take to protect our proprietary information may
not be adequate to prevent theft of our technology. We may not be able to
prevent our competitors from independently developing technologies that are
similar to or better than ours.
Our products employ technology that may infringe on the proprietary rights of
third parties, which may expose us to litigation and prevent us from selling our
products
Vigorous protection and pursuit of intellectual property rights or positions
characterize the semiconductor industry. This often results in expensive and
lengthy litigation. We, as well as our customers or suppliers, may be accused of
infringing on patents or other intellectual property rights owned by third
parties. This has happened in the past. An adverse result in any litigation
could force us to pay substantial damages, stop manufacturing, using and selling
the infringing products, spend significant resources to develop non-infringing
technology, discontinue using certain processes or obtain licenses to the
infringing technology. In addition, we may not be able to develop non-infringing
technology, nor might we be able to find appropriate licenses on reasonable
terms.
Patent disputes in the semiconductor industry are often settled through
cross-licensing arrangements. Because we currently do not have a substantial
portfolio of patents, we may not be able to settle an alleged patent
infringement claim through a cross-licensing arrangement. We are therefore more
exposed to third party claims than some of our competitors and customers.
In the past, our customers have been required to obtain licenses from and pay
royalties to third parties for the sale of systems incorporating our
semiconductor devices. Until December of 1997, we indemnified our customers up
to the dollar amount of their purchases of our products found to be infringing
on technology owned by third parties. Customers may also make claims against us
with respect to infringement.
Furthermore, we may initiate claims or litigation against third parties for
infringing our proprietary rights or to establish the validity of our
proprietary rights. This could consume significant resources and divert the
efforts of our technical and management personnel, regardless of the
litigation's outcome.
<PAGE>
Securities we issue to fund our operations could dilute your ownership
We may need to raise additional funds through public or private debt or equity
financing to fund our operations. If we raise funds by issuing equity
securities, the percentage ownership of current stockholders will be reduced and
the new equity securities may have priority rights to your investment. We may
not obtain sufficient financing on terms we or you will find favorable. We may
delay, limit or eliminate some or all of our proposed operations if adequate
funds are not available.
Our stock price has been and may continue to be volatile
In the past, our common stock price has fluctuated substantially. The reasons
this may continue include the following:
- - our or our competitors' new product announcements;
- - quarterly fluctuations in our financial results and other companies in the
semiconductor, networking or computer industries;
- - conditions in the networking or semiconductor industry; and
- - investor sentiment toward technology stocks.
In addition, increases in our stock price and expansion of our price-to-earnings
multiple may have made our stock attractive to momentum investors who often
shift funds into and out of stocks rapidly, exacerbating price fluctuations in
either direction.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The following discussion regarding our risk management activities contains
"forward-looking statements" that involve risks and uncertainties. Actual
results may differ materially from those projected in the forward-looking
statements.
We are exposed to foreign currency fluctuations through our operations in Canada
and elsewhere. In our effort to hedge this risk, we typically forecast our
operational currency needs, purchase such currency on the open market at the
beginning of an operational period, and classify these funds as a hedge against
operations. We usually limit the operational period to less than 3 months to
avoid undue exposure of our asset position to further foreign currency
fluctuation. While we expect to utilize this method of hedging our foreign
currency risk in the future, we may change our hedging methodology and utilize
foreign exchange contracts that are currently available under our operating line
of credit agreement.
Occasionally, we may not be able to correctly forecast our operational needs. If
our forecasts are overstated or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses. At the
end of the third quarter of 1999, we did not have significant foreign currency
denominated net asset or net liability positions, and we had no outstanding
foreign exchange contracts.
<PAGE>
We maintain investment portfolio holdings of various issuers, types, and
maturity dates with various banks and investment banking institutions. We
sometimes hold investments beyond 120 days, and the market value of these
investments on any day during the investment term may vary as a result of market
interest rate fluctuations. We do not hedge this exposure because short-term
fluctuations in interest rates would not likely have a material impact on
interest earnings. We classify our investments as available-for-sale or
held-to-maturity at the time of purchase and re-evaluate this designation as of
each balance sheet date. We had approximately $103.2 million in outstanding
short-term investments at the end of the third quarter of 1999. In the future,
we expect to hold the short-term investments we buy through to maturity.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
- 10.30 Abrizio Inc. 1997 Stock Option Plan (1)
- 11.1 Calculation of earnings per share (2)
- 27 Financial Data Schedule
(1) Incorporated by reference from Exhibit 4.1 filed with the Registrant's
Registration Statement on Form S-8 filed on September 14, 1999.
(2) Refer to Note 5 of the financial statements included in Item I of Part I of
this Quarterly Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC-SIERRA, INC.
(Registrant)
Date: November 5, 1999 /S/ JOHN W. SULLIVAN
---------------- ------------------------------
John W. Sullivan
Vice President, Finance
(duly authorized officer)
Chief Financial Officer
(principal accounting officer)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FILED FOR THE QUARTER ENDED SEPTEMBER 26, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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