----------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10 - Q/A - 1
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended September 27, 1998
[ ] 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 September 27, 1998 - 30,918,031
------------------------------------------------------
<PAGE>
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q, as filed by the Registrant for the quarter ending September 27, 1998, and
is being filed to reflect the restatement of the Registrant's condensed
consolidated financial statements. See "Restatement of Quarterly Financial
Statements" in Notes to the Condensed Consolidated Financial Statements for a
discussion of the basis for such restatement.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated statements of operations (restated)
- Consolidated balance sheets (restated)
- Consolidated statements of cash flows (restated)
- Notes to consolidated financial statements (restated)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (restated)
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 27, Sep 30, Sep 27, Sep 30,
1998 1997 1998 1997
(restated - (restated -
see note 2) see note 2)
<S> <C> <C> <C> <C>
Net revenues $ 42,105 $ 27,815 $ 116,375 $ 95,453
Cost of revenues 10,035 6,058 28,138 25,522
------------- ------------- ------------- -------------
Gross profit 32,070 21,757 88,237 69,931
Other costs and expenses:
Research and development 9,739 5,136 23,575 16,485
Marketing, general and administrative 7,549 5,735 21,106 18,650
Acquisition of in process research and development - - 39,176 -
Impairment of intangible assets 4,311 - 4,311 -
------------- ------------- ------------- -------------
Income from operations 10,471 10,886 69 34,796
Interest income, net 566 331 2,140 488
------------- ------------- ------------- -------------
Income before provision for income taxes 11,037 11,217 2,209 35,284
Provision for income taxes 5,632 3,926 16,468 10,582
------------- ------------- ------------- -------------
Net income (loss) $ 5,405 $ 7,291 $ (14,259) $ 24,702
============= ============= ============= =============
Basic net income (loss) per share $ 0.17 $ 0.23 $ (0.45) $ 0.80
============= ============= ============= =============
Diluted net income (loss) per share $ 0.16 $ 0.22 $ (0.45) $ 0.76
============= ============= ============= =============
Shares used to calculate:
Basic net income (loss) per share 32,193 31,146 31,849 30,946
Diluted net income (loss) per share 34,394 33,188 31,849 32,486
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Sep 27, Dec 28,
1998 1997
(unaudited)
(restated -
see note 2)
ASSETS:
Current assets:
Cash and cash equivalents $ 13,770 $ 27,906
Short-term investments 50,198 41,334
Accounts receivable, net 19,653 15,103
Inventories 4,157 3,199
Prepaid expenses and other current assets 3,569 1,958
Short-term deposits for wafer fabrication capacity - 4,000
------------ -----------
Total current assets 91,347 93,500
Property and equipment, net 30,965 19,699
Goodwill and other intangible assets, net 20,852 8,635
Investments and other assets 4,503 4,424
Deposits for wafer fabrication capacity 23,120 23,120
------------ -----------
$ 170,787 $ 149,378
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 4,901 $ 7,421
Accrued liabilities 21,017 13,751
Accrued income taxes 9,658 8,780
Current portion of obligations under capital leases
and long-term debt 4,996 4,652
Net liabilities of discontinued operations - 301
------------ -----------
Total current liabilities 40,572 34,905
Deferred income taxes 3,925 4,023
Noncurrent obligations under capital leases
and long-term debt 6,448 9,092
Special shares convertible into PMC common stock 8,690 10,793
Shareholders' equity:
Common stock, par value $0.001 31 30
Additional paid in capital 177,998 143,153
Accumulated deficit (66,877) (52,618)
------------ -----------
Total shareholders' equity 111,152 90,565
------------ -----------
$ 170,787 $ 149,378
============ ===========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
------------------------
Sep 27, Sep 30,
1998 1997
(restated -
see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (14,259) $ 24,702
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,649 6,280
Acquisition of in process research and development 39,176 -
Impairment of intangible assets 4,311 -
Changes in assets and liabilities
Accounts receivable (3,287) 3,637
Inventories (403) 6,562
Prepaid expenses and other (1,315) (341)
Accounts payable and accrued expenses 2,426 (411)
Accrued restructuring costs - (10,616)
Net assets/liabilities associated with discontinued operations (301) (513)
----------- -----------
Net cash provided by operating activities 35,997 29,300
----------- -----------
Cash flows from investing activities:
Proceeds from sales/maturities of short-term investments 43,442 19,926
Purchases of short-term investments (52,306) (57,604)
Proceeds from refund of wafer fabrication deposits 4,000 -
Investments in other companies - (3,000)
Payment for purchase of Integrated Telecom Technology, Inc.,
net of cash acquired (27,165) -
Purchase of other in process research and development (1,419) -
Proceeds from sale of equipment - 2,515
Purchases of plant and equipment (17,336) (4,826)
----------- -----------
Net cash used in investing activities (50,784) (42,989)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable and long-term debt (136) (2,446)
Proceeds from sale/leaseback of equipment - 1,107
Principal payments under capital lease obligations (3,735) (3,214)
Proceeds from issuance of common stock 4,522 5,562
----------- -----------
Net cash provided by financing activities 651 1,009
----------- -----------
Net decrease in cash and cash equivalents (14,136) (12,680)
Cash and cash equivalents, beginning of the period 27,906 35,038
----------- -----------
Cash and cash equivalents, end of the period $ 13,770 $ 22,358
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PMC-SIERRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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 28, 1997. The results of operations for
the three and nine months ended September 27, 1998 are not necessarily
indicative of results to be expected in future periods.
2. Restatement of Quarterly Financial Statements
Subsequent to the issuance of the Company's September 27, 1998 consolidated
financial statements, the Company received the Securities and Exchange
Commission's (`SEC') new guidance related to the valuation of in process
research and development (`IPR&D') in purchase transactions. The Company
has considered the impact of this new guidance on the valuation of
purchased IPR&D and other intangibles acquired in connection with the
acquisition of Integrated Telecom Technology, Inc. (`IGT') in May, 1998
(see note 3).
The Company's initial calculations to value the acquired IPR&D were based
upon a methodology that focused on the after-tax cash flows attributable to
the technology on an overall basis, without regard for stage of completion
of individual projects, and the selection of an appropriate rate of return
to reflect the risk associated with the stage of completion of the
technology. This methodology conformed to generally accepted accounting
principles applied in accordance with then established industry practice.
Based on a revaluation performed using the methodology set forth in the
SEC's September 1998 letter to the American Institute of Certified Public
Accountants (`AICPA'), the Company has adjusted the amount of purchase
price allocated to IPR&D. As a result of the revised valuation, the charge
for IPR&D was decreased by $11.7 to $37.8 million, the amount ascribed to
other intangible assets increased from $6.4 to $18.1 million and
amortization increased by $160,000 for the quarter.
The Company has also adjusted its third quarter financial statements to
reflect a $4.3 million impairment of the additional $11.7 million of
intangible assets recognized in the second quarter adjustment and a total
charge of $453,000 for additional amortization on these assets. This
impairment resulted from the determination that one of the three projects
in progress at the acquisition date was not technologically feasible.
Management determined that the developed and core technology related to
this project has no alternative future use and all development work on this
project was terminated.
<PAGE>
The restatement resulted in the following impact on the Company's
previously reported results of operations for the three and nine month
periods ended September 27, 1998.
(in thousands except per share data)
Statement of Operations:
Three Months Nine Months
Ended Ended
Sep 27, Sep 27,
1998 1998
Net income (loss)
As previously reported $ 10,009 $ (21,165)
Adjustment related to acquired in-process R&D
and intangible amortization - 11,670
Adjustment related to impairment of intangible assets (4,311) (4,311)
Adjustment related to additional amortization of
intangible assets (293) (453)
------------ -----------
Restated $ 5,405 $ (14,259)
============ ===========
Net income (loss) per share - diluted
As previously reported $ 0.29 $ (0.66)
Adjustment related to acquired in-process R&D
and intangible amortization $ - $ 0.37
Adjustment related to impairment of intangible assets $ (0.12) $ (0.14)
Adjustment related to additional amortization of
intangible assets $ (0.01) $ (0.02)
------------ -----------
Restated $ 0.16 $ (0.45)
============ ===========
Balance Sheet: June 28, 1998
-------------------------
(as (previously
restated) reported)
Goodwill and other intangible assets, net 20,852 13,946
Total assets 170,787 163,881
Total shareholders' equity 111,152 104,246
3. Acquisition of Integrated Telecom Technology
On May 20, 1998, the Company acquired Integrated Telecom Technology, Inc.
("IGT") in exchange for total consideration of $55.0 million consisting of
cash paid to IGT stockholders of $17.8 million, cash paid to IGT creditors
of $9.0 million and the issuance of approximately 415,000 shares of common
stock and options to purchase approximately 214,000 shares of common stock.
The purchase price includes professional fees and other direct costs of the
acquisition totaling $850,000. IGT is a fabless semiconductor company
headquartered in Gaithersburg, MD with a development site in San Jose, CA.
IGT makes Asynchronous Transfer Mode (ATM) switching chipsets for wide area
network applications as well as ATM Segmentation-and-Reassembly and other
telecommunication chips. Upon consumation of the transaction, IGT was
merged with a wholly owned subsidiary of the Company.
<PAGE>
The acquisition was recorded under the purchase method of accounting and
the final allocation among tangible and intangible assets and liabilities
is as follows:
Tangible assets $ 4,598
Intangible assets:
Developed and core technology 7,830
Assembled workforce 1,050
Goodwill 9,284
In process technology 37,757
Liabilities (4,669)
------------
$ 55,850
============
The revised valuation was based on management's estimates of the after tax
net cash flows and gives explicit consideration to the SEC's views on IPR&D
in purchase transactions. In making the allocation of purchase price, the
Company considered the present value of cash flows and income, the status
of projects, completion costs and project risk. Specifically, the Company
considered (1) the value of core technology and ensured that the relative
allocations to core technology and in process technology were consistent
with the relative contributions of each of the final products and (2) stage
of completion of the individual projects and ensured that the value
considered only the efforts completed as of the transaction date.
The revised amount allocated to IPR&D of $37.8 million was expensed upon
acquisition, as it was determined that the underlying projects had not
reached technological feasibility, had no alternative future use and
successful development was uncertain.
As at the acquisition date, IGT had three development projects which were
in process. These projects included an ATM switching chipset and two
different types of segmentation and reassembly chips ("SARs"). IGT had
developed SARs in the past and appropriate recognition was given in the
valuation to the developed and core technology underpinning the SAR
development projects. The SARs were estimated to be 66% and 83% developed
at the time of the acquisition. The ATM switching chipset was an entirely
new development effort and was estimated to be 78% complete at the time of
purchase. During the third quarter, development work on the SAR project
which was 66% complete at the time of the acquisition was terminated, as it
was determined not to be technologically feasible and to have no
alternative future use. As a result, the Company recognized an impairment
of $4.3 million of the related intangible assets, including a pro rata
allocation of goodwill. The Company will only benefit from the IPR&D and
intangible assets related to the other two projects when they begin
shipping products to customers. Failure to reach successful completion of
these projects could result in impairment of the associated capitalized
intangible assets and could require the Company to accelerate the time
period over which the intangibles are being amortized, which could have a
material and adverse affect on the Company's results of operations.
<PAGE>
The operating results of IGT have been included in the consolidated
statements since the date of acquisition. The following table presents the
unaudited pro forma results of operations for informational purposes
assuming that the Company had acquired IGT at the beginning of the 1998 and
1997 fiscal years. This information may not necessarily be indicative of
the future combined results of operations of the Company.
Nine Months Ended
---------------------------
Sep 27, Sep 30,
1998 1997
(in thousands, except for per share amounts) (restated - (restated -
see note 2) see note 2)
Net revenues $ 120,684 $ 104,676
Net income $ 24,068 $ 19,458
Basic net income per share: $ 0.75 $ 0.62
Diluted net income per share: $ 0.70 $ 0.59
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill. The $37.8
million charge for purchased in process technology and the $4.3 million
impairment of intangible assets have been excluded from the pro forma
results, as they are material non-recurring charges.
3. On May 1, 1998 a subsidiary of the Company acquired certain technology for
cash consideration of $1.4 million. This technology has not reached
technological feasibility and has no alternative future use. Accordingly,
this amount is included in the in process research and development expensed
in the three months ended June 28, 1998.
4. The components of inventories are as follows (in thousands):
Sep 28, Dec 28,
1998 1997
(unaudited)
Work-in-progress $ 1,174 $ 2,316
Finished goods 2,983 883
----------- ------------
$ 4,157 $ 3,199
=========== ============
<PAGE>
5. Recently Issued Accounting Standards
- - Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
SFAS No. 130 requires disclosure of comprehensive income in interim periods
and additional disclosures of the components of comprehensive income on an
annual basis. Comprehensive income includes all changes in equity during a
period except those resulting from investments by and distributions to the
Company's shareholders. For the quarters ended September 27, 1998 and
September 30, 1997, there were no material differences between the
Company's comprehensive income and net income.
- - In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes
annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic
areas and major customers. Adoption of this statement will not impact the
Company's consolidated financial position, results of operations or cash
flows. The Company will adopt this statement in its financial statements
for the year ending December 27, 1998.
- - In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative and Similar Financial Instruments and
for Hedging Activities". This new standard defines derivatives, requires
that all derivatives be carried at fair market value and provides for
hedging accounting when certain conditions are met. Based upon the hedging
strategies currently used and the level of activity related to derivative
instruments, the Company does not anticipate the effect of adoption to have
a material impact on the Company's consolidated financial position, results
of operations or cash flows. The Company will adopt this statement in its
financial statements for the year ending December 2000.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read 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 in the Company's 1997
Annual Report to Shareholders. Reference to the Company includes its subsidiary
PMC-Sierra Ltd., a Canadian corporation and its other subsidiaries.
During the second quarter, the Company acquired Integrated Telecom Technology,
Inc. ("IGT") in exchange for total consideration of $55.0 million consisting of
cash paid to IGT shareholders of $17.8 million, cash paid to IGT creditors of
$9.0 million, the issuance of approximately 415,000 shares of common stock and
options to purchase approximately 214,000 shares of common stock. The purchase
price includes professional fees and other direct costs of the acquisition of
$850,000. IGT is a fabless semiconductor company headquartered in Gaithersburg,
MD with a development site in San Jose, CA. The Company assumed current
liabilities totaling $3.1 million, interest-bearing obligations in the form of
capital leases of $1.6 million and received tangible assets of $4.6 million
resulting in tangible net liabilities of $0.1 million.
Subsequent to the issuance of the Company's September 27, 1998 consolidated
financial statements, the Company received the Securities and Exchange
Commission's (`SEC') new guidance related to the valuation of in process
research and development (`IPR&D') in purchase transactions. The Company has
considered the impact of this new guidance on the valuation of purchased IPR&D
and other intangibles acquired in connection with the acquisition of Integrated
Telecom Technology, Inc. (`IGT') in May, 1998 (see note 3 to Consolidated
Financial Statements). Based on a revaluation performed using the new SEC
methodology, the Company has adjusted the amount of purchase price allocated to
IPR&D. As a result of the revised valuation, the charge for IPR&D was decreased
by $11.7 to $37.8 million, the amount ascribed to other intangible assets
increased from $6.4 to $18.1 million and amortization increased by $160,000 for
the quarter.
The revised amount allocated to IPR&D of $37.8 million was expensed upon
acquisition, as it was determined that the underlying products had not reached
technological feasibility, had no alternative future use and successful
development was uncertain. The Company will begin to benefit from the IPR&D and
intangible assets related to these projects only when they begin shipping
products to customers. Failure to reach successful completion of these products
could result in impairment of the associated capitalized intangible assets and
could require the Company to accelerate the time period over which the
intangibles are being amortized, which could have a material and adverse affect
on the Company's results of operations.
Subsequent to the filing of the Company's second quarter report, development
work on one of three projects in process at the time of the acquisition was
terminated (See Operating Expenses and Charges). As a result, the Company has
also adjusted its third quarter financial statements to reflect a $4.3 million
impairment of the additional $11.7 million of intangible assets recognized in
the second quarter and recorded an additional charge of $453,000 for
amortization of intangible assets recognized in the second quarter adjustment.
Certain statements in this Report constitute "forward-looking statements" within
the meaning of the federal securities laws. The actual results, performance, or
achievements of the Company may be materially different from those expressed or
implied by such forward-looking statements. The forward-looking statements
include projections relating to trends in markets, revenues, particularly
expectations of long-term revenues, gross margins, future expenditures on
research and development, marketing, general and administrative expense and the
year 2000 issue. The Company undertakes no obligation to release revisions to
forward-looking statements to reflect subsequent events.
<PAGE>
Results of Operations
Third Quarters of 1998 and 1997
Net Revenues ($000,000)
- -----------------------
Third Quarter
-----------------------
1998 1997 Change
Networking products $36.3 $24.0 51%
User Interface 5.8 3.8 53%
----------- ----------
Total net revenues $42.1 $27.8 51%
=========== ==========
Third quarter networking product revenue increased 51% over last year's third
quarter. The growth in revenues of the Company's ATM, SONET/SDH, T1/E1 and
DS3/E3 integrated circuits accounted for the majority of third quarter increase
compared to the prior year's third quarter. During the third quarter the Company
announced the availability of its gigabit ethernet semiconductors for general
sampling. Revenues from gigabit ethernet sales are not expected to be material
in 1998.
The Company's third quarter user interface revenue increased 53% over the
comparable period in 1997 but are expected to decline significantly in the
fourth quarter of 1998. No investment has been made in R&D related to user
interface products since the third quarter 1996 strategic decision to focus on
networking products.
Gross Profit ($000,000)
- -----------------------
Third Quarter
----------------------
1998 1997 Change
Gross profit $32.1 $21.8 47%
Percentage of net revenues 76% 78%
Gross profit increased in dollars and decreased as a percentage of sales in the
third quarter compared to the prior year's third quarter. The increase in
dollars compared to the prior year is primarily a function of the substantially
increased volume of semiconductor sales. The lower gross profit percentage of
sales is the result of a number of factors, the most significant of which is
price reductions contracted by the Company with its customers. Price reductions
on the Company's products occur from both normal competitive pressures and from
customers moving into higher volume price brackets.
<PAGE>
Operating Expenses and Charges ($000,000)
- -----------------------------------------
Third Quarter
---------------------
1998 1997 Change
Research and development $9.7 $5.1 90%
Percentage of net revenues 23% 18%
Marketing, general & administrative $7.5 $5.7 32%
Percentage of net revenues 18% 21%
Impairment of Intangible Assets $4.3 -
Research and development ("R&D") spending of $9.7 million in the third quarter
of 1998 is up significantly over last year's third quarter, both in dollars and
as a percentage of net revenues. The Company increased its R&D spending in order
to respond to the array of opportunities presented by the growth of the
internet, data networking and the convergence of voice and data communications.
The Company incurs R&D expenditures in order to attain technological leadership
from a multi-year perspective. Such funding has resulted in fluctuations in R&D
spending from period to period in the past. The Company expects such
fluctuations, particularly when measured as a percentage of net revenues, to
occur in the future, primarily due to the timing of expenditures and changes in
the level of net revenues.
Marketing, general and administrative expenses were higher in the third quarter
of 1998 than the comparable period in 1997, but lower as a percentage of net
revenues. A substantial portion of the Company's marketing, general and
administrative expense is fixed in the short term. While it is the Company's
long term goal to reduce these costs as a percentage of net revenues during
periods of rising sales, a decline in net sales could cause these costs to
increase as a percentage of net revenues.
The impairment of intangible assets of $4.3 million recorded in this amended
third quarter filing recognizes the impairment due to the termination of a
development project acquired in the purchase of IGT. The impaired assets were
recognized as part of the second quarter adjustment of $11.7 million to IPR&D
and related intangible assets (See Operating Expenses and Charges - first nine
months).
The terminated project related to ongoing development of a type of segmentation
and reassembly chip used to convert data packets to asynchronous transfer mode
data cells. The product was terminated and the few customers of IGT's
predecessor chip were notified of the termination of all future development of
this technology. The technology was specialized and has no alternative future
use.
<PAGE>
Interest Income (Expense), Net
- ------------------------------
Net interest income increased to $0.6 million in the third quarter of 1998 from
$0.3 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.
Provision for Income Taxes
- --------------------------
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations.
First Nine Months of 1998 and 1997
Net Revenues ($000,000)
- -----------------------
First nine months
-------------------------
1998 1997 Change
Networking products $96.8 $60.8 59%
User Interface 19.6 34.7 (44%)
------------ -----------
Total net revenues $116.4 $95.5 22%
============ ===========
The increase in net revenues from networking products reflects growth in
broadband networking markets due to the current trend toward standard products
such as those the Company develops and away from application specific integrated
circuits ("ASIC's") developed for the use of a single company, and sales of the
products acquired with the acquisition of IGT in May of 1998. The decrease in
net revenues from user interface product is the result of the third quarter of
1996 decision to focus on networking products and to discontinue development of
user interface products.
Gross Profit ($000,000)
- -----------------------
First nine months
-------------------------
1998 1997 Change
Gross profit $88.2 $69.9 26%
Percentage of net revenues 76% 73%
Gross profit increased in both dollars and as a percentage of net revenues in
the first nine months of 1998 compared to the same period in 1997. Increased
sales of higher gross margin networking products more than offset the decline in
gross profit due to lower net revenues from the Company's User Interface
products.
<PAGE>
Operating Expenses and Charges ($000,000)
- -----------------------------------------
First nine months
--------------------------
1998 1997 Change
Research and development $23.6 $16.5 43%
Percentage of net revenues 20% 17%
Marketing, general & administrative $21.1 $18.7 13%
Percentage of net revenues 18% 20%
In process research and development $39.2 -
Impairment of Intangible Assets $4.3 -
R&D expenses increased in both dollars and as a percentage of net revenues in
the first nine months of 1998 compared to the same period in 1997. R&D spending
in both years has been focused only on networking products. The growth in
spending on R&D has tracked, and is expected to continue to track, much more
closely to networking product revenue rather than total revenue.
Marketing, general and administrative expense increased in dollars and decreased
as a percentage of sales for the first nine months of 1998 compared to the same
period in 1997. During the first two quarters of 1997 certain of the marketing,
general and administrative expenses related to the Company's modem products that
were fully disposed of at mid year 1997.
In process research and development expenses of $39.2 million were recorded in
the second quarter of 1998 with $37.8 million related to the acquisition of IGT
and $1.4 million related to the acquisition of technology which has not reached
technological feasibility and has no alternative future use. In the Company's
original second quarter report on Form 10Q, the Company recorded a charge for
purchased IPR&D of $49.4 million in connection with the acquisition of IGT. The
revised charge gives explicit consideration to the valuation methodology set
forth in the SEC's September 1998 letter to the AICPA.
The $37.8 million charge for IPR&D in the IGT acquisition is an allocation based
on the estimated fair value of the risk-adjusted cash flows related to three
incomplete development projects. At the date of acquisition, these projects had
not yet reached technological feasibility, had no alternative future use and
successful development was uncertain. Accordingly, these costs were expensed as
of the acquisition date and were recorded as a one-time charge to earnings in
the second quarter of 1998.
As at the acquisition date, IGT had three development projects which were in
process. These projects included an ATM switching chipset and two different
types of segmentation and reassembly chips ("SARs"). IGT had developed SARs in
the past and appropriate recognition was given in the valuation to the developed
and core technology underpinning the SAR development projects. The SARs were
estimated to be 66% and 83% developed at the time of the acquisition. The ATM
switching chipset was an entirely new development effort and was estimated to be
78% complete at the time of purchase. During the third quarter, development work
on the SAR project which was 66% complete at the time of the acquisition was
terminated, as it was determined not to be technologically feasible and to have
no alternative future use. As a result, the Company recognized an impairment of
$4.3 million of the related intangible assets, including a pro rata allocation
of goodwill. The Company will only benefit from the IPR&D and intangible assets
related to the other two projects when they begin shipping products to
customers. Failure to reach successful completion of these projects could result
in impairment of the associated capitalized intangible assets and could require
the Company to accelerate the time period over which the intangibles are being
amortized, which could have a material and adverse affect on the Company's
results of operations.
<PAGE>
Liquidity and Capital Resources
The Company's cash and cash equivalents and short term investments declined from
$69.2 million on December 28, 1997 to $64.0 million on September 27, 1998.
During the first nine months of 1998 the Company's operating activities provided
$36.0 million in cash. Significant investing activities included $27.2 million
related to the Company's purchase of IGT, $17.3 million of purchases of plant
and equipment and $1.4 million related to the purchase of other in process
research and development. The Company also received a refund of $4.0 million of
foundry deposits based on its 1997 wafer purchases. Financing activities
included $3.7 million of principal payments on capital lease obligations and
$4.5 million in proceeds from issuance of common stock.
As of September 27, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $64.0 million and a $15.0 million revolving credit
facility. The Company believes that existing cash and cash equivalents,
anticipated funds from operations and access to its revolving line of credit
will satisfy the Company's projected working capital requirements, anticipated
capital expenditures and capital lease payments for the foreseeable future. The
Company expects to purchase, or arrange capital leases for approximately $3 - 5
million of new capital expenditures over the balance of 1998.
The Company's future capital requirements will depend on many factors,
including, among others, product development and acquisitions of complementary
businesses, products or technologies. To the extent that existing resources and
the funds generated by future earnings are insufficient to fund the Company's
operations, the Company may need to raise additional funds through public or
private debt or equity financing. If additional funds are raised through the
issuance of equity securities, the percentage ownership of current stockholders
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. No
assurance can be given that additional financing will be available or that, if
available, it can be obtained on terms favorable to the Company and its
stockholders. If adequate funds are not available, the Company may be required
to delay, limit or eliminate some or all of its proposed operations.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE
SUBJECT TO A NUMBER OF RISKS, SOME OF WHICH ARE DESCRIBED BELOW. THE FACT THAT
SOME OF THE RISK FACTORS MAY BE THE SAME OR SIMILAR TO THOSE IN THE COMPANY'S
PAST SEC FILINGS MEANS ONLY THAT THE RISKS ARE PRESENT IN MULTIPLE PERIODS. THE
COMPANY BELIEVES THAT MANY OF THE RISKS DETAILED HERE AND IN THE COMPANY'S OTHER
SEC FILINGS ARE PART OF DOING BUSINESS IN THE FABLESS NETWORKING SEMICONDUCTOR
INDUSTRY AND WILL LIKELY BE PRESENT IN ALL PERIODS REPORTED. THE FACT THAT
CERTAIN RISKS ARE ENDEMIC TO THE INDUSTRY DOES NOT LESSEN THE SIGNIFICANCE OF
THE RISK.
<PAGE>
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results may vary due to a number of
factors, including, among others, the timing of new product introductions,
decreased demand or average selling prices for products, market acceptance of
products, demand for products of the Company's customers, the general conditions
of the networking industry, the introduction of products or technologies by the
Company's competitors, competitive pressure on product pricing, the Company's
and its customers' inventory levels of the Company's products, product
availability from outside foundries, variations in manufacturing yields for the
Company's products, expenditures for new product and process development, the
acquisition of wafer fabrication and other manufacturing capacity, and the
acquisition of businesses, products or technologies. At various times in the
past, the Company's foundry and other suppliers have experienced lower than
anticipated yields that have adversely affected production and, consequently,
the Company. There can be no assurance that the Company's existing or future
foundry and other suppliers will not experience irregularities which could have
a material adverse effect on the Company. The Company from time to time may
order in advance of anticipated customer demand from its suppliers in response
to anticipated long lead times to obtain inventory and materials, which might
result in excess inventory levels if expected orders fail to materialize or
other factors render the Company's product or its customer's products less
marketable. The Company's ability to forecast sales of networking chips is
limited due to customer uncertainty regarding future demand for end-user
networking equipment and price competition in the market for networking
equipment. Any delay or cancellation of existing orders, or any decline in
projected future orders, by the Company's customers could have a material
adverse effect on the Company. Margins will vary depending on product mix. In
the longer term, the Company may experience declining gross profits as a
percentage of total net revenues if anticipated decreases in average selling
prices of existing networking products are not offset by commensurate reductions
in product costs, or by an offsetting increase in gross profit contribution from
new, higher gross margin, networking products. The Company is also affected by
the state and direction of the electronics industry and the economy in the
United States and other markets the Company serves. Although industry observers
expect continued growth in sales of networking and telecommunications equipment,
worldwide capital spending overall is expected to slow. This could adversely
affect sales of products based on the Company's devices, which in turn could
slow the rate of growth in the Company's sales. The occurrence of any of the
foregoing or other factors could have a material adverse effect on the Company.
Due to these factors, past results may not be indicative of future results.
<PAGE>
TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by evolving industry
standards, rapid technological change and product obsolescence. Technological
change may be particularly pronounced in the developing markets for
communications semiconductor devices used in high-speed networks. The Company's
future success will be highly dependent upon the timely completion and
introduction of new products at competitive price and performance levels. The
success of new products depends on a number of factors, including proper
definition of such products, successful and timely completion of product
development and introduction to market, correct judgment with respect to product
demand, market acceptance of the Company's and its customers' products,
fabrication yields by the Company's independent foundries and the continued
ability of the Company to offer innovative new products at competitive prices.
Many of these factors are outside the control of the Company. There can be no
assurance that the Company will be able to identify new product opportunities
successfully, develop and bring to market new products, achieve design wins or
be able to respond effectively to new technological changes or product
announcements by others. A failure in any of these areas would have a material
and adverse affect on the Company.
The Company's current strategy is focused on high-speed networking interface
chips. Products for telecommunications and data communications applications are
based on industry standards that are continually evolving. Future transitions in
customer preferences could quickly make the Company's products obsolete. A
material part of the Company's products are in the ATM telecommunications and
networking market, which is in an early stage of development. The emergence and
adoption of new industry standards that compete with ATM or maintenance by the
industry of existing standards in lieu of new standards could render the
Company's ATM products unmarketable or obsolete. The market for ATM equipment
has not developed as rapidly as industry observers have predicted, and
alternative networking technologies such as "fast ethernet" and "gigabit
ethernet" have developed to meet consumer requirements. A substantial portion of
the Company's development efforts are focused on ATM and related products. Net
revenues derived from sales of ATM, T1/E1, DS3/E3 and SONET/SDH based products
amounted to 67% and 33% of the Company's total net revenues in 1997 and 1996,
respectively. As a result of the Company's 1996 restructuring, revenues from
non-networking products have declined significantly over the last several years,
making the Company's results depend primarily on networking products.
The Company has developed a gigabit Ethernet chipset which is currently sampling
to customers. This is a new product area for the Company and there can be no
assurance that these products will have correctly anticipated the needs of the
networking industry or that they will receive sufficient design wins to achieve
commercial success.
Many of the Company's products under development are complex semiconductor
devices that require extensive design and testing before prototypes can be
manufactured. The integration of a number of functions in a single chip or in a
chipset requires the use of advanced semiconductor manufacturing techniques.
This can result in chip redesigns if the initial design does not permit
acceptable manufacturing yields. The Company's products are often designed for
customers who in many instances have not yet fully defined their hardware
products. Design delays or redesigns by these customers could in turn delay
completion or require redesign of the semiconductor devices needed for the final
hardware product. In this regard, many of the relevant standards and protocols
for products based on high speed networking technologies have not been widely
adopted or ratified by the relevant standard-setting bodies. Redesigns or design
delays often are required for both the hardware manufacturer's products and the
Company's chips as industry and customer standards, protocols or design
specifications are determined. Any resulting delay in the production of the
Company's products could have a material adverse effect on the Company.
<PAGE>
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change and by price erosion. The industry consists of major
domestic and international semiconductor companies, many of which have
substantially greater financial and other resources than the Company. Emerging
companies also provide significant competition in this segment of the
semiconductor market. The Company believes that its ability to compete
successfully in this market depends on a number of factors, including, among
others, the price, quality and performance of the Company's and its competitors'
products, the timing and success of new product introductions by the Company,
its customers and its competitors, the emergence of new standards, the
development of technical innovations, the ability to obtain adequate
manufacturing capacity, the efficiency of production, the rate at which the
Company's customers design the Company's products into their products, the
number and nature of the Company's competitors in a given market, the assertion
of the Company's and its competitors' intellectual property rights and general
market and economic conditions.
The Company's competitors in this market include, among others, Cypress
Semiconductor, Dallas Semiconductor, Galileo Technology, Integrated Device
Technology, Level One Communications, Lucent Technologies, MMC Networks,
Rockwell International, Siemens, Texas Instruments, and Transwitch. The number
of competitors in this market and the technology platforms on which their
products will compete may change in the future. It is likely that over the next
few years additional competitors will enter the market with new products.
Manufacturers of more traditional semiconductor devices are attempting to
penetrate the markets for networking and telecommunication chips. These new
competitors may have substantially greater financial and other resources than
the Company. Others may be startups with a narrow but highly focused marketing
and engineering plan, which could result in strong competition in segments of
the Company's product line. Competition among manufacturers of semiconductors
like the Company's products typically occurs at the design stage, where the
customer evaluates alternative design approaches that require integrated
circuits. Because of the growth of broadband data networking and design-in
cycles in certain of the Company's customers products, the Company's competitors
have frequent opportunities to achieve design wins in next generation systems.
Any success by the Company's competitors in supplanting the Company's products
would have a material adverse effect on the Company.
Historically, average selling prices ("ASPs") in the semiconductor industry have
decreased over the life of the particular product. The willingness of
prospective customers to design the Company's products into their products
depends to a significant extent upon the ability of the Company to price its
products at a level that is cost effective for such customers. If the Company is
unable to reduce its costs sufficiently to offset declines in ASPs or is unable
to introduce new higher performance products with higher ASPs, the Company would
be materially and adversely affected. Any yield or other production problems,
shortages of supply that increase the Company's manufacturing costs, or failure
to reduce manufacturing costs, would have a material adverse effect on the
Company.
<PAGE>
ACCESS TO WAFER FABRICATION AND OTHER MANUFACTURING CAPACITY
The Company does not own or operate a wafer fabrication facility, and all of its
semiconductor device requirements are supplied by outside foundries.
Substantially all of the Company's semiconductor products are currently
manufactured by third party foundry suppliers. The Company's foundry suppliers
fabricate products for other companies and produce products of their own design.
The Company's reliance on independent foundries involves a number of risks,
including the absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
delivery schedules, manufacturing yields and costs. In the event that these
foundries are unable or unwilling to continue to manufacture the Company's
products in required volumes, the Company will have to identify and qualify
acceptable additional or alternative foundries. This qualification process could
take six months or longer. No assurance can be given that any such source would
become available to the Company or that any such source would be in a position
to satisfy the Company's production requirements on a timely basis, if at all.
Any significant interruption in the supply of semiconductors to the Company
would result in the allocation of products to customers, which in turn could
have a material adverse effect on the Company.
All of the Company's semiconductor products are assembled by sub-assemblers in
Asia. Shortages of raw materials, political and social instability, disruptions
in the provision of services by the Company's assembly houses or other
circumstances that would require the Company to seek additional or alternative
sources of supply or assembly could lead to supply constraints or delays in the
delivery of the Company's products. Such constraints or delays may result in the
loss of customers or other adverse effects on the Company. The Company's
reliance on independent assembly houses involves a number of other risks,
including reduced control over delivery schedules, quality assurances and costs,
the possible discontinuance of such contractors' assembly processes and
fluctuations of regional economies. Any supply or other problems resulting from
such risks would have a material adverse effect on the Company.
CUSTOMER CONCENTRATION
The Company has no long-term volume purchase commitments from any of its major
customers. The Company has only one customer that accounted for more than 10% of
its 1997 revenues, but depends on a limited number of customers for a major
portion of its revenues.
The reduction, delay or cancellation of orders from one or more significant
customers could have a material and adverse affect on the Company. Due to the
relatively short product life cycles in the telecommunications and data
communications markets, the Company would be materially and adversely affected
if one or more of its significant customers were to select devices manufactured
by one of the Company's competitors for inclusion in future product generations.
There can be no assurance that the Company's current customers will continue to
place orders with the Company, that orders by existing customers will continue
at the levels of previous periods, or that the Company will be able to obtain
orders from new customers. Loss of one or more of the Company's current
customers or a disruption in the Company's sales and distribution channels could
have a material and adverse effect on the Company.
<PAGE>
INTERNATIONAL OPERATIONS
In fiscal years 1997, 1996 and 1995, international sales accounted for
approximately 30%, 53% and 39% of the Company's net revenues, respectively. The
Company's networking products must accommodate numerous worldwide communications
standards and sales to United States based customers are often for products that
they in turn export worldwide. The Company expects that international sales will
continue to represent a significant portion of the Company's and its customers'
net revenues for the foreseeable future. The majority of the Company's
development, test, marketing and administrative functions occur in Canada. In
addition, substantially all of the Company's products are manufactured,
assembled and tested by independent third parties in Asia. Due to its reliance
on international sales and operations, the Company is subject to the risks of
conducting business outside of the United States. These risks include unexpected
changes in, or impositions of, legislative or regulatory requirements and policy
changes affecting the telecommunications and data communications markets, delays
resulting from difficulty in obtaining export licenses for certain technology,
tariffs, quotas, exchange rates and other trade barriers and restrictions,
longer payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws and other factors beyond the Company's control. The Company is also subject
to general geopolitical risks in connection with its international operations,
such as political, social and economic instability, potential hostilities and
changes in diplomatic and trade relationships. Sales of the Company's networking
products are denominated in United States dollars as are costs related to the
manufacture and assembly of products by the Company's Asian suppliers. Costs
related to the majority of the Company's development, test, marketing and
administrative functions are denominated in Canadian dollars. Selling costs are
denominated in a variety of currencies. As a result, the Company is subject to
the risks of currency fluctuations. There can be no assurance that one or more
of the foregoing factors will not have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
services of its key technical personnel, particularly those highly skilled at
the design and test functions involved in the development of high speed
networking products and related software. The competition for such employees is
intense. The Company has no employment agreements in place with these key
personnel. However, the Company from time to time issues shares of Common Stock
or options to purchase Common Stock of the Company subject to vesting. To the
extent shares purchased from or options granted by the Company have economic
value, these securities could create retention incentives. The loss of the
services of one or more of these key personnel, and any difficulties the Company
may experience in hiring qualified replacements, would have a material and
adverse affect on the Company.
PATENTS AND PROPRIETARY RIGHTS
The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company relies on a combination of patents,
trademarks, copyrights, trade secret laws, confidentiality procedures and
licensing arrangements to protect its intellectual property rights. The Company
currently holds several patents and has a number of pending patent applications.
There can be no assurance that patents will be issued from any of the Company's
pending applications or that any claims allowed will be of sufficient scope or
strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company. In addition, competitors of the Company may be able to design around
the Company's patents. The laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. There can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
<PAGE>
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. The Company or its customers or
foundries have in the past, and may from time to time in the future, be notified
of claims that the Company may be infringing patents or other intellectual
property rights owned by third parties. If it is necessary or desirable, the
Company may seek licenses under patents or intellectual property rights. There
can be no assurance that licenses will be available or that the terms of any
offered license will be acceptable to the Company. Failure to obtain a license
from a third party for technology used by the Company could cause the Company to
incur substantial liabilities and to suspend the manufacture of products or the
use by the Company's foundry suppliers requiring the technology. In the past,
the Company's customers have been required to obtain licenses from and pay
royalties to third parties for the sale of systems incorporating the Company's
semiconductor devices. If this occurs in the future, the customers' businesses
may be materially and adversely affected, which in turn would have a material
and adverse affect on the Company. The Company has provided its customers with
indemnity up to the dollar amount of their purchases of any Company products
found to be infringing on technology owned by third parties. Although the
Company discontinued the practice of indemnifying its customers in December of
1997, third party or customer claims may still be made against the Company with
respect to the infringement of the technology of third parties. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products, spend significant
resources to develop non-infringing technology, discontinue the use of certain
processes or obtain licenses to the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Patent disputes in the semiconductor industry have
often been settled through cross-licensing arrangements. Because the Company
currently does not have a substantial portfolio of patents, the Company may not
be able to settle an alleged patent infringement claim through a cross-licensing
arrangement. Any successful third party claim against the Company or its
customers for patent or intellectual property infringement could have a material
adverse effect on the Company.
<PAGE>
ACQUISITIONS
The Company's strategy may involve, in part, acquisitions of products,
technologies or businesses from third parties. Identifying and negotiating these
acquisitions may divert substantial management time away from the Company's
operations. An acquisition could absorb substantial cash resources, could
require the Company to incur or assume debt obligations, or could involve the
issuance of additional equity securities of the Company. The issuance of
additional equity securities would dilute, and could represent an interest
senior to the rights of, then outstanding PMC common stock. An acquisition which
is accounted for as a purchase, like the acquisition of the networking business
in 1994, the acquisition of certain assets of Bipolar Integrated Technology,
("Bit") in September 1996, and the recent acquisition of Integrated Telecom
Technology, Inc. could involve significant one-time write-offs, and could
involve the amortization of goodwill over a number of years, which would
adversely affect earnings in those years. Any acquisition will require attention
from the Company's management to integrate the acquired entity into the
Company's operations, may require the Company to develop expertise outside its
existing businesses and may result in departures of management of the acquired
entity. An acquired entity may have unknown liabilities, and its business may
not achieve the results anticipated at the time of the acquisition.
FUTURE CAPITAL NEEDS
The Company must continue to make significant investments in research and
development as well as capital equipment and expansion of facilities for
networking products. The Company's future capital requirements will depend on
many factors, including, among others, product development, investments in
working capital, and acquisitions of complementary businesses, products or
technologies. To the extent that existing resources and future earnings are
insufficient to fund the Company's operations, the Company may need to raise
additional funds through public or private debt or equity financing. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of current stockholders will be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. No assurance can be given that additional
financing will be available or that, if available, it can be obtained on terms
favorable to the Company and its stockholders. If adequate funds are not
available, the Company may be required to delay, limit or eliminate some or all
of its proposed operations, which could have a material adverse effect on the
Company.
VOLATILITY OF STOCK PRICE
Factors such as announcements of the introduction of new products by the Company
or its competitors, quarterly fluctuations in the Company's financial results or
the financial results of other semiconductor companies or of companies in the
networking or personal computer industry, general conditions in the
semiconductor industry and conditions in the worldwide financial markets have,
in the past, caused the price of the Company's Common Stock to fluctuate
substantially, and may do so in the future. In addition, increases in the
Company's stock price and expansion of its price-to-earnings multiple may have
made it attractive to so-called momentum investors. Momentum investors are
generally thought to shift funds into and out of stocks rapidly, exacerbating
price fluctuations in either direction. The price of the Company's stock may
also be impacted by investor sentiment toward technology stocks, in general,
which often is unrelated to the operating performance of a specific company.
<PAGE>
YEAR 2000 COMPUTER SYSTEMS ISSUES
The Company is aware of issues associated with the limitations of the
programming code in many existing computer systems, whereby the computer systems
may not properly recognize date sensitive information as the next millennium
(year 2000) approaches. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail, resulting in
disruptions of the Company's operations. The Company has identified significant
applications that will require modification to ensure year 2000 compliance. The
Company uses commercially available standard software for its critical operating
and financial applications. One vendor of critical software used by the Company
has provided a program update, which is intended to rectify the year 2000 issues
related to this software. This update was installed in the second quarter of
1998 and testing to date has not found any significant errors in the updates.
Updates for the Company's other non-critical software are available at the
current time and, if new versions of the software are not already purchased, are
planned for installation in 1999. If the Company's vendors' updates do not
successfully rectify the year 2000 issues related to their software, the Company
could be forced to purchase a competing system that is year 2000 compliant and
incur installation and other costs in order to mitigate the Year 2000 Issue. The
installation of a replacement system for those applications that are currently
not year 2000 compliant is not anticipated to be material to the Company's
financial position or results of operations in any given year. In the event that
the current systems need to be entirely replaced, the Company estimates that it
would cost approximately $3 million to acquire and implement new systems. Any
new systems would be capitalized and subsequently depreciated.
The Company's suppliers and customers are generally much larger organizations
than the Company with a greater number of suppliers and customers of their own.
The Company believes that many of its suppliers and customers have not completed
their own systems modification to be year 2000 compliant. The Company has
received written communication from its critical suppliers that they have
developed an action plan to address the issues related to the year 2000. The
failure of significant suppliers or customers of the Company to become year 2000
compliant could have a material effect on the Company. Those consequences could
include the inability to receive product in a timely manner or lost sales
opportunities either of which could result in a material decline in the
Company's revenues and profits.
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
11.1 Calculation of earnings per share
27 Financial Data Schedule
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: February 10, 1999 /S/ JOHN W. SULLIVAN
----------------- ------------------------------
John W. Sullivan
Vice President, Finance
(Duly Authorized Officer)
Chief Financial Officer
(Principal Accounting Officer)
PMC-Sierra, Inc.
CALCULATION OF EARNINGS PER SHARE
(in thousands, except for per share amounts)
(unaudited)
Three Months Ended
------------------------
Sep 27, Sept 30,
1998 1997
(restated)
Numerator:
Net income $ 5,405 $ 7,291
============ ===========
Denominator:
Basic weighted average common shares outstanding (1) 32,193 31,146
------------ -----------
Effect of dilutive securities:
Stock options 2,182 2,025
Stock warrants 19 17
------------ -----------
Shares used in calculation of net income per share 34,394 33,188
============ ===========
Basic net income per share $ 0.17 $ 0.23
Diluted net income per share $ 0.16 $ 0.22
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic net
income per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FILED FOR THE QUARTER ENDED SEPTEMBER 27, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
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<SECURITIES> 50,198
<RECEIVABLES> 19,653
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<INVENTORY> 4,157
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