UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8 - K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
November 29, 2000
PMC-Sierra, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-19084 94-2925073
---------------------- --------------------- ---------------------------
State of incorporation Commission File Number IRS Employer Identification
900 East Hamilton Avenue
Suite 250
Campbell, CA 95008
(address of principal executive offices)
Telephone number, including area code: (408) 626-2000
Item 5. Other Items
On August 24, 2000, Registrant completed the acquisition of Quantum Effect
Devices, Inc., a publicly traded Delaware corporation located in Santa Clara,
California, in accordance with the Reorganization Agreement dated July 11, 2000
between Registrant and QED. QED designs, develops and markets embedded
microprocessor solutions targeted at communications, consumer appliance and
office automation markets.
Registrant is filing this report to provide historical financial statements and
additional disclosure to reflect combined operating results of Registrant and
QED.
Item 7. Financial Statements and Exhibits
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, (1)
(in thousands, except for per share data)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 (2) 1998 (3) 1997 (4) 1996 (5) 1995 (6)
STATEMENT OF OPERATIONS DATA:
Net revenues $ 294,743 $ 172,416 $ 139,337 $ 193,992 $ 198,637
Gross profit 222,114 128,359 105,274 99,044 101,527
Research and development 85,808 52,124 34,608 37,650 30,240
In process research and development - 39,176 - 7,783 -
Impairment of intangible assets - 4,311 - - -
Marketing, general and administrative 52,435 33,361 26,502 32,448 31,243
Costs of merger 866 - - - -
Purchase price adjustment - compensation - - - - 10,624
Restructuring and other charges - - (1,383) 64,670 -
Income (loss) from operations 81,093 (1,528) 45,247 (43,507) 29,420
Gain on sale of investments 26,800 - - - -
Income (loss) from continuing operations 74,439 (21,587) 30,535 (51,774) 25,502
Loss from discontinued operations - - - - (22,497)
Net income (loss) 74,439 (21,587) 30,535 (51,774) 3,005
Net income (loss) per share - basic: (7)
From continuing operations $ 0.51 $ (0.16) $ 0.24 $ (0.43) $ 0.23
From discontinued operations - - - - (0.20)
----------------------------------------------------------------------------
Net income (loss) $ 0.51 $ (0.16) $ 0.24 $ (0.43) $ 0.03
============================================================================
Net income (loss) per share - diluted: (7)
From continuing operations $ 0.47 $ (0.16) $ 0.23 $ (0.43) $ 0.22
From discontinued operations - - - - (0.19)
----------------------------------------------------------------------------
Net income (loss) $ 0.47 $ (0.16) $ 0.23 $ (0.43) $ 0.03
============================================================================
Shares used in per share calculation - basic 146,064 137,030 127,767 121,177 110,134
Shares used in per share calculation - diluted 159,770 137,030 134,133 121,177 117,235
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 206,286 $ 99,901 $ 76,060 $ 47,760 $ 54,663
Working capital 186,011 82,380 61,752 24,004 39,438
Total assets 380,697 224,215 161,454 140,129 197,405
Long-term debt (including current portion) 8,760 16,369 16,873 24,637 12,718
Stockholders' equity 258,076 139,297 94,232 54,324 90,106
<FN>
(1) The Company's fiscal year ends on the last Sunday of the calendar year. The
reference to December 31 has been used as the fiscal year end for ease of
presentation.
(2) Results for the year ended December 31, 1999 includes gains of $26.8
million and the related tax provision of $3.6 million on sale of
investments and a $0.9 million charge for costs of merger for the
acquisition of Abrizio Inc.
(3) Results for the year ended December 31, 1998 include an in process research
and development charge of $39.2 million and a charge for impairment of
intangible assets of $4.3 million.
(4) Results for the year ended December 31, 1997 include a recovery of $1.4
million from the reversal of the excess accrued restructure charge
resulting from the conclusion of the restructuring.
(5) Results for the year ended December 31, 1996 include a restructuring charge
of $69.4 million related to Company's exit from the modem chipset business
and the associated restructuring of its non-networking operations, and a
$7.8 million in process research and development charge.
(6) Results for the year ended December 31, 1995 include a $10.6 million
purchase price adjustment relating to the finalization of the acquisition
of the Company's Canadian networking product operations.
(7) Reflects 2-for-1 stock splits effective February 2000, May 1999 and October
1995.
</FN>
</TABLE>
Report of Deloitte & Touche LLP, Independent Auditors
The Board of Directors of PMC-Sierra, Inc.
We have audited the accompanying consolidated balance sheets of PMC-Sierra, Inc.
as of December 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PMC-Sierra, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles
in the United States.
/s/ DELOITTE & TOUCHE LLP
Vancouver, British Columbia
January 17, 2000 (November 21, 2000, as to Note 2 and 14)
<TABLE>
<CAPTION>
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
December 31,
----------------------------
(IN THOUSANDS, EXCEPT PAR VALUE) 1999 1998
---------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 93,534 $ 49,008
Short-term investments 112,752 50,893
Restricted cash 2,000 -
Accounts receivable, net of allowance for doubtful accounts of $ 1,544 42,209 28,617
($1,128 in 1998)
Inventories, net 14,277 5,216
Deferred income taxes 9,270 1,506
Prepaid expenses and other current assets 8,967 5,134
Short-term deposits for wafer fabrication capacity 4,637 4,000
----------------------------------------------------------------------------------------- ------------
Total current assets 287,646 144,374
Property and equipment, net 51,461 36,432
Goodwill and other intangible assets, net of accumulated amortization
of $9,961 ($6,455 in 1998) 15,280 19,629
Investments and other assets 11,827 4,660
Deposits for wafer fabrication capacity 14,483 19,120
----------------------------------------------------------------------------------------- ------------
$ 380,697 $ 224,215
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 17,195 11,262
Accrued liabilities 20,008 17,686
Deferred income 34,657 12,947
Income taxes payable 25,912 13,910
Current portion of obligations under capital leases and long-term debt 3,863 6,189
------------ ------------
Total current liabilities 101,635 61,994
Deferred income taxes 9,091 4,357
Noncurrent obligations under capital leases and long-term debt 4,897 10,180
Commitments and contingencies (Note 6)
PMC special shares convertible into 4,242 (5,036 in 1998) shares of 6,998 8,387
common stock
Stockholders' equity
Convertible preferred stock and additional paid in capital 39,949 20,470
Preferred stock, par value $0.001; 5,000 shares authorized: -
none issued or outstanding in 1999 and 1998
Common stock and additional paid in capital, par value $0.001;
200,000 shares authorized (100,000 shares in 1998)
146,516 shares issued and outstanding (133,206 in 1998) 230,287 203,301
Deferred stock compensation (5,238) (3,113)
Accumulated deficit (6,922) (81,361)
----------------------------------------------------------------------------------------- ------------
Total stockholders' equity 258,076 139,297
----------------------------------------------------------------------------------------- ------------
$ 380,697 $ 224,215
============ ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 1999 1998 1997
------------------------------------------------------------------ -------------- ------------
Net revenues $ 294,743 $ 172,416 $ 139,337
Cost of revenues 72,629 44,057 34,063
----------- ---------- ---------
Gross profit 222,114 128,359 105,274
Other costs and expenses:
Research and development 82,425 50,890 34,608
Marketing, general and administrative 51,061 33,224 26,502
Amortization of deferred stock compensation:
Research and development 3,383 1,234 -
Marketing, general and administrative 1,374 137 -
Amortization of goodwill 1,912 915 300
Costs of merger 866 - -
Acquisition of in process research and development - 39,176 -
Impairment of intangible assets - 4,311 -
Restructuring and other costs - - (1,383)
-----------------------------------------------------------------------------------------------------
Income (loss) from operations 81,093 (1,528) 45,247
Interest and other income, net 7,883 2,916 1,104
Gain on sale of investments 26,800 - -
-----------------------------------------------------------------------------------------------------
Income before provision for income taxes 115,776 1,388 46,351
Provision for income taxes 41,337 22,975 15,816
-----------------------------------------------------------------------------------------------------
Net income (loss) $ 74,439 $ (21,587) $ 30,535
==============================================
Net income (loss) per common share - basic $ 0.51 $ (0.16) $ 0.24
==============================================
Net income (loss) per common share - diluted $ 0.47 $ (0.16) $ 0.23
==============================================
Shares used in per share calculation - basic 146,064 137,030 127,767
Shares used in per share calculation - diluted 159,770 137,030 134,133
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock
Convertible and Additional and Additional
Preferred Paid in Common Stock Paid in Deferred Total
Stock Number Capital Number of Capital Stock Accumulated Stockholders'
(IN THOUSANDS) Of Shares Amount Shares(1) Amount(1) Compensation Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 4,300 $ 8,520 116,968 $136,113 $ - $(90,309) $ 54,324
Conversion of special shares
into common stock - - 1,276 1,701 - - 1,701
Issuance of common stock
under stock benefit plans - - 5,784 7,672 - - 7,672
Net income - - - - - 30,535 30,535
----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 4,300 8,520 124,028 145,486 - (59,774) 94,232
Conversion of special shares
into common stock - - 1,436 2,406 - - 2,406
Issuance of preferred stock 4,800 11,950 - - - - 11,950
Issuance of common stock
under stock benefit plans - - 6,082 22,704 - - 22,704
Issuance of common stock and
stock options to acquire
Integrated Telecom Technology,Inc. - - 1,660 28,221 - - 28,221
Deferred stock compensation - - - 4,484 (4,484) - -
Amortization of deferred
stock compensation - - - - 1,371 - 1,371
Net loss - - - - - (21,587) (21,587)
----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 9,100 $20,470 133,206 $203,301 $(3,113) $(81,361) $139,297
Conversion of special shares
into common stock - - 792 1,389 - - 1,389
Issuance of preferred stock 4,519 19,479 - - - - 19,479
Issuance of common stock
under stock benefit plans - - 12,430 18,640 - - 18,640
Conversion of warrants
into common stock - - 88 75 - - 75
Deferred stock compensation - - - 6,882 (6,882) - -
Amortization of deferred - - - - 4,757 - 4,757
stock compensation
Net income - - - - - 74,439 74,439
----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 13,619 $39,949 146,516 $230,287 $(5,238) $ (6,922) $258,076
=================================================================================================
<FN>
(1) Includes exchangeable shares.
See notes to consolidated financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 74,439 $ (21,587) $ 30,535
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of plant and equipment 19,805 12,916 8,802
Amortization of intangibles 3,599 2,850 1,363
Amortization of deferred stock compensation 4,757 1,371 -
Deferred income taxes (3,030) (1,083) 3,662
Equity in income of investee (792) - -
Gain on sale of investments (26,800) - -
Acquisition of in process research and development - 39,176 -
Impairment of intangible assets - 4,311 -
Loss on disposal of equipment - - 258
Recovery related to restructuring provision - - (1,383)
Changes in operating assets and liabilities
Accounts receivable (13,592) (10,545) (2,004)
Inventories (9,061) (1,462) 4,662
Prepaid expenses and other (2,693) (2,439) 1,489
Accounts payable and accrued liabilities 8,657 2,783 816
Income taxes payable 12,002 5,621 4,746
Deferred income 21,710 9,666 1,201
Accrued restructuring costs - - (14,942)
Net liabilities associated with discontinued operations - (301) (1,299)
---------- ----------- -----------
Net cash provided by operating activities 89,001 41,277 37,906
---------- ----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (137,556) (53,001) (59,187)
Proceeds from sales and maturities of short-term investments 75,697 43,442 24,877
Restricted cash (2,000) - -
Purchases of plant and equipment (34,221) (23,535) (9,844)
Proceeds from sale of equipment and capacity assets - - 7,631
Purchase of investments (8,500) - (3,000)
Proceeds from sale of investments 28,628 - -
Purchase of intangible assets (411) - -
Proceeds from refund of wafer fabrication deposits 4,000 4,000 -
Payment for purchase of Integrated Telecom Technology, Inc.,
net of cash acquired - (27,165) -
Purchase of other in process research and development - (1,419) -
---------- ------------ -----------
Net cash used in investing activities (74,363) (57,678) (39,523)
---------- ------------ -----------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 2,971 1,933 3,346
Repayment of notes payable and long-term debt (2,687) (764) (3,593)
Proceeds from sale/leaseback of equipment - 140 1,114
Principal payments under capital lease obligations (8,590) (5,280) (12,932)
Proceeds from issuance of common stock 18,715 22,704 7,672
Proceeds from issuance of preferred stock 19,479 11,950 -
---------- ------------ -----------
Net cash provided by (used in) financing activities 29,888 30,683 (4,393)
---------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 44,526 14,282 (6,010)
Cash and cash equivalents, beginning of the period 49,008 34,726 40,736
---------- ----------- ------------
Cash and cash equivalents, end of the period $ 93,534 $ 49,008 $ 34,726
========== =========== ============
Supplemental disclosures for cash flow information:
Cash paid for interest $ 1,058 $ 1,315 $ 2,053
Cash paid for income taxes 33,123 13,001 6,772
Supplemental disclosures of non-cash investing and
financing activities:
Issuance of common stock and stock options to acquire
Integrated Telecom Technology, Inc. - 28,221 -
Capital lease obligations incurred for purchase of property
and equipment 408 689 3,780
Notes payable issued for purchase of property and equipment 2,206 757 -
Conversion of PMC-Sierra special shares into common stock 1,389 2,406 1,701
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
NOTE 1. Summary of Significant Accounting Policies
Description of business. PMC-Sierra, Inc (the "Company" or "PMC-Sierra")
provides customers with internetworking semiconductor system solutions for high
speed transmission and networking systems.
Basis of presentation. The accompanying consolidated financial statements
include the accounts of PMC-Sierra, Inc. and its wholly owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated. The
Company's fiscal year ends on the last Sunday of the calendar year. For ease of
presentation, the reference to December 31 has been utilized as the fiscal year
end for all financial statement captions. Fiscal years 1999, 1998 and 1997 each
consisted of 52 weeks. The Company's reporting currency is the United States
dollar.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities as of the dates
and for the periods presented. Estimates are used for, but not limited to, the
accounting for doubtful accounts, inventory reserves, depreciation and
amortization, sales returns, warranty costs, taxes and contingencies. Actual
results may differ from those estimates.
Cash, cash equivalents and short-term investments. Cash equivalents are defined
as highly liquid debt instruments with original maturities at the date of
acquisition of 90 days or less that have insignificant interest rate risk.
Short-term investments are defined as money market instruments with original
maturities greater than 90 days, but less than one year.
Under Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities, management classifies investments as
available-for-sale or held-to-maturity at the time of purchase and re-evaluates
such designation as of each balance sheet date. Investments classified as
held-to-maturity securities are stated at amortized cost with corresponding
premiums or discounts amortized against interest income over the life of the
investment.
Marketable equity and debt securities not classified as held-to-maturity are
classified as available-for-sale and reported at fair value. Unrealized gains
and losses on these investments are included in equity as a separate component
of stockholders' equity. The cost of securities sold is based on the specific
identification method.
As at December 31, 1999 and 1998, the Company's short-term investments consisted
of held-to-maturity and/or available-for-sale investments, and their carrying
value was substantially the same as their market value. Proceeds from sales and
realized gains or losses on sales of available-for-sale securities for all years
presented were immaterial.
As of December 31, 1999, $6.1 million of short-term investments related to
available-for-sale securities (1998 - nil).
Restricted cash. At December 31, 1999, the Company had restricted cash of $2.0
million which was released from restriction on June 30, 2000.
Inventories. Inventories are stated at the lower of cost (first-in, first out)
or market (estimated net realizable value).
The components of inventories are as follows:
December 31,
-------------------------
(IN THOUSANDS) 1999 1998
-----------------------------------------------------
Work-in-progress $ 10,275 $ 2,590
Finished goods 4,002 2,626
-----------------------------------------------------
$ 14,277 $ 5,216
============================
Property and equipment, net. Property and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets, ranging from two to five years, or the applicable lease term,
whichever is shorter. The carrying value of property and equipment is reviewed
periodically for any permanent impairment in value.
The components of property and equipment are as follows:
December 31,
------------------------
(IN THOUSANDS) 1999 1998
-----------------------------------------------------
Machinery and equipment $ 91,160 $ 62,504
Leasehold improvements 5,371 2,709
Furniture and fixtures 5,037 3,024
Building 701 693
-----------------------------------------------------
Total cost 102,269 68,930
Accumulated depreciation (50,808) (32,498)
-----------------------------------------------------
$ 51,461 $ 36,432
========================
The Company leases furniture and equipment under long-term capital leases.
Accordingly, capitalized costs of approximately $6,171,000 and $19,035,000 at
December 31, 1999 and 1998, respectively, and accumulated amortization of
approximately $4,549,000 and $12,434,000, respectively, are included in property
and equipment.
Goodwill and other intangible assets. Goodwill, developed and core technology
and other intangible assets are carried at cost less accumulated amortization,
and are being amortized on a straight-line basis over the economic lives of the
respective assets, generally three to seven years. Among other considerations,
to assess impairment, the Company periodically estimates undiscounted future
cash flows to determine if they exceed the unamortized balance of the related
intangible asset.
The components of goodwill and other intangible assets, net arose from the
following acquisitions:
December 31,
------------------------
(IN THOUSANDS) 1999 1998
--------------------------------------------------------------------------
PMC-Sierra, Ltd. $ 5,390 $ 6,665
Bipolar Integrated Technology, Inc. 170 216
Integrated Telecom Technology, Inc. 9,720 12,748
--------------------------------------------------------------------------
$ 15,280 $ 19,629
========================
Investments in Non-Public Companies. The Company has certain investments in
non-publicly traded companies in which it has less than 20% of the voting rights
and in which it does not exercise significant influence. These investments are
carried at cost. The Company monitors these investments for impairment and makes
appropriate reductions in carrying value when necessary.
Investments in Equity Accounted Investees. Investees in which the Company has
between 20% and 50% of the voting rights, and in which the Company exercises
significant influence, are accounted for using the equity method.
Deposits for wafer fabrication capacity. Two independent foundries supply
substantially all of the Company's products. Under wafer supply agreements with
these foundries, the Company has deposits of $19.1 million (1998 - $23.1
million) to secure access to wafer fabrication capacity. During 1999, the
Company purchased $30.5 million ($18.3 million and $13.2 million in 1998 and
1997, respectively) from these foundries. Purchases in any year may or may not
be indicative of any future period since wafers are purchased based on current
market pricing and the Company's volume requirements change in relation to sales
of its products.
In each year, the Company is entitled to receive a refund of a portion of the
deposits based on the annual purchases from these suppliers compared to the
target levels in the wafer supply agreements. Based on 1999 purchases, the
Company is entitled to receive a $4.6 million refund from these suppliers in the
first quarter of 2000. If the Company does not receive back the balance of its
deposits during the term of the agreements, then the outstanding deposits will
be refunded to the Company at the termination of the agreements.
Accrued liabilities. The components of accrued liabilities are as follows:
December 31,
---------------------------
(IN THOUSANDS) 1999 1998
-------------------------------------------------------------------------
Accrued compensation and benefits $ 9,202 $ 6,510
Accrued royalties - 175
Other accrued liabilities 10,806 11,001
-------------------------------------------------------------------------
$ 20,008 $ 17,686
===========================
Foreign currency translation. For all foreign operations, the U.S. dollar is the
functional currency. Assets and liabilities in foreign currencies are translated
using the exchange rate at the balance sheet date. Revenues and expenses are
translated at average rates of exchange during the year. Gains and losses from
foreign currency transactions are included in interest and other income, net.
Fair value of financial instruments. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange.
The Company's carrying value of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities
approximates fair value because the instruments have a short-term maturity.
The fair value of the Company's long-term debt and obligations under capital
leases at December 31, 1999 and 1998 also approximates their carrying value.
The fair value of the deposits for wafer fabrication capacity is not practicably
determinable.
Concentrations. The Company maintains its cash, cash equivalents and short-term
investments in investment grade financial instruments with high-quality
financial institutions, thereby reducing credit risk concentrations.
At December 31, 1999, approximately 43% (1998 - 38%) of accounts receivable
represented amounts due from one of the Company's distributors. The Company
believes that this concentration and the concentration of credit risk resulting
from trade receivables owing from high-technology industry customers is
substantially mitigated by the Company's credit evaluation process, large number
of customers, relatively short collection terms, and the geographical dispersion
of sales. The Company generally does not require collateral security for
outstanding amounts.
The Company relies on a limited number of suppliers for wafer fabrication
capacity.
Revenue recognition. Revenues from product sales direct to customers and minor
distributors are recognized at the time of shipment. The Company accrues for
warranty costs, sales returns and other allowances at the time of shipment based
on its experience. Certain of the Company's product sales are made to major
distributors under agreements allowing for price protection and/or right of
return on products unsold. Accordingly, the Company defers recognition of
revenue on such sales until the products are sold by the distributors.
Interest and other income, net. The components of interest and other income, net
are as follows:
Year Ended December 31,
----------------------------------------
(IN THOUSANDS) 1999 1998 1997
-----------------------------------------------------------------------------
Interest income $ 8,449 $ 4,369 $ 3,581
Interest expense (*) (1,526) (1,412) (2,324)
Equity in income of investee 792 - -
Other 168 (41) (153)
-----------------------------------------------------------------------------
$ 7,883 $ 2,916 $ 1,104
========================================
* consists primarily of interest on long-term and obligations under capital
leases.
Income taxes. Income taxes are reported under Statement of Financial Accounting
Standards No. 109 and, accordingly, deferred income taxes are recognized using
the asset and liability method, whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis, and operating loss and tax credit carryforwards.
Net income (loss) per common share. Basic net income (loss) per share is
computed using the weighted average number of shares outstanding during the
period. The PMC-Sierra Ltd. Special Shares have been included in the calculation
of basic net income (loss) per share. Diluted net income (loss) per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of stock options and warrants.
Share and per share data presented reflect the two-for-one stock splits
effective February 2000 and May 1999.
Segment reporting. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS 131). SFAS 131 uses a management approach to report
financial and descriptive information about a Company's operating segments.
Operating segments are revenue-producing components of the Company for which
separate financial information is produced internally for the Company's
management. Under this definition, the Company operated, for all periods
presented, in two segments: networking and non-networking products.
Comprehensive income. Under Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, the Company is required to report total
comprehensive income and comprehensive income per share. Comprehensive income is
defined as changes in stockholders' equity exclusive of transactions with owners
such as capital contributions and dividends. The Company has no comprehensive
income items, other than the net income or loss in any of the years presented.
Recently issued accounting standards. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133
(SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS 133 will require the recognition of all derivatives on
the Company's consolidated balance sheet at fair value. The FASB has
subsequently delayed implementation of the standard to 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.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101(SAB 101), Revenue Recognition, which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. The Company believes the
adoption of SAB 101 will not have a material impact on the Company's financial
position and results of operations. The Company is required to adopt SAB 101 no
later than the fourth quarter of fiscal 2000.
Reclassifications. Certain prior year amounts have been reclassified in order to
conform with the 1999 presentation.
NOTE 2. Business Combinations and Investments in Other Companies
Acquisition of Quantum Effect Devices, Inc.
-------------------------------------------
In August 2000, the Company acquired Quantum Effect Devices, Inc., a public
company located in the United States. QED develops embedded microprocessors that
perform information processing in networking equipment. Under the terms of the
agreement, approximately 12,300,000 shares of common stock were exchanged and
options assumed to acquire QED.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
During the quarter ended September 24, 2000, PMC-Sierra recorded merger-related
transaction costs of $23,180,000 related to the acquisition of QED. These
charges, which consist primarily of investment banking and other professional
fees, were included under costs of merger in the Condensed Consolidated
Statements of Operations in the quarter ended September 24, 2000.
Acquisition of Extreme Packet Devices, Inc.
-------------------------------------------
In April 2000, the Company acquired Extreme Packet Devices, Inc., a privately
held fabless semiconductor company located in Canada. Extreme specializes in
developing semiconductors for high speed IP and ATM traffic management at 10
Gigabits per second rates. PMC-Sierra issued approximately 2,000,000
exchangeable shares (see note 8) and PMC-Sierra stock options in exchange for
all of the outstanding equity securities and options of Extreme.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
During the quarter ended June 25, 2000, PMC-Sierra recorded merger-related
transaction costs of $5,776,000 related to the acquisition of Extreme. These
charges, which consist primarily of investment banking and other professional
fees, were included under costs of merger in the Condensed Consolidated
Statements of Operations in the quarter ended June 25, 2000.
Acquisition of AANetcom, Inc.
----------------------------
In March 2000, the Company acquired AANetcom, Inc., a privately held fabless
semiconductor company located in the United States. AANetcom's technology is
designed for use in gigabit or terabit switchers and routers, telecommunication
access equipment, and optical networking switches in applications ranging from
the enterprise to the core of the Internet. PMC-Sierra issued approximately
4,800,000 shares of PMC-Sierra common stock in exchange for all of the
outstanding equity securities and options of AANetcom.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
During the quarter ended March 26, 2000, PMC-Sierra recorded merger-related
transaction costs of $7,368,000 related to the acquisition of AANetcom. These
charges, which consist primarily of investment banking and other professional
fees, were included under costs of merger in the Condensed Consolidated
Statements of Operations in the quarter ended March 26, 2000.
Acquisition of Toucan Technology Ltd.
------------------------------------
In January 2000, the Company acquired Toucan Technology Ltd., a privately held
integrated circuit design company located in the Ireland. Toucan offers
expertise in telecommunications semiconductor design. At December 31, 1999, the
Company owned seven per cent of Toucan and purchased the remainder for
approximately 300,000 shares of PMC-Sierra common stock and PMC-Sierra stock
options.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
During the quarter ended March 26, 2000, PMC-Sierra recorded merger-related
transaction costs of $534,000 related to the acquisition of Toucan. These
charges, which consist primarily of investment banking and other professional
fees, were included under costs of merger in the Condensed Consolidated
Statements of Operations in the quarter ended March 26, 2000.
The historical results of operations of the Company, Toucan, AANetcom, Extreme
and QED for the periods prior to the mergers are as follows:
Year Ended December 31,
----------------------------------------
(IN THOUSANDS) 1999 1998 1997
------------------------------------------------------------------------
Net revenues
PMC, as previously reported $ 262,477 $ 161,812 $ 127,166
Toucan 24 739 1,932
AANetcom 780 830 -
Extreme - - -
QED 31,462 9,035 10,239
------------------------------------------------------------------------
Combined $ 294,743 $ 172,416 $ 139,337
========================================
Net income (loss)
PMC, as previously reported $ 90,020 $ (5,945) $ 34,184
Toucan (221) (1,057) 191
AANetcom (6,210) (1,733) (349)
Extreme (1,987) - -
QED (7,163) (12,852) (3,491)
-------------------------------------------------------------------------
Combined $ 74,439 $ (21,587) $ 30,535
=========================================
Acquisition of Abrizio, Inc.
----------------------------
In 1999, the Company 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-Sierra issued approximately
8,704,000 shares in PMC-Sierra common stock and PMC-Sierra stock options in
exchange for all of the outstanding equity securities and options of Abrizio.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
During the quarter ended September 26, 1999, PMC-Sierra 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.
The historical results of operations of the Company and Abrizio for the periods
prior to the merger are as follows:
Six Months
Ended Year Ended December 31,
June 27, ------------------------
1999 1998 1997
---------------------------------------
(IN THOUSANDS)
------------------------------------------------------------------------
Net revenues
PMC $ 109,426 $ 161,812 $ 127,166
Abrizio 850 - -
------------------------------------------------------------------------
Combined $ 110,276 $ 161,812 $ 127,166
========================================
Net income (loss)
PMC $ 51,715 $ (2,878) $ 34,258
Abrizio (3,670) (3,067) (74)
-------------------------------------------------------------------------
Combined $ 48,045 $ (5,945) $ 34,184
=========================================
Acquisition of Integrated Telecom Technology, Inc.
-------------------------------------------------
In 1998, the Company acquired Integrated Telecom Technology, Inc. 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 balance of $28.2 million by the issuance of approximately 1,660,000 shares
of common stock and options to purchase approximately 214,000 shares of common
stock (based on the market value of PMC-Sierra common stock on the issuance
date). The purchase price includes professional fees and other direct costs of
the acquisition totaling $850,000. IGT was a fabless semiconductor company
headquartered in Gaithersburg, Maryland with a development site in San Jose,
California. Upon consummation of the transaction, IGT was merged with a
wholly-owned subsidiary of the Company.
The acquisition was accounted for using the purchase method of accounting and
the final allocation among tangible and intangible assets and liabilities was as
follows (in thousands):
Tangible assets $ 4,598
Intangible assets:
Developed and core technology 7,830
Assembled workforce 1,050
Goodwill 9,284
In process research and development ("IPR&D") 37,757
Liabilities (4,669)
-----------
$ 55,850
===========
The 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. In the allocation of the IGT acquisition purchase price to IPR&D
consideration was given to the following for each in process project at the time
of the acquisition:
- the present value of the forecasted cash flows and income that were expected
to result from the projects;
- the status of the projects;
- completion costs;
- project risks;
- the value of core technology; and
- the stage of completion of the individual project.
In valuing core technology, the relative allocations to core technology and
IPR&D were consistent with the relative contributions of each project. The value
of IPR&D was determined based on efforts completed as of the date IGT was
acquired.
As of the acquisition date, IGT had three development projects in process. In
order to develop these projects into commercially viable products, the Company
had to complete all planning, designing and testing activities necessary to
establish that the products could be produced to meet their design requirements.
Project A was completed in the first quarter of 1999 and was in full production
by the end of the year. Project B was in development in the fourth quarter of
1998 and was in full production by the first quarter of 1999. This was
consistent with the initial estimates used in the valuation of the projects.
During the third quarter of 1998, the Company determined that the intangible
value of Project C was impaired. The developed and core technology related to
this project in process at the time of acquisition was determined not to be
technologically feasible and had no alternative future use. As a result, the
Company recognized an impairment of $4.3 million in intangible assets and
related goodwill.
NOTE 3. Investments and Other Assets
The components of Investments and Other Assets are as follows:
December 31,
----------------------------
(in thousands) 1999 1998
Investments in Non-Public companies $ 8,050 $ 4,091
Investments in Equity Accounted Investee 3,506 -
Other Assets 271 569
---------- ----------
$ 11,827 $ 4,660
========== ==========
Investments in Non-Public Companies
-----------------------------------
The Company has certain investments in non-publicly traded companies which are
generally recorded at cost. In 1999, the Company made investments in various
non-publicly traded companies for total cash consideration of $8.5 million (1998
- nil; 1997 - $3 million).
During the second quarter of 1999, the Company recognized a gain related to the
disposition of its investment in IC Works, Inc. (ICW). ICW was purchased by
Cypress Semiconductor, Inc. (Cypress), a publicly traded 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 had a fair market value of approximately $8.6 million. During the
same quarter, the Company 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
until first quarter of 2000 and are carried at the nominal book value of the
Company's original investment in ICW.
Investments in Equity Accounted Investee
----------------------------------------
During the second quarter of 1999, the Company's investee, Sierra Wireless Inc.,
which was accounted for under the cost method, 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 IPO for a pre-tax gain of approximately $14.5 million.
As a result of these transactions, at December 31, 1999, the Company owned
approximately 24% of the common shares of Sierra Wireless and accounts for its
investment under the equity method. The difference between the carrying value of
the investment and the underlying equity in net assets, representing negative
goodwill in the amount of $7.4 million, is being amortized to equity in income
of investee over a five year period. Included in Interest and other income, net
for the year ended December 31, 1999, is equity in income of Sierra Wireless of
$792,000.
As at December 31, 1999, the quoted market value of the Company's investment in
Sierra Wireless was approximately $152.3 million. The common shares of Sierra
Wireless held by the Company are subject to certain resale provisions.
NOTE 4. Lines of credit
At December 31, 1999, the Company had available a revolving line of credit with
a bank under which the Company may borrow up to $15 million with interest at the
bank's alternate base rate (annual rate of 8.5% at December 31, 1999). The
Company cannot pay cash dividends, or make material divestments without the
prior written consent of the bank. The agreement expires in May 2001. At
December 31, 1999 and December 31, 1998, there were no amounts outstanding under
this agreement.
NOTE 5. Obligations Under Capital Leases and Long-Term Debt
Obligations under capital leases and long-term debt are as follows:
December 31,
-----------------------
(IN THOUSANDS) 1999 1998
--------------------------------------------------------------------------------
Obligations under capital leases with interest $ 2,084 $ 11,217
ranging from 7.4% to 17.9%
Various loans, secured by property and equipment, 4,146 2,110
payable in annual installments of
approximately $1,012,000 and with interest rates
ranging from 6.25% to 12.3%
Various unsecured notes, with unspecified maturity 1,361 1,332
dates and with interest rates ranging from 5% to 8%
Various unsecured notes, payable in various 1,169 1,710
installments with interest rates
ranging from 0% to 10%
--------------------------------------------------------------------------------
8,760 16,369
Less current portion (3,863) (6,189)
--------------------------------------------------------------------------------
$ 4,897 $ 10,180
==========================
Future minimum lease payments at December 31, 1999 under capital leases are as
follows:
Year Ending December 31 (in thousands)
-----------------------------------------------------------------------
2000 $ 1,533
2001 586
2002 100
2003 9
-----------------------------------------------------------------------
Total minimum lease payments 2,228
Less amount representing imputed interest (144)
-----------------------------------------------------------------------
Present value of future minimum lease payments $ 2,084
===========
Future principal payments at December 31, 1999 of long-term debt are as follows:
Year Ending December 31 (in thousands)
-----------------------------------------------------------------------
2000 $ 2,420
2001 3,473
2002 736
2003 47
-----------------------------------------------------------------------
$ 6,676
==========
NOTE 6. Commitments and Contingencies
Operating leases. The Company leases its facilities under operating lease
agreements, which expire at various dates through October 1, 2009. Total rent
expense for the years ended December 31, 1999, 1998 and 1997 was $4.3 million,
$2.3 million and $1.5 million, respectively.
Minimum future rental payments under these leases are as follows:
Year Ending December 31 (in thousands)
-----------------------------------------------------------------------
2000 $ 5,551
2001 7,191
2002 6,750
2003 6,717
2004 6,207
thereafter 26,706
-----------------------------------------------------------------------
$ 59,122
=========
Supply agreements. The Company has wafer supply agreements with two independent
foundries, which expire in December 2000. Under these agreements, the suppliers
are obligated to provide certain quantities of wafers per year. Neither of the
agreements have minimum unit volume purchase requirements but the Company is
obligated under one of the agreements to purchase in future periods a minimum
percentage of its total annual wafer requirements, provided that the foundry is
able to continue to offer competitive technology, pricing, quality and delivery.
Contingencies. In the normal course of business, the Company receives and makes
inquiries with regard to possible patent infringements. Where deemed advisable,
the Company may seek or extend licenses or negotiate settlements. Outcomes of
such negotiations may not be determinable at any point in time; however,
management does not believe that such licenses or settlements will, individually
or in the aggregate, have a material adverse effect on the Company's financial
position, results of operations or liquidity.
NOTE 7. Special Shares
At December 31, 1999 and 1998, the Company maintained a reserve of 4,242,000 and
5,036,000 shares, respectively, of PMC-Sierra common stock to be issued to
holders of PMC-Sierra,LTD (LTD) Special Shares and options to purchase LTD
Special Shares. The holders of these Special Shares have the right to exchange
one A Special Share for eight shares of the Company's common stock, and one B
Special Share for 2.18448 shares of the Company's common stock.
These Special Shares of LTD are classified outside of stockholders' equity until
such shares are exchanged for PMC-Sierra common stock. Upon exchange, amounts
will be transferred from the LTD Special Shares account to the Company's common
stock and additional paid-in capital on the consolidated balance sheet.
NOTE 8. Stockholders' Equity
Convertible Preferred Stock of QED. Included in stockholders' equity of the
Company are QED $ 0.001 par value per share Series A, B, C, D convertible
preferred shares. At December 31, 1999 and 1998, QED had authorized and
outstanding convertible preferred shares as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Shares Shares Proceeds Net Shares Proceeds Net
Authorized Outstanding of Issuance Costs Outstanding of Issuance Costs
--------------------------- ---------------- ------------ -----------------
Series A 1,800 1,800 $ 2,520 1,800 $ 2,520
Series B 2,594 2,500 6,000 2,500 6,000
Series C 4,804 4,800 11,950 4,800 11,950
Series D 4,700 4,519 19,479 - -
--------- ---------- ------------- ----------- -----------
13,898 13,619 $ 39,949 9,100 $ 20,470
--------- ---------- ------------- ----------- -----------
</TABLE>
On February 1, 2000, QED completed its initial public offering of common stock.
Simultaneously with the closing of the initial public offering, all issued and
outstanding shares of QED's convertible preferred stock were automatically
converted into 13,619,000 shares of QED common stock. All shares of common stock
of QED were exchanged for shares of PMC-Sierra common stock at an exchange ratio
of 0.385 (see Note 2) per QED common share.
Authorized share capital of PMC-Sierra. On July 10, 1997, the Company was
reincorporated in the State of Delaware from the State of California. Prior to
the reincorporation, the Company had authorized capital of 55,405,916 shares,
50,000,000 of which were designated "Common Stock", 5,000,000 of which were
designated "Preferred Stock", and 405,916 of which were designated "Series D
Preferred Stock". All authorized shares had no par value. After the
reincorporation, the Company had an authorized capital of 55,000,000 shares,
50,000,000 of which were designated "Common Stock", $0.001 par value, and
5,000,000 of which were designated "Preferred Stock", $0.001 par value. The
excess of the amount recorded as capital stock over the par value of capital
stock on reincorporation has been recorded as additional paid in capital at
December 31, 1997. The issued and outstanding shares immediately before and
after the reincorporation remained the same. The reincorporation included no
other significant changes with respect to shares outstanding, reserved shares
and various applicable options, rights and warrants.
During 1998 and 1999, the Company's stockholders elected to add an additional
50,000,000 and 100,000,000 authorized shares of common stock, respectively, to
the 50,000,000 shares of common stock authorized at the end of 1997. The Company
currently has an authorized capital of 205,000,000 shares, 200,000,000 of which
are designated "Common Stock", $0.001 par value, and 5,000,000 of which are
designated "Preferred Stock", $0.001 par value.
Stock Splits. In April 1999, the Company's Board of Directors approved a
two-for-one split of the Company's common stock in the form of a stock dividend
that was applicable to shareholders of record on April 30, 1999, and effective
on May 14, 1999.
In January 2000, the Company's Board of Directors approved another two-for-one
split of the Company's common stock in the form of a stock dividend that was
applicable to shareholders of record on January 31, 2000, and effective on
February 14, 2000.
All references to share and per share data for all periods presented have been
adjusted to give effect to these two-for-one stock splits.
Warrants. During 1996, the Company issued a warrant to purchase 100,000 shares
of common stock at $2.31 per share to an investment banking firm in settlement
for services previously expensed. The warrant expires in August 2000. In 1999,
as a result of the Company's acquisition of Abrizio, Inc., the Company assumed
warrants to purchase 174,580 shares of common stock at $1.66 per share. In 2000,
as a result of the Company's acquisitions of AANetcom, Inc., Extreme Packet
Devices, Inc. and Quantum Effect Devices, the Company assumed warrants to
purchase 50,759, 63,162 and 68,434 shares of common stock at $9.36, $3.06 and
$5.26 per share, respectively. These warrants expire between October 2002 and
December 2005. At the end of 1999, warrants to purchase 266,633 shares of common
stock were outstanding.
Exchangeable Shares. As a result of the acquisition of Extreme, each holder of
the Extreme common stock received shares exchangeable into 0.2240 shares of
PMC-Sierra common stock for each Extreme common share held. The shares are
exchangeable, at the option of the holder, for PMC-Sierra common stock on a
share-for-share basis. The exchangeable shares remain securities of PMC-Sierra
and entitle the holders to dividend and other rights economically equivalent to
that of PMC-Sierra common stock and, through a voting trust, to vote at
shareholder meetings of PMC-Sierra. At December 31, 1999, 1,620,000 of these
exchangeable shares were outstanding.
NOTE 9. Employee Benefit Plans
Employee Stock Purchase Plan. In 1991, the Company adopted an Employee Stock
Purchase Plan ("ESPP") under Section 423 of the Internal Revenue Code. A total
of 6,497,012 shares of common stock have been reserved for issuance under the
Plan. Under this Plan, eligible employees may purchase a limited amount of
common stock at a minimum of 85% of the market value at certain plan-defined
dates.
During 1998, the Company's stockholders elected to add a provision to the ESPP.
Under the new terms, the number of shares authorized to be available for
issuance under the plan shall be increased automatically on January 1, 1999, and
every year thereafter until the expiration of the plan. The increase will be
limited to the lesser of (i) 1% of the outstanding shares on January 1 of each
year, (ii) 2,000,000 shares, or (iii) an amount to be determined by the Board of
Directors.
During 1999, 1998 and 1997, respectively, there were 229,518, 385,716 and
420,596 shares issued under the Plan at weighted-average prices of $8.12, $3.07
and $2.60 per share, respectively. The weighted-average fair value of the 1999,
1998 and 1997 awards was $9.32, $2.86 and $1.74 per share, respectively. During
1999, the Company's stockholders authorized an additional 1,257,012 shares to be
available under the plan. At December 31, 1999, there were 2,221,994 shares of
common stock available for issuance under the purchase plan.
Stock Option Plans. The Company has two main stock option plans: the 1987
Incentive Stock Plan and the 1994 Incentive Stock Plan. These plans cover grants
of options to purchase the Company's common stock. The options generally expire
within five to ten years and vest over four years.
During 1998, the Company's common stockholders elected to add a provision to the
1994 Incentive Stock Plan. Under the new terms, the number of shares authorized
to be available for issuance under the plan shall be increased automatically on
January 1, 1999 and every year thereafter until the expiration of the plan. The
increase will be limited to the lesser of (i) 4% of the outstanding shares on
January 1 of each year, (ii) 8,000,000 shares, or (iii) an amount to be
determined by the Board of Directors.
In addition, the Company has, in connection with the acquisitions of various
companies, assumed the stock option plans of each acquired company (see Note 2),
and the related options are included in the following table.
Option activity under the option plans was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Available Number of Options Exercise Price
For Issuance Outstanding Per Share
----------------- ----------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 (5,496,963 9,096,365 13,602,101 $ 2.46
options exercisable at a weighted average
price of $1.73)
Authorized 3,897,642 - -
Granted (weighted average fair value of (6,144,545) 6,144,545 $ 4.09
$2.00 per share)
Exercised - (2,931,664) $ 1.73
Expired (144,448) - -
Cancelled 1,974,885 (1,974,885) $ 3.68
------------ -----------
Outstanding at December 31, 1997 (5,913,843 8,679,899 14,840,097 $ 3.12
options exercisable at a weighted average
price of $2.12)
Authorized 5,539,919 - -
Granted (weighted average fair value of (7,848,463) 7,848,463 $ 5.30
$4.08 per share)
Exercised - (3,908,541) $ 1.61
Expired (54,768) - -
Cancelled 665,756 (665,756) $ 5.41
------------ -----------
Outstanding at December 31, 1998 (6,486,442 6,982,343 18,114,263 $ 4.30
options exercisable at a weighted average
price of $3.17)
Authorized 5,351,836
Granted (weighted average fair value of (10,866,489) 10,866,489 $ 28.88
$16.09 per share)
Exercised (3,659,296) $ 2.74
Expired (2,702) - -
Repurchased 4,568 - -
Cancelled 401,508 (398,836) $ 11.64
------------ -----------
Outstanding at December 31, 1999 1,871,064 24,922,620 $ 15.13
============ ===========
</TABLE>
The following table summarizes information concerning options outstanding for
the combined option plans at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price per share Exercisable Price per share
------------------ ----------- ----------- --------------- ------------ ---------------
$ 0.02 - $ 3.53 6,195,711 7.21 $ 2.02 3,446,083 $ 2.41
$ 3.57 - $ 6.25 3,825,378 6.77 4.18 2,792,999 4.12
$ 6.35 - $ 14.05 5,383,078 8.20 8.22 2,059,532 8.02
$ 15.99 - $ 25.97 5,442,174 9.12 17.56 1,290 25.97
$ 32.21 - $ 53.07 4,076,279 9.93 51.21 0 0.00
----------- -----------
$ 0.02 - $53.07 24,922,620 8.22 15.13 8,299,904 4.38
=========== ===========
</TABLE>
Stock-based compensation. In accordance with the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies APB
Opinion 25 and related interpretations in accounting for its stock-based awards.
The Company's ESPP is non-compensatory under APB Opinion 25. The Company also
does not recognize compensation expense for employee stock options which are
granted with exercise prices equal to the fair market value of the Company's
common stock at the date of grant.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for awards granted or modified after December 31,
1994 as if the Company had accounted for its stock-based awards to employees
under the fair value method of SFAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated using the
multiple option approach, recognizing forfeitures as they occur, assuming no
expected dividends and using the following weighted average assumptions:
Options ESPP
----------------------- ------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Expected life (years) 3.4 3.4 2.6 1.4 1.5 1.4
Expected volatility 0.7 0.7 0.7 0.7 0.7 0.8
Risk-free interest rate 5.4% 5.2% 6.0% 5.2% 5.2% 5.9%
If the computed fair values of 1999, 1998 and 1997 awards had been amortized to
expense over the vesting period of the awards as prescribed by SFAS 123, net
income (loss) and net income (loss) per share would have been:
(in thousands except per share amounts):
1999 1998 1997
-------- -------- --------
Net income (loss) $ 47,947 $(33,266) $26,005
Basic net income (loss) per share 0.33 (0.24) 0.20
Diluted net income (loss) per share 0.30 (0.24) 0.19
The pro forma disclosures above include the effect of SFAS 128 relating to the
calculation of net income per share and FASB Technical Bulletin 97-1, which
clarified the application of SFAS 123 for the estimation of the fair value of
awards under ESPP plans with a multiple year look-back feature.
Because SFAS 123 is applicable only to awards granted or modified subsequent to
December 31, 1994, the pro forma effect is not indicative of future pro forma
adjustments, when the calculation will apply to all applicable stock awards.
NOTE 10. Income Taxes
The income tax provisions, calculated under Statement of Financial Accounting
Standard No. 109 ("SFAS 109"), consist of the following:
Year Ended December 31,
-------------------------------------------
(IN THOUSANDS) 1999 1998 1997
-------------------------------------------------------------------------------
Current:
Federal $ - $ - $ (1,797)
State 525 190 (12)
Foreign 43,842 23,868 13,963
-------------------------------------------------------------------------------
44,367 24,058 12,154
-------------------------------------------------------------------------------
Deferred:
Federal (132) (43) 2,251
Foreign (2,898) (1,040) 1,411
-------------------------------------------------------------------------------
(3,030) (1,083) 3,662
-------------------------------------------------------------------------------
Provision for income taxes $ 41,337 $ 22,975 $ 15,816
===========================================
A reconciliation between the Company's effective tax rate and the U.S. Federal
statutory rate is as follows:
Year Ended December 31,
----------------------------------
(IN THOUSANDS) 1999 1998 1997
--------------------------------------------------------------------------------
Income (loss) before provision for income
taxes $ 115,776 $ 1,388 $ 46,351
Federal statutory tax rate 35% 35% 35%
Income taxes at U.S. Federal statutory rate $ 40,522 $ 486 $ 16,223
State taxes, net of federal benefit 525 - -
Net operating losses (utilized) not utilized (941) 6,389 (3,149)
In-process research and development costs
relating to IGT acquisition - 13,214 -
In-process research and development costs
relating to other acquisitions - 497 -
Impairment of intangible assets - 1,509 -
Incremental taxes on foreign earnings (698) 234 2,258
Other 1,929 646 484
--------------------------------------------------------------------------------
Provision for income taxes $ 41,337 $ 22,975 $ 15,816
==================================
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
-------------------------
(IN THOUSANDS) 1999 1998
------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 62,625 $ 28,582
State tax loss carryforwards 4,294 1,897
Credit carryforwards 7,405 4,526
Reserves and accrued expenses 6,487 1,330
Restructuring and other charges 842 3,732
Deferred income 9,328 1,682
------------------------------------------------------------------------------
Total deferred tax assets 90,981 41,749
Valuation allowance (81,711) (40,243)
------------------------------------------------------------------------------
Total net deferred tax assets 9,270 1,506
------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (8,885) (4,015)
Capitalized technology (206) (342)
------------------------------------------------------------------------------
Total deferred tax liabilities (9,091) (4,357)
------------------------------------------------------------------------------
Total net deferred taxes $ 179 $ (2,851)
=========================
At December 31, 1999, the Company has approximately $183,157,000 of federal net
operating losses, which will expire from 2000 to 2019. Included in the federal
net operating losses is $13,726,000 which is subject to a limitation due to
ownership change limitations provided by the Internal Revenue Code of 1986. The
Company also has approximately $77,657,000 of state tax loss carryforwards,
which expire from 2001 to 2013. The utilization of these state losses is subject
to a limitation due to ownership change limitations provided by the various
state income tax legislation.
Included in the credit carryforwards at December 31, 1999 are $3,585,000 of
federal research and development credits, which will expire from 2000 to 2012,
$628,000 of state manufacturer's investment credits which expire from 2002 to
2006, $1,767,000 of foreign tax credits which expire from 2000 to 2003,
$1,012,000 of state research and development credits and $410,000 of federal AMT
credits which carryforward indefinitely.
Not included in the deferred assets at December 31, 1999 are approximately
$39,547,000 of cumulative tax deductions related to equity transactions, the
benefit of which will be credited to stockholders' equity, if and when realized
after the other tax deductions in the carryforwards have been realized.
The pretax income from foreign operations was $116,839,000 in 1999, $61,298,000
in 1998 and $37,200,000 in 1997. Undistributed earnings of the Company's foreign
subsidiaries are considered to be indefinitely reinvested and accordingly, no
provision for federal and state income taxes have been provided thereon. Upon
distribution of those earnings in the form of a dividend or otherwise, the
Company would be subject to both US income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to the various foreign
countries. It is not practical to estimate the income tax liability that might
be incurred on the remittance of such earnings.
NOTE 11. 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 user interface products such as custom, modem and other semiconductors.
The Company is supporting these 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 gross margins from operations of the two segments.
Summarized financial information by segment is as follows:
Year Ended December 31,
------------------------------------------------
(in thousands) 1999 1998 1997
------------------------------------------------------------------------
Net revenues
Networking $ 277,452 $ 150,143 $ 97,683
Non-Networking 17,291 22,273 41,654
------------------------------------------------------------------------
Total $ 294,743 $ 172,416 $ 139,337
============= =================================
Gross profit
Networking $ 214,186 $ 117,830 $ 80,702
Non-Networking 7,928 10,529 24,572
------------------------------------------------------------------------
Total $ 222,114 $ 128,359 $ 105,274
================================================
Enterprise-wide information is provided in accordance with SFAS 131. Geographic
revenue information is based on the location of the customer invoiced.
Long-lived assets include property and equipment, goodwill and other intangible
assets, investments and other assets and deposits for wafer fabrication
capacity, and is based on the physical location of the assets.
Year Ended December 31,
------------------------------------------------
(in thousands) 1999 1998 1997
----------------------------------------------------------------------------
Net revenues
United States $ 205,473 $ 118,941 $ 100,858
Canada 42,731 15,851 12,373
Europe and Middle East 14,830 13,449 12,114
Asia 31,521 24,076 13,693
Other foreign 188 99 299
---------- ----------- ------------
Total $ 294,743 $ 172,416 $ 139,337
========== =========== ============
Long-lived assets
United States $ 34,700 $ 40,121 $ 28,724
Canada 57,311 38,865 29,297
Other 1,040 855 849
---------- ----------- ------------
Total $ 93,051 $ 79,841 $ 58,870
========== =========== ============
The Company has revenues from external customers (1999 and 1998 - 2, 1997 - 1)
that exceed 10% of total net revenues as follows:
Year Ended December 31,
-----------------------------------------
(in thousands) 1999 1998 1997
------------------------------------------------------------------------
Networking $ 95,764 $ 31,780 $ 1,757
Non-Networking - 18,579 21,403
NOTE 12. Restructuring
On September 29, 1996, the Company recorded a restructuring charge in connection
with the Company's decision to exit from the modem chipset business and the
associated restructuring of the Company's non-networking product operations. In
1997, the Company recorded a recovery of $1,383,000 from the reversal of the
excess accrued restructuring charge related to the completion of the
restructuring. There were no additional amounts incurred related to this
restructuring in 1999 and 1998.
NOTE 13. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income
(loss) per share:
December 31,
-----------------------------------
1999 1998 1997
Numerator:
Net income (loss) $ 74,439 $ (21,587) $ 30,535
-----------------------------------
Denominator:
Basic weighted average common shares
outstanding (1) 146,064 137,030 127,767
Effect of dilutive securities:
Stock options 13,590 - 6,310
Stock warrants 116 - 56
-----------------------------------
Diluted weighted average common shares
outstanding 159,770 137,030 134,133
===================================
Basic net income (loss) per share $ 0.51 $ (0.16) $ 0.24
===================================
Diluted net income (loss) per share $ 0.47 $ (0.16) $ 0.23
===================================
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic
weighted average common shares outstanding.
NOTE 14. Subsequent Events
During fiscal 2000, the Company acquired Toucan, AANetcom, and Extreme and QED.
These acquisitions have been accounted for as poolings of interests and are
reflected in these financial statements. Refer to Note 2 for more details.
On June 27, 2000, the Company acquired Malleable Technologies Inc., a privately
held fabless semiconductor company located in the United States. The Company
issued approximately 1,250,000 PMC-Sierra common shares and options in exchange
for the remaining 85% interest of Malleable's outstanding common stock, options
and warrants that the Company did not already own. This transaction will be
accounted for as a purchase.
On July 21, 2000, the Company completed the acquisition of Datum Telegraphic
Inc., a privately held fabless semiconductor company located in Canada. The
Company issued approximately 681,000 PMC-Sierra common shares and options and
paid approximately $17 million in cash in exchange for the remaining 92%
interest of Datum's outstanding common stock and options that the Company did
not already own. This transaction will be accounted for as a purchase.
On September 29, 2000, the Company acquired SwitchOn Networks, Inc., a privately
held fabless semiconductor located in the United States. Under the terms of the
agreement, approximately 2,113,000 shares of common stock were issued and stock
options and warrants were assumed to acquire SwitchOn. This transaction will be
accounted for as a pooling of interests.
The pro forma effects of the Malleable, Datum and SwitchOn acquisitions on the
reported financial position and the results of operations are not presented in
this document.
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 1, 2000
PMC-SIERRA, INC.
/s/ John W Sullivan
----------------------
John W. Sullivan
Vice-President, Finance and
Principal Accounting Officer
(c) Exhibits pursuant to Item 601 of Regulation S-K
Exhibit Description
Number
----------------------------------------------------------------------------
23.1 Consent of Deloitte & Touche LLP, Independent
Auditors
27 Restated Financial Data Schedules
