<PAGE>
As filed with the Securities and Exchange Commission on July 20, 2000
Registration No. -
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
PMC-SIERRA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 3674 94-2925073
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction of Classification Code
incorporation or Number)
organization)
PMC-SIERRA, INC.
900 East Hamilton Avenue
Suite 250
Campbell, CA 95008
(408) 626-2000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Robert L. Bailey
Chairman of the Board of Directors and Chief Executive Officer
PMC-SIERRA, INC.
900 East Hamilton Avenue
Suite 250
Campbell, CA 95008
(408) 626-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
With Copies to:
Neil Wolff David A. Lipkin
Wilson Sonsini Goodrich & Rosati Cooley Godward LLP
Professional Corporation Five Palo Alto Square
650 Page Mill Road 3000 El Camino Real
Palo Alto, CA 94304 Palo Alto, CA 94306
(650) 493-9300 (650) 843-5000
----------------
Approximate date of commencement of proposed sale to the public: Upon
consummation of the merger described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1) Per Share Price(2) Fee
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<S> <C> <C> <C> <C>
Common Stock $0.001 par
value.................. 12,534,675 Not Applicable $2,658,917,983 $701,954.35
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</TABLE>
(1) Based upon the maximum number of shares of common stock, $0.001 par value
per share, of PMC-Sierra, Inc., that may be issued pursuant to the merger
giving effect to the exercise of all currently outstanding options to
purchase Quantum Effect Devices, Inc.'s common stock, $0.001 par value per
share and rights to purchase QED common stock under QED's Employee Stock
Purchase Plan.
(2) Estimated solely for purposes of calculating the registration fee required
by the Securities Act of 1933, as amended, and computed pursuant to Rules
457(f) and (c) under the Securities Act based on $212.13, the average of
the high and low per share prices of common stock of PMC on the Nasdaq
National Market on July 19, 2000.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.
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<PAGE>
TO THE STOCKHOLDERS OF QUANTUM EFFECT DEVICES, INC.
A MERGER PROPOSAL--YOUR VOTE IS VERY IMPORTANT
Dear Stockholder:
You are cordially invited to attend a special meeting of the stockholders of
Quantum Effect Devices, Inc., or QED, on , 2000 at 2500 Augustine
Boulevard, Suite 200, Santa Clara, CA 95054, at 10:00 a.m., local time. At the
special meeting, you will be asked to adopt the reorganization agreement
between PMC-Sierra, Inc. and QED.
If the merger is completed, QED will become a wholly-owned subsidiary of PMC
and you will become a stockholder of PMC. In the merger, each share of your QED
common stock will be exchanged for 0.385 of a share of PMC common stock. If the
merger is completed, PMC will assume QED's warrants, stock option plan and
employee stock purchase plan, as adjusted by the 0.385 exchange ratio. PMC
common stock is listed on the Nasdaq National Market under the trading symbol
"PMCS," and on , 2000, PMC common stock closed at $ per share. Based
on the number of shares of common stock of QED and PMC outstanding on June 30,
2000, the former stockholders of QED will own approximately 6.7% of PMC's
common stock after the merger assuming exercise of outstanding QED options and
warrants.
You may vote at the special meeting if you own shares of QED as of the close
of business on , 2000. The merger cannot be completed unless QED's
stockholders approve the adoption of the reorganization agreement. The board of
directors of QED has unanimously approved the reorganization agreement and
recommends that its stockholders adopt the reorganization agreement. Your vote
is very important. Whether or not you plan to attend the special meeting in
person, please take the time to vote by completing and mailing the enclosed
proxy card to us or by voting electronically as described in the enclosed proxy
card. If you sign, date and mail your proxy card without indicating how you
want to vote, your proxy will count as a vote in favor of the merger. If you
attend the special meeting in person, you may vote your shares personally on
all matters even if you have previously returned a proxy card.
This proxy statement-prospectus provides you with detailed information about
the proposed merger. PMC provided the information concerning PMC. QED provided
the information concerning QED. Please see "Where You Can Find More
Information" on page 92 for additional information about PMC and QED. In
particular, you should carefully consider the discussion in the section
entitled "Risk Factors" on page 13 of the proxy statement-prospectus.
/s/ Thomas Riordan
Thomas Riordan
Chief Executive Officer
Quantum Effect Devices, Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the shares of PMC common stock to be
issued in connection with the merger or determined whether this proxy
statement-prospectus is adequate or accurate. Any representation to the
contrary is a criminal offense.
This proxy statement-prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this proxy
statement-prospectus, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither
the delivery of this proxy statement-prospectus nor any distribution of
securities pursuant to this proxy statement-prospectus shall, under any
circumstances, create any implication that there has been no change in the
information set forth or incorporated into this proxy statement-prospectus by
reference or in our affairs since the date of this proxy statement-prospectus.
The information contained in this proxy statement-prospectus with respect to
QED was provided by QED and the information contained in this proxy statement-
prospectus with respect to PMC and its subsidiaries was provided by PMC.
<PAGE>
Quantum Effect Devices, Inc.
2500 Augustine Boulevard, Suite 200
Santa Clara, CA 95054
(408) 565-0335
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Date: , 2000
Time: 10:00 a.m.
Place: 2500 Augustine Boulevard, Suite 200, Santa Clara, CA 95054
----------------
At the meeting you will be asked:
1. To consider and vote upon a proposal to adopt the Agreement and Plan of
Reorganization, dated as of July 11, 2000, by and among PMC-Sierra, Inc.,
Penn Acquisition Corp., a wholly-owned subsidiary of PMC, and Quantum Effect
Devices, pursuant to which
. Penn Acquisition Corp. will merge with and into QED and QED will survive
the merger as a wholly-owned subsidiary of PMC.
. Holders of outstanding shares of QED common stock will receive 0.385 of
a share of PMC common stock for each share of QED common stock they
hold.
. PMC will assume QED's warrants, stock option plan and employee stock
purchase plan, based on the same exchange ratio.
Adoption of the reorganization agreement will also constitute approval of
the merger and the other transactions contemplated by the reorganization
agreement.
2. To transact such other business as may properly come before the special
meeting or any adjournment of the special meeting.
The affirmative vote of a majority of the outstanding shares of QED common
stock is required to adopt the reorganization agreement.
The attached proxy statement-prospectus contains a more complete description
of these items of business including the reorganization agreement, the proposed
merger and certain actions to be taken in connection with the merger. You are
cordially invited to attend the meeting in person. To ensure that your vote
will be counted, please complete, date and sign the enclosed proxy and return
it promptly in the enclosed postage-paid envelope, or vote electronically as
described on the enclosed proxy card, whether or not you plan to attend the
special meeting. You may revoke your proxy in the manner described in the
accompanying document at any time before it is voted at the special meeting.
Executed proxies with no instructions indicated thereon will be voted "FOR"
adoption of the reorganization agreement.
Only holders of record of QED common stock at the close of business on
, 2000, the record date, are entitled to vote on the matters listed in
this notice of special meeting. You may vote in person at the QED special
meeting even if you have returned a proxy.
/s/ Thomas Riordan
Thomas Riordan
Chief Executive Officer
Quantum Effect Devices, Inc.
Whether or Not You Plan to Attend the Meeting,
Please Complete, Sign, Date and Return the Accompanying Proxy
In the Enclosed Self-addressed Stamped Envelope.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Questions and Answers About the Merger..................................... iii
Summary.................................................................... 1
The Companies............................................................ 1
The Merger............................................................... 1
Selected Historical and Pro Forma Combined Financial Data................ 5
Comparative Per Share Market Price Data.................................. 11
Risk Factors............................................................... 13
Risks Related to the Merger.............................................. 13
Risks Related to PMC..................................................... 14
Risks Related to QED..................................................... 15
The Merger................................................................. 24
Background of the Merger................................................. 24
Reasons for the Merger................................................... 25
Recommendation of QED's Board of Directors............................... 27
Opinion of QED's Financial Advisor....................................... 28
Interests of Certain QED Directors, Officers and Affiliates in the
Merger.................................................................. 35
Completion and Effectiveness of the Merger............................... 35
Structure of the Merger and Conversion of QED Common Stock............... 35
Exchange of QED Stock Certificates for PMC Stock Certificates............ 36
Material United States Federal Income Tax Considerations of the Merger... 36
Accounting Treatment of the Merger....................................... 38
Regulatory Filings and Approvals Required to Complete the Merger......... 38
Restrictions on Sales of Shares by Affiliates of QED and PMC............. 38
Nasdaq Listing of PMC Common Stock to be Issued in the Merger............ 38
Delisting and Deregistration of QED Common Stock after the Merger........ 38
The Reorganization Agreement............................................... 39
Conditions to Completion of the Merger................................... 39
Representations and Warranties........................................... 40
QED's Operation of Business Before Completion of the Merger.............. 42
PMC's Conduct of Business Before Completion of the Merger................ 43
No Solicitation Involving QED............................................ 43
Other Matters Prior to the Completion of the Merger...................... 45
Termination of the Reorganization Agreement.............................. 46
Payment of Termination Fee............................................... 48
Extension, Waiver and Amendment of the Reorganization Agreement.......... 48
Voting Agreements........................................................ 48
Affiliate Agreements..................................................... 49
Noncompetition and Nonsolicitation Agreements............................ 49
Operations After the Merger.............................................. 49
The Special Meeting of QED Stockholders.................................... 50
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<S> <C>
Date, Time and Place of the Special Meeting............................. 50
Stockholders Record Date for the Special Meeting........................ 50
Vote of QED Stockholders Required for Adoption of the Reorganization
Agreement.............................................................. 50
Proxies................................................................. 50
Availability of Accountants............................................. 51
The Companies............................................................. 52
PMC's Business.......................................................... 52
QED's Business.......................................................... 57
QED Management's Discussion and Analysis of Financial Condition and
Results of Operations of QED............................................. 67
Overview................................................................ 67
QED's Quarterly Results of Operations................................... 68
Comparison of the Nine Month Periods Ended March 31, 2000 and 1999...... 70
Comparison of the Years Ended June 30, 1999, 1998 and 1997.............. 71
Income Taxes............................................................ 72
Liquidity and Capital Resources......................................... 72
Quantitative and Qualitative Disclosures About Market Risk.............. 73
Unaudited Pro Forma Condensed Combined Financial Information.............. 75
Share Ownership by Principal Stockholders, Management and Directors of
QED...................................................................... 85
Description of PMC Capital Stock.......................................... 87
Description of QED Capital Stock.......................................... 88
Comparison of Rights of Holders of QED Common Stock and PMC Common Stock.. 88
Experts................................................................... 91
Legal Matters............................................................. 91
Where You Can Find More Information....................................... 92
Stockholder Proposals for the 2000 Annual Meeting of QED Stockholders if
the Merger is not Completed.............................................. 93
Quantum Effect Devices, Inc. Index To Financial Statements................ F-1
</TABLE>
LIST OF ANNEXES
<TABLE>
<C> <S>
ANNEX A --Agreement and Plan of Reorganization
ANNEX B --Form of Voting Agreement
ANNEX C --Opinion of Morgan Stanley & Co. Incorporated, dated July 11, 2000
ANNEX D --PMC quarterly financial statements (restated for pooling of
interests transactions consummated in 2000) for the quarter ended
March 26, 2000
ANNEX E --PMC annual financial statements (restated for pooling of interests
transactions consummated in 2000)
--Malleable Technologies, Inc. quarterly financial statements for the
ANNEX F quarter ended March 31, 2000
ANNEX G --Malleable Technologies, Inc. annual financial statements for the
fiscal year ended December 31, 1999
--PMC's quarterly report on Form 10-Q for the quarter ended March 26,
ANNEX H 2000
--PMC's annual report on Form 10-K, as amended, for the fiscal year
ANNEX I ended December 26, 1999
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will I receive in the merger? (see page 36)
A: If the merger is completed, you will receive 0.385 of a share of PMC common
stock for each share of QED common stock you own. PMC will not issue any
fractional shares. You will also receive cash based on the average closing
price of PMC common stock on the Nasdaq National Market for the five trading
days prior to the completion of the merger in lieu of any fractional share of
PMC common stock you would otherwise be entitled to receive. The exchange ratio
will not change even if the market prices of QED or PMC common stock fluctuate.
Based on the number of QED and PMC shares outstanding as of June 30, 2000, the
former stockholders of QED (assuming exercise of outstanding QED options and
warrants) will own approximately 6.7% of PMC's common stock after the merger.
Q: Will I be able to trade the PMC common stock that I receive in the merger?
(see page 38)
A: Yes. The PMC common stock you receive will be freely tradeable unless you
are an affiliate of PMC or QED. PMC's common stock is listed on the Nasdaq
National Market under the symbol "PMCS."
Q: What do I need to do now? (see page 50)
A: After you review this proxy statement-prospectus, you can either mail your
signed proxy card in the enclosed return envelope as soon as possible so that
your shares can be voted at the special meeting of QED stockholders or vote
your shares electronically in accordance with the instructions provided on the
enclosed proxy card.
Q: What happens if I return a signed proxy card but do not indicate how to vote
my proxy? (see page 50)
A: If you do not include instructions on how to vote your properly signed
proxy, your shares will be voted FOR adoption of the reorganization agreement.
Q: What happens if I don't return a proxy card or vote electronically? (see
page 50)
A: If you don't return your proxy card, vote electronically, or vote at the QED
special meeting, it will have the same effect as voting AGAINST adoption of the
reorganization agreement.
Q: If my broker holds my shares in "street name," will my broker vote my shares
for me? (see page 50)
A: No. Your broker will not be able to vote your shares without instructions
from you. If you do not provide your broker with voting instructions, this will
have the same effect as voting against adoption of the reorganization
agreement.
Q: Can I change my vote after I have mailed my signed proxy card or vote
electronically? (see page 51)
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can send a
written notice to the Secretary of QED stating that you would like to revoke
your proxy. Second, you can complete and submit a new proxy card dated later
than the first proxy card, or you can vote electronically per the instructions
on the enclosed proxy card. Third, you can attend the special meeting, file a
written notice of revocation of your proxy with the Secretary of QED and vote
in person. Your attendance alone will not revoke your proxy. If you have
instructed a broker to vote your shares, you must follow your broker's
directions to change those instructions.
iii
<PAGE>
Q: What does the QED board of directors recommend? (see page 27)
A: The QED board of directors approved the reorganization agreement and
recommends that you vote FOR the proposal to adopt the reorganization
agreement.
Q: Should I send in my stock certificates now? (see page 36)
A: No. After the merger is completed, PMC will send you written instructions
for exchanging your QED stock certificates for PMC stock certificates.
Q: When do you expect the merger to be completed? (see page 38)
A: We are working towards completing the merger as quickly as possible. In
addition to stockholder approval, we must also receive clearance under the
Hart-Scott-Rodino Antitrust Improvements Act and each of QED and PMC must
satisfy or waive all of the closing conditions contained in the reorganization
agreement. We hope to complete the merger promptly after the QED stockholder
meeting.
Q: Will I recognize gain or loss for tax purposes? (see page 36)
A: The merger has been structured as a reorganization for United States federal
income tax purposes. QED common stockholders will not recognize gain or loss
for United States federal income tax purposes by exchanging their QED shares
for shares of PMC common stock in the merger. However, QED stockholders will
recognize gain or loss with respect to cash received in lieu of a fractional
share of PMC common stock. You are urged to consult your own tax advisor to
determine your particular tax consequences resulting from the merger.
Q: Am I entitled to appraisal rights?
A: No. Holders of QED common stock are not entitled to appraisal rights in
connection with the merger.
Q: Will my rights as a QED stockholder change as a result of the merger? (see
page 89)
A: Yes. While your stockholder rights will remain governed by Delaware law, you
will become a PMC stockholder as a result of the merger and will have rights
after the merger which are governed by PMC's certificate of incorporation and
by-laws.
Q: Is PMC stockholder approval required?
A: No.
Q: Who can help answer my questions?
A: You can write or call QED Investor Relations at Quantum Effect Devices,
Inc., 2500 Augustine Boulevard, Suite 200, Santa Clara, CA 95054, telephone
(408) 330-0503 with any questions about the merger.
iv
<PAGE>
SUMMARY
This summary may not contain all of the information that is important to
you. You should carefully read this entire document and its attachments for a
more complete understanding of the reorganization agreement and merger. The
reorganization agreement is attached as Annex A to this document. We encourage
you to read the reorganization agreement which is the document governing the
merger.
The Companies
Quantum Effect Devices, Inc.
2500 Augustine Blvd., Suite 200
Santa Clara, CA 95054
(408) 565-0300
QED is a leading developer of high-performance embedded microprocessors that
perform information processing in:
. networking/communication infrastructure equipment, such as routers and
switches;
. business network equipment, such as laser printers, network computers and
data storage systems; and
. consumer network products, such as set-top boxes and cable modems.
QED maintains a site on the Internet at www.qedinc.com. Information found at
QED's website is not a part of this document. QED was originally incorporated
in the State of California in 1991 and was reincorporated in the State of
Delaware in 1999.
PMC-Sierra, Inc.
900 E. Hamilton Ave, Suite 250
Campbell, CA 95008
(408) 626-2000
PMC designs, develops, markets and supports high-performance semiconductor
networking solutions. PMC's Internet Protocol, ATM, SONET/SDH, T1/E1/T3/E3,
voice over packet and wireless infrastructure products are used in high-speed
transmission and networking systems. PMC's products adhere to international
standards and are sold on the merchant market either directly or through its
worldwide distribution channels.
PMC maintains a site on the Internet at www.pmc-sierra.com. Information
found at PMC's website is not part of this document. PMC was originally
incorporated in the State of California in 1983 and was reincorporated in the
State of Delaware in 1997.
The Merger
QED's Reasons for the Merger (see page )
QED anticipates several potential benefits from the merger, including the
following.
. QED's microprocessor technology, design expertise and products complement
PMC's networking product design, manufacturing and support capabilities.
. The merger will enable QED to use PMC's sales channels to reach PMC's
worldwide customer base.
. QED as part of PMC will be able to direct more resources towards
microprocessor research and development.
QED also believes that the merger will provide QED's stockholders with
equity that enjoys greater liquidity than is currently available for QED common
stock.
Structure of the Transaction (see page 35)
QED will merge with a subsidiary of PMC and become a wholly-owned subsidiary
of PMC. Following the merger, QED stockholders (assuming exercise of
outstanding options and warrants of QED) will own PMC common stock representing
approximately 6.7% of PMC.
1
<PAGE>
Stockholder Approval (see page 50)
The holders of a majority of the outstanding shares of QED common stock must
adopt the reorganization agreement for the merger to occur. Each share of QED
common stock outstanding on the record date has one vote.
Recommendation of QED's Board of Directors (see page 27)
After careful consideration, QED's board of directors has determined the
merger to be fair to you and in your best interests. QED's board of directors
has approved the reorganization agreement and recommends that you adopt it.
Opinion of QED's Financial Advisor (see page 28)
Morgan Stanley & Co. Incorporated, QED's financial advisor, has delivered an
opinion to QED's board of directors that, as of the date of its opinion and
subject to the considerations described in its opinion, the exchange ratio
pursuant to the reorganization agreement is fair from a financial point of view
to holders of QED common stock. You should read Annex C, which contains the
full text of that opinion.
Completion and Effectiveness of the Merger (see page 35)
PMC and QED will complete the merger when all of the conditions to
completion of the merger are satisfied or waived. The merger will become
effective when PMC files a certificate of merger with the State of Delaware.
PMC and QED are working toward completing the merger as quickly as
reasonably possible and hope to complete the merger promptly after the QED
special stockholder meeting.
Conditions to Completion of the Merger (see page 39)
PMC's and QED's respective obligations to complete the merger are subject to
the prior satisfaction or waiver of conditions.
. Both PMC's and QED's obligations to complete the merger depend on the
satisfaction of several conditions, some of which include QED
stockholder approval and the expiration of a waiting period under
antitrust laws.
. QED's obligation to complete the merger is also subject to PMC's
performance of its obligations under the reorganization agreement and
the accuracy of its representations to QED in the reorganization
agreement.
. PMC's obligation to complete the merger is also subject to QED's
performance of its obligations under the reorganization agreement, the
accuracy of QED's representations to PMC in the reorganization agreement
and PMC's ability to account for the merger using the pooling of
interests method.
Termination of the Reorganization Agreement (see page 46)
PMC and QED may terminate the reorganization agreement by mutual written
consent.
Either PMC or QED may terminate the reorganization agreement if the
conditions to completion of the merger would not be satisfied because:
. of a material breach of the reorganization agreement by the other party
which cannot be cured with commercially reasonable efforts, or
. a representation or warranty of the other party in the reorganization
agreement becomes materially inaccurate, either of which is incurable or
not cured within a specified period.
. the merger is not completed by February 15, 2001;
. a court or other government entity issues a non-appealable decree or
ruling prohibiting the merger; or
2
<PAGE>
. QED's stockholders do not adopt the reorganization agreement at the
special meeting.
PMC may terminate the reorganization agreement if:
. QED's board of directors withdraws or changes in a manner adverse to PMC
its recommendation in favor of adoption of the reorganization agreement
and the merger;
. QED's board of directors does not reaffirm its recommendation in favor
of the adoption of the reorganization agreement and merger within ten
business days after PMC requests reaffirmation following the
announcement of any offer or proposal from a party other than PMC or an
affiliated party relating to an extraordinary transaction involving QED,
such as a merger or a sale of significant assets;
. QED's board of directors approves or recommends any offer or proposal
from a party other than PMC or an affiliated party relating to a
proposal to acquire QED;
. QED enters into any letter of intent or other agreement accepting any
offer or proposal from a party other than PMC or an affiliated party
relating to a proposal to acquire QED; or
. a person unaffiliated with PMC commences a tender or exchange offer
relating to the securities of QED, and QED does not recommend that its
stockholders reject such offer within ten business days after the offer
is initiated.
Payment of Termination Fee (see page 47)
If the reorganization agreement is terminated under certain circumstances,
QED will pay PMC a termination fee of $65 million.
No Other Negotiations Involving QED (see page 43)
QED has agreed, subject to some limited exceptions, not to initiate or
engage in discussions with any party unaffiliated with PMC about a business
combination with the other party while the merger is pending.
Voting Agreements (see page 48)
QED stockholders collectively holding approximately 36% of the outstanding
QED common stock have entered into agreements to vote these shares in favor of
adoption of the reorganization agreement. These QED stockholders were not paid
additional consideration in connection with the voting agreements.
Noncompetition and Nonsolicitation Agreements (see page 49)
QED's Chief Executive Officer, Thomas Riordan, and its Chief Operating
Officer and Vice President of Engineering, Raymond Kunita, have agreed not to
compete with PMC in the development, manufacture, marketing or sale of PMC's
products, and not to solicit PMC's employees, for three years after the merger.
Interests of Certain QED Directors, Officers and Affiliates in the Merger (see
page 35)
Barry Cox, QED's Chairman, and Mr. Riordan will continue to serve as QED
directors after the merger.
PMC has agreed to keep QED's director and officer indemnification
arrangements in effect for at least six years after the merger and to maintain
QED's director and officer liability insurance in effect for at least six years
after the merger.
As of June 30, 2000, directors and executive officers of QED and their
affiliates held approximately 36.2% of the outstanding shares of QED common
stock.
U.S. Federal Income Tax Considerations of the Merger (see page 36)
The merger has been structured as a reorganization for United States federal
income tax purposes. QED common stockholders will not recognize gain or loss
for United States federal income tax purposes by exchanging their QED
3
<PAGE>
shares for shares of PMC common stock in the merger. However, QED stockholders
will recognize gain or loss with respect to cash received in lieu of a
fractional share of PMC common stock. We urge you to consult your own tax
advisor to determine your particular tax consequences resulting from the
merger.
Accounting Treatment of the Merger (see page 38)
PMC intends to account for the merger using the pooling of interests method.
Under this method, each of PMC's and QED's historical recorded assets and
liabilities will be carried forward to the combined company at their recorded
amounts. In addition, the operating results of the combined company will
include PMC's and QED's operating results for the entire fiscal year in which
the merger is completed and PMC's and QED's historical reported operating
results for prior periods will be combined and restated as the operating
results of the combined company.
Expiration of Antitrust Waiting Period Required to Complete the Merger (see
page 38)
PMC and QED have made the required antitrust filings with the Department of
Justice and the Federal Trade Commission, but the applicable waiting period has
not expired as of the date of this proxy statement-prospectus. PMC and QED can
not complete the merger until the applicable waiting period has ended. PMC and
QED intend to comply with any requests for information from the Department of
Justice and the Federal Trade Commission.
The Ability to Sell PMC Stock (see page 38)
All shares of PMC common stock received by you in connection with the merger
will be freely transferable unless you are considered an affiliate of either of
PMC or QED under the Securities Act of 1933. Shares of PMC common stock held by
affiliates may only be sold pursuant to a registration statement or exemption
under the Securities Act.
Each QED and PMC board members affiliates, and executive officer has
executed an agreement not to sell or otherwise dispose of, or to reduce his
risk relative to, any shares of PMC or QED common stock owned by him during the
period beginning 30 days prior to the merger and ending after PMC publicly
announces financial results covering at least 30 days of combined operations of
PMC and QED.
Forward-Looking Statements in this Proxy Statement-Prospectus
This proxy statement-prospectus contains forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 with respect to PMC's and QED's financial condition, results of operations
and business, and the expected impact on PMC's financial performance of PMC's
recently announced acquisitions and the merger with QED. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions identify forward-looking statements. These forward-
looking statements are not guarantees of future performance and are subject to
risks and uncertainties that could cause actual results to differ materially
from the results contemplated by the forward-looking statements. In evaluating
the merger, you should carefully consider the discussion of risks and
uncertainties in the section entitled "Risk Factors" on page 13 of this proxy
statement-prospectus.
4
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
PMC and QED have provided the following selected historical financial data
and selected pro forma combined financial data to aid you in analyzing the
financial aspects of the proposed merger. The information is only a summary.
You should read it together with PMC's and QED's financial statements and other
financial information contained in the most recent annual and quarterly reports
filed by PMC and QED and either included in this document or its annexes.
The selected historical consolidated statement of operations financial data
for PMC for each of the fiscal years in the three-year period ended December
31, 1999, and for QED for each of the fiscal years in the three-year period
ended June 30, 1999, have been derived from financial statements included in
this document. The selected historical statement of operations data for PMC for
the fiscal years ended December 31, 1996 and 1995 and for QED for the fiscal
years ended June 30, 1996 and 1995 have been derived from financial statements
not included in this document.
The selected historical consolidated balance sheet data for PMC as of
December 31, 1999 and 1998, and for QED as of June 30, 1999 and 1998, have been
derived from financial statements included in this document. The selected
historical balance sheet data for PMC as of December 31, 1997, 1996 and 1995
and for QED as of June 30, 1997, 1996 and 1995 have been derived from financial
statements not included in this document.
The selected historical consolidated and pro forma financial data of PMC
incorporate the operating results of Toucan Technologies Limited, AANetcom,
Inc. and Extreme Packet Devices, Inc. PMC acquired these companies during the
first four months of fiscal 2000 in transactions accounted for using the
pooling of interests method.
The selected unaudited pro forma combined financial data gives effect to the
merger of PMC and QED, as well as other transactions completed by PMC in 2000.
The merger between PMC and QED is accounted for using the pooling of interests
method of accounting and is derived from unaudited pro forma condensed combined
financial information included in this document. The other transactions
completed by PMC in 2000 include the June 27, 2000 acquisition of Malleable
Technologies, Inc., a privately held fabless semiconductor company, and the
proposed acquisition of Datum Technologies Inc., a privately held wireless
semiconductor company, which was announced on June 28, 2000. The acquisitions
of Malleable and Datum are accounted for using the purchase method of
accounting.
The pro forma balance sheet information as of March 31, 2000 gives effect to
the merger and other transactions of PMC as if they occurred on March 31, 2000
and the pro forma statement of operations information for the three months
ended March 31, 2000 and 1999 present the combined results of operations of PMC
and QED, as if such transactions had been effective at the beginning of each
period presented.
Since the fiscal years for PMC and QED differ, the pro forma statement of
operations combine PMC's operations for the fiscal years ended December 31,
1999, 1998 and 1997 with QED's recast operations for the twelve month periods
ended December 31, 1999, 1998 and 1997 as if the merger had been effective at
the beginning of each period presented.
The pro forma financial data is presented for illustrative purposes only.
This data does not purport to reflect the operating results or financial
position that would have resulted if the merger had occurred at the beginning
of the periods indicated. This information does not predict the operating
results or financial position of the combined company after the merger.
PMC's financial reporting year consists of either 52-week or 53-week periods
ending on the Sunday closest to December 31. Each fiscal year presented
contained 52 weeks, except for 53-week fiscal 1996. For ease of presentation,
PMC's fiscal years are all shown as ending on December 31 and fiscal quarters
are shown on the last calendar day of each quarter.
5
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF PMC
You should read the selected financial data set forth below in conjunction
with PMC's annual report on Form 10-K/A for fiscal 1999 included in Annex I and
the restated consolidated financial statements and related notes included in
Annex E. The balance sheet data as of December 31, 1999 and 1998 and the
statements of operations data for the years ended December 31, 1999, 1998 and
1997 have been derived from audited restated consolidated financial statements
of PMC included in Annex E. The balance sheet data as of December 31, 1997,
1996 and 1995 and the statement of operations data for the years ended December
31, 1996 and 1995 have been derived from audited consolidated financial
statements of PMC not included in this document. The balance sheet data as of
March 31, 2000 and the statement of operations data for the three months ended
March 31, 2000 and 1999 have been derived from the unaudited restated financial
statements of PMC included in Annex D. The unaudited financial data is not
indicative of the results for our full fiscal year or any other period. In the
opinion of PMC's management, the accompanying unaudited financial data includes
all adjustments (consisting only of normal recurring accruals) necessary for
their fair presentation in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31, (1)
---------------- -----------------------------------------------
2000 1999 1999 (2) 1998 (3) 1997 (4) 1996 (5) 1995 (6)
-------- ------- -------- -------- -------- -------- --------
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues........... $102,807 $50,399 $263,281 $163,381 $129,098 $189,836 $189,436
Gross profit........... 82,256 39,479 208,134 125,161 96,033 94,888 92,326
Research and
development........... 30,180 14,261 72,630 40,066 24,262 30,655 23,949
In process research and
development........... -- -- -- 39,176 -- 7,783 --
Impairment of
intangible assets..... -- -- -- 4,311 -- -- --
Marketing, general and
administrative........ 15,390 9,687 43,378 29,400 23,928 30,976 30,272
Costs of merger........ 7,902 -- 866 -- -- -- --
Purchase price
adjustment--
compensation.......... -- -- -- -- -- -- 10,624
Restructuring and other
charges............... -- -- -- -- (1,383) 64,670 --
Income (loss) from
operations............ 28,325 15,053 88,348 11,293 48,926 (39,196) 27,481
Gain on sale of
investments........... 4,117 -- 26,800 -- -- -- --
Income (loss) from
continuing
operations............ 20,146 9,415 81,602 (8,735) 34,026 (48,496) 23,941
Loss from discontinued
operations............ -- -- -- -- -- -- (22,497)
Net income (loss)...... $ 20,146 9,415 $ 81,602 $ (8,735) $ 34,026 $(48,496) $ 1,444
Net income (loss) per
share--basic: (7)
from continuing
operations............ $ 0.14 0.07 $ 0.57 $ (0.07) $ 0.27 $ (0.41) $ 0.22
from discontinued
operations............ -- -- -- -- -- -- (0.21)
-------- ------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.14 0.07 $ 0.57 $ (0.07) $ 0.27 $ (0.41) $ 0.01
======== ======= ======== ======== ======== ======== ========
Net income (loss) per
share--diluted: (7)
from continuing
operations............ $ 0.12 0.06 $ 0.52 $ (0.07) $ 0.26 $ (0.41) $ 0.21
from discontinued
operations............ -- -- -- -- -- -- (0.20)
-------- ------- -------- -------- -------- -------- --------
Net income (loss)...... $ 0.12 0.06 $ 0.52 $ (0.07) $ 0.26 $ (0.41) $ 0.01
======== ======= ======== ======== ======== ======== ========
Shares used in per
share calculation--
basic................. 148,362 138,680 142,759 134,202 125,507 119,029 108,224
Shares used in per
share calculation--
diluted............... 168,222 149,839 156,465 134,202 131,873 119,029 114,632
</TABLE>
<TABLE>
<CAPTION>
December 31, (1)
----------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
-------------- -------- ------- ------- ------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments........... $225,072 $196,691 $96,584 $70,584 $41,992 $46,033
Working capital........ 189,407 170,668 80,385 59,902 20,618 32,994
Total assets........... 401,524 351,828 214,708 152,426 130,448 185,275
Long term debt
(including current
portion).............. 7,341 5,665 14,086 14,519 24,637 12,718
Stockholders' equity... 274,269 241,580 137,322 92,175 48,737 81,297
</TABLE>
6
<PAGE>
(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 include 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 the company's exit from the modem
chipset business and the associated restructuring of its non-networking
operations, and $7.8 million for an 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, April 1999 and
October 1995.
7
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF QED
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and related notes included
elsewhere in this document. The balance sheet data as of June 30, 1998 and 1999
and the statement of operations data for the years ended June 30, 1997, 1998
and 1999 have been derived from the audited financial statements of QED
included elsewhere in this document. The balance sheet data as of June 30,
1995, 1996 and 1997 and the statement of operations data for the years ended
June 30, 1995 and 1996 have been derived from audited financial statements of
QED not included in this document. The balance sheet data as of March 31, 2000
and the statement of operations data for the nine months ended March 31, 2000
and 1999 have been derived from the unaudited financial statements of QED
included elsewhere in this document. The unaudited financial data is not
indicative of the results for QED's full fiscal year or any other period. In
the opinion of QED's management, the accompanying unaudited financial data
includes all adjustments (consisting only of normal recurring accruals)
necessary for their fair presentation in accordance with generally accepted
accounting principles.
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Year Ended June 30,
---------------- -------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- -------- ------- ------- ------- ------
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Product revenue........ $29,966 $ 5,322 $ 10,937 $ 1,428 $ -- $ -- $ --
Royalty revenue........ 2,647 3,400 4,425 5,052 8,850 2,712 2,363
Contract development
revenue............... -- -- -- -- 1,213 3,115 5,507
------- ------- -------- ------- ------- ------- ------
Total revenue.......... 32,613 8,722 15,362 6,480 10,063 5,827 7,870
------- ------- -------- ------- ------- ------- ------
Cost of product reve-
nue.................... 17,710 5,071 8,513 3,714 -- -- --
------- ------- -------- ------- ------- ------- ------
Gross profit............ 14,903 3,651 6,849 2,766 10,063 5,827 7,870
Operating expenses:
Research and develop-
ment.................. 10,490 9,254 12,381 9,552 9,421 6,733 5,605
Selling, general and
administrative........ 6,941 3,549 5,436 2,979 2,123 1,135 820
Stock-based compensa-
tion.................. 884 518 777 150 -- -- --
------- ------- -------- ------- ------- ------- ------
Total operating ex-
penses................ 18,315 13,321 18,594 12,681 11,544 7,868 6,425
------- ------- -------- ------- ------- ------- ------
Income (loss) from oper-
ations................. (3,412) (9,670) (11,745) (9,915) (1,481) (2,041) 1,445
Interest and other in-
come (expense), net.... 373 (134) (24) 121 340 350 64
------- ------- -------- ------- ------- ------- ------
Net income (loss) before
taxes.................. (3,039) (9,804) (11,769) (9,794) (1,141) (1,691) 1,509
Provision (benefit) for
income taxes........... -- -- -- 89 60 (650) 619
------- ------- -------- ------- ------- ------- ------
Net income (loss)....... $(3,039) $(9,804) $(11,769) $(9,883) $(1,201) $(1,041) $ 890
======= ======= ======== ======= ======= ======= ======
Basic income (loss) per
share.................. $ (.24) $ (1.23) $ (1.45) $ (1.53) $ (.21) $ (.20) $ .19
======= ======= ======== ======= ======= ======= ======
Diluted income (loss)
per share.............. $ (.24) $ (1.23) $ (1.45) $ (1.53) $ (.21) $ (.20) $ .14
======= ======= ======== ======= ======= ======= ======
Basic average common
shares outstanding..... 12,824 7,987 8,111 6,451 5,746 5,320 4,644
------- ------- -------- ------- ------- ------- ------
Diluted average common
shares outstanding..... 12,824 7,987 8,111 6,451 5,746 5,320 6,444
------- ------- -------- ------- ------- ------- ------
</TABLE>
<TABLE>
<CAPTION>
June 30,
-----------------------------------
March 31, 2000 1999 1998 1997 1996 1995
-------------- ------- ------ ------ ------ ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents,
short-term investments
and restricted cash... $56,327 $19,465 $9,756 $6,973 $8,215 $2,005
Working capital surplus
(deficit)............. 64,006 18,174 8,221 4,027 5,036 (498)
Total assets........... 80,097 27,879 15,856 10,657 12,243 5,791
Long-term liabilities,
less current portion.. 1,125 2,375 1,621 -- -- --
Total stockholders' eq-
uity.................. 66,367 17,606 8,509 5,995 7,156 2,061
</TABLE>
8
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL DATA OF PMC AND QED
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
----------------------- ----------------------------
2000 1999 1999 1998 1997
--------------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data
Net revenues............ $114,449 $54,776 $294,918 $172,416 $139,337
Income (loss) from
operations............. 5,387 (7,385) (892) (1,528) 45,246
Net income (loss)....... (2,628) (13,214) (7,600) (21,587) 30,534
Basic net income (loss)
per common share....... (0.02) (0.09) (0.05) (0.16) 0.24
Diluted net income
(loss) per common
share.................. (0.02) (0.09) (0.05) (0.16) 0.22
<CAPTION>
As of March 31,
2000
---------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital......... $233,395
Total assets............ 831,482
Long-term obligations,
net of current
maturities............. 12,613
Stockholders' equity.... 665,507
</TABLE>
COMPARATIVE PER SHARE DATA
The following table presents certain unaudited historical per share and
combined pro forma per share data of PMC and QED after giving effect to the
merger using the pooling of interests method of accounting and, after giving
affect to other transactions completed by PMC in 2000. The equivalent QED per
share data is calculated based on an exchange ratio of 0.385 of a share of PMC
common stock for each share of QED common stock outstanding. The pro forma data
does not purport to be indicative of the results of future operations or the
results that would have occurred had the merger been consummated at the
beginning of the periods presented. The information set forth below should be
read in conjunction with the historical financial statements and notes thereto
of PMC and QED included in this document and its annexes, and the selected
unaudited pro forma condensed combined financial data included elsewhere in
this document. The unaudited pro forma combined and unaudited pro forma
equivalent per share data combine the results of operations of PMC for the
three years ended December 31, 1999 with the results of operations of QED for
the twelve month periods ended December 31, 1999, respectively, and PMC's
financial position at March 31, 2000 with QED's financial position at March 31,
2000.
PMC
<TABLE>
<CAPTION>
Three
Months Fiscal Year Ended
Ended December 31(1)
March 31, -------------------
2000 1999 1998 1997
--------- ----- ------ -----
<S> <C> <C> <C> <C>
Historical per common share data:
Income (loss) from continuing operations per
diluted share............................... $0.12 $0.52 $(0.07) $0.26
Net book value per share(2).................. $1.89 $1.69
</TABLE>
9
<PAGE>
QED
<TABLE>
<CAPTION>
Fiscal Year Ended
Nine Months June 30,
Ended March ----------------------
31, 2000 1999 1998 1997
----------- ------ ------ ------
<S> <C> <C> <C> <C>
Historical per Common Share Data:
Loss from continuing operations per
diluted share............................ $(0.24) $(1.45) $(1.53) $(0.21)
Net book value per share(2)............... $ 2.49 $ 0.79
</TABLE>
PMC AND QED
<TABLE>
<CAPTION>
Three Months Fiscal Year Ended
Ended December 31(1)
March 31, ---------------------
2000 1999 1998 1997
------------ ------ ------ -----
<S> <C> <C> <C> <C>
Combined pro forma per common share data:
Income (loss) from continuing operations
per combined company's diluted share(3)... $(0.02) $(0.05) $(0.16) $0.22
Income from continuing operations per
equivalent QED diluted share(4)........... $(0.01) $(0.02) $(0.06) $0.09
Net book value per combined company's
share(2).................................. $ 1.76 $ 4.39
Net book value per equivalent QED
share(4).................................. $ 0.68 $ 1.69
</TABLE>
--------
(1) Each fiscal year ended on the last Sunday in December.
(2) The historical book value per PMC share is computed by dividing
stockholders' equity by the number of shares of common stock outstanding
at March 31, 2000 and at PMC's fiscal year end. The historical book value
per QED share is computed by dividing stockholders' equity by the number
of shares of common stock and preferred stock (which subsequently
converted into an equivalent number of shares of common stock) outstanding
at March 31, 2000 and at QED's fiscal year end. The pro forma combined
book value per share is computed by dividing the pro forma stockholders'
equity by the pro forma number of shares of PMC common stock outstanding
as of PMC's fiscal quarter ended March 31, 2000 assuming the merger had
occurred as of these dates.
(3) The pro forma combined shares used in this calculation are equal to QED's
common and where applicable potential common shares outstanding multiplied
by the 0.385 exchange ratio, plus PMC's common and equivalent shares
outstanding.
(4) The shares used in this calculation are equal to the pro forma combined
shares described in footnote (3) divided by the 0.385 exchange ratio.
10
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE DATA
In this and the following tables, sales prices have been rounded to the
nearest whole cent. To maintain consistency, the information provided below is
based on calendar rather than fiscal quarters.
PMC's common stock is traded on the Nasdaq National Market under the symbol
"PMCS." The following table shows the high and low per share sales prices of
PMC common stock on the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
PMC Sales
Price
-------------
High Low
------ ------
<S> <C> <C>
1998
First quarter................................................... $ 9.77 $ 6.50
Second quarter.................................................. 12.82 9.25
Third quarter................................................... 11.94 6.66
Fourth quarter.................................................. 16.41 5.72
1999
First quarter................................................... 21.03 15.67
Second quarter.................................................. 31.63 17.73
Third quarter................................................... 56.19 29.88
Fourth quarter.................................................. 80.56 38.38
2000
First quarter................................................... 255.50 60.00
Second quarter.................................................. 206.00 110.75
Third quarter (through July 18, 2000)........................... 230.38 168.00
</TABLE>
QED's common stock is traded on the Nasdaq National Market under the symbol
"QEDI." The following table shows the high and low sales prices of QED common
stock on the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
QED Sales
Price
--------------
High Low
------- ------
<S> <C> <C>
2000
First quarter (from initial public offering on February 1,
2000)......................................................... $119.56 $39.25
Second quarter................................................. 90.00 32.00
Third quarter (through July 18, 2000).......................... 88.00 55.00
</TABLE>
The following table sets forth the closing prices of PMC and QED common
stock as reported on the Nasdaq National Market, and the equivalent per share
price of QED, giving effect to the proposed merger, on July 11, 2000, the last
full trading day prior to the public announcement of the proposed merger, and
, 2000, the latest practicable trading day prior to the printing of this
proxy statement-prospectus.
<TABLE>
<CAPTION>
Closing Sales Price
-------------------------
QED
PMC QED Equivalent
------- ------ ----------
<S> <C> <C> <C>
Price per share
July 11, 2000........................................ $196.44 $60.50 $75.63
, 2000...........................................
</TABLE>
The equivalent QED per share price represents 38.5% of the price of one
share of PMC common stock. 0.385 is the exchange ratio that will be used in the
merger.
You should obtain current market quotations for PMC and QED common stock
because their market prices are volatile. The value of the shares of PMC common
stock that holders of QED will receive in the proposed merger may increase or
decrease before and after the merger.
11
<PAGE>
Dividend Policy
Neither PMC nor QED has declared any cash dividends. Each company currently
intends to retain earnings for use in its business and does not anticipate
paying any cash dividends in the foreseeable future.
Holders
At June 30, 2000 PMC had approximately 1,251 stockholders of record.
Pages I-61 through I-64 of PMC's annual report on Form 10-K attached as
Annex I provide information concerning beneficial ownership of PMC Common Stock
by
.any person known to PMC to beneficially own more than 5% of PMC's common
stock
.each PMC director
.all PMC directors and officers as a group
The merger will not affect the numbers of shares held by these persons or
the group. The merger will reduce the percentage of PMC's common stock held by
each of these persons and the group by approximately 6.7%. PMC's only
commitments to issue common stock to these persons are the stock options and
stock purchase plan participations described on pages I-57 through I-59 of
PMC's annual report on Form 10-K attached as Annex I and in the directors'
subsequent filings under section 16 of the Securities Exchange Act of 1934.
12
<PAGE>
RISK FACTORS
By voting in favor of the merger, you will be choosing to exchange your
current investment in QED common stock for an investment in PMC common stock.
An investment in PMC common stock involves a high degree of risk. In addition
to the other information contained in or annexed to this proxy statement-
prospectus, you should carefully consider the following risk factors in
deciding whether to vote for the merger.
Risks Related To The Merger
While PMC's and QED's stock prices have been volatile in recent periods, the
merger exchange ratio is fixed
Upon completion of the merger, each share of QED common stock will be
exchanged for 0.385 of a share of PMC common stock. The exchange ratio will not
change even if the market price of either QED common stock or PMC common stock
fluctuates. QED may not withdraw from the merger or resolicit the vote of its
stockholders solely because of changes in the market price of PMC or QED common
stock. The specific dollar value of PMC common stock you will receive upon
completion of the merger will depend on the market value of PMC common stock at
that time. PMC's stock price has been volatile and you should expect it to
continue to fluctuate.
PMC and QED may not realize the benefits they expect from the merger
PMC and QED may not realize the benefits described in "Reasons for the
Merger" below because of the following challenges.
. Incorporating QED's microprocessor technology into PMC's next generation
of products
. Integrating QED's relatively small technical team with PMC's larger and
more widely dispersed engineering organization, without losing the
services of QED's technical experts in the microprocessor field
. Integrating QED's non-networking products with PMC's business, because
PMC does not have manufacturing, selling or support experience for these
products, which are sold to customers that PMC does not normally service
. Integrating different enterprise resource planning and accounting
systems
The integration process may disrupt PMC's and QED's businesses
The integration of PMC and QED will be complex, time consuming and expensive
and may disrupt PMC's and QED's businesses. Some of QED's suppliers, vendors,
licensees and licensors are PMC's competitors and as a result may alter their
business relationship with QED following the merger.
General uncertainty related to the merger could harm the combined company
PMC's or QED's customers may, in response to the announcement of the
proposed merger, delay or defer purchasing decisions. If PMC's or QED's
customers delay or defer purchasing decisions the combined company's revenues
could materially decline. Similarly, PMC and QED employees may experience
uncertainty about their future role with the combined company. This may harm
the combined company's ability to attract and retain key management, marketing
and technical personnel. Also, speculation regarding the likelihood of the
closure of the merger could increase the volatility of PMC's or QED's stock
price.
The failure to obtain all required consents and waivers may cause third parties
to terminate or alter existing contracts with QED
QED has contracts with some of its suppliers, customers, licensors,
licensees and other business partners. Certain of these contracts require QED
to obtain consent from these other parties in connection with the
13
<PAGE>
reorganization agreement. If their consent cannot be obtained, QED may suffer a
loss of potential future revenue and may lose rights to facilities or
intellectual property that are material to QED's business and the business of
the combined company.
Failure to qualify for pooling of interests accounting treatment may harm the
future operating results of the combined company
If, after completion of the merger, events occur that cause the merger to no
longer qualify for pooling of interests accounting treatment, the purchase
method of accounting would apply. Purchase accounting treatment would harm the
reported operating results of the combined company. Under purchase accounting,
PMC would record the estimated fair value of PMC common stock issued in the
merger as the cost of acquiring QED. A portion of the purchase price would be
charged to in process research and development, or IPR&D, expense. The
remainder would be allocated to the net assets acquired, with the excess of the
estimated fair value of PMC common stock over the fair value of net assets
acquired recorded as goodwill or other intangible assets. This goodwill would
be amortized in future periods. The estimated fair value of PMC common stock to
be issued in the merger is much greater than the historical net book value at
which QED carries its assets in its accounts.
Failure to complete the merger could harm QED's stock price and future business
and operations
If the merger is not completed, QED may be subject to the following risks:
. If the reorganization agreement is terminated under certain
circumstances, QED will be required to pay PMC a termination fee of $65
million;
. The price of QED common stock may decline to the extent that the current
market price of QED common stock reflects a market assumption that the
merger will be completed;
. Costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed; and
. If the merger is terminated and QED's board of directors determines to
seek another merger or business combination, QED may not be able to find
a partner willing to pay an equivalent or more attractive price than
that which would be paid in the merger.
Risks Related To PMC
In determining whether to convert QED shares to PMC shares through the
merger, QED stockholders should read carefully the section titled "Factors You
Should Consider Before Investing in PMC-Sierra" on pages H12 through H18 in
PMC's quarterly report on Form 10-Q attached as Annex H. These risks all relate
to PMC's current business. In addition, since PMC has recently closed or
announced seven acquisitions, including the acquisition of QED.
PMC recommends that you carefully note the following additional risks
relating to PMC:
PMC has not yet achieved revenues from its recent acquisitions
The products from five of the companies PMC has recently acquired have been
incorporated into customer equipment designs that have yet to generate
significant revenue for PMC. These or any follow-on products may not achieve
commercial success. These acquisitions may not generate future revenues or
earnings.
PMC's operating results will be harmed as a result of using the purchase method
of accounting for recent and potential future acquisitions
PMC either closed or announced two purchase transactions in the third
quarter of fiscal 2000. PMC expects a material charge related to IPR&D and
goodwill capitalization in the current fiscal quarter. The IPR&D charge will
decrease financial statement earnings in the current quarter and the goodwill
asset will be amortized over the expected period of benefit and will materially
impact operating results. PMC may enter into additional purchase acquisitions
in the future.
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PMC may not successfully integrate acquired new technologies into its product
portfolio.
PMC initiated its presence in the digital signal processing market with the
recently announced acquisition(s) of Toucan, Malleable and Datum. Prior to
these acquisitions, PMC had limited design expertise in this technology and may
fail to bring digital signal processing products to market successfully.
In addition, Datum's technology is applicable to the radio frequency
wireless networking market--a market in which PMC has no current presence.
PMC may suffer design and sales setbacks as it expands
PMC's geographic expansion, acquisitions and growth rate could hinder its
ability to coordinate design and sales activities. If PMC is unable to develop
systems and communication processes to support its expanding geographic
diversity, it may suffer product development delays or strained customer
relationships.
Risks Related To QED
In determining whether to adopt the reorganization agreement and exchange
their investment in QED with an investment in PMC, QED stockholders should
consider the following risks relating to QED together with the information
about QED's business, financial condition and results of operations provided
elsewhere in this document. If the merger is completed, these risks will
continue to apply to your investment in PMC, although to a lesser degree
because QED's business will following the merger represent a small portion of
the combined company's business.
QED has a limited operating history under its current business model, which
makes it difficult to predict its future operating results
QED was incorporated in 1991 and began business as a provider of proprietary
microprocessor designs to semiconductor companies. In 1996, QED obtained a
license to design, manufacture and sell embedded microprocessors using
intellectual property developed by MIPS Computer Systems, Inc., currently known
as MIPS Technologies, Inc. Since obtaining this license, QED has transitioned
to a company that develops and markets its own products. Therefore, QED has
operated under its current business model for a short period of time. This
limited operating history makes it difficult to predict QED's future revenue
and expenses.
QED has not been profitable operating under its current business model, and QED
may not achieve profitability
In 1997, QED began transitioning from a provider of proprietary
microprocessor designs to a company that develops and markets its own products,
and since then QED has lost money in each quarter. Although product revenue has
increased significantly in the year ended June 30, 1999 and in the nine months
ended March 31, 2000, QED still has not achieved profitability. If QED's
revenue does not increase, QED may not achieve or sustain profitability.
QED experiences fluctuations in its operating results due to a number of
frequently changing business conditions, which may cause QED's stock price to
decline
QED experiences fluctuations in its operating results due to a variety of
factors, including:
. the timing and amount of orders from its customers, including
cancellations and reschedulings;
. the gain or loss of significant customers, including as a result of
industry consolidation;
. seasonality in some of its target markets;
. changes in the mix of products QED sells;
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. changes in demand by the end users of its customers' products;
. market acceptance of QED's current and future products;
. variability of QED customers' product life cycles;
. changes in the average selling prices of embedded microprocessors or the
products that incorporate them due to QED's customers reaching volume
production, technological change, product obsolescence or otherwise; and
. cancellations, changes or delays of deliveries to QED by its
manufacturers, including as a result of the availability and terms of
manufacturing capacity.
Revenue from the sale of QED's embedded microprocessors is dependent upon
companies designing QED's microprocessors into their products, which QED refers
to as "design wins." QED's gross margin is impacted by the mix of revenue among
its products. As a result of these factors and those listed above, QED's
lengthy sales cycle and its dependence on relatively few customers whose order
cycles vary significantly, QED's revenue and gross margin could fluctuate
significantly.
QED cannot accurately forecast all of the above factors. As a result, QED
believes that period-to-period comparisons do not indicate future operating
results. QED 's operating results in a future quarter or quarters may fall
below the expectations of public market analysts or investors. If this were to
occur, the price of QED's common stock could decline.
The inability of QED's RM7000 embedded microprocessor to achieve greater market
acceptance could harm its near-term growth
QED believes that its RM7000 embedded microprocessor, which began shipping
in the second half of 1998, will form the basis for its next-generation family
of embedded microprocessors. Although QED has achieved design wins for the
RM7000, some of them may not result in revenue to QED. If the RM7000 does not
achieve greater market acceptance:
. revenue from QED's existing products could be inadequate to cover QED's
expenses, including the cost of selling, marketing, developing and
manufacturing the RM7000 and other new products;
. QED's brand and reputation could be damaged; and
. QED's competitors' products could achieve greater market share as QED's
market share declines.
QED's failure to develop and introduce new products on a timely basis could
harm its ability to attract and retain customers
The semiconductor industry is characterized by rapidly changing technology,
frequent product introductions and ongoing demands for greater speed and
functionality. Therefore, QED must continually design, develop and introduce
new products with improved features to be competitive. To introduce these
products on a timely basis QED must:
. design innovative and performance-improving features that differentiate
its products from those of its competitors;
. transition its products to new manufacturing process technologies;
. identify emerging technological trends in its target markets, including
new standards for its products;
. accurately define and design new products to meet market needs;
. anticipate changes in end-user preferences with respect to its
customers' products;
. bring products to market on a timely basis at competitive prices; and
. respond effectively to technological changes or product announcements by
others.
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QED cannot assure you that it will be able to meet the design and market
introduction schedules for its new products or enhancements to its existing
products or that these products will achieve market acceptance.
QED must achieve new design wins that translate into customer purchases for its
product revenue to increase
QED's success depends in large part upon achieving design wins for its
products with current and future customers. Design wins are indications by
existing and potential customers that they intend to incorporate QED's products
into new designs. To achieve design wins, QED must continually increase the
performance levels of its embedded microprocessors, keep pace with evolving
industry standards and introduce new products in a timely manner. If QED fails
to achieve design wins, it will lose potential sales opportunities.
Design wins, however, do not necessarily result in purchase orders for QED
products. QED's design wins are solely an expression of interest by customers
and are not supported by binding contracts of any nature. Design wins also may
not result in future revenue for the following reasons:
. consolidation of its customer base or acquisitions of its customers;
. failure of its customers' products to compete in their respective
markets; and
. cancellation of development of a customer's product that incorporates
its embedded microprocessors.
QED faces intense competition in the market for embedded microprocessors
Competition in the market for embedded microprocessors is intense, and QED
expects it to increase in the future. QED faces competition from:
. other licensees of technology from MIPS Technologies, including NEC
Corporation, Toshiba Corporation, Integrated Device Technology, Inc.,
SiByte, Inc., Alchemy Semiconductor, Inc., and SandCraft, Inc.
. companies utilizing alternative reduced instruction set computing, or
RISC, technologies, including ARM/Strong Arm, developed by ARM Holdings
plc and Intel; Hitachi SH, developed by Hitachi; and PowerPC, developed
by Motorola, Inc. and IBM Corporation; and
. companies utilizing technologies other than RISC.
Many of QED's existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater brand recognition, larger
customer bases and greater financial and marketing resources than it does. They
may therefore be able to respond more quickly than QED can to new or emerging
technologies and changes in customer requirements. They may also be able to
devote greater resources than QED can to the development and promotion of their
technologies and products. QED also faces competition from several private
companies in various stages of development. In addition, QED's competitors that
are licensees of MIPS Technologies may obtain more favorable terms under their
current or future licenses, which would place QED at a competitive
disadvantage.
Furthermore, many of QED's existing and potential customers have the
resources to internally develop microprocessors and other devices that perform
all or a portion of the functions performed by its products. If these customers
decided to develop embedded microprocessors internally rather than purchasing
QED's products, QED would lose sales opportunities.
If QED's target markets reject the MIPS microprocessor architecture, support
and demand for its products will decline
QED has derived and expects to continue to derive substantially all of its
product revenue from products based on the MIPS microprocessor architecture.
Therefore, QED's success is dependent on continued
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acceptance of this architecture within its target markets. Moreover, a large
number of companies currently develop semiconductor design tools, components
and products that are compatible with and optimized for the MIPS microprocessor
architecture. If these companies ceased to provide these tools for any reason,
it could become more difficult or less desirable for manufacturers and others
to continue to support the MIPS microprocessor architecture. If the markets for
embedded microprocessors adopt an alternative technology, QED could lose the
support of these MIPS architecture-based tools, components and products and the
demand for its products would decline.
If MIPS technologies develops future generations of its technology, QED may not
be able to obtain a license on reasonable terms
MIPS Technologies has introduced, and will likely continue to introduce, new
generations of its microprocessor technology architecture containing
improvements that are not covered by the technology QED is currently licensing
from MIPS Technologies. QED's success could depend on its ability to develop
products that incorporate those improvements. QED may not be able to license
the technology for any new improvements from MIPS Technologies on commercially
reasonable terms or at all. If QED cannot obtain required licenses from MIPS
Technologies, QED could encounter delays in product development while it
attempts to develop similar technology, or it may not be able to develop,
manufacture and sell products incorporating this technology.
QED depends upon its license of microprocessor technology from MIPS
technologies as the basis for its products, and QED will be unable to market
its products if this license is terminated
All of QED's current products and planned future products are based upon the
microprocessor technology it licenses from MIPS Technologies. QED's failure to
comply with any of the terms of its license agreement could result in the
termination of its rights, preventing it from marketing its current and planned
products.
The loss of any of QED's key personnel or the failure to hire and retain
additional qualified personnel could impair its ability to develop and market
its products
QED's success depends to a significant degree upon the continued
contributions of its key management, engineering and sales and marketing
personnel, especially its design engineers, who it believes are difficult to
replace. QED is particularly dependent upon the continued services of Thomas J.
Riordan, its Chief Executive Officer, President and a director, and Raymond
Kunita, its Chief Operating Officer and Vice President of Engineering.
Competition for highly skilled managerial, engineering and sales and marketing
personnel in the semiconductor industry is intense, and QED may not succeed in
attracting and retaining these personnel. QED's inability to attract and retain
qualified personnel in the future or delays in hiring required personnel could
impair its ability to meet customer and technological demands or its ability to
develop and market its products. QED does not have either employment contracts
with, or key person life insurance on, any of its key personnel.
QED's dependence on third parties to fabricate its embedded microprocessors
reduces its control over the production, supply and delivery of its products
QED's currently relies on third parties to fabricate its products. In the
years ended June 30, 1999 and 2000, IBM and Taiwan Semiconductor Manufacturing
Company Ltd., or TSMC, performed all of its product fabrication. Although QED
recently amended its contract with IBM, which expires no sooner than
November 14, 2002, IBM is not obligated under this contract to provide QED with
any specified number of products, at any specified price. TSMC fabricates its
microprocessors on a purchase order basis, and QED does not currently have a
long-term contract with TSMC.
There are significant risks associated with QED's reliance on third parties
to fabricate its products, including:
. manufacturing capacity may be unavailable to QED, even though it may
have submitted a product order;
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. QED has limited control over product delivery schedules, and it may not
receive products within the time frames and in the volumes required by
us at a favorable cost or at all;
. QED could face delays in obtaining, or it may not be able to obtain
access to, key fabrication process technologies; and
. QED has limited control over quality assurance, manufacturing yields and
production costs.
Typically, QED's semiconductor manufacturers require approximately 13 to 15
weeks to deliver new orders, which often requires it to place orders in advance
of expected purchase orders from its customers. As a result, QED has only a
limited ability to react to fluctuations in demand for its products, which
could cause it to have an excess or a shortage of inventory of a particular
product.
If QED's manufacturers are unable or unwilling to continue to manufacture
QED's products in required volumes or at commercially acceptable costs, QED may
be forced to seek other manufacturing sources for its products. Transferring to
another manufacturer would require a significant amount of time, and QED cannot
assure you that it could make a smooth and timely transition.
QED's dependence upon third parties to assemble and test substantially all of
its products reduces its control of product delivery schedules and quality
assurance
Because third parties assemble and test substantially all of its products,
QED does not directly control its product delivery schedules and quality
assurance. This lack of control could result in product shortages, particularly
in the case of new products. Product shortages could increase QED's
fabrication, assembly or testing costs or delay delivery of QED products. QED
does not have long-term contracts with the companies that test and assemble its
products, and QED typically procures services from them on a per order basis.
Therefore, QED may not be able to continue to obtain assembly and testing
services for its products on acceptable terms, or at all. If QED is required to
find and qualify alternative assemblers or testers for its products, QED could
experience delays in product shipments or a decline in product quality.
QED may not achieve acceptable product yields from its third-party
manufacturers, which could increase the cost and reduce the supply of its
products
In the process of manufacturing embedded microprocessors, contaminants,
manufacturing errors and other factors can result in a substantial percentage
of nonfunctional products, and many semiconductor companies frequently
encounter difficulties in achieving acceptable product yields. The proportion
of functional products derived from a particular manufacturing process is
referred to as product "yield." If QED does not achieve planned yields, its
product costs would increase and product availability would decrease. Yield
problems may not be identified and resolved, if ever, until a product has been
manufactured and can be analyzed and tested. As a result, yield problems are
often difficult, time consuming and expensive to correct. The risk of low
yields is compounded by the offshore location of some of QED's third-party
manufacturing facilities, increasing the effort and time required to identify,
communicate and resolve manufacturing yield problems.
In the past, QED has experienced lower yields and related problems more
often with newer products than with mature products. For example, shipments to
customers have been delayed by as much as three weeks because of low-yielding
manufacturing processes on new products. Other companies have experienced poor
yields with respect to mature products, and QED may also experience poor yields
on mature products. While QED believes that its manufacturing yields have
generally been consistent with industry norms, QED may experience yield
problems in the future that have a significant impact on its operating results
and its ability to deliver its products to customers in a timely manner. If QED
does not deliver its products to customers in a timely manner, they may choose
other suppliers.
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QED relies on foreign third-party manufacturing operations, which exposes it to
risks inherent in international operations
QED is subject to risks associated with conducting business outside of the
United States because a large portion of its semiconductor fabrication and
substantially all of its assembly and testing operations occur in foreign
countries. These risks include:
. unexpected changes in U.S. or foreign regulatory requirements;
. additional costs and delays associated with tariffs, quotas and other
trade barriers and restrictions; and
. uncertainties relating to political, social and economic conditions.
In addition, all of QED's current arrangements with third-party
manufacturers provide for pricing and payment in U.S. dollars. Fluctuations in
currency exchange rates, therefore, could cause its third-party manufacturers
to increase their prices, which would reduce QED's gross margin.
QED's failure to protect its proprietary rights, or the costs of protecting
these rights, may harm its ability to compete
Third parties may be able to copy or reverse engineer aspects of QED's
products or obtain and use information that it regards as proprietary. QED's
success and ability to compete is dependent in part upon continued protection
of its proprietary rights. QED's failure to adequately protect its proprietary
rights could result in its competitors offering similar products, potentially
resulting in its loss of a competitive advantage and decreased revenue. In
addition, as a licensee of patent rights relating to the MIPS architecture, QED
relies upon MIPS Technologies to enforce its patent rights against infringers.
If MIPS Technologies fails to enforce its patent rights, QED might not be able
to compete successfully. QED also seeks to protect its trade secrets and
proprietary information through confidentiality agreements with its employees
and consultants and with other parties. However, QED may not have an adequate
remedy in the event these agreements are breached or any remedy if its trade
secrets are independently developed by others. Despite QED's efforts to protect
its proprietary rights, existing intellectual property laws afford only limited
protection. In addition, the laws of some foreign countries provide only
limited proprietary rights protection.
Litigation may be necessary in the future to enforce QED's intellectual
property rights, to protect its trade secrets or to determine the validity and
scope of the proprietary rights of others. This litigation could result in
substantial costs and diversion of resources.
QED could be subject to claims of infringement of third-party intellectual
property, which could result in significant expense and loss of intellectual
property rights
The semiconductor industry is characterized by uncertain and conflicting
intellectual property claims and frequent intellectual property litigation,
especially regarding patent rights. From time to time, third parties may assert
patent, copyright, trademark and other intellectual property rights to
technologies that are important to QED's business. QED may receive notices of
claims that its products infringe or may infringe these rights. Any litigation
to determine the validity of these claims, including claims arising through
QED's contractual indemnification of its customers, regardless of their merit
or resolution, would likely be costly and divert the efforts and attention of
QED's management and technical personnel. QED cannot assure you that it would
prevail in this litigation given the complex technical issues and inherent
uncertainties in intellectual property litigation. If this litigation resulted
in an adverse ruling, QED could be required to:
. pay substantial damages;
. cease the manufacture, use or sale of infringing products;
. discontinue the use of certain technology; or
. obtain a license under the intellectual property rights of the third
party claiming infringement, which license may not be available on
reasonable terms, or at all.
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QED's lengthy sales cycle makes it difficult for QED to predict if or when a
sale will be made, which increases its risks related to customer cancellations
The timing of QED's sales revenue is difficult to predict because of the
length and variability of the sales cycle for its products. QED's sales cycle
typically includes a three- to six-month period prior to its achieving a design
win and an additional 12- to 24-month period before a customer commences volume
production of products incorporating QED's embedded microprocessors. While
potential customers are evaluating QED's products and before they place an
order with QED, it may incur sales and marketing expenses and expend
significant management effort. Therefore, QED takes risks related to product
cancellations or changed product plans, which could result in the loss of
anticipated sales or missed sales opportunities.
QED's revenue and profits may decrease if it loses any of its significant
customers
Historically, a relatively small number of customers have accounted for a
significant portion of QED's total revenue in any particular period. The loss
of any significant customer could cause QED's revenue to decline. In the year
ended June 30, 1999, QED's four largest customers, including sales to their
respective manufacturing subcontractors, accounted for 23%, 20%, 15% and 12% of
its total revenue. In the nine month period ended March 31, 2000, these same
four customers accounted for 27%, 5%, 21% and 11% of QED's total revenue. QED
anticipates that sales of its products to relatively few customers will
continue to account for a significant portion of its total revenue. QED has no
long-term purchase commitments with any of its significant customers.
Therefore, these customers could cease purchasing QED's products with limited
notice and with little or no penalty.
QED's dependence on a small number of customers increases the risks
associated with its potential loss of customers resulting from business
combinations or consolidations. If a customer or potential customer were
acquired or combined with another company, the resulting company could cancel
development efforts, design wins or purchase orders as part of the integration
process.
If QED fails to establish and maintain relationships with key participants in
QED's target markets, QED may have difficulty marketing its products
It is important to QED's success to establish and maintain relationships
with customers who are technology or market-share leaders in its target
markets. QED believes that it needs to work closely with these customers to
gain valuable insight into market demands for new products and in order to help
QED design new embedded microprocessors. If QED fails to establish and maintain
these relationships, it would be more difficult for QED to develop and market
products offering features that address emerging market trends.
In addition, to help sell QED's products, QED relies upon its relationships
with vendors of collateral products and tools, such as companion integrated
circuits, operating systems and a variety of system design tools. If QED fails
to maintain current relationships and to develop new relationships with these
vendors, QED's products may not remain compatible with other products and
tools. This lack of compatibility could affect QED's ability to acquire greater
market share.
Many of QED's sales representatives are new to QED and if they fail to
successfully market QED's products or if QED fails to expand the number of
sales representatives, QED may not be able to increase sales and market
awareness of its products
QED depends on sales representatives to sell a substantial portion of QED's
products. QED has established relationships with many of its sales
representatives within the last year, and QED is unable to predict how
successful these sales representatives will be in marketing and selling its
products. In addition, QED must expand the number of sales representatives both
domestically and internationally. Without this increase, QED may not be able to
increase sales and market awareness of its products. Competition for qualified
sales representatives is intense. QED may not be able to retain its existing
sales representatives or engage the type and number of sales representatives
that QED requires on a timely basis or at all. In addition, all of its sales
representatives' agreements may be terminated upon 30-days notice by either
party.
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QED's rapid growth has strained its resources, and QED may not be able to
manage future growth
QED has experienced a period of rapid growth and expansion, which has
placed, and continues to place, a significant strain on its resources. This
growth has required QED to increase the number of its employees from 48 as of
September 30, 1997 to 118 as of June 30, 2000, and otherwise expand its
operations, which has resulted in increased responsibilities for its
management. If QED continues to expand its operations, QED may significantly
strain QED's management, manufacturing, financial, information systems and
other resources. Moreover, QED cannot be certain that its systems, procedures,
controls and existing space will be adequate to support its operations. QED is
currently implementing a new enterprise resource planning system to accommodate
the growth in its operations, and QED may not be able to implement this system
effectively or on a timely basis.
If QED's products contain defects or fail to achieve industry reliability
standards, QED's business reputation will be harmed, and it may incur
significant unexpected expenses and lose sales opportunities
QED's products have in the past contained, and may in the future contain,
undetected errors. Errors are more common when products are introduced or as
new versions are released. QED may find errors, defects or failures in its
products after commencement of commercial shipments. If this happens, QED may
experience:
. delay in or loss of market acceptance and sales;
. product returns;
. diversion of development resources;
. injury to QED's reputation; or
. increased service and warranty costs.
Moreover, because QED designs many of its embedded microprocessors for
products that provide critical communications services, QED may be subject to
significant liability claims. QED's agreements with customers typically contain
provisions intended to limit its exposure to liability claims. These
limitations may not, however, preclude all potential claims from being made.
QED does not currently have product liability insurance, and its general
liability insurance generally would not cover any claims sought against it.
Furthermore, QED's agreements with their manufacturers contain limitations on
their obligations to indemnify them if their embedded microprocessors contain
manufacturing defects. Liability claims could require QED to spend significant
time and money in litigation or to pay significant damages. As a result, any of
these claims, whether or not successful, could seriously damage QED's
reputation and business.
Risks Related to QED's Industry
The growth of QED's target markets depends upon the continued growth of the
Internet, and, therefore, QED's operating results could be harmed if the
Internet and, hence, its target markets fail to grow or grow more slowly than
expected
QED derives its revenue from the sale of embedded microprocessors for the
networking/communications infrastructure equipment, business network equipment
and consumer network products markets. In particular, QED depends on the
continued growth of the Internet, which largely dictates the demand for the
products incorporating its embedded microprocessors. The continued growth of
the Internet depends on various factors, many of which are outside QED's
control. Risks related to continued growth of the Internet include that:
. Internet infrastructure may not be able to support the demands placed on
it;
. performance and reliability of the Internet may decline as usage grows;
and
. privacy, security and authentication concerns with respect to the
transmission of confidential information over the Internet may result in
decreased usage.
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Although QED's target markets have experienced significant growth in recent
years, they may not continue to grow as rapidly or at all. If they fail to
grow, or grow more slowly than expected, QED's operating results could be
harmed.
The cyclicality of the semiconductor industry may impact QED's operating
results
The semiconductor industry is highly cyclical and subject to rapid
technological change. From time to time, the semiconductor industry has
experienced significant economic downturns, characterized by diminished product
demand, accelerated erosion of prices and excess production capacity. QED's
industry also periodically experiences increased demand and production capacity
constraints. Accordingly, QED's operating results may vary significantly as a
result of general conditions in the semiconductor industry.
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THE MERGER
This section describes material aspects of the proposed merger, including
the reorganization agreement. While we believe that the description covers the
material terms of the merger and the reorganization agreement, this summary may
not contain all of the information that is important to you. You should read
carefully this entire document and the other documents to which we refer for a
more complete understanding of the merger and the reorganization agreement.
Background of the Merger
On April 27, 2000, Messrs. Tom Riordan, of QED, Robert Bailey, PMC's
Chairman and Chief Executive Officer, and Greg Aasen, PMC's Chief Operations
Officer, met in San Jose, California to discuss a potential strategic
relationship between the companies.
On April 28, 2000, Mr. Bailey informed the PMC board of directors of recent
discussions with QED regarding a potential strategic relationship.
On May 2, 2000, Messrs. Riordan and Kunita discussed with Frank Marshall, a
member of PMC's board, the merits of a strategic relationship between the
companies.
On May 8, 2000, Messrs. Riordan and Kunita met with Messrs. Bailey and Aasen
and other PMC representatives. Messrs. Riordan and Kunita provided an overview
of QED and its products. Representatives of PMC provided an overview of PMC and
its products.
At various times between May 11 and May 31, 2000, Messrs. Riordan and Kunita
and a QED technical staff member analyzed with PMC technical personnel a
variety of networking processor-based tasks using QED microprocessor
technology. This analysis demonstrated to PMC that QED's technology
complemented PMC's technology.
On June 1, 2000, Messrs. Riordan and Kunita met with Messrs. Bailey and
Aasen in San Jose, California regarding a strategic combination of QED and PMC.
PMC proposed preliminary terms of a merger. The proposal was contingent upon
PMC board approval, the completion of a merger agreement and due diligence.
On June 2, 2000, QED's board of directors met by teleconference and
discussed PMC's preliminary offer. QED's board authorized management to
continue its discussions with PMC regarding a strategic combination.
Between June 7, 2000 and July 11, 2000, management of PMC and QED and their
investment bankers discussed potential terms and conditions for a transaction.
On June 8, 2000, QED management met with representatives of Morgan Stanley &
Co. Incorporated to discuss the merits of a strategic combination of PMC and
QED including a comparison of the merits of possible strategic combinations
with other companies.
On June 8, 2000, Mr. Riordan telephoned Mr. Bailey and proposed a
counteroffer.
On June 9, 2000, Messrs. Bailey, Aasen and Sullivan met by teleconference
with PMC's board of directors to discuss revised terms for the proposal.
From June 12 through June 18, 2000, senior executives from PMC and QED
together with their financial advisers held telephone discussions to negotiate
the exchange ratio and discuss potential terms of the merger. QED's board of
directors met on June 13, 16 and 17, 2000 to review the status of discussions.
On June 20, 2000, PMC transmitted an initial term sheet to QED, after which
QED notified its legal advisors of a potential combination and began a review
of the term sheet.
24
<PAGE>
On June 21, 2000, QED formally engaged Morgan Stanley to act as its
financial advisor in connection with a possible transaction with PMC.
On June 27, 2000, Mr. Riordan, Barry Cox, Chairman of the QED board of
directors, and Les Crudele, a QED board member, and representatives of Morgan
Stanley, met with Mr. Sullivan, a PMC technical employee and representatives of
Thomas Weisel Partners LLP. At the meeting, QED and PMC executed a non-
disclosure agreement which included provisions restricting QED from engaging in
certain activities without the consent of the board of directors of QED. QED
representatives presented a detailed description of QED's products, technology,
and business strategy.
On June 27, 2000, the QED board of directors met with representatives of
Morgan Stanley to review the status of the discussions and to discuss the terms
and conditions of the proposed transaction. The directors also authorized
management to enter into an exclusivity agreement and commence negotiating a
reorganization agreement with PMC. QED's legal advisors made a presentation to
the board of directors concerning the transaction.
On June 28, 2000, representatives of PMC met with a representative of Morgan
Stanley and Mr. Crudele to present an overview of PMC's products, technology,
and business strategy. On June 28, 2000, QED and PMC entered into an
exclusivity agreement restricting QED's ability to negotiate with other
acquirors.
On June 30, 2000, Mr. Riordan and a representative of Morgan Stanley met
with Mr. Bailey to discuss PMC's business strategy and the merits of a
strategic combination of QED and PMC.
From July 5 through July 11, 2000, the parties negotiated the definitive
reorganization agreement.
On July 10, 2000 the PMC board of directors met and reviewed the proposed
transaction terms and received the oral opinion of its financial advisors as to
the fairness of the exchange ratio. The PMC board of directors unanimously
approved the proposed reorganization agreement.
On July 11, 2000 the QED board of directors met to discuss the proposed
transaction. At that meeting Morgan Stanley rendered its oral opinion,
subsequently confirmed in writing, that as of July 11, 2000, based upon and
subject to the various considerations set forth in the opinion the exchange
ratio pursuant to the reorganization agreement was fair from a financial point
of view to the holders of shares of QED common stock. The QED board of
directors unanimously approved the proposed reorganization agreement.
On July 11, 2000, PMC and QED signed the definitive reorganization agreement
and issued a press release announcing the transaction.
Reasons For The Merger
PMC's Reasons for The Merger
PMC's board of directors has determined that the terms of the merger and the
reorganization agreement are fair to, and in the best interests of, PMC and its
stockholders. PMC's board of directors consulted with PMC's senior management,
as well as its legal counsel, independent accountants and financial advisors in
reaching its decision to approve the merger. PMC's board of directors
considered a number of factors in its deliberations.
. PMC believes that microprocessors can replace some of PMC's existing
solutions for low-end networking applications and for protocol
processing on-line cards and switches. PMC lacks high-performance
microprocessor technology and does not have the expertise to develop its
own microprocessors.
. QED is a technical and performance leader in MIPS microprocessor
technology with multiple suppliers and customers and has a large team of
experienced chip and microprocessor design engineers who can meet PMC's
microprocessor development needs.
25
<PAGE>
PMC's board of directors also considered the following when assessing the
transaction:
. historical information concerning the businesses operations, positions
and results of operations, technology and management style, competitive
position, industry trends and prospects of QED and PMC;
. information contained in SEC filings by QED;
. current and historical market prices, volatility and trading data for
the two companies;
. information and advice based on due diligence investigations by members
of PMC's board of directors and management and PMC's legal, financial
and accounting advisors concerning the business, business trends,
technology, services, operations, properties, assets, financial
condition, operating results and prospects of QED and QED's management
team; and
. data on companies comparable to QED and other financial analyses.
Except as outlined above, PMC's board of directors did not find it
practicable to quantify, analyze or assign relative weights to each individual
factor to reach its determination. Individual members of PMC's board of
directors may have assigned different relative weights or conclusions to each
factor affecting the board's determination.
QED's Reasons for the Merger
QED's board of directors has determined that the terms of the merger and the
reorganization agreement are fair to, and in the best interests of, QED and its
stockholders. Accordingly, QED's board of directors has approved the
reorganization agreement and the merger and recommends that you vote FOR
adoption of the reorganization agreement.
In reaching its decision, QED's board of directors identified several
potential benefits of the merger, the most important of which included:
. QED's microprocessor technology, design expertise and products
complement PMC's networking product design, manufacturing and support
capabilities;
. the ability of QED to access PMC's sales channels to reach PMC's
worldwide customer base;
. the ability to direct more resources towards microprocessor research and
development; and
QED also believes that the merger will provide QED's stockholders with
equity that enjoys greater liquidity than is currently available for QED common
stock.
QED's board of directors consulted with QED's senior management, as well as
its legal counsel and financial advisors, in reaching its decision to approve
the merger. Among the factors considered by QED's board of directors in its
deliberations were the following:
. the financial condition, results of operations, cash flow, business and
prospects of QED and PMC;
. QED's need for the kind of worldwide distribution network, complementary
products and strong customer relationships which PMC enjoys;
. QED's need to direct more resources towards research and development to
remain competitive in the stand-alone high-performance embedded
microprocessor market;
. competition with emerging full-system silicon suppliers over the long
term required QED to provide complementary solutions to its stand-alone
microprocessors;
. QED's pending initial public offering lock-up release and the likelihood
that some stockholders would sell shares upon the expiration of the
lock-up;
26
<PAGE>
. the fairness to QED and its stockholders of the terms of the
reorganization agreement and related agreements, which were the product
of extensive arm's length negotiations. In particular, QED's board of
directors considered the events triggering payment of the termination
fee and the limitations on the ability of QED to negotiate with other
companies regarding an alternative transaction, and the potential effect
these provisions would have on QED receiving alternative proposals that
could be superior to the merger.
. the fact that the merger is expected to qualify as a tax-free
reorganization and to be accounted for using the pooling of interests
method of accounting; and
. the analysis prepared by Morgan Stanley presented to QED's board of
directors along with the opinion of Morgan Stanley that, as of July 11,
2000, the exchange ratio set forth in the reorganization agreement was
fair from a financial point of view to the holders of QED common stock,
as described more fully in the text of the entire opinion attached as
Annex C to this document.
. historical information concerning the businesses operations, positions
and results of operations, technology and management style, competitive
position, industry trends and prospects of QED and PMC;
. information contained in SEC filings by PMC;
. current and historical market prices, volatility and trading data for
the two companies;
. information and advice based on due diligence investigations by members
of QED's board of directors and management and QED's legal, financial
and accounting advisors concerning the business, business trends,
technology, services, operations, properties, assets, financial
condition, operating results and prospects of PMC, and PMC's management
team; and
. data on companies comparable to PMC and other financial analyses.
QED's board of directors also identified and considered a number of
uncertainties and risks in its deliberations concerning the merger, including
the following:
. the risk that the potential benefits sought in the merger might not be
fully realized, if at all;
. the risk that the integration process may disrupt PMC's and QED's
respective businesses; and
. the other risks associated with the businesses of PMC, QED and the
merged companies and the merger described in this proxy statement-
prospectus under "Risk Factors."
As a result of the foregoing considerations, QED's board of directors
determined that the potential benefits of the merger outweighed the benefits of
remaining a separate company or pursuing alternate transactions. QED's board of
directors believes that the combined company will have a greater opportunity
than QED alone to compete in the embedded microprocessor market.
Except as outlined above, QED's board of directors did not find it
practicable to quantify, analyze or assign relative weights to each individual
factor to reach its determination. However, individual members of QED's board
of directors may have assigned different relative weights or conclusions to
each factor affecting the board's determination.
Recommendation of QED's Board of Directors
After careful consideration, QED's board of directors unanimously determined
the merger to be fair to you and in your best interest. QED's board of
directors approved the reorganization agreement and recommends that you vote in
favor of adopting the reorganization agreement.
27
<PAGE>
Opinion of QED's Financial Advisor
Under an engagement letter dated June 21, 2000, QED retained Morgan Stanley
to provide it with financial advisory services and a financial fairness opinion
in connection with the merger. QED's Board of Directors selected Morgan Stanley
to act as its financial advisor based on Morgan Stanley's qualifications,
expertise and reputation and its knowledge of the business and affairs of QED.
At the meeting of the QED Board of Directors on July 11, 2000, Morgan Stanley
rendered its oral opinion, subsequently confirmed in writing, that as of July
11, 2000, based upon and subject to the various considerations set forth in the
opinion, the exchange ratio pursuant to the reorganization agreement was fair
from a financial point of view to holders of shares of QED common stock.
The full text of the written opinion of Morgan Stanley, dated as of July 11,
2000, is attached as Annex C. The opinion sets forth, among other things, the
assumptions made, procedures followed, matters considered and limitations on
the scope of the review undertaken by Morgan Stanley in rendering its opinion.
We urge you to read the entire opinion carefully. Morgan Stanley's opinion is
directed to QED's board of directors and addresses only the fairness from a
financial point of view of the exchange ratio pursuant to the reorganization
agreement to holders of shares of QED common stock as of the date of the
opinion. It does not address any other aspects of the merger and does not
constitute a recommendation to any holder of QED common stock as to how to vote
at the QED special meeting. The summary of the opinion of Morgan Stanley set
forth in this document is qualified in its entirety by reference to the full
text of the opinion.
In connection with rendering its opinion, Morgan Stanley, among other
things:
. reviewed certain publicly available financial statements and other
information of QED;
. reviewed certain internal financial statements and other financial and
operating data concerning QED prepared by the management of QED;
. reviewed certain financial projections prepared by the management of QED
and PMC;
. reviewed certain publicly available financial projections from equity
research analyst reports of QED;
. discussed the past and current operations financial condition and
prospects of QED, including a review of publicly available projections
from equity research analyst estimates and information relating to
certain strategic, financial and operational benefits anticipated from
the merger, with senior executives of QED;
. reviewed certain publicly available financial statements and other
information of PMC;
. reviewed certain internal financial statements and other financial and
operating data concerning PMC, prepared by the management of PMC;
. reviewed the pro forma impact of the merger on certain financial ratios
of PMC;
. reviewed certain publicly available financial projections from equity
research analyst reports of PMC;
. discussed the past and current operations financial condition and
prospects of PMC, including a review of publicly available projections
from equity research analyst estimates and information relating to
certain strategic, financial and operational benefits anticipated from
the merger, with senior executives of PMC;
. reviewed the reported prices, trading activity and market liquidity for
the QED common stock and PMC common stock;
. compared the financial performance of QED and PMC and the prices and
trading activity of the QED common stock and PMC common stock with that
of certain other publicly-traded companies comparable to QED and PMC,
and their securities;
. reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
28
<PAGE>
. participated in discussions and negotiations among representatives of
QED and PMC and their respective financial and legal advisors;
. discussed the current and expected competitive environment in QED's
available markets;
. discussed QED's pending initial public offering lock-up expiration and
the likelihood that certain stockholders would sell shares upon the
expiration of the lock-up;
. reviewed the draft reorganization agreement and certain related
documents; and
. performed such other analyses and considered such other factors Morgan
Stanley deemed appropriate.
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information provided by PMC and QED for
the purposes of its opinion. With respect to the financial projections and
discussions relating to the strategic, financial and operational benefits
anticipated from the merger, Morgan Stanley assumed that they were, in each
case, reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance and prospects of
QED and PMC. Morgan Stanley relied upon the assessment by the management of QED
and PMC of their ability to retain key employees of QED. Morgan Stanley also
relied upon, without independent verification, the assessment by the management
of QED and PMC of: (i) the strategic, financial and other benefits expected to
result from the merger; (ii) the timing and risks associated with the
integration of QED and PMC; and (iii) the validity of, and risks associated
with, QED's and PMC existing and future technologies, services or business
models.
Morgan Stanley did not make any independent valuation or appraisal of the
assets or liabilities or technology of QED and PMC, nor were they furnished
with any such appraisals. In addition, Morgan Stanley assumed that the merger
will be treated as a tax-free reorganization pursuant to Section 368(a) of the
Internal Revenue Code of 1986. Morgan Stanley's opinion is based on financial,
economic, market and other conditions as of the date of its opinion.
The following is a brief summary of the material financial analyses
performed by Morgan Stanley in connection with its oral opinion and the
preparation of its written opinion. Some of these summaries of financial
analyses include information presented in tabular format. In order to fully
understand the financial analyses used by Morgan Stanley, the tables must be
read together with the text of each summary. The tables alone do not constitute
a complete description of the financial analyses.
QED Stock Price Performance. Morgan Stanley reviewed the recent stock price
performance of QED common stock over various periods ending on July 10, 2000.
Morgan Stanley observed the following:
<TABLE>
<CAPTION>
QED common
stock closing
price
--------------
Period ending July 10, 2000 Low High
--------------------------- ------ -------
<S> <C> <C>
Since initial public offering................................ $32.00 $119.56
Last 30 days................................................. $34.56 $ 68.63
Last 60 days................................................. $32.00 $ 72.50
July 10, 2000 closing price.................................. $ 60.38
Implied transaction value.................................... $ 74.38
Transaction premium.......................................... 23.2%
</TABLE>
The implied transaction value of $74.38 per share of QED common stock is based
on the exchange ratio of 0.385 and PMC common stock price of $193.19 as of July
10, 2000. Morgan Stanley noted that the implied transaction value reflected a
23.2% premium to QED's closing price as of July 10, 2000 and was above the high
end of the range of the closing prices for the 30 day and 60 day periods ending
on July 10, 2000.
29
<PAGE>
Exchange Ratio Premium Analysis. Morgan Stanley reviewed the ratios of the
closing prices of QED common stock divided by the corresponding closing prices
of PMC common stock over various periods ending on July 10, 2000. These ratios
are referred to as period average exchange ratios. Morgan Stanley examined the
premiums represented by the exchange ratio set forth in the reorganization
agreement over the period average exchange ratios, and found them to be as
follows:
<TABLE>
<CAPTION>
Transaction
premium to period
Period average average exchange
Period ending July 10, 2000 exchange ratio ratio
--------------------------- -------------- -----------------
<S> <C> <C>
Since initial public offering............... 0.407x (5.3)%
Last 60 days................................ 0.331x 16.4 %
Last 30 days................................ 0.295x 30.5 %
Last 15 days................................ 0.316x 22.0 %
Last 5 days................................. 0.342x 12.5 %
July 10, 2000............................... 0.313x 23.2 %
</TABLE>
Comparative Stock Price Performance. Morgan Stanley reviewed the recent
stock price performance of QED common stock and compared it with the
performance of PMC common stock, a stock price index comprising a group of
comparable companies, referred to as the communications integrated circuits
index (the "Communications IC Index"), and the Nasdaq Index. The Communications
IC Index included:
<TABLE>
<S> <C>
Altera Corp. Marvell Technology Group Ltd.
Applied Micro Circuits Corp. MMC Networks, Inc.
Broadcom Corporation TranSwitch Corp.
Conexant Systems, Inc. Vitesse Corp.
LSI Logic Corp. Xilinx, Inc.
</TABLE>
Morgan Stanley observed the following percentage changes in the price of QED
common stock, the price of PMC common stock, the Communications IC Index and
the Nasdaq Index, as of July 10, 2000:
<TABLE>
<CAPTION>
Percentage price change (as of July
10, 2000)
Since QED's initial public offering
(February 1, 2000 closing prices)
-----------------------------------
<S> <C>
QED...................................... 6.9 %
PMC...................................... 88.0 %
Communications IC Index.................. 57.2 %
NASDAQ Index............................. (1.8)%
</TABLE>
Morgan Stanley noted that QED's share price had increased less than the price
of PMC's common stock and the Communications IC Index and more than the Nasdaq
Index on a relative basis from February 1, 2000 to July 10, 2000.
30
<PAGE>
Volume Trading Analysis. Morgan Stanley compared average daily trading
volume for shares of QED common stock and shares of PMC common stock over
various periods ending July 10, 2000. Morgan Stanley also analyzed the multiple
of the implied shares of PMC common stock issued in the merger to PMC-Sierra's
average daily trading volume over the same periods for purposes of analyzing
market liquidity. The following table shows the results of these calculations:
<TABLE>
<CAPTION>
Approximately
12.1 million shares
of PMC common
stock as a multiple
Period Ending July 10, QED average daily PMC average daily of PMC daily
2000 trading volume trading volume trading volume
---------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Last 5 days............. 19,230 1,822,310 6.6
Last 10 days............ 26,955 1,717,470 7.0
Last 15 days............ 22,887 1,827,920 6.6
Last 30 days............ 27,932 2,259,197 5.3
Last 45 days............ 28,668 2,722,357 4.4
Last 60 days............ 45,344 3,071,981 3.9
Since QED's initial
public offering
(February 1, 2000
closing prices)........ 94,244 2,725,091 4.4
</TABLE>
Morgan Stanley noted that QED's average daily trading volume was materially
less than PMC's average daily trading volume during the trading periods
analyzed. The number of PMC shares issued in connection with the merger,
approximately 12.1 million, was calculated based on the exchange ratio of 0.385
and QED's fully diluted shares outstanding, using the treasury method of
approximately 31.4 million shares as of July 10, 2000. Based on the analyses,
Morgan Stanley noted that those PMC shares issued in connection with the merger
would on average represent four to seven days of average PMC daily trading
volume.
Comparable Company Analysis. Morgan Stanley compared selected financial
information for QED with publicly available information for some of the
companies included in the Communications IC Index described above. Based on
estimates from research analysts and using the closing price of QED common
stock as of July 10, 2000 of $60.38 per share, Morgan Stanley calculated, for
each of these companies, an aggregate value to revenue multiple for calendar
year 2000 and 2001. The following table shows the results of these
calculations:
<TABLE>
<CAPTION>
Aggregate value to revenue
------------------------------
CY2000E CY2001E
------------- -------------
<S> <C> <C>
QED........................................ 33.4x 21.6x
PMC........................................ 65.6 44.6
Comparable Company Peer Group
Broadcom Corporation....................... 72.1x 48.1x
Applied Micro Circuits Corp................ 48.5 30.1
Marvell Technology Group Ltd............... 33.9 20.5
TranSwitch Corp............................ 29.9 20.5
Vitesse Corp............................... 28.8 19.9
MMC Networks, Inc.......................... 26.4 14.7
Xilinx Corp................................ 25.2 19.2
Altera Corp................................ 16.0 11.8
LSI Logic Corp............................. 7.6 5.7
Conexant Systems, Inc...................... 5.0 3.9
------------- -------------
Mean (including QED and PMC)............. 32.7 21.7
Median (including QED and PMC)........... 29.4 20.2
</TABLE>
31
<PAGE>
Morgan Stanley noted that QED's aggregate value to revenue multiple for
calendar year 2000 and 2001 was within the range of multiples for the
comparable companies, and the PMC aggregate value to revenue multiple for
calendar year 2000 and 2001 was at the high end of the range of multiples for
the comparable companies. Morgan Stanley further noted that the implied
aggregate value to revenue multiple of 41.6x and 26.9x for calendar years 2000
and 2001, respectively, based on the implied transaction aggregate value, were
each at the high end of the range of multiples for the comparable companies.
Based on the analyses, Morgan Stanley calculated an implied reference range for
QED common stock of $33.00-$55.00 per share. Morgan Stanley observed that the
implied transaction value of $74.38 per share of QED common stock was greater
than the implied reference range based on this analysis.
No company included in the comparable company analysis is identical to
either QED or PMC. In evaluating the comparable companies, Morgan Stanley made
judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters. Many of
these matters are beyond the control of QED and PMC, such as the impact of
competition on the businesses of QED and PMC and their industries in general,
industry growth and the absence of any material adverse changes in the
financial condition and prospects of QED, PMC, the industry or in the financial
markets in general. Mathematical analysis, such as determining the average or
median, is not in itself a meaningful method of using comparable group data.
Comparable Company Float Analysis. Morgan Stanley compared float as a
percentage of shares outstanding based on publicly available information for
the companies included in the comparable company analysis described above. The
following table shows the results of these calculations:
<TABLE>
<CAPTION>
Float as a
% of Shares
Outstanding
-----------
<S> <C>
QED.............................................................. 16.1%
PMC.............................................................. 94.3%
Comparable Company Peer Group
Vitesse Corp..................................................... 98.2%
TranSwitch Corp.................................................. 98.1%
Altera Corp...................................................... 96.7%
Xilinx, Inc...................................................... 96.4%
LSI Logic Corp................................................... 94.8%
Applied Micro Circuits Corp...................................... 94.6%
MMC Networks, Inc................................................ 83.9%
Conexant Systems, Inc............................................ 83.8%
Broadcom Corporation............................................. 61.2%
Marvell Technology Group Ltd..................................... 8.3%
</TABLE>
Morgan Stanley noted that QED's float as a percentage of shares outstanding was
materially less than most of the selected comparable companies. Morgan Stanley
also noted that PMC's float as a percentage of shares outstanding was
materially greater than QED's float as a percentage of shares outstanding.
Morgan Stanley observed that the materially different float statistics between
QED and PMC would be an important consideration given QED's pending initial
public offering lock-up expiration and the likelihood that certain QED
stockholders would sell shares upon the expiration of the lock-up.
Analysis of Selected Precedent Transactions. Morgan Stanley compared
statistics based on publicly available information for selected transactions in
the communications integrated circuits semiconductor sector to the relevant
financial statistics for QED. Morgan Stanley analyzed statistics including
aggregate value to last twelve month ("LTM") revenue multiples, premium paid to
the one month prior share price, premium paid to
32
<PAGE>
the 30 day average exchange ratio and premium paid to the 60 day average
exchange ratio. The following table lists the selected precedent transactions:
Selected Precedent Transactions (Target / Acquiror)
Burr-Brown Corp. / Texas Instruments Incorporated
DSP Communications, Inc. / Intel Corp.
Giga / Intel Corp.
Level One Communications, Incorporated / Intel Corp.
Maker Communications, Inc. / Conexant Systems, Inc.
Ortel Corp. / Lucent Technologies Inc.
Unitrode Corporation / Texas Instruments Incorporated
VLSI Technology, Inc. / Koninklijke (Royal) Phillips Electronics N.V.
Based on the analyses, Morgan Stanley estimated a reference range for QED
common stock of $12.89- $76.36 per share using aggregate value to LTM revenue
multiples, $48.75-$71.25 per share using premium paid to the one month prior
share price and $71.24-$102.26 per share using premium paid to the 30 day and
60 day average exchange ratio range. Morgan Stanley observed that the implied
transaction value of $74.38 per share of QED common stock was either greater
than or within the implied reference ranges based on the analyses.
No company or transaction utilized in the analysis of selected precedent
transactions is identical to QED or PMC or the merger. In evaluating the
precedent acquisition transactions, Morgan Stanley made judgments and
assumptions with regard to industry performance, general business, market and
financial conditions and other matters, which are beyond the control of QED and
PMC, such as the impact of competition on the business of QED, PMC, or the
industry generally, industry growth and the absence of any adverse material
change in financial condition and prospects of QED, PMC or the industry or in
the financial markets in general, which could affect the public trading value
of the companies and the aggregate value of the transactions to which they are
being compared.
Discounted Equity Value. Morgan Stanley performed an analysis of the implied
present value per share of QED common stock on a standalone basis based on
QED's projected future equity value using Morgan Stanley publicly-available
equity research analyst projections for QED's future revenue projections. For
purpose of this analysis Morgan Stanley calculated an implied present value per
share range of $43.00 to $64.00 using a range of revenue multiples of 20x to
30x and a discount rate of 35%. Morgan Stanley observed that the implied
transaction value of $74.38 per share of QED common stock was greater than this
estimated reference range.
Relative Contribution Analysis. Morgan Stanley compared QED and PMC
stockholders' respective percentage ownership of the combined company to QED's
and PMC's respective percentage contribution to the combined company using
revenues, gross profit, operating income, net income and market capitalization
based on Morgan Stanley publicly-available equity research analyst estimates.
Morgan Stanley noted that QED's implied pro forma ownership percentage ranged
from 7% to 10% using estimated revenues and gross profit while the implied pro
forma ownership percentage ranged from 0% to 4% using operating income, net
income and market capitalization. Morgan Stanley noted that the implied pro
forma QED ownership of the combined company of 6.6% using the exchange ratio of
0.385x was less than the implied pro forma ownership percentages calculated by
Morgan Stanley based on revenues and gross profits and greater than those
calculated based on operating income, net income and market capitalization.
Based on the analyses, Morgan Stanley calculated an estimated reference range
for QED common stock of $26.51-$79.09 per share. Morgan Stanley
33
<PAGE>
observed that the implied transaction value of $74.38 per share of QED common
stock was within the reference range based on this analysis.
Pro Forma Merger Analysis. Morgan Stanley analyzed the pro forma impact of
the merger on PMC's combined projected revenue per share and earnings per share
for calendar year 2000 and 2001. In performing this analysis, Morgan Stanley
used Morgan Stanley publicly-available equity research analyst estimates for
revenue and earnings projections. Morgan Stanley's analysis indicated that the
merger would result in revenue per share accretion for PMC of approximately 4%
for calendar year 2000 and 2001 and earnings per share dilution of
approximately 6% for calendar year 2000 and 3% for calendar year 2001,
excluding goodwill amortization, purchased in-process research and development
and other one-time gains and charges, and without giving effect to any
synergies from the merger.
In connection with the review of the merger by QED's board of directors,
Morgan Stanley performed a variety of financial and comparative analyses for
purposes of rendering its opinion. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to a partial analysis or
summary description. In arriving at its opinion, Morgan Stanley considered the
results of all of its analyses as a whole and did not attribute any particular
weight to any analysis or factor it considered. Morgan Stanley believes that
selecting any portion of its analyses, without considering all analyses as a
whole, would create an incomplete view of the process underlying its analyses
and opinion. In addition, Morgan Stanley may have given various analyses and
factors more or less weight than other analyses and factors, and may have
deemed various assumptions more or less probable than other assumptions. As a
result, the ranges of valuations resulting from any particular analysis
described above should not be taken to be Morgan Stanley's view of the actual
value of QED or PMC. In performing its analyses, Morgan Stanley made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters. Many of these assumptions are beyond the control
of QED or PMC. Any estimates contained in Morgan Stanley's analyses are not
necessarily indicative of future results or actual values, which may be
significantly more or less favorable than those suggested by such estimates.
Morgan Stanley conducted the analyses described above solely as part of its
analysis of the fairness of the exchange ratio pursuant to the reorganization
agreement from a financial point of view to holders of shares of QED common
stock and in connection with the delivery of its opinion dated July 11, 2000 to
QED's board of directors. These analyses do not purport to be appraisals or to
reflect the prices at which shares of common stock of QED or PMC might actually
trade.
The exchange ratio pursuant to the reorganization agreement was determined
through arm's length negotiations between QED and PMC and was approved by QED's
board of directors. Morgan Stanley provided advice to QED during these
negotiations. Morgan Stanley did not, however, recommend any specific exchange
ratio to QED or that any given exchange ratio constituted the only appropriate
exchange ratio for the merger.
In addition, Morgan Stanley's opinion and its presentation to QED's board of
directors was one of many factors taken into consideration by QED's board of
directors in deciding to approve the merger. Consequently, the analyses as
described above should not be viewed as determinative of the opinion of QED's
board of directors with respect to the exchange ratio or of whether QED's board
of directors would have been willing to agree to a different exchange ratio.
QED's board of directors retained Morgan Stanley based upon Morgan Stanley's
qualifications, experience and expertise. Morgan Stanley is an internationally
recognized investment banking and advisory firm. Morgan Stanley, as part of its
investment banking and financial advisory business, is continuously engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. In the past, Morgan
Stanley and its affiliates have provided financial advisory and financing
services for both QED and PMC and have received fees for the rendering of these
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services. In the ordinary course of Morgan Stanley's trading and brokerage
activities, Morgan Stanley or its affiliates may at any time hold long or short
positions, may trade or otherwise effect transactions, for its own account or
for the account of customers in the equity and other securities of QED, PMC or
any other parties involved in the merger.
Under the engagement letter, Morgan Stanley provided financial advisory
services and a financial fairness opinion in connection with the merger, and
QED agreed to pay Morgan Stanley a customary fee for its services. QED has also
agreed to reimburse Morgan Stanley for its expenses incurred in performing its
services. In addition, QED has agreed to indemnify Morgan Stanley and its
affiliates, their respective directors, officers, agents and employees and each
person, if any, controlling Morgan Stanley or any of its affiliates against
certain liabilities and expenses, including certain liabilities under the
federal securities laws, related to or arising out of Morgan Stanley's
engagement.
Interests of Certain QED Directors, Officers and Affiliates in the Merger
PMC has agreed that Mr. Cox and Mr. Riordan will continue as QED directors
after the merger, allowing their stock and options to continue to vest.
PMC has agreed to honor QED's obligations under indemnification agreements
between QED and its directors and officers in effect before the completion of
the merger and any indemnification and exculpation provisions of QED's
certificate of incorporation and bylaws. PMC has also agreed to provide for
indemnification provisions in the certificate of incorporation and bylaws of
the surviving corporation of the merger that are at least as favorable as QED's
provisions and to maintain these provisions for at least six years from the
completion of the merger.
PMC has agreed to maintain QED's directors' and officers' liability
insurance for six years from the completion of the merger, provided that PMC is
not required to pay more than 150% of the last annual premium paid by QED for
such insurance. PMC has agreed to guaranty these obligations or make
arrangements to have them assumed in the event of a subsequent sale of QED to a
third party.
Completion and Effectiveness of the Merger
The merger will be completed when all of the conditions to completion of the
merger are satisfied or waived, including adoption of the reorganization
agreement by the stockholders of QED. The merger will become effective upon the
filing of a certificate of merger with the State of Delaware.
PMC and QED are working towards completing the merger as quickly as possible
and hope to complete the merger promptly after the QED stockholders meeting.
Structure of the Merger and Conversion of QED Common Stock
In accordance with the reorganization agreement and Delaware law, Penn
Acquisition Corp., a wholly-owned subsidiary of PMC, will be merged with and
into QED. As a result of the merger, the separate corporate existence of Penn
Acquisition Corp., will cease and QED will survive the merger as a wholly-owned
subsidiary of PMC.
Upon completion of the merger, each outstanding share of QED common stock,
other than shares held by PMC and its subsidiaries will be converted into the
right to receive 0.385 of a fully paid and nonassessable share of PMC common
stock. The exchange ratio will be proportionately adjusted for any future stock
split, stock dividend or similar event with respect to QED common stock or PMC
common stock effected between the date of the reorganization agreement and the
completion of the merger.
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No certificate or scrip representing fractional shares of PMC common stock
will be issued in connection with the merger. Instead you will receive cash,
without interest, in lieu of a fraction of a share of PMC common stock equal to
the product of the fraction and the average closing price of one share of PMC
common stock for the five most recent trading days before the effective time of
the merger.
Exchange of QED Stock Certificates for PMC Stock Certificates
When the merger is completed, the exchange agent will mail to you a letter
of transmittal and instructions for use in surrendering your QED stock
certificates in exchange for PMC stock certificates. When you deliver your QED
stock certificates to the exchange agent along with a properly executed letter
of transmittal and any other required documents, your QED stock certificates
will be canceled and you will receive PMC stock certificates representing the
number of full shares of PMC common stock to which you are entitled under the
reorganization agreement. You will receive payment in cash, without interest,
in lieu of any fractional shares of PMC common stock which would have been
otherwise issuable to you as a result of the merger calculated as provided in
the preceding paragraph.
You should not submit your QED stock certificates for exchange unless and
until you receive the transmittal instructions and a form of letter of
transmittal from the exchange agent.
You are not entitled to receive any dividends or other distributions on PMC
common stock until the merger is completed and you have surrendered your QED
stock certificates in exchange for PMC stock certificates.
. If there is any dividend or other distribution on PMC common stock with
a record date after the completion of the merger and a payment date
prior to the date you surrender your QED stock certificates in exchange
for PMC stock certificates, you will receive it with respect to the
number of whole shares of PMC common stock issued to you promptly after
they are issued.
. If there is any dividend or other distribution on PMC common stock with
a record date after the completion of the merger and a payment date
after the date you surrender your QED stock certificates in exchange for
PMC stock certificates, you will receive it with respect to the number
of whole shares of PMC common stock issued to you promptly after the
payment date.
PMC will only issue a PMC stock certificate or a check in lieu of a
fractional share in a name other than the name in which a surrendered QED stock
certificate is registered if you present the exchange agent with all documents
required to show and effect the unrecorded transfer of ownership and show that
you paid any applicable stock transfer taxes.
Material United States Federal Income Tax Considerations of the Merger
The following discussion summarizes the material federal income tax
considerations of the merger that are generally applicable to holders of QED
common stock in exchanging their QED common stock for PMC common stock. QED
stockholders should be aware that the following discussion does not deal with
all federal income tax considerations that may be relevant in light of their
particular circumstances, such as stockholders who are dealers in securities,
who are foreign persons or who acquired their QED common stock through stock
option or stock purchase programs or in other compensatory transactions, who
hold their shares of QED common stock as part of a hedge, straddle or other
risk reduction, constructive sale or conversion transaction, or who do not hold
their QED common stock as a capital asset. In addition, the following
discussion does not address the tax consequences of the merger under foreign,
state or local tax laws. Finally, the following discussion does not address the
tax consequences of transactions occurring prior to or after the merger
(whether or not such transactions are in connection with the merger) including,
without limitation, the exercise of options or rights to purchase QED common
stock in anticipation of the merger. Accordingly, QED stockholders are urged to
consult their own tax advisor as to the specific tax consequences to them
resulting from the merger, including the applicable federal, state, local and
foreign tax consequences to them of the merger.
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The following discussion, as well as the tax opinions referred to below to
be delivered upon completion of the merger, are based on the Internal Revenue
Code of 1986, as amended (the "Code"), applicable Treasury Regulations,
judicial authority and administrative rulings and practice, all as of the date
hereof in the case of the following discussion, and all as of the effective
time in the case of such tax opinions. The IRS could adopt a contrary position.
In addition, future legislative, judicial or administrative changes or
interpretations could adversely affect the accuracy of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the merger to
PMC, Penn Acquisition Corp., QED and/or their respective stockholders.
In the opinion of Wilson Sonsini Goodrich & Rosati, P.C., counsel to PMC,
and Cooley Godward LLP, counsel to QED, the merger will qualify as a
reorganization under section 368(a) of the Code. As a result, subject to the
limitations and qualifications referred to herein:
. The holders of QED common stock will recognize no gain or loss upon the
receipt of PMC common stock solely in exchange for their QED common
stock in the merger, except with respect to cash received in lieu of
fractional shares of PMC common stock.
. The aggregate tax basis of the PMC common stock received by the QED
stockholders in the merger will be the same as the aggregate tax basis
of the QED common stock surrendered in exchange therefor (reduced by any
basis allocable to fractional shares for which cash is received).
. The holding period of the PMC common stock received by each QED
stockholder in the merger will include the holding period of the QED
common stock surrendered in exchange therefor.
. A holder of QED common stock receiving cash in the merger in lieu of a
fractional interest in PMC common stock will be treated as if such
holder actually received such fractional share interest which was
subsequently redeemed by PMC. A QED stockholder should recognize gain or
loss with respect to a cash payment in lieu of a fractional share
measured by the difference, if any, between the amount of cash received
and the basis in such fractional share.
. Neither PMC, Penn Acquisition Corp. nor QED will recognize gain or loss
solely as a result of the merger.
Neither PMC nor QED has requested a ruling from the IRS in connection with
the merger. It is a condition to QED's obligation to consummate the merger that
PMC and QED each receive opinions from their respective counsel that the merger
will constitute a reorganization within the meaning of section 368(a) of the
Code for federal income tax purposes. The tax opinions neither bind the IRS nor
preclude the IRS from adopting a contrary position. The tax opinions expressed
herein, as well as those to be delivered upon consummation of the merger, are
subject to certain assumptions and qualifications and are based in part on the
truth and accuracy of certain representations of PMC, QED and Penn Acquisition
Corp.
A successful IRS challenge to the reorganization status of the merger would
result in QED stockholders recognizing gain or loss. The amount of gain or loss
for each share of QED common stock surrendered would equal the difference
between the stockholder's basis in each share and the fair market value, as of
the time of the merger, of the PMC common stock and any other consideration
received in exchange. QED stockholders' aggregate basis in the PMC common stock
so received would equal its fair market value, and the stockholders' holding
period for such stock would begin the day after the merger. However, even in
the event of a successful IRS challenge to the reorganization status of the
merger, neither PMC, Penn Acquisition Corp. nor QED would recognize gain or
loss solely as a result of the merger.
The foregoing discussion is not intended to be a complete analysis or
description of all potential United States federal income tax consequences or
any other consequences of the merger. In addition, the discussion does not
address tax consequences which may vary with, or are contingent on, your
individual circumstances. Moreover, the discussion does not address any non-
income tax or any foreign, state or local tax consequences of the merger. You
are strongly urged to consult with your tax advisor to determine the particular
United States federal, state, local or foreign income or other tax consequences
to you.
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Accounting Treatment of the Merger
PMC intends to account for the merger as a pooling of interests. Under the
pooling of interests method of accounting, each of PMC's and QED's historical
recorded assets and liabilities will be carried forward to the combined company
at their recorded amounts. In addition, the operating results of the combined
company will include PMC's and QED's operating results for the entire fiscal
year in which the merger is completed and PMC's and QED's historical reported
operating results for prior periods will be combined and restated as the
operating results of the combined company.
Regulatory Filings and Approvals Required to Complete the Merger
The merger is subject to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 which prevents this transaction from being completed
until required information and materials are furnished to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and
related waiting period ends. PMC and QED have made the required filings with
the Department of Justice or the Federal Trade Commission but the applicable
waiting periods have not yet ended. PMC and QED intend to comply with all
requests for information from any government entity.
Restrictions on Sales of Shares by Affiliates of QED and PMC
The shares of PMC common stock to be issued in connection with the merger
will be registered under the Securities Act of 1933 and will be freely
transferable under the Securities Act, except for shares of PMC common stock
issued to any person who is deemed to be an affiliate of either PMC or QED on
June 30, 2000. Persons who may be deemed to be affiliates include individuals
or entities that control, are controlled by, or are under common control of
either PMC or QED and may include some of each company's respective officers
and directors, as well as some of each company's respective principal
stockholders. Some affiliates of QED and PMC entered into affiliate agreements
in connection with the merger. Affiliates may not sell their shares of PMC
common stock acquired in connection with the merger except under:
. an effective registration statement under the Securities Act covering
the resale of those shares;
. an exemption under of Rule 145(d) under the Securities Act; and
. any other applicable exemption under the Securities Act.
This proxy statement-prospectus does not cover the resale of shares of PMC
common stock to be received by affiliates in the merger.
Under the affiliate agreements, PMC will be entitled to place appropriate
legends on the certificates evidencing any PMC common stock to be received by
these persons and to issue stop transfer instructions to the transfer agent for
the PMC common stock. These persons have also acknowledged the resale
restrictions imposed by Rule 145 under the Securities Act on shares of PMC
common stock to be received by them in the merger.
Nasdaq Listing of PMC Common Stock to be Issued in the Merger
PMC will list the shares of PMC common stock to be issued in the merger on
the Nasdaq National Market.
Delisting and Deregistration of QED Common Stock after the Merger
If the merger is completed, QED common stock will be delisted from the
Nasdaq National Market and will be deregistered under the Securities Exchange
Act of 1934.
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THE REORGANIZATION AGREEMENT
Conditions to Completion of the Merger
In addition to the conditions applicable to either PMC or QED set forth
below, PMC's and QED's obligations to complete the merger are subject to the
satisfaction or waiver of each of the following conditions:
. the reorganization agreement must be adopted by the requisite vote of
the holders of QED common stock entitled to vote;
. PMC's registration statement, of which this proxy statement-prospectus
forms a part, must be effective, no stop order suspending its
effectiveness must be in effect, and no proceedings for suspension of
its effectiveness or similar proceeding in respect of this document,
must be pending before or threatened in writing by the SEC;
. no law, rule, regulation, injunction or other order may have been
enacted or issued which has the effect of making the merger illegal or
otherwise prohibiting consummation of the merger; and
. all applicable waiting periods under applicable antitrust laws relating
to the merger must have expired or been terminated.
QED's obligation to complete the merger is subject to the satisfaction or
waiver of each of the following additional conditions:
. PMC's representations and warranties must have been accurate in all
respects as of July 11, 2000 and must be accurate as of the date the
merger is to be completed as if made at and as of such date except:
. that if any one or more of these representations and warranties are
not accurate but the effect in each case, or in the aggregate, of
the inaccuracies of these representations and warranties
specifically set forth in the reorganization agreement that must be
correct in all material respects as of July 11, 2000 and as of the
date the merger is to be completed, is that there is not a material
adverse effect on PMC on the date that the merger is consummated
(ignoring for the purpose of this analysis "materiality" and
"material adverse effect" qualifiers in such representations and
warranties), then this condition will be deemed satisfied;
. for inaccuracies arising from changes or actions contemplated by the
reorganization agreement; and
. to the extent PMC's representations and warranties address matters
only as of a particular date, in which case they must have been
accurate as of that date.
. PMC must have performed or complied with in all material respects all of
the agreements and covenants required by the reorganization agreement to
be performed or complied with by PMC at or before completion of the
merger;
. each of PMC and QED must have received from their respective tax counsel
in form and substance reasonably satisfactory to PMC or QED, as the case
may be, an opinion to the effect that the merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code; and
. there is no material adverse effect on PMC.
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PMC's obligation to complete the merger is subject to the satisfaction or
waiver of each of the following additional conditions:
. QED's representations and warranties must have been accurate in all
respects as of July 11, 2000 and must be accurate as of the date the
merger is to be completed as if made at and as of such date except:
. that if any one or more of these representations and warranties are
not accurate but the effect in each case, or in the aggregate, of the
inaccuracies of these representations and warranties
is that there is not a material adverse effect on QED on the date
that the merger is consummated (ignoring for the purpose of this
analysis "materiality" and "material adverse effect" qualifiers in
such representations and warranties), then this condition will be
deemed satisfied, and
. for inaccuracies arising from changes or actions contemplated by the
reorganization agreement; and
. to the extent QED representations and warranties address matters only
as of a particular date, in which case they must have been accurate
as of that date,
. QED must have performed or complied with in all material respects all of
the agreements and covenants required by the reorganization agreement to
be performed or complied with by QED at or before completion of the
merger;
. there is no material adverse effect on QED.
. each of QED's affiliates shall have entered into an affiliate agreement
and each of the agreements shall be in full force and effect as of the
date of the merger;
. PMC shall have received from QED a copy of a letter issued by QED's
independent accountants addressed to QED in substance reasonably
satisfactory to PMC to the effect that QED's independent accountants
concur with QED management's conclusion that no conditions related to
QED exist that would preclude PMC from accounting for the merger as a
pooling of interests;
. PMC shall have received from its independent accountants a copy of a
letter addressed to PMC in substance reasonably satisfactory to PMC to
the effect that its independent accountants concur with PMC management's
conclusion that PMC can account for the merger as a pooling of
interests; and
. to the extent QED's representations and warranties address matters only
as of a particular date, they must have been accurate as of that date.
Representations and Warranties
PMC and QED each made a number of representations and warranties in the
reorganization agreement regarding aspects of their respective businesses,
financial condition, structure and other facts pertinent to the merger.
The representations and warranties given by QED cover the following topics,
among others, as they relate to QED:
. QED's corporate organization and its qualification to do business;
. QED's certificate of incorporation and bylaws;
. QED's capitalization;
. QED's corporate authority to enter into, and carry out the obligations
under, the reorganization agreement and the enforceability of the
reorganization agreement;
. absence of a breach of QED's charter, bylaws or material agreements as a
result of the merger;
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. QED's receipt of regulatory approvals required to complete the merger;
. QED's compliance with applicable laws and its receipt of material
permits required to conduct its business;
. QED's forms and reports filed with the Securities and Exchange
Commission;
. QED's financial statements;
. QED's liabilities;
. changes in QED's business since March 31, 2000;
. litigation involving QED;
. QED's employee benefit plans;
. information supplied by QED for use in the registration statement of
which this proxy statement-prospectus forms a part;
. restrictions on the conduct of QED's business;
. QED's title to the properties it owns and the enforceability of its
leases;
. QED's taxes and tax returns;
. payment by QED of fees to brokers in connection with the reorganization
agreement;
. QED's intellectual property;
. QED's material agreements, contracts and commitments;
. the opinion of QED's financial advisor;
. approval of the board of directors of QED;
. vote required for the approval of the merger by the stockholders of QED;
. the taking by QED of any action that would impact the treatment of the
merger as a pooling of interests;
. QED's customers;
. labor matters related to QED;
. environmental matters related to QED;
. QED's insurance policies; and
. state takeover statutes not applying to the merger.
The representations and warranties given by PMC cover the following topics,
among others, as they relate to PMC and its subsidiaries:
. corporate organization, qualification to do business and ownership of
other entities;
. certificate of incorporation and bylaws;
. capitalization;
. forms and reports filed with the Securities and Exchange Commission;
. financial statements;
. liabilities;
. changes in PMC's business since March 31, 2000;
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. litigation affecting PMC or its ability to complete the merger;
. information supplied by PMC for use in the registration statement of
which this proxy statement-prospectus forms in part; and
. the treatment of the merger as a pooling of interests.
The representations and warranties in the reorganization agreement are
complicated and not easily summarized. You are urged to carefully read the
articles of the reorganization agreement entitled "Representations and
Warranties of Company" and "Representations and Warranties of Parent and Merger
Sub."
QED's Operation of Business Before Completion of the Merger
QED has agreed that until the earlier of either the completion of the merger
or the termination of the reorganization agreement, unless PMC consents in
writing, QED will operate its business in the ordinary course and in
substantially the same manner as previously conducted and in substantial
compliance with all applicable laws and regulations, pay its debts and taxes
when due, pay other material obligations when due and use its commercially
reasonable efforts consistent with past practices and policies to:
. preserve intact its current business organization;
. keep available the services of its current officers and employees; and
. preserve its relationships with customers, suppliers, distributors,
licensors, licensees and others with which it has significant business
dealings.
QED has also agreed that until the earlier of the completion of the merger
or the termination of the reorganization agreement, unless PMC consents in
writing, QED will not do any of the following:
. with certain exceptions, waive any stock repurchase rights, accelerate,
amend or change the period of exercisability of any options, or reprice
any options;
. with certain exceptions, grant any severance or termination pay;
. transfer or license its intellectual property other than in the ordinary
course of business;
. declare, set aside or pay any dividends or make other distributions on
its capital stock;
. with certain exceptions, purchase, redeem or otherwise acquire any
shares of capital stock;
. issue, deliver, sell, authorize, pledge or encumber any shares of
capital stock, other than according to certain exceptions;
. cause, permit or submit to a vote of its stockholders any amendment to
its certificate of incorporation or bylaws;
. acquire or agree to acquire another entity or business;
. with certain exceptions, sell, lease, license, encumber or dispose of
its assets other than in the ordinary course of business;
. incur or guarantee any indebtedness;
. adopt or amend any employee benefit plan or any employee stock purchase
or stock option plan or enter into any employment relationship other
than in the ordinary course of business;
. pay, discharge, settle or satisfy any litigation other than on the
ordinary course of business;
. release or fail to enforce confidentiality or nondisclosure provisions
of any agreement with any person;
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. modify, amend or terminate contracts related to intellectual property or
any other material contracts;
. except as required by GAAP, revalue assets or change accounting methods,
principles or practices;
. enter into any contracts requiring a payment of more than $3 million;
. engage in any action that would reasonably by expected to cause the
merger to fail to qualify as a tax-free reorganization under Section
368(a) of the Internal Revenue Code;
. engage in any action that would reasonably be expected to interfere with
PMC's ability to account for the merger as a pooling of interests;
. make any tax election or accounting method change inconsistent with past
practice that would adversely affect any material tax liability; or
. engage in any action with the intent to adversely impact the
transactions contemplated in the reorganization agreement.
The agreements related to the conduct of QED's business in the
reorganization agreement are complicated and not easily summarized. You are
urged to carefully read the article of the reorganization agreement entitled
"Conduct Prior to the Effective Time."
PMC's Conduct of Business Before Completion of the Merger
PMC has agreed that until the earlier of the completion of the merger or
termination of the reorganization agreement, unless QED consents in writing,
PMC will not engage in any action that would reasonably be expected to:
. cause the merger to fail to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code; or
. interfere with PMC's ability to account for the merger as a pooling of
interests.
No Solicitation Involving QED
Until the merger is completed or the reorganization agreement is terminated,
QED has agreed, subject to limited exceptions, that neither it nor any of its
subsidiaries, nor any of its officers, directors, investment bankers or other
related parties, will, directly or indirectly:
. solicit, initiate or knowingly encourage or induce the making,
submission or announcement of any acquisition proposal, as defined
below;
. participate in any discussions or negotiations regarding any acquisition
proposal;
. knowingly furnish to any person any information with respect to any
acquisition proposal;
. knowingly take any other action that would be reasonably expected to
lead to any acquisition proposal;
. approve, endorse or recommend any acquisition proposal without complying
with the provisions described below; or
. enter into any letter of intent or similar document or any contract,
agreement or commitment providing for an acquisition transaction, as
defined below.
Notwithstanding the foregoing provisions, between the date of the
reorganization agreement and at any time prior to the adoption of the
reorganization agreement by QED's stockholders, QED and its officers,
directors, investment bankers and other related parties may furnish information
regarding QED to, enter into a confidentiality agreement with, or enter into
discussions or negotiations with, or enter into a definitive
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acquisition agreement with any person or group in response to an acquisition
proposal that constitutes a superior offer submitted by the person or group, if
all of the following conditions are met:
. the offer has not been withdrawn;
. neither QED nor any of its representatives has breached the
nonsolicitation provisions contained in the reorganization agreement
prior to and in connection with such acquisition proposal;
. QED's board of directors concludes in good faith, after consultation
with its outside legal counsel, that the action is required in order for
QED's board of directors to comply with its fiduciary obligations to its
stockholders under applicable law;
. at least 48 hours prior to furnishing any information to, entering into
a confidentiality agreement with, or entering into discussions or
negotiations with the person or group, QED gives PMC written notice of
the identity of the person or group and of QED's intention to take these
actions and QED receives from the person or group an executed agreement
with confidentiality provisions at least as restrictive as the
confidentiality agreement between QED and PMC; and
. contemporaneously with furnishing any information to the person or
group, QED furnishes the same information to PMC, to the extent this
information has not been previously furnished by QED to PMC.
QED has agreed to provide PMC at least 24 hours prior notice of a meeting of
its board of directors in which its board of directors is expected to consider
a superior offer and to provide PMC at least two business days prior written
notice of a meeting of its board of directors in which its board of directors
is expected to recommend a superior offer.
QED has agreed to promptly inform PMC of any request received by QED for
information which QED reasonably believes would lead to an acquisition
proposal, or of any acquisition proposal, or any inquiry received by QED with
respect to or which QED reasonably believes would lead to any acquisition
proposal, including the following:
. the material terms and conditions of such request, acquisition proposal
or inquiry; and
. the identity of the person or group making any the request, acquisition
proposal or inquiry.
QED has further agreed to keep PMC informed in all material respects of the
status and details, including material amendments or proposed amendments, of
any such request, acquisition proposal or inquiry.
Under the reorganization agreement, QED's board of directors is allowed to
withhold, withdraw, modify, amend, change or refrain from making its
recommendation in favor of adoption of the reorganization agreement if neither
QED nor any of its representatives has breached the non-solicitation provisions
of the reorganization agreement prior to and in connection with the proposed
changing of the recommendation, and QED's board of directors concludes in good
faith, after consultation with its outside legal counsel, that the withholding,
withdrawing, amending, modifying, changing or refraining from making its
recommendation is required in order for QED's board of directors to comply with
its fiduciary obligations to QED's stockholders under applicable law; provided
that PMC is given at least 48 hours prior written notice (or any lesser notice
that is provided to QED's board) of any public announcement of any such matter
and the opportunity to meet with QED and its counsel. Regardless of whether
there has been a superior offer or any change or other action described above,
QED is obligated under the reorganization agreement to hold and convene the QED
special meeting.
An "acquisition proposal" is any offer or proposal, other than an offer or
proposal by PMC, contemplating any acquisition transaction. An "acquisition
transaction" is any transaction or series of related transactions other than
the transactions contemplated by the reorganization agreement involving:
. any acquisition or purchase from QED by any person or "group", as
defined under Section 13(d) of the Securities Exchange Act, of more than
a 15% interest in the total outstanding voting securities of
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QED or any tender offer or exchange offer that if consummated would
result in any person or group beneficially owning 15% or more of the
total outstanding voting securities of QED;
. any merger, consolidation, business combination or similar transaction
involving QED in which the stockholders of QED immediately preceding the
transaction hold, directly or indirectly, less than 85% percent of the
equity interests in the surviving or resulting entity or in any parent
entity;
. any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of more than 25% percent of the
assets of QED; or
. any liquidation or dissolution of QED with a similar effect as any of
the above transactions.
A "superior offer" is any bona fide written acquisition proposal not
received in violation of the non solicitation provisions contained in the
reorganization agreement for at least a majority of the outstanding shares of
QED common stock on terms that QED's board of directors determines in its good
faith judgment, after consultation with a financial advisor of nationally
recognized reputation and taking into account all the known terms and
conditions of the acquisition proposal, that are more favorable to QED's
stockholders than the terms of the merger involving PMC. However, an
acquisition proposal will not be considered a superior offer if any financing
required to consummate the transaction contemplated by that acquisition
proposal is not committed and is not likely in the judgment of QED's board of
directors to be obtained by the entity making that acquisition proposal on a
timely basis.
Other Matters Prior to the Completion of the Merger
QED's Employee Benefit Plans. QED is required to terminate, effective as of
the day immediately before completion of the merger, any and all of its 401(k)
plans. QED's employees will be eligible to participate in a 401(k) plan
sponsored by PMC no later than the first day of the next commencing month
immediately after the completion of the merger.
Upon the consummation of the merger, PMC will provide QED's employees with
employee benefits that are the same as similarly situated employees of PMC,
including as to location. PMC will provide QED's employees with credit for
service with QED for purposes of eligibility and vesting under each employee
benefit plan maintained by PMC or its subsidiaries after completion of the
merger to the extent of their service with QED.
Treatment of QED Stock Options. Upon completion of the merger, each
outstanding option to purchase QED common stock will be assumed by PMC and
will be converted, in accordance with its terms, into an option to purchase
the number of whole shares of PMC common stock equal to 0.385 times the number
of shares of QED common stock held immediately prior to the completion of the
merger, rounded down to the nearest whole share. The exercise price will be
equal to the exercise price per share of QED common stock subject to the
option before conversion divided by 0.385, rounded up to the nearest whole
cent. The other terms of each option and the QED option plans referred to
above under which the options were issued will continue to apply in accordance
with their terms, including any provisions providing for acceleration.
PMC will file a registration statement on Form S-8 for the shares of PMC
common stock issuable with respect to assumed options under the QED stock
option plan as soon as is reasonably practicable after the completion of the
merger, but in no event more than 10 business days after the completion.
QED Employee Stock Purchase Plan. Upon completion of the merger, PMC will
assume QED's employee stock purchase plan and all outstanding rights to
purchase shares of QED common stock under QED's employee stock purchase plan
will be converted into rights to purchase the number of shares of PMC common
stock equal to 0.385 times the number of shares of QED common stock held
immediately prior to the completion of the merger.
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<PAGE>
All converted purchase rights will be assumed by PMC, and each offering
period in effect under QED's employee stock purchase plan immediately prior to
the completion of the merger will be continued in accordance with the terms of
QED's employee stock purchase plan until the end of that offering period. QED's
employee stock purchase plan will terminate with the exercise of the last
assumed purchase right.
PMC will allow QED employees to participate in the PMC employee stock
purchase plan, subject to the terms and conditions of PMC's employee stock
purchase plan, immediately after the completion of the merger.
QED Warrants. Upon completion of the merger, PMC will assume each
outstanding warrant to purchase shares of QED common stock. Each warrant
assumed by PMC will continue to have, and be subject to, the same terms and
conditions of that warrant immediately prior to the completion of the merger,
except that each warrant will be exercisable for that number of shares of PMC
common stock that were issuable upon exercise of the warrant immediately prior
to the completion of the merger multiplied by 0.385 and the per share exercise
price for the shares of PMC common stock will be equal to the quotient
determined by dividing the exercise price per share immediately prior to the
completion of the transaction by 0.385. PMC will comply with all of the terms
of the warrants to buy QED common stock.
Indemnification. PMC has agreed to honor QED's obligations under
indemnification agreements in effect on July 11, 2000 between QED and its
current and former directors and officers and any indemnification provisions of
QED's certificate of incorporation and bylaws. PMC has also agreed to provide
for indemnification and exculpation provisions in the certificate of
incorporation and bylaws of the corporation surviving the merger that are at
least as favorable as the indemnification and exemption provisions contained in
QED's certificate of incorporation and bylaws on July 11, 2000, to maintain
these provisions for at least six years from the completion of the merger and
not to amend, repeal or otherwise modify these provisions in any manner that
would adversely affect the rights thereunder of QED's current or former
directors or officers or of persons who are employees or agents of QED
immediately prior to the completion of the merger, unless such modifications
are required by law.
In addition, PMC has agreed to maintain QED's directors' and officers'
liability insurance for six years from the completion of the merger, covering
those persons who were covered by QED's director's and officers' liability
insurance policy on July 11, 2000 on terms equivalent in all material respects
to those applicable to directors and officers of QED, provided that PMC is not
required to pay more than 150% of the last annual premium for QED's insurance.
PMC has agreed to guarantee these obligations or make arrangements to have them
assumed in the event of a subsequent sale of QED to a third party.
Tax Matters. Prior to the filing of the registration statement of which this
proxy statement-prospectus forms a part, QED and PMC delivered to Cooley
Godward LLP and to Wilson Sonsini Goodrich & Rosati, Professional Corporation,
tax representation letters in customary form. PMC and QED will use reasonable
efforts prior and after the completion of the merger to cause the merger to
qualify as a reorganization under Section 368(a) of the Internal Revenue Code.
Action by Board of Directors. Prior to the completion of the merger, the
board of directors of PMC, or an appropriate committee of its non-employee
directors, will adopt a resolution consistent with Security and Exchange
Commission regulations, rules and interpretations which provide that the
assumption of options exercisable for QED common stock, and the receipt of PMC
common stock by certain officers and directors of QED, will in each case be
exempt from Section 16 of the Securities and Exchange Act.
Termination of the Reorganization Agreement
The reorganization agreement may be terminated at any time prior to
completion of the merger, whether before or after the adoption of the
reorganization agreement by QED stockholders:
. by mutual written consent, duly authorized by the board of directors of
PMC and QED;
46
<PAGE>
. by either PMC or QED, if the merger is not completed by February 15,
2001 for any reason, except that this right to terminate the
reorganization agreement is not available to any party whose action or
failure to act has been a principal cause of or resulted in the failure
of the merger to occur on or before February 15, 2001 if such action or
failure to act constitutes a breach of the reorganization agreement;
. by either PMC or QED, if there is any order, decree, ruling or other
action of a governmental entity having the effect of permanently
restraining, enjoining or prohibiting the completion of the merger which
is final and nonappealable;
. by either PMC or QED, if the reorganization agreement fails to receive
the requisite vote for adoption by the stockholders of QED at the QED
special meeting, except that this right to terminate the reorganization
agreement is not available to any party if such party's action or
failure to act constitutes a breach by such party of the reorganization
agreement and such party's action or failure to act has been the cause
of the failure to obtain stockholder approval.
. by QED, upon a breach of any covenant or agreement on the part of PMC in
the reorganization agreement, or if any of PMC's representations or
warranties are or become inaccurate, in either case, such that the
condition to QED's obligation to complete the merger would not be met.
However, if the inaccuracy or breach is curable by PMC, and PMC
continues to exercise commercially reasonable efforts to cure this
inaccuracy, QED may not terminate the reorganization agreement for 30
days after delivery of written notice from QED to PMC of the breach. If
the breach is cured during those 30 days, or if QED shall otherwise be
in material breach of the reorganization agreement, QED may not exercise
this termination right;
. by PMC, upon a breach of any covenant or agreement on the part of QED
set forth in the reorganization agreement, or if any of QED's
representations or warranties are or become inaccurate, in either case
such that the condition to PMC's obligation to complete the merger would
not be met. However, if the inaccuracy or breach is curable by QED, and
QED continues to exercise commercially reasonable efforts to cure this
inaccuracy PMC may not terminate the reorganization agreement for 30
days after delivery of written notice from PMC to QED of the breach. If
the breach is cured during those 30 days, or if PMC shall otherwise be
in material breach of the reorganization agreement, PMC may not exercise
this termination right; and
. by PMC if a triggering event shall have occurred.
A "triggering event" occurs if:
. QED's board of directors, or any of its committees, withholds, withdraws
or refrains from making, or modifies, amends or changes in a manner
adverse to PMC, its recommendation in favor of the adoption of the
reorganization agreement;
. QED fails to include in this proxy statement-prospectus the
recommendation of QED's board of directors in favor of the adoption of
the reorganization agreement;
. QED's board of directors fails to reaffirm its recommendation in favor
of the adoption of the reorganization agreement within 10 business days
after PMC requests in writing that such recommendation be reaffirmed at
any time following the public announcement and during the pendency of an
acquisition proposal;
. QED's board of directors, or any of its committees, approves or
recommends any acquisition proposal;
. QED enters into any letter of intent or similar document or any
agreement, contract or commitment accepting any acquisition proposal;
. QED breaches the nonsolicitation provisions of the reorganization
agreement in any material respect; and
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. a tender or exchange offer relating to not less than 15% percent of the
securities of QED is commenced by a person unaffiliated with PMC, and
QED does not send to its securityholders, within 10 business days after
such tender or exchange offer is first published, sent or given, a
statement disclosing that QED recommends rejection of such tender or
exchange offer.
Payment of Termination Fee
If the reorganization agreement is terminated by PMC because of the
occurrence of a triggering event, QED will pay PMC a termination fee of $65
million within one business day after demand by PMC, unless PMC's termination
is for QED's material breach of the nonsolicitation provisions of the
reorganization agreement and occurs more than 10 days after QED notifies PMC of
such breach.
Further, if prior to the termination of the reorganization agreement by PMC
or QED as a result of the QED stockholders failure to approve the
reorganization agreement, a third party has announced an acquisition proposal
and not unconditionally and publicly withdrawn such acquisition proposal prior
to the date that is 5 business days prior to the termination of the
reorganization agreement and within 9 months following the termination of the
reorganization agreement, a company acquisition (as defined below) is
consummated, or QED enters into an agreement or binding letter of intent
providing for a company acquisition and such company acquisition is ultimately
consummated, QED will pay PMC upon to the consummation of such a company
acquisition a termination fee of $65 million.
A "company acquisition" is any of the following:
. a merger, consolidation, business combination, recapitalization or
similar transaction involving QED in which the stockholders of QED
immediately preceding the transaction do not hold at least 60% of the
aggregate equity interests in the surviving or resulting entity of the
transaction or a parent entity following the transaction;
. a sale or other disposition by QED of assets representing in excess of
60% of the aggregate fair market value of QED's business immediately
prior to the sale; or
. the acquisition by any person or group, including by way of a tender
offer or an exchange offer or issuance by QED, directly or indirectly,
of beneficial ownership or a right to acquire beneficial ownership of
shares representing in excess of 60% of the voting power of the then
outstanding shares of capital stock of QED.
Extension, Waiver and Amendment of the Reorganization Agreement
Subject to applicable law, PMC and QED may amend the reorganization
agreement at any time by a written amendment signed on behalf of each of PMC
and QED.
Either PMC or QED may in writing extend the other's time for the performance
of any of the obligations or other acts under the reorganization agreement,
waive any inaccuracies in the other's representations and warranties or
documents delivered to the other, and waive compliance by the other with any of
the agreements or conditions for the benefit of the waiving party contained in
the reorganization agreement.
Voting Agreements
As a condition to PMC's entering into the reorganization agreement, PMC and
each of Bessec Ventures IV LP, Bessemer Venture Investors I LP, Bessemer
Venture Partners IV LP, Lester Crudele, Raymond Kunita, Thomas Riordan,
Christopher Schaepe, William Thomas, Weiss Peck & Greer Venture Associates IV
LLC, Weiss Peck & Greer Venture Associates III LLC, Weiss Peck & Greer Venture
Associates IV Cayman LP, WPG Enterprise Fund II LLC, WPG Enterprise Fund III
LLC and WPG Information Science Entrepreneur Fund LP entered into voting
agreements. By entering into the voting agreements, these QED stockholders have
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<PAGE>
irrevocably appointed the directors of PMC as their sole and exclusive
attorneys and proxies, providing such proxy the limited right to vote the
shares of QED common stock beneficially owned by these QED stockholders,
including shares of QED common stock acquired after the date of the voting
agreements, in favor of the adoption of the reorganization agreement. These QED
stockholders may vote their shares of QED common stock on all other matters.
As of the record date, these individuals and entities collectively
beneficially owned 9,582,692 shares of QED common stock which represented
approximately 36% of the outstanding shares of QED common stock. None of the
QED stockholders who are parties to the voting agreements were paid additional
consideration in connection with them.
Under these voting agreements, the stockholders also have agreed not to sell
the QED common stock and options owned, controlled or acquired, either directly
or indirectly, by it or him until the earlier of the termination of the
reorganization agreement or the completion of the merger, unless the transfer
is in accordance with any affiliate agreement between the stockholder and PMC
and each person to which any shares or any interest in any shares is
transferred agrees in writing to be bound by the terms and provisions of the
voting agreement, including the proxy.
These voting agreements will terminate upon the earlier to occur of the
termination of the reorganization agreement or the completion of the merger.
The form of voting agreement is attached as Annex B.
Affiliate Agreements
As a condition to PMC's entering into the reorganization agreement, each
member of QED's board of directors and some officers and stockholders of QED
executed affiliate agreements. Under the affiliate agreements, each of these
persons has agreed not to sell or otherwise dispose of, or to reduce their risk
relative to, any shares of QED or PMC common stock owned by them during the
period beginning 30 days prior to the merger and ending after PMC publicly
announces financial results covering at least 30 days of combined operations of
PMC and QED. The form of voting agreement is attached to this registration
statement as Annex B, and you are urged to read it in its entirety.
Noncompetition and Nonsolicitation Agreements
As a condition to PMC's entering into the reorganization agreement, Mr.
Riordan and Mr. Kunita entered in noncompetition agreements with PMC, effective
upon the completion of the merger. By entering into these noncompetition
agreements, each of these individuals has agreed for 36 months following the
completion of the merger not to directly or indirectly engage in or provide
services to a business anywhere in the world which develops, manufactures,
markets or sells any products which directly compete with products
manufactured, marketed or sold by PMC or its subsidiaries at the date that the
individual's employment terminates with PMC or its subsidiaries.
Further, during such period, each of the individuals will not directly or
indirectly attempt to influence any employee of PMC or its subsidiaries to
terminate his or her relationship with PMC or its subsidiaries or hire the
employee.
Operations After the Merger
Following the merger, QED will continue its operations as a wholly-owned
subsidiary of PMC for some period of time determined by PMC. The stockholders
of QED will become stockholders of PMC, and their rights as stockholders will
be governed by the PMC certificate of incorporation, as currently in effect,
the PMC bylaws and the laws of the State of Delaware. See "Comparison of Rights
of Holders of QED Common Stock and PMC Common Stock" on page 89 of this proxy
statement-prospectus.
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THE SPECIAL MEETING OF QED STOCKHOLDERS
Date, Time and Place of the Special Meeting
The Special Meeting is to be held on , , 2000 at 10:00 a.m. at 2500
Augustine Boulevard, Suite 200, Santa Clara, CA 95054.
Stockholder Record Date for the Special Meeting
QED's board of directors has fixed the close of business on , ,
as the record date for determination of QED stockholders entitled to notice of
and entitled to vote at the special meeting. On the record date, there were
shares of QED common stock outstanding, held by approximately holders
of record.
Vote of QED Stockholders Required for Adoption of the Reorganization Agreement
A majority of the outstanding shares of QED common stock entitled to vote at
the special meeting must be represented, either in person or by proxy, to
constitute a quorum at the special meeting. The affirmative vote of the holders
of at least a majority of QED's common stock outstanding and entitled to vote
at the special meeting is required to adopt the reorganization agreement. You
are entitled to one vote for each share of QED common stock held by you on the
record date on each proposal to be presented to stockholders at the special
meeting.
The QED stockholders who are parties to voting agreements with PMC agreed to
vote their shares of QED common stock in favor of the adoption of the
reorganization agreement. As of the record date, these stockholders held
approximately shares of QED common stock, which represented approximately
of all outstanding shares of QED common stock entitled to vote at the
special meeting.
As of the record date for the special meeting, directors and executive
officers of QED and their affiliates held approximately shares of QED common
stock, which represented approximately % of all outstanding shares of QED
common stock entitled to vote at the special meeting.
Proxies
All shares of QED common stock represented by properly executed proxies that
QED receives by mail or electronically before or at the special meeting will,
unless the proxies are revoked or replaced, be voted in accordance with the
instructions indicated on the proxy card. If no instructions are indicated on a
properly executed proxy, the shares will be voted FOR adoption of the
reorganization agreement.
Because adoption of the reorganization agreement requires the affirmative
vote of at least a majority of QED's common stock outstanding as of the record
date, abstentions, failures to vote and broker non-votes will have the same
effect as a vote against adoption of the reorganization agreement.
. If a properly executed proxy is returned and the stockholder has
abstained from voting on adoption of the reorganization agreement, the
common stock represented by the proxy will not be considered to have
been voted in favor of adoption of the reorganization agreement.
. If an executed proxy is returned by a broker holding shares of common
stock in street name which indicates that the broker does not have
discretionary authority to vote on adoption of the reorganization
agreement, the shares will be considered to have been voted against
adoption of the reorganization agreement. Your broker will vote your
shares only if you provide instructions on how to vote by following the
information provided to you by your broker.
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QED does not expect that any matter other than adoption of the
reorganization agreement will be brought before the special meeting. If,
however, other matters are properly presented, the persons named as proxies
will vote in accordance with their judgment with respect to those matters,
unless authority to do so is withheld in the proxy.
You may revoke your proxy at any time before it is voted by:
. notifying in writing the Secretary of QED;
. granting a subsequent proxy; or
. appearing in person and voting at the special meeting; attendance at the
special meeting will not in and of itself constitute revocation of a
proxy.
PMC and QED will equally share the expenses incurred in connection with the
printing and mailing of this proxy statement-prospectus. QED will request
banks, brokers and other intermediaries holding shares beneficially owned by
others to send this proxy statement-prospectus to and obtain proxies from the
beneficial owners and will reimburse the holders for their reasonable expenses
in so doing.
You should not send in any stock certificates with your proxies. A
transmittal form with instructions for the surrender of stock certificates for
QED common stock will be mailed to you as soon as practicable after completion
of the merger.
Availability of Accountants
PricewaterhouseCoopers LLP has acted as QED's independent accountants since
1995. Representatives of PricewaterhouseCoopers LLP are expected to be present
at the special meeting, and they will have an opportunity to make a statement
if they desire to do so and are expected to be available to respond to
appropriate questions.
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THE COMPANIES
PMC's Business
PMC designs, develops, markets and supports high-performance semiconductor
networking solutions. PMC's internet protocol, ATM, SONET/SDH, T1/E1/T3/E3,
voice over packet and wireless infrastructure products are used in high-speed
transmission and networking systems. PMC's products adhere to international
standards and are sold on the merchant market either directly or through its
worldwide distribution channels.
We have attached PMC's annual report on Form 10-K for fiscal 1999 in Annex
I, which provides a description of PMC's business on pages I-2 through I-14
and other non-financial information about PMC on pages I-14 through I-31.
A description of PMC's properties is provided on page K-14 of PMC's Form
10-K attached at Annex I.
Legal proceedings
PMC is currently unaware of any material pending legal proceeding, other
than ordinary routine litigation incidental to the business, to which PMC or
any of its subsidiaries is a party or of which any of their property is the
subject.
PMC's financial condition and results of operations
The annual report contains information about PMC's financial condition and
results of operations through fiscal 1999. We have also attached PMC's
quarterly report on Form 10-Q in Annex H, which contains information about
PMC's financial condition and results of operations through the first quarter
of fiscal 2000. You should carefully read the section titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
those reports. You should also read the sections titled "Financial Statement
Schedule" in Form 10-K.
PMC acquired Toucan, AANetcom, and Extreme since filing its annual report
and Extreme since filing its quarterly report. PMC accounted for these
transactions using the poolings of interests method. Accordingly, PMC has
restated its annual historical financial statements to include these
transactions for all prior periods. The restated annual financial statements
are attached in Annex H and the restated quarterly financial statements are
attached in Annex I. PMC's discussion about market risk from PMC is discussed
in the "Quantitative and Qualitative Disclosures About Market Risk" sections
on pages I-30 through I-31 in PMC's annual report on Form 10-K attached as
Annex I, and page H-18 in its quarterly report on Form 10-Q attached as Annex
H.
You should read the restated financial statements instead of the financial
statements on pages I-31 through I-57 of the annual report for fiscal 1999 and
H-3 through H-8 of the quarterly report for the first quarter of fiscal 2000.
The following table shows the material differences between the income
statements included in the annual and quarterly reports, and the related
sections titled "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" in those reports, and the restated financial
statements attached as Annex H and I.
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<TABLE>
<CAPTION>
Three Months Year Ended December 31,
Ended ----------------------------
March 26, 2000 1999 1998 1997
-------------- -------- -------- --------
(unaudited) (in thousands)
<S> <C> <C> <C> <C>
Net revenues
PMC, as previously
reported............... $102,807 $262,477 $161,812 $127,166
Toucan.................. 24 739 1,932
AANetcom................ 780 830
Extreme................. -- -- -- --
-------- -------- -------- --------
Combined................ $102,807 $263,281 $163,381 $129,098
======== ======== ======== ========
Net income (loss)
PMC, as previously
reported............... $ 22,993 $ 90,020 $ (5,945) $ 34,184
Toucan.................. (221) (1,057) 191
AANetcom................ (6,210) (1,733) (349)
Extreme................. (2,847) (1,987) -- --
-------- -------- -------- --------
Combined................ $ 20,146 $ 81,602 $ (8,735) $ 34,026
======== ======== ======== ========
</TABLE>
These restatements resulted in additional research and development
expenditures of approximately $1.4 million, $3.4 million and $6.9 million in
fiscal 1997, 1998 and 1999 and $2.0 million in the first quarter of fiscal
2000. Expenses for the year ended December 31, 1999 also include $3.5 million
related to additional stock compensation expenses of AANetcom.
The material balance sheet changes include increases in assets resulting
from the restatements of $1.9 million cash and $5.2 million property and
equipment as of March 31, 2000, increases of $6.0 million cash and $3.3 million
property and equipment as of December 31, 1999 and increases of $7.2 million
cash and $2.3 million property and equipment. Extreme capital leases increased
liabilities by $4.3 million as of March 31, 2000. Total liabilities increased
by December 31, 1999.
PMC's announced acquisitions
Since filing its annual report, PMC has filed reports with the SEC on Form
8-K announcing the signing or closing of acquisitions including the following:
. On April 6, 2000, PMC acquired Extreme Packet Devices Inc., or Extreme,
a British Columbia corporation located in Kanata, Ontario, Canada.
Extreme was privately held. Extreme develops semiconductors for high
speed Internet Protocol and ATM traffic management at 10 gigabit per
second rates. PMC acquired Extreme for shares exchangeable into
approximately 2,000,000 shares of PMC stock and PMC stock options in
exchange for all the outstanding stock and stock options of Extreme. The
transaction was accounted for as a pooling of interests.
. On June 13, 2000, PMC announced an agreement to acquire Malleable
Technologies, Inc., or Malleable, which was completed on June 27, 2000.
Malleable is a Delaware corporation located in San Jose, California.
Malleable makes digital signal processors for voice-over-packet
processing applications which bridge voice and high speed data networks
by compressing voice traffic into ATM or Internet Protocol packets.
PMC purchased the 85% of Malleable that PMC did not already own for
approximately 1,250,000 shares of PMC common stock and options to
purchase PMC common stock. The purchase price had been determined when
PMC invested in Malleable preferred stock in July 1999 and received an
option to purchase Malleable. A PMC employee had served as a director of
Malleable since the July 1999 investment. PMC will account for the
acquisition using the purchase method. While PMC expects to record a
charge during the third quarter of 2000 due to the acquisition of in
process research and development, the amount of the charge has not yet
been determined.
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Malleable's financial statements are attached as Annexes F and G.
. On June 26, 2000, PMC agreed to acquire Datum Telegraphic Inc., or
Datum, a British Columbia corporation located in Vancouver, Canada.
Datum is privately held. Datum develops semiconductors for wireless base
stations. The agreement anticipates a purchase of the 92% of Datum which
PMC does not already own for approximately 550,000 shares of PMC common
stock and 44,000 options to purchase PMC common stock and approximately
$17 million cash. Certain Datum stockholders can elect to receive up to
$19 million in cash, subject to approval by the other Datum
stockholders. PMC expects to account for the acquisition using the
purchase method. While PMC expects to record a charge during the third
quarter of 2000 due to the acquisition of in process research and
development, the amount of the charge has not yet been determined.
PMC's second fiscal quarter financial results
PMC reported on July 13, 2000 net revenue of $134.1 million, net income of
$49.9 million and earnings per share (diluted) of $0.30 for the second fiscal
quarter. These results include the operations of Extreme Packet Devices but do
not include the results of acquiring Malleable or Datum. PMC's press release
included the following consolidated financial information.
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PMC-SIERRA, INC.
SECOND FISCAL QUARTER
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- -----------------
June 25, Mar. 26, June 27, June 25, June 27,
2000 2000 1999 2000 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues.....................
Networking..................... $127,170 $ 97,753 $ 55,082 $224,923 $102,487
Non-networking................. 6,938 5,054 4,805 11,992 7,799
-------- -------- -------- -------- --------
Net revenues..................... 134,108 102,807 59,887 236,915 110,286
Cost of revenues................. 27,741 20,551 13,034 48,292 23,954
-------- -------- -------- -------- --------
Gross profit................... 106,367 82,256 46,853 188,623 86,332
Other costs and expenses:
Research and development....... 32,655 26,795 15,902 59,450 29,705
Marketing, general and
administrative................ 19,995 15,131 10,043 35,126 19,677
Amortization of deferred stock
compensation:
Research and development..... 2,968 3,385 697 6,353 1,155
Marketing, general and
administrative.............. 559 259 175 818 228
Amortization of goodwill....... 459 459 478 918 956
Costs of merger................ 5,776 7,902 -- 13,678 --
-------- -------- -------- -------- --------
Income from operations........... 43,955 28,325 19,558 72,280 34,611
Interest and other income, net... 3,646 3,620 1,134 7,266 2,224
Gain on sale of investments...... 22,992 4,117 26,800 27,109 26,800
-------- -------- -------- -------- --------
Income before provision for
income taxes.................... 70,593 36,062 47,492 106,655 63,635
Provision for income taxes....... 20,655 15,916 12,261 36,571 18,989
-------- -------- -------- -------- --------
Net income....................... $ 49,938 $ 20,146 $ 35,231 $ 70,084 $ 44,646
======== ======== ======== ======== ========
Net income per common share --
basic........................... $ 0.33 $ 0.14 $ 0.25 $ 0.47 $ 0.32
======== ======== ======== ======== ========
Net income per common share --
diluted......................... $ 0.30 $ 0.12 $ 0.23 $ 0.42 $ 0.30
======== ======== ======== ======== ========
Shares used in per share
calculation -- basic............ 149,919 148,362 140,245 149,141 139,462
Shares used in per share
calculation -- diluted.......... 169,002 168,222 152,791 168,612 151,315
</TABLE>
--------
(1) The net income per share and number of shares used in the per share
calculation for all periods presented reflect the two-for-one stock split
that was effective February 2000.
(2) All items in both the 2000 and 1999 periods include the results of Extreme
Packet Devices which was acquired in the second quarter of 2000 in a
transaction accounted for as a pooling of interests.
55
<PAGE>
PMC-SIERRA, INC.
SECOND FISCAL QUARTER
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 25, Dec. 26,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $126,073 $ 90,055
Short-term investments..................................... 123,844 106,636
Accounts receivable, net................................... 64,614 36,170
Inventories, net........................................... 13,164 7,208
Deferred income taxes...................................... 9,270 9,270
Prepaid expenses and other current assets.................. 11,475 7,496
Short-term deposits for wafer fabrication capacity......... -- 4,637
-------- --------
Total current assets..................................... 348,440 261,472
Property and equipment, net.................................. 72,804 48,766
Goodwill and other intangible assets......................... 13,433 15,280
Investments and other assets................................. 13,993 11,827
Deposits for wafer fabrication capacity...................... 23,001 14,483
-------- --------
$471,671 $351,828
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 24,926 $ 11,973
Accrued liabilities........................................ 21,239 16,123
Deferred income............................................ 47,413 34,486
Accrued income taxes....................................... 22,265 25,912
Current portion of obligations under capital leases and
long-term debt ........................................... 4,168 2,310
-------- --------
Total current liabilities................................ 120,011 90,804
Deferred income taxes........................................ 9,091 9,091
Noncurrent obligations under capital leases and long-term
debt........................................................ 1,603 3,355
Special shares convertible into 4,016 (1999 - 4,242) common
stock....................................................... 6,653 6,998
Stockholders' equity......................................... 334,313 241,580
-------- --------
$471,671 $351,828
======== ========
</TABLE>
56
<PAGE>
QED's Business
QED is a leading developer of high-performance embedded microprocessors that
perform information processing in networking/communications infrastructure
equipment, business network equipment and consumer network products. QED
believes that it has one of the industry's most experienced microprocessor
development teams. While QED focuses its development efforts on the high-
performance segments of the embedded microprocessor market, it also offers its
mature products to the more price sensitive segments of its target markets. QED
sells its products directly to systems manufacturers, and outsources the
fabrication of its microprocessors to third parties.
QED's Industry Background
Embedded Microprocessors
Microprocessors are generally thought of as the integrated circuits that
perform sophisticated computations and control the flow of information within
desktop computers. The majority of microprocessors, however, are hidden, or
embedded, in products and systems where they perform specialized tasks. A
microprocessor is typically classified by the number of fundamental elements of
data, or bits, that it can process at one time. Low-performance 4- and 8-bit
embedded microprocessors perform simple tasks in products such as microwave
ovens and thermostats. Complex tasks, such as delivering e-mail messages over
the Internet or presenting web pages clearly on televisions and printers,
require a high level of computing power, which can only be delivered by high-
performance 32- and 64-bit embedded microprocessors.
High-performance embedded microprocessors are configured in a system much
like a small, general-purpose computer and must support advanced software
operating systems and high-level programming languages to enable complex
application software. Uses for high-performance embedded microprocessors
include networking/communications infrastructure equipment, such as routers and
switches; business network equipment, such as laser printers, network computers
and data storage systems; and consumer network products, such as Internet-
enabled televisions and cable modems.
While the desktop microprocessor market is dominated by Intel Corporation's
"x86" complex instruction set computing, or CISC, architecture, several
microprocessor architectures have emerged within the high-performance embedded
microprocessor market. A microprocessor's architecture refers to its
fundamental operations and organization, which enable it to perform
computations and to control the flow of information. Embedded microprocessors
achieve high performance and silicon-area efficiency because they are based on
reduced instruction set computing, or RISC, architectures. A leading RISC
architecture is known as MIPS. Microprocessors based on the MIPS architecture
standard have been developed for applications ranging from game consoles such
as the Sony Playstation, to routers and switches, to multiprocessor enterprise
servers. The MIPS architecture is widely supported by independent suppliers of
software and hardware.
Market Opportunity for High-Performance Embedded Microprocessors
In addition to the increased volume of network traffic, the emergence of
multimedia and streaming audio and video content and transaction-intensive e-
commerce web sites have strained the ability of networks to process and
transmit information quickly. These factors have created the need for increased
network capacity, or bandwidth. Advances in communication technology are
helping to alleviate bandwidth constraints by providing higher transmission
capacity. To accommodate this increased demand for bandwidth, intelligent
devices within a network's infrastructure, such as routers and switches, are
increasingly required to quickly process greater amounts of more complex
information. Network interface devices, such as network printers and cable
modems, also require increased processing capacity to more efficiently utilize
available bandwidth. All of these devices therefore need high levels of
performance from the microprocessors embedded within them.
As the bandwidth and information transmission capabilities of networks have
increased, so have users' expectations for their performance. Network service
providers have responded by broadening their product
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<PAGE>
offerings, allowing users to select between varied levels of information
transmission service. To provide different levels of service, networking
equipment vendors are seeking ways to cost-effectively incorporate more
processing capability within their systems. In addition, new data communication
standards and protocols are frequently being introduced into network
infrastructures to support their expanded capabilities. Hence, networks are now
required to support many standards and protocols simultaneously. This increase
in complexity requires higher performance as well as increased flexibility from
the embedded microprocessors within the devices that manage networks.
As the popularity of the Internet has increased, more powerful and
sophisticated products have emerged to provide additional connections to
Internet users. These devices require new generations of high-performance
microprocessors that must also meet strict power consumption and heat
dissipation requirements as well as the cost constraints of systems
manufacturers.
With growing demands on network capabilities and increasing business and
consumer expectations for performance, new generations of high-performance
embedded microprocessors are required to enable cost-effective deployment of
advanced communications products, both within network infrastructures and at
network interfaces.
Markets and Applications
Each of QED's three target markets is information-intensive and requires
high bandwidth and increasing computational performance.
Networking/Communications Infrastructure Equipment
As greater numbers of devices access intranets and the Internet and the
speed of those devices increases, the capacity of network infrastructures must
grow to accommodate the increased traffic. In addition, network content is
increasingly data-intensive. Although primarily text and graphics-based today,
information and services available on networks, particularly the Internet, are
increasingly incorporating video and audio. To meet this bandwidth demand:
.Internet backbone speeds are being upgraded to higher data rates;
. high speed Internet access is being deployed to the home through
technologies such as xDSL and ISDN;
. networks are being upgraded to higher-speed communications protocols; and
. data and voice communications are being unified in the same network
infrastructure.
Accordingly, QED designs its newest microprocessors to meet the high-
performance needs of the most complex network infrastructure equipment. QED's
products are designed into the following network infrastructure applications:
. Routers. Routers and switch routers direct data and information packets
to the correct destinations within a network. High-performance routers
are equipped with multiple embedded microprocessors to manage different
functions such as routing packets of information, translating between
communication protocols and adding higher levels of transmission
services to a network.
. LAN Switches. Local area network, or LAN, switches are intranet network
devices that provide a direct connection from the sender of information
to the receiver within an intranet. Embedded microprocessors are used to
manage information flow through LAN switches. Multiple embedded
microprocessors may be used in each LAN switch to increase the data
movement capabilities of the switch.
. Access Servers. The server nearest to a network user is the access
server, which uses embedded microprocessors to combine discrete data
streams, such as information from individual modem lines, into fewer
streams of high-speed data.
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<PAGE>
. Network Interface Cards. Network interface cards provide the physical
connection between networking equipment and a user's access device.
Network interface cards are used at all levels in a network
infrastructure from the access server connecting modem, to xDSL or ISDN
connections, to high speed routers. Performance increases within network
interface cards have been driven by the requirement to make more
physical connections in a limited space. Consequently, network interface
cards are incorporating high-performance embedded microprocessors, with
at least one microprocessor embedded into each.
. Storage Area Networks. The growth in the amount of critical information
processed and stored by businesses has increased the need for more
sophisticated data storage systems. Storage area networks have been
developed to address this need by distributing data storage over a
network of storage devices. The complexity of managing information
within storage area networks requires high levels of embedded
microprocessor performance.
Business Network Equipment
Businesses are increasingly deploying LANs as their central communications
infrastructure to perform a range of important tasks such as sending documents,
accessing databases and other enterprise-wide information, connecting with
vendors and suppliers on-line and connecting to larger networks, including the
Internet. Highly sophisticated business network equipment has been developed to
manage these tasks at the network interface. Designers of business network
equipment generally require moderate to high processing performance, but must
balance this need against the power consumption and cost of the microprocessor
embedded into their products. Products within this market include:
. Printers. QED believes that printers will continue to require additional
embedded microprocessor performance to manage increases in print speed,
image complexity and the addition of color. Multifunction printers can
combine the functions of copiers, scanners, fax equipment and printers
in one device. All of these devices incorporate embedded microprocessors
for processing the increasingly sophisticated data comprising color
images, web sites and other network content.
. Network Computers. The primary purpose of a network computer is to serve
as an input/output device for accessing information stored on a network.
Network computers are designed to be less expensive than traditional
desktop computers. The processing capability of a network computer is
optimized by an embedded microprocessor's ability to move and format
data for presentation to the user.
. Disk Arrays. Disk arrays have been developed in response to the
increasing volume of data being stored by businesses. They consist of
multiple hard drives configured to operate like a single, large disk
drive. Servers can read data from drive arrays faster and achieve
greater protection from data loss relative to traditional hard drives.
Microprocessors are used in disk arrays to control the flow of data
among their component hard drives and the server.
Consumer Network Products
A new class of network products has been developed to provide consumers with
additional means of accessing the Internet beyond desktop computers. Because
these are retail products, most suppliers to this market are sensitive to the
price of the microprocessors that they incorporate into their products. They
are also concerned with the power consumption and heat dissipation of the
microprocessors because the devices into which they are installed are often
relatively small. There are two principal categories of products in this
market:
. Consumer Internet Appliances. Products such as set-top boxes provide an
alternative way to access the Internet through services such as WebTV
and are designed to be significantly easier to install and operate and
less expensive than a PC. These devices may offer a range of services
such as digital recording and customization for each user. The challenge
in this market is to offer full-speed
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<PAGE>
multimedia performance at competitive prices. QED believes that as
expectations for the performance of Internet appliances rise and as
multimedia information on the Internet becomes more sophisticated, the
need for increased performance provides a significant opportunity for
QED's products.
. Digital Network Transmission Products. In order to access new digital
data services, two classes of products, the cable modem and the "x"
digital subscriber line, or xDSL, modem, have been developed. Cable
modem and xDSL modem technology offer significantly higher network
speeds than analog modems, therefore requiring higher microprocessor
performance to manage information flow. Some cable television operators
are upgrading their networks to enable two-way communications through
the use of a cable modem. High speed access services such as Excite@Home
have also emerged to provide network infrastructure and services to
cable modem customers. In addition, xDSL modem technology has been
developed to provide high speed digital communications through existing
telephone lines to the home. This service may be offered in areas where
the local telephone switch network has been upgraded to offer digital
service.
Products
The following chart summarizes QED's line of microprocessor products:
<TABLE>
<CAPTION>
Product System
Product Introduction Performance Memory Interface Target Application
------- ------------ ----------- ------------ --------- -----------------------
<S> <C> <C> <C> <C> <C>
RM5230 Q3 1997 175MHz 16K/16K 32-bit Consumer
RM5260 Q3 1997 175MHz 16K/16K 64-bit Business
RM5270 Q4 1997 200MHz 16K/16K 64-bit Networking
RM5231 Q3 1998 250MHz 32K/32K 32-bit Business and Consumer
RM5261 Q3 1998 266MHz 32K/32K 64-bit Business
RM5271 Q3 1998 300MHz 32K/32K 64-bit Networking and Business
RM7000 Q4 1998 266MHz 16K/16K/256K 64-bit Networking and Business
RM7000 Q1 2000 300MHz 16K/16K/256K 64-bit Networking and business
</TABLE>
In the above table, product introduction refers to the calendar quarter in
which the product was first commercially shipped. Performance indicates
maximum available execution speed. Memory indicates the amount of memory
contained in the instruction cache and data cache, and for the RM7000, in the
level-two cache. System interface indicates the width of the microprocessor's
path to external input/output and memory devices.
QED Products
In 1997, QED introduced the first microprocessors supplied directly by QED,
which it named RISCMark-TM-. As of June 30, 2000, QED has introduced three
generations of products, all of which are in production:
RM5230, RM5260 and RM5270. Introduced in 1997, this series of products is
based on the same microprocessor core. The RM5230 is primarily used by
manufacturers of consumer Internet appliances. The RM5260 is a higher-
performance, 64-bit version of the RM5230. The 64-bit RM5270, the highest-
performance product in the series, supports an external secondary-cache memory
interface for more demanding computing applications.
RM5231, RM5261 and RM5271. This series of products is an upgrade to the
RM52x0 series and provides higher execution speeds and additional performance
features. The RM52x1 is currently supplied in processing speeds up to 300MHz.
These devices are designed to be compatible with the prior generation RM52x0.
RM7000. The RM7000 is the highest-performance product in QED's product
line, and QED believes it is the highest-performance 64-bit embedded
microprocessor in commercial production. QED developed the
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<PAGE>
RM7000 to be the microprocessor core for its new generation of products. This
product incorporates significant design and performance enhancements while
maintaining compatibility with prior product generations. The RM7000 is
incorporated primarily into networking infrastructure products, such as routers
and switches. QED's latest version of the RM7000, the RM7000A, boosts yet
higher the maximum performance. Production of the RM7000A is scheduled for Q4
2000.
Licensed Products. QED's initial business model was to develop and license
proprietary designs based on a microprocessor architecture developed by MIPS
Computer Systems. Under this business model, QED developed five microprocessors
under contract with various manufacturers. Since beginning the transition to
the new business model in June 1996, QED has not entered into any new third-
party licensing agreements and currently has no plans to do so.
Technology
QED's design efforts are focused on creating high-performance embedded
microprocessors based on the MIPS architecture.
Proprietary MIPS Architecture Designs
QED's microprocessor designs based on the MIPS architecture use proprietary
logic and circuit design techniques to achieve high performance:
Logic Design. QED's microprocessors use proprietary techniques similar to
those used in high-performance workstation and mainframe microprocessor
designs, including:
. superscalar, or parallel, instruction issue, which is a way to increase
processor performance by allowing multiple operations to occur
simultaneously;
. multistage pipelines, which are a way to allow operations to be broken
down into discrete steps that can then be overlapped;
. a two-level, integrated, cache memory hierarchy, which is a design that
allows instructions and data to be delivered to and processed by a
processor's operational units at an average rate substantially greater
than that achievable with single-level caches;
. flexible cache memory management that allows a processor's cache memory
to be optimized for a specific application; and
. dynamic power management that allows elements of the processor not used
for a particular operation to be shut down.
Circuit Design. Rather than using commercially available circuit libraries,
QED has developed proprietary circuits that are designed for building high-
performance microprocessors. Commercially available circuits are generally
optimized for the development of specific purpose integrated circuits and are
usually a poor fit for high-performance designs. QED's proprietary circuits
that increase speed and/or lower power consumption include:
. asynchronous circuits, which allow high-speed functional units of the
embedded microprocessor to be built in a small area on the integrated
circuit;
. charge/discharge circuits, which allow high-speed operation by
minimizing electrical inefficiencies;
. constant current source circuits, which high-speed performance for the
most critical operations; and
. reduced voltage swing circuits, which use low power for relatively non-
critical operations.
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Proprietary Design and Verification Environment
QED's embedded microprocessor development environment uses a combination of
industry standard development tools augmented and integrated together by their
proprietary design tools. Some of QED's proprietary tools supplement the
capabilities of commercially available tools that are optimized for specific
purpose integrated circuit development. Examples of QED's proprietary tools
include:
. a MIPS architecture random-sequence generator/checker, which permits
billions of verification operations to be performed on QED's designs
prior to manufacture;
. an in-process design database consistency manager, which permits a full
design team to work on the same design simultaneously;
. a logic synthesizer, which offers more control to the designer than
commercially available synthesizers; and
. semiconductor manufacturing process technology conversion programs,
which are designed to permit QED to move its products efficiently from
one manufacturer or manufacturing process technology to another.
Research and Development
QED has assembled a core team of experienced engineers averaging
approximately 13 years of microprocessor design experience. As of June 30,
2000, 34 of QED's 61 research and development employees had advanced degrees.
QED has three design teams. One concentrates on new product development with
the objective of developing QED's next generation high performance
microprocessor. A second team works on integrating more functions with existing
products. The third team transfers products to new manufacturing technologies
and modifies existing products to adapt them to new applications. Because QED
relies upon third parties to manufacture its products, QED does not use
research and development resources on manufacturing process technology.
QED's research and development expenses were $12.4 million for the year
ended June 30, 1999, $9.6 million for the year ended June 30, 1998, and $9.4
million for the year ended June 30, 1997. These expenses consisted primarily of
salaries and related costs of employees engaged in ongoing research.
QED is designing two new microprocessors for end markets requiring a balance
between price and performance. The RM7061 will be marketed as a lower-cost
version of the RM7000 for consumer Internet appliances. The RM5720 will
integrate industry-standard connections and is intended to lower the cost of a
high performance system by eliminating the need for an external input/output
and memory controller. It will be marketed to networking infrastructure and
business network equipment manufacturers.
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<PAGE>
Customers
QED has several key customers in each of its three target markets. Because
QED leverages its technology across these markets, its products may be
incorporated into equipment that is sold in several markets. For example, QED's
products are used in WebTV's set top boxes, Hewlett-Packard's printers and
Cisco Systems' network switching equipment. Revenue from WebTV, Hewlett-Packard
and Cisco, including sales to manufacturing subcontractors, accounted for
approximately 27%, 3% and 21% of its total revenue for the nine months ended
March 31, 2000. Based on QED's product revenue for the year ended June 30,
2000, its largest customers are:
Aeroflex Inc. Extreme Networks, Inc.
Alcatel Hewlett-Packard Company
Arrowpoint Lexmark International Group
Cabletron Systems Lucent Technologies Inc.
Cisco Systems Midway Games Inc.
Cobalt Group, Inc. Netscreen Technologies, Inc.
Cosine Communications Silicon Graphics, Inc.
Echostar Communications Corporation Thompson Consumers Electronics
EFI Electronics Corporation Timeline Vista
Electronic Assembly WebTV Networks, Inc.
Historically, a small number of customers have accounted for a substantial
portion of QED's total revenue. Sales to Cisco Systems, WebTV, Integrated
Device Technology, Inc. (consisting only of royalty revenue), and Echostar
Communications, including sales to their manufacturing subcontractors,
accounted for 21%, 27%, 5% and 11%, of QED's total revenue for the nine months
ended March 31, 2000 and accounted for 15%, 23%, 20%, and 12% of their total
revenue for the year ended June 30, 1999.
From January 1, 1998 through March 31, 2000, QED achieved 199 design wins
with 91 companies. Of these design wins, 71 are in production, and QED believes
23 are considered unlikely to go into production. QED defines a design win as a
measurable commitment from a customer to use its products. These measures
include parts taken by the customer, a completed printed circuit board design
or a funded program that is targeted for production. A particular design win
may not result in significant product revenue to QED.
Sales and Marketing
In North America, QED sells its products through a direct sales force of
seven people, with three based in QED's corporate headquarters in Santa Clara,
California, one based in a regional office in Research Triangle Park, North
Carolina, one based in a regional office in Massachusetts, one based in Boise,
Idaho, and one in Europe. QED also sells its products in North America through
13 sales representatives. QED sells its products in Europe through five sales
representatives. QED sells their products in Korea through a sales
representative, and sells its products in Japan through a distributor. QED's
sales effort is supported by a marketing staff of seven and eight applications
engineers who work directly with their customers on technical issues.
Manufacturing
Semiconductor Fabrication. QED uses independent semiconductor manufacturers
to fabricate its microprocessors. By subcontracting its manufacturing, QED
focuses its resources on product design to eliminate the high cost of owning
and operating a semiconductor fabrication facility. This fabless business model
also allows QED to take advantage of the research and development efforts of
manufacturers, permitting QED to work with those manufacturers offering the
most advanced manufacturing processes and competitive prices.
Taiwan Semiconductor Manufacturing Corporation, or TSMC, at its
manufacturing plants in Taiwan and the United States, and IBM Corporation, at
its manufacturing plants in the states of Vermont, New York, and
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<PAGE>
France have manufactured all of QED's products to date. QED currently uses only
these two independent manufacturers, and few of QED's products have been
manufactured at both manufacturing companies at any given time. As a result,
any inability of TSMC or IBM to provide the necessary capacity or output could
result in significant production delays, which could seriously harm QED's
business. In the event either TSMC or IBM suffers any damage to their
manufacturing facilities, or in the event of any other disruption of
manufacturing capacity, QED may not be able to qualify alternative
manufacturing sources for its products in a timely manner.
QED has entered into a manufacturing agreement with IBM, which expires no
sooner than November 14, 2002. However, the contract does not guarantee any
level of production capacity or any particular price. QED operates with TSMC on
a purchase order basis and does not have a long-term agreement with TSMC.
QED's designs are compatible with industry-standard manufacturing processes.
QED believes this compatibility permits the use of multiple manufacturers,
mitigating the risk of using a single source for a product. QED's products are
currently fabricated using .18 micron, .25 micron and .35 micron process
technologies. QED continuously evaluates the benefits, on a product by product
basis, of migrating to a smaller geometry process technology in order to reduce
costs and increase the performance of its embedded microprocessors.
Testing and Assembly. Initial testing of the silicon wafers containing QED's
microprocessors is primarily performed by a subcontractor located in Taiwan.
Following completion of initial testing, the silicon wafers are cut into
individual semiconductors and assembled into packages. All testing is performed
on standard test equipment using proprietary test programs developed by QED's
test engineering group. The test facilities are periodically audited to ensure
that their procedures remain consistent with those required for the production
of leading-edge devices. QED uses subcontractors based in Korea and the
Philippines to package its products. QED uses standard, readily available
packages for all of its products. Following packaging, a subcontractor performs
final testing. QED relies upon third parties to assemble and test substantially
all of its products. While QED has not experienced significant problems in the
past, this reliance upon third parties could result in product shortages or
delays in the future. If these shortages or delays were significant, its
customers might seek alternative sources of supply, which could harm its
operating results and reputation. Like many companies in the semiconductor
industry, QED maintains excess levels of inventory to mitigate the risk of
product shortages or delays. Although QED's inventory has been sufficient to
cover periodic delays and shortages in the past, their inventory may not be
sufficient if a significant production shortage or delay occurs in the future.
QED believes that its past experience with production shortages and delays has
been generally consistent with industry norms.
Quality Assurance and Reliability. QED prequalifies each manufacturing
plant. QED also participates in quality and reliability monitoring through each
stage of the production cycle by reviewing data from its wafer manufacturing
plant and assembly subcontractors. QED closely monitors wafer manufacturing
plant production to enhance product quality and reliability and yield levels.
QED purchases wafers on a fixed-cost basis and, therefore, any improvement in
manufacturing yields reduces their cost per product. Like many semiconductor
companies, QED has experienced its most significant yield problems with its
newer products. The manufacture of new products often requires the
implementation of new circuit designs or new manufacturing processes, which
generally require time and experience to refine so that acceptable yields are
achieved. Other companies have experienced poor yields with respect to mature
products, and QED may also experience poor yields on mature products. In
general, yield fluctuations on mature products may impact the cost of
manufacturing but will not result in product shortages or delays. QED believes
that its experience with poor yields has been generally consistent with
industry norms.
Competition
The embedded microprocessor market is intensely competitive and
characterized by continual technological change and price erosion. QED expects
competition to increase as its target markets continue to grow and to present
increasingly attractive business opportunities. Many of its direct and indirect
competitors
64
<PAGE>
are large corporations with substantially greater technical, financial and
marketing resources and name recognition than QED. In addition, many of these
competitors have a much larger installed customer base than they do.
Competition within QED's industry is based on a variety of factors,
including:
. microprocessor performance;
. product functionality;
. product price;
. product reliability;
. software compatibility;
. financial strength;
. name recognition;
. marketing and distribution capability; and
. customer support.
QED believes that it competes favorably with respect to each of these
factors.
QED faces competition from the following sources:
Other MIPS Licensees. QED licenses the MIPS instruction set architecture on
a non-exclusive basis. MIPS Technologies has licensed and, QED believes, will
continue to license its technology to other companies that compete or may
compete with QED. Other licensees of MIPS Technologies that currently compete
with QED in its target markets include NEC Corporation, Toshiba Corporation and
Integrated Device Technology.
Companies Utilizing Alternative Risc Architectures. QED faces competition
from companies that use alternative RISC architectures. These architectures
include ARM/Strong Arm, developed by ARM Holdings plc and Intel; Hitachi SH,
developed by Hitachi; and PowerPC, developed by Motorola, Inc. and IBM. While
some of these companies have targeted the lower-end segments of the embedded
microprocessor market and, therefore, do not currently compete with QED, these
companies may develop products for the high-end segments of the market.
Companies Utilizing Non-Risc Technologies. The embedded microprocessor
market is mostly comprised of companies utilizing RISC technology. Nonetheless,
CISC architectures, including the x86 architecture, have been introduced into
QED's target markets and represent a source of competition.
QED believes that its high-end products generally exhibit higher
performance, as measured in terms of execution speed, than those of their
competitors who license the MIPS instruction set architecture. In addition, QED
believes that its latest product, the RM7000, incorporates more memory,
measured in terms of kilobytes, than its competitors' current product
offerings. QED's competitors who license the MIPS instruction set architecture
offer products with a 64-bit interface, as do all of QED's products other than
the RM5231. QED's competitors who do not license the MIPS instruction set
architecture do not currently offer products with a 64-bit interface.
MIPS License and Intellectual Property
QED's success and ability to compete is dependent in part upon its
proprietary technology. QED relies upon a combination of patent, mask work,
copyright, trademark and trade secret laws and other means to protect its
technology. QED has four issued patents that expire in 2014 through 2016. QED
also seeks to protect its trade secrets and proprietary technology through
confidentiality agreements with employees, consultants and other parties.
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<PAGE>
QED currently derives and expects to continue to derive a substantial
majority of its revenue from the sale of products incorporating microprocessor
technology of MIPS Technologies. QED has obtained the right to use this
technology in its products under a Technology License Agreement with MIPS
Technologies. The technology license granted under this agreement is perpetual
and bears a royalty based upon a percentage of QED's revenue derived from sales
of products incorporating the licensed technology. QED's breach of this
agreement could result in its loss of these rights, which would harm QED's
business. QED also depends on MIPS Technologies to enforce these patents
against third-party infringement. Because this license is non-exclusive, MIPS
Technologies has licensed, and could in the future license, its technologies to
third parties, including QED's competitors. If QED's competitors obtain a
license from MIPS Technologies on more favorable terms than QED, or if MIPS
Technologies fails to enforce its patent rights against infringers, QED might
not be able to compete successfully.
Employees
As of June 30, 2000 QED had a total of 118 employees, including 61 in
research and development, 24 in sales and marketing, 18 in manufacturing and 15
in general administration. As of June 30, 2000, QED had 10 contractors in
research and development. None of its employees is represented by a collective
bargaining agreement or an employment agreement. QED has never experienced any
work stoppage. QED considers its relations with its employees to be good.
Facilities
QED's corporate headquarters, which serves as its principal sales,
marketing, research and development and administrative office, occupies 38,593
square feet in two adjacent buildings in Santa Clara, California under a 15,218
square foot lease and a 23,375 square foot lease. The 15,218 square foot lease
expires on June 30, 2001, and the 23,375 square foot lease expires on October
31, 2004.
QED also has small sales offices in Raleigh, North Carolina, Burlington,
Massachusetts, Roswell, Georgia and Boise, Idaho. The leases for these offices
expire on March 15, 2000, October 14, 2000, October 1, 2000 and December 31,
2001.
QED believes that its existing facilities are adequate to meet its current
needs.
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QED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF QED
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes, and with QED's audited
financial statements and notes thereto for the year ended June 30, 1999.
Overview
QED is a leading developer and supplier of high performance embedded
microprocessors for use in information-intensive products such as
networking/communications infrastructure equipment, business network equipment
and consumer network products. QED began operations in 1991 as an intellectual
property company, developing and licensing RISC microprocessor designs for
third parties in exchange for royalty payments. During the year ended June 30,
1997, QED began transitioning to a semiconductor company that designs,
develops, markets and sells its own high-performance microprocessors using the
MIPS microprocessor architecture. Volume shipments of its products began during
the three months ended March 31, 1998.
Continuous growth in QED's product revenue depends upon an increasing number
of customers incorporating its microprocessors into their end product designs.
QED has achieved numerous design wins with existing and new customers. There is
generally a time lag ranging from 12 to 24 months between a design win and
volume shipments of QED's products. Design wins are only an expression of
interest by potential customers and are not binding contracts of any nature.
QED cannot assure you that design wins will result in future revenue or that
such revenue will be derived in a predictable manner.
As a result of the aforementioned transition and change in its business
model, QED has not entered into any new revenue generating third party
licensing agreements since June 1996 and currently has no plans to do so.
Consequently, royalty revenue relates primarily to products sold by its
licensees based on designs that are maturing and will become obsolete. QED
believes that its royalty revenue will continue to decline both in absolute
dollars and as a percentage of total revenue.
Cost of revenue includes product costs, MIPS license royalty expenses,
salaries and overhead costs associated with employees engaged in activities
related to the manufacturing of our products. Research and development expense
consists primarily of salaries and related overhead costs associated with
employees engaged in research, design and development activities as well as the
cost of mask sets, wafers and other materials and related services used in the
development process. Selling, general and administrative expense consists of
salaries, commissions paid to internal and external sales representatives,
third party certification and testing costs and legal and accounting services.
Stock-based compensation expense relates both to stock-based employee and
consultant compensation arrangements. Employee-related stock compensation
expense is based on the deemed fair market value of our common stock and the
exercise price of options to purchase that stock on the date of grant and is
recognized on an accelerated basis over the vesting periods of the related
options, usually four years. Consultant stock-based compensation expense is
based on the Black-Scholes option pricing model.
QED currently uses independent suppliers to manufacture, test and assemble
all of its products. This business model allows QED to focus its resources on
the design, development and marketing of its products, rather than on building
and maintaining manufacturing facilities. Because QED must often place orders
for products with its vendors prior to entering into sales contracts, QED may
be exposed to the risks associated with holding obsolete or excess inventory.
As the production processes used to manufacture QED's microprocessor have
matured, QED has experienced higher production yields, which have contributed
to the increase in its gross margins. QED anticipates that gross margins will
continue to increase in the future as more of its products mature, production
efficiencies increase, and overall sales volumes increase. However, QED
believes that the selling prices of its products generally decline over time,
and each of its products has a different cost structure. Additionally, the
position of the products in their respective life cycles, manufacturing cost
efficiencies and competitive pricing strategies may affect gross margins on a
quarterly basis. As a result, gross margins may vary on a quarterly basis as
the mix of products sold changes.
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QED's Quarterly Results of Operations
Because QED has a limited operating history under its current business
model, QED believes that year-to-year comparisons prior to 1999 are less
meaningful than an analysis of recent quarterly operating results. Accordingly,
QED is providing a discussion and analysis of its results of operations for the
six quarters ended March 31, 2000.
The following tables present selected unaudited quarterly financial
information for each of the six quarters through March 31, 2000 and the
percentage of total revenue represented by each item in QED's statement of
operations. This information has been presented on the same basis as the
audited financial statements appearing elsewhere in this prospectus and, in the
opinion of management, reflects all adjustments necessary for a fair
presentation of this information under generally accepted accounting
principles. These quarterly results are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31, December 31,
2000 1999 1999 1999 1999 1998
--------- ------------ ------------- -------- --------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Earnings
Data:
Revenue:
Product revenue........ $10,628 $9,530 $ 9,808 $ 5,615 $ 2,512 $ 1,427
Royalty revenue........ 358 730 50 380 246 255
Royalty revenue from
related parties....... 400 500 609 645 837 823
------- ------ ------- ------- ------- -------
Total revenue.......... 11,386 10,760 10,467 6,640 3,595 2,505
Cost of product
revenue................ 5,621 5,675 6,414 3,442 1,951 1,275
------- ------ ------- ------- ------- -------
Gross profit............ 5,765 5,085 4,053 3,198 1,644 1,230
Operating expenses:
Research and
development........... 3,929 3,420 3,141 3,127 2,917 3,404
Selling, general and
administrative........ 2,641 2,175 2,125 1,887 1,274 1,128
Stock-based
compensation.......... 212 18 654 259 238 148
------- ------ ------- ------- ------- -------
Total operating
expenses.............. 6,782 5,613 5,920 5,273 4,429 4,680
------- ------ ------- ------- ------- -------
Loss from operations.... (1,017) (528) (1,867) (2,075) (2,785) (3,450)
Interest income
(expense) net.......... 237 23 113 111 (155) (21)
------- ------ ------- ------- ------- -------
Net loss before income
taxes.................. (780) (505) (1,754) (1,964) (2,940) (3,417)
Provision for income
taxes.................. -- -- -- -- -- --
------- ------ ------- ------- ------- -------
Net loss................ $ (780) $ (505) $(1,754) $(1,964) $(2,940) $(3,471)
======= ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31, December 31,
2000 1999 1999 1999 1999 1998
--------- ------------ ------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
As A Percentage of Total
Revenue:
Revenue:
Product revenue........ 93.3% 88.6% 93.7% 84.6% 69.9% 57.0%
Royalty revenue........ 3.1 6.8 .5 5.7 6.8 10.2
Royalty revenue from
related parties....... 3.6 4.6 5.8 9.7 23.3 32.8
----- ----- ----- ----- ----- ------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of product
revenue................ 49.4 52.7 61.3 51.8 54.3 50.9
----- ----- ----- ----- ----- ------
Gross profit............ 50.6 47.3 38.7 48.2 45.7 49.1
Operating expenses:
Research and
development........... 34.5 31.8 30.0 47.2 81.1 135.9
Selling, general and
administrative........ 23.2 20.2 20.3 28.4 35.5 45.0
Stock-based
compensation.......... 1.9 .2 6.2 3.9 6.6 5.9
----- ----- ----- ----- ----- ------
Total operating
expenses.............. 59.6 52.2 56.5 79.5 123.2 186.8
----- ----- ----- ----- ----- ------
Loss from operations.... (9.0) (4.9) (17.8) (31.3) (77.5) (137.7)
Interest income
(expense) net.......... 2.1 .2 1.0 1.7 (4.3) (.8)
----- ----- ----- ----- ----- ------
Net loss before income
taxes.................. (6.9) (4.7) (16.8) (29.6) (81.8) (138.5)
Provision for income
taxes.................. -- -- -- -- -- --
----- ----- ----- ----- ----- ------
Net loss................ (6.9)% (4.7)% (16.8%) (29.6%) (81.8)% (138.5)%
===== ===== ===== ===== ===== ======
</TABLE>
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Product Revenue. Product revenue has increased each quarter since QED began
commercial volume shipments of products in the quarter ended March 31, 1998,
except for the quarter ended December 31, 1999. This growth is attributable to
new product introductions and enhancements and an increasing number of design
wins for QED's products. In addition, the increase in product revenue reflects
growth in QED's overall number of customers, as well as in the number of
customers reaching volume production. The 2.8% decrease in product revenue in
the December 1999 quarter was due to a decrease in sales to the consumer
appliance market, which was almost substantially offset by an increase in sales
to other markets. Consumer appliances such as set-top boxes have a seasonal
sales cycle that generally peaks in the September quarter.
Royalty Revenue and Royalty Revenue from Related Parties. Royalty revenue
has decreased as a percentage of total revenue as QED continues to transition
from a license model to a product model. Royalty revenue is dependent upon
shipments of products by third parties and related third parties. QED has no
control over the volume or timing of these shipments, which vary from quarter
to quarter. Therefore, royalty revenue for a particular quarter could fluctuate
based on the volume or timing of shipments. Royalty revenue for the quarter
ended December 31, 1999 was positively impacted by a non-recurring receipt of
$500,000 arising from the sub-licensing of QED's technology by an unrelated
licensee.
Gross Profit. The decrease in QED's gross profit during the quarter ended
September 30, 1999 was due to a decline in royalty revenue, changes in product
mix, and higher than normal yield losses. There are no direct costs associated
with QED's royalty revenue, which therefore has a high gross profit margin.
During the quarter ended September 30, 1999, a relatively high percentage of
QED's revenue was derived from the sale of its lowest-margin consumer appliance
products in conjunction with Christmas production increases. Additionally, QED
experienced low wafer yields on one of its high-margin products that further
reduced its gross profit. QED has revised the mask set for this product, which
helped to increase wafer yields and gross profits in the quarter ended December
31, 1999. The increase in gross profit during the quarter ended March 31, 2000
was attributable to a favorable product mix and continuing yield improvements.
Operating Expenses
Research and Development. Research and development expenses have fluctuated
on a quarterly basis due to the timing of product development activities. Prior
to releasing new products, QED incurs one-time charges for test wafers and mask
set revisions. QED has also incurred additional expenses related to hiring
contractors to assist in the development effort. In addition, the number of
QED's full-time employees has increased over the six quarters ended March 31,
2000, as have related overhead expenses. To maintain its competitiveness, QED
expects to continue to increase its research and development expenses in
absolute dollars each fiscal year for the foreseeable future.
Selling, General and Administrative. Selling, general and administrative
expenses have generally increased over the six quarters ended March 31, 2000 in
response to the growth in product revenue and QED's overall growth. The number
of employees increased on a quarterly basis during this period, as have related
overhead expenses. In addition, some of the fluctuations in quarterly selling,
general and administrative expenses in the table above are related to the
timing of third party certification expenses, such as Microsoft Windows CE
certification. QED expects selling, general and administrative expenses to
increase in absolute dollars as it adds personnel, increases its sales and
marketing activities and incurs additional costs related to being a public
company.
Stock-Based Compensation. In connection with the granting of stock options
to its employees and consultants, QED has recorded deferred stock-based
compensation totaling approximately $2.5 million through March 31, 2000, of
which $598,000 remains to be amortized. This amount is included as a component
of stockholders' equity and is being amortized by charges to operations over
the vesting period of the related options, on an accelerated basis. The
amortization of the remaining deferred stock-based compensation at March 31,
2000 will result in additional charges to operations through the year ended
June 30, 2003. Future
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compensation charges would be reduced if any employee terminates employment
prior to the expiration of the option vesting periods. During the quarter ended
December 31, 1999, QED terminated certain consulting agreements. As a result,
approximately $177,000 of previously recognized compensation expense associated
with unvested options was reversed. The amortization of stock-based
compensation is classified as a separate component of operating expenses in
QED's statement of operations.
QED's quarterly results of operations have fluctuated significantly in the
past and may continue to fluctuate in the future based on a number of factors,
not all of which are in its control. If revenue declines in a given quarter,
QED's operating results will be adversely affected because many of its expenses
are relatively fixed. As a result, QED believes period-to-period comparisons
are not necessarily meaningful and should not be relied upon as indicative of
future results.
Comparison of the Nine Month Periods Ended March 31, 2000 and 1999
Product Revenue. Product revenue increased by $24.6 million or 463%, from
$5.3 million for the nine months ended March 31, 1999 to $30.0 million for the
nine months ended March 31, 2000. This increase in product revenue was due to
an increase in the number of QED design wins which have reached volume
production. Product revenue has increased almost every quarter since QED began
shipping products in the first quarter of the year ended June 30, 1998. In
addition to an increasing number of design wins, the increase in product
revenue is also attributable to new product introductions and enhancements of
existing products, including a shift to smaller manufacturing geometries. It is
also due to an increase in the number of customers in each of QED's target
markets.
Royalty Revenue and Royalty Revenue from Related Parties. Total royalty
revenue decreased from $3.4 million for the nine months ended March 31, 1999 to
$2.6 million for the nine months ended March 31, 2000. Combined royalty revenue
has decreased as a percentage of total revenue as QED continues to transition
from a license model to a product model. Royalty revenue is dependent upon
shipments of products by third parties and related third parties. QED has no
control over the volume or timing of these shipments, which vary quarter to
quarter. As QED is no longer licensing new products to third parties, QED
expects royalty revenue to continue to decrease both in absolute dollars, as
well as a percentage of total revenue, in future periods.
Gross Profit. Overall gross profit increased from $3.7 million, or 41.9% of
revenue, during the nine months ended March 31, 1999 to $14.9 million, or 45.7%
of revenue, during the nine months ended March 31, 2000. During the nine months
ended March 31, 1999, when QED began investing in manufacturing infrastructure
including hiring manufacturing employees, the low volume of product sales
negatively influenced gross profit and margin. QED's product gross profit and
margin improved during the nine months ended March 31, 2000 as the increase in
production volumes led to manufacturing and cost efficiencies, including volume
discounts on the cost of components, such as silicon wafers. Each of QED's
products has a different cost structure; therefore, gross margins vary on a
quarterly basis as its product mix changes. Additionally, the position of QED's
products in their respective life cycles, manufacturing cost efficiencies and
competitive pricing strategies may affect gross margins on a quarterly basis.
Operating Expenses
Research and Development. Research and development expenses increased by
$1.2 million or 13.4%, from $9.3 million for the nine months ended March 31,
1999 to $10.5 million for the nine months ended March 31, 2000. The increase in
spending on research and development during this period is attributable to an
increase in the number of research and development projects and a corresponding
increase in the number of engineers and consultants. It is also due to
increased depreciation charges on new and upgraded software design tools. QED
expects that research and development expense will continue to increase in
absolute dollars for the foreseeable future.
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Selling, General and Administrative. Selling, general and administrative
expenses increased from $3.5 million for the nine months ended March 31, 1999
to $6.9 million for the nine months ended March 31, 2000. This increase of $3.4
million, or 95.6%, is due to an increase in personnel and related expenses as
well as to increases in commissions corresponding to the increase in QED's
product revenue. It is also due to increased occupancy costs and professional
fees. QED expects that selling, general and administrative expenses will
continue to increase in absolute dollars for the foreseeable future to support
the continued expansion of its operations.
Stock-Based Compensation. Stock-based compensation expenses increased from
$518,000 for the nine months ended March 31, 1999 to $884,000 for the nine
months ended March 31, 2000. Stock-based compensation is being recognized on an
accelerated basis and relates primarily to certain option grants to employees
at prices below deemed fair market values as well as for options granted to
consultants. QED expects stock-based compensation expense to decrease in
general on a quarterly and annual basis.
Interest Income and Expense, Net. Net interest income (expense) for the nine
months ended March 31, 1999 and 2000 increased from ($134,000) to $373,000. The
overall increase in net interest income resulted from changes in QED's average
cash and investment balances during these respective periods as a result of the
cash generated by a private placement of Preferred Stock in March 1999 and
QED's initial public offering in February 2000. It is also due to an overall
decrease in interest expense corresponding to the decrease in debt during these
respective periods.
QED's quarterly results of operations have fluctuated significantly in the
past and may continue to fluctuate in the future based on a number of factors,
not all of which are in its control. If revenue declines in a given quarter,
QED's operating results will be adversely affected because many of its expenses
are relatively fixed. As a result, QED believes period to period comparisons
are not necessarily meaningful and should not be relied upon as indicative of
future results.
Comparison of the Years Ended June 30, 1999, 1998 and 1997
Product Revenue. Product revenue increased from $1.4 million in the year
ended June 30, 1998 to $10.9 million in the year ended June 30, 1999. The
increase in product revenue in the year ended June 30, 1999 was due to the sale
of products based primarily upon design wins achieved during the year ended
June 30, 1998. QED did not have any product revenue during the year ended June
30, 1997.
Royalty Revenue and Royalty Revenue from Related Parties. Combined royalty
revenue decreased from $10.1 million in the year ended June 30, 1997 to $5.1
million in the year ended June 30, 1998 to $4.4 million in the year ended June
30, 1999. In the year ended June 30, 1997, all of QED's revenue was derived
from royalty agreements, including a one-time payment of $5.1 million from a
related party.
Gross Profit. Overall gross margin increased from 42.7% in the year ended
June 30, 1998 to 44.6% in the year ended June 30, 1999. QED incurred a gross
loss from product sales of $2.3 million in the year ended June 30, 1998 due to
the low volumes of products initially introduced by QED. Gross profit from
product sales improved to $2.4 million or 22.2% of product revenue in the year
ended June 30, 1999. This increase was due to the maturing of QED's products,
an increase in sales volume and the absorption of fixed costs, including
overhead, over a larger unit volume. There were no product sales in the year
ended June 30, 1997, and, therefore, there were no direct product costs,
resulting in an overall gross margin of 100%.
Research and Development. Research and development expenses increased from
$9.4 million in the year ended June 30, 1997 to $9.6 million in the year ended
June 30, 1998 and to $12.4 million in the year ended June 30, 1999. The
majority of the increase in spending on research and development during these
periods reflects the increase in hiring of engineers and consultants to develop
new microprocessor products, as well as to enhance the design of existing
products. From the year ended June 30, 1998 to the year ended June 30,
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1999, this spending increased by $1.9 million, or 85% and from the year ended
June 30, 1997 to the year ended June 30, 1998, spending on salaries and
consultants increased by $1.2 million, or 84%. The increase also reflects QED's
increasing investment in hardware and software design tools used to develop and
test new products. Additionally, the cost of materials and related services
grew significantly over these periods.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $2.1 million in the year ended June 30, 1997 to $3.0
million in the year ended June 30, 1998 and to $5.4 million in the year ended
June 30, 1999. From the year ended June 30, 1998 to the year ended June 30,
1999, $1.4 million, or 53%, of the increase was due to an increase in personnel
and related expenses. Additionally, over this period, commissions increased
corresponding to the increase in product revenue, and marketing expenses,
professional services fees and occupancy costs increased due to QED's overall
growth. From the year ended June 30, 1997 to the year ended June 30, 1998,
$390,000, or 30%, of the increase was due to an increase in personnel and
related expenses.
Stock-Based Compensation. QED recorded deferred stock-based compensation
costs in the years ended June 30, 1999 and 1998 of $1.4 million and $1.0
million, in connection with certain stock option grants made during these
periods. This increase was primarily the result of increases in the number of
options granted due to the increased hiring of employees and an increase in the
utilization of the services of consultants. QED recognized $777,000 and
$150,000 of stock-based compensation expense in the years ended June 30, 1999
and 1998.
Interest Income (Expense), Net. Interest income decreased from $340,000 in
the year ended June 30, 1997 to $325,000 in the year ended June 30, 1998, and
then increased to $472,000 in the year ended June 30, 1999. The fluctuations in
interest income resulted from changes in QED's average cash and investment
balances. In March 1999, QED raised approximately $20.0 million from the sale
of its Series D preferred and common stock. Interest expense increased from
$204,000 in the year ended June 30, 1998 to $496,000 in the year ended June 30,
1999. Interest payments are related to QED's equipment lease lines and
borrowings. QED did not have any interest expense in the year ended June 30,
1997.
Income Taxes
Federal and state income taxes were minimal during the years ended June 30,
1999, 1998 and 1997 as a result of QED's net operating losses. As of June 30,
1999, QED had available federal net operating loss carryforwards of
approximately $18.0 million and state net operating loss carryforwards of
approximately $10.0 million. QED also had research and development tax credit
carryforwards of approximately $1.0 million. The net operating loss and credit
carryforwards will expire at various times through 2019. As of June 30, 1999,
QED had deferred tax assets of approximately $9.5 million, for which no benefit
has been recorded in its financial statements, and which consist primarily of
net operating loss and research and development tax credit carryforwards. This
deferred tax asset will be recognized in future periods as any taxable income
is realized and consistent profits are reported.
Liquidity and Capital Resources
Since inception, we have financed our operations through a combination of
sales of equity securities, cash generated by operations during our early
years, and borrowings. As of March 31, 2000, we had $46.4 million in cash, cash
equivalents and short-term investments and $2.0 million of restricted cash. Net
cash used by operating activities during the years ended June 30, 1999, 1998
and 1997 and the nine months ended March 31, 2000 was $11.0 million, $10.9
million, $96,000 and $10.3 million, respectively. During these periods, cash
used by operating activities consisted primarily of cash utilized to fund
operating losses and for working capital. During the year ended June 30, 1999
and the nine months ended March 31, 2000, the items that significantly impacted
cash balances were accounts receivable and inventories, both of which increased
as the volume of product sales increased.
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Net cash provided by (used in) investing activities for the years ended June
30, 1999, 1998 and 1997 and the nine months ended March 31, 2000 was $(18.5)
million, $(76,000), $2.0 million and $5.5 million, respectively. Cash generated
by investing activities during nine months ended March 31, 2000 was related to
interest earned on the investments and the transfer of short-term investments
into cash equivalents. Net cash used in investing activities was related to the
acquisition of property and equipment and the purchase of short-term
investments. Capital expenditures in the years ended June 30, 1999, 1998 and
1997 and the nine months ended March 31, 2000 were $493,000, $76,000, $936,000
and $2.7 million, respectively. Additionally, equipment acquired under capital
lease arrangements was $367,000 in the year ended June 30, 1999 and $825,000 in
the year ended June 30, 1998. No equipment was acquired under a capital lease
during the nine months ended March 31, 2000. Overall capital spending during
these periods was the result of hiring additional employees and upgrading our
design tools. This transition required us to increase our investment in
hardware infrastructure, as well as in software tools, furniture and fixtures.
As of March 31, 2000, we had no material outstanding commitments to purchase or
lease capital equipment. However, we expect to continue investing in software
and hardware design tools in future periods and do not expect capital spending
to decline in absolute dollars in any future period.
Net cash provided by (used in) financing activities in the years ended June
30, 1999, 1998 and 1997 and the nine months ended March 31, 2000 was $21.2
million, $13.8 million, $(210,000) and $49.8 million, respectively. Cash
provided by financing activities during nine months ended March 31, 2000
relates to the sale of shares of common stock as part of QED's initial public
offering in February 2000. The net cash provided by financing activities in the
years ended June 30, 1999 and 1998 related to the sale of shares of our
preferred stock. Net cash provided by financing activities also related to
proceeds from the issuance of common stock and proceeds from borrowings. Net
cash used in financing activities related to principal payments under capital
leases and repayment of borrowings.
In January 1999, we obtained a $6.0 million line of credit expiring on
December 31 , 2000. Borrowings under this line of credit currently bear
interest at an annual rate of 8.5%. This line of credit is secured by
substantially all of our tangible assets and contains financial and other
covenants that arise after more than $2.0 million has been drawn down. As of
March 31, 2000, $1.5 million was outstanding under this line.
We believe that cash and cash equivalents, cash generated from operations,
if any, and the net proceeds from this offering will be sufficient to satisfy
our working capital requirements for the next 18 months. After that time, we
may require additional funds for working capital and operating expenses or for
other purposes. Our future operating expenses and capital requirements are
difficult to predict with accuracy. We believe that success in our industry
requires substantial capital in order to maintain the flexibility to take
advantage of opportunities as they may arise. Therefore, we may, from time to
time, invest in or acquire complementary businesses, products or technologies.
We may effect additional equity or debt financing to fund such activities or to
satisfy our future capital requirements. The sale of additional equity or
convertible debt could result in additional dilution to our stockholders.
QED believes that cash and cash equivalents and cash generated from
operations will be sufficient to satisfy its working capital requirements for
the next 12 months. QED believes that success in its industry requires
substantial capital in order to maintain the flexibility to take advantage of
opportunities as they may arise. QED may, from time to time, invest in or
acquire complementary businesses, products or technologies. QED may seek
additional equity or debt financing to fund such activities. The sale of
additional equity or convertible debt could result in additional dilution to
QED's stockholders.
Quantitative and Qualitative Disclosures About Market Risk
QED does not use derivative financial instruments in its investment
portfolio. QED only invests in instruments that meet high credit and quality
standards, as specified in its investment policy guidelines. QED had an
investment portfolio of money market funds, commercial securities and U.S.
Government bonds, including those classified as short-term investments and
restricted cash, of $18.8 million and $9.9 million, as of
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June 30, 1999 and March 31, 2000. These instruments, like all fixed income
instruments, are subject to interest rate risk. The fixed income portfolio will
fall in value if there were an increase in interest rates. If market interest
rates were to increase immediately and uniformly by 10% from levels as of June
30, 1999 and March 31, 2000, the decline of the fair value of the fixed income
portfolio would not be material. All of QED's revenue is denominated in U.S.
dollars, and therefore, QED does not currently engage in any currency hedging
transactions.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
gives effect to the merger between PMC and QED as well as other transactions
completed by PMC in 2000. The merger between PMC and QED is accounted for using
the pooling of interests method of accounting. The other transactions completed
by PMC in 2000 include the June 27, 2000 acquisition of Malleable, a privately
held fabless semiconductor company, and the proposed acquisition of Datum, a
privately held wireless semiconductor company, which was announced on June 28,
2000. The acquisition of Malleable and Datum are accounted for using the
purchase method of accounting.
The pro forma condensed combined financial information reflects assumptions
and adjustments described in the accompanying notes and are based on the
historical financial statements of PMC, QED, Malleable and Datum. The unaudited
pro forma condensed combined financial information should be read in
conjunction with the audited historical consolidated financial statements and
related notes thereto of PMC, QED and Malleable which are included herein
elsewhere in the registration statement.
The Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31,
2000 gives effect to the merger and other transactions of PMC as if they
occurred on March 31, 2000, after giving effect to certain adjustments
described in the attached Notes to Unaudited Pro Forma Condensed Combined
Financial Statements.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
three months ended March 31, 2000 and 1999 present the combined results of
operations of PMC and QED, as if their merger had been effective at the
beginning of each period presented.
Since the fiscal years of PMC and QED differ, the Unaudited Pro Forma
Condensed Combined Statement of Operations combine PMC's Consolidated
Statements of Operations for the fiscal years ended December 31, 1999, 1998 and
1997 with QED's operations for the twelve month periods ended December 31,
1999, 1998 and 1997. The Unaudited Pro Forma Condensed Combined Statements of
Operations for the years ended December 31, 1999, 1998 and 1997 present the
combined results of operations of PMC and QED as if the merger had been
effective at the beginning of each period presented, after giving effect to
certain adjustments described in the attached Notes to Unaudited Pro Forma
Condensed Combined Financial Statements.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
three months ending March 31, 2000 and 1999 and the year ended December 31,
1999 also includes historical results of operations for Malleable and Datum,
after giving effect to certain adjustments described in the attached Notes to
Unaudited Pro Forma Condensed Combined Financial Statements.
PMC is in the process of evaluating the fair value of consideration given to
effect the acquisition as well as the fair value of Malleable assets acquired
and liabilities assumed and the Datum assets to be acquired and liabilities to
be assumed in order to make a final allocation of purchase price, including the
allocation to in process research and development, goodwill and other
intangibles. Accordingly, the purchase accounting information is preliminary
and has been made solely for the purpose of developing such unaudited pro forma
condensed combined financial information.
The unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and does not purport to be indicative
of the operating results or financial position that would have actually
occurred if the merger had been in effect on the dates indicated, nor is it
necessarily indicative of future operating results or financial position of the
merged companies. The pro forma adjustments are based on the information and
assumptions available at the time of the printing of this document.
75
<PAGE>
PMC-SIERRA, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET--UNAUDITED
March 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Historical Other Pro Forma Historical Pro Forma Pro Forma
PMC PMC (3) PMC QED Adjustments Combined
---------- ------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash
equivalents........... $225,072 1,746 226,818 46,418 $273,236
Short-term
investments........... -- 2,613 2,613 7,909 10,522
Restricted cash........ -- -- -- 2,000 2,000
Accounts receivable,
net................... 46,108 75 46,183 8,251 54,434
Inventories............ 9,621 -- 9,621 9,924 19,545
Deferred income taxes.. 9,270 -- 9,270 -- 9,270
Prepaid expenses and
other current assets.. 8,239 17 8,256 2,109 10,365
Short-term deposits for
wafer fabrication
capacity.............. 637 -- 637 -- 637
-------- ------- ------- ------- --------
Total current assets... 298,947 4,451 303,398 76,611 380,009
Property and equipment,
net.................... 61,246 2,020 63,266 3,486 66,752
Goodwill and other
intangible assets,
net.................... 14,359 349,713 364,072 -- 364,072
Investments and other
assets................. 12,489 (6,323) 6,166 -- 6,166
Deposits for wafer
fabrication capacity... 14,483 -- 14,483 -- 14,483
-------- ------- ------- ------- --------
$401,524 349,861 751,385 80,097 $831,482
======== ======= ======= ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable....... 22,513 707 23,220 1,222 21,950 (2) 46,392
Accrued liabilities.... 25,642 1,798 27,440 6,629 34,069
Deferred income........ 42,574 -- 42,574 -- 42,574
Income taxes payable... 13,346 -- 13,346 4,394 17,740
Current portion of
obligations under
capital leases and
long-term debt........ 5,465 14 5,479 360 5,839
-------- ------- ------- ------- ------- --------
Total current
liabilities........... 109,540 2,519 112,059 12,605 21,950 146,614
Deferred income taxes... 9,091 259 9,350 9,350
Noncurrent obligations
under capital leases
and long-term debt..... 1,876 262 2,138 1,125 3,263
-------- ------- ------- ------- ------- --------
120,507 3,040 123,547 13,730 21,950 159,227
-------- ------- ------- ------- ------- --------
Special shares
convertible into PMC
common stock........... 6,748 -- 6,748 -- 6,748
Stockholders' equity:
Common stock and
additional paid in
capital............... 251,742 419,554 671,296 94,368 765,664
Deferred stock
compensation.......... (17,320) (36,333) (53,653) (598) (54,251)
Accumulated deficit.... 39,847 (36,400) 3,447 (27,403) (21,950)(2) (45,906)
-------- ------- ------- ------- ------- --------
Total stockholders'
equity................ 274,269 346,821 621,090 66,367 (21,950) 665,507
-------- ------- ------- ------- ------- --------
$401,524 349,861 751,385 80,097 -- $831,482
======== ======= ======= ======= ======= ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
76
<PAGE>
PMC-SIERRA, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS--UNAUDITED
Three Months Ended March 31, 2000
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Pro
Historical Other Forma Pro Forma
PMC PMC (3) PMC QED Combined
---------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues................ $102,807 $ 256 $103,063 $11,386 $114,449
Cost of revenues............ 20,551 2 20,553 5,621 26,174
-------- -------- -------- ------- --------
Gross profit................ 82,256 254 82,510 5,765 88,275
Other costs and expenses:
Research and development.. 26,795 1,998 28,793 3,929 32,722
Marketing, general and ad-
ministrative............. 15,131 375 15,506 2,641 18,147
Amortization of deferred
stock compensation:
Research and develop-
ment................... 3,385 259 3,644 104 3,748
Marketing, general and
administrative......... 259 -- 259 108 367
Amortization of goodwill.. 459 19,543 20,002 -- 20,002
Costs of merger........... 7,902 -- 7,902 -- 7,902
-------- -------- -------- ------- --------
Income (loss) from opera-
tions...................... 28,325 (21,921) 6,404 (1,017) 5,387
Interest income (expense),
net........................ 3,620 (56) 3,564 237 3,801
Gain on sale of invest-
ments...................... 4,117 -- 4,117 -- 4,117
-------- -------- -------- ------- --------
Income (loss) before provi-
sion for income taxes...... 36,062 (21,977) 14,085 (780) 13,305
Provision for income taxes.. 15,916 17 15,933 -- 15,933
-------- -------- -------- ------- --------
Net income (loss)........... $ 20,146 $(21,994) $ (1,848) $ (780) $ (2,628)
======== ======== ======== ======= ========
Basic net income per share.. $ 0.14 $ (0.02)
Diluted net income per
share...................... $ 0.12 $ (0.02)
Shares used to calculate:
Basic net income per
share.................... 148,362 158,244
Diluted net income per
share.................... 168,222 158,244
</TABLE>
See notes to unaudited pro forma combined financial statements.
77
<PAGE>
PMC-SIERRA, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS--UNAUDITED
Three Months Ended March 31, 1999
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Historical Other Pro Forma Historical Pro Forma
PMC PMC (3) PMC QED Combined
---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues............. $50,399 $ 782 $ 51,181 $ 3,595 $ 54,776
Cost of revenues......... 10,920 45 10,965 1,951 12,916
------- -------- -------- ------- --------
Gross profit........... 39,479 737 40,216 1,644 41,860
Other costs and expenses:
Research and
development........... 13,803 752 14,555 2,917 17,472
Marketing, general and
administrative........ 9,634 64 9,698 1,274 10,972
Amortization of
deferred stock
compensation:
Research and
development......... 458 121 579 117 696
Marketing, general
and administrative.. 53 -- 53 121 174
Amortization of
goodwill.............. 478 19,453 19,931 -- 19,931
------- -------- -------- ------- --------
Income (loss) from
operations.............. 15,053 (19,653) (4,600) (2,785) (7,385)
Interest income
(expense), net.......... 1,090 (36) 1,054 (155) 899
------- -------- -------- ------- --------
Income (loss) before
provision for income
taxes................... 16,143 (19,689) (3,546) (2,940) (6,486)
Provision for income
taxes................... 6,728 -- 6,728 -- 6,728
------- -------- -------- ------- --------
Net income (loss)........ $ 9,415 $(19,689) $(10,274) $(2,940) $(13,214)
======= ======== ======== ======= ========
Basic net income per
share................... $ 0.07 $ (0.09)
Diluted net income per
share................... $ 0.06 $ (0.09)
Shares used to calculate:
Basic net income per
share................. 138,680 143,760
Diluted net income per
share................. 149,839 143,760
</TABLE>
See notes to unaudited pro forma combined financial statements.
78
<PAGE>
PMC-SIERRA, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS--UNAUDITED
Year ended December 31, 1999
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Historical Other Pro Forma Historical Pro Forma
PMC PMC(3) PMC QED Combined
---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues............. $263,281 $ 175 $263,456 $31,462 $294,918
Cost of revenues......... 55,147 52 55,199 17,482 72,681
-------- -------- -------- ------- --------
Gross profit........... 208,134 123 208,257 13,980 222,237
Other costs and expenses:
Research and
development........... 69,820 3,208 73,028 12,605 85,633
Marketing, general and
administrative........ 43,600 729 44,329 7,461 51,790
Amortization of
deferred stock
compensation:
Research and
development......... 2,810 -- 2,810 1,169 3,979
Marketing, general
and administrative.. 778 -- 778 -- 778
Amortization of
goodwill.............. 1,912 78,171 80,083 -- 80,083
Costs of merger........ 866 -- 866 -- 866
-------- -------- -------- ------- --------
Income (loss) from
operations.............. 88,348 (81,985) 6,363 (7,255) (892)
Interest income
(expense), net.......... 7,791 (53) 7,738 92 7,830
Gain on sale of
investments............. 26,800 -- 26,800 -- 26,800
-------- -------- -------- ------- --------
Income (loss) before
provision for income
taxes................... 122,939 (82,038) 40,901 (7,163) 33,738
Provision for income
taxes................... 41,337 1 41,338 -- 41,338
-------- -------- -------- ------- --------
Net income (loss)........ $ 81,602 $(82,039) $ (437) $(7,163) $ (7,600)
======== ======== ======== ======= ========
Basic net income per
share: $ 0.57 $ (0.05)
Diluted net income per
share: $ 0.52 $ (0.05)
Shares used to calculate:
Basic net income per
share................. 142,759 148,008
Diluted net income per
share................. 156,465 148,008
</TABLE>
See notes to unaudited pro forma combined financial statements.
79
<PAGE>
PMC-SIERRA, Inc.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS--UNAUDITED
Year ended December 31, 1998
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Historical Historical Pro Forma
PMC QED Combined
---------- ---------- ---------
<S> <C> <C> <C>
Net revenues................................... $163,381 $ 9,035 $172,416
Cost of revenues............................... 38,220 5,837 44,057
-------- -------- --------
Gross profit................................. 125,161 3,198 128,359
Other costs and expenses:
Research and development...................... 39,263 11,628 50,891
Marketing, general and administrative......... 29,263 3,961 33,224
Amortization of deferred stock compensation:
Research and development..................... 803 430 1,233
Marketing, general and administrative........ 137 -- 137
Amortization of goodwill...................... 915 -- 915
Acquisition of in process research and
development.................................. 39,176 -- 39,176
Impairment of intangibles..................... 4,311 -- 4,311
-------- -------- --------
Income (loss) from operations.................. 11,293 (12,821) (1,528)
Interest income (expense), net................. 2,858 58 2,916
-------- -------- --------
Income (loss) before provision for income
taxes......................................... 14,151 (12,763) 1,388
Provision for income taxes..................... 22,886 89 22,975
-------- -------- --------
Net income (loss).............................. $ (8,735) $(12,852) $(21,587)
======== ======== ========
Basic net income per share................... $ (0.07) $ (0.16)
Diluted net income per share................. $ (0.07) $ (0.16)
Shares used to calculate:
Basic net income per share................... 134,202 137,103
Diluted net income per share................. 134,202 137,103
</TABLE>
See notes to unaudited pro forma combined financial statements.
80
<PAGE>
PMC-SIERRA, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS--UNAUDITED
Year ended December 31, 1997 (in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Pro Forma
PMC QED Combined
-------- ------- ---------
<S> <C> <C> <C>
Net revenues............................ $129,098 $10,239 $139,337
Cost of revenues........................ 33,065 997 34,062
-------- ------- --------
Gross profit.......................... 96,033 9,242 105,275
Other costs and expenses:
Research and development............... 24,262 10,346 34,608
Marketing, general and administrative.. 23,928 2,576 26,504
Amortization of goodwill............... 300 -- 300
Costs of merger........................ -- -- --
Restructuring and other costs.......... (1,383) -- (1,383)
-------- ------- --------
Income (loss) from operations........... 48,926 (3,680) 45,246
Interest income (expense), net.......... 856 248 1,104
-------- ------- --------
Income (loss) before provision for
income taxes........................... 49,782 (3,432) 46,350
Provision for income taxes............. 15,756 60 15,816
-------- ------- --------
Net income (loss)....................... $ 34,026 $(3,492) $ 30,534
======== ======= ========
Basic net income per share............ $ 0.27 $ 0.24
Diluted net income per share.......... $ 0.26 $ 0.22
Shares used to calculate:
Basic net income per share............ 125,507 127,794
Diluted net income per share.......... 131,873 136,959
</TABLE>
See notes to unaudited pro forma combined financial statements.
81
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(1) Basis of Presentation
The Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31,
2000 combines the historical consolidated balance sheet of PMC, after giving
effect to the acquisition of Malleable and the proposed acquisition of Datum as
described in Note 3, and the historical balance sheet of QED, as if the merger
had been effective on March 31, 2000. The Unaudited Pro Forma Condensed
Combined Statements of Operations for the three months ended March 31, 2000 and
1999 and the years ended December 31, 1999, 1998 and 1997 combine the
historical statements of operations of PMC and QED as if the merger had been
effective at the beginning of each period presented.
Since the fiscal years of PMC and QED differ, the financial statements of
QED have been recast for the 1999, 1998 and 1997 completed fiscal years of PMC
and are presented for the twelve month periods ended December 31, 1999, 1998
and 1997. The unaudited pro forma condensed combined financial information
should be read in conjunction with the historical financial statements of PMC
and QED.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
three months ended March 31, 2000 and 1999 and the year ended December 31, 1999
also include historical results of operations for Malleable and Datum, as
described in Note 3.
Under the terms of the merger agreement, a subsidiary of PMC will be merged
with and into QED as the surviving corporation. This unaudited pro forma
financial information reflects the issuance of 0.385 of a share of PMC common
stock for each outstanding share of QED common stock. The actual number of
shares of PMC common stock to be issued will be based on the number of
outstanding shares of QED common stock at the effective time of the merger.
The following table provides the pro forma share issuances in connection
with the merger as of March 31, 2000 (in thousands):
<TABLE>
<S> <C>
QED common shares outstanding as of March 31, 2000.................. 26,670
Exchange ratio...................................................... 0.385
-------
Number of shares of PMC stock exchanged............................. 10,268
Number of shares of PMC common stock outstanding as of March 31,
2000............................................................... 145,209
Number of shares of PMC common stock outstanding as of March 31,
2000 assuming completion of the merger on that date................ 155,477
=======
</TABLE>
In addition, at the effective time of the merger, PMC will assume all of the
outstanding QED stock options and warrants with the number of shares issuable
and the price appropriately adjusted by the exchange ratio. At March 31, 2000,
QED had options and warrants outstanding to purchase 4,719,153 shares of QED
stock which would become options and warrants to purchase 1,816,874 shares of
PMC common stock.
(2) Merger Costs
PMC and QED estimate they will incur transaction costs of approximately $22
million associated with the merger, consisting primarily of transaction fees
for investment bankers, attorneys, accountants, financial printing and other
related charges. These nonrecurring transaction costs will be charged to
operations as incurred. These charges have been reflected in the Unaudited Pro
Forma Condensed Combined Balance Sheet but have not been included in the
Unaudited Pro Forma Condensed Combined Statements of Operations as these
statements do not give effect to nonrecurring merger costs related to the
transaction.
82
<PAGE>
(3) Other PMC Purchase Transactions
The other transactions completed by PMC in 2000 include the June 27, 2000
acquisition of Malleable, a privately held fabless semiconductor company, and
the proposed acquisition of Datum, a privately held wireless semiconductor
company, which was announced on June 28, 2000.
The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the
appropriate pro forma adjustments to record the acquisition of Malleable and
proposed acquisition of Datum. Acquisition costs and the preliminary
determination of the unallocated excess of acquisition costs over net assets
acquired are set forth below:
<TABLE>
<CAPTION>
Malleable Datum Total
--------- ------- -------
(in thousands)
<S> <C> <C> <C>
Assumed value of shares of PMC common stock issued
and value of PMC warrants and PMC options
exchanged........................................ 299,115 126,939 426,054
Estimated transaction costs....................... 825 875 1,700
------- ------- -------
Estimated total acquisition costs................. 299,940 127,814 427,754
Less: net assets acquired......................... 3,371 1,937 5,308
------- ------- -------
Unallocated excess of acquisition costs over net
assets acquired.................................. 296,569 125,877 422,446
Preliminary allocation to:
In process research and development............. 31,500 4,900 36,400
Unearned compensation........................... 29,033 7,300 36,333
------- ------- -------
Preliminary allocation to goodwill and other
intangibles...................................... 236,036 113,677 349,713
======= ======= =======
</TABLE>
The fair value of shares of PMC common stock was determined by taking an
average of the opening and closing price of PMC common stock for a short period
just before and just after the terms of the transaction were agreed to by the
parties and announced to the public. The purchase price was increased by the
estimated fair value of the PMC options and warrants exchanged for the
Malleable and Datum options and warrants outstanding.
The pro forma financial information reflects the results of operations for
Malleable for the three months ended March 31, 2000 and 1999 and the year ended
December 31, 1999 and of Datum for the three months ended February 29, 2000 and
1999 and the year ended November 30, 1999. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations reflect additional amortization expense
resulting from the increase in goodwill and other intangible assets due to
these acquisitions. The charge for in process research and development and the
allocation to unearned compensation have been reflected in the Unaudited Pro
Forma Condensed Combined Balance Sheet. The charges for in process research and
development and amortization of unearned compensation have not been included in
the Unaudited Pro Forma Condensed Combined Statements of Operations as these
statements do not give effect to nonrecurring merger costs related to the
transaction. The unallocated excess of acquisition costs over net assets
acquired has been preliminarily allocated to goodwill, which is being amortized
over five years.
In connection with finalizing the purchase price allocation of these
transactions, PMC is currently evaluating the fair value of the consideration
given and the fair value of the assets acquired and liabilities assumed. Using
this information, PMC will make a final allocation of the purchase price,
including the allocation to in process research and development, unearned
compensation, goodwill and other intangibles. Accordingly, the purchase
accounting information is preliminary.
83
<PAGE>
(4) Unaudited Pro Forma Net Income (Loss) Per Share
The following table reconciles the number of shares used in the pro forma
per share calculations to the numbers set forth in PMC and QED historical
statements of operations (after giving effect to the other PMC purchase
transactions described in Note 3):
Shares Used in Pro Forma Share Calculations
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
------------------- --------------------------------------
March 26, March 28, December 26, December 27, December 28,
2000 1999 1999 1998 1997
--------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Shares used in basic per
share calculations
Historical PMC......... 148,362 138,680 142,759 134,202 125,507
Pro forma PMC.......... 150,293 140,611 144,691 134,202 125,507
Historical QED......... 20,651 8,180 8,615 7,534 5,940
As converted QED....... 7,951 3,149 3,317 2,901 2,287
------- ------- ------- ------- -------
Pro forma combined...... 158,244 143,760 148,008 137,103 127,794
======= ======= ======= ======= =======
Shares used in diluted
per share
calculations(1)
Historical PMC......... 148,362 138,680 142,759 134,202 131,873
Pro forma PMC.......... 150,293 140,611 144,691 134,202 131,873
Historical QED......... 20,651 8,180 8,615 7,534 13,210
As converted QED....... 7,951 3,149 3,317 2,901 5,086
------- ------- ------- ------- -------
Pro forma combined...... 158,244 143,760 148,008 137,103 136,959
======= ======= ======= ======= =======
</TABLE>
--------
(1) Diluted per share calculations do not included common equivalent associated
with options and warrants in periods where their effect is anti-dilutive.
(5) Conforming Adjustments and Intercompany Transactions
There are no material intercompany transactions included in the unaudited
pro forma condensed combined financial statements. There were no material
adjustments required to conform the accounting policies of PMC and QED.
84
<PAGE>
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS,
MANAGEMENT AND DIRECTORS OF QED
The following table sets forth information concerning the beneficial
ownership of common stock of QED as of June 30, 2000 for the following:
. each person or entity who is known by QED to own beneficially more than
five percent of the outstanding shares of QED common stock;
. each of QED's current directors;
. the chief executive officer and other highly compensated officers of
QED; and
. all directors and executive officers of QED as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act and the information
is not necessarily indicative of beneficial ownership for any other purpose.
Under such rule, beneficial ownership includes any shares as to which the
individual or entity has voting power or investment power and any shares that
the individual has the right to acquire within 60 days of June 30, 2000 through
the exercise of any stock option or other right. Unless otherwise indicated in
the footnotes or table, each person or entity has sole voting and investment
power, or shares such powers with his or her spouse, with respect to the shares
shown as beneficially owned and has an address of c/o Quantum Effect Devices,
Inc., 2500 Augustine Boulevard, Santa Clara, CA 95054.
The executive officers and directors listed below and the entities
affiliated with Weiss, Peck & Greer Venture Partners and the entities
affiliated with Bessemer Venture Partners, have entered into a voting agreement
with PMC agreeing to vote their shares of QED common stock in favor of adoption
of the reorganization agreement.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
-----------------------
Directors, Executive Officers and 5% Stockholders Number Percent
------------------------------------------------- ------------ ----------
<S> <C> <C>
Executive Officers and Directors
Christopher J. Schaepe(1).............................. 5,535,121 20.7%
Thomas J. Riordan(2)................................... 1,294,417 4.8
Raymond Kunita(3)...................................... 1,296,217 4.8
Bruce K. Graham(4)..................................... 1,997,441 7.5
Barry L. Cox(5)........................................ 416,563 *
Howard Bailey(6)....................................... 120,000 *
Andrew J. Keane(7)..................................... 93,750 *
Other 5% Stockholders
Entities Affiliated with Weiss, Peck & Greer Venture
Partners(1)............................................ 5,481,283 20.5
555 California Street, Suite 3130
San Francisco, CA 94104
Integrated Device Technology, Inc....................... 2,812,000 10.5
2975 Stender Way
Santa Clara, CA 95054
Entities Affiliated with Bessemer Venture Partners(4)... 1,991,609 7.5
1400 Old Country Road, Suite 407
Westbury, NY 11590
Norwest Venture Partners VI, L.P........................ 1,707,094 6.4
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
All executive officers and directors as a group......... 10,855,182 40.7
</TABLE>
--------
. Represents beneficial ownership of less than 1%.
(1) Includes:
.2,029,216 shares held by WPG Enterprise Fund II, L.L.C.;
. 1,687,297 shares held by Weiss Peck & Greer Venture Associates, III,
L.L.C.;
85
<PAGE>
. 865,267 shares held by Weiss Peck & Greer Venture Associates VI,
L.L.C.;
. 756,733 shares held by WPG Enterprise Fund III, L.L.C.;
. 109,239 shares held by Weiss Peck & Greer Venture Associates IV
Cayman, L.P.; and
. 33,531 shares held by WPG Information Sciences Entrepreneur Fund,
L.P.
WPG Venture Partners III, L.P. is the fund investment advisory member of
WPG Enterprise Fund II, L.L.C. and Weiss Peck & Greer Venture Associates
III, L.L.C. Christopher J. Schaepe, one of our directors, is the general
partner of WPG Venture Partners III, L.P., and, as such, may be deemed to
share voting and investment power with respect to the shares held by these
entities. WPG VC Fund Advisor L.L.C. is the fund investment advisory member
of Weiss, Peck & Greer Venture Associates IV, L.L.C. and WPG Enterprise
Fund III, L.L.C., and is the general partner of WPG Information Sciences
Entrepreneur Fund, L.P. Mr. Schaepe is the managing member of WPG VC Fund
Advisor, L.L.C., and, as such, may be deemed to share voting and investment
power with respect to the shares held by these entities. WPG Fund Advisor
L.L.C. is the administrative general partner of Weiss, Peck & Greer Venture
Associates IV Cayman, L.P. Mr. Schaepe is a non-managing member of WPG Fund
Advisor, L.L.C. and, as such, may be deemed to share voting and investment
power with respect to the shares held by Weiss, Peck & Greer Venture
Associates IV Cayman, L.P. Mr. Schaepe disclaims beneficial ownership of
all shares with respect to which he may be deemed to share voting and
investment power except to the extent of his pecuniary interests therein.
Mr. Schaepe's shares also include 20,000 shares held by Mr. Schaepe, 24,000
shares held by Mr. Schaepe's family living trust of which he is a trustee
and 4,000 shares held by his son's irrevocable trust. Mr. Schaepe disclaims
beneficial ownership of the shares held by his son's irrevocable trust.
(2)Includes 16,459 shares subject to options that are exercisable within 60
days of June 30, 2000.
(3)Includes 16,459 shares subject to options that are exercisable within 60
days of June 30, 2000.
(4) Includes (1) 1,050,328 shares held by Bessemer Venture Partners IV L.P.,
(2) 199,160 shares held by Bessemer Venture Investors L.P., and (3) 742,121
shares held by Bessec Ventures IV L.P. Deer IV & Co. LLC is the general
partner of Bessemer Venture Partners IV L.P., Bessemer Venture Investors
L.P. and Bessec Ventures IV L.P. Bruce K. Graham, one of our directors, is
a general partner of Deer IV & Co. LLC, and may be deemed to share voting
and investment power with respect to these shares. He disclaims beneficial
ownership of such shares except to the extent of his pecuniary interests
therein.
(5)Includes 20,476 shares subject to options that are exercisable within 60
days of June 30, 2000.
(6)Includes 9,062 shares subject to options that are exercisable within 60 days
of June 30, 2000.
(7)Includes 10,417 shares subject to options that are exercisable within 60
days of June 30, 2000.
Limitation of Liability of Our Directors and Officers; Directors and Officers
Insurance
The merger agreement provides that PMC and the surviving corporation will
cause to be maintained in effect for a period of six years following the time
of the merger:
. the current provisions in QED's certificate of incorporation, bylaws and
indemnification agreements regarding indemnification and exculpation of
QED's current and former officers and directors; and
. the current policies of QED's director's and officer's liability
insurance and fiduciary liability insurance, provided that PMC and the
surviving corporation may substitute policies with at least the same
coverage and amounts and containing terms and conditions, which in the
aggregate, are no less advantageous to the insured.
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DESCRIPTION OF PMC CAPITAL STOCK
Common Stock
Subject to preferences that may be applicable to any preferred stock which
may be issued in the future, the holders of common stock are entitled to
receive ratably such non-cumulative dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available therefor.
The common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions available to the
common stock. The holders of common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders, except that stockholders may,
in accordance with Section 214 of the Delaware General Corporation Law,
cumulate their votes in the election of directors. PMC's stockholders may not
act by written consent, except to call a meeting of stockholders. In the event
of liquidation, dissolution or winding up of PMC, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to liquidation preferences, if any, of preferred stock
which may be issued in the future. All outstanding shares of common stock are
fully paid and non-assessable.
Preferred Stock
PMC's board of directors has the authority to issue up to 5,000,000 shares
of preferred stock in one or more series, to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of preferred stock, and to fix the number of shares constituting any
series and the designations of such series, without any further vote or action
by the stockholders. Such issued preferred stock could adversely affect the
voting power and other rights of the holders of common stock. The issuance of
preferred stock may also have the effect of delaying, deferring or preventing a
change in control of PMC. At present, there are no outstanding shares of
preferred stock.
Rights of Holders of Redeemable Shares
PMC's subsidiary PMC-Sierra Ltd, a British Columbia corporation, has
outstanding Special Shares redeemable for PMC common stock. Special shares
generally represent the economic and functional equivalent of the common stock
of PMC for which they can be redeemed. However, Special Shares do not vote
together with PMC's common stock. Each class of Special Shares has class voting
rights with respect to transactions that affect the rights of the class and for
certain extraordinary corporate transactions involving PMC-Sierra Ltd. If PMC-
Sierra Ltd is liquidated or dissolved, then the Special Shares receive a
preferential payment equal to the value of the PMC common stock for which the
Special Shares could then be redeemed. The Special Shares were issued in a 1994
recapitalization of PMC-Sierra Ltd through which PMC acquired control of
PMC-Sierra Ltd.
Another PMC subsidiary has outstanding shares redeemable for PMC Common
Stock, which vote together with PMC's common stock and also represent the
economic equivalent of PMC's common stock. These shares were issued in
connection with the Extreme Packet Devices acquisition. Additional shares of
this type will be issued in the Datum Telegraphic acquisition.
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DESCRIPTION OF QED CAPITAL STOCK
The authorized capital stock of QED consists of 100,000,000 shares of common
stock, $0.001 par value per share, and 10,000,000 shares of Preferred Stock
$0.001 par value.. As of June 30, 2000, (i) 26,685,217 shares of common stock
were issued and outstanding, all of which were validly issued, fully paid and
nonassessable; (ii) no shares of common stock were held by subsidiaries of QED;
(iii) 300,000 shares of common stock were available for future issuance
pursuant to the employee stock purchase plan; (iv) 5,374,669 shares of common
stock were reserved for issuance upon the exercise of outstanding options to
purchase common stock under QED's 1999 equity incentive plan; (v) 1,990,364
shares of common stock were available for future grant under QED's 1999 equity
incentive plan; (vi) no shares of common stock were reserved for issuance upon
the exercise of outstanding options to purchase common stock under QED's 1999
non-employee directors' stock option plan; (vii) 356,589 shares of common stock
were available for future grant under QED's 1999 non-employee directors' stock
option plan; and (viii) 97,750 shares of common stock were reserved for future
issuance upon exercise of outstanding warrants of QED. As of the date hereof,
no shares of preferred stock were issued or outstanding.
COMPARISON OF RIGHTS OF HOLDERS OF QED COMMON STOCK AND
PMC COMMON STOCK
This section of the proxy statement-prospectus describes the material
differences between the rights of holders of QED common stock and PMC common
stock. While PMC and QED believe that the description covers the material
differences between the two, this summary may not contain all of the
information that is important to you. You should carefully read this entire
document and the other documents we refer to for a more complete understanding
of the differences between being a stockholder of QED and being a stockholder
of PMC.
Number of Directors
PMC's bylaws fix the authorized number of directors at five. PMC's board of
directors or stockholders may change such number by amending their respective
bylaws or certificates. QED's certificate provides that the board of directors
have the exclusive authority to fix the authorized number of directors by one
or more resolutions adopted by the board of directors. QED's board of directors
is presently composed of five members.
Cumulative Voting for Directors
Under Delaware law, unless the corporation's or certificate of incorporation
provides otherwise, there can be no cumulative voting for the election of
directors. PMC's certificate provides for cumulative voting, QED's does not.
QED's certificate does not provide for cumulative voting, unless the company
(i) is subject to Section 2115(b) of the California General Corporation Law and
(ii) is not a "listed" corporation or ceases to be a "listed corporation under
Section 301.5 of the California General Corporation Law. QED is not currently
subject to Section 2115(b).
Classified Board of Directors
A classified board is one to which some, but not all, of the directors are
elected on a rotating basis each year. Delaware law permits, but does not
require, a classified board of directors, with staggered terms under which one-
half or one-third of the directors are elected for terms of two or three years,
respectively. This
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<PAGE>
method of electing directors makes changes in the composition of the board of
directors, and thus a potential change in control of a corporation, a lengthier
and more difficult process. QED currently has a classified board made up of
three classes. PMC does not have a classified board of directors.
Director Voting
PMC's bylaws and QED's bylaws provide that the number of directors
constituting a quorum shall be a majority of the number of authorized
directors.
Removal of Directors
Under Delaware law, unless otherwise restricted by the certificate of
incorporation or by the corporation's bylaws, any director or the entire board
of directors may be removed with or without cause by the holders of a majority
of the shares then entitled to vote at an election of directors; provided,
however, that so long as stockholders of the corporation are entitled to
cumulative voting, as are PMC's stockholders, no individual director may be
removed without cause, unless the entire board is removed, if the number of
votes cast against such removal would be sufficient to elect the director if
then cumulatively voted at an election of the class of directors of which the
director is a part. Whenever the holders of any class or series are entitled to
elect one or more directors by the certificate of incorporation, such director
or directors may be removed without cause only if there are sufficient votes by
the holders of the outstanding shares of that class or series. A vacancy
created by the removal of a director may be filled only by the approval of the
stockholders.
During such time that QED is not subject to Section 2115(b), QED's
certificate does not permit the holders of a majority of the outstanding shares
then entitled to vote to remove any director or the entire board from office
other than for cause. Unless the QED board of directors determines by
resolution that a vacancy is be filled by the stockholders, any vacancy created
by the removal of a director may be filled only by the affirmative vote of a
majority of the directors then in office.
Under Delaware law, no reduction of the authorized number of directors shall
have the effect of removing any director prior to the expiration of such
director's term of office.
Filling Vacancies on the Board of Directors
Under Delaware law, vacancies and newly created directorships may be filled
by a majority of the directors then in office, even though less than a quorum,
unless otherwise provided in the certificate of incorporation or bylaws and
unless the certificate of incorporation directs that a particular class is to
elect such director, in which case any other directors elected by such class,
or a sole remaining director, shall fill such vacancy. PMC's and QED's bylaws
allow any vacancy on the board of directors to be filled by a majority of the
directors then in office, although less than a quorum.
Advance Notice of Stockholder Proposals
PMC's and QED's bylaws provide that no matter, including director
nominations, proposed by PMC's or QED's respective stockholders will be
considered at an annual meeting unless:
. it is specified in the written notice of meeting;
. it is brought by or at the direction of the board of directors; or
. it is brought by a stockholder of the corporation who was a stockholder
of record on the record date and written notice of such matter is
provided to PMC or QED in compliance with the form and time frames set
forth in each corporation's bylaws.
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Power to Call Special Meetings of Stockholders
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. Pursuant to PMC's bylaws, special
meetings may be called by the chairman of the board, the board of directors,
or the president. The stockholders may also request a special meeting with the
written consent of a majority of the outstanding shares, provided that the
notice states each action proposed and is sent to PMC in compliance with the
time frames set by PMC's certificate. QED's bylaws specify that the chairman
of the board, the chief executive officer, the board of directors by a
resolution adopted by a quorum, and the holders of 50% of QED's outstanding
common stock may call a special meeting. However, if anyone but the board of
directors calls a special meeting, then the request must be made in writing in
compliance with the form and time frames outlined by QED's bylaws.
Business Combination Following a Change of Control
In the last several years, a number of states, have adopted special laws
designed to make some kinds of "unfriendly" corporate takeovers, or other
transactions involving a corporation and one or more of its significant
stockholders, more difficult. Under Section 203 of the Delaware General
Corporation Law, some business combinations by Delaware corporations with
interested stockholders are subject to a three-year moratorium unless
specified conditions are met. Section 203 prohibits a Delaware corporation
from engaging in a business combination with an interested stockholder for
three years following the date that such person becomes an interested
stockholder. With some exceptions, an interested stockholder is generally a
person or group who or which owns 15% or more of the corporation's outstanding
voting stock, including any rights to acquire stock pursuant to an option,
warrant, agreement, arrangement or understanding, or upon the exercise of
conversion or exchange rights, and stock with respect to which the person has
voting rights only, or is an affiliate or associate of the corporation and was
the owner of 15% or more of such voting stock at any time within the previous
three years.
Amendment of Charter Documents
Generally, under Delaware law, an amendment to a corporation's certificate
of incorporation requires the approval of the board of directors and the
approval of holders of a majority of the outstanding stock entitled to vote
thereon. The holders of the outstanding shares of a class are entitled to vote
as a separate class on a proposed amendment that would increase or decrease
the aggregate number of authorized shares of such class, increase or decrease
the par value of the shares of such class, or alter or change the powers,
preferences or special rights of the shares of such class so as to affect them
adversely. PMC's certificate can be amended, altered or repealed in any manner
now or hereafter prescribed by Delaware law. PMC's bylaws may be altered,
amended or repealed at any meeting of the board of directors by a majority
vote of the directors present at the meeting or by the stockholders.
QED's certificate of incorporation may be amended, altered, changed or
repealed in any manner now or hereafter prescribed by Delaware Law; except
that the affirmative vote of the holders of at least 66 2/3% of the voting
power of all of the then-outstanding shares of QED stock, voting as a single
class are required to alter, amend or repeal Articles V, VI and VII. QED's
bylaws may be amended, altered, or repealed by the board of directors or with
the affirmative vote of the then-outstanding shares of QED stock entitled to
vote.
Indemnification
PMC's and QED's certificates of incorporation indemnify directors and
officers to the fullest extent permissible under Delaware law, as such law
exists currently or as it may be amended in the future. Under Delaware law,
such provision may not indemnify directors' or officers' liability for:
. breaches of the director's or officer's duty of loyalty to the
corporation or its stockholders;
. acts or omissions not in good faith or involving intentional misconduct
or knowing violations of law;
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. the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or
. transactions in which the director or officer received an improper
personal benefit.
PMC's and QED's bylaws authorize each corporation to provide insurance for
its directors, officers, employees and/or agents, against any expense,
liability or loss, whether or not the respective corporation would have the
power to indemnify such person against such expense, liability or loss under
Delaware law. QED's bylaws further authorize it to make advances to such
persons for expenses incurred during legal proceedings related to actions made
by them on behalf of QED.
The reorganization agreement provides that PMC will use its best efforts for
a period of six years to maintain in effect the directors' and officers'
liability policies maintained by QED.
Inspection of Stockholders List
Delaware law permits any stockholder upon written demand under oath stating
the purpose thereof to inspect, during regular business hours, a corporation's
stock ledger, a list of its stockholders and its other books and records and to
make copies of extracts therefrom for any proper purpose. If the corporation
refuses such request, or fails to respond within five business days after the
demand has been made, the stockholder may petition the court for an order to
compel such inspection. The court may prescribe limitations or conditions upon
the inspection, or award any other or further relief the court deems just and
proper.
EXPERTS
The audited consolidated financial statements of PMC as of December 31, 1999
and 1998, and for each of the years in the three-year period ended December 31,
1999 are annexed to this document in reliance on the report of Deloitte &
Touche LLP, independent auditors, given on the authority of said firm as
experts in accounting and auditing.
The financial statements of QED as of June 30, 1999 and 1998 and for each of
the three years in the period ended June 30, 1999 included in this proxy
statement prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The audited financial statements of Malleable as of December 31, 1999 and
1998 and cumulative from July 31, 1997 (inception) through December 31, 1999
are annexed to this document in reliance on the report of Deloitte & Touche
LLP, independent auditors, given on the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the shares of PMC common stock offered by this document and
certain legal matters with respect to the federal income tax consequences of
the merger will be passed upon for PMC by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain legal matters with
respect to federal income tax consequences of the merger will be passed upon
for QED by Cooley Godward LLP, Palo Alto, California.
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WHERE YOU CAN FIND MORE INFORMATION
The following reports, which have been filed by PMC with the Securities and
Exchange Commission, are attached as Annexes F and G to this proxy statement-
prospectus:
. PMC's annual report on Form 10-K, as amended, for the fiscal year ended
December 26, 1999
. PMC's quarterly report on Form 10-Q for the quarter ended March 26, 2000
Additional copies of the reports annexed to this proxy statement-prospectus
(excluding exhibits, unless specifically requested) are available from PMC upon
request without charge. Requests should be directed to: PMC-Sierra, Inc, 900
East Hamilton Avenue, Suite 250, Campbell, CA 95008, Attention: Investor
Relations, or by calling at (408) 626-2000. Any request for reports should be
made by August 12, 2000 to ensure timely delivery.
PMC and QED each file reports, proxy statements and other information with
the Securities and Exchange Commission which may be inspected and copied at the
public reference facilities maintained by the SEC at:
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at (800) SEC-0330. The SEC
maintains a website that contains reports, proxy statements and other
information regarding PMC. The address of the SEC website is
http://www.sec.gov.
Reports, proxy statements and other information regarding PMC and QED may
also be inspected at The National Association of Securities Dealers, Inc., 1735
K Street, N.W., Washington, D.C. 20006.
PMC has filed a registration statement under the Securities Act of 1933 with
the SEC with respect to PMC's common stock to be issued to QED stockholders in
the merger. This proxy statement-prospectus constitutes the prospectus of PMC
filed as part of the registration statement. This proxy statement-prospectus
does not contain all of the information set forth in the registration statement
because parts of the registration statement are omitted in accordance with the
rules and regulations of the SEC. The registration statement and its exhibits
are available for inspection and copying at the SEC's offices as set forth
above.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT AND ITS
ANNEXES IN CONSIDERING ADOPTION OF THE REORGANIZATION AGREEMENT. NEITHER PMC
NOR QED HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION
OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION.
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STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING OF
QED STOCKHOLDERS IF THE MERGER IS NOT COMPLETED
QED will hold a 2000 annual meeting of QED stockholders at a date to be
determined, only if the merger is not completed.
If the merger is not completed, QED stockholders may present proper
proposals for consideration at the next annual meeting of QED stockholders by
submitting their proposal in writing to the Secretary of QED in a timely
manner. However, in order for such stockholder proposals to be eligible to be
brought before QED's stockholders at the next annual meeting of QED's
stockholders, the stockholder submitting the proposal must also comply with the
procedures, including the deadlines, required by the certificate of
incorporation and bylaws of QED. Stockholder nominations of directors are not
stockholder proposals within the meaning of Rule 14a-8 and are not eligible for
inclusion in QED's proxy statement.
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QUANTUM EFFECT DEVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Balance Sheets as of June 30, 1999 and 1998.............................. F-3
Statements of Operations for the years ended June 30, 1999, 1998 and
1997.................................................................... F-4
Statements of Stockholders' Equity for the years ended June 30, 1999,
1998 and 1997........................................................... F-5
Statements of Cash Flows for the years ended June 30, 1999, 1998 and
1997.................................................................... F-6
Notes to Financial Statements............................................ F-7
Unaudited Condensed Balance Sheets as of March 31, 2000 and June 30,
1999.................................................................... F-22
Unaudited Condensed Statements of Operations for the three and nine
months ended March 31, 2000 and 1999.................................... F-23
Unaudited Condensed Statements of Cash Flows for the nine months ended
March 31, 2000 and 1999................................................. F-24
Notes to Unaudited Condensed Financial Statements........................ F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Quantum Effect Devices, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Quantum Effect Devices, Inc. as of
June 30, 1998, and 1999 and the results of its operations and its cash flows
for the three years in the period ended June 30, 1999, in conformity with
accounting principles generally accepted in the United States. These 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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers, LLP
San Jose, California
August 11, 1999 except Note 10,
which is as of December 28, 1999.
F-2
<PAGE>
QUANTUM EFFECT DEVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
----------------
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 1,442 $ 9,756
Short-term investments..................................... 16,023 --
Restricted cash............................................ 2,000 --
Accounts receivable, net................................... 3,065 1,387
Receivables from related parties........................... 652 870
Inventories................................................ 2,122 852
Prepaid expenses and other current assets.................. 768 1,082
------- -------
Total current assets..................................... 26,072 13,947
Property and equipment, net.................................. 1,807 1,909
------- -------
Total assets........................................... $27,879 $15,856
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings, current portion................................ $ 1,140 $ 489
Accounts payable........................................... 3,066 2,090
Accrued expenses and other current liabilities............. 3,102 2,217
Deferred revenue........................................... 248 710
Capital lease obligations, current portion................. 342 220
------- -------
Total current liabilities................................ 7,898 5,726
Borrowings, non-current portion.............................. 1,949 1,143
Capital lease obligations, non-current portion............... 426 478
------- -------
Total liabilities...................................... 10,273 7,347
------- -------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value, 13,897,750 shares
authorized, 13,618,837 and 9,100,000 shares issued and
outstanding .............................................. 14 9
Common stock, $.001 par value, 29,000,000 shares
authorized, 8,532,959 and 7,789,966 shares issued and
outstanding .............................................. 9 8
Additional paid-in capital................................... 43,409 21,955
Note receivable from stockholder............................. -- --
Deferred stock-based compensation............................ (1,462) (868)
Accumulated deficit.......................................... (24,364) (12,595)
------- -------
Total stockholders' equity............................... 17,606 8,509
------- -------
Total liabilities and stockholders' equity................... $27,879 $15,856
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
QUANTUM EFFECT DEVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Revenue:
Product revenue................................ $ 10,937 $ 1,428 $ --
Royalty revenue................................ 1,388 1,798 2,687
Royalty revenue from related parties........... 3,037 3,254 7,376
--------- -------- -------
Total revenue................................. 15,362 6,480 10,063
--------- -------- -------
Cost of revenue:
Product revenue................................ 8,513 3,714 --
--------- -------- -------
Gross profit.................................. 6,849 2,766 10,063
--------- -------- -------
Operating expenses:
Research and development....................... 12,381 9,552 9,421
Selling, general and administrative............ 5,436 2,979 2,123
Stock-based compensation....................... 777 150 --
--------- -------- -------
Total operating expenses...................... 18,594 12,681 11,544
--------- -------- -------
Loss from operations............................. (11,745) (9,915) (1,481)
Interest income.................................. 472 325 340
Interest expense................................. (496) (204) --
--------- -------- -------
Net loss before income taxes..................... (11,769) (9,794) (1,141)
Provision for income taxes....................... -- 89 60
--------- -------- -------
Net loss......................................... $(11,769) $(9,883) $(1,201)
========= ======== =======
Net loss per share:
Basic and diluted.............................. $ (1.45) $ (1.53) $ (.21)
========= ======== =======
Weighted average shares........................ 8,111 6,451 5,746
========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
QUANTUM EFFECT DEVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Preferred
Stock Common Stock Additional Deferred
------------- ------------- Paid-In Stock-Based Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
------ ------ ------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30,
1996................... 4,300 $ 4 5,548 $ 6 $ 8,657 $ -- $ (1,511) $ 7,156
Exercise of stock
options................ -- -- 266 -- 40 -- -- 40
Net loss................ -- -- -- -- -- (1,201) (1,201)
------ --- ----- --- ------- ------- -------- --------
BALANCE AT JUNE 30,
1997................... 4,300 4 5,814 6 8,697 -- (2,712) 5,995
Issuance of Series C
preferred stock........ 4,800 5 -- -- 11,946 -- -- 11,951
Exercise of stock
options................ -- -- 1,976 2 294 -- -- 296
Deferred stock-based
compensation........... -- -- -- -- 1,018 (1,018) -- --
Amortization of deferred
stock-based
compensation........... -- -- -- -- -- 150 -- 150
Net loss................ -- -- -- -- -- -- (9,883) (9,883)
------ --- ----- --- ------- ------- -------- --------
BALANCE AT JUNE 30,
1998................... 9,100 9 7,790 8 21,955 (868) (12,595) 8,509
Issuance of Series D
preferred stock........ 4,519 5 -- -- 19,473 -- -- 19,478
Issuance of common stock
for cash............... -- -- 238 -- 475 -- -- 475
Exercise of stock
options................ -- -- 505 1 135 -- -- 136
Deferred stock-based
compensation........... -- -- -- -- 1,371 (1,371) -- --
Amortization of deferred
stock-based
compensation........... -- -- -- -- -- 777 -- 777
Net loss................ -- -- -- -- -- -- (11,769) (11,769)
------ --- ----- --- ------- ------- -------- --------
BALANCE AT JUNE 30,
1999................... 13,619 $14 8,533 $9 $43,409 $(1,462) $(24,364) $ 17,606
====== === ===== === ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
QUANTUM EFFECT DEVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $ (11,769) $ (9,883) $ (1,201)
Adjustments to reconcile net loss to net cash
used in operating activities:
Allowance for doubtful accounts............ 300 -- --
Depreciation and amortization.............. 962 909 959
Amortization of deferred stock-based
compensation.............................. 777 150 --
Deferred income taxes...................... -- 89 580
Changes in assets and liabilities:
Accounts receivable....................... (1,760) (1,271) 217
Inventories............................... (1,270) (852) --
Prepaid expenses and other current
assets................................... 314 (391) (476)
Accounts payable.......................... 976 597 770
Accrued expenses and other current
liabilities.............................. 885 210 1,148
Deferred revenue.......................... (462) (451) (2,093)
---------- --------- ---------
Net cash used in operating activities... (11,047) (10,893) (96)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment...... (493) (76) (936)
Purchase of short term investments......... (16,023) -- --
Maturities and sales of short term
investments............................... -- -- 2,974
Restricted cash............................ (2,000) -- --
---------- --------- ---------
Net cash provided by (used in) investing
activities............................... (18,516) (76) 2,038
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases.... (297) (127) --
Proceeds from issuance of preferred stock.. 19,478 11,951 --
Proceeds from issuance of common stock..... 611 296 40
Proceeds from borrowings................... 2,000 2,000 --
Repayments of borrowings................... (543) (368) (250)
---------- --------- ---------
Net cash provided by (used in) financing
activities............................... 21,249 13,752 (210)
---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................. (8,314) 2,783 1,732
Cash and cash equivalents at beginning of
period...................................... 9,756 6,973 5,241
---------- --------- ---------
Cash and cash equivalents at end of period... $ 1,442 $ 9,756 $ 6,973
========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income tax paid (refunded), net............ $ 55 $ (467) $ 470
========== ========= =========
Cash paid for interest..................... $ 405 $ 170 $ --
========== ========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment
through capital leases.................... $ 367 $ 825 $ --
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Quantum Effect Devices, Inc. (formerly Quantum Effect Design, Inc.) ("QED"
or the "Company") was incorporated in California in August 1991 and
reincorporated in Delaware on December 28, 1999 (see note 11). The Company
changed its name from Quantum Effect Design, Inc. to Quantum Effect Devices,
Inc. in August 1999. The Company is a developer and supplier of high
performance embedded microprocessors for use in information-intensive
applications such as networking/communications infrastructure equipment,
business network equipment and consumer network products.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, and such
differences could affect the results of operations reported in future periods.
REVENUE RECOGNITION
Revenue from product sales is generally recognized upon shipment, net of
sales returns and allowances. Revenue generated by sales to distributors under
agreements allowing certain rights of return are deferred for financial
reporting purposes until the products are sold by the distributors.
Royalty revenue is recognized when third parties and related third parties
sell products that the Company has developed and licensed for production.
Royalty revenue received in advance of the sale of the licensed products is
recorded as deferred revenue and recognized when the products are sold by the
third parties.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of three
months or less from the date of purchase to be cash equivalents. At June 30,
1999, cash and cash equivalents were held by three major U.S. financial
institutions. Cash and cash equivalents consist of cash on deposit with banks,
money market funds and commercial deposits, the fair value of which
approximates cost.
F-7
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company classifies all short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value. The fair value of
such securities approximates cost, and there were no material unrealized gains
or losses as of June 30, 1999. Short-term investments generally have maturities
of less than one year from the date of purchase. The following table summarizes
the estimated fair value of the Company's cash, cash equivalents and short-term
investments (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------
1999 1998
------- ------
<S> <C> <C>
Cash and cash equivalents:
Cash.......................................................... $ 654 $ 621
Money market funds............................................ 788 1,135
Commercial paper.............................................. -- 8,000
------- ------
$ 1,442 $9,756
======= ======
Short-term investments:
U.S. Government bonds and notes............................... $10,943 $ --
Commercial bonds and notes.................................... 5,080 --
------- ------
$16,023 $ --
======= ======
</TABLE>
RESTRICTED CASH
At June 30, 1999, the Company had $2.0 million invested in a certificate of
deposit with a major U.S. financial institution as security for a letter of
credit with a major supplier for the same amount. This letter of credit expires
on May 30, 2000.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents, short-term
investments and accounts receivable. Substantially all of the Company's cash
and cash equivalents are invested in highly-liquid money market funds and
commercial securities with major financial institutions. Short-term investments
consist of U.S. government and commercial bonds and notes. The Company sells
its products principally to original equipment manufacturers and their
subcontract manufacturers. The Company performs ongoing credit evaluations of
its customers and maintains an allowance for potential credit losses. Credit
losses to date have been consistent with management's estimates.
The following table sets forth customers comprising 10% or more of the
Company's total revenue for each of the periods indicated.
<TABLE>
<CAPTION>
Year Ended
June 30,
----------------
Customer 1999 1998 1997
-------- ---- ---- ----
<S> <C> <C> <C>
A........................................................... 20% 50% 23%
B........................................................... 4 23 25
C........................................................... 18 19 --
D........................................................... -- -- 51
E........................................................... 13 -- --
F........................................................... 12 -- --
</TABLE>
F-8
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's accounts receivable were concentrated with two customers at
June 30, 1998 (representing 39% and 53% of aggregate receivables) and four
customers at June 30, 1999 (representing 22%, 20%, 17% and 15% of aggregate
receivables).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, restricted cash short-term investments,
accounts receivable, accounts payable, capital lease obligations and borrowings
approximate their fair value due to the relatively short maturities and based
upon comparable market information available at the respective balance sheet
dates. The carrying value of the Company's long-term financial instruments
approximates fair value because the interest rates approximate current market
rates of similar debt. The Company does not hold or issue financial instruments
for trading purposes.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out ("FIFO") method. Appropriate consideration is
given to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
historical cost, less accumulated depreciation and amortization. Depreciation
is computed using the straight-line method over the estimated useful lives of
these assets, ranging from three to five years, or, in the case of leasehold
improvements, over the lease period, whichever is shorter.
Upon disposal, the assets and related accumulated depreciation and
amortization are removed from the Company's accounts, and the resulting gains
or losses are reflected in the statements of operations.
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that their net book value
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the asset is less than the net book value of the asset. The amount of the
impairment loss will generally be measured as the difference between net book
values of the assets and their estimated fair values. Based on its most recent
analysis, the Company believes that no long-lived assets were impaired at June
30, 1998 and 1999.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. There was no difference
between the Company's net loss and its total comprehensive loss for the years
ended June 30, 1997, 1998 and 1999.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Accordingly, compensation cost for stock options is measured as the excess, if
F-9
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
any, of the fair value of the Company's stock at the date of grant over the
stock option exercise price. Expense associated with stock-based compensation
is amortized on an accelerated basis over the vesting period of the individual
award consistent with the method described in Financial Accounting Standards
Board Interpretation No. 28 ("FIN 28"). Application of FIN 28 results in
amortization of approximately 53% of the compensation in the first 12 months of
vesting, 27% of the compensation in the second 12 months of vesting, 14% of the
compensation in the third 12 months of vesting and 6% of the compensation in
the fourth 12 months of vesting. The Company accounts for stock issued to non-
employees in accordance with the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") and Emerging Issues Task Force Consensus No. 96-18, "Accounting for
Equity Instruments that are offered to other than employees for acquiring of in
conjunction with selling goods or services" ("EITF 96-18"). Under SFAS 123 and
EITF 96-18 stock option awards issued to non-employees are accounted for at
their fair value using the Black-Scholes method. The fair value of each non-
employee stock awarded is remeasured at each period end until a commitment date
is reached, which is generally the vesting date.
SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), effective for fiscal
years beginning after December 31, 1997.
The Company has determined that it has one reportable business segment: the
design, license, manufacture and marketing of integrated circuits. To date, all
of the Company's products and services have originated within the United
States.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
based on the weighted average number of common shares and dilutive potential
common shares outstanding. The calculation of diluted net loss per share
excludes potential common shares if the effect is anti-dilutive. Potential
common shares consist of incremental common shares issuable upon the exercise
of stock options, shares issuable upon conversion of convertible preferred
stock and common shares issuable upon the exercise of common and convertible
preferred stock warrants.
The following table sets forth the computation of basic and diluted net loss
per share for the periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Numerator:
Net loss......................................... $(11,769) $(9,883) $(1,201)
========= ======== =======
Denominator:
Weighted average common shares................... 8,111 6,451 5,746
========= ======== =======
Net loss per share:
Basic and diluted................................ $ (1.45) $ (1.53) $ (.21)
========= ======== =======
</TABLE>
F-10
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods presented (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Series A preferred stock...................................... 1,800 1,800 1,800
Series B preferred stock...................................... 2,500 2,500 2,500
Series C preferred stock...................................... 4,800 4,800 --
Series D preferred stock...................................... 4,519 -- --
Series B and C preferred stock warrants....................... 98 94 --
Common stock options.......................................... 5,200 3,208 3,880
Common stock warrants......................................... 80 -- --
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires all costs related to
the development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. The Company does not expect that the
adoption of SOP 98-1 will have a material effect on its financial statements.
SOP 98-1 is effective for the Company's fiscal year ending June 30, 2000.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133--an amendment of FASB Statement No.
133" ("SFAS No. 137"). SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair market value. Changes in the fair
market value of derivatives are recorded each period in current earnings or
comprehensive income, depending on whether a derivative is designed as part of
a hedge transaction, and if so, the type of hedge transaction. Substantially
all of the Company's revenue and costs are denominated in U.S. dollars, and to
date the Company has not entered into any material derivative contracts. The
Company does not expect that the adoption of SFAS No. 133 will have a material
effect on its financial statements. The effective date of SFAS No. 133 as
amended by SFAS No. 137 will be for fiscal years beginning after June 15, 2000.
NOTE 2--RELATED PARTY TRANSACTIONS:
DEVELOPMENT AND LICENSE AGREEMENT WITH MOTOROLA
In August 1995, the Company issued to Motorola, Inc. ("Motorola") 2,500,000
shares of Series B convertible preferred stock under the Series B Preferred
Stock Purchase Agreement, at a price of $2.40 per share. In February 1997,
Motorola sold all of the 2,500,000 shares of Series B convertible preferred
stock to a third party.
In August 1995, the Company entered into a Development and License Agreement
with Motorola ("the Motorola Agreement"). Under the Motorola Agreement, the
Company obtained a license from Motorola to design certain microprocessors on
behalf of Motorola in exchange for up to $1.1 million in milestone payments. In
March 1997, Motorola indicated its final acceptance of all milestones set forth
in the Motorola Agreement. As a result, the Company granted Motorola an
exclusive, royalty-bearing license to manufacture
F-11
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
and sell the licensed product. The full amount of milestone payments and a one-
time royalty payment of $4.0 million, totaling $5.1 million, received from
Motorola was recognized upon final acceptance of the milestones in the year
ended June 30, 1997. This amount is recorded in the statement of operations
under "Royalty revenue from related parties." The Company is not entitled to
any other royalties under this contract.
DEVELOPMENT AND LICENSE AGREEMENT WITH IDT
In January 1992, the Company entered into a Development and License
Agreement (the "IDT Agreement") with Integrated Device Technology, Inc.
("IDT"). At June 30, 1999, IDT owned approximately 16.4% of the Company's
outstanding common and preferred stock. Under the terms of the IDT Agreement,
IDT agreed to fund the development of three products, based on the achievement
of certain milestones. The IDT agreement stipulated that products developed
under it become the sole and exclusive property of IDT. IDT is required to pay
to the Company royalties on QED-developed products sold by IDT for a period of
ten years from the initial royalty payment. The Company recognized IDT royalty
income of $2,276,000, $3,254,000 and $3,037,000 in the years ended June 30,
1997, 1998 and 1999, respectively. These amounts are recorded in the statement
of operations under "Royalty revenue from related parties."
SALE OF CAPITAL STOCK TO CISCO
In April 1999, in conjunction with the sale of Series D preferred stock to
other investors, the Company sold 1,047,454 shares of Series D preferred stock
and 237,500 shares of common stock to Cisco Systems, Inc. ("Cisco"). The
Company believes that these shares were sold on an arms-length basis.
Product revenue for the year ended June 30, 1999 includes sales of
approximately $255,000 made directly to Cisco. This excludes amounts sold to
Cisco's manufacturing subcontractors, which total approximately $2 million.
NOTE 3--BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
June 30,
----------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Accounts receivable......................................... $ 3,365 $ 1,387
Less: allowance for doubtful accounts....................... (300) --
------- -------
$ 3,065 $ 1,387
======= =======
INVENTORIES:
Work-in-progress............................................ $ 1,384 $ 815
Finished goods.............................................. 738 37
------- -------
$ 2,122 $ 852
======= =======
PROPERTY AND EQUIPMENT, NET:
Furniture and fixtures...................................... $ 257 $ 181
Computer hardware........................................... 3,918 3,252
Computer software........................................... 3,095 2,977
Leasehold improvements...................................... 23 23
------- -------
7,293 6,433
Less: Accumulated depreciation and amortization............. (5,486) (4,524)
------- -------
$ 1,807 $ 1,909
======= =======
</TABLE>
F-12
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Assets acquired under capital lease obligations are included in property and
equipment and totaled $825,000 and $1,192,000, with related accumulated
depreciation of $530,000 and $167,000 at June 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
June 30,
-------------
1999 1998
------ ------
(in
thousands)
<S> <C> <C>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued employee compensation.................................. $1,439 $1,126
Accrued warranty............................................... 929 531
Other.......................................................... 734 560
------ ------
$3,102 $2,217
====== ======
</TABLE>
NOTE 4--BORROWINGS:
SECURED PROMISSORY NOTE
In September 1997, the Company borrowed $2,000,000 under a secured
promissory note (the "Note"). The Note is secured by certain fixed assets of
the Company and bears interest at 8.25% per annum. The Note balance is payable
over 42 months commencing November 1, 1997, with a final balloon payment of
$300,000.
LINE OF CREDIT
In January 1999, the Company entered into a loan and security agreement
("line of credit") with a lender, under which it may borrow up to $6,000,000.
The line of credit is collaterized by substantially all of the Company's
tangible assets and expires on December 31, 2000. Under the line of credit, the
Company borrowed $2,000,000 through June 30, 1999. Borrowings under the line of
credit are payable over 42 months commencing in July 1999, and bear interest at
12% for the first six months and 8.5% thereafter, with a final balloon payment
of $200,000.
Under the line of credit, no financial covenants are required to be met for
borrowings up to $2,000,000. For incremental borrowings up to $6,000,000, QED
must maintain certain financial ratios. The line of credit prohibits the
Company from paying dividends. At June 30, 1999, the Company was in compliance
with these covenants.
Aggregate principal payments remaining under the Note and the line of credit
at June 30, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDING JUNE 30,
2000............................................................ $ 1,140
2001............................................................ 1,289
2002............................................................ 660
-------
3,089
Less: current portion........................................... (1,140)
-------
Non-current portion............................................. $ 1,949
=======
</TABLE>
F-13
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--PREFERRED STOCK:
Preferred stock at June 30, 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
Proceeds
Shares Net of
---------------------- Issuance
Authorized Outstanding Costs
---------- ----------- --------
<S> <C> <C> <C>
Series A..................................... 1,800 1,800 $ 2,520
Series B..................................... 2,594 2,500 6,000
Series C..................................... 4,804 4,800 11,951
Series D..................................... 4,700 4,519 19,478
------ ------ -------
13,898 13,619 $39,949
====== ====== =======
</TABLE>
The holders of preferred stock have various rights and preferences as
follows:
CONVERSION
Each share of Series A, B, C and D preferred stock outstanding is
convertible into common stock at any time at the option of the holder based on
a formula which currently results in a one-for-one exchange ratio of common for
preferred. This formula is subject to adjustments for stock splits, stock
dividends, recapitalizations, and other similar transactions. The shares of
preferred stock automatically convert into shares of common stock upon the
effectiveness of a registration statement under the Securities Act of 1933, as
amended, (the "Securities Act") if the offering results in gross proceeds of at
least $10,000,000, and the per share offering price is at least $6.48.
DIVIDENDS
Noncumulative dividends at the annual rate of $.11, $.19, $.20 and $.35 per
share for Series A, B, C and D preferred stock, respectively, as declared by
the Board of Directors, are payable to the holders of preferred stock in
preference to any dividends for common stock declared by the Board of
Directors. Dividends on shares of preferred stock may exceed the annual per
share rate of $.11, $.19 and $.20 and $.35 for Series A, B, C and D preferred
stock, respectively, in the event that a higher dividend rate is paid on any
other class of the Company's stock. In such an event, the dividends on the
shares of preferred stock will be paid at the same rate, determined on an if-
converted basis. No dividends have been declared to date.
LIQUIDATION
In the event of liquidation, holders of preferred stock are entitled to a
per share distribution in preference to holders of common stock equal to $1.40,
$2.40, $2.50 and $4.32 for Series A, B, C and D preferred stock, respectively
(adjusted for stock splits, combinations or similar events), plus any declared
but unpaid dividends. In the event funds are sufficient to make a complete
distribution to the holders of preferred stock as described above, the
remaining assets will be distributed to the holders of common stock and Series
A, B and C preferred stock based upon the number of shares of common stock held
by each, assuming conversion of all shares of preferred stock into common
stock; provided that the holders of Series C preferred shall not be entitled to
distributions in excess of $10.00 per share.
VOTING
The holders of common stock are entitled to elect one of the Company's five
directors. The holders of Series A preferred stock are entitled to elect two of
the Company's five directors. The holders of Series B preferred stock are
entitled to elect one of the company's five directors. The holders of Series C
preferred stock
F-14
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
are entitled to elect one of the company's five directors. The holders of
Series D preferred stock are not entitled to elect members of the Company's
Board of Directors. Each share of preferred stock is entitled to one vote for
each share of common stock into which the preferred stock is convertible.
SERIES B PREFERRED STOCK WARRANTS
In connection with a secured promissory note (see note 4) and a secured
lease agreement signed in September 1997, the Company issued warrants to
purchase 93,750 shares of Series B preferred stock at an exercise price of
$1.60 per share. The warrants expire in September 30, 2003 or three years from
the effective date of the Company's IPO, whichever is later. The warrants
include certain registration rights. They also include anti-dilution provisions
similar to those granted to holders of preferred stock and provide for exercise
on a "net exercise" basis. The Company has determined the value of the warrants
to be $158,000, based on the Black-Scholes option pricing model, and this
amount is being recognized as interest expense over the term of the related
borrowing agreements. Notwithstanding the above expiration dates, upon
conversion of the convertible preferred stock in connection with an IPO, the
convertible preferred stock warrants shall automatically become exercisable.
SERIES C PREFERRED STOCK WARRANTS
In July 1998, the Company issued warrants to purchase 4,000 shares of Series
C preferred stock at an exercise price of $2.50 per share in connection with an
increase of $200,000 to its existing lease line from $1,000,000 to $1,200,000.
The warrants expire in July 2004 or three years from the effective date of the
Company's initial public offering, whichever is later. The warrants include
registration rights and anti-dilution provisions similar to those granted to
holders of Series C preferred stock and provide for exercise on a "net
exercise" basis. The Company has determined the value of the warrants to be
$6,000, based on the Black-Scholes option pricing model, and this amount is
being recognized as interest expense over the term of the related borrowing
agreement. Notwithstanding the above expiration dates, upon conversion of the
convertible preferred stock in connection with an IPO, the preferred stock
warrants shall automatically become exercisable.
If the total amount of equipment purchased under the lease line exceeds
$1,200,000, the leasing company has the right to purchase an additional number
shares of Series C preferred stock determined by dividing (i) 5% of the dollar
amount of equipment leased exceeding the $1,200,000 by (ii) the adjusted
exercise price per share. At June 30, 1999, borrowings under the line did not
exceed $1,200,000.
NOTE 6--COMMON STOCK:
The Company's Amended and Restated Articles of Incorporation authorize the
Company to issue 29,000,000 shares of $.001 par value common stock. At June 30,
1999, there were 8,532,959 shares of common stock issued and outstanding.
As of June 30, 1999, the Company has reserved the following number of shares
of common stock for future issuance (in thousands):
<TABLE>
<CAPTION>
June 30,
1999
--------
<S> <C>
Conversion of Series A preferred stock............................ 1,800
Conversion of Series B preferred stock and warrants............... 2,594
Conversion of Series C preferred stock and warrants............... 4,804
Conversion of Series D preferred stock............................ 4,700
Common stock warrant.............................................. 173
Options under stock option plans.................................. 5,405
------
Total........................................................... 19,476
======
</TABLE>
F-15
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
COMMON STOCK WARRANT
In connection with the loan and security agreement signed in January 1999
(see note 4), the Company issued warrants to purchase 80,000 shares of common
stock at an exercise price of $2.50 per share. The warrants will become
exercisable for up to an additional 93,000 shares of common stock for 10% of
the aggregate borrowings made by the Company in excess of $2,000,000, up to a
total of $6,000,000 in borrowings. The warrants expire in December 2005 or upon
a reorganization, reclassification, consolidation, merger or sale of the
Company, as defined. The warrants include registration rights and anti-dilution
provisions similar to those granted to holders of Series C preferred stock and
provide for exercise on a "net exercise" basis. The Company determined the
value of the warrants relating to the 80,000 immediately vested shares to be
$134,000, based on the Black-Scholes option pricing model, and this amount is
being recognized as interest expense over the term of the related borrowing
agreement. At June 30, 1999, the borrowings under the line of credit had not
exceeded $2,000,000.
NOTE 7--EMPLOYEE BENEFIT PLANS:
1992 STOCK OPTION PLAN
In September 1992, the Company adopted a stock option plan (the "1992
Plan"), which authorizes the Board of Directors to grant incentive stock
options and nonstatutory stock options to employees, directors, and consultants
for up to 4,600,000 shares of common stock.
Under the 1992 Plan, incentive stock options are granted at a price that is
not to be less than 100% of the fair market value of the common stock on the
date of grant, as determined by the Board of Directors. Nonstatutory stock
options are granted at a price that is not less than 85% of the fair market
value of the common stock on the date of grant, as determined by the Board of
Directors. Options vest at 25% on the first anniversary of the date of grant
and vest in equal monthly installments over the remaining 36 months. Options
granted to stockholders who own more than 10% of the outstanding stock of the
Company at the time of grant must be issued at prices not less than 110% of the
estimated fair value of the stock on the date of grant.
1997 STOCK OPTION PLAN
In May 1997, the Company adopted a stock option plan (the "1997 Plan"),
which authorizes the Board of Directors to grant incentive stock options and
nonstatutory stock options to employees, directors and consultants for up to
2,000,000 shares of common stock. In March 1998, September 1998 and March 1999,
the 1997 Plan was amended to increase the number of authorized shares by a
total of 2,500,000 shares of common stock.
Under the 1997 Plan, all stock options are granted at a price that is not
less than 100% of the fair market value of the stock on the date of grant, as
determined by the Board of Directors. Options vest at 25% on the first
anniversary of the date of grant and vest in equal monthly installments over
the remaining 36 months. Options are exercisable for a term of ten years after
the date of grant. No options will be granted to any individual who owns more
than 10% of total combined voting power of all classes of stock.
F-16
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option activity under the 1992, 1997,
and 1999 Plan (in thousands):
<TABLE>
<CAPTION>
Options Outstanding
------------------------
Options Weighted Average
Available Exercise Price
For Grant Shares Per Share
--------- ------ ----------------
<S> <C> <C> <C>
Balance at June 30, 1996..................... 680 2,972 $.15
Additional shares reserved................. 2,000 -- --
Granted.................................... (1,420) 1,420 .15
Canceled................................... 246 (246) .15
Exercised.................................. -- (266) .15
------ ------
Balance at June 30, 1997..................... 1,506 3,880 .15
Additional shares reserved................. 500 --
Granted.................................... (1,332) 1,332 .59
Canceled................................... 28 (28) .15
Exercised.................................. -- (1,976) .15
------ ------
Balance at June 30, 1998..................... 702 3,208 .33
Additional shares reserved................. 2,000 -- --
Granted.................................... (2,589) 2,589 2.31
Canceled................................... 92 (92) .80
Exercised.................................. -- (505) .27
------ ------
Balance at June 30, 1999..................... 205 5,200 1.32
====== ======
</TABLE>
Significant option groups outstanding at June 30, 1999, and related
weighted average exercise prices and contractual life information are as
follows (shares in thousands):
<TABLE>
<CAPTION>
Options Vested and
Options Outstanding Exercisable
-------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Contractual Price Price
Number Life Per Number Per
Range of Exercise Prices Outstanding (Years) Share Outstanding Share
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.15..................... 1,763 7.1 $ .15 914 $.15
.25--1.00............... 1,704 8.9 .85 208 .74
1.50--3.00.............. 1,510 9.7 2.75 -- --
3.50--4.75.............. 223 9.9 4.44 -- --
----- -----
5,200 1,122
===== =====
</TABLE>
DEFERRED STOCK-BASED COMPENSATION
In connection with certain employee stock option grants made since January
1998, the Company recognized deferred compensation, which is being amortized
over the vesting periods of the related options, usually four years, using an
appropriate accelerated basis. The fair value per share used to calculate
deferred compensation was derived by reference to the convertible preferred
stock values, reduced by an appropriate discount factor. Future compensation
charges are subject to reduction for any employee who terminates employment
prior to expiration of such employee's option vesting period.
F-17
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth deferred compensation and the amortization of
deferred compensation (in thousands):
<TABLE>
<CAPTION>
Year Ended
June 30,
--------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred stock-based compensation........................... $851 $773 $--
Amortization of deferred stock-based compensation........... $598 $111 $--
</TABLE>
CONSULTANT OPTIONS
During the period from October 31, 1997 through June 30, 1999, the Company
granted options to purchase 163,100 shares of common stock to consultants in
exchange for services at exercise prices ranging from $.15 to $4.75 per share.
The Company determined the value of the options granted to consultants based
on the Black-Scholes option pricing model. The fair value of options granted to
consultants was determined using the following assumptions: expected lives of
10 years, risk free interest rates ranging from 4.45% to 5.93%, dividend yield
of .0% and volatility of 60%. The following table summarizes the fair values
and the related amortization recorded (in thousands, except per option data):
<TABLE>
<CAPTION>
Year Ended
June 30,
----------------
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Weighted average fair per share value of options granted to
consultants during the period............................... $4.84 $4.39 $--
Deferred stock-based compensation............................ $ 520 $ 245 $--
Amortization of deferred stock-based compensation............ $ 179 $ 39 $--
</TABLE>
FAIR VALUE DISCLOSURES
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted under the fair
value method. The fair value for these options was estimated using the Black-
Scholes option pricing model.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option pricing models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's options have characteristics significantly different from
those of options of publicly traded companies and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of options.
The fair value of options at the date of grant was estimated on the date of
grant based on the minimum value method as prescribed by SFAS No. 123. The
following table summarizes the estimated fair value of options and assumptions
used in the SFAS No. 123 calculations:
<TABLE>
<CAPTION>
Year Ended June
30,
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Estimated fair value.................................... $3.17 $1.25 $ .15
Expected life (years)................................... 4 4 4
Risk-free interest rate................................. 5.16% 5.98% 6.66%
Dividend yield.......................................... -- -- --
Volatility.............................................. -- -- --
</TABLE>
F-18
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Had compensation cost for the Company's stock options been determined based
on the fair value of the options at the date of grant using the minimum value
method as required by SFAS No. 123, the Company's pro forma net loss would have
been as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net loss (in thousands):
As reported................................... $(11,769) $(9,883) $(1,201)
Pro forma..................................... $(12,392) $(9,916) $(1,217)
Basic and diluted net loss per share:
As reported................................... $ (1.45) $ (1.53) $ (.21)
Pro forma..................................... $ (1.53) $ (1.54) $ (.21)
</TABLE>
401(k) SAVINGS PLAN
Effective January 1, 1992, the Company adopted a salary savings plan (the
"Savings Plan") which conforms to Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code"), whereby eligible employees may contribute up
to 20% of their earnings, not to exceed amounts allowed under the Code. Under
the terms of the Savings Plan, the Company may make contributions at the
discretion of the Board of Directors. As of June 30, 1999 the Company has not
made any contributions to the Savings Plan.
NOTE 8--INCOME TAXES:
The provision for income taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
June 30,
---------------
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
CURRENT:
Federal................................................. $ -- $ -- $(503)
State................................................... -- -- (17)
---- ---- -----
-- -- (520)
---- ---- -----
DEFERRED:
Federal................................................. -- 89 580
---- ---- -----
-- 89 580
---- ---- -----
Provision for income taxes................................ $ -- $ 89 $ 60
==== ==== =====
</TABLE>
F-19
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred tax assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 6,705 $ 3,045
Research and development tax credits....................... 957 375
Nondeductible reserves..................................... 968 746
Depreciation and amortization.............................. 456 503
Contract revenue........................................... 128 283
Other...................................................... 330 106
------- -------
Gross deferred tax assets.................................. 9,544 5,058
Valuation allowance........................................ (9,544) (5,058)
------- -------
Net deferred tax assets.................................... $ -- $ --
======= =======
</TABLE>
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of losses, recent
increases in expense levels, the fact that the market in which the Company
competes is intensely competitive and characterized by rapidly changing
technology, the lack of carryback capacity to realize deferred tax assets and
the uncertainty regarding market acceptance of the Company's products. The
Company will continue to assess the realizability of the deferred tax assets
based on actual and forecasted operating results.
At June 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $18,000,000 and
$10,000,000, respectively, which expire at various dates through 2019. In
addition, the Company has research and development credit carryforwards of
approximately $1,000,000 for federal and for state purposes. These
carryforwards expire in varying amounts through 2019. Under the Tax Reform Act
of 1986, the amounts of and benefits from net operating loss and tax
carryforwards may be impaired or limited in certain circumstances. Events which
could cause limitations in the amount of net operating losses that the Company
may utilize in any one year include, but are not limited to, a cumulative
ownership change of more than 50%, as defined, over a three year period. As a
result of the IPO, such a change in ownership is expected to occur.
NOTE 9--COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and equipment under non-cancelable operating
and capital leases with various expiration dates through 2002. Rent expense for
operating leases was as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
June 30,
--------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Rent expense..................................................... $480 $173 $147
</TABLE>
F-20
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under non-cancelable operating and capital
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
YEAR ENDING JUNE 30,
2000..................................................... $ 517 $ 393
2001..................................................... 535 349
2002..................................................... -- 102
------ -----
Total minimum lease payments............................. $1,052 844
======
Less: amount representing interest....................... (76)
-----
Present value of capital lease obligations............... 768
Less: current portion.................................... (342)
-----
Capital lease obligations, non-current portion........... $ 426
=====
</TABLE>
CONTINGENCIES
From time to time, in the normal course of business, various claims are made
against the Company. In the opinion of the Company's management, there are no
pending claims, the outcome of which is expected to result in a material
adverse effect on the financial position or results of operations of the
Company.
NOTE 10--SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
On September 1, 1999, the Company's Board of Directors authorized management
of the Company to file a Registration Statement with the Securities and
Exchange Commission permitting the Company to sell its common stock to the
public.
REINCORPORATION
On December 28, 1999, the Company was reincorporated in the State of
Delaware. All share information included in these financial statements has been
adjusted to reflect this reincorporation.
EMPLOYEE BENEFIT PLANS
On September 1, 1999, the Board of Directors authorized establishment of the
1999 Equity Incentive Plan with 1,400,000 shares newly authorized, the 1999
Non-Employee Directors' Stock Option Plan with 200,000 shares newly authorized,
and the 1999 Employee Stock Purchase Plan with 300,000 shares reserved for
issuance. The 1999 Non-Employee Directors' Stock Option Plan and 1999 Employee
Stock Purchase Plan will become effective upon the closing of the IPO. Each of
the plans was approved by the stockholders in November 1999.
FACILITIES LEASE
On August 16, 1999, the Company entered into an additional five-year
facilities lease to commence on November 1, 1999. The annual lease payments
will amount to approximately $687,000.
F-21
<PAGE>
QUANTUM EFFECT DEVICES, INC.
CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 46,418 $ 1,442
Short-term investments.................................. 7,909 16,023
Restricted cash......................................... 2,000 2,000
Accounts receivable, net................................ 8,251 3,717
Inventories............................................. 9,924 2,122
Prepaid expenses and other current assets............... 2,109 768
-------- --------
Total current assets.................................. 76,611 26,072
Property and equipment, net............................... 3,486 1,807
-------- --------
Total assets.......................................... $ 80,097 $ 27,879
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings, current portion............................. $ 1,222 $ 1,140
Accounts payable........................................ 6,629 3,066
Accrued expenses and other current liabilities.......... 4,394 3,350
Capital lease obligations, current portion.............. 360 342
-------- --------
Total current liabilities............................. 12,605 7,898
Borrowings, non-current portion........................... 970 1,949
Capital lease obligations, non-current portion............ 155 426
-------- --------
Total liabilities..................................... 13,730 10,273
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock......................................... -- 14
Common stock............................................ 26 9
Additional paid-in capital.............................. 94,384 43,409
Note receivable from stockholder........................ (42) --
Deferred stock-based compensation....................... (598) (1,462)
Accumulated deficit..................................... (27,403) (24,364)
-------- --------
Total stockholders' equity............................ 66,367 17,606
-------- --------
Total liabilities and stockholders' equity............ $ 80,097 $ 27,879
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Note: The balance sheet at June 30, 1999 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
F-22
<PAGE>
QUANTUM EFFECT DEVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Three Months Ended
Ended March 31, March 31,
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Product revenue......................... $10,628 $ 2,512 $29,966 $ 5,322
Royalty revenue......................... 358 246 1,138 1,008
Royalty revenue from related parties.... 400 837 1,509 2,392
------- ------- ------- -------
Total revenue......................... 11,386 3,595 32,613 8,722
Cost of revenue:
Product revenue......................... 5,621 1,951 17,710 5,071
------- ------- ------- -------
Gross profit.......................... 5,765 1,644 14,903 3,651
------- ------- ------- -------
Operating expenses:
Research and development................ 3,929 2,917 10,490 9,254
Selling, general, and administrative.... 2,641 1,274 6,941 3,549
Stock-based compensation................ 212 238 884 518
------- ------- ------- -------
Total operating expenses.............. 6,782 4,429 18,315 13,321
------- ------- ------- -------
Loss from operations...................... (1,017) (2,785) (3,412) (9,670)
Interest income........................... 545 42 890 183
Interest expense and other................ (308) (197) (517) (317)
------- ------- ------- -------
Net loss.................................. $ (780) $(2,940) $(3,039) $(9,804)
======= ======= ======= =======
Basic and diluted net loss per
share:Diluted net income (loss) per
share.................................... $ (0.04) $ (0.36) $ (0.24) $ (1.23)
Shares used in computing basic and diluted
net loss per share....................... 20,651 8,180 12,824 7,987
</TABLE>
See accompanying notes to condensed financial statements
F-23
<PAGE>
QUANTUM EFFECT DEVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (3,039) $ (9,804)
Adjustments to reconcile net loss to net cash used in
operating activities:
Allowance for doubtful accounts......................... 158 --
Depreciation and amortization........................... 975 710
Amortization of stock-based compensation................ 884 518
Changes in operating assets and liabilities:
Accounts receivable................................... (4,692) (79)
Inventories........................................... (7,802) (607)
Prepaid expenses and other current assets............. (1,341) (295)
Accounts payable...................................... 3,563 (976)
Accrued expenses and other liabilities................ 1,044 142
-------- --------
Net cash used in operating activities..................... (10,250) (10,391)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment................... (2,655) 88
Purchases of short-term investments..................... (13,691) --
Maturities and sales of short-term investments.......... 21,805 --
-------- --------
Net cash provided by investing activities................. 5,459 88
-------- --------
Cash flows from financing activities:
Principal payments under capital leases................. (253) (216)
Proceeds from issuance of preferred stock, net of
issuance costs......................................... 19,478
Proceeds from issuance of common stock, net of issuance
costs.................................................. 50,917 549
Proceeds from borrowings................................ 2,000
Repayments of borrowings................................ (897) (402)
-------- --------
Net cash provided by financing activities................. 49,767 21,409
-------- --------
Net increase in cash and cash equivalents................. 44,976 11,106
Cash and cash equivalents at beginning of period.......... 1,442 9,756
-------- --------
Cash and cash equivalents at end of period................ $ 46,418 $ 20,862
======== ========
</TABLE>
See accompanying notes to condensed financial statements
F-24
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1--Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2000. For further information, refer to the audited consolidated financial
statements and footnotes for the fiscal year ended June 30, 1999 included in
the Company's prospectus dated January 31, 2000.
Comprehensive Income
The Company adopted statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. There were no
differences between the Company's net losses and its total comprehensive losses
for the periods presented.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires all costs related to
the development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. The Company does not expect that the
adoption of SOP 98-1 will have a material effect on its financial statements.
SOP 98-1 is effective for the Company's fiscal year ending June 30, 2000.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133 -- an amendment of FASB Statement
No. 133" ("SFAS No. 137"). SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair market value.
Changes in the fair market value of derivatives are recorded each period in
current earnings or comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction, and if so, the type of hedge
transaction. Substantially all of the Company's revenue and costs are
denominated in U.S. dollars, and to date the Company has not entered into any
material derivative contracts. The Company does not expect that the adoption of
SFAS No. 133 will have a material effect on its financial statements. The
effective date of SFAS No. 133 as amended by SFAS No. 137 will be for fiscal
years beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles (GAAP) to revenue recognition in
financial statements. We are required to adopt SAB 101 in the first quarter of
fiscal 2001 and are currently studying the impact of SAB 101 on our financial
statements. We do not believe that SAB 101 will have a material impact on our
financial statements.
F-25
<PAGE>
QUANTUM EFFECT DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 2--Inventories
Inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out basis. Appropriate consideration is given
to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value.
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
--------- --------
(In Thousands)
<S> <C> <C>
Work-in-process......................................... $8,279 $1,384
Finished goods.......................................... 1,645 738
------ ------
$9,924 $2,122
====== ======
</TABLE>
Note 3--Net Loss Per Share
Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
based on the weighted average number of common shares and dilutive potential
common shares outstanding. The calculation of diluted net loss per share
excludes potential common shares if the effect is anti-dilutive. Potential
common shares consist of incremental common shares issuable upon the exercise
of stock options, shares issuable upon conversion of preferred stock and common
shares issuable upon the exercise of common and preferred stock warrants.
Approximately 4,472,000 stock options have been excluded from the calculations
below for the three months ended March 31, 2000 and approximately 4,089,000
options have been excluded from the calculations below for the nine months
ended March 31, 2000 as their effect would have been anti-dilutive.
The following table sets forth the computation of basic and diluted net loss
per share for the periods presented:
<TABLE>
<CAPTION>
Three Months
Ended Nine Months
March 31, Ended March 31,
--------------- ----------------
2000 1999 2000 1999
------ ------- ------- -------
(In thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Numerator:
Net loss............................. $ (780) $(2,940) $(3,039) $(9,804)
Denominator:
Weighted average common shares....... 20,651 8,180 12,824 7,987
Net loss per share:
Basic and diluted.................... $(0.04) $ (0.36) $ (0.24) $ (1.23)
</TABLE>
F-26
<PAGE>
ANNEX A
EXECUTION COPY
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PMC-SIERRA, INC.,
PENN ACQUISITION CORP.
AND
QUANTUM EFFECT DEVICES, INC.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE MERGER...................................................... A-1
1.1 The Merger......................................................... A-1
1.2 Effective Time; Closing............................................ A-1
1.3 Effect of the Merger............................................... A-2
1.4 Certificate of Incorporation; Bylaws............................... A-2
1.5 Directors and Officers............................................. A-2
1.6 Effect on Capital Stock............................................ A-2
1.7 Surrender of Certificates.......................................... A-3
1.8 No Further Ownership Rights in Company Common Stock................ A-4
1.9 Lost, Stolen or Destroyed Certificates............................. A-4
1.10 Tax and Accounting Consequences.................................... A-5
1.11 Taking of Necessary Action; Further Action......................... A-5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPANY...................... A-5
2.1 Organization and Qualification; Subsidiaries....................... A-5
2.2 Certificate of Incorporation and Bylaws............................ A-5
2.3 Capitalization..................................................... A-6
2.4 Authority Relative to this Agreement............................... A-7
2.5 No Conflict; Required Filings and Consents......................... A-7
2.6 Compliance; Permits................................................ A-8
2.7 SEC Filings; Financial Statements.................................. A-8
2.8 No Undisclosed Liabilities......................................... A-9
2.9 Absence of Certain Changes or Events............................... A-9
2.10 Absence of Litigation.............................................. A-9
2.11 Employee Benefit Plans............................................. A-10
2.12 Registration Statement; Proxy Statement............................ A-12
2.13 Restrictions on Business Activities................................ A-12
2.14 Title to Property.................................................. A-12
2.15 Taxes.............................................................. A-12
2.16 Brokers............................................................ A-14
2.17 Intellectual Property.............................................. A-14
2.18 Agreements, Contracts and Commitments.............................. A-16
2.19 Opinion of Financial Advisor....................................... A-17
2.20 Board Approval..................................................... A-17
2.21 Vote Required...................................................... A-17
2.22 Pooling of Interests............................................... A-17
2.23 Customers.......................................................... A-17
2.24 Labor Matters...................................................... A-17
2.25 Environmental Matters.............................................. A-17
2.26 Insurance.......................................................... A-19
2.27 State Takeover Statutes............................................ A-19
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB....... A-19
3.1 Organization and Qualification; Subsidiaries....................... A-19
3.2 Certificate of Incorporation and Bylaws............................ A-19
3.3 Capitalization..................................................... A-20
3.4 Authority Relative to this Agreement............................... A-20
3.5 No Conflict; Required Filings and Consents......................... A-20
3.6 SEC Filings; Financial Statements.................................. A-21
</TABLE>
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<TABLE>
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<C> <S> <C>
3.7 No Undisclosed Liabilities....................................... A-21
3.8 Absence of Certain Changes or Events............................. A-21
3.9 Absence of Litigation............................................ A-22
3.10 Registration Statement; Proxy Statement.......................... A-22
3.11 Pooling of Interests............................................. A-22
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.......................... A-22
4.1 Conduct of Business by Company................................... A-22
4.2 Conduct of Business by Parent.................................... A-24
ARTICLE V ADDITIONAL AGREEMENTS......................................... A-25
Proxy Statement/Prospectus; Registration Statement; Other
5.1 Filings; Board Recommendations................................... A-25
5.2 Meeting of Company Stockholders.................................. A-26
5.3 Confidentiality; Access to Information........................... A-27
5.4 No Solicitation.................................................. A-27
5.5 Public Disclosure................................................ A-28
5.6 Commercially Reasonable Efforts; Notification.................... A-29
5.7 Third Party Consents............................................. A-29
5.8 Stock Options; ESPP; Warrants and Employee Benefits.............. A-30
5.9 Form S-8......................................................... A-31
5.10 Indemnification.................................................. A-31
5.11 Affiliate Agreement.............................................. A-32
5.12 Regulatory Filings; Reasonable Efforts........................... A-32
5.13 Noncompetition Agreements........................................ A-32
5.14 Tax Matters...................................................... A-33
5.15 Action by Board of Directors..................................... A-33
ARTICLE VI CONDITIONS TO THE MERGER..................................... A-33
6.1 Conditions to Obligations of Each Party to Effect the Merger..... A-33
6.2 Additional Conditions to Obligation of Company................... A-33
Additional Conditions to the Obligations of Parent and Merger
6.3 Sub.............................................................. A-34
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER........................... A-35
7.1 Termination...................................................... A-35
7.2 Notice of Termination; Effect of Termination..................... A-36
7.3 Fees and Expenses................................................ A-36
7.4 Amendment........................................................ A-37
7.5 Extension; Waiver................................................ A-37
ARTICLE VIII GENERAL PROVISIONS......................................... A-38
8.1 Non-Survival of Representations and Warranties................... A-38
8.2 Notices.......................................................... A-38
8.3 Interpretation................................................... A-39
8.4 Counterparts..................................................... A-39
8.5 Entire Agreement; Third Party Beneficiaries...................... A-39
8.6 Severability..................................................... A-40
8.7 Other Remedies; Specific Performance............................. A-40
8.8 Governing Law.................................................... A-40
8.9 Rules of Construction............................................ A-40
8.10 Assignment....................................................... A-40
8.11 Waiver of Jury Trial............................................. A-40
</TABLE>
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INDEX OF EXHIBITS
<TABLE>
<C> <S> <C>
Exhibit A Form of Company Voting Agreement
Exhibit B-1 Form of Company Affiliate Agreement
Exhibit B-2 Form of Parent Affiliate Agreement
Exhibit C Form of Noncompetition Agreement
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of July 11, 2000, among PMC-Sierra, Inc., a Delaware
corporation ("Parent"), Penn Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), and Quantum Effect Devices,
Inc., a Delaware corporation ("Company").
Recitals
A. Upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware General Corporation Law ("Delaware Law"), Parent,
Merger Sub and Company intend to enter into a business combination transaction.
B. The Board of Directors of Company (i) has determined that the Merger (as
defined in Section 1.1) is consistent with and in furtherance of the long-term
business strategy of Company and fair to, and in the best interests of, Company
and its stockholders, (ii) has approved this Agreement, the Merger and the
other transactions contemplated by this Agreement, and (iii) has determined to
recommend that the stockholders of Company adopt this Agreement.
C. The Boards of Directors of Parent and Merger Sub have approved this
Agreement, the Merger and the other transactions contemplated by this
Agreement.
D. Concurrently with the execution of this Agreement and as a condition and
inducement to Parent's willingness to enter into this Agreement: (1) certain
Company Affiliates (as defined in Section 5.11(a)) are entering into Voting
Agreements in substantially the form attached hereto as Exhibit A (the "Company
Voting Agreements"); (2) certain Company Affiliates are entering into Company
Affiliate Agreements in substantially the form attached hereto as Exhibit B-1
(the "Company Affiliate Agreements"); and (3) certain individuals are entering
into Noncompetition Agreements in substantially the form attached hereto as
Exhibit C (the "Noncompetition Agreements").
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code").
F. It is also intended by the parties hereto that the Merger shall qualify
for accounting treatment as a pooling of interests.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I
The Merger
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with and into
Company (the "Merger"), the separate corporate existence of Merger Sub shall
cease and Company shall continue as the surviving corporation. Company as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the "Certificate of
Merger") (the time
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of such filing (or such later time as may be agreed in writing by Company and
Parent and specified in the Certificate of Merger) being the "Effective Time")
as soon as practicable on or after the Closing Date (as herein defined). The
closing of the Merger (the "Closing") shall take place at the offices of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, at a time and date to be
specified by the parties, which shall be no later than the second business day
after the satisfaction or waiver of the conditions set forth in Article VI, or
at such other time, date and location as the parties hereto agree in writing
(the "Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of Company and Merger Sub shall vest in the Surviving Corporation,
and all debts, liabilities and duties of Company and Merger Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, subject to the provisions of Section 5.10, the
Certificate of Incorporation of Company shall be amended and restated to be the
same in substance as the Certificate of Incorporation of Merger Sub as in
effect immediately prior to the Effective Time (except that the name of Company
will remain unchanged), and said amended and restated Certificate of
Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter amended.
(b) At the Effective Time, subject to the provisions of Section 5.10, the
Bylaws of Company shall be amended and restated to be the same in substance as
the Bylaws of Merger Sub as in effect immediately prior to the Effective Time,
and such amended and restated Bylaws shall be the Bylaws of the Surviving
Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be a combination of (a) all of the directors of Merger Sub
immediately prior to the Effective Time and (b) all of the directors of Company
who are also employees of Company immediately prior to the Effective Time. The
initial officers of the Surviving Corporation shall be the officers of Merger
Sub immediately prior to the Effective Time.
1.6 Effect on Capital Stock. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any
action on the part of Parent, Merger Sub, Company or the holders of any of the
following securities, the following shall occur:
(a) Conversion of Company Common Stock. Each share of Common Stock, par
value $0.001 per share, of Company (the "Company Common Stock") issued and
outstanding immediately prior to the Effective Time, other than any share of
Company Common Stock to be canceled and extinguished pursuant to
Section 1.6(b), will be automatically converted (subject to Sections 1.6(e) and
(f)) into 0.385 (the "Exchange Ratio") of a share of Common Stock, par value
$0.001 per share, of Parent (the "Parent Common Stock"). If any shares of
Company Common Stock outstanding immediately prior to the Effective Time are
unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable restricted stock purchase agreement or other
agreement with Company, then the shares of Parent Common Stock issued upon
conversion of such shares of Company Common Stock will also be unvested and
subject to the same repurchase option, risk of forfeiture or other condition,
and the certificates representing such shares of Parent Common Stock may
accordingly be marked with appropriate legends.
(b) Cancellation of Parent-Owned Stock. Each share of Company Common Stock
held by Company or owned by Merger Sub, Parent or any direct or indirect
wholly-owned subsidiary of Company or of Parent immediately prior to the
Effective Time shall be canceled and extinguished without any conversion
thereof.
(c) Stock Options; Employee Stock Purchase Plan. At the Effective Time, all
options to purchase Company Common Stock then outstanding under Company's 1999
Equity Incentive Plan and 1999 Non-Employee Directors' Stock Option Plan
(collectively, the "Company Option Plans"), and the Company
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Option Plans themselves, shall be assumed by Parent in accordance with Section
5.8. At the Effective Time, all purchase rights then outstanding under
Company's 1999 Employee Stock Purchase Plan (the "ESPP"), and the ESPP itself,
shall be assumed by Parent in accordance with Section 5.8.
(d) Capital Stock of Merger Sub. Each share of Common Stock, $0.001 par
value per share, of Merger Sub (the "Merger Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into one
validly issued, fully paid and nonassessable share of Common Stock, $0.001 par
value per share, of the Surviving Corporation. Each certificate evidencing
ownership of shares of Merger Sub Common Stock shall evidence ownership of such
shares of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio and any other
applicable numbers or amounts shall be adjusted to reflect appropriately the
effect of any stock split, reverse stock split, stock dividend (including any
dividend or distribution of securities convertible into or exercisable or
exchangeable for Parent Common Stock or Company Common Stock), extraordinary
cash dividend, reorganization, recapitalization, reclassification, combination,
exchange of shares or other like change with respect to Parent Common Stock or
Company Common Stock occurring or having a record date on or after the date
hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of Parent Common Stock will be
issued by virtue of the Merger, but in lieu thereof each holder of shares of
Company Common Stock who would otherwise be entitled to receive a fraction of a
share of Parent Common Stock (after aggregating all fractional shares of Parent
Common Stock that otherwise would be received by such holder) shall, upon
surrender of such holder's Certificates(s) (as defined in Section 1.7(c))
receive from Parent an amount of cash (rounded to the nearest whole cent),
without interest, equal to the product of (i) such fraction, multiplied by (ii)
the average closing price of one share of Parent Common Stock for the five (5)
most recent days that Parent Common Stock has traded ending on the trading day
immediately prior to the Effective Time, as reported on the Nasdaq National
Market ("Nasdaq").
1.7 Surrender of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Parent shall select a bank
or trust company reasonably acceptable to Company to act as the exchange agent
(the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent, for exchange in accordance
with this Article I, the shares of Parent Common Stock issuable pursuant to
Section 1.6(a) in exchange for outstanding shares of Company Common Stock, and
cash in an amount sufficient for payment in lieu of fractional shares pursuant
to Section 1.6(f) and any dividends or distributions to which holders of shares
of Company Common Stock may be entitled pursuant to Section 1.7(d).
(c) Exchange Procedures. As soon as practicable after the Effective Time,
Parent shall cause the Exchange Agent to mail to each holder of record (as of
the Effective Time) of a certificate or certificates, which immediately prior
to the Effective Time represented outstanding shares of Company Common Stock
(the "Certificates") (i) a letter of transmittal in customary form (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Parent Common
Stock pursuant to Section 1.6(a), cash in lieu of any fractional shares
pursuant to Section 1.6(f) and any dividends or other distributions pursuant to
Section 1.7(d). Upon surrender of Certificates for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Parent, together
with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the holders of such Certificates
shall be entitled to receive in exchange therefor certificates representing the
number of whole shares of Parent Common Stock into which their shares of
Company Common Stock were converted pursuant to Section 1.6(a), payment in lieu
of fractional shares which such holders have the right to receive pursuant to
Section 1.6(f) and any dividends or other distributions payable
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<PAGE>
pursuant to Section 1.7(d), and the Certificates so surrendered shall forthwith
be canceled. Until so surrendered, outstanding Certificates will be deemed,
from and after the Effective Time, to evidence only the ownership of the number
of whole shares of Parent Common Stock into which such shares of Company Common
Stock shall have been so converted (including any voting, notice or other
rights associated with the ownership of such shares of Parent Common Stock
under the Certificate of Incorporation or Bylaws of Parent or under Delaware
Law) and the right to receive an amount in cash in lieu of the issuance of any
fractional shares in accordance with Section 1.6(f) and any dividends or other
distributions payable pursuant to Section 1.7(d).
(d) Distributions With Respect to Unexchanged Shares. Dividends or other
distributions declared or made after the date of this Agreement with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holders of any unsurrendered Certificates with respect to the shares of
Parent Common Stock represented thereby when the holders of record of such
Certificates surrender such Certificates.
(e) Transfers of Ownership. If certificates representing shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the
persons requesting such exchange will have (i) paid to Parent or any agent
designated by it any transfer or other taxes required by reason of the issuance
of certificates representing shares of Parent Common Stock in any name other
than that of the registered holder of the Certificates surrendered, or (ii)
established to the reasonable satisfaction of Parent or any agent designated by
it that such tax has been paid or is not payable.
(f) Required Withholding. Each of the Exchange Agent, Parent and the
Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement to
any holder or former holder of Company Common Stock such amounts as may be
required to be deducted or withheld therefrom under the Code or state, local or
foreign law. To the extent such amounts are so deducted or withheld, such
amounts shall be treated for all purposes under this Agreement as having been
paid to the person to whom such amounts would otherwise have been paid.
(g) No Liability. Notwithstanding anything to the contrary in this Section
1.7, neither the Exchange Agent, Parent, the Surviving Corporation nor any
party hereto shall be liable to a holder of shares of Parent Common Stock or
Company Common Stock for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued in exchange for shares of Company Common Stock in
accordance with the terms hereof (including any cash paid in respect thereof
pursuant to Sections 1.6(f) and 1.7(d)) shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of Company Common
Stock. There shall be no further registration of transfers on the records of
the Surviving Corporation of shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event that any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent
shall issue and pay in exchange for such lost, stolen or destroyed
Certificates, upon the making of an affidavit of that fact by the holder
thereof, certificates representing the shares of Parent Common Stock into which
the shares of Company Common Stock represented by such Certificates were
converted pursuant to Section 1.6(a), cash for fractional shares, if any, as
may be required pursuant to Section 1.6(f) and any dividends or distributions
payable pursuant to Section 1.7(d); provided, however, that the Exchange Agent,
may, in its discretion and as a condition precedent to the issuance of such
certificates representing shares of Parent Common Stock and the payment of cash
and other distributions, require the owner of such lost, stolen or destroyed
Certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Parent, the Surviving
Corporation or the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed.
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1.10 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Code. The parties
hereto adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.
(b) It is intended by the parties hereto that the Merger shall be treated as
a pooling of interests for accounting purposes.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Company and Merger Sub, the officers and directors of Parent
and the Surviving Corporation shall be fully authorized (in the name of Merger
Sub, Company, the Surviving Corporation and otherwise) to take all such
necessary action.
ARTICLE II
Representations and Warranties of Company
Company represents and warrants to Parent and Merger Sub, subject to such
exceptions as are disclosed in writing in the disclosure letter supplied by
Company to Parent dated as of the date hereof (the "Company Schedule"), which
disclosure shall provide an exception to or otherwise qualify the
representations and warranties of Company contained in the section of this
Agreement corresponding by number to such disclosure and the other
representations and warranties herein to the extent such disclosure shall
reasonably appear to be applicable to such other representations or warranties,
as follows:
2.1 Organization and Qualification; Subsidiaries.
(a) Each of Company and its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted.
(b) As of the date hereof, Company has no subsidiaries. Except as set forth
in Section 2.1 of the Company Schedule, neither Company nor any of its
subsidiaries has agreed to make nor is obligated to make nor is bound by any
written or oral agreement, contract, understanding, negotiable instrument,
commitment or undertaking of any nature, in effect as of the date hereof or as
may hereafter be in effect (a "Contract"), under which it may become obligated
to make, any future investment in or capital contribution to any other entity.
Neither Company nor any of its subsidiaries directly or indirectly owns any
equity or similar interest in or any interest convertible, exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business, association or entity other than
the entities identified in the Company SEC Reports (as defined in Section 2.7).
(c) Except as set forth in Section 2.1 of the Company Schedule, Company and
each of its subsidiaries is qualified or licensed to do business as a foreign
corporation, and is in good standing (with respect to jurisdictions which
recognize such concept), under the laws of all jurisdictions where the
character of the properties owned, leased or operated by them or the nature of
their activities requires such qualification or licensing and where the failure
to be so qualified or licensed would have a Material Adverse Effect on Company.
2.2 Certificate of Incorporation and Bylaws. Company has previously
furnished to Parent a complete and correct copy of its Certificate of
Incorporation and Bylaws as amended and in effect as of the date of this
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Agreement (together, the "Company Charter Documents"). Such Company Charter
Documents and equivalent organizational documents of each of its subsidiaries
are in full force and effect. Company is not in violation of any of the
provisions of the Company Charter Documents, and no subsidiary of Company is in
violation of its equivalent organizational documents except where the violation
of any such equivalent organizational documents of a subsidiary of Company
would not, individually or in the aggregate, have a Material Adverse Effect on
Company.
2.3 Capitalization.
(a) The authorized capital stock of Company consists of 100,000,000 shares
of Company Common Stock, $0.001 par value per share, and 10,000,000 shares of
Preferred Stock ("Company Preferred Stock"). As of June 30, 2000: (i)
26,665,217 shares of Company Common Stock were issued and outstanding, all of
which were validly issued, fully paid and nonassessable; (ii) no shares of
Company Common Stock were held by subsidiaries of Company; (iii) 300,000 shares
of Company Common Stock were available for future issuance pursuant to the
ESPP; (iv) 5,374,669 shares of Company Common Stock were reserved for future
issuance upon the exercise of outstanding options to purchase Company Common
Stock under Company's 1999 Equity Incentive Plan; (v) 1,990,364 shares of
Company Common Stock were available for future grant under Company's 1999
Equity Incentive Plan; (vi) no shares of Company Common Stock were reserved for
future issuance upon the exercise of outstanding options to purchase Company
Common Stock under Company's 1999 Non-Employee Directors' Stock Option Plan;
(vii) 356,589 shares of Company Common Stock were available for future grant
under Company's 1999 Non-Employee Directors' Stock Option Plan; and (viii)
97,750 shares of Company Common Stock were reserved for future issuance upon
exercise of outstanding warrants of Company. As of the date hereof, no shares
of Company Preferred Stock were issued or outstanding.
(b) Section 2.3(b) of the Company Schedule sets forth the following
information with respect to outstanding Company Stock Options (as defined in
Section 5.8) as of July 10, 2000: (i) the total number of shares of Company
Common Stock subject to such Company Stock Options (which number is not
exceeded by the number of shares of Company Common Stock subject to Company
Stock Options outstanding on the date of this Agreement); (ii) the average per
share exercise price of such Company Stock Options; and (iii) whether the
exercisability of any Company Stock Option will be accelerated in any way by
the transactions contemplated by this Agreement, and the extent of
acceleration.
(c) Company has made available to Parent accurate and complete copies of all
stock option plans pursuant to which Company has granted such Company Stock
Options that are outstanding as of July 10, 2000 and the form of all stock
option agreements evidencing such Company Stock Options. Section 2.3(c) of the
Company Schedule also has attached to it Company's option schedule, which
schedule sets forth, as of July 10, 2000, with respect to each Company Stock
Option, the name of the holder thereof, the number of shares subject thereto,
and the grant date, exercise price, expiration date and vesting schedule
thereof.
(d) Except as set forth in Section 2.3(d) of the Company Schedule, there are
no commitments or agreements of any character to which Company is bound
obligating Company to accelerate the vesting of any Company Stock Option as a
result of the Merger. All outstanding shares of Company Common Stock, all
outstanding Company Stock Options, and all outstanding shares of capital stock
of each subsidiary of Company have been issued and granted in compliance with
(i) all applicable securities laws and other applicable Legal Requirements (as
defined below) in effect as of the time of grant and issuance and (ii) all
requirements set forth in applicable Contracts by which Company is bound and
which were in effect as of the time of grant and issuance. "Legal Requirements"
means any federal, state, local, municipal, foreign or other law, statute,
constitution, principle of common law, resolution, ordinance, code, edict,
decree, rule, regulation, ruling or requirement issued, enacted, adopted,
promulgated, implemented or otherwise put into effect by or under the authority
of any court, administrative agency, commission, governmental or regulatory
authority, domestic or foreign (a "Governmental Entity").
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(e) There are no equity securities, partnership interests or similar
ownership interests of any class of equity security of any subsidiary of
Company, or any security exchangeable or convertible into or exercisable for
such equity securities, partnership interests or similar ownership interests,
issued, reserved for issuance or outstanding, except for securities Company
owns free and clear of all liens, pledges, hypothecations, charges, mortgages,
security interests, encumbrances, claims, options, rights of first refusal,
preemptive rights, community property interests or similar restrictions
(including any restriction on the voting of any security, any restriction on
the transfer of any security or other asset, any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset)
("Encumbrances") directly or indirectly through one or more subsidiaries.
(f) Except as set forth in Section 2.3(a) hereof and Sections 2.3(b), (c),
(f) and (s) of the Company Schedule, as of the date hereof, there are no
subscriptions, options, warrants, equity securities, partnership interests or
similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which Company or any of its
subsidiaries is a party or by which it is bound obligating Company or any of
its subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition of, any shares of capital stock, partnership
interests or similar ownership interests of Company or any of its subsidiaries
or obligating Company or any of its subsidiaries to grant, extend, accelerate
the vesting of or enter into any such subscription, option, warrant, equity
security, call, right, commitment or agreement.
(g) As of the date of this Agreement, except as contemplated by this
Agreement and as set forth in Sections 2.3(b), (c), (f) and (g) of the Company
Schedule, there are no registration rights and there is, except for the Company
Voting Agreements, no voting trust, proxy, rights plan, antitakeover plan or
other agreement currently in effect to which Company or any of its subsidiaries
is a party or by which they are bound with respect to any equity security of
any class of Company or with respect to any equity security, partnership
interest or similar ownership interest of any class of any of its subsidiaries.
Stockholders of Company will not be entitled to dissenters' rights under
applicable state law in connection with the Merger.
2.4 Authority Relative to this Agreement. Company has all necessary
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and, subject to the adoption of this
Agreement by holders of a majority of the outstanding shares of Company Common
Stock in accordance with Delaware Law and the Company Charter Documents, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Company and the consummation by Company of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of Company and no other corporate proceedings on
the part of Company are necessary to authorize this Agreement or to consummate
the transactions contemplated hereby (other than the adoption of this Agreement
by holders of a majority of the outstanding shares of Company Common Stock in
accordance with Delaware Law and the Company Charter Documents). This Agreement
has been duly and validly executed and delivered by Company and, assuming the
due authorization, execution and delivery by Parent and Merger Sub, constitutes
the legal and binding obligation of Company, enforceable against Company in
accordance with its terms, subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws of general application affecting the
enforcement of creditors' rights and the exercise by courts of equitable
powers.
2.5 No Conflict; Required Filings and Consents.
(a) Except as set forth in Section 2.5(a) of the Company Schedule, the
execution and delivery of this Agreement by Company do not, and the performance
of this Agreement by Company will not, (i) conflict with or violate the Company
Charter Documents or the equivalent organizational documents of any of
Company's subsidiaries, (ii) subject to obtaining the vote of Company's
stockholders in favor of the adoption of this Agreement and to compliance with
the requirements set forth in Section 2.5(b) below, conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to Company or
any of its subsidiaries or by which its or any of their respective properties
is bound or affected, or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or materially
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impair Company's or any of its subsidiaries' rights or alter the rights or
obligations of any third party against or to Company under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or
result in the creation of an Encumbrance on any of the properties or assets of
Company or any of its subsidiaries pursuant to, any material mortgage,
Contract, permit, franchise or other obligation to which Company or any of its
subsidiaries is a party or by which Company or any of its subsidiaries or its
or any of their respective properties are bound or affected (a "Company
Obligation"), except in the case of clause (ii) or clause (iii), to the extent
such conflict, violation, breach, default, impairment or other effect would
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on Company.
(b) Except as set forth in Section 2.5(b) of the Company Schedule, the
execution and delivery of this Agreement by Company do not, and the performance
of this Agreement by Company shall not, require Company to obtain or make, at
or prior to the Effective Time, any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Entity, except (i)
pursuant to applicable requirements, if any, of the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), state securities laws ("Blue Sky Laws"), the pre-merger
notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act") and of foreign Governmental Entities and
the rules and regulations thereunder, the rules and regulations of Nasdaq, and
the filing and recordation of the Certificate of Merger as required by Delaware
Law, and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not,
individually or in the aggregate, (A) reasonably be expected to have a Material
Adverse Effect on Company or, after the Effective Time, Parent, or (B) prevent
consummation of the Merger or otherwise prevent Company from performing its
material obligations under this Agreement.
2.6 Compliance; Permits.
(a) Neither Company nor any of its subsidiaries is in conflict with, or in
default or violation of, any Legal Requirement or Company Obligation, except
for any conflicts, defaults or violations that (individually or in the
aggregate) would not cause Company to lose any material benefit or incur any
material liability. No investigation or review by any Governmental Entity is
pending or, to the knowledge of Company, being threatened against Company or
its subsidiaries, nor, to Company's knowledge, has any Governmental Entity
indicated to Company in writing an intention to conduct the same, other than,
in each such case, those the outcome of which would not, individually or in the
aggregate, reasonably be expected to have the effect of prohibiting or
materially impairing any business practice of Company or any of its
subsidiaries or the conduct of business by Company or any of its subsidiaries.
(b) Company and its subsidiaries hold all franchises, grants,
authorizations, permits, licenses, variances, exemptions, easements, consents,
certifications, orders and approvals from Governmental Entities which are
material to the operation of the business of Company and its subsidiaries taken
as a whole (collectively, the "Company Permits"). Company and its subsidiaries
are in compliance in all material respects with the terms of the Company
Permits.
2.7 SEC Filings; Financial Statements.
(a) Company has made available to Parent (through reference to documents
filed by EDGAR or otherwise) a correct and complete copy of each report,
schedule, registration statement and definitive proxy statement filed by
Company with the Securities and Exchange Commission ("SEC") since the initial
filing date of the registration statement for Company's initial public offering
(the "Company SEC Reports"), which are all the forms, reports and documents
required to be filed by Company with the SEC since the initial filing date of
the registration statement for Company's initial public offering. The Company
SEC Reports (A) were prepared in accordance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (B) did not at the
time they were filed (or if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. Company does
not have any subsidiaries that are required to file any reports or other
documents with the SEC.
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(b) Each set of financial statements (including, in each case, any related
notes thereto) contained in the Company SEC Reports was prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
thereto and except that unaudited statements do not contain footnotes in
substance or form required by GAAP, as is permitted by Form 10-Q of the
Exchange Act) and each fairly presents in all material respects the financial
position of Company at the respective dates thereof and the results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal adjustments which
were not or are not expected to be material in amount.
(c) Company has previously furnished to Parent a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Company with the SEC pursuant to
the Securities Act or the Exchange Act.
2.8 No Undisclosed Liabilities. Except as set forth in Section 2.8 of the
Company Schedule, neither Company nor any of its subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of a nature required
to be disclosed on a balance sheet or in the related notes to the financial
statements prepared in accordance with GAAP which are, individually or in the
aggregate, material to the business, results of operations, assets or financial
condition of Company and its subsidiaries taken as a whole, except (i)
liabilities disclosed or provided for in Company's unaudited balance sheet as
of March 31, 2000 set forth in the Company SEC Reports or in the related notes,
(ii) liabilities incurred since March 31, 2000 and on or prior to the date
hereof in the ordinary course of business which have not resulted, in the
aggregate, in any material increase in the Company's liabilities from those
disclosed or provided for in Company's unaudited balance sheet as of March 31,
2000 set forth in the Company SEC Reports or in the related notes, or (iii)
liabilities incurred after the date hereof in the ordinary course of business.
2.9 Absence of Certain Changes or Events. Except as set forth in Section 2.9
of the Company Schedule, since March 31, 2000, there has not been (i) any
Material Adverse Effect on Company, (ii) any declaration, setting aside or
payment of any dividend on, or other distribution (whether in cash, stock or
property) in respect of, any of Company's or any of its subsidiaries' capital
stock, or any purchase, redemption or other acquisition by Company of any of
Company's capital stock or any other securities of Company or its subsidiaries
or any options, warrants, calls or rights to acquire any such shares or other
securities except for repurchases from employees following their termination
pursuant to the terms of their pre-existing stock option or purchase
agreements, (iii) any split, combination or reclassification of any of
Company's or any of its subsidiaries' capital stock, (iv) any granting by
Company or any of its subsidiaries of any material increase in compensation or
fringe benefits, except for normal increases of cash compensation in the
ordinary course of business consistent with past practice, or any payment by
Company or any of its subsidiaries of any bonus, except for bonuses made in the
ordinary course of business consistent with past practice, or any granting by
Company or any of its subsidiaries of any increase in severance or termination
pay or any entry by Company or any of its subsidiaries into any currently
effective employment, severance, termination or indemnification agreement or
any agreement the benefits of which would be contingent or the terms of which
would be materially altered upon the consummation of the transactions
contemplated hereby, (v) entry by Company or any of its subsidiaries into any
licensing or other agreement with regard to the acquisition or disposition of
any Intellectual Property (as defined in Section 2.17) other than licenses and
other agreements in the ordinary course of business consistent with past
practice and licenses disclosed in Section 2.17(g) of the Company Schedule,
(vi) any amendment or consent with respect to any licensing agreement filed or
required to be filed by Company with the SEC, (vii) any material change by
Company in its accounting methods, principles or practices, except as required
by concurrent changes in GAAP, or (viii) any material revaluation by Company of
any of its assets, including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable or any sale
of assets of Company other than in the ordinary course of business.
2.10 Absence of Litigation. Except as specifically disclosed in the Company
SEC Reports, as of the date hereof, there are no material claims, actions,
suits or proceedings pending or, to the knowledge of
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Company, threatened (or, to the knowledge of Company, any governmental or
regulatory investigation pending or threatened) against Company or any of its
subsidiaries or any properties or rights of Company or any of its subsidiaries,
before any Governmental Entity.
2.11 Employee Benefit Plans.
(a) All material employee compensation, incentive, fringe or benefit plans,
programs, policies, commitments or other similar arrangements (whether or not
set forth in a written document and including, without limitation, all
"employee benefit plans" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) covering any
active employee, former employee, director or consultant of Company, any
subsidiary of Company or any trade or business (whether or not incorporated)
which is a member of a controlled group or which is under common control with
Company within the meaning of Section 414 of the Code (an "ERISA Affiliate") or
(ii) with respect to which Company has material liability as of the date
hereof, and covering any active employee, former employee, director or
consultant of Company, any subsidiary of Company or any ERISA Affiliate are
listed in Section 2.11(a) of the Company Schedule (the "Plans"). Except with
respect to International Employee Plans (as defined in Section 2.11(h) below)
that provide benefits only to the extent required under applicable local laws,
Company has provided or made available to Parent: (i) correct and complete
copies of all documents embodying each Plan including (without limitation) all
amendments thereto, and all related trust documents; (ii) the three (3) most
recent annual reports (Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under ERISA or the Code in
connection with each Plan; (iii) the most recent summary plan description
together with the summary(ies) of material modifications thereto, if any,
required under ERISA with respect to each Plan; (iv) the most recent IRS
determination, opinion, notification and advisory letters; (v) all material
correspondence to or from any governmental agency relating to any Plan; (vi)
all forms of notice and election documents related to COBRA; (vii) all
discrimination tests performed with respect to each Plan for the most recent
three (3) plan years; (viii) the most recent annual actuarial valuations, if
any, prepared for each Plan; (xi) if the Plan is funded, the most recent annual
and periodic accounting of Plan assets; (x) all material administrative service
agreements, group annuity contracts, group insurance contracts and similar
written agreements and contracts relating to each Plan; (xi) all material
communications to employees or former employees relating to any amendments,
terminations, establishments, increases or decreases in benefits, acceleration
of payments or vesting schedules which would result in a material liability
under any Plan or proposed Plan; and (xii) all currently effective registration
statements, annual reports (Form 11-K and all attachments thereto) and
prospectuses prepared in connection with any Plan that includes securities
registered under the Securities Act.
(b) Each Plan has been maintained and administered in all material respects
in compliance with its terms and with the requirements prescribed by any and
all statutes, orders, rules and regulations, including but not limited to ERISA
and the Code, which are applicable to such Plan. No suit, action or other
litigation (excluding claims for benefits incurred in the ordinary course of
Plan activities) has been brought or, to the knowledge of Company, is
threatened, against or with respect to any Plan. There are no audits, inquiries
or proceedings pending or, to the knowledge of Company, threatened by the
Internal Revenue Service (the "IRS") or the Department of Labor (the "DOL")
with respect to any Plan. All contributions, reserves or premium payments
required to be made or accrued as of the date hereof to the Plans have been
timely made or accrued. Any Plan intended to be qualified under Section 401(a)
of the Code and each related trust intended to qualify under Section 501(a) of
the Code (i) has either obtained a favorable determination, notification,
advisory and/or opinion letter, as applicable, as to its qualified status from
the IRS or still has a remaining period of time under applicable Treasury
Regulations or IRS pronouncements in which to apply for such letter and to make
any amendments necessary to obtain a favorable determination, and (ii)
incorporates or has been amended to incorporate all provisions required to
comply with the Tax Reform Act of 1986 and subsequent legislation to the extent
such amendment or incorporation is required. Company does not have any plan or
commitment to establish any new Plan or to modify any Plan (except to the
extent required by law or to conform any such Plan to the requirements of any
applicable law, in each case as previously disclosed to Parent in writing, or
as
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required by this Agreement). Each Plan can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
liability to Parent, Company or any of its ERISA Affiliates except as otherwise
provided in the Plan (other than ordinary administration expenses and expenses
for benefits accrued but not yet paid).
(c) Neither Company nor any its ERISA Affiliates has at any time ever
maintained, established, sponsored, participated in, or contributed to any plan
subject to Title IV of ERISA or Section 412 of the Code, and at no time has
Company or any of its ERISA Affiliates contributed to or been requested to
contribute to any "multiemployer plan," as such term is defined in ERISA or to
any plan described in Section 413(c) of the Code. Neither Company, any of its
ERISA Affiliates, nor, to the knowledge of Company, any officer or director of
Company or any of ERISA Affiliates is subject to any liability or penalty under
Section 4975 through 4980B of the Code or Title I of ERISA. No "prohibited
transaction," within the meaning of Section 4975 of the Code or Sections 406
and 407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has
occurred with respect to any Plan which could subject Company or its
subsidiaries to material liabilities.
(d) None of the Plans promises or provides retiree medical or other retiree
welfare benefits to any person except as required by applicable law, and
neither Company nor any of its subsidiaries has represented, promised or
contracted to provide such retiree benefits to any employee, former employee,
director, consultant or other person, except (i) to the extent required by
statute or (ii) for benefits the cost of which are fully paid for by such
person.
(e) Neither Company nor any of its subsidiaries is bound by or subject to
(and none of its respective assets or properties is bound by or subject to) any
arrangement with any labor union. No employee of Company or any of its
subsidiaries is represented by any labor union or covered by any collective
bargaining agreement relating to Company or any of its subsidiaries and, to the
knowledge of Company, no campaign to establish such representation is in
progress. There is no pending or, to the knowledge of Company, threatened labor
dispute involving Company or any of its subsidiaries and any group of its
employees nor has Company or any of its subsidiaries experienced any
significant labor interruptions over the past three (3) years. Company and its
subsidiaries are in compliance in all material respects with all applicable
material foreign, federal, state and local laws, rules and regulations
respecting employment, employment practices, terms and conditions of employment
and wages and hours.
(f) Neither Company nor any of its ERISA Affiliates has, prior to the
Effective Time and in any material respect, violated any of the health
continuation requirements of COBRA, the requirements of the Family Medical
Leave Act of 1993, as amended, the requirements of the Women's Health and
Cancer Rights Act, as amended, the requirements of the Newborns' and Mothers'
Health Protection Act of 1996, as amended, the requirements of the Health
Insurance Portability and Accountability Act of 1996, as amended, or any
similar provisions of state law applicable to employees of Company.
(g) Except as disclosed in Section 2.11(g) of the Company Schedule, neither
the execution and delivery of this Agreement by Company nor the consummation by
Company of the transactions contemplated hereby will (i) result in any payment
(including severance, unemployment compensation, golden parachute, bonus or
otherwise) becoming due to any stockholder, director or employee of Company or
any of its subsidiaries under any Plan or otherwise, (ii) materially increase
any benefits otherwise payable under any Plan, or (iii) except as required by
the Code, result in the acceleration of the time of payment or vesting of any
such benefits.
(h) Each Plan that has been adopted or maintained by Company or any of its
subsidiaries, whether informally or formally, for the benefit of current or
former employees of Company or any of its subsidiaries outside the United
States ("International Employee Plan") has been established, maintained and
administered in material compliance with its terms and conditions and with the
requirements prescribed by any and all statutory or regulatory laws that are
applicable to such International Employee Plan. No International Employee Plan
has unfunded liabilities that, as of the Effective Time, will not be offset by
insurance or fully accrued. Except as required by law or the terms of any such
plan, no condition exists that would prevent Company or Parent from terminating
or amending any International Employee Plan at any time for any reason.
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2.12 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Company for inclusion in: (i) the registration
statement on Form S-4 to be filed with the SEC by Parent in connection with the
issuance of the Parent Common Stock in or as a result of the Merger (the "S-4")
will, at the time the S-4 becomes effective under the Securities Act, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading; and (ii) the proxy statement/prospectus to be filed with the SEC by
Company pursuant to Section 5.1(a) (the "Proxy Statement/Prospectus") will, at
the dates mailed to the stockholders of Company and at the time of the
stockholders' meeting of Company (the "Company Stockholders' Meeting") in
connection with the transactions contemplated hereby, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading. The Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations promulgated by the
SEC thereunder. Notwithstanding the foregoing, Company makes no representation
or warranty with respect to any information supplied by Parent or Merger Sub
which is contained in any of the foregoing documents.
2.13 Restrictions on Business Activities. There is no agreement, commitment,
judgment, injunction, order or decree binding upon Company or its subsidiaries
or to which Company or any of its subsidiaries is a party which has or would
reasonably be expected to have the effect of prohibiting or materially
impairing any current business practice of Company or any of its subsidiaries,
any acquisition of property by Company or any of its subsidiaries or the
conduct of business by Company or any of its subsidiaries as currently
conducted.
2.14 Title to Property. Neither Company nor any of its subsidiaries owns any
material real property. Except as set forth in Section 2.14 of the Company
Schedule, Company and each of its subsidiaries have good title to, or valid
leasehold interests in, all of their material properties and tangible assets,
free and clear of all Encumbrances except liens for taxes or other governmental
charges or levies not yet due and payable and such liens or other imperfections
of title, if any, that do not materially interfere with the ability of Company
to conduct its business as currently conducted. All leases pursuant to which
Company or any of its subsidiaries lease from others material real or personal
property are in full force and effect in accordance with their respective
terms, except where the failure to be in full force and effect would not
reasonably be expected to materially interfere with the ability of Company to
conduct its business as currently conducted. There is not, under any of such
leases, any existing material default or event of default of Company or any of
its subsidiaries or, to Company's knowledge, any other party, except for such
defaults or events of default that would not reasonably be expected to
materially interfere with the ability of Company to conduct its business as
currently conducted.
2.15 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or
"Taxes" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and liabilities
relating to taxes, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed
with respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts and including
any liability for Taxes of a predecessor entity.
(b) Tax Returns and Audits.
(i) Company and each of its subsidiaries have timely filed all federal,
state, local and foreign returns, estimates, forms, information statements and
reports ("Returns") relating to Taxes required to be filed by Company and each
of its subsidiaries with any Tax authority, except such Returns which are not,
individually or in the aggregate, material to Company. Company and each of its
subsidiaries have paid all Taxes shown to be due on such Returns.
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(ii) Company and each of its subsidiaries as of the Effective Time will have
withheld with respect to its employees all federal and state income Taxes,
Taxes pursuant to the Federal Insurance Contribution Act, Taxes pursuant to the
Federal Unemployment Tax Act and other Taxes required to be withheld, except
such Taxes which are not, individually or in the aggregate, material to
Company.
(iii) Neither Company nor any of its subsidiaries has been delinquent in the
payment of any material Tax. There is no material Tax deficiency outstanding,
proposed or assessed against Company or any of its subsidiaries. Neither
Company nor any of its subsidiaries has executed any unexpired waiver of any
statute of limitations on or extension of any period for the assessment or
collection of any Tax.
(iv) Except as set forth in Section 2.15(b) of the Company Schedule, no
audit or other examination of any Return of Company or any of its subsidiaries
by any Tax authority is presently in progress, nor has Company or any of its
subsidiaries been notified of any request for such an audit or other
examination.
(v) No adjustment relating to any Returns filed or required to be filed by
Company or any of its subsidiaries has been proposed in writing, formally or
informally, by any Tax authority to Company or any of its subsidiaries or any
representative thereof.
(vi) Neither Company nor any of its subsidiaries has any liability for any
material unpaid Taxes (whether or not shown to be done on any Return) which has
not been accrued for or reserved on Company's balance sheet dated March 31,
2000 in accordance with GAAP, whether asserted or unasserted, contingent or
otherwise, which is material to Company, other than any liability for unpaid
Taxes that may have accrued since April 1, 2000 in connection with the
operation of the business of Company and its subsidiaries in the ordinary
course. There are no liens with respect to Taxes on any of the assets of
Company or any of its subsidiaries, other than liens which are not individually
or in the aggregate material, or customary liens for current Taxes not yet due
and payable.
(vii) There is no contract, agreement, plan or arrangement to which Company
or any of its subsidiaries is a party as of the date of this Agreement,
including but not limited to the provisions of this Agreement, that,
individually or collectively, should give rise to the payment of any amount
that would not be deductible pursuant to Sections 280G, 404 or 162(m) of the
Code. There is no contract, agreement, plan or arrangement to which Company or
any of its subsidiaries is a party or by which it is bound to compensate any
individual for excise taxes paid pursuant to Section 4999 of the Code.
(viii) Neither Company nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by Company or any of its subsidiaries.
(ix) Except as set forth in Section 2.15(b) of the Company Schedule, neither
Company nor any of its subsidiaries is party to or has any obligation under any
tax-sharing, tax indemnity or tax allocation agreement or arrangement.
(x) None of Company's or its subsidiaries' assets are tax exempt use
property within the meaning of Section 168(h) of the Code.
(xi) Neither Company nor any of its subsidiaries has constituted either a
"distributing corporation" or a "controlled corporation" in a distribution of
stock qualifying for tax-free treatment under Section 355 of the Code (x) in
the two years prior to the date of this Agreement or (y) in a distribution
which could otherwise constitute part of a "plan" or "series of related
transactions" (within the meaning of Section 355(e) of the Code) in conjunction
with the Merger.
(xii) Company and each of its subsidiaries are in full compliance with all
terms and conditions of any Tax exemptions, Tax holiday or other Tax reduction
agreement or order of a territorial or foreign government and
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the consummation of the Merger will not have any adverse effect on the
continued validity and effectiveness of any such Tax exemptions, Tax holiday or
other Tax reduction agreement or order.
2.16 Brokers. Except for fees payable to Morgan Stanley & Co. Incorporated
pursuant to an engagement letter dated June 21, 2000, a copy of which has been
provided to Parent, Company has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders fees or agent's commissions
or any similar charges in connection with this Agreement or any transaction
contemplated hereby.
2.17 Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"Intellectual Property" shall mean any or all of the following and all
worldwide common law and statutory rights in, arising out of, or associated
therewith: (i) patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof ("Patents"); (ii) inventions (whether
patentable or not), invention disclosures, improvements, trade secrets,
proprietary information, know how, technology, technical data and customer
lists, and all documentation relating to any of the foregoing; (iii)
copyrights, copyright registrations and applications therefor, and all
other rights corresponding thereto throughout the world; (iv) domain names,
uniform resource locators ("URLs") and other names and locators associated
with the Internet ("Domain Names"); (v) industrial designs and any
registrations and applications therefor; (vi) trade names, logos, common
law trademarks and service marks, trademark and service mark registrations
and applications therefor; (vii) all databases and data collections and all
rights therein; (viii) all moral and economic rights of authors and
inventors, however denominated; and (ix) any similar or equivalent rights
to any of the foregoing (as applicable).
"Company Intellectual Property" shall mean any Intellectual Property that
is owned by, or exclusively licensed to, Company and its subsidiaries.
"Registered Intellectual Property" means all Intellectual Property that is
the subject of an application, certificate, filing, registration or other
document issued, filed with, or recorded by any private, state, government
or other legal authority and that has not been abandoned or allowed to
lapse.
"Company Registered Intellectual Property" means all of the Registered
Intellectual Property owned by, or filed in the name of, Company or any of
its subsidiaries.
(a) Section 2.17(a) of the Company Schedule is a complete and accurate list
of all Company Registered Intellectual Property which specifies the
jurisdictions in which each such item of Company Registered Intellectual
Property has been issued or registered and lists any proceedings or actions
before any court or tribunal (including the United States Patent and Trademark
Office (the "PTO") or equivalent authority anywhere in the world) related to
any of the Company Registered Intellectual Property.
(b) Except as set forth in Section 2.17(b) of the Company Schedule, no
Company Intellectual Property or product or service offering of Company or any
of its subsidiaries (a "Company Product") is subject to any proceeding or
outstanding decree, order, judgment, contract, license, agreement, or
stipulation restricting in any manner by its terms the use, transfer, or
licensing thereof by Company or any of its subsidiaries, or which materially
and adversely affects the validity or enforceability of such Company
Intellectual Property.
(c) Each material item of Company Registered Intellectual Property is, to
the knowledge of Company, valid and subsisting. All necessary registration,
maintenance and renewal fees currently due in connection with such Company
Registered Intellectual Property have been made. All necessary documents,
recordations and certificates in connection with such Company Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions,
as the case may be, for the purposes of maintaining such Company Registered
Intellectual Property.
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(d) Except as set forth in Section 2.17(d) of the Company Schedule, Company
owns and has good title to or has all necessary licenses to each material item
of Company Intellectual Property free of any Encumbrance (excluding rights of
licensors and non-exclusive licenses and related restrictions granted in the
ordinary course). In this paragraph the term "Encumbrance" excludes
infringement of Company Intellectual Property by third parties.
(e) To the extent that any Intellectual Property that has been developed or
created independently by a third party or jointly with a third party for
Company or any of its subsidiaries is used by Company or is incorporated into
any Company Products, Company has a written agreement with such third party
with respect thereto and Company thereby either (i) has obtained ownership of,
and is the exclusive owner of, or (ii) has obtained a perpetual, non-terminable
license to all such Intellectual Property.
(f) Except as set forth in Section 2.17(f) of the Company Schedule, neither
Company nor any of its subsidiaries has transferred ownership of, or granted
any exclusive license with respect to, any Intellectual Property that is
material Company Intellectual Property, to any third party, or knowingly
permitted Company's rights in such material Company Intellectual Property to
lapse or enter the public domain.
(g) Section 2.17(g) of the Company Schedule lists all material contracts,
licenses and agreements to which Company or any of its subsidiaries is a party:
(i) with respect to Company Intellectual Property licensed or transferred to
any third party (other than end-user licenses in the ordinary course); or (ii)
pursuant to which a third party has licensed or transferred any Intellectual
Property to Company or any of its subsidiaries.
(h) Except as set forth in Section 2.17(h) of the Company Schedule, all
contracts, licenses and agreements listed in Section 2.17(g) of the Company
Schedule are in full force and effect. The consummation of the transactions
contemplated by this Agreement will neither violate nor result in the breach,
modification, cancellation, termination or suspension ("Termination") of such
contracts, licenses and agreements by their terms. Each of Company and its
subsidiaries is in material compliance with any such contracts, licenses and
agreements. To the knowledge of Company, all other parties to such contracts,
licenses and agreements are in compliance with, and have not materially
breached any term of, such contracts, licenses and agreements, which breach has
not been cured. Following the Closing Date, the Surviving Corporation will be
permitted to exercise all of Company's rights under such contracts, licenses
and agreements by their terms to the same extent Company and its subsidiaries
would have been able to had the transactions contemplated by this Agreement not
occurred and without the payment of any additional amounts or consideration
other than ongoing fees, royalties or payments which Company would otherwise be
required to pay. There is no provision in any of Company's contracts or
agreements which, as a result of this Agreement and the transactions
contemplated by this Agreement, requires Parent or Merger Sub to (i) grant to
any third party any right to or with respect to any material Intellectual
Property owned by, or licensed to, either of them, (ii) be bound by, or subject
to, any non-compete or other material restriction on the operation or scope of
their respective businesses, or (iii) be obligated to pay any royalties or
other material amounts to any third party in excess of those payable by Parent
or Merger Sub, respectively, prior to the Closing.
(i) To Company's knowledge, Company's and its subsidiaries' design,
development, manufacture, distribution, reproduction, marketing or sale of the
products of Company and its subsidiaries has not infringed or misappropriated
and does not infringe or misappropriate the Intellectual Property of any third
party, and does not constitute unfair competition or trade practices under the
laws of any jurisdiction.
(j) Neither Company nor any of its subsidiaries has received written notice
from any third party that the operation of the business of Company or any of
its subsidiaries or any act, product or service of Company or any of its
subsidiaries, infringes or misappropriates the Intellectual Property of any
third party or constitutes unfair competition or trade practices under the laws
of any jurisdiction.
(k) To the knowledge of Company, no person has infringed or misappropriated
or is infringing or misappropriating any Company Intellectual Property.
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(l) Company and each of its subsidiaries has taken reasonable steps to
protect Company's and its subsidiaries' rights in Company's confidential
information and trade secrets that it wishes to protect or any trade secrets or
confidential information of third parties provided to Company or any of its
subsidiaries. Each of Company and its subsidiaries has a policy requiring each
employee and contractor to execute a proprietary information/confidentiality
agreement substantially in the form provided to Parent. All current and former
employees and contractors of Company and any of its subsidiaries have executed
such an agreement, except where the failure to do so would not be reasonably
expected to have a Material Adverse Effect on Company.
2.18 Agreements, Contracts and Commitments. As of the date of this
Agreement, except as set forth in Section 2.17(g) or Section 2.18 of the
Company Schedule, neither Company nor any of its subsidiaries is a party to or
is bound by:
(a) any written employment or consulting agreement, contract or commitment
with any officer or employee of Company currently earning an annual salary in
excess of $150,000 or member of Company's Board of Directors, other than those
that are terminable by Company or any of its subsidiaries on no more than
thirty (30) days' notice without material liability or financial obligation to
Company;
(b) any material agreement of indemnification or any guaranty other than any
agreement of indemnification entered into in connection with the sale of
products or license of technology in the ordinary course of business;
(c) any material agreement, contract or commitment containing any covenant
limiting in any material respect the right of Company or any of its
subsidiaries to engage in any line of business or to compete with any person or
granting any exclusive distribution rights;
(d) any agreement, contract or commitment relating to the disposition or
acquisition by Company or any of its subsidiaries after the date of this
Agreement of a material amount of assets not in the ordinary course of business
or pursuant to which Company or any of its subsidiaries has any material
ownership interest in any corporation, partnership, joint venture or other
business enterprise other than Company's subsidiaries;
(e) any dealer, distributor, joint marketing or development agreement under
which Company or any of its subsidiaries have continuing material obligations
to jointly market any product, technology or service and which may not be
canceled without material penalty upon notice of ninety (90) days or less, or
any material agreement pursuant to which Company or any of its subsidiaries
have continuing material obligations to jointly develop any intellectual
property that will not be owned, in whole or in part, by Company or any of its
subsidiaries and which may not be canceled without material penalty upon notice
of ninety (90) days or less;
(f) any agreement, contract or commitment to license any third party to
manufacture or reproduce any Company product, service or technology or any
agreement, contract or commitment to sell or distribute any Company products,
service or technology except agreements with distributors or sales
representatives in the normal course of business cancelable without material
penalty upon notice of ninety (90) days or less and substantially in the form
previously provided to Parent;
(g) any mortgages, indentures, guarantees, loans or credit agreements,
security agreements or other agreements or instruments relating to the
borrowing of money by Company or extension of credit (other than customer
accounts receivable owing to Company created in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms);
(h) any material settlement agreement under which Company has ongoing
obligations;
(i) any other agreement, contract or commitment that calls for the payment
or receipt by Company of $3,000,000 or more; or
(j) any other agreement, contract or commitment that is of the nature
required to be filed by Company as an exhibit to a Report on Form 10-K under
the Exchange Act.
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Neither Company nor any of its subsidiaries, nor to Company's knowledge any
other party to a Company Contract (as defined below), is in material breach,
violation or default under a Company Contract. Neither Company nor any of its
subsidiaries has received written notice within the last twelve months that it
has breached, violated or defaulted under, any of the material terms or
conditions of any of the agreements, contracts or commitments to which Company
or any of its subsidiaries is a party or by which it is bound that are required
to be disclosed in the Company Schedule pursuant to this Section 2.18 (any such
agreement, contract or commitment, a "Company Contract" in such a manner as
would permit any other party to cancel or terminate any such Company Contract,
or would permit any other party to seek material damages or other remedies (for
any or all of such breaches, violations or defaults, in the aggregate).
2.19 Opinion of Financial Advisor. Company has been advised by its financial
advisor, Morgan Stanley & Co. Incorporated, that in its opinion, as of the date
of this Agreement, the Exchange Ratio is fair to the holders of shares of
Company Common Stock from a financial point of view, and Company shall provide
to Parent a copy of the written confirmation of such opinion as soon as
available.
2.20 Board Approval. The Board of Directors of Company has, as of the date
of this Agreement, (i) approved, subject to stockholder adoption of this
Agreement, this Agreement and the Merger and other transactions contemplated
hereby, (ii) determined that the Merger is consistent with the long-term
business strategy of Company and is in the best interests of the stockholders
of Company and is on terms that are fair to such stockholders and (iii)
determined to recommend that the stockholders of Company adopt this Agreement.
2.21 Vote Required. The affirmative vote of holders of a majority of the
outstanding shares of Company Common Stock entitled to vote with respect to the
Merger is the only vote of the holders of any class or series of Company's
capital stock necessary to adopt this Agreement.
2.22 Pooling of Interests. To its knowledge, based on consultation with its
independent accountants, Company believes that neither Company nor any of its
directors, officers or affiliates has taken any action which will interfere
with Parent's ability to account for the Merger as a pooling of interests.
2.23 Customers. Section 2.23 of the Company Schedule lists the Company's ten
largest customers based on revenues during the twelve-month period ended June
30, 2000 and specifies the amounts invoiced (in the aggregate) to each such
customer in such period. As of the date hereof, Company has not received any
written communication indicating that any of such customers intends to cease
doing business with Company or materially alter the amount of business that
such customer currently conducts with Company. Company has made available to
Parent true and correct copies of any contracts Company may have with its top
ten customers.
2.24 Labor Matters. No work stoppage or labor strike against Company is
pending or, to Company's knowledge, threatened or reasonably anticipated.
Company does not know of any activities or proceedings of any labor union to
organize any employees. Except as set forth in Section 2.24 of the Company
Schedule, there are no actions, suits, claims, labor disputes or grievances
pending, or, to the knowledge of Company, threatened or reasonably anticipated
relating to any labor, safety or discrimination matters involving any Employee,
including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, would, individually
or in the aggregate, result in any material liability to Company. Neither
Company nor any of its subsidiaries has engaged in any unfair labor practices
within the meaning of the National Labor Relations Act. Except as set forth in
Section 2.24 of the Company Schedule, Company is not presently, nor has it been
in the past, a party to, or bound by, any collective bargaining agreement or
union contract with respect to Employees and no collective bargaining agreement
is being negotiated by Company.
2.25 Environmental Matters. Company: (i) has obtained all applicable
permits, licenses and other authorizations that are required under
Environmental Laws the absence of which would have a Material Adverse Effect on
Company and all such permits are valid and in full force and effect; (ii) is in
compliance in
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all material respects with all material terms and conditions of such required
permits, licenses and authorizations, and also is in compliance in all material
respects with all other material limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in such laws or contained in any regulation, code, plan, order,
decree, judgment, notice or demand letter issued, entered, promulgated or
approved thereunder; (iii) as of the date hereof, has no knowledge of and has
not received written notice of any environmental event, condition,
circumstance, activity, practice, incident, action or plan that is reasonably
likely to materially interfere with the continued conduct of Company's business
activities, or prevent continued compliance in all material respects with
Environmental Laws, or that would give rise to any material common law or
statutory liability, or otherwise form the basis of any material Environmental
Claim with respect to Company, or any person or entity whose liability for any
Environmental Claim Company has retained or assumed either contractually or by
operation of law; (iv) has not disposed of, released, discharged or emitted any
Hazardous Materials into the soil or groundwater at any properties owned or
leased at any time by Company, or at any other property, or exposed any
employee or other individual to any Hazardous Materials or condition in such a
manner as would result in any material liability or result in any material
corrective or remedial action obligation; (v) has not assumed liabilities of
any person or entity either contractually or by operation of law for any
release or discharge of any Hazardous Materials into the soil or groundwater,
or any exposure to an employee or other individual to any Hazardous Materials
which has caused or could reasonably be expected to cause an adverse health
effect to any such employee or other individual; (vi) has taken all actions
necessary under Environmental Laws to register any products or materials
required to be registered by Company (or any of its agents) thereunder; (vii)
has conducted its business in substantial compliance with all applicable
Environmental Laws; and (viii) has transferred or released Hazardous Materials
only to those Disposal Sites set forth in Section 2.25 of the Company Schedule,
and no action, proceeding, liability or claim exists or is threatened against
any Disposal Site or against Company with respect to any transfer or release of
any Hazardous Materials which could reasonably be expected to subject Company
to material liability. To Company's knowledge, no Hazardous Materials are
present in, on or under any properties owned, leased or used at any time
(including both land and improvements thereon) by Company, and no reasonable
likelihood exists that any Hazardous Materials will come to be present in, on
or under any properties owned, leased, operated, occupied or used at any time
(including both land and improvements thereon) by Company, or were present on
any other property at the time it ceased to be owned, leased, operated,
occupied, or used by Company, in each case so as to give rise to any material
liability or corrective or remedial obligation of Company under any
Environmental Laws. Company has delivered to Parent or made available for
inspection by Parent and its agents, representatives and employees all records
in Company's possession relating to compliance with Environmental Laws,
environmental audits and environmental assessments of any property owned,
leased, occupied or used by Company or any entity whose liability for any
Environmental Claim Company has retained or assumed either contractually or by
operation of law. Company has complied in all material respects with all
environmental disclosure obligations imposed by applicable law with respect to
this transaction. Section 2.25 of the Company Schedule accurately describes all
of the permits required under Environmental Laws currently held by Company.
Company has no knowledge of any circumstance that exists which could cause any
permit required under Environmental Laws to be revoked, modified or rendered
non-renewable upon payment of the permit fee. For the purposes of this Section
2.25, "Environmental Claim" means any notice, claim, act, cause of action or
investigation by any person (including any governmental agency) alleging
potential liability (including potential liability for investigatory costs,
cleanup costs, governmental response costs, natural resources damages, property
damages, personal injuries or penalties) arising out of, based on or resulting
from (i) the presence, or release into the environment, of any Hazardous
Materials or (ii) any violation, or alleged violation, of any Environmental
Laws. "Environmental Laws" means all Federal, state, local and foreign laws and
regulations relating to pollution of the environment (including ambient air,
surface water, ground water, land surface or subsurface strata) or the
protection of human health and worker safety, including, without limitation,
laws and regulations relating to emissions, discharges, releases or threatened
releases of Hazardous Materials, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials. "Hazardous Materials" means chemicals,
pollutants, contaminants, wastes, toxic substances, radioactive and biological
materials, asbestos-containing materials, hazardous substances, petroleum and
petroleum products or
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any fraction thereof, excluding, however, Hazardous Materials contained in
products typically used for office and janitorial purposes properly and safely
maintained in accordance with Environmental Laws. "Disposal Site" means a
landfill, disposal agent, waste hauler or recycler of Hazardous Materials.
2.26 Insurance. Company has provided to Parent the insurance policies and
fidelity bonds covering the assets, business, equipment, properties,
operations, employees, officers and directors of Company and its subsidiaries
(collectively, the "Insurance Policies"). There is no material claim by Company
or any of its subsidiaries pending under any of the material Insurance Policies
as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds.
2.27 State Takeover Statutes. The Board of Directors of Company has taken
all actions so that the restrictions contained in Section 203 of the Delaware
Law applicable to a "business combination" (as defined in such Section 203)
will not apply to the execution, delivery or performance of this Agreement or
to the consummation of the Merger or the other transactions contemplated by
this Agreement. To the knowledge of Company, no other state takeover statute is
applicable to the Merger or the other transactions contemplated hereby.
ARTICLE III
Representations and Warranties of Parent and Merger Sub
Parent and Merger Sub jointly and severally represent and warrant to
Company, subject to such exceptions as are disclosed in writing in the
disclosure letter supplied by Parent to Company dated as of the date hereof
(the "Parent Schedule"), which disclosure shall provide an exception to or
otherwise qualify the representations and warranties of Parent and Merger Sub
contained in the section of this Agreement corresponding by number to such
disclosure and the other representations and warranties herein to the extent
such disclosure shall reasonably appear to be applicable to such other
representations or warranties, as follows:
3.1 Organization and Qualification; Subsidiaries.
(a) Each of Parent and its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted.
(b) Parent has no material subsidiaries except for the corporations
identified in the Parent SEC Reports (as hereinafter defined). Neither Parent
nor any of its subsidiaries has agreed nor is obligated to make nor is bound by
any Contract under which it may become obligated to make, any future investment
in or capital contribution to any other entity. Neither Parent nor any of its
subsidiaries directly or indirectly owns any equity or similar interest in or
any interest convertible, exchangeable or exercisable for, any equity or
similar interest in, any corporation, partnership, joint venture or other
business, association or entity other than the entities identified in the
Parent SEC Reports and Parent's limited partnership or limited liability
company interests in venture capital funds. Neither Parent nor any of its
subsidiaries directly or indirectly owns, beneficially or of record, any shares
of Company Common Stock or other equity interest in Company other than pursuant
to this Agreement and the Company Voting Agreements.
(c) Parent and each of its subsidiaries is qualified or licensed to do
business as a foreign corporation, and is in good standing (with respect to
jurisdictions which recognize such concept), under the laws of all
jurisdictions where the character of the properties owned, leased or operated
by them or the nature of their activities requires such qualification or
licensing and where the failure to be so qualified or licensed would have a
Material Adverse Effect on Parent.
3.2 Certificate of Incorporation and Bylaws. Parent has previously furnished
to Company complete and correct copies of its Certificate of Incorporation and
Bylaws as amended and in effect as of the date of this
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Agreement (together, the "Parent Charter Documents"). Such Parent Charter
Documents and equivalent organizational documents of each of its subsidiaries
are in full force and effect. Parent is not in violation of any of the
provisions of the Parent Charter Documents, and no subsidiary of Parent is in
violation of any of its equivalent organizational documents except where the
violation of any such equivalent organizational documents of a subsidiary of
Parent would not, individually or in the aggregate, have a Material Adverse
Effect on Parent.
3.3 Capitalization. As of the date of this Agreement, the authorized capital
stock of Parent consists of (i) 900,000,000 shares of Parent Common Stock, par
value $0.001 per share, and (ii) 5,000,000 shares of Preferred Stock, par value
$0.001 per share ("Parent Preferred Stock"). At the close of business on June
26, 2000, 146,148,415 shares of Parent Common Stock were issued and
outstanding. As of the date hereof, no shares of Parent Preferred Stock were
issued or outstanding. The authorized capital stock of Merger Sub consists of
1,000 shares of common stock, $0.001 par value per share, all of which, as of
the date hereof, are issued and outstanding. All of the outstanding shares of
Parent's and Merger Sub's respective capital stock have been duly authorized
and validly issued and are fully paid and nonassessable. The shares of Parent
Common Stock to be issued pursuant to the Merger will be, duly authorized,
validly issued, fully paid and nonassessable. All of the outstanding shares of
capital stock (other than directors' qualifying shares) of each of Parent's
subsidiaries is duly authorized, validly issued, fully paid and nonassessable
and all such shares (other than directors' qualifying shares) are owned by
Parent or another subsidiary free and clear of all Encumbrances.
3.4 Authority Relative to this Agreement. Each of Parent and Merger Sub has
all necessary corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Parent and Merger Sub and the consummation by Parent and Merger Sub of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Parent and Merger Sub, and no other
corporate proceedings on the part of Parent or Merger Sub are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Parent and
Merger Sub and, assuming the due authorization, execution and delivery by
Company, constitutes the legal and binding obligation of Parent and Merger Sub,
enforceable against Parent and Merger Sub in accordance with its terms, subject
to bankruptcy, insolvency, reorganization, moratorium or other similar laws of
general application affecting the enforcement of creditors' rights and the
exercise by courts of equitable powers.
3.5 No Conflict; Required Filings and Consents.
(a) The execution, delivery and performance of this Agreement does not and
will not, (i) conflict with or violate the Parent Charter Documents or
equivalent organizational documents or any of Parent's subsidiaries, (ii)
subject to compliance with the requirements set forth in Section 3.5(b) below,
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to Parent or any of its subsidiaries or by which they or any of
their respective properties are bound or affected, or (iii) result in any
breach of or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or impair Parent's or any of its
subsidiaries' rights or alter the rights or obligations of any third party
against or to Parent under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of an
Encumbrance on any of the properties or assets of Parent or any of its
subsidiaries pursuant to, any material mortgage, Contract, permit, franchise or
other obligation to which Parent or any of its subsidiaries is a party or by
which Parent or any of its subsidiaries or its or any of their respective
properties are bound or affected, except in the case of clause (ii) or (iii),
to the extent such conflict, violation, breach, default, impairment or other
effect would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect on Parent.
(b) The execution and delivery of this Agreement by Parent and Merger Sub do
not, and the performance of this Agreement by Parent and Merger Sub shall not,
require Parent to obtain or make any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Entity except (i)
pursuant to
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applicable requirements, if any, of the Securities Act, the Exchange Act, Blue
Sky Laws, the pre-merger notification requirements of the HSR Act and of
foreign governmental entities and the rules and regulations thereunder, the
rules and regulations of Nasdaq, and the filing and recordation of the
Certificate of Merger as required by Delaware Law and (ii) where the failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not, individually or in the aggregate, (A)
prevent consummation of the Merger or otherwise prevent Parent or Merger Sub
from performing their respective material obligations under this Agreement or
(B) reasonably be expected to have a Material Adverse Effect on Parent.
3.6 SEC Filings; Financial Statements.
(a) Parent has made available to Company (through reference to documents
filed by EDGAR or otherwise) a correct and complete copy of each report,
schedule, registration statement and definitive proxy statement filed by Parent
with the SEC since December 31, 1999 (the "Parent SEC Reports"), which are all
the forms, reports and documents required to be filed by Parent with the SEC
since December 31, 1999. The Parent SEC Reports (A) were prepared in accordance
with the requirements of the Securities Act or the Exchange Act, as the case
may be, and (B) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of Parent's subsidiaries is required to file any reports
or other documents with the SEC.
(b) Each set of consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto and except that
unaudited statements do not contain footnotes in substance or form required by
GAAP, as is permitted by Form 10-Q of the Exchange Act) and each fairly
presents in all material respects the consolidated financial position of Parent
and its subsidiaries at the respective dates thereof and the consolidated
results of their operations and cash flows for the periods indicated, except
that the unaudited interim financial statements were or are subject to normal
adjustments which were not or are not expected to be material in amount.
(c) Parent has previously furnished to Company a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Parent with the SEC pursuant to
the Securities Act or the Exchange Act.
3.7 No Undisclosed Liabilities. Neither Parent nor any of its subsidiaries
has any liabilities (absolute, accrued, contingent or otherwise) of a nature
required to be disclosed on a balance sheet or in the related notes to the
consolidated financial statements prepared in accordance with GAAP which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of Parent and its subsidiaries taken as a
whole, except (i) liabilities disclosed or provided for in Parent's unaudited
balance sheet as of March 31, 2000 as set forth in the Parent SEC Reports or in
the related notes or (ii) liabilities incurred since March 31, 2000 in the
ordinary course of business.
3.8 Absence of Certain Changes or Events. Since March 31, 2000, there has
not been: (i) any Material Adverse Effect on Parent; (ii) any declaration,
setting aside or payment of any dividend on, or other distribution (whether in
cash, stock or property) in respect of, any of Parent's or any of its
subsidiaries' capital stock, or any purchase, redemption or other acquisition
by Parent of any of Parent's capital stock or any other securities of Parent or
its subsidiaries or any options, warrants, calls or rights to acquire any such
shares or other securities except for repurchases from employees following
their termination pursuant to the terms of their pre-existing stock option or
purchase agreements, (iii) any split, combination or reclassification of any of
Parent's or any of its subsidiaries' capital stock, (iv) any material change by
Parent in its accounting methods, principles or practices, except as required
by concurrent changes in GAAP, or (v) any material revaluation by Parent of
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any of its assets, including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable or any sale
of assets of the Parent other than in the ordinary course of business.
3.9 Absence of Litigation. As of the date hereof, there are no claims,
suits, actions or proceedings that have a reasonable likelihood of success on
the merits pending or, to the knowledge of Parent, threatened against, relating
to or affecting Parent or any of its subsidiaries, before any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that seek to restrain or enjoin the consummation of the
transactions contemplated by this Agreement or that could otherwise reasonably
be expected to have a Material Adverse Effect on Parent.
3.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Parent for inclusion in: (i) the S-4 will, at the
time the S-4 becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading; and (ii) the
Proxy Statement/Prospectus will, at the dates mailed to the stockholders of
Company and at the time of the Company Stockholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The S-4
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations promulgated by the SEC thereunder.
Notwithstanding the foregoing, Parent makes no representation or warranty with
respect to any information supplied by Company which is contained in any of the
foregoing documents.
3.11 Pooling of Interests. To its knowledge, based on consultation with its
independent accountants, neither Parent nor any of its directors, officers or
affiliates has taken any action which would interfere with Parent's ability to
account for the Merger as a pooling of interests.
ARTICLE IV
Conduct Prior to the Effective Time
4.1 Conduct of Business by Company. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Company and each of its
subsidiaries shall, except (i) as permitted by the terms of this Agreement or
except as provided in Section 4.1 of the Company Schedule, or (ii) to the
extent that Parent shall otherwise consent in writing (which consent, or
refusal thereof, shall not be unreasonably delayed), carry on its business in
the ordinary course in substantially the same manner as heretofore conducted
and in substantial compliance with all applicable laws and regulations, pay its
debts and taxes when due subject to good faith disputes over such debts or
taxes, pay or perform other material obligations when due subject to good faith
disputes over such obligations, and use its commercially reasonable efforts
consistent with past practices and policies to (i) preserve intact its present
business organization, (ii) keep available the services of its present officers
and employees, and (iii) preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others with which it has significant
business dealings. In addition, Company will promptly notify Parent of any
material event involving its business or operations occurring outside the
ordinary course of business.
In addition, except as permitted by the terms of this Agreement and except
as provided in Section 4.1 of the Company Schedule, without the prior written
consent of Parent (which consent, or refusal thereof, shall not be unreasonably
delayed), during the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement pursuant to its terms or
the Effective Time, Company shall not do any of the following and shall not
permit its subsidiaries to do any of the following:
(a) Except as required by law or pursuant to the terms of a Plan in effect
as of the date hereof, and except as may be requested to enable Parent to
account for the Merger as a pooling of interests, waive any stock
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repurchase rights, accelerate, amend or change the period of exercisability of
options or restricted stock, or reprice options granted under any employee,
consultant, director or other stock plans or authorize cash payments in
exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee except
pursuant to written agreements outstanding, or policies existing, on the date
hereof and as previously disclosed in writing or made available to Parent, or
adopt any new severance plan, or amend or modify or alter in any manner any
severance plan, agreement or arrangement existing on the date hereof;
(c) Other than in the ordinary course of business consistent with past
practices, transfer or license to any person or entity or otherwise extend,
amend or modify any rights to the Company Intellectual Property, or enter into
grants to transfer or license to any person future patent rights; provided that
in no event shall Company license on an exclusive basis or sell any Company
Intellectual Property (other than in connection with the abandonment of
immaterial Company Intellectual Property after at least five business days'
written notice to Parent);
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for any capital stock;
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of Company or its subsidiaries, except repurchases of
unvested shares at cost in connection with the termination of the employment
relationship with any employee pursuant to stock option or purchase agreements
in effect on the date hereof (or any such agreements entered into in the
ordinary course consistent with past practice by Company with employees hired
after the date hereof);
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber or propose
any of the foregoing with respect to any shares of capital stock or any
securities convertible into shares of capital stock, or subscriptions, rights,
warrants or options to acquire any shares of capital stock or any securities
convertible into shares of capital stock, or enter into other agreements or
commitments of any character obligating it to issue any such shares or
convertible securities, other than (x) the issuance, delivery and/or sale of
(i) shares of Company Common Stock pursuant to the exercise of stock options or
warrants outstanding as of the date of this Agreement, and (ii) shares of
Company Common Stock issuable to participants in the ESPP consistent with the
terms thereof, and (y) the granting of stock options to new employees in the
ordinary course of business in such amounts and in all other respects and
consistent with past practices and with similar vesting terms.
(g) Cause, permit or submit to a vote of Company's stockholders any
amendments to the Company Charter Documents (or similar governing instruments
of any of its subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or agree
to enter into any joint ventures or strategic partnerships;
(i) Sell, lease, license, encumber or otherwise dispose of any properties or
assets except in the ordinary course of business consistent with past practice,
except for the sale, lease, licensing, encumbering or disposition (other than
through licensing permitted by clause (c)) of property or assets which are not
material, individually or in the aggregate, to the business of Company and its
subsidiaries;
(j) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of Company,
enter into any "keep well" or other agreement to maintain any financial
statement condition or enter
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into any arrangement having the economic effect of any of the foregoing other
than in connection with the financing of working capital consistent with past
practice;
(k) Adopt or amend any Plan or any employee stock purchase or employee stock
option plan, or enter into any employment contract or collective bargaining
agreement (other than offer letters and letter agreements entered into in the
ordinary course of business consistent with past practice with employees who
are terminable "at will"), pay any special bonus or special remuneration to any
director or employee, or increase the salaries or wage rates or fringe benefits
(including rights to severance or indemnification) of its directors, officers,
employees or consultants except, in each case, as may be required by law;
(l) (i) pay, discharge, settle or satisfy any litigation (whether or not
commenced prior to the date of this Agreement) or any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge, settlement or
satisfaction, in the ordinary course of business consistent with past practice
or in accordance with their terms, of liabilities recognized or disclosed in
the most recent financial statements (or the notes thereto) of Company included
in the Company SEC Reports or incurred since the date of such financial
statements or disclosed in Section 2.8 or Section 2.9 of the Company Schedule,
or (ii) waive the benefits of, agree to modify in any manner, terminate,
release any person from or knowingly fail to enforce the confidentiality or
nondisclosure provisions of any agreement to which Company or any of its
subsidiaries is a party or of which Company or any of its subsidiaries is a
beneficiary;
(m) Except in the ordinary course of business consistent with past practice,
modify, amend or terminate any Contract disclosed in Section 2.17(g) or Section
2.18 of the Company Schedule or waive, delay the exercise of, release or assign
any material rights or claims thereunder;
(n) Except as required by GAAP, revalue any of its assets or make any change
in accounting methods, principles or practices;
(o) Incur or enter into any agreement, contract or commitment requiring
Company or any of its subsidiaries to pay in excess of $3,000,000;
(p) Engage in any action that would reasonably be expected to (i) cause the
Merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code or (ii) interfere with Parent's ability to account for the Merger as a
pooling of interests, whether or not (in each case) otherwise permitted by the
provisions of this Article IV;
(q) Make any Tax election or accounting method change (except as required by
GAAP) inconsistent with past practice that, individually or in the aggregate,
is reasonably likely to adversely affect in any material respect the Tax
liability or Tax attributes of Company or any of its subsidiaries, settle or
compromise any material Tax liability or consent to any extension or waiver of
any limitation period with respect to Taxes;
(r) Engage in any action with the intent to directly or indirectly adversely
impact any of the transactions contemplated by this Agreement other than to the
extent permitted by Section 5.4; or
(s) Agree in writing or otherwise to take any of the actions described in
Section 4.1 (a) through (r) above.
4.2 Conduct of Business by Parent. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, except as permitted by the terms
of this Agreement and except as provided in Section 4.2 of the Parent Schedule,
without the prior written consent of Company (which consent, or refusal
thereof, shall not be unreasonably delayed), Parent shall not engage in any
action that would reasonably be expected to (i) cause the Merger to fail to
qualify as a "reorganization" under Section 368(a) of the Code or (ii)
interfere with Parent's ability to account for the Merger as a pooling of
interests.
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ARTICLE V
Additional Agreements
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings; Board
Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
Company and Parent will prepare, and file with the SEC, the Proxy
Statement/Prospectus, and Parent will prepare and file with the SEC the S-4 in
which the Proxy Statement/Prospectus will be included as a prospectus. Each of
Parent and Company shall provide promptly to the other such information
concerning its business and financial statements and affairs as, in the
reasonable judgment of the providing party or its counsel, may be required or
appropriate for inclusion in the Proxy Statement/Prospectus and the S-4, or in
any amendments or supplements thereto, and cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the Proxy
Statement/Prospectus and the S-4. Each of Company and Parent will respond to
any comments of the SEC, and will use its respective commercially reasonable
efforts to have the S-4 declared effective under the Securities Act as promptly
as practicable after such filing, and Company will cause the Proxy
Statement/Prospectus to be mailed to its stockholders at the earliest
practicable time after the S-4 is declared effective by the SEC. Each of the
parties hereto shall cause the Proxy Statement/Prospectus and the S-4 to comply
as to form and substance as to such party in all material respects with the
applicable requirements of (i) the Exchange Act, (ii) the Securities Act, and
(iii) the rules and regulations of Nasdaq. As promptly as practicable after the
date of this Agreement, each of Company and Parent will prepare and file any
other filings required to be filed by it under the Exchange Act, the Securities
Act or any other Federal, foreign or Blue Sky or related laws relating to the
Merger and the transactions contemplated by this Agreement (the "Other
Filings"). Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common Stock
to be issued in the Merger will be registered or qualified under the securities
law of every jurisdiction in the United States in which any registered holder
of Company Common Stock has an address of record on the record date for
determining the stockholders entitled to notice of and to vote at the Company
Stockholders' Meeting; provided that Parent shall not be required to consent to
the service of process in any jurisdiction in which it is not so subject. Each
of Company and Parent will notify the other promptly upon the receipt of any
comments from the SEC or its staff or any other government officials of the
receipt of notice that the S-4 has become effective, of the issuance of any
stop order, of the suspension of the qualification of the Parent Common Stock
issuable in connection with the Merger for offering or sale in any
jurisdiction, or of any request by the SEC or its staff or any other government
officials for amendments or supplements to the S-4, the Proxy
Statement/Prospectus or any Other Filing or for additional information and,
except as may be prohibited by any Governmental Entity or by any Legal
Requirement, will supply the other with copies of all correspondence between
such party or any of its representatives, on the one hand, and the SEC or its
staff or any other government officials, on the other hand, with respect to the
S-4, the Proxy Statement/Prospectus, the Merger or any Other Filing. Each of
Company and Parent will cause all documents that it is responsible for filing
with the SEC or other regulatory authorities under this Section 5.1(a) to
comply in all material respects with all applicable requirements of law and the
rules and regulations promulgated thereunder. Whenever Company or Parent
becomes aware of any event which is required to be set forth in an amendment or
supplement to the Proxy Statement/Prospectus, the S-4 or any Other Filing,
Company or Parent, as the case may be, will promptly inform the other of such
event and cooperate in filing with the SEC or its staff or any other government
officials, and/or mailing to stockholders of Company, such amendment or
supplement.
(b) The Proxy Statement/Prospectus will include (i) the recommendation of
the Board of Directors of Company to Company's stockholders that they vote in
favor of adoption of this Agreement, subject to the right of the Board of
Directors of Company to withhold, withdraw, modify, change or refrain from
making its recommendation in compliance with Section 5.2(c) and (ii) the
opinion of Morgan Stanley & Co. Incorporated referred to in Section 2.19.
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5.2 Meeting of Company Stockholders.
(a) Company will take all action necessary in accordance with Delaware Law
and the Company Charter Documents to convene the Company Stockholders' Meeting
to be held as promptly as practicable after the declaration of the
effectiveness of the S-4 for the purpose of enabling Company's stockholders to
vote upon the adoption of this Agreement. Unless the Board of Directors of
Company shall have withheld, withdrawn, modified, amended, changed or refrained
from making its recommendation in favor of the adoption of this Agreement in
compliance with Section 5.2(c), Company will use its commercially reasonable
efforts to solicit from its stockholders proxies in favor of the adoption of
this Agreement and to secure the vote or consent of its stockholders required
by the rules of Nasdaq or Delaware Law. Notwithstanding anything to the
contrary contained in this Agreement, Company may adjourn or postpone the
Company Stockholders' Meeting (i) to the extent necessary to facilitate the
providing of any necessary supplement or amendment to the Proxy
Statement/Prospectus to Company's stockholders in advance of a vote on the
adoption of this Agreement, or (ii) if as of the time for which the Company
Stockholders' Meeting is originally scheduled (as set forth in the Proxy
Statement/Prospectus) there are insufficient shares of Company Common Stock
represented (either in person or by proxy) to constitute a quorum necessary to
conduct the business of the Company Stockholders' Meeting. Company shall ensure
that the Company Stockholders' Meeting is called, noticed, convened, held and
conducted, and that all proxies solicited by Company in connection with the
Company Stockholders' Meeting are solicited, in compliance with Delaware Law,
the Company Charter Documents, the rules of Nasdaq and all other applicable
legal requirements. Company's obligation to call, give notice of, convene and
hold the Company Stockholders' Meeting in accordance with this Section 5.2(a)
shall not be limited or otherwise affected by the commencement, disclosure,
announcement or submission to Company of any Acquisition Proposal or any change
in the Board of Directors' recommendation regarding the Merger or any other
determination subsequent to the date hereof by Company's Board of Directors
that it can no longer make such recommendation.
(b) Unless the Board of Directors of Company shall have withheld, withdrawn,
modified, amended, changed or refrained from making its recommendation in favor
of the adoption of this Agreement in compliance with Section 5.2(c): (i) the
Board of Directors of Company shall recommend that Company's stockholders vote
in favor of the adoption of this Agreement at the Company Stockholders'
Meeting; (ii) the Proxy Statement/Prospectus shall include a statement to the
effect that the Board of Directors of Company has recommended that Company's
stockholders vote in favor of the adoption of this Agreement at the Company
Stockholders' Meeting; and (iii) neither the Board of Directors of Company nor
any committee thereof shall withhold, withdraw, modify, amend, change or
refrain from making, or resolve to withhold, withdraw or refrain from making,
or modify, amend or change, in a manner adverse to Parent, the recommendation
of the Board of Directors of Company that Company's stockholders vote in favor
of the adoption of this Agreement.
(c) Nothing in this Agreement shall prevent the Board of Directors of
Company from withholding, withdrawing, modifying, amending, changing or
refraining from making ("Changing") its recommendation in favor of the adoption
of this Agreement if (i) neither Company nor any of its representatives shall
have violated any of the restrictions set forth in Section 5.4 prior to and in
connection with the proposed Changing of its recommendation and (ii) the Board
of Directors of Company concludes in good faith, after consultation with its
outside legal counsel, that the Changing of such recommendation is required in
order for the Board of Directors of Company to comply with its fiduciary
obligations to Company's stockholders under applicable law; provided, however,
that prior to publicly Changing such recommendation, Company shall have given
Parent at least forty-eight (48) hours written notice (or such lesser prior
notice as provided to the members of Company's Board of Directors) and the
opportunity to meet with Company and its counsel. Nothing contained in this
Section 5.2 shall limit Company's obligation to hold and convene the Company
Stockholders' Meeting (regardless of whether the recommendation of the Board of
Directors of Company shall have been withdrawn, amended or modified).
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5.3 Confidentiality; Access to Information.
(a) Confidentiality Agreement. The parties acknowledge that Company and
Parent have previously executed a Confidentiality Agreement, dated as of June
28, 2000 (the "Confidentiality Agreement"), which Confidentiality Agreement
will continue in full force and effect in accordance with its terms.
(b) Access to Information. Company will afford Parent and its accountants,
counsel and other representatives reasonable access during normal business
hours, upon reasonable notice, to the properties, books, records and personnel
of Company during the period prior to the Effective Time to obtain all
information concerning the business, including the status of product
development efforts, properties, results of operations and personnel of
Company, as Parent may reasonably request. No information or knowledge obtained
by Parent in any investigation pursuant to this Section 5.3 will affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger.
5.4 No Solicitation.
(a) From and after the date of this Agreement until the Effective Time or
termination of this Agreement pursuant to Article VII, Company and its
subsidiaries will not, nor will they authorize or permit any of their
respective officers or directors or any investment banker, attorney or other
advisor or representative retained by any of them to, nor will they authorize
any of their respective employees or affiliates to, nor will they fail to take
reasonable measures to cause their respective employees not to, directly or
indirectly (i) solicit or initiate or knowingly encourage or induce the making,
submission or announcement of any Acquisition Proposal (as defined below), (ii)
participate in any discussions or negotiations regarding, or knowingly furnish
to any person any information with respect to, or knowingly take any other
action that would reasonably be expected to lead to, any Acquisition Proposal,
(iii) approve, endorse or recommend any Acquisition Proposal without complying
with Section 5.2(c) or (iv) enter into any letter of intent or similar document
or any contract, agreement or commitment providing for any Acquisition
Transaction (as defined below); provided, however, that this Agreement shall
not prohibit Company or any of its officers, directors, affiliates, employees,
investment bankers, attorneys or other advisors or representatives from (A) at
any time prior to the adoption of this Agreement by Company's stockholders,
furnishing information regarding Company to, entering into a confidentiality
agreement with, entering into discussions or negotiations with, or entering
into a definitive acquisition agreement with any person or group in response to
a Superior Offer submitted by such person or group (and not withdrawn) if (1)
neither Company nor any representative of Company and its subsidiaries shall
have violated any of the restrictions set forth in this Section 5.4 prior to
and in connection with such Acquisition Proposal, (2) the Board of Directors of
Company concludes in good faith, after consultation with its outside legal
counsel, that such action is required in order for the Board of Directors of
Company to comply with its fiduciary obligations to Company's stockholders
under applicable law, (3) (x) at least forty-eight (48) hours prior to
furnishing any such information to, entering into a confidentiality agreement
with or entering into discussions or negotiations with, such person or group,
Company gives Parent written notice of the identity of such person or group and
of Company's intention to take such action and (y) Company receives from such
person or group an executed agreement with confidentiality provisions at least
as restrictive as the Confidentiality Agreement, and (4) contemporaneously with
furnishing any such information to such person or group, Company furnishes such
information to Parent (to the extent such information has not been previously
furnished by Company to Parent) or (B) complying with Rule 14d-9 or Rule 14e-2
promulgated under the Exchange Act or furnishing a copy or excerpts of this
Agreement (excluding, however, the Company Schedule and the Parent Schedule) to
any person. Company and its subsidiaries will immediately cease any and all
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any Acquisition Proposal. In addition to the
foregoing, Company shall (i) provide Parent with at least twenty-four (24)
hours prior notice (or such lesser prior notice as provided to the members of
Company's Board of Directors) of any meeting of Company's Board of Directors at
which Company's Board of Directors is reasonably expected to consider a
Superior Offer and (ii) provide Parent with at least two (2) business days
prior written notice (or such lesser prior notice as provided to the members of
Company's Board of Directors)
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of a meeting of Company's Board of Directors at which Company's Board of
Directors is reasonably expected to recommend a Superior Offer to its
stockholders and together with such notice a copy of any definitive
documentation relating to such Superior Offer.
"Superior Offer" shall mean any bona fide written Acquisition Proposal not
received in violation of Section 5.4 for at least a majority of the outstanding
shares of Company Common Stock on terms that the Board of Directors of Company
determines in its good faith judgment, after consultation with a financial
advisor of nationally recognized reputation and taking into account all the
known terms and conditions of the Acquisition Proposal, are more favorable to
Company's stockholders than the terms of the Merger; provided, however, that
any such Acquisition Proposal shall not be deemed to be a "Superior Offer" if
any financing required to consummate the transaction contemplated by such
Acquisition Proposal is not committed and is not likely in the judgment of
Company's Board of Directors to be obtained by the entity making such
Acquisition Proposal on a timely basis. The parties agree that an Acquisition
Proposal shall not be precluded from being deemed a "Superior Offer" solely as
a result of such Acquisition Proposal being conditioned upon the completion of
due diligence. For purposes of this Agreement, "Acquisition Proposal" shall
mean any offer or proposal (other than an offer or proposal by Parent or any of
its affiliates) contemplating any Acquisition Transaction. For purposes of this
Agreement, "Acquisition Transaction" shall mean any transaction or series of
related transactions other than the transactions contemplated by this Agreement
that constitutes: (A) an acquisition or purchase from Company by any person or
"group" (as defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of more than a 15% interest in the total outstanding
voting securities of Company or any tender offer or exchange offer that if
consummated would result in any person or "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder)
beneficially owning 15% or more of the total outstanding voting securities of
Company or any merger, consolidation, business combination or similar
transaction involving Company pursuant to which the stockholders of Company
immediately preceding such transaction hold, directly or indirectly, less than
85% of the equity interests in the surviving or resulting entity of such
transaction or in any parent entity immediately following such transaction; (B)
a sale, lease (other than in the ordinary course of business), exchange,
transfer, license (other than in the ordinary course of business), acquisition
or disposition of more than 25% of the assets of Company; or (C) a liquidation
or dissolution of Company having similar effect to the foregoing.
(b) In addition to the obligations of Company set forth in paragraph (a) of
this Section 5.4, Company shall notify Parent orally and in writing of (i) (A)
any request received by Company for information which Company reasonably
believes would lead to an Acquisition Proposal, (B) any Acquisition Proposal,
or (C) any inquiry received by Company with respect to, or which Company
reasonably believes would lead to, any Acquisition Proposal, (ii) the material
terms and conditions of such request, Acquisition Proposal or inquiry, and
(iii) the identity of the person or group making any such request, Acquisition
Proposal or inquiry, such written and oral notice to be provided as promptly as
practicable, and in any event within one (1) business day after any of
Company's officers, directors, investment bankers, attorneys or other advisors
or representatives become aware of the receipt by Company of any request,
proposal or inquiry described in clause (i). Company will take reasonable
measures to cause its employees to notify its officers when any such employee
becomes aware of the receipt by Company of any request, proposal or inquiry
described in clause (i). Company will keep Parent informed in all material
respects of the status and details (including material amendments or proposed
amendments) of any such request, Acquisition Proposal or inquiry.
5.5 Public Disclosure. Parent and Company will consult with each other, and
to the extent practicable, agree, before issuing any press release or otherwise
making any public statement with respect to the Merger, this Agreement or an
Acquisition Proposal and will not issue any such press release or make any such
public statement prior to such consultation, except as may be required by law
or any listing agreement with a national securities exchange or Nasdaq, in
which case reasonable efforts to consult with the other party will be made
prior to such release or public statement; provided, however, that no such
consultation or agreement shall be required if, prior to the date of such
release or public statement, Company shall have withheld, withdrawn, modified,
amended, changed or refrained from making its recommendation in favor of the
adoption of this
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Agreement in compliance with Section 5.2. The parties have agreed to the text
of the joint press release announcing the signing of this Agreement.
5.6 Commercially Reasonable Efforts; Notification.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use all commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including using commercially reasonable efforts
to accomplish the following: (i) causing the conditions precedent set forth in
Article VI to be satisfied; (ii) obtaining all necessary actions or nonactions,
waivers, consents, approvals, orders and authorizations from Governmental
Entities; (iii) making all necessary registrations, declarations and filings
(including registrations, declarations and filings with Governmental Entities,
if any); (iv) avoiding any suit, claim, action, investigation or proceeding by
any Governmental Entity challenging the Merger or any other transaction
contemplated by this Agreement; (v) obtaining all consents, approvals or
waivers from third parties required as a result of the transactions
contemplated in this Agreement; (vi) defending any suits, claims, actions,
investigations or proceedings, whether judicial or administrative, challenging
this Agreement or the consummation of the transactions contemplated hereby,
including seeking to have any stay or temporary restraining order entered by
any court or other Governmental Entity vacated or reversed; and (vii) executing
or delivering any additional instruments reasonably necessary to consummate the
transactions contemplated by, and to fully carry out the purposes of, this
Agreement. In connection with and without limiting the foregoing, subject to
the other terms and conditions hereof, Company and its Board of Directors
shall, if any state takeover statute or similar statute or regulation is or
becomes applicable to the Merger, this Agreement or any of the transactions
contemplated by this Agreement, use commercially reasonable efforts and take
all commercially reasonable acts to ensure that the Merger and the other
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger, this Agreement
and the transactions contemplated hereby. Notwithstanding anything herein to
the contrary, nothing in this Agreement shall be deemed to require Parent or
Company or any subsidiary or affiliate thereof to agree to any divestiture by
itself or any of its affiliates of shares of capital stock or of any business,
assets or property, or the imposition of any material limitation on the ability
of any of them to conduct their business or to own or exercise control of such
assets, properties and stock.
(b) Company shall give prompt notice to Parent upon becoming aware that any
representation or warranty made by it contained in this Agreement has become
untrue or inaccurate, or of any failure of Company to comply with or satisfy in
any material respect any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement, in each case, where the conditions set
forth in Section 6.3(a) or Section 6.3(b) would not be satisfied as a result
thereof; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
(c) Parent shall give prompt notice to Company upon becoming aware that any
representation or warranty made by it or Merger Sub contained in this Agreement
has become untrue or inaccurate, or of any failure of Parent or Merger Sub to
comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement, in each
case, where the conditions set forth in Section 6.2(a) or Section 6.2(b) would
not be satisfied as a result thereof; provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
5.7 Third Party Consents. As soon as practicable following the date hereof,
Parent and Company will each use its commercially reasonable efforts to obtain
any consents, waivers and approvals under any of its or its subsidiaries'
respective agreements, contracts, licenses or leases required to be obtained in
connection with the consummation of the transactions contemplated hereby.
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5.8 Stock Options; ESPP; Warrants and Employee Benefits.
(a) Stock Options. At the Effective Time, each outstanding option to
purchase shares of Company Common Stock (each, a "Company Stock Option") under
the Company Option Plans, whether or not vested, shall be assumed by Parent.
Each Company Stock Option so assumed by Parent under this Agreement will
continue to have, and be subject to, the same terms and conditions of such
Company Stock Options immediately prior to the Effective Time (including,
without limitation, any repurchase rights or vesting provisions and provisions
regarding the acceleration of vesting on certain transactions, other than the
transactions contemplated by this Agreement), except that (i) each Company
Stock Option will be exercisable (or will become exercisable in accordance with
its terms) for that number of whole shares of Parent Common Stock equal to the
product of the number of shares of Company Common Stock that were issuable upon
exercise of such Company Stock Option immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounded down to the nearest whole number of
shares of Parent Common Stock and (ii) the per share exercise price for the
shares of Parent Common Stock issuable upon exercise of such assumed Company
Stock Option will be equal to the quotient determined by dividing the exercise
price per share of Company Common Stock at which such Company Stock Option was
exercisable immediately prior to the Effective Time by the Exchange Ratio,
rounded up to the nearest whole cent. Parent shall comply with the terms of all
such Company Stock Options and use its best efforts to ensure, to the extent
required by and subject to the provisions of, the Company Option Plans, and to
the extent permitted under the Code, that any Company Stock Options that
qualified for tax treatment as incentive stock options under Section 422 of the
Code prior to the Effective Time continue to so qualify after the Effective
Time. Parent shall take all corporate actions necessary to reserve for issuance
a sufficient number of shares of Parent Common Stock for delivery upon exercise
of assumed Company Stock Options on the terms set forth in this Section 5.8(a).
(b) ESPP. At the Effective Time, Parent shall assume the ESPP, and all
outstanding rights to purchase shares of Company Common Stock under the ESPP
("Purchase Rights") shall be converted (in accordance with the Exchange Ratio)
into rights to purchase shares of Parent Common Stock (with the number of
shares rounded down to the nearest whole share and the purchase price as of the
offering date for each offering period in effect as of the Effective Time
rounded up to the nearest whole cent). All such converted Purchase Rights shall
be assumed by Parent, and each offering period in effect under the ESPP
immediately prior to the Effective Time shall be continued in accordance with
the terms of the ESPP until the end of such offering period. The ESPP shall
terminate with the exercise of the last assumed Purchase Right, and no
additional Purchase Rights shall be granted under the ESPP following the
Effective Time, provided that references to Company in the ESPP and related
documents shall mean Parent (except that the purchase price as of the offering
date for a relevant period shall be determined with respect to the fair market
value of Company Common Stock on such date, as adjusted hereby). Parent shall
take all corporate action necessary to reserve for issuance a sufficient number
of shares of Parent Common Stock for issuance upon exercise of Purchase Rights
under the ESPP assumed in accordance with this Section 5.8(b). Parent agrees
that, from and after the Effective Time, Company's employees may participate in
the employee stock purchase plan sponsored by Parent (the "Parent ESPP"),
subject to the terms and conditions of the Parent ESPP, and that service with
Company shall be treated as service with Parent for determining eligibility of
Company's employees under the Parent ESPP.
(c) Warrants. At the Effective Time, each outstanding warrant to purchase
shares of Company Common Stock (each, a "Company Warrant") shall be assumed by
Parent. Each Company Warrant so assumed by Parent under this Agreement will
continue to have, and be subject to, the same terms and conditions of such
Company Warrant immediately prior to the Effective Time, except that (i) each
Company Warrant will be exercisable (or will become exercisable in accordance
with its terms) for that number of whole shares of Parent Common Stock equal to
the product of the number of shares of Company Common Stock that were issuable
upon exercise of such Company Warrant immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounded down to the nearest whole number of
shares of Parent Common Stock and (ii) the per share exercise price for the
shares of Parent Common Stock issuable upon exercise of such assumed Company
Warrant will be equal to the quotient determined by dividing the exercise price
per share of Company Common
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Stock at which such Company Warrant was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
Parent shall comply with the terms of all such Company Warrants. Parent shall
take all corporate actions necessary to reserve for issuance a sufficient
number of shares of Parent Common Stock for delivery upon exercise of assumed
Company Warrants on the terms set forth in this Section 5.8(c).
(d) 401(k). Company shall terminate, effective as of the day immediately
preceding the Effective Time, any and all 401(k) plans sponsored or maintained
by Company unless Parent provides written notice to Company prior to the
Effective Time that any such 401(k) plan shall not be terminated. Parent shall
receive from Company evidence that Company's plan(s) and / or program(s) have
been terminated pursuant to resolutions of Company's Board of Directors (the
form and substance of such resolutions shall be subject to review and
reasonable approval of Parent), effective as of the day immediately preceding
the Effective Time. Company employees shall be eligible to participate in a
401(k) plan sponsored by Parent no later than the first day of the next
commencing month immediately after the Effective Time.
(e) Benefits; Prior Service. From and after the Effective Time, Company
employees shall be provided with employee benefits that are the same as those
provided to employees of Parent who are similarly situated, including as to
their location of employment. Parent shall cause employees of Company and its
subsidiaries to be credited with service with Company and each of its
subsidiaries for purposes of eligibility and vesting under each employee
benefit plan maintained by Parent or its subsidiaries after the Effective Time
to the extent of their service with Company; provided, however, that such
service shall not be recognized to the extent that such recognition would
result in duplication of benefits.
5.9 Form S-8. Parent agrees to file a registration statement on Form S-8 for
the shares of Parent Common Stock issuable with respect to assumed Company
Stock Options as soon as is reasonably practicable and in any event within ten
(10) business days after the Effective Time.
5.10 Indemnification.
(a) From and after the Effective Time, Parent will cause the Surviving
Corporation to fulfill and honor in all respects the obligations of Company (or
any predecessor corporation) pursuant to (i) each indemnification agreement
currently in effect between Company and each person who is or was a director or
officer of Company (or any predecessor corporation) prior to the Effective Time
(the "Indemnified Parties") and (ii) any indemnification provision under the
Company Charter Documents as in effect on the date hereof. The Certificate of
Incorporation and Bylaws of the Surviving Corporation will contain provisions
with respect to exculpation and indemnification that are at least as favorable
to the Indemnified Parties as those contained in the Company Charter Documents
as in effect on the date hereof, which provisions will not be amended, repealed
or otherwise modified for a period of six (6) years from the Effective Time in
any manner that would adversely affect the rights thereunder of any Indemnified
Party or of individuals who, immediately prior to the Effective Time, were
employees or agents of Company, unless such modification is required by law.
(b) For a period of six (6) years after the Effective Time, Parent will
cause the Surviving Corporation to maintain in effect, to the extent available,
directors' and officers' liability insurance covering those persons who are
currently covered by Company's directors' and officers' liability insurance
policy on terms equivalent in all material respects to those applicable to the
current directors and officers of Company; provided, however, that in no event
will Parent or the Surviving Corporation be required to expend an annual
premium for such coverage in excess of 150% of the amount of the last annual
premium paid by the Company prior to the date of this Agreement for such
coverage and provided, further, that if the annual premium payable for such
insurance coverage exceeds such amount, Parent shall be obligated to obtain a
policy with the greatest coverage available for an annual premium not exceeding
such amount.
(c) In the event Company or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or
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entity of such consolidation or merger or (ii) transfers a material amount of
its properties and assets to any person in a single transaction or a series of
transactions, then, and in each such case, Parent will either guarantee or
otherwise remain liable for the indemnification obligations referred to in this
Section 5.10 or will make or cause to be made proper provision so that the
successors and assigns of Company or the Surviving Corporation, as the case may
be, assume the indemnification obligations described herein for the benefit of
the Indemnified Parties.
(d) The provisions of this Section 5.10 are (i) intended to be for the
benefit of, and will be enforceable by, each of the Indemnified Parties and
(ii) in addition to, and not in substitution for, any other rights to
indemnification or contribution that any such Indemnified Party may have by
contract or otherwise.
5.11 Affiliate Agreement.
(a) Set forth in Section 5.11 of the Company Schedule is a list of those
persons who may be deemed to be, in Company's reasonable judgment, affiliates
of Company within the meaning of Rule 145 promulgated under the Securities Act
or Opinion 16 of the Accounting Principles Board and applicable SEC rules and
regulations (each, a "Company Affiliate"). Company will provide Parent with
such information and documents as Parent reasonably requests for purposes of
reviewing such list. Company will use its commercially reasonable efforts to
deliver or cause to be delivered to Parent, on or as promptly as practicable
following the date hereof, from each Company Affiliate that has not delivered a
Company Affiliate Agreement on or prior to the date hereof, an executed Company
Affiliate Agreement. Each Company Affiliate Agreement will be in full force and
effect as of the Effective Time. Parent will be entitled to place appropriate
legends on the certificates evidencing any Parent Common Stock to be received
by a Company Affiliate pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for the Parent
Common Stock, consistent with the terms of the Company Affiliate Agreement
entered into by such Company Affiliate.
(b) Set forth in Section 5.11 of the Parent Schedule is a list of those
persons who may be deemed to be, in Parent's reasonable judgment, affiliates of
Parent within the meaning of Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations (each, a "Parent Affiliate"). Parent will
provide Company with such information and documents as Company reasonably
requests for purposes of reviewing such list. Parent will use its commercially
reasonable efforts to obtain and provide a copy to Company, on or as promptly
as practicable following the date hereof, from each Parent Affiliate, an
executed Parent Affiliate Agreement in substantially the form attached hereto
as Exhibit B-2 (the "Parent Affiliate Agreements"). Each Parent Affiliate
Agreement will be in full force and effect as of the Effective Time.
5.12 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, Company and Parent each shall file with the United States Federal
Trade Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification or
control laws and regulations of any other applicable jurisdiction, as agreed to
by the parties. Company and Parent each shall promptly (a) supply the other
with any information which may be required in order to effectuate such filings
and (b) supply any additional information which reasonably may be required by
the FTC, the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate; provided,
however, that Parent shall not be required to agree to any divestiture by
Parent or Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or of Company, its affiliates, or the imposition of
any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and stock.
5.13 Noncompetition Agreements. Each of Thomas Riordan and Raymond Kunita
shall have entered into Noncompetition Agreements and each such agreement shall
be in full force and effect at the Effective Time.
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5.14 Tax Matters. Prior to the filing of the S-4, Company, Parent and Merger
Sub shall execute and deliver to Cooley Godward LLP and to Wilson Sonsini
Goodrich & Rosati, Professional Corporation, tax representation letters in
customary form. To the extent requested by Cooley Godward LLP or Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Parent, Merger Sub and Company
shall each confirm to Cooley Godward LLP and to Wilson Sonsini Goodrich &
Rosati, Professional Corporation, the accuracy and completeness as of the
Effective Time of the foregoing tax representation letters. Parent and Company
shall use reasonable efforts prior to and after the Effective Time to cause the
Merger to qualify as a reorganization under Section 368(a) of the Code.
Following delivery of the foregoing tax representation letters, each of Company
and Parent shall use its reasonable efforts to cause Cooley Godward LLP and
Wilson Sonsini Goodrich & Rosati, Professional Corporation, respectively, to
deliver to it a tax opinion satisfying the requirements of Item 601 of
Regulation S-K promulgated under the Securities Act. In rendering such opinions
and the opinions referred to in Section 6.2(c), each of such counsel shall be
entitled to rely on the foregoing tax representation letters.
5.15 Action by Board of Directors. Prior to the Effective Time, the Board of
Directors of Parent, or an appropriate committee of non-employee directors
thereof, shall adopt a resolution consistent with the interpretative guidance
of the SEC so that (i) the assumption of Company Stock Options by Company
Insiders (as defined below) pursuant to this Agreement, and (ii) the receipt by
Company Insiders of Parent Common Stock in exchange for Company Common Stock
pursuant to the Merger, shall in each case be an exempt transaction for
purposes of Section 16 of the Exchange Act by any officer or director of
Company who may become a covered person of Parent for purposes of Section 16 of
the Exchange Act (a "Company Insider").
ARTICLE VI
Conditions to the Merger
6.1 Conditions to Obligation of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions, any of which may be waived if waived in writing by both
Parent and Company:
(a) Company Stockholder Approval. This Agreement shall have been adopted by
the requisite vote under applicable law by the stockholders of Company.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the S-4 effective. No stop order suspending the effectiveness of the
S-4 or any part thereof shall have been issued and then be in effect and no
proceeding for that purpose, and no similar proceeding in respect of the Proxy
Statement/Prospectus, shall have been initiated or threatened in writing by the
SEC and shall not have been withdrawn.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods, if any, under the HSR Act relating to the transactions contemplated
hereby will have expired or terminated early and all material foreign antitrust
approvals required to be obtained prior to the Merger in connection with the
transactions contemplated hereby shall have been obtained.
6.2 Additional Conditions to Obligation of Company. The obligation of
Company to effect the Merger shall be subject to the satisfaction at or prior
to the Closing Date of each of the following conditions, any of which may be
waived, in writing, exclusively by Company:
(a) Representations and Warranties. Each representation and warranty of
Parent and Merger Sub contained in this Agreement (i) shall have been accurate
in all respects as of the date of this Agreement and (ii) shall be accurate in
all respects on and as of the Closing Date with the same force and effect as if
made on
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the Closing Date except, with respect to clauses (i) and (ii), (A) in each
case, or in the aggregate, as does not constitute a Material Adverse Effect on
Parent determined as of the Closing Date, (B) for inaccuracies arising from
changes or actions contemplated by this Agreement and (C) for those
representations and warranties which address matters only as of a particular
date (which representations shall have been accurate (subject to the
qualification as set forth in the preceding clause (A)) as of such particular
date) (it being understood that, for purposes of determining the accuracy of
such representations and warranties, (i) all "Material Adverse Effect"
qualifications and other qualifications based on the word "material" contained
in such representations and warranties shall be disregarded and (ii) any update
of or modification to the Parent Schedule made or purported to have been made
after the date of this Agreement shall be disregarded). Company shall have
received a certificate with respect to the foregoing signed on behalf of Parent
by an authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have performed or
complied with, in all material respects, all agreements and covenants required
by this Agreement to be performed or complied with by them on or prior to the
Closing Date, and Company shall have received a certificate to such effect
signed on behalf of Parent by an authorized officer of Parent.
(c) Tax Opinions. Each of Company and Parent shall have received a written
opinion from its respective tax counsel, in form and substance reasonably
satisfactory to Company or Parent, as the case may be, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code and such opinion shall not have been withdrawn; provided, however,
that if tax counsel to Company (Cooley Godward LLP) does not render such
opinion or renders but withdraws such opinion, this condition shall nonetheless
be deemed to be satisfied if counsel to Parent (Wilson Sonsini Goodrich &
Rosati, Professional Corporation) renders, and does not withdraw, such opinion
to Company.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to effect the Merger shall be subject to
the satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. Each representation and warranty of
Company contained in this Agreement (i) shall have been accurate in all
respects as of the date of this Agreement and (ii) shall be accurate in all
respects on and as of the Closing Date with the same force and effect as if
made on and as of the Closing Date except, with respect to clauses (i) and
(ii), (A) in each case, or in the aggregate, as does not constitute a Material
Adverse Effect on Company determined as of the Closing Date; provided, however,
such Material Adverse Effect qualifier shall be inapplicable with respect to
representations and warranties contained in Sections 2.4, 2.19, 2.20, 2.21,
2.27 and 2.28 (which representations shall have been accurate in all material
respects as of the date of this Agreement and shall be accurate in all material
respects as of the Closing Date), (B) for inaccuracies arising from changes or
actions contemplated by this Agreement and (C) for those representations and
warranties which address matters only as of a particular date (which
representations shall have been accurate (subject to the qualification as set
forth in the preceding clause (A)) as of such particular date) (it being
understood that, for purposes of determining the accuracy of such
representations and warranties, (i) all "Material Adverse Effect"
qualifications and other qualifications based on the word "material" contained
in such representations and warranties shall be disregarded and (ii) any update
of or modification to the Company Schedule made or purported to have been made
after the date of this Agreement shall be disregarded). Parent shall have
received a certificate with respect to the foregoing signed on behalf of
Company by an authorized officer of Company.
(b) Agreements and Covenants. Company shall have performed or complied with,
in all material respects, all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing
Date, and Parent shall have received a certificate to such effect signed on
behalf of Company by an authorized officer of Company.
(c) Affiliate Agreements. Each of the Company Affiliates shall have entered
into the Company Affiliate Agreement and each of such agreements will be in
full force and effect as of the Effective Time.
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(d) Opinion of Accountants. Parent shall have received (i) from
PricewaterhouseCoopers LLP, independent auditors for Company, a copy of a
letter addressed to Company dated as of the Closing Date in substance
reasonably satisfactory to Parent (which may contain customary qualifications
and assumptions) to the effect that PricewaterhouseCoopers LLP concurs with
Company management's conclusion that no conditions exist related to Company
that would preclude Company from being a party to a business combination for
which the "pooling-of-interest" method of accounting is used and (ii) from
Deloitte & Touche LLP, independent accountants for Parent, a copy of a letter
addressed to Parent dated as of the Closing Date in substance reasonably
satisfactory to Parent (which may contain customary qualifications and
assumptions) to the effect that Deloitte & Touche LLP concurs with Parent
management's conclusion that the Merger can properly be accounted for as a
"pooling-of-interests."
ARTICLE VII
Termination, Amndment and Waiver
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approval of the
stockholders of Company:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent and Company;
(b) by either Company or Parent if the Merger shall not have been
consummated by February 15, 2001 (such date, or such other date that may be
agreed by mutual written consent, being the "Outside Date") for any reason;
provided, however, that the right to terminate this Agreement under this
Section 7.1(b) shall not be available to any party whose action or failure to
act has been a principal cause of or resulted in the failure of the Merger to
occur on or before such date if such action or failure to act constitutes a
breach of this Agreement;
(c) by either Company or Parent if a Governmental Entity shall have issued
an order, decree or ruling or taken any other action, in any case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree, ruling or other action shall have become final and
nonappealable;
(d) by either Company or Parent if (1) the Company Stockholders' Meeting
(including any adjournments thereof) shall have been held and completed and the
stockholders of Company shall have taken a final vote on a proposal to adopt
this Agreement, and (2) the required approval of the stockholders of Company
contemplated by this Agreement shall not have been obtained; provided, however,
that the right to terminate this Agreement under this Section 7.1(d) shall not
be available to Company or Parent where the failure to obtain Company
stockholder approval shall have been caused by the action or failure to act of
Company or Parent, respectively, and such action or failure to act constitutes
a breach by Company or Parent, respectively, of this Agreement;
(e) by Company, upon a breach of any covenant or agreement on the part of
Parent set forth in this Agreement, or if any representation or warranty of
Parent shall have been inaccurate when made or shall have become inaccurate, in
either case such that the conditions set forth in Section 6.2(a) or Section
6.2(b) would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become inaccurate, provided, that if
such inaccuracy in Parent's representations and warranties or breach by Parent
is curable by Parent, then this Agreement shall not terminate pursuant to this
Section 7.1(e) with respect to a particular breach or inaccuracy until the
earlier of (i) the expiration of a thirty (30) day period commencing upon
delivery of written notice from Company to Parent of such breach or inaccuracy
and (ii) Parent ceasing to exercise commercially reasonable efforts to cure
such breach (it being understood that Company may not terminate this Agreement
pursuant to this Section 7.1(e) if it shall have materially breached this
Agreement or if such breach by Parent or inaccuracy in Parent's representations
and warranties is cured prior to such termination becoming effective pursuant
hereto);
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(f) by Parent, upon a breach of any covenant or agreement on the part of
Company set forth in this Agreement, or if any representation or warranty of
Company shall have been inaccurate when made or shall have become inaccurate,
in either case such that the conditions set forth in Section 6.3(a) or Section
6.3(b) would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become inaccurate, provided, that if
such inaccuracy in Company's representations and warranties or breach by
Company is curable, then this Agreement shall not terminate pursuant to this
Section 7.1(f) with respect to a particular breach or inaccuracy until the
earlier of (i) the expiration of a thirty (30) day period commencing upon
delivery of written notice from Parent to Company of such breach or inaccuracy
and (ii) Company ceasing to exercise commercially reasonable efforts to cure
such breach (it being understood that Parent may not terminate this Agreement
pursuant to this Section 7.1(f) if it shall have materially breached this
Agreement or if such breach by Company or inaccuracy in Company's
representations and warranties is cured prior to such termination becoming
effective pursuant hereto);
(g) by Parent if a Triggering Event (as defined below) shall have occurred.
For the purposes of this Agreement, a "Triggering Event" shall be deemed to
have occurred if: (i) the Board of Directors of Company or any committee
thereof shall for any reason have withheld, withdrawn or refrained from making
or shall have modified, amended or changed in a manner adverse to Parent its
recommendation in favor of the adoption of this Agreement; (ii) Company shall
have failed to include in the Proxy Statement/Prospectus the recommendation of
the Board of Directors of Company in favor of the adoption of this Agreement;
(iii) the Board of Directors of Company fails to reaffirm its recommendation in
favor of the adoption of this Agreement within ten (10) business days after
Parent requests in writing that such recommendation be reaffirmed at any time
following the public announcement and during the pendency of an Acquisition
Proposal; (iv) the Board of Directors of Company or any committee thereof shall
have approved or recommended any Acquisition Proposal; (v) Company shall have
entered into any letter of intent or similar document or any agreement,
contract or commitment accepting any Acquisition Proposal; (vi) Company shall
have breached any of the provisions of Section 5.4 of this Agreement in any
material respect or (vii) a tender or exchange offer relating to not less than
15% of the then outstanding shares of capital stock of Company shall have been
commenced by a person unaffiliated with Parent and Company shall not have sent
to its securityholders pursuant to Rule 14e-2 promulgated under the Securities
Act, within ten (10) business days after such tender or exchange offer is first
published sent or given, a statement disclosing that Company recommends
rejection of such tender or exchange offer.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 will be effective immediately upon the delivery of
written notice thereof by the terminating party to the other parties hereto
(or, in the case of termination pursuant to Section 7.1(f) or Section 7.1(g),
on the date specified therein). In the event of the termination of this
Agreement as provided in Section 7.1, this Agreement shall be of no further
force or effect, except (i) as set forth in this Section 7.2, Section 7.3 and
Article 8 (General Provisions), each of which shall survive the termination of
this Agreement, and (ii) nothing herein shall relieve any party from liability
for any intentional or willful breach of this Agreement. No termination of this
Agreement shall affect the obligations of the parties contained in the
Confidentiality Agreement, all of which obligations shall survive termination
of this Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such fees and expenses whether or
not the Merger is consummated; provided, however, that Parent and Company shall
share equally all fees and expenses, other than attorneys' and accountants fees
and expenses, incurred in connection with the printing and filing (with the
SEC) of the Proxy Statement/Prospectus (including any preliminary materials
related thereto) and the S-4 (including financial statements and exhibits) and
any amendments or supplements thereto and any fees required to be paid under
the HSR Act.
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(b) Company Payments.
(i) Company shall pay to Parent in immediately available funds, within one
(1) business day after demand by Parent, an amount equal to $65,000,000 (the
"Termination Fee") if this Agreement is terminated by Parent pursuant to
Section 7.1(g); provided, however, that in the event this Agreement is
terminated by Parent pursuant to 7.1(g) as a result of a "Triggering Event"
specified in clause (vi) of the definition thereof, then the Termination Fee
shall not be payable if Parent shall have terminated this Agreement more than
ten (10) business days after the Company shall have notified Parent of the
breach of Section 5.4 hereof to which such Triggering Event relates.
(ii) If (A) this Agreement is terminated by Parent or Company, as
applicable, pursuant to Section 7.1(d), (B) prior to such termination a third
party shall have publicly announced an Acquisition Proposal, (C) such
Acquisition Proposal shall not have been unconditionally and publicly withdrawn
prior to the date that is five (5) business days prior to such termination, and
(D) within nine (9) months following the termination of this Agreement a
Company Acquisition (as defined below) is consummated or Company enters into a
definitive agreement or binding letter of intent providing for a Company
Acquisition (which is subsequently consummated), then Company shall pay Parent
in immediately available funds at or prior to the consummation of such Company
Acquisition an amount equal to the Termination Fee.
(iii) Company acknowledges that the agreements contained in this Section
7.3(b) are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, Parent would not enter into this Agreement;
accordingly, if Company fails to pay in a timely manner the amounts due
pursuant to this Section 7.3(b) and, in order to obtain such payment, Parent
makes a claim that results in a final judgment against Company no longer
subject to appeal for the amounts set forth in this Section 7.3(b), Company
shall pay to Parent its reasonable costs and expenses (including reasonable
attorneys' fees and expenses) in connection with such suit, together with
interest on the amounts set forth in this Section 7.3(b) at the prime rate of
Bank of America N.T. & S.A. in effect on the date such payment was required to
be made. Payment of the fees described in this Section 7.3(b) shall not be in
lieu of damages incurred in the event of willful breach of this Agreement. For
the purposes of this Agreement, "Company Acquisition" shall mean any of the
following transactions (other than the transactions contemplated by this
Agreement): (i) a merger, consolidation, business combination, recapitalization
or similar transaction involving Company pursuant to which the stockholders of
Company immediately preceding such transaction do not hold (directly or
indirectly) at least 60% of the aggregate equity interests in the surviving or
resulting entity of such transaction or a parent entity following such
transaction, (ii) a sale or other disposition by Company of assets representing
in excess of 60% of the aggregate fair market value of Company's business
immediately prior to such sale or (iii) the acquisition by any person or group
(including by way of a tender offer or an exchange offer or issuance by
Company), directly or indirectly, of beneficial ownership or a right to acquire
beneficial ownership of shares representing in excess of 60% of the voting
power of the then outstanding shares of capital stock of Company.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of Parent and Company.
7.5 Extension; Waiver. At any time prior to the Effective Time, any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party. Delay in exercising any right under
this Agreement shall not constitute a waiver of such right.
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ARTICLE VIII
General Provisions
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of Company, Parent and Merger Sub contained in this Agreement or in
any certificate or instrument delivered pursuant to Article VI shall terminate
at the Effective Time, and only the covenants that by their terms survive the
Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given on the day of delivery if delivered
personally or sent via telecopy (receipt confirmed) or on the second business
day after being sent if delivered by commercial delivery service, to the
parties at the following addresses or telecopy numbers (or at such other
address or telecopy numbers for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
PMC-Sierra, Inc.
900 East Hamilton Avenue
Suite 250
Campbell, CA 95008
Attention: President
Telecopy No.: (408) 369-1176
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Neil J. Wolff, Esq.
Telecopy No.:(650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
One Market
Spear Tower, Suite 3300
San Francisco, California 94105
Attention: Steve L. Camahort, Esq.
Michael S. Dorf, Esq.
Telecopy No.:(415) 947-2099
(b) if to Company, to:
Quantum Effect Devices, Inc.
3255-3 Scott Boulevard
Suite 200
Santa Clara, CA 95054
Attention: President
Telecopy No.: (408) 565-0335
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with a copy to:
Cooley Godward LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: David Lipkin, Esq.
Matt Sonsini, Esq.
Telecopy No.: (650) 849-7400
8.3 Interpretation.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. When a
reference is made in this Agreement to a Section, such reference shall be to a
Section of this Agreement. Unless otherwise indicated the words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. When
reference is made herein to "the business of" an entity, such reference shall
be deemed to include the business of all direct and indirect subsidiaries of
such entity. Reference to the subsidiaries of an entity shall be deemed to
include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "person" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization, entity or
Governmental Entity.
(c) For purposes of this Agreement, the term "Material Adverse Effect" when
used in connection with an entity means any change, event, violation,
inaccuracy, circumstance or effect, individually or when aggregated with other
changes, events, violations, inaccuracies, circumstances or effects, that is or
would reasonably be expected to be materially adverse to the business,
capitalization, financial condition or results of operations of such entity and
its subsidiaries taken as a whole; provided, however that none of the following
shall be deemed either alone or in combination to constitute, and none of the
following shall be taken into account in determining whether there has been or
will be, a Material Adverse Effect on an entity: (i) any change, event,
violation, inaccuracy, circumstance or effect attributable or relating to in
significant part (A) conditions affecting the U.S. economy as a whole or any
foreign economy in any location where such entity has material operations or
sales or affecting the semiconductor industry generally or (B) the announcement
or pendency of the Merger (including cancellations of or delays in customer
orders, reductions in sales, disruptions in supplier, distributor, partner or
similar relationships or litigation relating to the Merger, in each case that
are attributable or relate in significant part to the announcement or pendency
of the Merger); (ii) any change in the market price or trading volume of such
entity's stock; or (iii) any failure by such entity to meet internal
projections or forecasts or published revenue or earnings predictions.
(d) For purposes of this Agreement, an "agreement," "arrangement,"
"contract," "commitment" or "plan" shall mean a legally binding, written
agreement, arrangement, contract, commitment or plan, as the case may be.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company
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Schedule and the Parent Schedule (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, it being understood, however, that the
Confidentiality Agreement shall continue in full force and effect until the
Closing and shall survive any termination of this Agreement; and (b) except
with respect to the Indemnified Parties under Section 5.10, are not intended to
confer upon any other person any rights or remedies hereunder.
8.6 Severability. In the event that any provision of this Agreement, or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity. In any action at law or suit in equity to enforce this Agreement or the
rights of any of the parties hereunder, the prevailing party in such action or
suit shall be entitled to receive a reasonable sum for its attorneys' fees and
all other reasonable costs and expenses incurred in such action or suit.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 Waiver of Jury Trial. EACH OF PARENT, COMPANY AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, COMPANY OR MERGER SUB IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
PMC-Sierra, Inc.
By: _________________________________
Name: _______________________________
Title: ______________________________
Penn Acquisition Corp.
By: _________________________________
Name: _______________________________
Title: ______________________________
Quantum Effect Devices, Inc.
By: _________________________________
Name: _______________________________
Title: ______________________________
**** REORGANIZATION AGREEMENT ****
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ANNEX B
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is made and entered into as of July
11, 2000, among PMC-SIERRA, INC., a Delaware corporation ("Parent"), and the
undersigned stockholder (the "Stockholder") of QUANTUM EFFECT DEVICES, INC., a
Delaware corporation (the "Company").
RECITALS
A. The Company, Merger Sub (as defined below) and Parent have entered into
an Agreement and Plan of Reorganization of even date herewith (the
"Reorganization Agreement"), which provides for the merger (the "Merger") of
Penn Acquisition Corp., a wholly-owned subsidiary of Parent ("Merger Sub"),
with and into the Company. Pursuant to the Merger, all outstanding capital
stock of the Company shall be converted into common stock of Parent, as set
forth in the Reorganization Agreement;
B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such
number of shares of the outstanding capital stock of the Company and shares
subject to outstanding options and warrants as is indicated on the signature
page of this Agreement; and
C. In consideration of the execution of the Reorganization Agreement by
Parent, Stockholder (in his or her capacity as such) agrees to vote the Shares
(as defined below) and other such shares of capital stock of the Company over
which Stockholder has voting power so as to facilitate consummation of the
Merger.
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
1. Certain Definitions. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Reorganization Agreement. For purposes of this
Agreement:
(a) "Expiration Date" shall mean the earlier to occur of (i) such date and
time as the Reorganization Agreement shall have been terminated pursuant to
Article VII thereof, or (ii) such date and time as the Merger shall become
effective in accordance with the terms and provisions of the Reorganization
Agreement.
(b) "Person" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(c) "Shares" shall mean: (i) all securities of the Company (including all
shares of Company Common Stock and all options, warrants and other rights to
acquire shares of Company Common Stock) owned by Stockholder as of the date of
this Agreement; and (ii) all additional securities of the Company (including
all additional shares of Company Common Stock and all additional options,
warrants and other rights to acquire shares of Company Common Stock) of which
Stockholder acquires ownership during the period from the date of this
Agreement through the Expiration Date.
(d) Transfer. A Person shall be deemed to have effected a "Transfer" of a
security if such person directly or indirectly: (i) sells, pledges, encumbers,
grants an option with respect to, transfers or disposes of such security or any
interest in such security; or (ii) enters into an agreement or commitment
providing for the sale of, pledge of, encumbrance of, grant of an option with
respect to, transfer of or disposition of such security or any interest
therein.
2. Transfer of Shares.
(a) Transferee of Shares to be Bound by this Agreement. Stockholder agrees
that, during the period from the date of this Agreement through the Expiration
Date, Stockholder shall not cause or permit any Transfer of
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<PAGE>
any of the Shares to be effected unless such Transfer is in accordance with any
affiliate agreement between Stockholder and Parent contemplated by the
Reorganization Agreement and each Person to which any of such Shares, or any
interest in any of such Shares, is or may be transferred shall have: (a)
executed a counterpart of this Agreement and a proxy in the form attached
hereto as Exhibit A (with such modifications as Parent may reasonably request);
and (b) agreed in writing to hold such Shares (or interest in such Shares)
subject to all of the terms and provisions of this Agreement.
(b) Transfer of Voting Rights. Stockholder agrees that, during the period
from the date of this Agreement through the Expiration Date, Stockholder shall
not deposit (or permit the deposit of) any Shares in a voting trust or grant
any proxy or enter into any voting agreement or similar agreement in
contravention of the obligations of Stockholder under this Agreement with
respect to any of the Shares.
3. Agreement to Vote Shares. At every meeting of the stockholders of the
Company called, and at every adjournment thereof, and on every action or
approval by written consent of the stockholders of the Company, Stockholder (in
his or her capacity as such) shall cause the Shares to be voted in favor of
adoption of the Reorganization Agreement. Notwithstanding any provision of this
Agreement to the contrary, nothing in this Agreement shall limit or restrict
Stockholder from acting in Stockholder's capacity as a director or officer of
Company (it being understood that this Agreement shall apply to Stockholder
solely in Stockholder's capacity as a stockholder of Company) or voting in
Stockholder's sole discretion on any matter other than those matters referred
to in the preceding sentence.
4. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to Parent a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable to the fullest extent
permissible by law, with respect to the Shares.
5. Representations and Warranties of the Stockholder. Stockholder (i) is the
beneficial owner of the shares of Company Common Stock of the Company and the
options and warrants to purchase shares of Common Stock of the Company
indicated on the signature page of this Agreement, which are free and clear of
any liens, adverse claims, charges or other encumbrances (except as such
encumbrances arising under securities laws); (ii) does not beneficially own any
securities of the Company other than the shares of Company Common Stock of the
Company and options and warrants to purchase shares of Common Stock of the
Company indicated on the signature page of this Agreement; and (iii) has full
power and authority to make, enter into and carry out the terms of this
Agreement and the Proxy.
6. Additional Documents. Stockholder (in his or her capacity as such) and
Parent hereby covenant and agree to execute and deliver any additional
documents necessary or desirable, in the reasonable opinion of Parent, to carry
out the intent of this Agreement.
7. Legending of Shares. If so requested by Parent, Stockholder agrees that
the Shares shall bear a legend stating that they are subject to this Agreement
and to an irrevocable proxy.
8. Termination. This Agreement shall terminate and shall have no further
force or effect as of the Expiration Date.
9. Miscellaneous.
(a) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
(b) Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but, except as otherwise
specifically provided herein, neither this Agreement nor any of the rights,
interests or
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<PAGE>
obligations of the parties hereto may be assigned by either of the parties
without prior written consent of the other.
(c) Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
(d) Specific Performance; Injunctive Relief. The parties hereto acknowledge
that Parent shall be irreparably harmed and that there shall be no adequate
remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation, Parent
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Parent at law
or in equity.
(e) Notices. All notices and other communications pursuant to this Agreement
shall be in writing and deemed to be sufficient if contained in a written
instrument and shall be deemed given if delivered personally, telecopied, sent
by nationally-recognized overnight courier or mailed by registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following address (or at such other address for a party as shall be specified
by like notice):
If to Parent:
PMC-Sierra, Inc.
900 East Hamilton Avenue
Suite 250
Campbell, CA 95008
Attention: President
Telecopy No.: (408) 369-1176
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Neil J. Wolff, Esq.
Telecopy No.: (650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
Spear Street Tower
One Market
San Francisco, California 94105
Attention: Steve L. Camahort, Esq.
Michael S. Dorf, Esq.
Telecopy No.: (415) 947-2099
If to Stockholder:
To the address for notice set forth on the signature page hereof.
(f) Governing Law. This Agreement shall be governed by the laws of the State
of Delaware, without reference to rules of conflicts of law.
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(g) Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
(h) Effect of Headings. The section headings are for convenience only and
shall not affect the construction or interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
(j) No Obligation to Exercise Options. Notwithstanding any provision of this
Agreement to the contrary, nothing in this Agreement shall obligate Stockholder
to exercise any option, warrant or other right to acquire shares of Company
Common Stock.
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IRREVOCABLE PROXY
The undersigned stockholder (the "Stockholder") of Quantum Effect Devices,
Inc., a Delaware corporation (the "Company"), hereby irrevocably (to the
fullest extent permitted by law) appoints the directors on the Board of
Directors of PMC-Sierra, Inc., a Delaware corporation ("Parent"), and each of
them, as the sole and exclusive attorneys and proxies of the undersigned, with
full power of substitution and resubstitution, to vote and exercise all voting
and related rights (to the full extent that the undersigned is entitled to do
so) with respect to all of the shares of capital stock of the Company that now
are or hereafter may be beneficially owned by the undersigned, and any and all
other shares or securities of the Company issued or issuable in respect thereof
on or after the date hereof (collectively, the "Shares") in accordance with the
terms of this Proxy until the Expiration Date (as defined below). Upon the
undersigned's execution of this Proxy, any and all prior proxies given by the
undersigned with respect to any Shares are hereby revoked and the undersigned
agrees not to grant any subsequent proxies with respect to the Shares until
after the Expiration Date.
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Voting
Agreement of even date herewith by and among Parent and the undersigned
stockholder (the "Voting Agreement"), and is granted in consideration of Parent
entering into that certain Agreement and Plan of Reorganization of even date
herewith (the "Reorganization Agreement"), among Parent, Penn Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger
Sub"), and the Company. The Reorganization Agreement provides for the merger of
Merger Sub with and into the Company in accordance with its terms (the
"Merger"). As used herein, the term "Expiration Date" shall mean the earlier to
occur of (i) such date and time as the Reorganization Agreement shall have been
validly terminated pursuant to Article VII thereof or (ii) such date and time
as the Merger shall become effective in accordance with the terms and
provisions of the Reorganization Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting, consent and similar rights of the
undersigned with respect to the Shares (including, without limitation, the
power to execute and deliver written consents) at every annual, special or
adjourned meeting of stockholders of the Company and in every written consent
in lieu of such meeting in favor of adoption of the Reorganization Agreement.
The attorneys and proxies named above may not exercise this Proxy on any
other matter. The undersigned stockholder may vote the Shares on all other
matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This Proxy is irrevocable (to the fullest extent permitted by law). This
Proxy shall terminate, and be of no further force and effect, automatically
upon the Expiration Date.
Dated: July 11, 2000
_____________________________________
Signature of Stockholder
_____________________________________
Print Name of Stockholder
[Signature Page to Irrevocable Proxy]
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ANNEX C
July 11, 2000
Board of Directors
Quantum Effect Devices, Inc.
2500-5 Augustine Drive, Suite 200
Santa Clara, CA 95054
Members of the Board:
We understand that Quantum Effect Devices, Inc.("QED" or the "Company"),
PMC-Sierra, Inc. ("PMC-Sierra") and Penn Acquisition Corp., a wholly-owned
subsidiary of PMC-Sierra ("Merger Sub"), propose to enter into an Agreement and
Plan of Reorganization, substantially in the form of the draft dated July 11,
2000 (the "Merger Agreement") which provides, among other things, for the
merger (the "Merger") of Merger Sub with and into QED. Pursuant to the Merger,
QED will become a wholly-owned subsidiary of PMC-Sierra and each outstanding
share of common stock, par value $0.001 per share (the "QED Common Stock") of
QED, other than shares held by QED or owned by Merger Sub, PMC-Sierra or any
subsidiary of QED or PMC-Sierra, will be converted into the right to receive
0.385 shares (the "Exchange Ratio") of common stock, par value $0.001 per share
(the "PMC-Sierra Common Stock") of PMC-Sierra, subject to adjustments in
certain circumstances. The terms and conditions of the Merger are more fully
set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to the holders of
shares of QED Common Stock.
For the purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of QED;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning QED prepared by the management of QED;
(iii) reviewed certain financial projections prepared by the managements of
QED and PMC-Sierra;
(iv) reviewed certain publicly available financial projections from equity
research analysts reports of QED;
(v) discussed the past and current operations and financial condition and
the prospects of QED, including a review of publicly available
projections from equity research analyst estimates and information
relating to certain strategic, financial and operational benefits
anticipated from the Merger, with senior executives of QED;
(vi) reviewed certain publicly available financial statements and other
information of PMC-Sierra;
(vii) reviewed certain internal financial statements and other financial
and operating data concerning PMC-Sierra prepared by the management
of PMC-Sierra;
(viii) reviewed the pro forma impact of the Merger on certain financial
ratios of PMC-Sierra;
(ix) reviewed certain publicly available financial projections from equity
research analyst reports of PMC-Sierra;
(x) discussed the past and current operations and financial condition and
the prospects of PMC-sierra, including a review of publicly available
projections from equity research analyst estimates and information
relating to certain strategic, financial operational benefits
anticipated from the Merger, with senior executives of PMC-Sierra;
(xi) reviewed the reported prices, trading activity and market liquidity
for the QED Common Stock and PMC-Sierra Common Stock;
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(xii) compared the financial performance of QED and PMC-Sierra and the
prices and trading activity of the QED Common Stock and PMC-Sierra
Common Stock with that of certain other publicly-traded Companies
comparable to QED and PMC-Sierra, respectively, and their securities;
(xiii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(xiv) participated in the discussions and negotiations among
representatives of QED and PMC-Sierra and their financial and legal
advisors;
(xv) discussed the current and expected competitive environment in QED's
available markets;
(xvi) discussed QED's pending initial public offering lock-up release and
the intention of certain shareholders to sell shares upon the
expiration of such lock-up;
(xvii) reviewed the draft Merger Agreement and certain related documents;
and
(xviii) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purpose of
this opinion. With respect to the financial projections and discussions
relating to the strategic, financial and operational benefits anticipated from
the Merger, we have assumed that they have, in each case, been reasonably
prepared on the bases reflecting the best currently available estimates and
judgments of the future financial performance and prospects of QED and PMC-
Sierra. We have relied upon the assessment by the managements of QED and PMC-
Sierra of their ability to retain key employees of QED. We have also relied
upon, without independent verification, the assessment by the managements of
QED and PMC-Sierra of: (i) the strategic, financial and other benefits expected
to result from the Merger; (ii) the timing and risks associated with the
integration of QED and PMC-Sierra; and (iii) the validity of, and risks
associated with, QED's and PMC-Sierra's existing and future technologies,
services or business models. We have not made any independent valuation or
appraisal of the assets or liabilities or technology of QED and PMC-Sierra, nor
have we been furnished any such appraisals. In addition, we have assumed that
the Merger will be consummated in accordance with the terms set forth in the
Merger Agreement, including that the Merger will be accounted for as a
"pooling-of-interests" business combination in accordance with U.S. Generally
Accepted Accounting Principles and that the Merger will be treated as a tax-
free reorganization pursuant to Section 368(a) of the Internal Revenue Code of
1986. Our opinion is necessarily based on the financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
We have acted as a financial advisor to the Board of Directors of QED in
connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financial services for QED and have received fees for
the rendering of these services. In the ordinary course of our business we may
actively trade the securities of QED and PMC-Sierra for our own account and for
the accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of QED and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in
any filing of a proxy or registration statement with the Securities and
Exchange Commission made by QED in respect of the Merger. In addition, this
opinion does not in any manner address the prices at which the PMC-Sierra
Common Stock will trade following the consummation of the Merger, and Morgan
Stanley & Co. Incorporated expresses no opinion or recommendation as to how the
shareholders of QED should vote at the shareholders' meeting to be held in
connection with the Merger.
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Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to the holders of shares of QED Common Stock.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By:
________________________
Geoffrey D. Baldwin
Principal
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ANNEX D
PMC-Sierra, Inc.
Condensed Consolidated Financial Statements as of
March 26, 2000 and December 26, 1999 and for the
Three-Month Periods Ended March 26, 2000 and March 28, 1999
<PAGE>
PMC-Sierra, Inc.
Index to Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets..................................... D-1
Condensed Consolidated Statements of Operations........................... D-2
Condensed Consolidated Statements of Cash Flows........................... D-3
Notes to Condensed Consolidated Financial Statements...................... D-4
</TABLE>
<PAGE>
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Mar 26, Dec 26,
2000 1999
----------- --------
(unaudited)
(in thousands,
except par value)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $225,072 $ 90,055
Short-term investments................................. -- 106,636
Accounts receivable, net............................... 46,108 36,170
Inventories, net....................................... 9,621 7,208
Deferred income taxes.................................. 9,270 9,270
Prepaid expenses and other current assets.............. 8,239 7,496
Short-term deposits for wafer fabrication capacity..... 637 4,637
-------- --------
Total current assets................................. 298,947 261,472
Property and equipment, net;............................. 61,246 48,766
Goodwill and other intangible assets, net................ 14,359 15,280
Investments and other assets............................. 12,489 11,827
Deposits for wafer fabrication capacity.................. 14,483 14,483
-------- --------
$401,524 $351,828
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 22,513 $ 11,973
Accrued liabilities.................................... 25,642 16,123
Deferred income........................................ 42,574 34,486
Income taxes payable................................... 13,346 25,912
Current portion of obligations under capital leases and
long-term debt........................................ 5,465 2,310
-------- --------
Total current liabilities............................ 109,540 90,804
Deferred income taxes.................................... 9,091 9,091
Noncurrent obligations under capital leases and long-term
debt.................................................... 1,876 3,355
PMC special shares convertible into 4,069 (1999--4,242)
common stock............................................ 6,748 6,998
Stockholders' equity
Common stock and additional paid in capital, par value
$0.001;
200,000 shares authorized (200,000 shares in 1999)
145,209 shares issued and outstanding (142,938 in
1999)................................................ 251,742 226,409
Deferred stock compensation............................ (17,320) (4,530)
Retained earnings...................................... 39,847 19,701
-------- --------
Total stockholders' equity........................... 274,269 241,580
-------- --------
$401,524 $351,828
======== ========
</TABLE>
See notes to condensed consolidated financial statements
D-1
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
---------------
Mar 26, Mar 28,
2000 1999
------- -------
(in thousands,
except for per
share amounts)
<S> <C> <C>
Net revenues................................................... 102,807 50,399
Cost of revenues............................................... 20,551 10,920
------- -------
Gross profit................................................. 82,256 39,479
Other costs and expenses:
Research and development..................................... 26,795 13,803
Marketing, general and administrative........................ 15,131 9,634
Amortization of deferred stock compensation
Research and development................................... 3,385 458
Marketing, general and administrative...................... 259 53
Amortization of goodwill..................................... 459 478
Costs of merger.............................................. 7,982 --
------- -------
Income from operations......................................... 28,325 15,053
Interest and other income, net................................. 3,620 1,090
Gain on sale of investments.................................... 4,117 --
------- -------
Income before provision for income taxes....................... 36,062 16,143
Provision for income taxes..................................... 15,916 6,728
------- -------
Net income..................................................... $20,146 $ 9,415
======= =======
Net income per common share--basic............................. $ 0.14 $ 0.07
======= =======
Net income per common share--diluted........................... $ 0.12 $ 0.06
======= =======
Shares used in per share calculation--basic.................... 148,362 138,680
Shares used in per share calculation--diluted.................. 168,222 149,839
</TABLE>
See notes to condensed consolidated financial statements.
D-2
<PAGE>
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
------------------
Mar 26, Mar 28,
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 20,146 $ 9,415
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of plant and equipment...................... 6,352 4,145
Amortization of intangibles.............................. 921 871
Amortization of deferred stock compensation.............. 3,644 511
Equity in income of investee............................. (725) --
Gain on sale of investments.............................. (4,117) --
Changes in operating assets and liabilities
Accounts receivable..................................... (9,938) 1,800
Inventories............................................. (2,413) (1,391)
Prepaid expenses and other.............................. (730) (124)
Accounts payable and accrued liabilities................ 20,059 4,665
Income taxes payable.................................... (12,566) (4,978)
Deferred income......................................... 8,088 1,863
-------- --------
Net cash provided by operating activities.............. 28,721 16,777
-------- --------
Cash flows from investing activities:
Proceeds from sales and maturities of short-term
investments.............................................. 106,636 50,893
Purchases of plant and equipment.......................... (14,372) (5,880)
Proceeds from sale of investments......................... 4,167 --
Proceeds from refund of wafer fabrication deposits........ 4,000 4,000
-------- --------
Net cash provided by investing activities.............. 100,431 49,013
-------- --------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt............ -- 136
Repayment of notes payable and long-term debt............. (2,222) (93)
Principal payments under capital lease obligations........ (562) (1,147)
Proceeds from issuance of common stock.................... 8,649 3,195
-------- --------
Net cash provided by financing activities.............. 5,865 2,091
-------- --------
Net increase in cash and cash equivalents.................. 135,017 67,881
Cash and cash equivalents, beginning of the period......... 90,055 45,691
-------- --------
Cash and cash equivalents, end of the period............... $225,072 $113,572
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
D-3
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Summary of Significant Accounting Policies
Description of business. PMC-Sierra, Inc. (the "Company" or "PMC" ) provides
customers with internetworking semiconductor system solutions for high speed
transmission and networking systems.
Basis of presentation. All historical financial information has been
restated to reflect the acquisitions of Toucan Technology Limited ("Toucan"),
AANetcom, Inc. ("AANetcom") in the first quarter of fiscal 2000 and Extreme
Packet Devices, Inc. ("Extreme") in the second quarter of fiscal 2000. These
acquisitions were accounted for as poolings of interests.
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 26, 1999. The results of operations for the interim period are not
necessarily indicative of results to be expected in future periods.
Inventories. Inventories are stated at the lower of cost (first-in, first
out) or market (estimated net realizable value).
<TABLE>
<CAPTION>
Dec
Mar 26, 26,
2000 1999
----------- ------
(unaudited)
(in thousands)
<S> <C> <C>
Work-in-progress.......................................... $ 3,834 $4,031
Finished goods............................................ 5,787 3,177
------- ------
$ 9,621 $7,208
======= ======
</TABLE>
Recently issued accounting standards. In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Statement will require the recognition of all
derivatives on the Company's consolidated balance sheet at fair value. The
Financial Accounting Standards Board has subsequently delayed implementation of
the standard for the financial years beginning after June 15, 2000. The Company
expects to adopt the new Statement effective January 1, 2001. The impact on the
Company's financial statements is not expected to be material.
NOTE 2. Business Combinations.
Acquisition of Extreme Packet Devices, Inc.
In April 2000, the Company acquired Extreme Packet Devices, Inc.
("Extreme"), 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.
D-4
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, will be included under costs of merger in the Consolidated Statements of
Operations in the quarter ended June 25, 2000.
The historical results of operations of the Company and Extreme for the
periods prior to the mergers are as follows:
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
----------------- ----------
Mar 26, Mar 28, Dec 26,
2000 1999 1999
-------- ------- ----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Net revenues
PMC, as previously reported................... $102,807 $50,399 $263,281
Extreme....................................... -- -- --
-------- ------- --------
Combined...................................... 102,807 50,399 263,281
======== ======= ========
Net income (loss)
PMC, as previously reported................... 22,993 9,415 83,589
Extreme....................................... (2,847) -- (1,987)
-------- ------- --------
Combined...................................... $ 20,146 $ 9,415 $ 81,602
======== ======= ========
</TABLE>
Acquisition of AANetcom, Inc.
In March 2000, the Company acquired AANetcom, Inc. ("AANetcom"), 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, will be included under costs of merger in the Consolidated Statements of
Operations in the quarter ended March 26, 2000.
Acquisition of Toucan Technology.
In January 2000, the Company acquired Toucan Technology ("Toucan"), 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.
D-5
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, will be included under costs of merger in the Consolidated Statements of
Operations in the quarter ended March 26, 2000.
The historical results of operations of the Company, Toucan, AANetcom, and
Extreme for the periods prior to the mergers are as follows:
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
----------------- ----------
Mar 26, Mar 28, Dec 26,
2000 1999 1999
-------- ------- ----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Net revenues
PMC.......................................... $102,807 $50,399 $262,477
Toucan....................................... -- -- 24
AANetcom..................................... -- -- 780
Extreme...................................... -- -- --
-------- ------- --------
Combined..................................... 102,807 50,399 263,281
======== ======= ========
Net income (loss)
PMC.......................................... 28,708 11,076 90,020
Toucan....................................... (404) (452) (221)
AANetcom..................................... (5,311) (1,209) (6,210)
Extreme...................................... (2,847) -- (1,987)
-------- ------- --------
Combined..................................... $ 20,146 $ 9,415 $ 81,602
======== ======= ========
</TABLE>
NOTE 3. Sale of Investment
During the quarter ended March 26, 2000, the Company realized a pre-tax gain
of $4.1 million related to the disposition of 92,360 common shares of Cypress
Semiconductor, Inc., a publicly held company. These shares were previously
subject to escrow restrictions and were not available for sale until the first
quarter of fiscal 2000.
NOTE 4. Segment Information
The Company has two operating segments: networking and non-networking
products. The networking segment consists of internetworking semiconductor
devices and related technical service and support to equipment manufacturers
for use in their communications and networking equipment. The non-networking
segment includes custom user interface products. The Company is supporting the
non-networking products for existing customers, but has decided not to develop
any further products of this type.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on revenues and gross margins from operations of the two
segments.
D-6
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Three Months
Ended
----------------
Mar 26, Mar 28,
2000 1999
-------- -------
(unaudited)
(in thousands)
<S> <C> <C>
Net revenues
Networking............................................ $ 97,753 $47,405
Non-Networking........................................ 5,054 2,994
-------- -------
Total............................................... $102,807 $50,399
======== =======
Gross profit
Networking............................................ $ 80,008 $38,067
Non-Networking........................................ 2,248 1,412
-------- -------
Total............................................... $ 82,256 $39,479
======== =======
</TABLE>
NOTE 5. Net Income Per Share
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Three Months
Ended
---------------
Mar 26, Mar 28,
2000 1999
------- -------
(unaudited)
(in thousands,
except for per
share amounts)
<S> <C> <C>
Numerator:
Net income............................................. $20,146 $ 9,415
======= =======
Denominator:
Basic weighted average common shares outstanding
(1)................................................. 148,362 138,680
------- -------
Effect of dilutive securities:
Stock options....................................... 19,692 11,072
Stock warrants...................................... 168 87
------- -------
Shares used in calculation of diluted net income per
share............................................... 168,222 149,839
======= =======
Net income per common share--basic..................... $ 0.14 $ 0.07
Net income per common share--diluted................... $ 0.12 $ 0.06
</TABLE>
--------
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic
net income per share.
NOTE 6. Stock Split
In February 2000, the Company effected a two-for-one stock split in the form
of a stock dividend. Accordingly, all references to share and per-share data
for all periods presented have been adjusted to reflect this event.
D-7
<PAGE>
ANNEX E
PMC-Sierra, Inc.
Consolidated Financial Statements as of
December 31, 1999 and 1998 and for the Years
Ended December 31, 1999, 1998 and 1997
<PAGE>
PMC-Sierra, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... E-1
Consolidated Balance Sheets................................................ E-2
Consolidated Statements of Operations...................................... E-3
Consolidated Statements of Stockholders' Equity............................ E-4
Consolidated Statements of Cash Flows...................................... E-5
Notes to Consolidated Financial Statements................................. E-6
</TABLE>
<PAGE>
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders 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 and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted 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 accounting principles generally accepted
in the United States.
/s/ Deloitte & Touche LLP
Vancouver, British Columbia
January 17, 2000
(July 11, 2000, as to Notes 2 and 14)
E-1
<PAGE>
PMC-SIERRA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
(in thousands,
except par value)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 90,055 $ 45,691
Short-term investments................................... 106,636 50,893
Accounts receivable, net of allowance for doubtful
accounts of $1,244
($1,128 in 1998)........................................ 36,170 26,406
Inventories, net......................................... 7,208 3,617
Deferred income taxes.................................... 9,270 1,506
Prepaid expenses and other current assets................ 7,496 4,389
Short-term deposits for wafer fabrication capacity....... 4,637 4,000
-------- --------
Total current assets................................... 261,472 136,502
Property and equipment, net................................ 48,766 34,797
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
-------- --------
$351,828 $214,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 11,973 $ 9,262
Accrued liabilities...................................... 16,123 14,867
Deferred income.......................................... 34,486 12,517
Income taxes payable..................................... 25,912 13,910
Current portion of obligations under capital leases and
long-term debt.......................................... 2,310 5,561
-------- --------
Total current liabilities.............................. 90,804 56,117
Deferred income taxes...................................... 9,091 4,357
Noncurrent obligations under capital leases and long-term
debt...................................................... 3,355 8,525
Commitments and contingencies (Note 6)
PMC special shares convertible into 4,242 (1998--5,036)
common stock.............................................. 6,998 8,387
Stockholders' equity
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) 142,938 shares issued and outstanding (130,120 in
1998)................................................... 226,409 201,045
Deferred stock compensation.............................. (4,530) (1,822)
Retained earnings (accumulated deficit).................. 19,701 (61,901)
-------- --------
Total stockholders' equity............................. 241,580 137,322
-------- --------
$351,828 $214,708
======== ========
</TABLE>
See notes to consolidated financial statements.
E-2
<PAGE>
PMC-SIERRA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
(in thousands, except for
per share amounts)
<S> <C> <C> <C>
Net revenues...................................... $263,281 $163,381 $129,098
Cost of revenues.................................. 55,147 38,220 33,065
-------- -------- --------
Gross profit.................................... 208,134 125,161 96,033
Other costs and expenses:
Research and development........................ 69,820 39,262 24,262
Marketing, general and administrative........... 43,600 29,263 23,928
Amortization of deferred stock compensation:
Research and development...................... 2,810 804 --
Marketing, general and administrative......... 778 137 --
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 from operations............................ 88,348 11,293 48,926
Interest and other income, net.................... 7,791 2,858 856
Gain on sale of investments....................... 26,800 --
-------- -------- --------
Income before provision for income taxes.......... 122,939 14,151 49,782
Provision for income taxes........................ 41,337 22,886 15,756
-------- -------- --------
Net income (loss)................................. $ 81,602 $ (8,735) $ 34,026
======== ======== ========
Net income (loss) per common share--basic......... $ 0.57 $ (0.07) $ 0.27
======== ======== ========
Net income (loss) per common share--diluted....... $ 0.52 $ (0.07) $ 0.26
======== ======== ========
Shares used in per share calculation--basic....... 142,759 134,202 125,507
Shares used in per share calculation--diluted..... 156,465 134,202 131,873
</TABLE>
See notes to consolidated financial statements.
E-3
<PAGE>
PMC-SIERRA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
and Additional Deferred Total
Common Stock Paid in Stock Accumulated Stockholders'
Number of Shares(1) Capital Amount(1) Compensation Deficit Equity
------------------- ----------------- ------------ ----------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1996................... 114,740 $135,930 $ -- $(87,192) $ 48,738
Conversion of special
shares into common
stock.................. 1,276 1,701 -- -- 1,701
Issuance of common stock
under stock benefit
plans.................. 5,626 7,633 -- -- 7,633
Net income.............. -- -- -- 34,026 34,026
------- -------- ------- -------- --------
Balances at December 31,
1997................... 121,642 145,264 -- (53,166) 92,098
Conversion of special
shares into common
stock.................. 1,436 2,406 -- -- 2,406
Issuance of common stock
under stock benefit
plans.................. 5,382 22,391 -- -- 22,391
Issuance of common stock
and stock options to
acquire Integrated
Telecom Technology,
Inc.................... 1,660 28,221 -- -- 28,221
Deferred stock
compensation........... -- 2,763 (2,763) -- --
Amortization of deferred
stock compensation..... -- -- 941 -- 941
Net loss................ -- -- -- (8,735) (8,735)
------- -------- ------- -------- --------
Balances at December 31,
1998................... 130,120 $201,045 $(1,822) $(61,901) $137,322
Conversion of special
shares into common
stock.................. 792 1,389 -- -- 1,389
Issuance of common stock
under stock benefit
plans.................. 11,938 17,604 -- -- 17,604
Conversion of warrants
into common stock...... 88 75 -- -- 75
Deferred stock
compensation........... -- 6,296 (6,296) -- --
Amortization of deferred
stock compensation..... -- -- 3,588 -- 3,588
Net income.............. -- -- -- 81,602 81,602
------- -------- ------- -------- --------
Balances at December 31,
1999................... 142,938 $226,409 $(4,530) $ 19,701 $241,580
======= ======== ======= ======== ========
</TABLE>
--------
(1) Includes exchangeable shares
See notes to consolidated financial statements.
E-4
<PAGE>
PMC-SIERRA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 81,602 $(8,735) $34,026
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation of plant and equipment............... 18,719 11,916 7,912
Amortization of intangibles....................... 3,599 2,850 1,363
Amortization of deferred stock compensation....... 3,588 941 --
Deferred income taxes............................. (3,030) (1,172) 3,082
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 restructure reserves.......... -- -- (1,383)
Changes in operating assets and liabilities
Accounts receivable............................... (9,764) (9,515) (1,387)
Inventories....................................... (3,591) 137 4,662
Prepaid expenses and other........................ (1,967) (1,461) 1,116
Accounts payable and accrued liabilities.......... 4,369 1,321 (1,126)
Income taxes payable.............................. 12,002 5,101 4,747
Deferred income................................... 21,969 10,419 2,098
Accrued restructuring costs....................... -- -- (14,942)
Net liabilities associated with discontinued
operations....................................... -- (301) (1,299)
-------- ------- -------
Net cash provided by operating activities......... 99,904 54,988 39,127
-------- ------- -------
Cash flows from investing activities:
Purchases of short-term investments............... (109,635) (53,001) (59,187)
Proceeds from sales and maturities of short-term
investments...................................... 53,892 43,442 24,877
Purchases of plant and equipment.................. (32,334) (23,585) (9,224)
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............. (64,360) (57,728) (38,903)
-------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt.... 2,091 2,466 846
Repayment of notes payable and long-term debt..... (2,687) (764) (2,640)
Proceeds from sale/leaseback of equipment......... -- 140 1,114
Principal payments under capital lease
obligations...................................... (8,263) (5,052) (12,895)
Proceeds from issuance of common stock............ 17,679 22,391 7,633
-------- ------- -------
Net cash provided by (used in) financing
activities....................................... 8,820 19,181 (5,942)
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 44,364 16,441 (5,718)
Cash and cash equivalents, beginning of the year... 45,691 29,250 34,968
-------- ------- -------
Cash and cash equivalents, end of the year......... $ 90,055 $45,691 $29,250
======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest............................ $ 825 $ 1,104 $ 1,985
Cash paid for income taxes........................ 32,927 13,001 7,239
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........................... 148 -- 3,536
Notes payable issued for purchase of property and
equipment........................................ 206 757 --
Conversion of PMC-Sierra special shares into
common stock..................................... 1,389 2,406 1,701
</TABLE>
See notes to consolidated financial statements.
E-5
<PAGE>
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" ("SFAS 115"), 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 solely of held-to-maturity 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.
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:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
(in
thousands)
<S> <C> <C>
Work-in-progress............................................... $4,031 $1,761
Finished goods................................................. 3,177 1,856
------ ------
$7,208 $3,617
====== ======
</TABLE>
E-6
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Machinery and equipment.................................... $83,532 $56,108
Leasehold improvements..................................... 5,358 2,686
Furniture and fixtures..................................... 4,701 2,814
Building................................................... 701 693
------- -------
Total cost................................................. 94,292 62,301
Accumulated depreciation................................... (45,526) (27,504)
------- -------
$48,766 $34,797
======= =======
</TABLE>
The Company leases furniture and equipment under long-term capital leases.
Accordingly, capitalized costs of approximately $4,940,000 and $17,832,000 at
December 31, 1999 and 1998, respectively, and accumulated amortization of
approximately $3,831,000 and $12,114,000, 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:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
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
======= =======
</TABLE>
Investments in Non-Public Companies. The Company has certain investments in
non-publicly traded companies in which it has less that 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 foundaries, 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.
E-7
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Accrued compensation and benefits........................... $ 7,427 $ 5,637
Accrued royalties........................................... -- 175
Other accrued liabilities................................... 8,696 9,055
------- -------
$16,123 $14,867
------- -------
</TABLE>
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 51% (1998--41%) 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.
E-8
<PAGE>
Interest and other income, net. The components of interest and other income,
net are as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1999 1998 1997
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Interest income.................................... $7,774 $ 4,053 $ 3,265
Interest expense(*)................................ (943) (1,154) (2,256)
Equity in income of investee....................... 792 -- --
Other.............................................. 168 (41) (153)
------ ------- -------
$7,791 $ 2,858 $ 856
====== ======= =======
</TABLE>
* consists primarily of interest on long-term debt and 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 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 April 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 ("SFAS 130"), 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 SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on the Company's consolidated
balance sheet at fair value. The 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.
Reclassifications. Certain prior year amounts have been reclassified in
order to conform with the 1999 presentation.
E-9
<PAGE>
NOTE 2. Business Combinations and Investments in Other Companies
Acquisition of Extreme Packet Devices, Inc.
In April 2000, the Company acquired Extreme Packet Devices, Inc.
("Extreme"), 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, will be included under costs of merger in the Consolidated Statements of
Operations in the quarter ended June 25, 2000.
Acquisition of AANetcom, Inc.
In March 2000, the Company acquired AANetcom, Inc. ("AANetcom"), 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, will be included under costs of merger in the 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. ("Toucan"), a
privately held integrated circuit design company located in Ireland. Toucan
offers expertise in telecommunications semiconductor design. At December 31,
1999, the Company owned seven percent 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, will be included under costs of merger in the Consolidated Statements of
Operations in the quarter ended March 26, 2000.
E-10
<PAGE>
The historical results of operations of the Company, Toucan, AANetcom, and
Extreme for the periods prior to the mergers are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net revenues
PMC, as previously reported.................. $262,477 $161,812 $127,166
Toucan....................................... 24 739 1,932
AANetcom..................................... 780 830
Extreme...................................... -- -- --
-------- -------- --------
Combined..................................... $263,281 $163,381 $129,098
======== ======== ========
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) -- --
-------- -------- --------
Combined..................................... $ 81,602 $ (8,735) $ 34,026
======== ======== ========
</TABLE>
Acquisition of Abrizio, Inc.
In 1999, the Company acquired Abrizio, Inc. ("Abrizio"), 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.
The historical results of operations of the Company and Abrizio for the
periods prior to the merger are as follows:
<TABLE>
<CAPTION>
Year Ended
Six Months December 31,
Ended June ------------------
27, 1999 1998 1997
---------- -------- --------
(in thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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.
E-11
<PAGE>
Acquisition of Integrated Telecom Technology, Inc.
In 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 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):
<TABLE>
<S> <C>
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
=======
</TABLE>
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. In the
determination of 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 project.
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.
E-12
<PAGE>
NOTE 3. Investments and Other Assets
The components of Investments and Other Assets are as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------- ------
(in thousands)
<S> <C> <C>
Investments in Non-Public Companies.......................... $ 8,050 $4,091
Investments in Equity Accounted Investee..................... 3,506 --
Other Assets................................................. 271 569
------- ------
$11,827 $4,660
======= ======
</TABLE>
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. ("Sierra Wireless"), 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. Line 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.
E-13
<PAGE>
NOTE 5. Obligations Under Capital Leases and Long-Term Debt
Obligations under capital leases and long-term debt are as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Obligations under capital leases with interest ranging
from 7.4% to 17.9%...................................... $ 1,483 $ 9,603
Various notes, secured by property and equipment, payable
in annual installments of approximately $441,000 and
with interest rates ranging from 6.25% to 12.3%......... 1,652 1,441
Various unsecured notes, with unspecified maturity dates
with interest rates ranging from 5% to 8%............... 1,361 1,332
Various unsecured notes, payable in various installments
with interest rates ranging from 0% to 10%.............. 1,169 1,710
------- -------
5,665 14,086
Less current portion..................................... (2,310) (5,561)
------- -------
$ 3,355 $ 8,525
======= =======
</TABLE>
Future minimum lease payments at December 31, 1999 under capital leases are
as follows:
<TABLE>
<CAPTION>
Year Ending December 31
----------------------- (in thousands)
<S> <C>
2000.......................................................... $1,140
2001.......................................................... 359
2002.......................................................... 72
2003.......................................................... 9
------
Total minimum lease payments.................................. 1,580
Less amount representing imputed interest..................... (97)
------
Present value of future minimum lease payments................ $1,483
======
</TABLE>
NOTE 6. Commitments and Contingencies
Operating leases. The Company leases its facilities under operating lease
agreements, which expire at various dates through April 30, 2006. Total rent
expense for the years ended December 31, 1999, 1998 and 1997 was $3.7 million,
$1.9 million and $1.3 million, respectively.
Minimum rental commitments under these leases are as follows:
<TABLE>
<CAPTION>
Year Ending December 31
----------------------- (in thousands)
<S> <C>
2000......................................................... $ 4,489
2001......................................................... 6,324
2002......................................................... 6,058
2003......................................................... 5,997
2004......................................................... 5,588
thereafter................................................... 26,706
-------
$55,162
=======
</TABLE>
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
E-14
<PAGE>
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 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 LTD Special Shares 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
Authorized. 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 effect to these two-for-one stock splits.
E-15
<PAGE>
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 August 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. At the end 1999, warrants to purchase 84,278 shares of
common stock were outstanding. In 2000, as a result of the Company's
acquisitions of AANetcom, Inc. and Extreme Packet Devices, Inc., the Company
assumed warrants to purchase 50,759 and 63,162 shares of common stock at $9.36
and $3.06 per share, respectively. At the end of 1999, warrants to purchase
113,921 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 exchangeable
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. As at December 31, 1999, 1,620 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 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, respectively, per share. 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. As of December 31, 1999, there were
2,221,994 shares of common stock available for issuance under the purchase
plan.
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.
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, and the
related options are included in the following table.
E-16
<PAGE>
Option activity under the option plans was as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Available Options Exercise Price
For Issuance Outstanding Per Share
----------------- ----------- --------------
<S> <C> <C> <C>
Outstanding at December 31,
1996
(5,011,496 options
exercisable at a weighted
average price of $1.86)... 6,114,196 12,396,088 $ 2.66
Authorized................. 3,897,642 --
Granted (weighted average
fair value of $2.00 per
share).................... (5,705,800) 5,705,800 $ 4.37
Exercised.................. -- (2,773,800) $ 1.81
Expired.................... (144,448) --
Cancelled.................. 1,936,864 (1,936,864) $ 3.74
----------- ----------
Outstanding at December 31,
1997
(5,296,692 options
exercisable at a weighted
average price of $2.32)... 6,098,454 13,391,224 $ 3.41
Authorized................. 5,539,919 --
Granted (weighted average
fair value of $4.08 per
share).................... (7,119,544) 7,119,544 $ 5.62
Exercised.................. -- (3,208,064) $ 1.87
Expired.................... (54,768) --
Cancelled.................. 653,564 (653,564) $ 5.49
----------- ----------
Outstanding at December 31,
1998
(6,195,466 options
exercisable at a weighted
average price of $3.30)... 5,117,625 16,649,142 $ 4.57
Authorized................. 5,351,836
Granted (weighted average
fair value of $16.09 per
share).................... (10,045,229) 10,042,557 $30.37
Exercised.................. (3,254,654) $ 2.89
Expired.................... (2,702) --
Cancelled.................. 330,878 (328,206) $12.70
----------- ----------
Outstanding at December 31,
1999........................ 752,408 23,108,837 $15.90
=========== ==========
</TABLE>
The following table summarizes information concerning options outstanding
for the combined option plans at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Range of Number Contractual Life Exercise Price Number Exercise Price
Exercise Prices Outstanding (years) per share Exercisable per share
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.02 -
$ 3.53 5,132,352 7.12 $ 2.15 2,890,980 $2.65
$ 3.57 -
$ 6.25 3,691,668 6.68 4.15 2,792,114 4.12
$ 6.35 -
$14.05 4,909,310 8.11 8.22 2,059,532 8.02
$15.99 -
$23.97 5,301,900 9.10 17.37 0 0.00
$32.21 -
$53.07 4,073,607 9.93 51.21 0 0.00
---------- ---------
$ 0.02 -
$53.07 23,108,837 8.21 15.90 7,742,626 4.61
========== =========
</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
E-17
<PAGE>
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 option valuation 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:
<TABLE>
<CAPTION>
Options ESPP
---------------- ----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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):
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Net income (loss)................................. $56,281 $(20,290) $29,496
Basic net income (loss) per share................. 0.39 (0.15) 0.24
Diluted net income (loss) per share............... 0.36 (0.15) 0.22
</TABLE>
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 to the estimation of 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.
E-18
<PAGE>
NOTE 10. Income Taxes
The income tax provisions, calculated under Statement of Financial
Accounting Standard No. 109 ("SFAS 109"), consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal........................................ $ -- $ -- $(1,294)
State.......................................... 525 190 5
Foreign........................................ 43,842 23,868 13,963
------- ------- -------
44,367 24,058 12,674
------- ------- -------
Deferred:
Federal........................................ (132) (132) 1,671
Foreign........................................ (2,898) (1,040) 1,411
------- ------- -------
(3,030) (1,172) 3,082
------- ------- -------
Provision for income taxes....................... $41,337 $22,886 $15,756
======= ======= =======
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
Federal statutory rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Income (loss) before provision for income
taxes......................................... $122,939 $14,151 $49,782
Federal statutory tax rate..................... 35% 35% 35%
Income taxes (recovery) at U.S. Federal
statutory rate................................ $ 43,029 $ 4,953 $17,424
State taxes, net of federal benefit............ 525 -- --
Net operating losses (utilized) not utilized... (3,032) 1,987 (4,408)
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.......................................... 1,513 492 482
-------- ------- -------
Provision for income taxes..................... $ 41,337 $22,886 $15,756
======== ======= =======
</TABLE>
E-19
<PAGE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 56,558 $ 24,940
State tax loss carryforwards.......................... 3,690 1,500
Credit carryforwards.................................. 5,107 3,497
Reserves and accrued expenses......................... 4,585 430
Restructuring and other charges....................... 372 3,245
Deferred income....................................... 9,270 1,506
-------- --------
Total deferred tax assets............................. 79,582 35,118
Valuation allowance................................... (70,312) (33,612)
-------- --------
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)
======== ========
</TABLE>
At December 31, 1999, the Company has approximately $165,823,000 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 $67,591,000 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 are $2,258,000 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, $41,000 of state research
and development credits and $410,000 of federal AMT credits which carryforward
indefinitely.
Not included in the deferred assets 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.
E-20
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net revenues
Networking...................................... $245,990 $141,108 $ 87,444
Non-Networking.................................. 17,291 22,273 41,654
-------- -------- --------
Total........................................... $263,281 $163,381 $129,098
======== ======== ========
Gross profit
Networking...................................... $200,206 $114,632 $ 71,461
Non-Networking.................................. 7,928 10,529 24,572
-------- -------- --------
Total........................................... $208,134 $125,161 $ 96,033
======== ======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net revenues
United States.................................. $181,161 $110,520 $ 90,619
Canada......................................... 38,575 15,780 12,373
Europe and Middle East......................... 14,788 12,906 12,114
Asia........................................... 28,569 24,076 13,693
Other foreign.................................. 188 99 299
-------- -------- --------
Total.......................................... $263,281 $163,381 $129,098
======== ======== ========
Long-lived assets
United States.................................. $ 32,005 $ 38,486 $ 26,729
Canada......................................... 57,311 38,865 29,297
Other.......................................... 1,040 855 849
-------- -------- --------
Total.......................................... $ 90,356 $ 78,206 $ 56,875
======== ======== ========
</TABLE>
The Company has revenues from external customers (1999 and 1998-2, 1997-1)
that exceed 10% of total net revenues as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1999 1998 1997
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Networking............................................ $98,050 $31,549 $1,757
Non-Networking........................................ -- 18,579 21,403
</TABLE>
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-
E-21
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Numerator:
Net income (loss)............................... $81,602 $(8,735) $34,026
------- ------- -------
Denominator:
Basic weighted average common shares
outstanding(1)................................. 142,759 134,202 125,507
Effect of dilutive securities:
Stock options................................. 13,590 -- 6,310
Stock warrants................................ 116 -- 56
------- ------- -------
Diluted weighted average common shares
outstanding.................................... 156,465 134,202 131,873
======= ======= =======
Basic net income (loss) per share................. $ 0.57 $ (0.07) $ 0.27
======= ======= =======
Diluted net income (loss) per share............... $ 0.52 $ (0.07) $ 0.26
======= ======= =======
</TABLE>
--------
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic
net income per share.
NOTE 14. Subsequent Events
During the first half of 2000, the Company acquired Toucan, AANetcom, and
Extreme. 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 26, 2000, the Company announced the intent to acquire Datum
Telegraphic Inc. ("Datum"), a privately held fabless semiconductor company
located in Canada. This agreement provides for the Company to issue
approximately 550,000 PMC-Sierra common shares, 44,000 PMC-Sierra options and
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, subject to completion, will be accounted for as a
purchase.
On June 27, 2000, the Company acquired Malleable Technologies Inc.
("Malleable"), a privately held fabless semiconductor company located in the
USA. The Company issued approximately 1,250,000 PMC-Sierra common shares,
options and warrants 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 also be accounted for as a purchase.
On July 11, 2000, the Company announced the intent to acquire Quantum Effect
Devices, Inc. ("QED"), a publicly held semiconductor company located in the
United States and listed on the NASDAQ. This agreement provides for the Company
to issue PMC-Sierra common shares and options at an exchange ratio of 0.385
PMC-Sierra common share per QED common share in exchange for all outstanding
common stock and options of QED. This transaction, subject to QED stockholder
and regulatory approval, will be accounted for as a pooling of interests.
The pro forma effects of the above combinations on the reported financial
position and the results of operation are not presented in this document.
E-22
<PAGE>
ANNEX F
MALLEABLE TECHNOLOGIES, INC.
(A Development Stage Company)
Financial Statements as of March 31, 2000 and
December 31, 1999 and for the Three-Month Periods
Ended March 31, 2000 and 1999
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(A Development Stage Company)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets................................................... F-1
Condensed Statements of Operations......................................... F-2
Condensed Statements of Cash Flows......................................... F-3
Notes to Condensed Financial Statements.................................... F-4
</TABLE>
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(Formerly Malleable Microsystems, Inc.)
(A Development Stage Company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................... $ 1,140,550 $ 3,170,682
Accounts receivable and prepaid expenses........... 16,931 63,227
----------- -----------
Total current assets............................. 1,157,481 3,233,909
Property and equipment, net.......................... 1,417,641 911,883
Other assets......................................... 265,983 206,671
----------- -----------
Total assets..................................... $ 2,841,105 $ 4,352,463
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 766,836 $ 523,746
Current portion of capital lease................... 14,000 15,000
Deferred revenue................................... -- 14,144
----------- -----------
Total current liabilities........................ 780,836 552,890
----------- -----------
Notes payable........................................ 25,000 325,000
Capital lease obligations............................ 8,720 11,786
Shareholders' equity:
Convertible preferred stock........................ 7,635,179 7,312,512
Common stock....................................... 647,993 45,673
Warrants........................................... 101,157 19,252
Deferred stock compensation........................ (514,595) --
Deficit accumulated during the development stage... (5,843,185) (3,914,650)
----------- -----------
Total shareholders' equity....................... 2,026,549 3,462,787
----------- -----------
Total liabilities and shareholders' equity........... $ 2,841,105 $ 4,352,463
=========== ===========
</TABLE>
See notes to condensed financial statements.
F-1
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(Formerly Malleable Microsystems, Inc.)
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
----------- ---------
(Unaudited)
<S> <C> <C>
Net revenue--related party............................. $ 15,000 $ 148,682
Operating expenses:
Cost of revenue...................................... 1,580 65,097
Research and development............................. 1,261,854 302,253
Selling, general and administrative.................. 595,962 85,251
----------- ---------
Total costs and expenses........................... 1,857,816 387,504
----------- ---------
Loss from operations................................... (1,844,396) (283,919)
Interest expense, net.................................. (84,139) (1,826)
----------- ---------
Net loss............................................... $(1,928,535) $(285,745)
=========== =========
</TABLE>
See notes to condensed financial statements.
F-2
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(Formerly Malleable Microsystems, Inc.)
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
----------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities--
Net cash used in operating activities................ $(1,472,476) $(299,554)
----------- ---------
Cash flows from investing activities--
Purchases of property and equipment.................. (566,666) (90,177)
----------- ---------
Cash flows from financing activities:
Issuance of common stock............................. 12,220 --
Repayments on capital lease obligations.............. (3,210) --
----------- ---------
Net cash provided by financing activities.......... 9,010 --
----------- ---------
Net decrease in cash and equivalents................... (2,030,132) (389,731)
Cash and equivalents, beginning of period.............. 3,170,682 766,732
----------- ---------
Cash and equivalents, end of period.................... $ 1,140,550 $ 377,001
=========== =========
</TABLE>
See notes to condensed financial statements.
F-3
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2000
1. Basis of Presentation
The accompanying unaudited condensed financial statements of Malleable
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included.
Operating results for the three months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
2. Subsequent Events
On June 13, 2000, the Company entered into a definitive agreement with PMC-
Sierra, Inc. for the purchase of the Company's outstanding common and preferred
shares not already owned by PMC-Sierra, Inc. on that date, for approximately
1,250,000 shares of PMC-Sierra, Inc. common stock, options and warrants. The
agreement was a result of PMC-Sierra, Inc. exercising its right under a call
option issued to PMC-Sierra, Inc. in July 1999 to purchase the remaining common
and preferred shares.
* * * * *
F-4
<PAGE>
Annex G
MALLEABLE
TECHNOLOGIES, INC.
(A Development Stage Company)
Financial Statements for the Years Ended
December 31, 1999 and 1998 and
Cumulative from July 31, 1997 (Inception)
Through December 31, 1999 and
Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Malleable Technologies, Inc.:
We have audited the accompanying balance sheets of Malleable Technologies,
Inc., formerly Malleable Microsystems, Inc. (a development stage company) (the
"Company") as of December 31, 1999 and 1998 and the related statements of
operations, shareholders' equity and cash flows for the years then ended and
cumulative from July 31, 1997 (inception) through December 31, 1999. These
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 auditing standards generally
accepted in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of Malleable Technologies, Inc. at December
31, 1999 and 1998 and the results of its operations and its cash flows for the
years then ended and cumulative and for the period from July 31, 1997
(inception) through December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 10, 2000
(June 13, 2000 as to the second paragraph of Note 9)
G-1
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(Formerly Malleable Microsystems, Inc.)
(A Development Stage Company)
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents.................................. $ 3,170,682 $766,732
Accounts receivable and prepaid expenses.............. 63,227 17,800
----------- --------
Total current assets................................ 3,233,909 784,532
PROPERTY AND EQUIPMENT, Net............................. 911,883 144,425
OTHER ASSETS............................................ 206,671 60,647
----------- --------
TOTAL............................................... $ 4,352,463 $989,604
=========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 332,380 $160,092
Accrued liabilities................................... 191,366 20,863
Deferred revenue...................................... 15,000 42,500
Current portion of capital lease obligations.......... 14,144 --
----------- --------
Total current liabilities........................... 552,890 223,455
----------- --------
NOTES PAYABLE........................................... 325,000 425,000
CAPITAL LEASE OBLIGATIONS............................... 11,786 --
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value; authorized
7,631,758 shares in 1999 and 5,000,000 shares in
1998:
Series A--952,381 shares designated; shares issued and
outstanding: 952,381 in 1999 and 1998 (aggregate
liquidation preference of $437,000).................. 375,469 375,469
Series B--6,679,377 shares designated; shares issued
and outstanding: 3,451,855 in 1999 and none in 1998
(aggregate liquidation preference of $7,162,000)..... 6,937,043 --
Common stock, no par value; authorized 20,000,000
shares in 1999 and 11,000,000 shares in 1998; shares
issued and outstanding: 7,104,000 in 1999 and
6,488,000 in 1998.................................... 45,673 13,180
Warrants.............................................. 19,252 --
Deficit accumulated during the development stage...... (3,914,650) (47,500)
----------- --------
Total shareholders' equity.......................... 3,462,787 341,149
----------- --------
TOTAL............................................. $ 4,352,463 $989,604
=========== ========
</TABLE>
See notes to financial statements.
G-2
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(Formerly Malleable Microsystems, Inc.)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Years ended December 31, 1999 and 1998 and cumulative from
July 31, 1997 (inception) through December 31, 1999
<TABLE>
<CAPTION>
Cumulative from
July 31, 1997
Years Ended December (Inception)
31, Through
--------------------- December 31,
1999 1998 1999
----------- -------- ---------------
<S> <C> <C> <C>
NET REVENUE--Related party............... $ 175,682 $415,450 $ 596,132
COSTS AND EXPENSES:
Cost of revenue........................ 52,002 328,734 385,736
Research and development............... 2,885,196 45,000 2,930,196
Selling, general and administrative.... 1,053,175 83,093 1,137,056
----------- -------- -----------
Total costs and expenses............. 3,990,373 456,827 4,452,988
----------- -------- -----------
LOSS FROM OPERATIONS..................... (3,814,691) (41,377) (3,856,856)
INTEREST EXPENSE, Net ................... (51,659) (3,735) (55,394)
----------- -------- -----------
LOSS BEFORE INCOME TAXES................. (3,866,350) (45,112) (3,912,250)
INCOME TAXES............................. 800 800 2,400
----------- -------- -----------
NET LOSS................................. $(3,867,150) $(45,912) $(3,914,650)
=========== ======== ===========
</TABLE>
See notes to financial statements.
G-3
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(Formerly Malleable Microsystems, Inc.)
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY
Period from July 31, 1997 (inception) through December 31, 1999
<TABLE>
<CAPTION>
Convertible Preferred Stock
-------------------------------------
Deficit
Deferred Accumulated
Series A Series B Common Stock Stock During the
---------------- -------------------- ----------------- Compen- Development
Shares Amount Shares Amount Shares Amount Warrants sation Stage Total
------- -------- --------- ---------- --------- ------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
July 31, 1997--
Issuance of common
stock upon
incorporation to
founder in
exchange for
technology and
cash.............. -- $ -- -- $ -- 6,000,000 $10,000 -- $ -- $ -- $ 10,000
Net loss........... (1,588) (1,588)
------- -------- --------- ---------- --------- ------- ------- ------- ----------- ----------
BALANCES, December
31, 1997.......... -- -- -- -- 6,000,000 10,000 -- -- (1,588) 8,412
November 5, 1998--
Issuance of Series
A preferred stock
for cash at $0.42
per share, net of
issuance costs of
$24,531........... 952,381 375,469 -- -- 375,469
Exercise of common
stock options..... 488,000 3,180 3,180
Net loss........... (45,912) (45,912)
------- -------- --------- ---------- --------- ------- ------- ------- ----------- ----------
BALANCES, December
31, 1998.......... 952,381 375,469 6,488,000 13,180 -- -- (47,500) 341,149
July 6, 1999--
Issuance of Series
B preferred stock
for cash at $2.00
per share......... 2,000,000 4,000,000 4,000,000
July 6, 1999--
Issuance of Series
B preferred stock
at $1.80 per share
upon conversion of
a note............ 234,355 421,839 421,839
July 27, 1999--
Issuance of Series
B preferred stock
for cash at $2.00
per share......... 1,217,500 2,435,000 2,435,000
Conversion discount
on convertible
notes............. 80,204 80,204
June 1, 1999--
Issuance of
warrants.......... 19,252 19,252
Deferred stock
compensation...... 2,893 (2,893) --
Amortization of
stock
compensation...... 2,893 2,893
Exercise of common
stock options..... 616,000 29,600 29,600
Net loss........... (3,867,150) (3,867,150)
------- -------- --------- ---------- --------- ------- ------- ------- ----------- ----------
BALANCES, December
31, 1999.......... 952,381 $375,469 3,451,855 $6,937,043 7,104,000 $45,673 $19,252 $ -- $(3,914,650) $3,462,787
======= ======== ========= ========== ========= ======= ======= ======= =========== ==========
</TABLE>
See notes to financial statements.
G-4
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(Formerly Malleable Microsystems, Inc.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND CUMULATIVE FROM JULY 31, 1997
(INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
Cumulative from
Years Ended July 31,
December 31, 1997 (Inception)
---------------------- Through December
1999 1998 31, 1999
----------- --------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................ $(3,867,150) $ (45,912) $(3,914,650)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization....... 126,591 4,967 132,180
Noncash interest expense............ 21,839 -- 21,839
Conversion discount on conversion
notes.............................. 80,204 -- 80,204
Issuance of warrants................ 11,683 -- 11,683
Loss on sale of property and
equipment.......................... 5,648 -- 5,648
Stock based compensation expense.... 2,893 -- 2,893
Changes in assets and liabilities:
Accounts receivable and prepaid
expense.......................... (37,858) (12,800) (55,658)
Accounts payable.................. 172,288 149,003 332,380
Accrued liabilities............... 170,503 20,863 191,366
Deferred revenue.................. (27,500) 42,500 15,000
----------- --------- -----------
Net cash provided by (used in)
operating activities........... (3,340,859) 158,621 (3,177,115)
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment.......................... (890,567) (147,799) (1,038,366)
Other assets........................ (155,154) (48,639) (210,016)
----------- --------- -----------
Net cash used in investing
activities..................... (1,045,721) (196,438) (1,248,382)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt.................. 325,930 425,000 750,930
Issuance of common stock............ 29,600 3,180 34,780
Proceeds from sale of preferred
stock, net......................... 6,435,000 375,469 6,810,469
----------- --------- -----------
Net cash provided by financing
activities..................... 6,790,530 803,649 7,596,179
----------- --------- -----------
NET INCREASE IN CASH AND EQUIVALENTS.. 2,403,950 765,832 3,170,682
CASH AND EQUIVALENTS, Beginning of
period............................... 766,732 900 --
----------- --------- -----------
CASH AND EQUIVALENTS, End of period... $ 3,170,682 $ 766,732 $ 3,170,682
=========== ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for income taxes.......... $ 800 $ 800 $ 2,400
=========== ========= ===========
Cash paid for interest.............. $ 225 $ 7,035 $ 7,260
=========== ========= ===========
SUPPLEMENTAL DISCLOSURES OF NON CASH
TRANSACTIONS--
Common stock issued in exchange for
intellectual property.............. $ -- $ -- $ 8,000
=========== ========= ===========
Conversion of note payable and
accrued interest to convertible
preferred stock.................... $ 421,839 $ -- $ 400,000
=========== ========= ===========
Property acquired under capital
leases............................. $ 27,000 $ -- $ 27,000
=========== ========= ===========
</TABLE>
See notes to financial statements.
G-5
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Period From July 31, 1997 (Inception) Through December 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation--Malleable Technologies, Inc. (the
"Company"), formerly Malleable Microsystems, Inc., was incorporated in
California on July 31, 1997 to develop and market a reconfigurable hardware
platform that is as efficient in performance, cost, and power, as hardwired
application specific integrated circuits (ASIC's) and provides customers with
a fast time to market for complex, multi-protocol, computation intensive
product applications in digital communications, networking, multi-media and
security markets. In 1999, Malleable Microsystems, Inc. changed its name to
Malleable Technologies, Inc. The Company's primary activities to date have
consisted of research and development, as well as certain consulting services
provided pursuant to an agreement with one customer. The Company follows
Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises."
The Company is subject to the risks associated with a development stage
enterprise, including the need to demonstrate and refine its product, develop
its marketing and distribution channels, expand its management and technical
team and continue to raise sufficient financing.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Equivalents--The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Concentration of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
cash and equivalents. Risks associated with cash and equivalents are mitigated
by banking with creditworthy institutions.
Property and Equipment--Property and equipment are stated at cost.
Equipment acquired under capital lease obligations is stated at the lower of
fair value or the present value of future minimum lease payments at the
inception of the lease. Depreciation is computed using the straight line
method over estimated useful lives of five to seven years. An impairment loss
is recognized when estimated future undiscounted cash flows expected to result
from the use of the asset including disposition, is less than the carrying
value of the asset.
Revenue Recognition--The Company recognizes consulting service revenues as
services are performed.
Deferred Revenue--Deferred revenue represents payments received from the
customer prior to performance of the services.
Income Taxes--The Company accounts for income taxes using an asset and
liability approach. Deferred tax liabilities are recognized for future taxable
amounts and deferred tax assets are recognized for future deductions and
operating loss carryforwards, net of a valuation allowance to reduce net
deferred tax assets to amounts that are more likely than not to be realized.
Research and Development--Research and development expenses are charged to
operations as incurred.
G-6
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period From July 31, 1997 (Inception) Through December 31, 1999
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."
Recently Issued Accounting Standards--In June 1998 and June 1999, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
respectively. These statements require companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133 will be effective for the Company's fiscal year ending
December 31, 2001. Management is in the process of evaluating the impact of
these statements on the Company's financial position, results of operations and
cash flows.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Computer hardware and software......................... $ 964,032 $131,528
Furniture and fixtures................................. 37,545 9,364
Office equipment....................................... 28,850 6,907
---------- --------
Total................................................ 1,030,427 147,799
Accumulated depreciation............................... (118,544) (3,374)
---------- --------
Property and equipment, net............................ $ 911,883 $144,425
========== ========
</TABLE>
At December 31, 1999, the Company had assets under capital lease with a net
book value of $26,000 (net of accumulated amortization of approximately
$1,000).
3. DEVELOPMENT AGREEMENTS
In February 1998, the Company entered into a development agreement with an
unrelated third party to design and develop certain products for the customer's
video-on-demand system. The agreement precludes the Company from developing
such products for certain other third parties without the written approval of
the customer for a period of two years from the earlier of the date of the
delivery of the products or the date of termination of the agreement. Under the
terms of the agreement the Company receives consulting fees for each week of
service provided and incentive payments based on meeting certain milestones as
defined.
The agreement was amended in June 1998. In addition to the deliverables
under the original contract, the amendment requires the Company to design and
develop its proprietary programmable hardware technology for certain specific
customer related uses. The amendment also precludes the Company from providing
similar design services, delivering related technology or selling the developed
customer chips for a period of one, one and two years, respectively, from the
date of the amendment.
In November 1998, in connection with a round of financing, the customer
invested in the Series A preferred stock (see Note 5) and loaned the Company
$400,000 under a convertible note (See Note 4).
G-7
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period From July 31, 1997 (Inception) Through December 31, 1999
Revenues under the development agreement were $175,682 and $415,450 for
fiscal years 1999 and 1998, respectively.
4. NOTES PAYABLE
Notes payable at December 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Convertible note payable................................. $300,000 $ --
Convertible note payable to a related party (see Note
3)...................................................... -- 400,000
Note payable............................................. 25,000 25,000
-------- --------
Total.................................................. $325,000 $425,000
======== ========
</TABLE>
Convertible Note Payable
In April 1999, the Company entered into a convertible note payable with a
third party. Interest on the unpaid principal balance accrues monthly at a rate
of 8% per annum, compounded monthly. This note becomes due upon the earlier of
(a) the acquisition of the Company, (b) the sale of substantially all of the
assets of the Company, or (c) April 9, 2003. In the event that the Company
sells shares of its Series B preferred stock for aggregate gross proceeds of at
least $1 million, then at the option of the noteholder, the outstanding
principal balance shall be converted into shares of Series B preferred stock at
a conversion price equal to 90%, 85% and 80% of the Series B closing price if
sale of the Series B preferred stock takes place (a) within 120 days, (b)
between and including 121 days and 210 days, and (c) more than 210 days,
respectively, after the issuance of the note. The note is unsecured. Upon the
sale of the Company's Series B preferred stock in July 1999, the note became
convertible. The conversion discount of $33,333 was recognized as a noncash
interest expense with a corresponding increase in the convertible Series B
preferred stock in 1999. This note was subsequently converted into Series B
preferred stock after the financial year end (see Note 9).
Convertible Note Payable to a Related Party
In conjunction with the sale of Series A preferred stock on November 5,
1998, the Company entered into a convertible note payable with the Series A
preferred stock investor. Interest on the unpaid principal balance accrues
monthly at a rate of 8% per annum, compounded monthly. This note becomes due
upon the earlier of (a) the acquisition of the Company, (b) the sale of
substantially all of the assets of the Company, or (c) November 5, 2002. In the
event that the Company sells shares of its Series B preferred stock for
aggregate gross proceeds of at least $1 million, then at the option of the
noteholder, the outstanding principal balance shall be converted into shares of
Series B preferred stock at a conversion price equal to 90% of the Series B
closing price. This note is secured by the intellectual property of the Company
(See Note 3). In July 1999, an aggregate of $421,839 ($400,000 of the original
principal of the Note and $21,839 of accrued interest) were converted into
234,355 shares of Series B preferred stock. The Company recognized the
conversion discount of $46,871 as a noncash interest expense with a
corresponding increase in the convertible Series B preferred stock.
Notes Payable
The Company has a $25,000 note payable to a related party who is a family
member of the Company's founder and president. This note accrues interest at a
rate of 8% per annum.
G-8
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period From July 31, 1997 (Inception) Through December 31, 1999
5. SHAREHOLDERS' EQUITY
Convertible Preferred Stock and Warrants
During June 1999, the Company authorized the sale and issuance of up to
7,631,758 shares of its preferred stock, comprising 952,381 shares of Series A
preferred stock and 6,679,377 shares of Series B preferred stock. In July 1999,
the Company issued 3,451,855 shares of Series B preferred stock for cash of
$6,435,000 and the conversion of a note payable of $421,839.
Significant terms of the outstanding preferred stock are as follows:
. Each share of convertible preferred stock is convertible into shares of
common stock on a one-for-one basis, subject to adjustment in certain
instances, at the option of the shareholder. Such shares will be
converted automatically upon the sale of the Company's common stock
pursuant to a registration statement under the Securities Act of 1933
meeting certain criteria or the affirmative vote of the holders of a
majority of the shares of preferred stock outstanding at the time of
such vote.
. Each share of convertible preferred stock has voting rights equivalent
to the number of shares of common stock into which it is convertible.
. Shareholders are entitled to receive noncumulative dividends as declared
by the Board of Directors out of any assets legally available, prior to
and in preference to any declaration or payment of any dividend on the
common stock. The dividend rate for Series A and Series B preferred
stock per share per annum is 8% of the original issue price. No
dividends have been declared as of December 31, 1999.
. In the event of liquidation, dissolution or winding up of the Company,
shareholders of Series A and Series B preferred stock are entitled to
receive the original issue price ($0.42 per share and $2 per share,
respectively), an additional amount equal to 8% per annum compounded
annually from the issue date of such shares for each share of Series A
and Series B preferred stock held by them, and any declared and unpaid
dividends with respect to such shares. If the assets and funds to be
distributed are insufficient to permit full payment, then the funds
shall be distributed on a pro rata basis among the holders of the Series
A preferred stock and Series B preferred stock in proportion to the
preferential amount each such holder is otherwise entitled to receive.
Upon completion of the distribution, the holders of preferred stock will
be entitled to a pro rata distribution until the holders of Series A
preferred stock and Series B preferred stock have received a total of
$1.26 and $6.00 per share, respectively. Any remaining assets shall be
distributed to the holders of the common stock of the Company on a pro
rata basis.
In connection with a sales representative agreement entered into by the
Company and a third party in May 1999, the Company granted the third party
warrants to purchase 25,000 shares of Series B preferred stock at $2.00 per
share. The warrants vest immediately upon issuance and expire in three years.
The estimated fair value of this warrant of $19,252 was included in accounts
receivable and prepaid expenses at December 31, 1999 and will be amortized to
selling expense over the one year period of the sales representative agreement.
Selling expense in 1999 includes $11,683 relating to the amortization expense
of the above warrant.
Stock Option Plan
In 1998, the Company adopted a stock option plan, which includes incentive
and nonstatutory stock options and restricted stock, and reserved 3,600,000
shares of common stock for issuance. Under the Plan,
G-9
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period From July 31, 1997 (Inception) Through December 31, 1999
officers, employees, directors and consultants may be granted options to
purchase shares of the Company's common stock. Options may be granted at not
less than fair market value for incentive stock options and not less than 85%
of fair market value for nonstatutory stock options at the date of grant as
determined by the Board of Directors. The options generally expire ten years
from the date of grant. Incentive stock options and nonstatutory options
normally vest at various rates over three to four years. The Company also sells
restricted stock subject to repurchase rights which generally lapse over a
period of time. At December 31, 1999, 724,219 shares were subject to a right of
repurchase.
The Company granted options to purchase 42,250 shares of common stock under
the plan to nonemployees for services performed as of the grant date. Stock-
based compensation expense of $2,893 relating to these grants was recognized in
1999.
A summary of option and restricted stock activity under the Plan is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Balances, December 31, 1997............................ -- $ --
Granted (weighted average fair value of $0.002) per
share................................................. 1,279,200 0.02
Exercised.............................................. (488,000) 0.01
---------
Balances, December 31, 1998............................ 791,200 0.03
Granted (weighted average fair value of $0.06) per
share................................................. 1,377,250 0.14
Exercised.............................................. (616,000) 0.05
Cancelled.............................................. (75,000) 0.25
---------
Balances, December 31, 1999............................ 1,477,450 $0.11
=========
</TABLE>
Additional information regarding options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Life Average Exercise Number Average Exercise
Prices Outstanding (Years) Price Exercisable Price
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.01 361,200 8.8 $0.01 113,283 $0.01
$0.05 590,000 9.2 $0.05 60,391 $0.05
$0.25 526,250 9.8 $0.25 11,875 $0.25
------- --------- --- ----- ------- -----
$0.01 -
$0.25 1,477,450 9.3 $0.11 185,549 $0.04
======= ========= === ===== ======= =====
</TABLE>
At December 31, 1999, 1,018,550 shares were available for future grant.
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations. Accordingly, no compensation expense has been recognized in
the financial statements for employee stock arrangements because the stock
option exercise price was not less than
G-10
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period From July 31, 1997 (Inception) Through December 31, 1999
the fair value of the underlying common stock at the date of the grant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), requires the disclosure of pro forma net loss
as if the Company had adopted the fair value method. The Company's calculations
were made using the minimum value method with the following weighted average
assumptions: expected life, four years; risk-free interest rate, 5%; and no
dividends during the expected term. The Company's calculations are based on a
multiple option valuation approach, and forfeitures are recognized as they
occur. If the computed fair values of the awards had been amortized to expense
over the vesting periods of the awards, pro forma net loss would not have been
materially different from the amounts reported for the years ended December 31,
1999 and 1998.
Common Stock
At the inception of the Company, the Company's founder contributed
technology and cash in exchange for 6,000,000 shares of common stock.
The Company has reserved the following shares of authorized but unissued
common stock as of December 31, 1999:
<TABLE>
<S> <C>
Convertible preferred stock..................................... 4,404,236
Options available under the stock option plan................... 1,018,550
Options issued and outstanding.................................. 1,477,450
Warrants issued and outstanding................................. 25,000
---------
6,925,236
=========
</TABLE>
6. CALL OPTION
In conjunction with the sale of the Company's Series B preferred stock in
July 1999, the Company, certain common stockholders and the preferred
stockholders granted to one of the Series B preferred stockholders ("Investor")
an irrevocable option to purchase substantially all of the Company's
outstanding capital stock. The option expires on July 6, 2000. The Investor may
exercise the option at any time during the option period. The purchase price is
equal to a fixed number of shares of the Investor's common stock (such shares
having an aggregate fair value of approximately $80 million at December 31,
1999) plus additional shares of the Investor's common stock with an aggregate
fair value of $75 million (based on ten days average closing price for the
Investor's stock ending two business days prior to the date of acquisition),
plus shares of the Investor's common stock to be issued upon exercise of
options as follows: all options to purchase shares of the Company's common
stock outstanding as of the date of acquisition shall remain outstanding and be
converted into options to purchase shares of the Investor's common stock, with
the number of shares subject to and exercise prices of each such option
determined based on the ratio of the consideration payable by the Investor for
each share of the Company's common stock. In addition, immediately prior to the
date of acquisition, the Company shall be entitled to issue options to its
officers and employees to purchase between 2,000,000 and 4,000,000 shares of
the Company's common stock, based on the achievement of certain specified
design wins.
7. INCOME TAXES
No federal income taxes were provided in 1999 and 1998 due to the Company's
net losses. The provision for income tax for 1999 and 1998 represents state
minimum income and franchise taxes.
G-11
<PAGE>
MALLEABLE TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period From July 31, 1997 (Inception) Through December 31, 1999
At December 31, 1999, the Company had available federal and California state
net operating loss carryforwards of approximately $3,800,000 to offset future
taxable income through 2019 and 2004, respectively. At December 31, 1999 and
1998, the net deferred tax assets of approximately $1,500,000 and $7,500,
respectively, generated primarily by net operating loss carryforwards have been
fully reserved due to the uncertainty surrounding the realization of such
benefits.
Current tax laws impose substantial restrictions on the utilization of net
operating loss and credit carryforwards in the event of an "ownership change,"
as defined by the Internal Revenue Code. If there should be an ownership
change, the Company's ability to utilize its carryforwards could be limited.
8. COMMITMENTS
The Company leases its facilities under a noncancelable operating lease that
expires in October 2001. Minimum future lease payments under noncancelable
operating and capital leases as of December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Lease Lease
------------------------ ------- ---------
<S> <C> <C>
2000...................................................... $15,540 $324,000
2001...................................................... 12,950 305,250
------- --------
Total minimum lease payments.............................. 28,490 $629,250
========
Less amount representing interest at 10%.................. (2,560)
-------
25,930
Less current portion...................................... (14,144)
-------
Long-term portion......................................... $11,786
=======
</TABLE>
Rent expense under operating lease for 1999, 1998 and for the period from
July 31, 1997 (inception) through December 31, 1999 was $102,859, $17,966 and
$120,825, respectively.
9. SUBSEQUENT EVENT
In February 2000, in connection with a convertible note payable issued in
April 1999, the note was converted into 175,000 shares of Series B preferred
stock. The Company also issued to the note holder a warrant to acquire 75,000
shares of the Company's common stock at an exercise price of $0.25 per share.
The warrant was fully vested upon issuance and expires in February 2001. The
estimated fair value of the warrant will be recognized as an expense in the
fiscal year 2000.
On June 13, 2000, the Company entered into a definitive agreement for the
purchase of the Company's outstanding common and preferred shares not already
owned by PMC-Sierra, Inc. on that date for approximately 1,250,000 shares of
PMC-Sierra, Inc. common stock, options and warrants pursuant to the exercise of
a call option held by PMC-Sierra, Inc. (See Note 6).
* * * * *
G-12
<PAGE>
ANNEX H
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the quarterly period ended March 26, 2000
[_] 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 April 30, 2000--145,891,414
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
H-1
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements........................................... H-3
--Consolidated statements of operations........................ H-3
--Consolidated balance sheets.................................. H-4
--Consolidated statements of cash flows........................ H-5
--Notes to consolidated financial statements................... H-6
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations.......................................... H-8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... H-18
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... H-19
</TABLE>
H-2
<PAGE>
Part I--FINANCIAL INFORMATION
Item 1--Financial Statements
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
----------------
Mar 26, Mar 28,
2000 1999
-------- -------
<S> <C> <C>
Net revenues.................................................. $102,807 $50,399
Cost of revenues.............................................. 20,601 10,974
-------- -------
Gross profit.............................................. 82,206 39,425
Other costs and expenses:
Research and development.................................... 24,805 13,914
Marketing, general and administrative....................... 14,725 9,634
Amortization of deferred stock compensation:
Research and development.................................. 3,062 458
Marketing, general and administrative..................... 259 53
Amortization of goodwill.................................... 307 313
Costs of merger............................................. 7,902 --
-------- -------
Income from operations........................................ 31,146 15,053
Interest and other income, net................................ 3,646 1,090
Gain on sale of investments................................... 4,117 --
-------- -------
Income before provision for income taxes...................... 38,909 16,143
Provision for income taxes.................................... 15,916 6,728
-------- -------
Net income.................................................... $ 22,993 $ 9,415
======== =======
Net income per common share--basic............................ $ 0.16 $ 0.07
======== =======
Net income per common share--diluted.......................... $ 0.14 $ 0.06
======== =======
Shares used in per share calculation--basic................... 146,733 138,666
Shares used in per share calculation--diluted................. 166,593 149,825
</TABLE>
See notes to consolidated financial statements.
H-3
<PAGE>
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Mar 26, Dec 26,
2000 1999
----------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $223,193 $ 85,945
Short-term investments................................. -- 106,636
Accounts receivable, net............................... 46,108 36,170
Inventories, net....................................... 9,621 7,208
Deferred income taxes.................................. 9,270 9,270
Prepaid expenses and other current assets.............. 8,025 7,270
Short-term deposits for wafer fabrication capacity..... 637 4,637
-------- --------
Total current assets................................. 296,854 257,136
Property and equipment, net............................ 56,075 48,032
Goodwill and other intangible assets, net.............. 14,359 15,280
Investments and other assets........................... 12,489 11,827
Deposits for wafer fabrication capacity................ 14,483 14,483
-------- --------
$394,260 $346,758
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 22,120 $ 11,570
Accrued liabilities.................................... 25,593 16,113
Deferred income........................................ 42,574 34,486
Accrued income taxes................................... 13,618 26,190
Current portion of obligations under capital leases and
long-term debt........................................ 1,956 2,255
-------- --------
Total current liabilities............................ 105,861 90,614
Deferred income taxes.................................... 9,091 9,091
Noncurrent obligations under capital leases and long-term
debt.................................................... 720 3,136
Special shares convertible into 4,069 (1999--4,242)
common stock............................................ 6,748 6,998
Stockholders' equity.....................................
Common stock and additional paid in capital, par value
$0.001; 200,000 shares authorized (200,000 shares in
1999) 143,568 shares issued and outstanding (141,317
in 1999).............................................. 241,331 219,761
Deferred stock compensation............................ (14,172) (4,530)
Retained earnings...................................... 44,681 21,688
-------- --------
Total stockholders' equity........................... 271,840 236,919
-------- --------
$394,260 $346,758
======== ========
</TABLE>
See notes to consolidated financial statements.
H-4
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
Mar 26, Mar 28,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 22,993 $ 9,415
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of plant and equipment.............. 5,886 4,145
Amortization of intangibles...................... 921 871
Amortization of deferred stock compensation...... 3,321 511
Equity in income of investee..................... (725) --
Gain on sale of investments........................ (4,117) --
Changes in operating assets and liabilities
Accounts receivable.............................. (9,938) 1,800
Inventories...................................... (2,413) (1,391)
Prepaid expenses and other....................... (742) (124)
Accounts payable and accrued expenses............ 20,030 4,632
Income taxes payable............................. (12,572) (4,945)
Deferred income.................................. 8,088 1,863
--------- ---------
Net cash provided by operating activities...... 30,732 16,777
========= =========
Cash flows from investing activities:
Proceeds from sales and maturities of short-term
investments....................................... 106,636 50,893
Purchases of plant and equipment................... (13,929) (5,880)
Proceeds from sale of investments.................. 4,167 --
Proceeds from refund of wafer fabrication
deposits.......................................... 4,000 4,000
--------- ---------
Net cash provided by investing activities...... 100,874 49,013
========= =========
Cash flows from financing activities:
Proceeds from notes payable........................ -- 136
Repayment of notes payable and long-term debt...... (2,222) (93)
Principal payments under capital lease
obligations....................................... (493) (1,147)
Proceeds from issuance of common stock............. 8,357 3,195
--------- ---------
Net cash provided by financing activities...... 5,642 2,091
========= =========
Net increase in cash and cash equivalents.......... 137,248 67,881
Cash and cash equivalents, beginning of the
period............................................ 85,945 45,691
--------- ---------
Cash and cash equivalents, end of the period....... $ 223,193 $ 113,572
========= =========
</TABLE>
See notes to consolidated financial statements.
H-5
<PAGE>
NOTE 1. Summary of Significant Accounting Policies
Description of business. PMC-Sierra, Inc (the "Company" or "PMC" ) provides
customers with internetworking semiconductor system solutions for high speed
transmission and networking systems.
Basis of presentation. All historical financial information has been
restated to reflect the acquisitions of Toucan Technology Limited ("Toucan")
and AANetcom, Inc. ("AANetcom") in the first quarter of fiscal 2000 which were
accounted for as poolings of interests.
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 26, 1999. The results of operations for the interim period are not
necessarily indicative of results to be expected in future periods.
Inventories. Inventories are stated at the lower of cost (first-in, first
out) or market (estimated net realizable value).
<TABLE>
<CAPTION>
Mar 26, Dec 26,
2000 1999
------- -------
(unaudited)
(in thousands)
<S> <C> <C>
Work-in-progress....................................... $3,834 $4,031
Finished goods......................................... 5,787 3,177
------- -------
$9,621 $7,208
======= =======
</TABLE>
Recently issued accounting standards. In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Statement will require the recognition of all
derivatives on the Company's consolidated balance sheet at fair value. The
Financial Accounting Standards Board has subsequently delayed implementation of
the standard for the financial years beginning after June 15, 2000. The Company
expects to adopt the new Statement effective January 1, 2001. The impact on the
Company's financial statements is not expected to be material.
NOTE 2. Business Combinations.
In January 2000, the Company acquired Toucan, a privately held integrated
circuit design company, located in Galway and Dublin, Ireland. Toucan offers
Company owned seven per cent of Toucan and purchased the remaining for
approximately 300,000 shares of PMC common stock and options to purchase PMC
common stock.
In March 2000, the Company acquired AANetcom, Inc. ("AANetcom"), a privately
held fabless semiconductor company with offices in Allentown, Pennsylvania and
San Jose, California. AANetcom's technology is designed for use in gigabit or
terabit switches and routers, telecommunication access equipment, and optical
networking switches in applications ranging from the enterprise to the core of
the Internet. The Company issued approximately 4.8 million shares of PMC common
stock in exchange for all outstanding stock and options of AANetcom.
These transactions were accounted for as a pooling of interests and all
historical financial information contained herein has been restated to include
combined results of operations, financial position and cash flows of Toucan and
AANetcom.
H-6
<PAGE>
During the quarter ended March 26, 2000, PMC recorded merger-related
transaction costs of $7.9 million related to the acquisition of Toucan and
AANetcom. 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.
Acquisitions Completed After March 26, 2000
In April 2000, the Company completed the purchase of Extreme Packet Devices,
Inc. ("Extreme"),
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. The purchase agreement provides for
the Company to issue approximately 2.0 million shares of PMC common stock and
options to purchase PMC common stock in exchange for all outstanding stock and
options of Extreme. This transaction will be accounted for as a pooling of
interests.
NOTE 3. Sale of Investment
During the quarter ended March 26, 2000, the Company realized a pre-tax gain
of $4.1 million related to the disposition of 92,360 common shares of Cypress
Semiconductor, Inc., a publicly held company. These shares were previously
subject to escrow restrictions and were not available for sale until the first
quarter of fiscal 2000.
NOTE 4. Segment Information
The Company has two operating segments: networking and non-networking
products. The networking segment consists of internetworking semiconductor
devices and related technical service and support to equipment manufacturers
for use in their communications and networking equipment. The non-networking
segment includes custom user interface products. The Company is supporting the
non-networking products for existing customers, but has decided not to develop
any further products of this type.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on revenues and gross margins from operations of the two
segments.
<TABLE>
<CAPTION>
Three Months
Ended
----------------
Mar 26, Mar 28,
2000 1999
-------- -------
(in thousands)
<S> <C> <C>
Net revenues
Networking................................................ $ 97,753 $47,405
Non-Networking............................................ 5,054 2,994
-------- -------
Total................................................... $102,807 $50,399
======== =======
Gross profit
Networking................................................ $ 79,958 $38,013
Non-Networking............................................ 2,248 1,412
-------- -------
Total................................................... $ 82,206 $39,425
======== =======
</TABLE>
H-7
<PAGE>
NOTE 5. Net Income Per Share
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Three Months
Ended
---------------
Mar 26, Mar 28,
2000 1999
------- -------
(in thousands,
except for per
share amounts)
<S> <C> <C>
Numerator:
Net income............................................... $22,993 $ 9,415
======= =======
Denominator:
Basic weighted average common shares outstanding(1)...... 146,733 138,666
------- -------
Effect of dilutive securities:
Stock options.......................................... 19,692 11,072
Stock warrants......................................... 168 87
------- -------
Shares used in calculation of diluted net income per
share................................................... 166,593 149,825
Net income per common share--basic......................... $ 0.16 $ 0.07
Net income per common share--diluted....................... $ 0.14 $ 0.06
</TABLE>
--------
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic
net income per share.
NOTE 6. Stock Split
In February 2000, the Company effected a two-for-one stock split in the form
of a stock dividend. Accordingly, all references to share and per-share data
for all periods presented have been adjusted to reflect this event.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Some statements in this report constitute "forward looking statements"
within the meaning of the federal securities laws, including those statements
relating to:
. revenues;
. gross margins;
. gross profit;
. research and development expenses;
. marketing, general and administrative expenditures; and
. capital resources sufficiency.
Our results may differ materially from those expressed or implied by the
forward-looking statements for a number of reasons, including those described
below in "Factors That You Should Consider Before Investing in PMC-Sierra." We
may not, nor are we obliged to, release revisions to forward-looking statements
to reflect subsequent events.
In February 2000, we effected a two-for-one stock split in the form of a
stock dividend. Accordingly, all references to share and per-share data for all
periods presented have been adjusted to reflect this event.
H-8
<PAGE>
Acquisitions
In January and March 2000, we announced the acquisitions of Toucan
Technology Ltd. ("Toucan"), AANetcom Inc. ("AANetcom") and Extreme Packet
Devices, Inc. ("Extreme") in exchange for approximately 7.1 million shares of
common stock and options to purchase common stock. The acquisitions of Toucan
and AANetcom were completed in the first quarter of 2000, while the acquisition
of Extreme was completed in April 2000.
We are accounting for all of these transactions as pooling-of-interests. We
have restated all prior period consolidated financial statements presented to
include combined results of operations, financial position and cash flows of
Toucan and AANetcom. Extreme will be reflected in the second quarter of fiscal
2000.
Results of Operations
First Quarters of 2000 and 1999
Net Revenues ($000,000)
<TABLE>
<CAPTION>
First
Quarter
------------
2000 1999 Change
------ ----- ------
<S> <C> <C> <C>
Networking products...................................... $ 97.8 $47.4 106%
Non-networking products.................................. 5.0 3.0 67%
------ -----
Total net revenues..................................... $102.8 $50.4 104%
====== =====
</TABLE>
Net revenues increased by 104% in the first quarter of 2000 compared to the
same quarter in 1999. Our networking revenue increased 106% in the same periods
and our non-networking revenues grew 67%.
Networking revenue growth was driven by growth in our customers' networking
equipment business, our customers' continued transition from internally
developed application specific semiconductors to our standard semiconductors,
and our introduction and sale of chips addressing additional network functions.
Non-networking revenues grew as a result of our customers' ordering
patterns. We expect our non-networking revenues to fluctuate in the future as
they have in the past. In the long run, we expect non-networking revenues to
reduce to zero as we have not developed any new products of this type since
1996.
Gross Profit ($000,000)
<TABLE>
<CAPTION>
First
Quarter
------------
2000 1999 Change
----- ----- ------
<S> <C> <C> <C>
Networking.............................................. $80.0 $38.0 111%
Non-networking.......................................... 2.2 1.4 57%
----- -----
Total gross profit.................................... $82.2 $39.4 109%
===== =====
Percentage of net revenues............................ 80% 78%
</TABLE>
Total gross profit grew 109% from $39.4 million in the first quarter of 1999
to $82.2 million in the same quarter of 2000. Total gross profit grew as a
result of higher sales volumes of both networking and non-networking products.
Total gross profit as a percentage of net revenue increased in the first
quarter of 2000 as our networking revenues comprised a greater portion of our
total revenues. Our networking gross profit as a percentage of net revenue is
high relative to the overall gross margins in the semiconductor industry
because our products are complex and are sold in relatively low volumes. We
believe that, should the market for our networking products grow and our
customers purchase in greater volume, our gross profit as a percentage of
revenue will decline.
H-9
<PAGE>
Non-networking gross profit as a percentage of non-networking revenue
declined in the first quarter of 2000 compared to the same period in 1999 as a
result of price changes on these older products.
Other Costs and Expenses ($000,000)
<TABLE>
<CAPTION>
First
Quarter
------------
2000 1999 Change
----- ----- ------
<S> <C> <C> <C>
Research and development................................ $24.8 $13.9 78%
Percentage of net revenues.............................. 24% 28%
Marketing, general and administrative................... $14.7 $ 9.6 53%
Percentage of net revenues.............................. 14% 19%
Amortization of deferred stock compensation:
Research and development.............................. $ 3.1 $ 0.4
Marketing, general and administrative................. 0.2 0.1
Amortization of goodwill................................ $ 0.3 $ 0.3
Costs of merger......................................... $ 7.9 --
</TABLE>
Our research and development ("R&D") expenses of $24.8 million in the first
quarter of 2000 increased 78% over the first quarter of 1999. Our R&D expenses
increased in absolute dollars but decreased as a percentage of net revenues.
R&D expenditures increased in the first quarter of 2000 predominantly because
we hired more R&D employees.
We incur R&D expenditures in order to attain technological leadership from a
multi-year perspective. This has caused R&D spending to fluctuate from quarter
to quarter. We expect such fluctuations, 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. We expect R&D
expenses to continue to increase in future periods.
We increased marketing, general and administrative expenses by 53% in the
first quarter of 2000 compared to the first quarter of 1999. Marketing, general
and administrative expenses decreased as a percentage of net revenue compared
to the first quarter of 1999 because many marketing, general and administrative
expenses are fixed in the short term. Therefore, in periods of rising revenues,
these expenses decline as a percentage of revenues.
We recorded a $3.3 million charge for amortization of deferred stock
compensation in the first quarter of 2000 compared to a $0.5 million charge in
the prior year's first quarter. Deferred compensation charges increased as a
result of the AANetcom acquisition. AANetcom had, in the past, issued shares at
prices lower than the deemed fair value of the stock. We are amortizing these
amounts using the accelerated method over the vesting period.
We incurred $0.3 million in non-cash goodwill charges in the first quarters
of 2000 and 1999 in connection with goodwill recorded as a result of prior
acquisitions. We may acquire products, technologies or companies in the future
for which the purchase method of accounting may be used. This could result in
significant goodwill amortization charges in future periods which could
materially impact our operating results.
During the first quarter of 2000, we recorded $7.9 million in merger costs
related to the acquisition of Toucan and AANetcom. These charges consist
primarily of investment banking and other professional fees. We expect to incur
significant merger costs related to future acquisitions.
Interest and other income, net
Net interest and other income increased to $3.6 million in the first quarter
of 2000 from $1.1 million in last year's first quarter due to higher cash
balances available to earn interest. In addition, we included $0.7 million from
our equity interest in another company in the first quarter of 2000.
H-10
<PAGE>
Gain on sale of investment
During the first quarter of 2000, we realized a pre-tax gain of
approximately $4.1 million as a result of our disposition of our remaining
investment in Cypress Semiconductor ("Cypress"). Cypress purchased our interest
in IC Works, Inc. ("ICW") in the second quarter of 1999. 92,360 Cypress shares
were released from escrow in the first quarter of 2000 and were subsequently
sold.
Provision for income taxes
The provision for income taxes consists primarily of estimated taxes on
Canadian and other foreign operations.
Recently issued accounting standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on our consolidated balance sheet at
fair value. The Financial Accounting Standards Board has subsequently delayed
implementation of the standard for the financial years beginning after June 15,
2000. We expect to adopt the new Statement effective January 1, 2001. We expect
the impact of this accounting standard will be immaterial to our financial
statements.
Liquidity and Capital Resources
Cash and cash equivalents and short term investments increased from $192.6
million at the end of 1999 to $223.2 million at March 26, 2000.
During the first quarter of 2000, operating activities provided $30.7
million in cash. Net income of $23.0 million includes non-cash charges of $5.9
million for depreciation, $0.9 million of intangible amortization, $3.4 million
of deferred stock compensation and a non-cash gain of $4.1 million from the
sale of an investment.
Our year to date investing activities included the maturity of short-term
investments, the bulk of which were reinvested as cash and cash equivalents.
They also included an investment of $13.9 million in plant and equipment, $4.2
million of proceeds from the sale of an investment and a wafer fabrication
deposit refund of $4.0 million.
Our year to date financing activities provided $5.6 million. We used $2.7
million for debt and lease repayments and received $8.3 million of proceeds
from issuing common stock.
Our principal source of liquidity at March 26, 2000 was our cash and cash
equivalents of $223.2 million. We also have a line of credit with a bank that
allows us to borrow up to $13 million provided, along with other restrictions,
that we do not pay cash dividends or make any material divestments without the
bank's written consent.
We believe that existing sources of liquidity and anticipated funds from
operations will satisfy our projected working capital, capital expenditure and
wafer deposit requirements through the end of 2000. We expect to spend
approximately $51 million on new capital additions and to provide $8.6 million
in wafer deposits over the balance of 2000.
H-11
<PAGE>
FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA
Our company is subject to a number of risks--some are normal to the fabless
networking semiconductor industry, some are the same or similar to those
disclosed in previous SEC filings, and some may be present in the future. You
should carefully consider all of these risks and the other information in this
report before investing in PMC. The fact that certain risks are endemic to the
industry does not lessen the significance of the risk.
As a result of these risks, our business, financial condition or operating
results could be materially adversely affected. This could cause the trading
price of our common stock to decline, and you may lose part or all of your
investment.
If one or more of our customers changes their ordering pattern or if we lose
one or more of our customers, our revenues could decline
We depend on a limited number of customers for a major portion of our
revenues. Through direct, distributor and subcontractor purchases, Lucent
Technologies and Cisco Systems each accounted for more than 10% of our fiscal
1999 revenues. We do not have long-term volume purchase commitments from any of
our major customers.
Our customers often shift buying patterns as they manage inventory levels,
decide to use competing products, are acquired or divested, market different
products, change production schedules or change their orders for other reasons.
If one or more customers were to delay, reduce or cancel orders, our overall
order levels may fluctuate greatly, particularly when viewed on a quarterly
basis.
If our customers use our competitors' products instead of ours, suffer a
decline in demand for their products or are acquired or sold, our revenues may
decline
Our expenses are relatively fixed so that fluctuation in our revenues may
cause our operating results to fluctuate as well. Demand for our products and,
as a result our revenues, may decline for the following reasons outside our
control.
As our customers increase the frequency by which they design next generation
systems and select the chips for those new systems, our competitors have an
increased opportunity to convince our customers to switch to their products,
which may cause our revenues to decline
The markets for our products are intensely competitive and subject to rapid
technological advancement in design tools, wafer manufacturing techniques,
process tools and alternate networking technologies. We must identify and
capture future market opportunities to offset the rapid price erosion that
characterizes our industry. We may not be able to develop new products at
competitive pricing and performance levels. Even if we are able to do so, we
may not complete a new product and introduce it to market in a timely manner.
Our customers may substitute use of our products in their next generation
equipment with those of current or future competitors.
We typically face competition at the design stage, where customers evaluate
alternative design approaches that require integrated circuits. Our competitors
have increasingly frequent opportunities to supplant our products in next
generation systems because of shortened product life and design-in cycles in
many of our customers' products.
Major domestic and international semiconductor companies, such as Intel,
IBM, and Lucent Technologies, are concentrating an increasing amount of their
substantially greater financial and other resources on the markets in which we
participate. This represents a serious competitive threat to PMC. Emerging
companies also provide significant competition in our segment of the
semiconductor market.
H-12
<PAGE>
Our competitors include Applied Micro Circuits Corporation, Broadcom,
Conexant Systems, Cypress Semiconductor, Dallas Semiconductor, Galileo
Technology, Integrated Device Technology, IBM, Infineon, Intel, Lucent
Technologies, Motorola, MMC Networks, Texas Instruments, Transwitch and Vitesse
Semiconductor. Over the next few years, we expect additional competitors, some
of which also may have greater financial and other resources, to enter the
market with new products. In addition, we are aware of venture-backed companies
that focus on specific portions of our broad range of products. Competition is
particularly strong in the market for optical networking and optical
telecommunication chips, in part due to the market's growth rate, which
attracts larger competitors, and in part due to the number of smaller companies
focused on this area. These companies, individually or collectively, could
represent future competition for many design wins, and subsequent product
sales.
We must often redesign our products to meet rapidly evolving industry standards
and customer specifications, which may delay an increase in our revenues
We sell products to a market whose characteristics include rapidly evolving
industry standards, product obsolescence, and new manufacturing and design
technologies. Many of the standards and protocols for our products are based on
high speed networking technologies that have not been widely adopted or
ratified by one of the standard setting bodies in our customers' industry. Our
customers often delay or alter their design demands during this standard-
setting process. In response, we must redesign our products to suit these
changing demands. Redesign usually delays the production of our products. Our
products may become obsolete during these delays.
If demand for our customers' products changes, including due to a downturn in
the networking industry, our revenues could decline
Our customers routinely build inventories of our products in anticipation of
end demand for their products. Many of our customers have numerous product
lines, numerous component requirements for each product, and sizeable and very
complex supplier structures. This makes forecasting their production
requirements difficult and can lead to an inventory surplus of certain of their
suppliers' components.
In the past, some of our customers have built PMC component inventories that
exceeded their production requirements. Those customers materially reduced
their orders and impacted our operating results. This may happen again.
In addition, while all of our sales are denominated in US dollars, our
customers' products are sold worldwide. Any major fluctuations in currency
exchange rates could materially affect our customers' end demand, and force
them to reduce orders, which could cause our revenues to decline.
Since we develop products many years before their volume production, if we
inaccurately anticipate our customers' needs, our revenues may not increase
Our products generally take between 18 and 24 months from initial
conceptualization to development of a viable prototype, and another 6 to 18
months to be designed into our customers' equipment and into production. They
often need to be redesigned because manufacturing yields on prototypes are
unacceptable or customers redefine their products to meet changing industry
standards. As a result, we develop products many years before volume production
and may inaccurately anticipate our customers' needs.
There have been times when we either designed products that had more
features than were demanded when they were introduced to the market or
conceptualized products that were not sufficiently feature-rich to meet the
needs of our customers or compete effectively against our competitors. This may
happen again.
H-13
<PAGE>
If the recent trend of consolidation in the networking industry continues, our
customers may be acquired or sold, which could cause those customers to cancel
product lines or development projects and our revenues to decline
The networking equipment industry has experienced significant merger
activity and partnership programs. Through mergers or partnerships, our
customers could seek to remove redundancies in their product lines or
development initiatives. This could lead to the cancellation of a product line
into which PMC products are designed or a development project on which PMC is
participating. In the cases of a product line cancellation, PMC revenues could
be materially impacted. In the case of a development project cancellation, we
may be forced to cancel development of one or more products, which could mean
opportunities for future revenues from this development initiative could be
lost.
If there is not sufficient market acceptance of the recently developed
specifications and protocols on which our new products are based, we may not be
able to sustain or increase our revenues
We recently introduced a number of ethernet switch products which function
at gigabit and fast ethernet speeds. Gigabit ethernet involves the transmission
of data over ethernet protocol networks at speeds of up to one billion bits per
second. Fast ethernet transmits data over these networks at speeds of up to 100
megabits per second. While gigabit and fast ethernet are well established, it
is not clear whether products meeting these protocols will be competitive with
products meeting alternative protocols, or whether our products will be
sufficiently attractive to achieve commercial success.
Some of our other recently introduced products adhere to specifications
developed by industry groups for transmissions of data signals, or packets,
over high-speed fiber optics transmission standards. These transmission
standards are called synchronous optical network, or SONET, in North America,
and synchronous data hierarchy, or SDH in Europe. The specifications, commonly
called packet-over-SONET/SDH, may be rejected for other technologies, such as
mapping IP directly onto fiber. In addition, we can not be sure whether our
products will compete effectively with packet-over-SONET/SDH offerings of other
companies.
A substantial portion of our business also relies on industry acceptance of
asynchronous transfer mode, or ATM, products. ATM is a networking protocol.
While ATM has been an industry standard for a number of years, the overall ATM
market has not developed as rapidly as some observers had predicted it would.
As a result, competing communications technologies, including gigabit and fast
ethernet and packet-over-SONET/SDH, may inhibit the future growth of ATM and
our sales of ATM products.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance
We recently acquired or have announced acquisitions of six companies, five
of which have design wins for their products. The design wins have not yet
generated significant revenue. These or any follow on products may not achieve
commercial success. These acquisitions may not generate future revenues or
earnings.
Acquiring products, technologies or businesses from third parties is an
integral part of our business strategy. Management may be diverted from our
operations while they identify and negotiate these acquisitions and integrate
an acquired entity into our operations. Also, we may be forced to develop
expertise outside our existing businesses, and replace key personnel who leave
due to an acquisition. We have not previously attempted to integrate several
acquisitions simultaneously and may not succeed in this effort.
A future acquisition could adversely affect operating results. In
particular, if we were to acquire a company or assets and record the
acquisition as a purchase, we may capitalize a significant goodwill asset. This
asset would be amortized over its expected period of benefit. The resulting
amortization expense could seriously impact operating results for many years.
H-14
<PAGE>
An acquisition could absorb substantial cash resources, require us to incur
or assume debt obligations, or issue additional equity. If we issue more
equity, we may dilute our common stock with securities that have an equal or a
senior interest.
Acquired entities also may have unknown liabilities, and the combined entity
may not achieve the results that were anticipated at the time of the
acquisition.
We anticipate lower margins on mature and high volume products, which could
adversely affect our profitability
We expect the average selling prices of our products to decline as they
mature. Historically, competition in the semiconductor industry has driven down
the average selling prices of products. If we price our products too high, our
customers may use a competitor's product or an in-house solution. To maintain
profit margins, we must reduce our costs sufficiently to offset declines in
average selling prices, or successfully sell proportionately more new products
with higher average selling prices. Yield or other production problems, or
shortages of supply may preclude us from lowering or maintaining current
operating costs.
We may not be able to meet customer demand for our products if we do not
accurately predict demand or if we fail to secure adequate wafer fabrication or
assembly capacity
Anticipating demand is difficult because our customers face volatile pricing
and demand for their end-user networking equipment. If our customers were to
delay, cancel or otherwise change future ordering patterns, we could be left
with unwanted inventory.
Recently, our suppliers, particularly silicon wafer suppliers, have
experienced an increase in the demand for their products or services. If our
silicon wafer or other suppliers are unable or unwilling to increase productive
capacity in line with the growth in demand, we may suffer longer production
lead times. Longer production lead times require that we forecast the demand
for our products further into the future. Thus, a greater proportion of our
manufacturing orders will be based on forecasts, rather than actual customers
orders. This increases the likelihood of forecasting errors. These forecasting
errors could lead to excess inventory in certain products and insufficient
inventory in others, which could adversely affect our operating results.
In addition, if our suppliers are unable or unwilling to increase productive
capacity in line with demand, we may suffer supply shortages or be allocated
supply. A shortage in supply could adversely impact our ability to satisfy
customer demand, which could adversely affect our customer relationships along
with our current and future operating results.
We rely on a limited source of wafer fabrication, the loss of which could delay
and limit our product shipments
We do not own or operate a wafer fabrication facility. Two outside foundries
supply most of our semiconductor device requirements. Our foundry suppliers
also produce products for themselves and other companies. In addition, we may
not have access to adequate capacity or certain process technologies. We have
less control over delivery schedules, manufacturing yields and costs than
competitors with their own fabrication facilities. If the foundries we use are
unable or unwilling to manufacture our products in required volumes, we may
have to identify and qualify acceptable additional or alternative foundries.
This qualification process could take six months or longer. We may not find
sufficient capacity quickly enough, if ever, to satisfy our production
requirements.
Some companies which supply our customers are similarly dependent on a
limited number of suppliers to produce their products. These other companies'
products may be designed into the same networking equipment into which we are
designed. Our order levels could be reduced materially if these companies are
unable to access sufficient production capacity to produce in volumes demanded
by our customers because our customers may be forced to slow down or halt
production on the equipment into which we are designed.
H-15
<PAGE>
We depend on third parties in Asia for assembly of our semiconductor products
which could delay and limit our product shipments
Sub-assemblers in Asia assemble all of our semiconductor products. Raw
material shortages, political and social instability, assembly house service
disruptions, currency fluctuations, or other circumstances in the region could
force us to seek additional or alternative sources of supply or assembly. This
could lead to supply constraints or product delivery delays which, in turn, may
result in the loss of customers. We have less control over delivery schedules,
assembly processes, quality assurances and costs than competitors that do not
outsource these tasks.
We depend on a limited number of design software suppliers, the loss of which
could impede our product development
A limited number of suppliers provide the computer aided design, or CAD,
software we use to design our products. Factors affecting the price,
availability or technical capability of these products could affect our ability
to access appropriate CAD tools for the development of highly complex products.
In particular, the CAD software industry has been the subject of extensive
intellectual property rights litigation, the results of which could materially
change the pricing and nature of the software we use. We also have limited
control over whether our software suppliers will be able to overcome technical
barriers in time to fulfill our needs.
We are subject to the risks of conducting business outside the United States to
a greater extent than companies which operate their businesses mostly in the
United States, which may impair our sales, development or manufacturing of our
products
We are subject to the risks of conducting business outside the United States
to a greater extent than most companies because, in addition to selling our
products in a number of countries, a significant portion of our research and
development and manufacturing are conducted outside of the United States. This
subjects us to the following risks.
We may lose our ability to design or produce products, could face additional
unforeseen costs or could lose access to key customers if any of the nations in
which we conduct business impose trade barriers or new communications standards
We may have difficulty obtaining export licenses for certain technology
produced for us outside the United States. If a foreign country imposes new
taxes, tariffs, quotas, and other trade barriers and restrictions or the United
States and a foreign country develop hostilities or change diplomatic and trade
relationships, we may not be able to continue manufacturing or sub-assembly of
our products in that country and may have fewer sales in that country. We may
also have fewer sales in a country that imposes new communications standards or
technologies. This could inhibit our ability to meet our customers' demand for
our products and lower our revenues.
If foreign exchange rates fluctuate significantly, our profitability may
decline
We are exposed to foreign currency rate fluctuations because a significant
part of our development, test, marketing and administrative costs are
denominated in Canadian dollars, and our selling costs are denominated in a
variety of currencies around the world. In addition, a number of the countries
in which we have sales offices have a history of imposing exchange rate
controls. This could make it difficult to withdraw the foreign currency
denominated assets we hold in these countries.
We may have difficulty collecting receivables from customers based in foreign
countries, which could adversely affect our earnings
We sell our products to customers around the world. Payment cycle norms in
these countries may not be consistent with our standard payment terms. Thus, we
may have greater difficulty collecting receivables on time from customers in
these countries. This could impact our financial performance, particularly on
our balance sheet.
H-16
<PAGE>
In addition, we may be faced with greater difficulty in collecting
outstanding balances due to the shear distances between our collection
facilities and our customers, and we may be unable to enforce receivable
collection in foreign nations due to their business legal systems. If one or
more of our foreign customers do not pay their outstanding receivable, we may
be forced to write-off the account. This could have a material impact on our
earnings.
The loss of personnel could preclude us from designing new products
To succeed, we must retain and hire technical personnel highly skilled at
the design and test functions used to develop high speed networking products
and related software. The competition for such employees is intense. We, along
with our peers, customers and other companies in the communications industry,
are facing intense competition for those employees from our peers and an
increasing number of startup companies which are emerging with potentially
lucrative employee ownership arrangements.
We do not have employment agreements in place with our key personnel. We
issue common stock options that are subject to vesting as employee incentives.
These options, however, are effective as retention incentives only if they have
economic value.
If we cannot protect our proprietary technology, we may not be able to prevent
competitors from copying our technology and selling similar products, which
would harm our revenues
To compete effectively, we must protect our proprietary information. We rely
on a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We hold several patents and have a number of
pending patent applications.
We might not succeed in attaining patents from any of our pending
applications. Even if we are awarded patents, they may not provide any
meaningful protection or commercial advantage to us, as they may not be of
sufficient scope or strength, or may not be issued in all countries where our
products can be sold. In addition, our competitors may be able to design around
our patents.
We develop, manufacture and sell our products in Asian and other countries
that may not protect our products or intellectual property rights to the same
extent as the laws of the United States. This makes piracy of our technology
and products more likely. Steps we take to protect our proprietary information
may not be adequate to prevent theft of our technology. We may not be able to
prevent our competitors from independently developing technologies that are
similar to or better than ours.
Our products employ technology that may infringe on the proprietary rights of
third parties, which may expose us to litigation and prevent us from selling
our products
Vigorous protection and pursuit of intellectual property rights or positions
characterize the semiconductor industry. This often results in expensive and
lengthy litigation. We, as well as our customers or suppliers, may be accused
of infringing on patents or other intellectual property rights owned by third
parties. This has happened in the past. An adverse result in any litigation
could force us to pay substantial damages, stop manufacturing, using and
selling the infringing products, spend significant resources to develop non-
infringing technology, discontinue using certain processes or obtain licenses
to the infringing technology. In addition, we may not be able to develop non-
infringing technology, nor might we be able to find appropriate licenses on
reasonable terms.
Patent disputes in the semiconductor industry are often settled through
cross-licensing arrangements. Because we currently do not have a substantial
portfolio of patents compared to our larger competitors, we may not be able to
settle an alleged patent infringement claim through a cross-licensing
arrangement. We are therefore more exposed to third party claims than some of
our larger competitors and customers.
H-17
<PAGE>
In the past, our customers have been required to obtain licenses from and
pay royalties to third parties for the sale of systems incorporating our
semiconductor devices. Until December of 1997, we indemnified our customers up
to the dollar amount of their purchases of our products found to be infringing
on technology owned by third parties. Customers may also make claims against us
with respect to infringement.
Furthermore, we may initiate claims or litigation against third parties for
infringing our proprietary rights or to establish the validity of our
proprietary rights. This could consume significant resources and divert the
efforts of our technical and management personnel, regardless of the
litigation's outcome.
Securities we issue to fund our operations could dilute your ownership
We may need to raise additional funds through public or private debt or
equity financing to fund our operations. If we raise funds by issuing equity
securities, the percentage ownership of current stockholders will be reduced
and the new equity securities may have priority rights to your investment. We
may not obtain sufficient financing on terms we or you will find favorable. We
may delay, limit or eliminate some or all of our proposed operations if
adequate funds are not available.
Our stock price has been and may continue to be volatile
In the past, our common stock price has fluctuated significantly. This could
continue as our or our competitors announce new products, our and our peers or
customers' results fluctuate, conditions in the networking or semiconductor
industry change or investors change their sentiment toward technology stocks.
In addition, increases in our stock price and expansion of our price-to-
earnings multiple may have made our stock attractive to momentum or day-trading
investors who often shift funds into and out of stocks rapidly, exacerbating
price fluctuations in either direction particularly when viewed on a quarterly
basis.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion regarding our risk management activities contains
"forward-looking statements" that involve risks and uncertainties. Actual
results may differ materially from those projected in the forward-looking
statements.
We are exposed to foreign currency fluctuations through our operations in
Canada and elsewhere. In our effort to hedge this risk, we typically forecast
our operational currency needs, purchase such currency on the open market at
the beginning of an operational period, and classify these funds as a hedge
against operations. We usually limit the operational period to less than 3
months to avoid undue exposure of our asset position to further foreign
currency fluctuation. While we expect to utilize this method of hedging our
foreign currency risk in the future, we may change our hedging methodology and
utilize foreign exchange contracts that are currently available under our
operating line of credit agreement.
Occasionally, we may not be able to correctly forecast our operational
needs. If our forecasts are overstated or understated during periods of
currency volatility, we could experience unanticipated currency gains or
losses. At the end of the first quarter of 2000, we did not have significant
foreign currency denominated net asset or net liability positions, and we had
no outstanding foreign exchange contracts.
We maintain investment portfolio holdings of various issuers, types, and
maturity dates with various banks and investment banking institutions. We
sometimes hold investments beyond 120 days, and the market value of these
investments on any day during the investment term may vary as a result of
market interest rate fluctuations. We do not hedge this exposure because short-
term fluctuations in interest rates would not likely have a material impact on
interest earnings. We classify our investments as available-for-sale or held-
to-
maturity at the time of purchase and re-evaluate this designation as of each
balance sheet date. We had no outstanding short-term investments at the end of
the first quarter of 2000. In the future, we expect to hold the short-term
investments we buy through to maturity.
H-18
<PAGE>
PART II--OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--
<TABLE>
<C> <S>
10.35 Deposit agreement between Chartered Semiconductor Manufacturing Ltd. and
PMC-Sierra, Inc. dated January 31, 2000. (1)
11.1 Calculation of earnings per share (2)
27 Financial Data Schedule
</TABLE>
--------
(1) Confidential treatment has been requested as to a portion of this exhibit.
(2) Refer to Note 5 of the financial statements included in Item I of Part I of
this Quarterly Report.
(b) Reports on Form 8-K--
. A Current Report on Form 8-K was filed on March 20, 2000 to disclose the
completion of the Company's purchases of Toucan Technology Ltd. and
AANetcom, Inc. and to disclose that the Company had signed a definitive
agreement to purchase Extreme Packet Devices Inc.
. A Current Report on Form 8-K was filed on April 12, 2000 to disclose the
completion of the Company's acquisition of Extreme Packet Devices Inc.
H-19
<PAGE>
ANNEX I
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--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 26, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission File Number 0-19084
----------------
PMC-Sierra, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2925073
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
</TABLE>
105-8555 BAXTER PLACE
BURNABY, BRITISH COLUMBIA, V5A 4V7
CANADA
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (604) 415-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
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 shorter 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
15, 2000, as reported by the Nasdaq National Market, was approximately
$15,831,000,000. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding voting stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 15, 2000, the Registrant had 139,210,849 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference in Items 10, 11, 12 and 13 Part III
of this Form 10-K Report.
This amended Form 10-K for the fiscal year ended December 26, 1999 is being
filed to include the supplemental disclosures of cash flows of the Registrant
in Item 8, which was omitted from the original filing.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
I-1
<PAGE>
PART I
ITEM 1. Business.
General
In this Annual Report, "PMC-Sierra", "PMC", "the Company", "us", "our" or
"we", includes PMC-Sierra, Inc. and all our subsidiary companies.
We issued one two-for-one stock dividend on May 14, 1999 and another on
February 14, 2000. The share numbers and prices presented in this report have
been adjusted to reflect these events.
We design, develop, market and support high-performance semiconductor
networking solutions. Our products are used in the high speed transmission and
networking systems which are being used to restructure the global
telecommunications and data communications infrastructure.
We provide components for equipment based on Asynchronous Transfer Mode
("ATM"), Synchronized Optical Network ("SONET"), Synchronized Digital Hierarchy
("SDH"), T1/E1/J1 and T3/E3/J2 access transmission, High speed Data Link
Control ("HDLC") and Ethernet. Our networking products adhere to international
standards and are sold on the merchant market to over 100 customers either
directly or through our worldwide distribution channels.
PMC-Sierra was incorporated in the State of California in 1983 and
reincorporated in the State of Delaware in 1997. Our principal executive office
is located at 105-8555 Baxter Place, Burnaby, B.C., Canada V5A 4V7. Our Common
Stock trades on the Nasdaq National Market under the symbol "PMCS" and is
included in the Nasdaq-100 index.
Glossary of Terms
We use a number of terms in this report which are familiar to industry
participants but which some investors may not recognize. We have provided a
glossary of some of these terms below.
ATM: Asynchronous Transfer Mode--a high speed switching technology used in
both LAN and WAN applications. ATM packages information in a fixed size (53
byte) cell format. ATM transmission rates can scale from 25 megabits per second
(Mbps) to 10 gigabits per second (Gbps).
Bandwidth: 1. The range of frequencies that can be utilized without
interference from an outside transmission of data packets between modules. 2.
The volume of data that a transmission line can carry, measured in bits per
second. Traditional copper lines have the lowest bandwidth potential, while
fiber optic lines have the highest.
Constant Bit Rate (CBR): A type of traffic that requires a continuous,
specific amount of bandwidth over the ATM network. This is typically required
for high quality video and digital voice transmission.
Dense Wavelength Division Multiplexing (DWDM): An extension of WDM
technology that allows simultaneous transmission of more than four channels on
a single fiber.
Digital Subscriber Line: Point-to-point public network access technologies
that allow multiple forms of data, voice, and video to be carried over twisted-
pair copper wire on the local loop between a network service provider's central
office and the customer site at limited distances. Most DSL technologies don't
use the full bandwidth of the twisted-pair, leaving enough room for a voice
channel.
I-2
<PAGE>
Ethernet: A standard protocol used in the LAN that encompasses both layer 1
(the transmission and reception of bits) and layer 2 (the packaging of data
into frames) functions. Ethernet supports data transfer rates of 10Mbps. The
Fast Ethernet and Gigabit Ethernet standards are compatible with previous
standards generations and support data transfer rates of 100 Mbps and 1,000
Mbps, respectively.
Frame Relay: A packet-switching technology used to route frames of
information within a WAN. Instead of leasing dedicated lines between all remote
sites, a virtual private network is established in which remote sites are
connected to a central carrier, which routes data accordingly.
Gigabit: One billion bits.
HDLC: High-level Data Link Control--A transmission protocol in which
information that allows devices to control data flow and correct errors is
embedded in a data frame. Typically used for frame relay services.
Internet Protocol (IP): A routing protocol standard that is used by
Microsoft Windows 95, Windows NT, the UNIX operating system, and the Internet.
IP implements the network layer (Layer 3) of the TCP/IP protocol, which
contains a network address and is used to route a message to a different
network or subnetwork.
LAN: Local Area Network--A shared network of computers that spans a
relatively small area, usually confined to a single or close cluster of
buildings.
MAN: Metropolitan Area Network--A communications network that covers a
geographic area, such as a city or suburb. A series of LANs at multiple sites
often interconnected by public facilities.
Megabit: One million bits.
Multiplexing: An electronic or optical process that combines a large number
of low-speed transmission lines into one high-speed line by splitting the total
available bandwidth of the high-speed line into narrower bands (known as FDM or
frequency division), or by allotting a common channel to several different
transmitting devices, one at a time in sequence (known as TDM, or time
division).
Packet: A group of binary digits switched as a whole. Each packet contains
information, a destination code, and a sequencing code in order to place the
data in proper place in the sequence of packets that comprise a complete data
transmission and codes used to check the transmission errors.
Point-of-Presence (POP): 1. A geographic area within which a communications
network allows local access. 2. Locations where a long-distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long-distance carrier. 3. The
physical site where an Internet service provider (ISP) has its modems and other
networking gear. Subscribers dial into the POP for Internet access.
Quality of Service (QoS): The ability to define a level of performance in a
system. For example, ATM networks specify modes of service that ensure optimum
performance for traffic, such as real-time voice and video. Voice information
receives priority over data information in order to ensure speech quality and
prevent delay.
Router: Device that connects multiple LANs or the bridge between a LAN and
the WAN.
SDH: Synchronous Digital Hierarchy--An international standard for
synchronous data transmission over fiber; SDH was adapted from SONET, which is
employed in North America.
SONET: Synchronous Optical Network--Standard for synchronous data
transmission over fiber. Rates are measured in optical carrier (OC) units. For
example, OC-1 equals rates of 51.84 Mbps and OC-3 equals rates of 155 Mbps. The
international equivalent is SDH.
I-3
<PAGE>
T1/E1/J1: T1 is a digital transmission link with a capacity of 1.544 Mbps. A
T-1 line can normally accommodate 24 voice conversations (channels), each one
digitized at 64 Kbps and one 8-Kpbs channel for signaling and control. E1 is
the European designation for T1 and has a capacity of approximately 2 Mbps. J1
is the Japanese designation for T1.
T3/E3/J2: A data communications line capable of transmission speeds of 45
Mbps. A T-3 line can normally accommodate 672 voice conversations. E3 is the
European designation for T3 and J2 is the Japanese designation for T3.
Terabit: One trillion bits.
WANs: Wide Area Network--A shared network of computers that spans a large
geographical area, normally consisting of multiple LANs or MANs.
INDUSTRY BACKGROUND
People are finding new and more demanding ways to use the world's
communications networks. At home, we use the Internet to shop, pay our bills or
communicate with each other. At the work site, we conduct on-line meetings,
read the news, share data across departments, download reports, sell products
and order supplies. These are just a few of the applications for which we use
the worldwide communications infrastructure.
The way we use the world's networks today is a relatively recent phenomenon.
Until just a few years ago, the world's networks were primarily used for
telephone calls and facsimile transmissions. Billions of dollars were spent by
traditional phone companies to supply reliable networks to provide these
services. The Internet was just a dream resident at colleges and universities.
Now the Internet has become much more broadly adopted, and the public expects
the networks of the world to supply the capacity to support large volumes of
data traffic in addition to phone conversations.
The Bandwidth Suppliers
Two major types of network bandwidth suppliers are trying to address these
rapidly evolving networking demands: traditional telephone companies, such as
AT&T, MCI Worldcom and Sprint, and new data-centric competitive carriers such
as Williams, Level 3 and UUNET. These bandwidth suppliers have used a variety
of technologies to deliver their network services. Many of the traditional
phone companies prefer "multi-service" Frame Relay and Asynchronous Transfer
Mode (ATM) networks in order to leverage their existing infrastructures while
providing the Quality of Service (QoS) required to support data, voice and
other communication traffic. The newer carriers are more data-centric, and thus
have preferred more Internet Protocol (IP) packet based data networks.
Today, the newest network deployments are focusing on transporting data,
voice and other communication signals over a single multi-service network. Many
carriers are building networks that converge (IP) layers over ATM and Frame
Relay sub-networks or directly onto fiber.
Carriers which own multi-service networks enter into agreements with their
customers to guarantee bandwidth for data or voice transport or Internet
access. These agreements can enable carriers to increase revenues as the most
critical traffic requirements can be guaranteed at a higher price.
Carriers can commit to particular service levels because the QoS traffic
management techniques made possible by protocols such as ATM have developed an
excellent capability for providing QoS standard guarantees. Protocols such as
IP have less developed, but rapidly improving, QoS characteristics. The current
lack of acceptable IP-related QoS standards has prohibited the implementation
of IP across the emerging global network. Thus, multi-service networks are
still preferred by most of the traditional phone companies.
I-4
<PAGE>
The Data Wave
Many carriers believe the next generation of communications networks will
be IP-based, as their networks will transport far more data than any other
type of traffic. Eventually, carriers intend to incorporate the exemplary
redundancy and reliability aspects of the voice network infrastructure in new
next-generation packet networks because they recognize that voice and other
traffic will still need to be transported. Consumers expect their telephones
to work from the moment they pick up the receiver and hear the "dial tone" to
the moment they hang it up, and they do not expect to "re-boot" their phones.
In keeping with this performance expectation, the builders of the Internet
will attempt to develop IP networks that offer the same dependability.
The Optical Transport Network
The emergence of the Optical Transport Network (OTN)--a network based on
glass and light transmission, rather than electrical transmission --is one of
the greatest evolutions in the broadband networking arena. Most of the current
Internet infrastructure is based on electrical transmission over copper wire.
Many carriers consider the massive bandwidth capacity provided by fiber optics
and Dense Wave Division Multiplexing (DWDM), a method of using color
wavelengths to create a new network "line" for every color, a more attractive
investment for long distance transmissions.
In 1999 various carriers deployed thousands of miles of glass fiber
underground and alongside railway lines or petroleum pipelines. These
deployments provide communications capacity within or across continents (i.e.
the WAN).Emerging lower cost DWDM systems are now being deployed in
Metropolitan Area Networks (MANs).
The emergence of the OTN has resulted in an optical/electrical convergence
where optical functions mesh with electrically managed functions. In today's
networks, optical wavelengths transport signals and electrical semiconductors
manage the higher layer protocols, such as IP routing or switching. PMC offers
products that merge existing electrical-based communications protocols, such
as ATM, SONET/SDH, Internet Protocol (IP) and Gigabit Ethernet with new
optical-based protocols. In the future, emerging technologies such as optical
switching and routing protocols will become increasingly important.
The standards for this electrical-to-optical interface have not been
finalized. The networking industry's Optical Domain Service Interconnect
industry-wide consortium has over 100 service providers and networking vendors
which are attempting to develop a standards-based approach to convergence.
While standards are evolving, small companies are offering the innovation,
time to market, and new technology required to enable carriers to the upgrade
rapidly from their existing circuit-based networks to an optical multi-service
network.
Systems suppliers for optical networking applications require semiconductor
products with greater levels of integration, increased density, and higher
speed capabilities. These high-speed techniques must handle access rates from
1.5 megabits per second to core Internet backbone rates of 10 gigabits per
second and beyond. They must use little power, so that larger networks may be
built, and comply with telephone company signal quality standards.
Specific Trends
The following specific trends are important to PMC-Sierra's internetworking
semiconductor businesses:
. A growing number of Internet Service Providers are using networking
equipment to aggregate networking traffic from 64 kilobit per second
streams with 155 Mbps or more of traffic that will be sent on fiber lines
onto the MAN and WAN core backbones of the Internet.
. For Remote Access data and voice networks, network users are upgrading
their Frame Relay networks to aggregate additional dedicated line traffic
(such as telephones) and differentiate data traffic protocol types such
as ATM, Frame Relay and IP. These new applications are referred to as
Any-Service-Any-Port (ASAP).
I-5
<PAGE>
. ATM networks are being created which can scale from low-rate 1.5 Mbps to
Terabit rates for data, voice and video traffic which require QoS
guarantees. ATM networks are being used increasingly in switching and
transmission systems that seek to provide QoS to customers.
. The current Internet infrastructure is dominated by router entry into WAN
backbone fiber networks. Sometimes users sending this traffic require
maximum bandwidth. These users may forego QoS and other management
processing overhead to get more bandwidth. In these cases, mapping IP
directly into SONET/SDH frames is more efficient because it does not use
bandwidth for undesired overhead. IP-Over-SONET/SDH (POS) is a protocol
used in Ethernet switches as an uplink to MAN/WAN fiber backbone rings,
high-speed Terabit routers and remote access concentrators. It maps
packet traffic directly into SONET/SDH lines and is being deployed by
carriers for these users.
. For residential Internet opportunities, the current 56 kilobit analog
modem is a bottleneck. Emerging Digital Subscriber Line (DSL) technology
uses the traditional phone lines to your home or office to provide up to
several Mbps of bandwidth for Internet access. New DSL access multiplexer
equipment is making the broad deployment of DSLs possible by providing a
manner with which to manage all of the network traffic to and from
customers using DSL services. Cable modems are also providing residential
customers with higher bandwidth access methods to the internet.
. Carriers are rapidly deploying base transceiver stations for wireless
services. These stations convert waves of radio frequency air traffic
into wired networks. The wired networks then aggregate, switch and
process the signals at primarily T1 or E1 rates. HDLC and ATM protocols
are often used to interface and process the aggregated T1 and E1 lines.
Networking Products
We provide networking semiconductor devices and related technical service
and support to equipment manufacturers for use in their communications and
networking equipment. Our objective is to develop networking semiconductors
that enable network systems vendors to get to market quickly with high
performance, cost effective and scalable systems.
I-6
<PAGE>
Our product offerings can be grouped into four general areas: ATM, SONET/SDH
(including POS), Remote Access and Ethernet switching. These products are
generally used in networking equipment as follows:
Table I--Networking Equipment in which PMC's Products are Used
<TABLE>
<CAPTION>
Networking Equipment ATM SONET/SDH ACCESS ETHERNET
-------------------- --- --------- ------ --------
<S> <C> <C> <C> <C>
Wide Area Network (WAN)
Remote Access Equipment
Frame Relay Access Devices.................... X
Access Multiplexers/DSLAMs*................... X X
Wireless Basestations......................... X X
Voice Switches................................ X X X
Digital Loop Carriers......................... X X
Frame Relay Switches.......................... X X
Internet Access Concentrators................. X X
Transmission and Switching Equipment
WAN Edge Switches............................. X X X X
Routers....................................... X X X X
WAN Core Switches............................. X X X
Digital Cross--Connects....................... X X X
Add-Drop Multiplexers......................... X X X
Terminal Multiplexers......................... X X X
Local Area Network (LAN)
Switches/Routers................................ X X X
Network Interface Cards......................... X
</TABLE>
--------
* DSLAM = Digital Subscriber Line Access Multiplexer
I-7
<PAGE>
The following is a summary of some of our more significant products currently
available. The purpose of this table is only to provide a general
understanding of where our products fit. Our chips may not perform all the
possible features related to a specific function. For example, we have a
number of single port OC-3 ATM physical layer products which perform different
functions within the physical layer of the networking hierarchy and are
generally used in different applications.
Table II--PMC-Sierra Product Summary
<TABLE>
<CAPTION>
Clock Rates/Throughput Capacities
----------------------------------------
No. Product Description Voltage T1 E1 T3 E3 J2 OC3 OC12 *OC12
--- ------- ----------- ------- ---- ---- ---- ---- ---- ---- ---- -----
<C> <C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ATM
1 S/UNI-MPH........ Quad T1/E1 ATM Interface 5v x x
2 S/UNI-PDH........ T1/E1/T3/E3+ATM 5v x x x x
3 S/UNI-155........ 1-port PHY 5v x
4 S/UNI-155-LITE... 1-port PHY+analog 5v x
CRU/CSU
5 S/UNI-PLUS....... enhanced 1-port 5v x
PHY+analog CRU/CSU
6 S/UNI-155-DUAL... 2-port PHY+analog 5v x
CRU/CSU
7 S/UNI-QUAD....... 4-port PHY+analog 3.3v x
CRU/CSU
8 S/UNI-155-ULTRA.. 1-port PHY+ UTP-5+analog 5v x
CRU/CSU
9 S/UNI 622........ 1-port PHY 5v x x
10 S/UNI-622 MAX.... 1-port PHY+analog 3.3v x
CRU/CSU
11 RCMP-800......... Routing Control, 5v x x
Monitoring & Policing
12 RCMP-200......... Routing Control, 5v x
Monitoring & Policing
13 S/UNI-ATLAS...... Full Duplex 3.3v x x
RCMP+additional features
14 AAL1gatorII...... AAL1 SAR 3.3v x x x x x
15 AAL1gator-4...... AAL1 SAR--4 channel 2.5v x x x x x
16 AAL1gator-8...... AAL1 SAR--8 channel 2.5v x x x x x
17 AAL1gator-32..... AAL1 SAR--32 channel 2.5v x x x x x
18 LASAR-155........ ATM PHY & SAR 5v x
19 QRT.............. Quad Routing Table 3.3v x x x x x x x
20 QSE.............. Quad Switching Element 3.3v x x x x x x x
SONET/SDH and POS
21 TUPP............. VT/TU Payload 5v x x x x x x
Alignor/Processor
22 TUPP-PLUS........ TUPP+Performance Monitor 5v x x x x x x
23 TUPP-PLUS 622.... TUPP+Performance Monitor 2.5v x x x x x x x
24 TUDX............. VT/TU X-Connect Switch 5v x x
25 TEMAP............ VT/TU Mapper and M13 3.3v x x x x
Multiplexer
26 STXC............. Transport Overhead 5v x
Terminator
27 STTX............. Transport Overhead 5v x
Terminator
28 SPECTRA-155...... Payload 5v x
Extractor/Aligner
29 SPECTRA-622...... Payload 3.3v x
Extractor/Aligner
30 SPTX............. Path Terminating 5v x
Tranceiver
31 S/UNI TETRA...... 4-port ATM+POS 3.3v x
PHY+analog CRU/CSU
32 S/UNI-622-POS.... 1-port ATM+POS 3.3v x
PHY+analog CRU/CSU
* equals greater than
</TABLE>
I-8
<PAGE>
<TABLE>
<CAPTION>
Clock Rates/Throughput Capacities
--------------------------------------------
No. Product Description Voltage T1 E1 T3 E3 J2 OC3 OC12 *OC12
--- ------- ----------- ------- ---- ---- ---- ---- ---- -------- ---- -----
<C> <C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Access
33 T1XC........... 1-port framer+analog 5v x
34 COMET.......... 1-port framer+long haul 3.3v x x
analog
35 E1XC........... 1-port framer+analog 5v x
36 QDSX........... 4-port short haul analog 5v x x
LIU
37 TQUAD.......... 4-port framer 5v x
38 EQUAD.......... 4-port framer 5v x
39 TOCTL.......... 8-port framer 3.3v x
40 EOCTL.......... 8-port framer 3.3v x
41 S/UNI JET...... 1-port framer or ATM UNI 3.3v x x x x x
42 S/UNI QJET..... 4-port framer or ATM UNI 3.3v x x x x x
43 D3MX........... M13 5v x x
Multiplexer/Demultiplexer
44 TEMUX.......... 28T/21E framer, Sonet 2.5/3.3 x x x x 3 3
mapper & M13 Mux
45 FREEDM-8....... 8 link, 128 ch. HDLC 3.3v x x x x
Controller
46 FREEDM-32...... 32 link, 128 ch. HDLC 3.3v x x x x
Controller
47 FREEDM-32P672.. 32 link, 672 ch. HDLC 3.3v x x x x
Controller
48 FREEDM-32A672.. 32 link, 672 ch. HDLC 3.3v x x x x
Controller w' "Any-PHY"
49 FREEDM-84P672.. 84 link, 672 ch. HDLC 3.3v x x x x x
Controller
50 FREEDM-84A672.. 84 link, 672 ch. HDLC 3.3v x x x x x
Controller w' "Any-PHY"
51 S/UNI DUPLEX... Dual Serial Link PHY 3.3v x x x x x x
Multiplexer (DSLAM)
52 S/UNI VORTEX... Octal Serial Link PHY 3.3v x x x x x
Multiplexer (DSLAM)
53 S/UNI APEX..... ATM/Packet Traffic Mgr. & 3.3v x x x x x x x
Switch
Ethernet
54 EXACT--PM3370.. 8x100 port controller 3.3v 100m b/s
55 EXACT--PM3380.. 1x1000 port controller 3.3v x
56 EXACT--PM3390.. 8 to 16 port EXACT Switch 3.3v x
Matrix
* equals greater than
</TABLE>
I-9
<PAGE>
<TABLE>
<CAPTION>
Function
---------------------------------------------------
Cell/Packet Traffic
No. Product Description LIU/Framr SAR Back-plane Processor Mgt Switch
--- ------- ----------- --------- --- ---------- ----------- ------- ------
<C> <C> <S> <C> <C> <C> <C> <C> <C>
ATM
1 S/UNI-MPH........ Quad T1/E1 ATM Interface x
2 S/UNI-PDH........ T1/E1/T3/E3+ATM x
3 S/UNI-155........ 1-port PHY x
4 S/UNI-155-LITE... 1-port PHY+analog CRU/CSU x
5 S/UNI-PLUS....... enhanced 1-port x
PHY+analog CRU/CSU
6 S/UNI-155-DUAL... 2-port PHY+analog CRU/CSU x
7 S/UNI-QUAD....... 4-port PHY+analog CRU/CSU x
8 S/UNI-155-ULTRA.. 1-port PHY+UTP-5+analog x
CRU/CSU
9 S/UNI 622........ 1-port PHY x
10 S/UNI-622 MAX.... 1-port PHY+analog CRU/CSU x
11 RCMP-800......... Routing Control, x
Monitoring & Policing
12 RCMP-200......... Routing Control, x
Monitoring & Policing
13 S/UNI-ATLAS...... Full Duplex x
RCMP+additional features
14 AAL1gatorII...... AAL1 SAR x
15 AAL1gator-4...... AAL1 SAR--4 channel x
16 AAL1gator-8...... AAL1 SAR--8 channel x
17 AAL1gator-32..... AAL1 SAR--32 channel x
18 LASAR-155........ ATM PHY & SAR x x
19 QRT.............. Quad Routing Table x x
20 QSE.............. Quad Switching Element x x
SONET/SDH and POS
21 TUPP............. VT/TU Payload x
Alignor/Processor
22 TUPP-PLUS........ TUPP+Performance Monitor x
23 TUPP-PLUS 622.... TUPP+Performance Monitor x
24 TUDX............. VT/TU X-Connect Switch x
25 TEMAP............ VT/TU Mapper and M13 x
Multiplexer
26 STXC............. Transport Overhead x
Terminator
27 STTX............. Transport Overhead x
Terminator
28 SPECTRA-155...... Payload Extractor/Aligner x
29 SPECTRA-622...... Payload Extractor/Aligner x
30 SPTX............. Path Terminating x
Tranceiver
31 S/UNI TETRA...... 4-port ATM+POS PHY+analog x
CRU/CSU
32 S/UNI-622-POS.... 1-port ATM+POS PHY+analog x
CRU/CSU
Access
33 T1XC............. 1-port framer+analog x
34 COMET............ 1-port framer+long haul x
analog
35 E1XC............. 1-port framer+analog x
36 QDSX............. 4-port short haul analog x
LIU
37 TQUAD............ 4-port framer x
38 EQUAD............ 4-port framer x
39 TOCTL............ 8-port framer x
40 EOCTL............ 8-port framer x
41 S/UNI JET........ 1-port framer or ATM UNI x
42 S/UNI QJET....... 4-port framer or ATM UNI x
43 D3MX............. M13 x
Multiplexer/Demultiplexer
44 TEMUX............ 28T/21E framer, Sonet x
mapper & M13 Mux
45 FREEDM-8......... 8 link, 128 ch. HDLC x
Controller
46 FREEDM-32........ 32 link, 128 ch. HDLC x
Controller
47 FREEDM-32P672.... 32 link, 672 ch. HDLC x
Controller
48 FREEDM-32A672.... 32 link, 672 ch. HDLC x
Controller w' "Any-PHY"
49 FREEDM-84P672.... 84 link, 672 ch. HDLC x
Controller
50 FREEDM-84A672.... 84 link, 672 ch. HDLC x
Controller w' "Any-PHY"
51 S/UNI DUPLEX..... Dual Serial Link PHY x x x
Multiplexer (DSLAM)
52 S/UNI VORTEX..... Octal Serial Link PHY x x x
Multiplexer (DSLAM)
53 S/UNI APEX....... ATM/Packet Traffic Mgr. & x x x x
Switch
Ethernet
54 EXACT--PM3370.... 8x100 port controller x x
55 EXACT--PM3380.... 1x1000 port controller x x
56 EXACT--PM3390.... 8 to 16 port EXACT Switch x x
Matrix
</TABLE>
I-10
<PAGE>
Industry analysts have recognized us as the market leader in ATM physical
layer solutions. We offer LAN, Edge and WAN core ATM switch chip sets. Our ATM
physical layer products come in a variety of packages and provide the interface
to copper or fiber cabling along with framing and mapping functions. The S/UNI
product line offers physical layer solutions in a range from 1.5 megabits to
622 megabits.
Our line of RCMP/ATLAS ATM layer processors handle higher layer ATM
protocols such as policing, operations and management, fault and performance
monitoring, while our ATM Switch chips offer a routing table and switching
element solution capable of running at up to 622 megabytes per second.
In 1998, we added the S/UNI--ATLAS to our product portfolio. This product is
a 622 Mbit/s ATM Layer device which integrates traffic policing, fault
management, performance monitoring, address resolution and translation onto one
chip. This full duplex chip is intended for the broadband OC-3 and OC-12
interface required for ATM edge, enterprise and core switches.
In 1999 we also introduced a chip set consisting of: The SPECTRA--622, the
TUPP+622 and the TEMAP. These SONET/SDH/T1/E1 products provide the framing,
tributary processing and mapping functions for fully channelized applications
such as multi-service add-drop multiplexers, switches, routers, concentrators
and central office digital cross-connects for rates between DS-O (64 Kbit/s)
through to OC-12/STM4 (622 Mbit/s).
In 1999, we introduced the VORTEX chipset, an ATM or packet-based DSLAM
solution. The chipset provides traffic management, aggregation, switching
maintenance and management functions for all DSL service types. The VORTEX
chipset is comprised of the S/UNI-Duplex line card multiplexer, the S/UNI-
VORTEX core card multiplexer and the S/UNI-APEX traffic manager and switch. The
VORTEX chipset can be combined with the S/UNI-ATLAS in DSLAM equipment used to
provide high speed consumer internet access, as well as third generation
wireless base stations, base station controllers and multi-service access
equipment.
Our Remote Access products include T1/E1 framers, and high density Frame
Relay and HDLC controllers. Our devices are used in data communications
applications such as multi-service and digital subscriber line access
multiplexers, frame relay access devices, Internet Protocol routers, wireless
base stations and remote access concentrators. Our access products are also
used for telecommunications applications such as private branch exchanges,
digital loop carriers, Class 5 switches, digital access cross connect systems,
add-drop multiplexers and base transceiver stations.
In 1999, we introduced four new products representing the next generation of
our family of FREEDM high density packet processors. The FREEDM 32P672 and
FREEDM 32A672 support up to 672 simultaneous HDLC channels across up to 32 T1
or E1 links while the FREEDM 84P672 and FREEDM 84A672 support up to 672
simultaneous HDLC channels across up to 84 T1 or E1 links. The "P" variety of
FREEDM products can be used in PCI-based remote access concentrators, while the
"A" variety can be used in voice-over-IP gateways and frame relay interfaces.
In 1999, we introduced the TEMUX chip to work along with the new FREEDM
products. The TEMUX integrates 28 T1 framers, 21 E1 framers, a DS-3
framer/multiplexer and SONET/SDH mappers into a single chip. The FREEDM/TEMUX
chip set provides a solution for packet-based T1/E1 over channelized DS-3 or
SONET/SDH interfaces used in Internet access switch, router and access
multiplexer equipment.
Also in 1999, we introduced the S/UNI-JET, a single channel J2, E3, T3
framer with ATM cell delineation. The 3.3 volt S/UNI-JET is designed for
DSLAMs, customer premise equipment routers, and access concentrators.
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<PAGE>
Non-Networking Products
In the third quarter of 1996, we announced our decision to exit the modem
chipset business and discontinue development of our custom chipsets. We
disposed of all modem-related inventories in 1997. Our remaining non-networking
products are still being sold but we are not planning new development or
follow-on products. Revenues from other non-networking products declined
rapidly in 1998 and 1999.
Sales, Marketing and Distribution
Our sales and marketing strategy is to be designed into our customers'
equipment by developing and selling superior products for which we will provide
premium service and technical support. We maintain close working relationships
with our customers in order to make products that address their needs. We
provide technical support to customers through field application engineers,
technical marketing and factory systems engineers. We believe that providing
comprehensive product service and support is critical to shortening customers'
design cycles and maintaining a competitive position in the networking market.
We sell our products directly and through distributors, independent
manufacturers' representatives and manufacturing subcontractors. Based on end
users and ignoring sales to distributors or sub-contractors, Lucent
Technologies and Cisco Systems each represented greater than 10% of our 1999
revenues. In 1999, the country purchasing the largest percentage of our
products outside of the United States was Canada at 15%. Our international
sales accounted for 31% in 1999 , 32% in 1998 and 30% in 1997.
Manufacturing
Independent foundries and chip assemblers manufacture all of our products.
We receive most of our wafers in finished form from Chartered Semiconductor
Manufacturing Ltd. ("Chartered"), and Taiwan Semiconductor Manufacturing
Corporation ("TSMC"). These independent foundries produce our networking
products at feature sizes down to 0.25 micron. We believe that by using
independent foundries to fabricate our wafers, we are better able to
concentrate our resources on designing and testing new products. In addition,
we avoid much of the capital cost associated with owning and operating a
fabrication facility.
We have supply agreements with Chartered and TSMC. We have made deposits to
secure access to wafer fabrication capacity under both of these agreements. At
December 31, 1999 and 1998, we had $19.1 and $23.1 million, respectively, in
deposits with the foundries. Under these agreements, the foundries must supply
certain quantities of wafers per year. Neither of these agreements have minimum
unit volume requirements but we are obliged under one of the agreements to
purchase a minimum percentage of our total annual wafer requirements provided
that the foundry is able to continue to offer competitive technology, pricing,
quality and delivery. The agreements may be terminated if either party does not
comply with the terms. We expect to spend $6.1 million in additional deposits
to secure foundry capacity in 2000 and to receive a refund of $4.6 million of
existing deposits.
Wafers supplied by outside foundries must meet our incoming quality and test
standards. We conduct the majority of our test operations on advanced mixed
signal and digital test equipment in our Burnaby, British Columbia, Canada
facility. The remainder of our testing is performed predominantly by
independent Asian companies.
Research and Development
Our current research and development efforts are targeted at integrating
multiple channels or functions on single chips, broadening the number of
products we provide to address varying protocols and networking functions, and
increasing the speeds at which our chips operate.
We have design centers in or near Vancouver (Canada), Portland (Oregon),
Gaithersburg (Maryland), San Jose (California), Galway (Ireland), Montreal
(Canada), Ottawa (Canada) and Saskatoon (Canada).
I-12
<PAGE>
We spent $63.3 million in 1999, $35.9 million in 1998, and $22.9 million in
1997 on research and development. In 1998, we also expensed $39.2 million of in
process research and development, $37.8 million of which related to the
acquisition of Integrated Telecom Technologies and $1.4 million of which
related to the acquisition of other technology.
Backlog
We sell primarily pursuant to standard short-term purchase orders. Our
customers frequently revise the quantity actually purchased and the shipment
schedules to reflect changes in their needs. As of December 31, 1999, our
backlog of products scheduled for shipment within six months totaled $155.2
million. As of December 31, 1998, our backlog of products scheduled for
shipment within six months totaled $56.3 million. Our customers may cancel a
significant portion of the backlog at their discretion without penalty.
Accordingly, we believe that our backlog at any given time is not a meaningful
indicator of future revenues.
Competition
The markets for our products are intensely competitive and subject to rapid
technological advancement in design tools, wafer manufacturing techniques,
process tools and alternate networking technologies. We must identify and
capture future market opportunities to offset the rapid price erosion that
characterizes our industry. We may not be able to develop new products at
competitive pricing and performance levels. Even if we are able to do so, we
may not complete a new product and introduce it to market in a timely manner.
Our customers may substitute use of our products with those of current or
future competitors.
We typically face competition at the design stage, where customers evaluate
alternative design approaches that require integrated circuits. Our competitors
have increasingly frequent opportunities to supplant our products in next
generation systems because of shortened product life and design-in cycles in
many of our customers' products.
Major domestic and international semiconductor companies, such as Intel,
IBM, and Lucent Technologies, are concentrating an increasing amount of their
substantially greater financial and other resources on the markets in which we
participate. This represents a serious competitive threat to PMC. Emerging
companies also provide significant competition in our segment of the
semiconductor market.
Our competitors include Applied Micro Circuits Corporation, Broadcom,
Conexant Systems, Cypress Semiconductor, Dallas Semiconductor, Galileo
Technology, Integrated Device Technology, IBM, Infineon, Intel, Lucent
Technologies, Motorola, MMC Networks, Texas Instruments, Transwitch and Vitesse
Semiconductor. Over the next few years, we expect additional competitors, some
of which may also have greater financial and other resources, to enter the
market with new products. In addition, we are aware of venture-backed companies
that focus on specific portions of our broad range of products. These
companies, individually or collectively, could represent future competition for
many design wins, and subsequent product sales.
Licenses, Patents And Trademarks
We have several U.S. patents and a number of pending patent applications in
the U.S. and Europe. In addition to such factors as innovation, technological
expertise and experienced personnel, we believe that a strong patent position
is becoming increasingly important to compete effectively in the industry. We
therefore have an active program to acquire additional patent protection.
We apply for mask work protection on our circuit designs. We also attempt to
protect our software, trade secrets and other proprietary information by, among
other security measures, entering into proprietary information agreements with
employees. Although we intend to protect our rights vigorously, we do not know
if the measures we use will be successful.
PMC and its logo are our registered trademarks and service marks. We own
other trademarks and service marks not appearing in this Form 10-K Annual
Report. Other trademarks used in this Form 10-K Annual Report are owned by
other entities.
I-13
<PAGE>
Employees
As of December 31, 1999, the Company had 660 employees, including 376 in
research and development, 100 in production and quality assurance, 110 in
marketing and sales and 74 in administration. Our employees are not represented
by a collective bargaining agreement. We have never experienced any work
stoppage. We believe our employee relations are good.
ITEM 2. Properties.
Our executive offices and much of our test, sales and marketing, and design
and engineering operations are located in an approximately 256,000 square foot
leased facility in Burnaby, British Columbia, Canada. This facility is leased
through May 2006. The Company also leases offices for its staff in
Massachusetts, North Carolina, Illinois, Texas, Maryland, California, Ontario
(Canada), Quebec (Canada), Saskatchewan (Canada), Barbados, Ireland, Germany,
Sweden, Taiwan, the Peoples' Republic of China and the United Kingdom.
We lease approximately 3,500, 17,000 and 84,000 square feet of office space
in three locations in or near San Jose. The leases expire in May 2002, May 2004
and September 2010, respectively. We also lease 16,000 square feet of office
space in Maryland and 42,000 square feet of office space in Oregon. These
facilities are leased through to June 2005 and March 2009, respectively.
ITEM 3. Legal Proceedings.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
I-14
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Stock Price Information. Our common stock trades on the Nasdaq National
Market under the symbol PMCS. The following table sets forth, for the periods
indicated, the high and low closing sale prices for our Common Stock as
reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998
First Quarter.................................................. $ 9.77 $ 6.50
Second Quarter................................................. 12.82 9.25
Third Quarter.................................................. 11.94 6.66
Fourth Quarter................................................. 16.41 5.72
<CAPTION>
High Low
------ ------
<S> <C> <C>
1999
First Quarter.................................................. $20.50 $15.82
Second Quarter................................................. 31.03 17.82
Third Quarter.................................................. 55.00 32.21
Fourth Quarter................................................. 80.16 40.00
</TABLE>
We issued a two-for-one stock dividend on May 14, 1999 and another on
February 14, 2000. Accordingly, the prices presented above have been adjusted
to reflect these events.
To maintain consistency, the information provided above is based on calendar
quarters rather than fiscal quarters. As of February 15, 2000, there were
approximately 856 holders of record of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. The
Company's current bank credit agreement prohibits the payment of cash dividends
without the approval of the bank.
I-15
<PAGE>
ITEM 6. Selected Financial Data.
Summary Consolidated Financial Data*
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended December 31,(1)
-----------------------------------------------
1999(2) 1998(3) 1997(4) 1996(5) 1995(6)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................. $262,477 $161,812 $127,166 $188,371 $188,724
Gross profit................. 207,114 123,592 94,101 93,423 91,614
Research and development..... 63,333 35,891 22,880 29,350 23,428
In process research and
development................. -- 39,176 -- 7,783 --
Impairment of intangibles
assets...................... -- 4,311 -- -- --
Marketing, general and
administrative.............. 45,324 30,161 23,666 30,691 30,051
Costs of merger.............. 866 -- -- -- --
Purchase price adjustment--
compensation................ -- -- -- -- 10,624
Restructuring and other
charges..................... -- -- (1,383) 64,670 --
Income (loss) from
operations.................. 97,591 14,053 48,938 (39,071) 27,511
Gain on sale of investments.. 26,800
Income (loss) from continuing
operations.................. 90,020 (5,945) 34,184 (48,150) 23,976
Loss from discontinued
operations.................. -- -- -- -- (22,497)
Net income (loss)............ $ 90,020 $ (5,945) $ 34,184 $(48,150) $ 1,479
Net income (loss) per share--
basic: (7) from continuing
operations................ $ 0.66 $ (0.05) $ 0.27 $ (0.41) $ 0.22
from discontinued
operations................ -- -- -- -- (0.21)
-------- -------- -------- -------- --------
Net income (loss)........ $ 0.66 $ (0.05) $ 0.27 $ (0.41) $ 0.01
======== ======== ======== ======== ========
Net income (loss) per share--
diluted: (7) from
continuing operations..... $ 0.60 $ (0.05) $ 0.26 $ (0.41) $ 0.21
from discontinued
operations................ -- -- -- -- (0.20)
-------- -------- -------- -------- --------
Net income (loss)........ $ 0.60 $ (0.05) $ 0.26 $ (0.41) $ 0.01
======== ======== ======== ======== ========
Shares used in per-share
calculation--basic.......... 137,428 130,760 124,756 118,876 108,072
Shares used in per-share
calculation--diluted........ 151,134 130,760 131,122 118,876 114,480
<CAPTION>
As of December 31, (1)
-----------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments...... $190,727 $ 89,400 $ 69,293 $ 42,062 $ 45,937
Working capital.............. 165,247 73,612 58,744 20,438 32,741
Total assets................. 341,970 204,496 149,577 129,914 184,860
Long term debt (including
current portion)............ 2,428 11,005 13,794 24,637 12,718
Stockholders' equity......... 235,686 130,675 90,714 48,444 81,000
</TABLE>
--------
* All financial information has been restated to reflect the acquisition of
Abrizio Inc. in August 1999, which was accounted for as a pooling of
interests.
(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.
I-16
<PAGE>
(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, April 1999 and
October 1995.
Quarterly Comparisons
The following tables set forth the consolidated statements of operations for
each of the Company's last eight quarters. This quarterly information is
unaudited and has been prepared on the same basis as the annual consolidated
financial statements. In management's opinion, this quarterly information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
Quarterly Data (Unaudited)*
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
---------------------------------- -----------------------------------
Fourth Third(1) Second(2) First Fourth Third(3) Second(4) First
------- -------- --------- ------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $80,600 $71,601 $59,887 $50,389 $45,437 $42,105 $ 39,975 $34,295
Gross profit............ 64,069 56,831 46,799 39,415 35,355 32,070 30,007 26,160
Research and
development............ 19,228 16,863 14,706 12,536 11,864 10,085 7,919 6,023
In process research and
development............ -- -- -- -- -- -- 39,176 --
Marketing, general and
administrative......... 13,208 11,251 10,733 10,132 8,210 8,144 7,627 6,180
Costs of merger......... -- 866 -- -- -- -- -- --
Impairment of intangible
assets................. -- -- -- -- -- 4,311 -- --
Income (loss) from
operations............. 31,633 27,851 21,360 16,747 15,281 9,530 (24,715) 13,957
Gain on sale of
investments............ -- -- 26,800 -- -- -- -- --
Net income (loss)....... $22,532 $19,443 $36,969 $11,076 $ 9,697 $ 4,529 $(29,650) $ 9,479
Net income (loss) per
share--basic(5)........ $ 0.16 $ 0.14 $ 0.27 $ 0.08 $ 0.07 $ 0.03 $ (0.23) $ 0.07
Shares used in per-share
calculation--basic..... 140,726 139,828 134,978 134,182 132,800 131,686 129,932 128,626
Net income (loss) per
share--diluted(5)...... $ 0.14 $ 0.13 $ 0.25 $ 0.08 $ 0.07 $ 0.03 $ (0.23) $ 0.07
Shares used in per-share
calculation--diluted... 157,020 154,648 147,524 145,342 142,464 140,488 129,932 136,710
</TABLE>
--------
* All financial information has been restated to reflect the acquisition of
Abrizio Inc. in August 1999, which was accounted for as a pooling of
interests.
I-17
<PAGE>
(1) Income (loss) from operations and net income includes a $0.9 million charge
for costs of merger for the acquisition of Abrizio Inc.
(2) Income (loss) from operations includes gains of $26.8 million and the
related tax provision of $3.6 million on sale of investments.
(3) Income (loss) from operations and net income includes a $4.3 million charge
for impairment of intangible assets.
(4) Income (loss) from operations and net income includes a $39.2 million
charge for in process research and development.
(5) Reflects 2-for-1 stock splits effective February 2000 and April 1999.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Some statements in this report constitute "forward looking statements"
within the meaning of the federal securities laws, including those statements
relating to:
.revenues;
.gross margins;
.gross profit;
. research and development expenses marketing, general and administrative
expenditures; and
. capital resources sufficiency.
Our results may differ materially from those expressed or implied by the
forward-looking statements for a number of reasons, including those described
below in "Factors You Should Consider Before Investing in PMC-Sierra." We may
not, nor are we obliged to, release revisions to forward-looking statements to
reflect subsequent events.
We issued a two-for-one stock dividend on May 14, 1999 and another on
February 14, 2000. Share numbers and prices in this report have been adjusted
to reflect these events.
General. We design, develop, market and support high-performance
semiconductor solutions for advanced telecommunications and data communications
networking markets. Our products are used in the broadband communications
infrastructure and high bandwidth networks. We supply ATM, SONET/SDH, T1/E1,
T3/E3 and ethernet semiconductors.
In January and March 2000, we announced acquisitions of Toucan Technology
Limited, AANetcom Inc. and Extreme Packet Devices ("Extreme") in exchange for
approximately 7 million shares of Common Stock and options to purchase Common
Stock. This includes an estimated 1.9 million shares of Common Stock and
Options for the purchase Extreme. The exact number of shares will vary along
with the market price of our Common Stock until the Extreme transaction closes.
We expect to account for these transactions using the pooling-of-interests
method.
In September 1999, we acquired Abrizio, Inc., a fabless semiconductor
company that specializes in broadband switch chip fabrics used in core ATM
switches, digital cross-connects, and terabit routers. We issued approximately
8,704,000 shares of Common Stock and stock options in exchange for all of the
equity securities of Abrizio.
The transaction was accounted for as a pooling of interests under Accounting
Principles Board Opinion No. 16. Accordingly, all prior period consolidated
financial statements presented have been restated to include the results of
operations, financial position and cash flows of Abrizio as though it had
always been a part of PMC.
I-18
<PAGE>
In the second quarter of 1998, we expanded our portfolio of ATM layer and
switching products by acquiring Integrated Telecom Technology Inc. ("IGT"). IGT
was a fabless semiconductor company headquartered in Gaithersburg, MD. IGT also
had a development site in San Jose, CA. IGT made ATM switching chipsets for
wide area network applications as well as ATM Segmentation-and-Reassembly and
other telecommunication chips.
We paid $55.0 million in total consideration to acquire IGT. We paid $17.8
million cash to IGT shareholders, $9.0 million cash to IGT creditors and issued
approximately 2,516,000 shares of Common Stock and options to purchase Common
Stock. The purchase price also included $850,000 in professional fees and other
direct acquisition costs (see note 2 of the Consolidated Financial Statements).
The IGT acquisition was accounted for as a purchase. The amount allocated to
in process research and development ("IPR&D") of $37.7 million was expensed on
the acquisition date. Our valuation employed the SEC's guidelines regarding
acceptable methodologies for valuing IPR&D. We considered the stage of
completion of individual projects and the risk associated with the stage of
completion of the technology.
During the third quarter of 1998, we determined that a portion of the
intangible assets recognized in connection with the IGT acquisition was
impaired as we had terminated development work on a project. We recorded an
impairment of intangible assets of $4.3 million because we determined that the
developed and core technology related to this project was not technologically
feasible and had no alternative future use.
Results of Operations
Net Revenues ($000,000)
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Networking products......................... $245.2 76 % $139.5 63 % $ 85.5
Non-networking--other....................... $ 17.3 (22)% $ 22.3 (38)% $ 35.8
Non-networking--modem....................... -- -- (100)% $ 5.9
------ --- ------ ---- ------
Total net revenues........................ $262.5 62 % $161.8 27 % $127.2
====== === ====== ==== ======
</TABLE>
Net revenues increased 62% in 1999 as the growth in volume of sales of
networking products exceeded the decline in revenues from non-networking
products.
Networking revenues grew 76% in 1999 and 63% in 1998. Our growth was driven
by growth in our customers' networking equipment business and our customers'
continued transition from designs based on custom semiconductors to designs
based on standard semiconductors.
Non-networking--other revenues, which include custom and other semiconductor
revenues, declined 22% from 1998 to 1999 and 38% from 1997 to 1998. This
reflects our strategic decision to restructure our other non-networking
business and to focus on networking semiconductor business. We are supporting
non-networking products for existing customers, but have not developed any
further products of this type since 1996.
Consistent with our 1996 restructuring, we exited the modem chipset business
and sold all our modem chipset inventories in 1997. No future revenues are
expected from that business.
I-19
<PAGE>
Gross Profit ($000,000)
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Networking products........................ $199.2 76 % $113.1 63 % $69.5
Percentage of networking revenues........ 81% 81% 81%
Non-networking products.................... $ 7.9 (25)% $ 10.5 (57)% $24.6
Percentage of non-networking revenues.... 46% 47% 69%
Total gross profit....................... $207.1 68 % $123.6 31 % $94.1
Percentage of net revenues............... 79% 76% 74%
</TABLE>
Total gross profit increased 68% from 1998 to 1999 and 31% from 1997 to 1998
as increased gross profit from higher sales volumes of networking products
offset a decline in gross profit due to lower revenues and margins from non-
networking products.
Networking gross profit in 1999, as a percentage of revenues, was consistent
with 1998 and 1997. Lower wafer costs, higher wafer yields and new product
production ramps offset reductions in average selling prices for sales of
existing products.
The gross margins of these products were high relative to overall gross
margins in the semiconductor industry because our chips are highly complex and
are sold in relatively low volumes. In 1999, each of our networking products
accounted for less than 10% of total networking revenue. We believe that, as
the market for our networking products grows and customers purchase in greater
volumes, gross profit as a percentage of revenues will decline.
Non-networking gross profit decreased by 25% from 1998 to 1999 and 57% from
1997 to 1998. Our non-networking gross profit continues to decline because of
the lack of new products.
Other Costs and Expenses ($000,000)
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Research and development.................... $63.3 76% $35.9 57% $22.9
Percentage of net revenues................ 24% 22% 18%
Marketing, general & administrative......... $44.1 51% $29.2 25% $23.4
Percentage of net revenues................ 17% 18% 18%
Amortization of goodwill.................... $ 1.3 37% $ 0.9 205% $ 0.3
Percentage of net revenues................ 0% 1% 0%
Costs of merger............................. $ 0.9 -- -- -- --
Percentage of net revenues................ 0% -- --
In process research & development........... -- -- $39.2 -- --
Percentage of net revenues................ 24% --
Impairment of intangible assets............. -- -- $ 4.3 -- --
Percentage of net revenues................ -- 3% --
Restructuring and other costs............... -- -- -- -- $(1.4)
Percentage of net revenues................ -- -- (1)%
</TABLE>
Research and Development and Marketing, General and Administrative
Expenses. Our research and development ("R&D") expenses increased both in
absolute dollars and as a percentage of net revenues in 1999 and in 1998. R&D
expenditures increased in 1999 and 1998 because we hired more employees,
expanded R&D subcontracting and acquired Abrizio Inc. and IGT. Substantially
all R&D activity carried out in 1999, 1998 and 1997 related to networking
products.
We incur R&D expenditures in order to attain technological leadership from a
multi-year perspective. This has caused R&D spending to fluctuate from quarter
to quarter. We expect such fluctuations, particularly when
I-20
<PAGE>
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. In the
future, we expect R&D expenses to increase and relate entirely to networking
products.
From 1998 to 1999 and from 1997 to 1998, we increased total marketing,
general and administrative expenses by 51% and 25% respectively. From 1998 to
1999, these expenses as a percentage of total net revenues declined because
many marketing, general and administrative expenses are fixed in the short
term. Therefore, during periods of rising revenues, these expenses decline as a
percentage of revenues. We expect marketing, general and administrative costs
to increase in absolute dollars during 2000.
Amortization of Goodwill. Goodwill amortization increased from 1998 to 1999
and from 1997 to 1998 as we amortized the goodwill recorded as a result of the
acquisition of IGT. Our strategic plan anticipates acquiring companies or
assets in 2000. The purchase method of accounting may be used to account for
these acquisitions. This could result in significant goodwill amortization
charges in future period which could materially impact our operating results.
Costs of Merger. We incurred approximately $900,000 in merger costs related
to the 1999 acquisition of Abrizio. We expect to incur significant merger costs
related to future acquisitions.
In Process Research and Development ("IPR&D"). No IPR&D charges were
incurred in 1999. Our operating earnings could be materially impacted from
significant IPR&D charges if we acquire companies or assets in 2000 and use the
purchase method of accounting.
In 1998, we recorded IPR&D expenses of $39.2 million. These charges include
$37.8 million related to the acquisition of IGT and $1.4 million related to the
acquisition of technology which had not reached technological feasibility and
had no alternative future use.
In our allocation of the IGT acquisition purchase price to IPR&D, we
considered the following for each in process project at the time of the
acquisition:
(1) the present value of forecasted cash flows and income that were
expected to result from the projects;
(2) the status of projects;
(3) completion costs;
(4) project risks;
(5) the value of core technology; and
(6) the stage of completion of the individual project.
In valuing the core technology, we ensured that the relative allocations to
core technology and IPR&D were consistent with the relative contributions of
each. In the determination of the value of IPR&D, we ensured that the value of
IPR&D only considered efforts completed as of the date IGT was acquired.
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.
As of the acquisition date, IGT had three development projects in process.
In order to develop these projects into commercially viable products, we had to
complete all planning, designing and testing activities necessary to establish
that the products could be produced to meet their design requirements.
I-21
<PAGE>
The calculations of value assigned to the IPR&D reflected the efforts of IGT
prior to the close of the acquisition. The estimated completion percentage,
estimated technology life and projected introduction date of the three
development projects as of the acquisition date were as follows:
<TABLE>
<CAPTION>
Percent Technology Introduction
Project Completed Life Date
------- --------- ---------- ------------
<S> <C> <C> <C>
Project A.................................. 78% 5 years 1999
Project B.................................. 83% 5 years 1999
Project C.................................. 65% 6 years 1998
</TABLE>
Project A related to the development of an ATM switching system. Projects B
and C related to the segmentation and reassembly ("SAR") of data in an ATM
network.
We completed project A in the first quarter of 1999 and were in full
production by the end of the year. We completed development of Project B in the
fourth quarter of 1998 and were in full production in the first quarter of
1999. This was consistent with our initial estimates used in the valuation of
the projects. We terminated development on Project C during the third quarter
of 1998 (see "Impairment of Intangible Assets").
Research and development efforts related to Project A and B are
substantially complete and actual results to date have been consistent, in all
material respects, with our assumptions at the time of the acquisitions. The
assumptions primarily consist of an expected completion date for the in-process
projects, estimated costs to complete the projects, and revenue and expense
projections once the products have entered the market. Products related to
Project A and B from the IGT acquisition have been introduced to the market in
the last nine to twelve months. Shipment volumes of products from acquired
technologies are not material to our overall position at the present time.
Therefore, it is difficult to determine the accuracy of overall revenue
projections early in the technology or product life cycle. Failure to achieve
the expected levels of revenues and net income from these products will
negatively impact the return on investment expected at the time that the
acquisition was completed and potentially result in impairment of any other
assets related to the development activities.
Impairment of Intangible Assets. During the third quarter of 1998, we
abandoned a development project. We determined that a portion of the intangible
assets recognized in connection with the IGT acquisition was impaired.
The terminated project related to ongoing development of a Segmentation-and-
Reassembly chip used to convert data packets to ATM data cells (refer to
Project C in "In Process Research and Development" above). The few customers
who were using a predecessor chip were notified of the termination of all
future development of this technology. The technology was specialized and has
no alternative future use.
Interest and Other Income, Net ($000,000)
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Interest and other income, net............... $7.2 148% $2.9 190% $1.0
Percentage of net revenues................... 3% 2% 1%
</TABLE>
Interest and Other Income, net. Higher cash balances available to earn
interest caused interest income to increase in 1999, 1998 and 1997. In
addition, in 1999 we included approximately $792,000 of income which came as a
result of an equity interest in another company. Interest expense decreased in
1999 and 1998 due to lower capital leases. This reduction was partially offset
by additional interest expense from debt assumed from Abrizio and leases
assumed from IGT.
Provision for Income Taxes. Our 1999 and 1998 income tax provision primarily
reflects the provision for income taxes for our Canadian subsidiary. Our U.S.
taxes for 1999 and 1998 were largely eliminated by tax
I-22
<PAGE>
losses realized from our 1996 restructuring charge. The $39.2 million charge
for IPR&D and the related $4.3 million impairment of intangible assets taken in
1998 are non-deductible and will not result in any future tax benefits.
Recently Issued Accounting Standards. In June 1998, the FASB issued
Statement of Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. We expect to adopt the new Statement
effective January 1, 2001. The Statement will require the recognition of all
derivatives on our consolidated balance sheet at fair value. We anticipate that
the adoption of this Statement will not have a significant effect on our
operating results or financial position.
Liquidity and Capital Resources. Cash and cash equivalents and short-term
investments increased from $89.4 million at the end of 1998 to $190.7 million
at the end of 1999. During 1999, operating activities provided $106.2 million
in cash. The net income of $90.0 million in 1999 includes non-cash charges of
$17.6 million for depreciation, $5.9 million for amortization and a non-cash
credit of $26.8 million for gains from the sale of certain investments.
During 1999, we spent $9.1 million on investments and $30.7 million on new
plant and equipment. We also used cash to increase short-term investments by
$55.7 million and to reduce our debt and capital lease obligations by $8.6
million. We received $4.0 million in a wafer fabrication deposit refund, $28.6
million from our sale of an investment and $11.3 million by issuing Common
Stock, principally under our stock option and purchase plans.
Our principal source of liquidity at December 26, 1999 was our cash, cash
equivalents and short-term investments of $190.7 million. We also have a line
of credit with a bank that allows us to borrow up to $15 million provided,
along with other restrictions, that we do not pay cash dividends or make any
material divestments without the bank's written consent.
We have supply agreements with two independent foundries that supply
substantially all of the wafers for our products. We have made deposits to
secure access to wafer fabrication capacity under both of these agreements. At
December 31, 1999 and 1998, we had $19.1 and $23.1 million, respectively, in
deposits with the foundries. Under these agreements, the foundries must supply
certain quantities of wafers per year. Neither of these agreements have minimum
unit volume requirements but we are obliged under one of the agreements to
purchase a minimum percentage of our total annual wafer requirements provided
that the foundry is able to continue to offer competitive technology, pricing,
quality and delivery. The agreements may be terminated if either party does not
comply with the terms. We expect to spend $6.1 million in additional deposits
to secure foundry capacity in 2000 and to receive a refund of $4.6 million of
existing deposits.
We purchased $39.1 million in goods from our foundry suppliers during 1999
compared to $22.4 million in 1998. Those amounts may not be indicative of any
future period since wafer prices and our volume requirements may change.
In each year, we are entitled to receive a refund of a portion of these
deposits. The amount to be received is based on the annual purchases from those
foundries compared to the target levels in the agreements. Based on 1999
purchases, we received a $4.0 million refund from one of the foundries in the
first quarter of 2000. If we do not receive our deposits back during the term
of the agreements, then they will be returned to us at the end of the term.
We believe that existing sources of liquidity and anticipated funds from
operations will satisfy our projected working capital and capital expenditure
requirements through the end of 2000. We expect to purchase or arrange capital
leases for approximately $55.0 million of new capital expenditures during 2000.
In 1999, actual capital expenditures totaled $30.7 million.
I-23
<PAGE>
FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA
Our company is subject to a number of risks--some are normal to the fabless
networking semiconductor industry, some are the same or similar to those
disclosed in previous SEC filings, and some may be present in the future. You
should carefully consider all of these risks and the other information in this
report before investing in PMC. The fact that certain risks are endemic to the
industry does not lessen the significance of the risk.
As a result of these risks, our business, financial condition or operating
results could be materially adversely affected. This could cause the trading
price of our common stock to decline, and you may lose part or all of your
investment.
If one or more of our customers changes their ordering pattern or if we lose
one or more of our customers, our revenues could decline
We depend on a limited number of customers for a major portion of our
revenues. Through direct, distributor and subcontractor purchases, Lucent
Technologies and Cisco Systems each accounted for more than 10% of our fiscal
1999 revenues. We do not have long-term volume purchase commitments from any of
our major customers.
Our customers often shift buying patterns as they manage inventory levels,
decide to use competing products, are acquired or divested, market different
products, change production schedules or change their orders for other reasons.
If one or more customers were to delay, reduce or cancel orders, our overall
order levels may fluctuate greatly, particularly when viewed on a quarterly
basis.
If our customers use our competitors' products instead of ours, suffer a
decline in demand for their products or are acquired or sold, our revenues may
decline
Our expenses are relatively fixed so that fluctuation in our revenues may
cause our operating results to fluctuate as well. Demand for our products and,
as a result our revenues, may decline for the following reasons outside our
control.
As our customers increase the frequency by which they design next generation
systems and select the chips for those new systems, our competitors have an
increased opportunity to convince our customers to switch to their products,
which may cause our revenues to decline
The markets for our products are intensely competitive and subject to rapid
technological advancement in design tools, wafer manufacturing techniques,
process tools and alternate networking technologies. We must identify and
capture future market opportunities to offset the rapid price erosion that
characterizes our industry. We may not be able to develop new products at
competitive pricing and performance levels. Even if we are able to do so, we
may not complete a new product and introduce it to market in a timely manner.
Our customers may substitute use of our products in their next generation
equipment with those of current or future competitors.
We typically face competition at the design stage, where customers evaluate
alternative design approaches that require integrated circuits. Our competitors
have increasingly frequent opportunities to supplant our products in next
generation systems because of shortened product life and design-in cycles in
many of our customers' products.
Major domestic and international semiconductor companies, such as Intel,
IBM, and Lucent Technologies, are concentrating an increasing amount of their
substantially greater financial and other resources on the markets in which we
participate. This represents a serious competitive threat to PMC. Emerging
companies also provide significant competition in our segment of the
semiconductor market.
I-24
<PAGE>
Our competitors include Applied Micro Circuits Corporation, Broadcom,
Conexant Systems, Cypress Semiconductor, Dallas Semiconductor, Galileo
Technology, Integrated Device Technology, IBM, Infineon, Intel, Lucent
Technologies, Motorola, MMC Networks, Texas Instruments, Transwitch and Vitesse
Semiconductor. Over the next few years, we expect additional competitors, some
of which also may have greater financial and other resources, to enter the
market with new products. In addition, we are aware of venture-backed companies
that focus on specific portions of our broad range of products. Competition is
particularly strong in the market for optical networking and optical
telecommunication chips, in part due to the market's growth rate, which
attracts larger competitors, and in part due to the number of smaller companies
focused on this area. These companies, individually or collectively, could
represent future competition for many design wins, and subsequent product
sales.
We must often redesign our products to meet rapidly evolving industry standards
and customer specifications, which may delay an increase in our revenues
We sell products to a market whose characteristics include rapidly evolving
industry standards, product obsolescence, and new manufacturing and design
technologies. Many of the standards and protocols for our products are based on
high speed networking technologies that have not been widely adopted or
ratified by one of the standard setting bodies in our customers' industry. Our
customers often delay or alter their design demands during this standard-
setting process. In response, we must redesign our products to suit these
changing demands. Redesign usually delays the production of our products. Our
products may become obsolete during these delays.
If demand for our customers' products changes, including due to a downturn in
the networking industry, our revenues could decline
Our customers routinely build inventories of our products in anticipation of
end demand for their products. Many of our customers have numerous product
lines, numerous component requirements for each product, and sizeable and very
complex supplier structures. This makes forecasting their production
requirements difficult and can lead to an inventory surplus of certain of their
suppliers' components.
In the past, some of our customers have built PMC component inventories that
exceeded their production requirements. Those customers materially reduced
their orders and impacted our operating results. This may happen again.
In addition, while all of our sales are denominated in US dollars, our
customers' products are sold worldwide. Any major fluctuations in currency
exchange rates could materially affect our customers' end demand, and force
them to reduce orders, which could cause our revenues to decline.
Since we develop products many years before their volume production, if we
inaccurately anticipate our customers' needs, our revenues may not increase
Our products generally take between 18 and 24 months from initial
conceptualization to development of a viable prototype, and another 6 to 18
months to be designed into our customers' equipment and into production. They
often need to be redesigned because manufacturing yields on prototypes are
unacceptable or customers redefine their products to meet changing industry
standards. As a result, we develop products many years before volume production
and may inaccurately anticipate our customers' needs.
There have been times when we either designed products that had more
features than were demanded when they were introduced to the market or
conceptualized products that were not sufficiently feature-rich to meet the
needs of our customers or compete effectively against our competitors. This may
happen again.
I-25
<PAGE>
If the recent trend of consolidation in the networking industry continues, our
customers may be acquired or sold, which could cause those customers to cancel
product lines or development projects and our revenues to decline
The networking equipment industry has experienced significant merger
activity and partnership programs. Through mergers or partnerships, our
customers could seek to remove redundancies in their product lines or
development initiatives. This could lead to the cancellation of a product line
into which PMC products are designed or a development project on which PMC is
participating. In the cases of a product line cancellation, PMC revenues could
be materially impacted. In the case of a development project cancellation, we
may be forced to cancel development of one or more products, which could mean
opportunities for future revenues from this development initiative could be
lost.
If there is not sufficient market acceptance of the recently developed
specifications and protocols on which our new products are based, we may not be
able to sustain or increase our revenues
We recently introduced a number of ethernet switch products which function
at gigabit and fast ethernet speeds. Gigabit ethernet involves the transmission
of data over ethernet protocol networks at speeds of up to one billion bits per
second. Fast ethernet transmits data over these networks at speeds of up to 100
megabits per second. While gigabit and fast ethernet are well established, it
is not clear whether products meeting these protocols will be competitive with
products meeting alternative protocols, or whether our products will be
sufficiently attractive to achieve commercial success.
Some of our other recently introduced products adhere to specifications
developed by industry groups for transmissions of data signals, or packets,
over high-speed fiber optics transmission standards. These transmission
standards are called synchronous optical network, or SONET, in North America,
and synchronous data hierarchy, or SDH in Europe. The specifications, commonly
called packet-over-SONET/SDH, may be rejected for other technologies, such as
mapping IP directly onto fiber. In addition, we cannot be sure whether our
products will compete effectively with packet-over-SONET/SDH offerings of other
companies.
A substantial portion of our business also relies on industry acceptance of
asynchronous transfer mode, or ATM, products. ATM is a networking protocol.
While ATM has been an industry standard for a number of years, the overall ATM
market has not developed as rapidly as some observers had predicted it would.
As a result, competing communications technologies, including gigabit and fast
ethernet and packet-over-SONET/SDH, may inhibit the future growth of ATM and
our sales of ATM products.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance
We recently acquired or have announced acquisitions of four companies, three
of which have design wins for their products. The design wins have not yet
generated significant revenue. These or any follow on products may not achieve
commercial success. These acquisition may not generate future revenues or
earnings.
Acquiring products, technologies or businesses from third parties is an
integral part of our business strategy. Management may be diverted from our
operations while they identify and negotiate these acquisitions and integrate
an acquired entity into our operations. Also, we may be forced to develop
expertise outside our existing businesses, and replace key personnel who leave
due to an acquisition. We have not previously attempted to integrate several
acquisitions simultaneously and may not succeed in this effort.
A future acquisition could adversely affect operating results. In
particular, if we were to acquire a company or assets and record the
acquisition as a purchase, we may capitalize a significant goodwill asset. This
asset would be amortized over its expected period of benefit. The resulting
amortization expense could seriously impact operating results for many years.
I-26
<PAGE>
An acquisition could absorb substantial cash resources, require us to incur
or assume debt obligations, or issue additional equity. If we issue more
equity, we may dilute our common stock with securities that have an equal or a
senior interest.
Acquired entities also may have unknown liabilities, and the combined entity
may not achieve the results that were anticipated at the time of the
acquisition.
We anticipate lower margins on mature and high volume products, which could
adversely affect our profitability
We expect the average selling prices of our products to decline as they
mature. Historically, competition in the semiconductor industry has driven down
the average selling prices of products. If we price our products too high, our
customers may use a competitor's product or an in-house solution. To maintain
profit margins, we must reduce our costs sufficiently to offset declines in
average selling prices, or successfully sell proportionately more new products
with higher average selling prices. Yield or other production problems, or
shortages of supply may preclude us from lowering or maintaining current
operating costs.
We may not be able to meet customer demand for our products if we do not
accurately predict demand or if we fail to secure adequate wafer fabrication or
assembly capacity
Anticipating demand is difficult because our customers face volatile pricing
and demand for their end-user networking equipment. If our customers were to
delay, cancel or otherwise change future ordering patterns, we could be left
with unwanted inventory.
Recently, our suppliers, particularly silicon wafer suppliers, have
experienced an increase in the demand for their products or services. If our
silicon wafer or other suppliers are unable or unwilling to increase productive
capacity in line with the growth in demand, we may suffer longer production
lead times. Longer production lead times require that we forecast the demand
for our products further into the future. Thus, a greater proportion of our
manufacturing orders will be based on forecasts, rather than actual customers
orders. This increases the likelihood of forecasting errors. These forecasting
errors could lead to excess inventory in certain products and insufficient
inventory in others, which could adversely affect our operating results.
In addition, if our suppliers are unable or unwilling to increase productive
capacity in line with demand, we may suffer supply shortages or be allocated
supply. A shortage in supply could adversely impact our ability to satisfy
customer demand, which could adversely affect our customer relationships along
with our current and future operating results.
We rely on a limited source of wafer fabrication, the loss of which could delay
and limit our product shipments
We do not own or operate a wafer fabrication facility. Two outside foundries
supply most of our semiconductor device requirements. Our foundry suppliers
also produce products for themselves and other companies. In addition, we may
not have access to adequate capacity or certain process technologies. We have
less control over delivery schedules, manufacturing yields and costs than
competitors with their own fabrication facilities. If the foundries we use are
unable or unwilling to manufacture our products in required volumes, we may
have to identify and qualify acceptable additional or alternative foundries.
This qualification process could take six months or longer. We may not find
sufficient capacity quickly enough, if ever, to satisfy our production
requirements.
Some companies which supply our customers are similarly dependent on a
limited number of suppliers to produce their products. These other companies'
products may be designed into the same networking equipment into which we are
designed. Our order levels could be reduced materially if these companies are
unable to
I-27
<PAGE>
access sufficient production capacity to produce in volumes demanded by our
customers because our customers may be forced to slow down or halt production
on the equipment into which we are designed.
We depend on third parties in Asia for assembly of our semiconductor products
which could delay and limit our product shipments
Sub-assemblers in Asia assemble all of our semiconductor products. Raw
material shortages, political and social instability, assembly house service
disruptions, currency fluctuations, or other circumstances in the region could
force us to seek additional or alternative sources of supply or assembly. This
could lead to supply constraints or product delivery delays which, in turn, may
result in the loss of customers. We have less control over delivery schedules,
assembly processes, quality assurances and costs than competitors that do not
outsource these tasks.
We depend on a limited number of design software suppliers, the loss of which
could impede our product development
A limited number of suppliers provide the computer aided design, or CAD,
software we use to design our products. Factors affecting the price,
availability or technical capability of these products could affect our ability
to access appropriate CAD tools for the development of highly complex products.
In particular, the CAD software industry has been the subject of extensive
intellectual property rights litigation, the results of which could materially
change the pricing and nature of the software we use. We also have limited
control over whether our software suppliers will be able to overcome technical
barriers in time to fulfill our needs.
We are subject to the risks of conducting business outside the United States to
a greater extent than companies which operate their businesses mostly in the
United States, which may impair our sales, development or manufacturing of our
products
We are subject to the risks of conducting business outside the United States
to a greater extent than most companies because, in addition to selling our
products in a number of countries, a significant portion of our research and
development and manufacturing are conducted outside of the United States. This
subjects us to the following risks.
We may lose our ability to design or produce products, could face additional
unforeseen costs or could lose access to key customers if any of the nations in
which we conduct business impose trade barriers or new communications standards
We may have difficulty obtaining export licenses for certain technology
produced for us outside the United States. If a foreign country imposes new
taxes, tariffs, quotas, and other trade barriers and restrictions or the United
States and a foreign country develop hostilities or change diplomatic and trade
relationships, we may not be able to continue manufacturing or sub-assembly of
our products in that country and may have fewer sales in that country. We may
also have fewer sales in a country that imposes new communications standards or
technologies. This could inhibit our ability to meet our customers' demand for
our products and lower our revenues.
If foreign exchange rates fluctuate significantly, our profitability may
decline
We are exposed to foreign currency rate fluctuations because a significant
part of our development, test, marketing and administrative costs are
denominated in Canadian dollars, and our selling costs are denominated in a
variety of currencies around the world. In addition, a number of the countries
in which we have sales offices have a history of imposing exchange rate
controls. This could make it difficult to withdraw the foreign currency
denominated assets we hold in these countries.
I-28
<PAGE>
We may have difficulty collecting receivables from customers based in foreign
countries, which could adversely affect our earnings
We sell our products to customers around the world. Payment cycle norms in
these countries may not be consistent with our standard payment terms. Thus, we
may have greater difficulty collecting receivables on time from customers in
these countries. This could impact our financial performance, particularly on
our balance sheet.
In addition, we may be faced with greater difficulty in collecting
outstanding balances due to the shear distances between our collection
facilities and our customers, and we may be unable to enforce receivable
collection in foreign nations due to their business legal systems. If one or
more of our foreign customers do not pay their outstanding receivable, we may
be forced to write-off the account. This could have a material impact on our
earnings.
The loss of personnel could preclude us from designing new products
To succeed, we must retain and hire technical personnel highly skilled at
the design and test functions used to develop high speed networking products
and related software. The competition for such employees is intense. We, along
with our peers, customers and other companies in the communications industry,
are facing intense competition for those employees from our peers and an
increasing number of startup companies which are emerging with potentially
lucrative employee ownership arrangements.
We do not have employment agreements in place with our key personnel. We
issue common stock options that are subject to vesting as employee incentives.
These options, however, are effective as retention incentives only if they have
economic value.
If we cannot protect our proprietary technology, we may not be able to prevent
competitors from copying our technology and selling similar products, which
would harm our revenues
To compete effectively, we must protect our proprietary information. We rely
on a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We hold several patents and have a number of
pending patent applications.
We might not succeed in attaining patents from any of our pending
applications. Even if we are awarded patents, they may not provide any
meaningful protection or commercial advantage to us, as they may not be of
sufficient scope or strength, or may not be issued in all countries where our
products can be sold. In addition, our competitors may be able to design around
our patents.
We develop, manufacture and sell our products in Asian and other countries
that may not protect our products or intellectual property rights to the same
extent as the laws of the United States. This makes piracy of our technology
and products more likely. Steps we take to protect our proprietary information
may not be adequate to prevent theft of our technology. We may not be able to
prevent our competitors from independently developing technologies that are
similar to or better than ours.
Our products employ technology that may infringe on the proprietary rights of
third parties, which may expose us to litigation and prevent us from selling
our products
Vigorous protection and pursuit of intellectual property rights or positions
characterize the semiconductor industry. This often results in expensive and
lengthy litigation. We, as well as our customers or suppliers, may be accused
of infringing on patents or other intellectual property rights owned by third
parties. This has happened in the past. An adverse result in any litigation
could force us to pay substantial damages, stop manufacturing, using and
selling the infringing products, spend significant resources to develop non-
infringing technology, discontinue using certain processes or obtain licenses
to the infringing technology. In addition, we may not be able to develop non-
infringing technology, nor might we be able to find appropriate licenses on
reasonable terms.
I-29
<PAGE>
Patent disputes in the semiconductor industry are often settled through
cross-licensing arrangements. Because we currently do not have a substantial
portfolio of patents compared to our larger competitors, we may not be able to
settle an alleged patent infringement claim through a cross-licensing
arrangement. We are therefore more exposed to third party claims than some of
our larger competitors and customers.
In the past, our customers have been required to obtain licenses from and
pay royalties to third parties for the sale of systems incorporating our
semiconductor devices. Until December of 1997, we indemnified our customers up
to the dollar amount of their purchases of our products found to be infringing
on technology owned by third parties. Customers may also make claims against us
with respect to infringement.
Furthermore, we may initiate claims or litigation against third parties for
infringing our proprietary rights or to establish the validity of our
proprietary rights. This could consume significant resources and divert the
efforts of our technical and management personnel, regardless of the
litigation's outcome.
Securities we issue to fund our operations could dilute your ownership
We may need to raise additional funds through public or private debt or
equity financing to fund our operations. If we raise funds by issuing equity
securities, the percentage ownership of current stockholders will be reduced
and the new equity securities may have priority rights to your investment. We
may not obtain sufficient financing on terms we or you will find favorable. We
may delay, limit or eliminate some or all of our proposed operations if
adequate funds are not available.
Our stock price has been and may continue to be volatile
In the past, our common stock price has fluctuated significantly. This could
continue as our or our competitors announce new products, our and our peers or
customers' results fluctuate, conditions in the networking or semiconductor
industry change or investors change their sentiment toward technology stocks.
In addition, increases in our stock price and expansion of our price-to-
earnings multiple may have made our stock attractive to momentum or day-trading
investors who often shift funds into and out of stocks rapidly, exacerbating
price fluctuations in either direction particularly when viewed on a quarterly
basis.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion regarding our risk management activities contains
"forward-looking statements" that involve risks and uncertainties. Actual
results may differ materially from those projected in the forward-looking
statements.
We are exposed to foreign currency fluctuations through our operations in
Canada and elsewhere. In our effort to hedge this risk, we typically forecast
our operational currency needs, purchase such currency on the open market at
the beginning of an operational period, and hold these funds as a hedge against
currency fluctuations. We usually limit the operational period to 3 months or
less. While we expect to utilize this method of hedging our foreign currency
risk in the future, we may change our hedging methodology and utilize foreign
exchange contracts that are currently available under our operating line of
credit agreement.
Occasionally, we may not be able to correctly forecast our operational
needs. If our forecasts are overstated or understated during periods of
currency volatility, we could experience unanticipated currency gains or
losses. At the end of 1999, we did not have significant foreign currency
denominated net asset or net liability positions, and we had no outstanding
foreign exchange contracts.
We maintain cash equivalent and short-term investment portfolio holdings of
various issuers, types, and maturity dates with various banks and investment
banking institutions. We occasionally hold short-term investments beyond 120
days, and the market value of these investments on any day during the
investment term may vary as a result of market interest rate fluctuations. We
do not hedge this exposure because short-term
I-30
<PAGE>
fluctuations in interest rates would not likely have a material impact on
interest earnings. We classify our investments as available-for-sale or held-
to-maturity at the time of purchase and re-evaluate this designation as of each
balance sheet date. We had approximately $106.6 million in outstanding short-
term investments at the end of 1999.
Year 2000 Computer Systems Issues Update
To date our systems and software have not experienced any material
disruption due to the onset of the Year 2000, and we have completed our Year
2000 preparedness activities. All of our systems are operating normally, as are
those of our customers and suppliers. Our expenditures on the year 2000 issue
were immaterial.
ITEM 8. Financial Statements and Supplementary Data.
The chart entitled "Quarterly Data (Unaudited)" contained in Item 6 Part II
hereof is hereby incorporated by reference into this Item 8 of Part II of this
Form 10-K.
I-31
<PAGE>
PMC-Sierra, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements Included in Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Deloitte & Touche LLP, Independent Auditors.................... V-33
Consolidated Balance Sheets at December 31, 1999 and 1998................ V-34
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1999.......................................... V-35
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1999............................. V-36
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999.......................................... V-37
Notes to Consolidated Financial Statements............................... V-39
Schedules for each of the three years in the period ended December 31,
1999 included in Item 14(d):
II--Valuation and Qualifying Accounts.................................. V-70
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or are not required, or the information required to be set forth therein is
included in the financial statements or the notes thereto.
I-32
<PAGE>
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders 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. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Vancouver, British Columbia
January 17, 2000 (March 3, 2000, as to Note 14)
I-33
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 84,091 $ 38,507
Short-term investments................................... 106,636 50,893
Accounts receivable, net of allowance for doubtful
accounts of $1,244 ($1,128 in 1998)..................... 35,698 26,227
Inventories, net......................................... 7,208 3,617
Deferred income taxes.................................... 9,270 1,506
Prepaid expenses and other current assets................ 6,822 4,045
Short-term deposits for wafer fabrication capacity....... 4,637 4,000
-------- --------
Total current assets................................... 254,362 128,795
Property and equipment, net................................ 45,489 32,452
Goodwill and other intangible assets, net of accumulated
amortization of $9,961 ($6,455 in 1998)................... 15,280 19,629
Investments and other assets............................... 12,356 4,500
Deposits for wafer fabrication capacity.................... 14,483 19,120
-------- --------
$341,970 $204,496
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 11,333 $ 8,964
Accrued liabilities...................................... 15,765 14,694
Deferred income.......................................... 34,486 12,517
Income taxes payable..................................... 26,183 13,897
Current portion of obligations under capital leases and
long-term debt.......................................... 1,348 5,111
-------- --------
Total current liabilities.............................. 89,115 55,183
Deferred income taxes...................................... 9,091 4,357
Noncurrent obligations under capital leases and long-term
debt...................................................... 1,080 5,894
Commitments and contingencies (Note 6)
Special shares convertible into 4,242 (5,036 in 1998)
common stock.............................................. 6,998 8,387
Stockholders' equity
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) 136,812 shares issued and outstanding (125,660 in
1998)................................................... 206,790 191,134
Deferred stock compensation.............................. (2,487) (1,822)
Retained earnings (accumulated deficit).................. 31,383 (58,637)
-------- --------
Total stockholders' equity............................. 235,686 130,675
-------- --------
$341,970 $204,496
======== ========
</TABLE>
See notes to consolidated financial statements.
I-34
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues...................................... $262,477 $161,812 $127,166
Cost of revenues.................................. 55,363 38,220 33,065
-------- -------- --------
Gross profit.................................. 207,114 123,592 94,101
Other costs and expenses:
Research and development........................ 63,333 35,891 22,880
Marketing, general and administrative........... 44,072 29,246 23,366
Amortization of goodwill........................ 1,252 915 300
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 from operations............................ 97,591 14,053 48,938
Interest and other income, net.................... 7,232 2,875 973
Gain on sale of investments....................... 26,800 -- --
-------- -------- --------
Income before provision for income taxes...... 131,623 16,928 49,911
Provision for income taxes........................ 41,603 22,873 15,727
-------- -------- --------
Net income (loss)................................. $ 90,020 $ (5,945) $ 34,184
======== ======== ========
Net income (loss) per common share--basic......... $ 0.66 $ (0.05) $ 0.27
======== ======== ========
Net income (loss) per common share--diluted....... $ 0.60 $ (0.05) $ 0.26
======== ======== ========
Shares used in per share calculation--basic....... 137,428 130,760 124,756
Shares used in per share calculation--diluted..... 151,134 130,760 131,122
</TABLE>
See notes to consolidated financial statements.
I-35
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
and
Additional
Paid in
Common Stock Capital Deferred Total
---------------- ------------ Stock Accumulated Stockholders
Number of Shares Amount Compensation Deficit Equity
---------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1996................... 114,588 $135,320 $ -- $(86,876) $ 48,444
Conversion of special
shares into common
stock.................. 1,276 1,701 -- -- 1,701
Issuance of common stock
under stock benefit
plans.................. 3,136 6,385 -- -- 6,385
Net income.............. -- -- -- 34,184 34,184
------- -------- ------- -------- --------
Balances at December 31,
1997................... 119,000 143,406 -- (52,692) 90,714
Conversion of special
shares into common
stock.................. 1,436 2,406 -- -- 2,406
Issuance of common stock
under stock benefit
plans.................. 3,564 14,338 -- -- 14,338
Issuance of common stock
and stock options to
acquire Integrated
Telecom Technology,
Inc.................... 1,660 28,221 -- -- 28,221
Deferred stock
compensation........... -- 2,763 (2,763) -- --
Amortization of deferred
stock compensation..... -- -- 941 -- 941
Net loss................ -- -- -- (5,945) (5,945)
------- -------- ------- -------- --------
Balances at December 31,
1998................... 125,660 $191,134 $(1,822) $(58,637) $130,675
Conversion of special
shares into common
stock.................. 792 1,389 -- -- 1,389
Issuance of common stock
under stock benefit
plans.................. 10,272 11,180 -- -- 11,180
Conversion of warrants
into common stock...... 88 75 -- -- 75
Deferred stock
compensation........... -- 3,012 (3,012) -- --
Amortization of deferred
stock compensation..... -- -- 2,347 -- 2,347
Net income.............. -- -- -- 90,020 90,020
------- -------- ------- -------- --------
Balances at December 31,
1999................... 136,812 $206,790 $(2,487) $ 31,383 $235,686
------- -------- ------- -------- --------
</TABLE>
See notes to consolidated financial statements.
I-36
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ 90,020 $ (5,945) $ 34,184
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation of plant and equipment.......... 17,627 11,440 7,787
Amortization of intangibles.................. 3,599 2,850 1,363
Amortization of deferred stock compensation.. 2,347 941 --
Deferred income taxes........................ (3,030) (1,172) 3,082
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.......................... (9,471) (9,861) (1,196)
Inventories.................................. (3,591) 137 4,662
Prepaid expenses and other................... (1,780) (1,370) 1,000
Accounts payable and accrued liabilities..... 3,842 1,484 (1,530)
Income taxes payable......................... 12,286 5,117 4,730
Deferred income.............................. 21,969 10,419 2,098
Accrued restructuring costs.................. -- -- (14,942)
Net liabilities associated with discontinued
operations.................................. -- (301) (1,299)
--------- -------- --------
Net cash provided by operating activities.. 106,226 57,226 38,814
--------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments........... (109,635) (53,001) (59,187)
Proceeds from sales and maturities of short-
term investments............................. 53,892 43,442 24,877
Purchases of plant and equipment.............. (30,664) (22,513) (8,221)
Proceeds from sale of equipment and capacity
assets....................................... -- -- 7,631
Purchases of investments...................... (9,130) -- (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...... (63,320) (56,656) (37,900)
--------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable................... 1,817 1,211 50
Repayment of notes payable and other long-term
debt......................................... (2,170) (541) (2,640)
Proceeds from sale/leaseback of equipment..... -- -- 1,107
Principal payments under capital lease
obligations.................................. (8,224) (5,030) (12,895)
Proceeds from issuance of common stock........ 11,255 14,338 6,385
--------- -------- --------
Net cash provided by (used in) financing
activities................................ 2,678 9,978 (7,993)
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 45,584 10,548 (7,079)
Cash and cash equivalents, beginning of the
year........................................... 38,507 27,959 35,038
--------- -------- --------
Cash and cash equivalents, end of the year...... $ 84,091 $ 38,507 $ 27,959
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
I-37
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest................................ $ 695 $ 958 $1,954
Cash paid for income taxes............................ 32,916 12,972 7,227
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............................... -- -- 3,536
Conversion of PMC special shares into common stock.... 1,389 2,406 1,701
</TABLE>
See notes to consolidated financial statements.
I-38
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
NOTE 1. Summary of Significant Accounting Policies
Description of business. PMC-Sierra, Inc (the "Company" or "PMC" ) 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" ("SFAS 115"), 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 solely of held-to-maturity 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.
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:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
(in
thousands)
<S> <C> <C>
Work-in-progress............................................... $4,031 $1,761
Finished goods................................................. 3,177 1,856
------ ------
$7,208 $3,617
====== ======
</TABLE>
I-39
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Machinery and equipment.................................. $ 79,521 $ 53,883
Leasehold improvements................................... 5,353 2,683
Furniture and fixtures................................... 4,484 2,653
-------- --------
Total cost............................................... 89,358 59,219
Accumulated depreciation................................. (43,869) (26,767)
-------- --------
$ 45,489 $ 32,452
======== ========
</TABLE>
The Company leases furniture and equipment under long-term capital
leases. Accordingly, capitalized costs of approximately $4,301,000 and
$17,686,000 at December 31, 1999 and 1998, respectively, and accumulated
amortization of approximately $3,738,000 and $12,067,000, 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:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
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
======= =======
</TABLE>
Investments in Non-Public Companies. The Company has certain investments in
non-publicly traded companies in which it has less that 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
I-40
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Accrued compensation and benefits........................... $ 7,132 $ 5,482
Accrued royalties........................................... -- 175
Other accrued liabilities................................... 8,633 9,037
------- -------
$15,765 $14,694
======= =======
</TABLE>
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.
I-41
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 51% (1998--41%) 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:
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1999 1998 1997
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Interest income.................................... $7,492 $ 3,846 $ 3,146
Interest expense (*)............................... (812) (1,006) (2,020)
Equity in income of investee....................... 792 -- --
Other.............................................. (240) 35 (153)
------ ------- -------
$7,232 $ 2,875 $ 973
====== ======= =======
</TABLE>
--------
* consists primarily of interest on long-term debt and 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 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 April 1999.
I-42
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 ("SFAS 130"), 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 SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on the Company's consolidated
balance sheet at fair value. The 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.
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 Abrizio, Inc.
In 1999, the Company acquired Abrizio, Inc. ("Abrizio"), a fabless
semiconductor company that specializes in broadband switch chip fabrics used in
core ATM switches, digital cross-connects, and terabit routers. PMC issued
approximately 8,704,000 shares in PMC-Sierra common stock and PMC 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.
The historical results of operations of the Company and Abrizio for the
periods prior to the merger are as follows:
<TABLE>
<CAPTION>
Year Ended
Six Months December 31,
Ended June ------------------
27, 1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
I-43
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the quarter ended September 26, 1999, PMC recorded merger-related
transaction costs of $866,000 related to the acquisition of Abrizio. These
charges, which consist primarily of investment banking and other professional
fees, have been included under costs of merger in the Consolidated Statements
of Operations.
Acquisition of Integrated Telecom Technology, Inc.
In 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 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 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:
<TABLE>
<S> <C>
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
=======
</TABLE>
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:
(1) the present value of the forecasted cash flows and income that were
expected to result from the projects;
(2) the status of the projects;
(3) completion costs;
(4) project risks;
(5) the value of core technology; and
(6) 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. In the
determination of 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.
I-44
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 project.
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:
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------- ------
(in thousands)
<S> <C> <C>
Investments in Non-Public Companies.......................... $ 8,680 $4,091
Investments in Equity Accounted Investee..................... 3,506 --
Other Assets................................................. 170 409
------- ------
$12,356 $4,500
======= ======
</TABLE>
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 $9.1
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. ("Sierra Wireless"), 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.
I-45
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Line 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:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Obligations under capital leases with interest ranging
from 7.4% to 17.9% ..................................... $ 1,254 $ 9,479
Various notes, secured by property and equipment, payable
in annual installments of approximately $400,000 and
with an interest rate of 12.3%.......................... 1,174 873
Various unsecured notes, payable in various installments
with interest rates ranging from 0% to 9%............... -- 653
------- -------
2,428 11,005
Less current portion..................................... (1,348) (5,111)
------- -------
$ 1,080 $ 5,894
======= =======
</TABLE>
Future minimum lease payments at December 31, 1999 under capital leases are
as follows:
<TABLE>
<CAPTION>
Year Ending
December 31
--------------
(in thousands)
<S> <C>
2000.......................................................... $1,049
2001.......................................................... 268
Total minimum lease payments.................................. 1,317
Less amount representing imputed interest..................... (63)
------
Present value of future minimum lease payments................ $1,254
======
</TABLE>
I-46
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6. Commitments and Contingencies
Operating leases. The Company leases its facilities under operating lease
agreements, which expire at various dates through April 30, 2006. Total rent
expense for the years ended December 31, 1999, 1998 and 1997 was $3.5 million,
$1.8 million and $1.3 million, respectively. Minimum rental commitments under
these leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31
--------------
(in thousands)
<S> <C>
2000 ......................................................... $ 4,122
2001.......................................................... 5,986
2002.......................................................... 5,794
2003.......................................................... 5,771
2004.......................................................... 5,588
thereafter.................................................... 26,706
-------
$53,967
=======
</TABLE>
Supply agreements. The Company has wafer supply agreement 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 common stock to be issued to holders
of 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 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
Authorized. 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
I-47
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 August 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. At the end 1999, warrants to purchase 84,278 shares of
common stock 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 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, respectively, per share. 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. As of December 31, 1999, there were
2,221,994 shares of common stock available for issuance under the purchase
plan.
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.
I-48
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, and the
related options are included in the following table.
Option activity under the option plans was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise
Available Number of Price
For Options Per
Issuance Outstanding Share
---------- ----------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1996 (5,011,496
options exercisable at a weighted average
price of $1.86).............................. 6,114,196 12,396,088 $ 2.66
Authorized.................................. 3,897,642 -- --
Granted (weighted average fair value of
$2.00 per share)........................... (5,705,800) 5,705,800 $ 4.37
Exercised................................... -- (2,773,800) $ 1.81
Expired..................................... (144,448) -- --
Cancelled................................... 1,936,864 (1,936,864) $ 3.74
---------- ----------
Outstanding at December 31, 1997 (5,296,692
options exercisable at a weighted average
price of $2.32).............................. 6,098,454 13,391,224 $ 3.41
Authorized.................................. 5,257,656 -- --
Granted (weighted average fair value of
$4.08 per share)........................... (7,119,544) 7,119,544 $ 5.62
Exercised................................... -- (3,208,064) $ 1.87
Expired..................................... (54,768) -- --
Cancelled................................... 653,564 (653,564) $ 5.49
---------- ----------
Outstanding at December 31, 1998 (6,195,466
options exercisable at a weighted average
price of $3.30).............................. 4,835,362 16,649,142 $ 4.57
Authorized.................................. 5,028,056
Granted (weighted average fair value of
$16.09 per share).......................... (9,763,486) 9,763,486 $31.12
Exercised................................... (3,254,654) $ 2.89
Expired..................................... (2,702) -- --
Cancelled................................... 328,206 (328,206) $12.70
---------- ----------
Outstanding at December 31, 1999.............. 425,436 22,829,768 $16.04
========== ==========
</TABLE>
I-49
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information concerning options outstanding
for the combined option plans at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Contractual Price Price
Number Life per Number per
Range of Exercise Prices Outstanding (years) share Exercisable share
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.02-$ 3.53.......... 4,926,464 7.02 $ 2.11 2,890,980 $2.65
$ 3.57-$ 6.25.......... 3,625,274 6.62 4.11 2,792,114 4.12
$ 6.35-$14.05.......... 4,902,522 8.11 8.21 2,059,532 8.02
$15.99-$23.97.......... 5,301,900 9.10 17.37 0 0.00
$32.21-$53.07.......... 4,073,608 9.93 51.21 0 0.00
---------- ---------
$ 0.02-$53.07.......... 22,829,768 8.19 16.04 7,742,626 4.61
========== =========
</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 option valuation 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:
<TABLE>
<CAPTION>
Options ESPP
---------------- ----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
(in thousands
except per share
amounts)
<S> <C> <C> <C>
Net income (loss)................................. $64,699 $(17,500) $29,654
Basic net income (loss) per share................. 0.47 (0.13) 0.24
Diluted net income (loss) per share............... 0.43 (0.13) 0.23
</TABLE>
I-50
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 to the estimation of 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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal........................................ $ -- $ -- $(1,294)
State.......................................... 525 190 5
Foreign........................................ 44,108 23,855 13,934
------- ------- -------
44,633 24,045 12,645
------- ------- -------
Deferred:
Federal........................................ (132) (132) 1,671
Foreign........................................ (2,898) (1,040) 1,411
------- ------- -------
(3,030) (1,172) 3,082
------- ------- -------
Provision for income taxes....................... $41,603 $22,873 $15,727
======= ======= =======
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
Federal statutory rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Income (loss) before provision for income
taxes......................................... $131,623 $16,928 $49,911
Federal statutory tax rate..................... 35% 35% 35%
Income taxes (recovery) at U.S. Federal
statutory rate................................ $ 46,068 $ 5,925 $17,469
State taxes, net of federal benefit............ 525 -- --
Net operating losses (utilized) not utilized... (5,805) 1,002 (4,482)
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.......................................... 1,513 492 482
-------- ------- -------
Provision for income taxes..................... $ 41,603 $22,873 $15,727
======== ======= =======
</TABLE>
I-51
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 53,519 $ 23,968
State tax loss carryforwards.......................... 3,690 1,500
Credit carryforwards.................................. 5,107 3,497
Reserves and accrued expenses......................... 4,585 430
Restructuring and other charges....................... 372 3,245
Deferred income....................................... 9,270 1,506
-------- --------
Total deferred tax assets........................... 76,543 34,146
Valuation allowance................................... (67,273) (32,640)
-------- --------
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)
======== ========
</TABLE>
At December 31, 1999, the Company has approximately $157,139,000 of federal
net operating losses, which will expire from 2000 to 2019. Include 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 $67,591,000 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 are $2,258,000 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, $41,000 of state research
and development credits and $410,000 of federal AMT credits which carryforward
indefinitely.
Not included in the deferred assets 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 $119,262,000 in 1999,
$62,355,000 in 1998 and $37,391,000 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
I-52
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net revenues
Networking...................................... $245,186 $139,539 $ 85,512
Non-Networking.................................. 17,291 22,273 41,654
-------- -------- --------
Total......................................... $262,477 $161,812 $127,166
======== ======== ========
Gross profit
Networking...................................... $199,186 $113,063 $ 69,529
Non-Networking.................................. 7,928 10,529 24,572
-------- -------- --------
Total......................................... $207,114 $123,592 $ 94,101
======== ======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net revenues
United States................................... $181,161 $110,256 $ 89,371
Canada.......................................... 38,575 15,780 12,373
Europe and Middle East.......................... 14,764 12,431 11,430
Asia............................................ 27,789 23,246 13,693
Other foreign................................... 188 99 299
-------- -------- --------
Total......................................... $262,477 $161,812 $127,166
======== ======== ========
Long-lived assets
United States................................... $ 30,342 $ 36,796 $ 26,581
Canada.......................................... 56,577 38,865 29,297
Other........................................... 689 40 --
-------- -------- --------
Total......................................... $ 87,608 $ 75,701 $ 55,878
======== ======== ========
</TABLE>
I-53
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has revenues from external customers (1999 and 1998--2, 1997--1)
that exceed 10% of total net revenues as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Networking........................................... $98,050 $31,549 $ 1,757
Non-Networking....................................... -- 18,579 21,403
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income (loss)................................... $90,020 $(5,945) $34,184
------- ------- -------
Denominator:
Basic weighted average common shares
outstanding(1)..................................... 137,428 130,760 124,756
Effect of dilutive securities:
Stock options..................................... 13,590 -- 6,310
Stock warrants.................................... 116 -- 56
------- ------- -------
Diluted weighted average common shares
outstanding.................................... 151,134 130,760 131,122
======= ======= =======
Basic net income (loss) per share..................... $ 0.66 $ (0.05) $ 0.27
======= ======= =======
Diluted net income (loss) per share................... $ 0.60 $ (0.05) $ 0.26
======= ======= =======
</TABLE>
--------
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic
net income per share.
NOTE 14. Subsequent Event
In January 2000, the Company acquired Toucan Technology ("Toucan"), a
privately held integrated circuit design company located in Ireland. At
December 31, 1999, the Company owned seven per cent of Toucan and purchased the
remainder for approximately 300,000 shares of PMC Common Stock and options to
purchase Common Stock. The acquisition will be accounted as a pooling of
interests.
On March 3, 2000, the Company acquired AANetcom, Inc. ("AANetcom"), a
privately held fabless semiconductor located in the USA. The Company issued 4.8
million PMC common shares in exchange for all outstanding stock and options of
AANetcom. The transaction will be accounted for as a pooling of interests.
I-54
<PAGE>
PMC-Sierra, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 3, 2000, the Company also announced the intent to acquire Extreme
Packet Devices, Inc. ("Extreme"), a privately held fabless semiconductor
company located in Canada. This agreement provides for the Company to issue PMC
common shares valued at $415 million (US) in exchange for all outstanding stock
and options of Extreme. This transaction, subject to completion, will also be
accounted for as a pooling of interests.
The pro forma effects of these combinations on the reported financial
position and the results of operation are not presented in this document.
I-55
<PAGE>
PART III
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
ITEM 10. Directors and Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age(1) Principal Occupation
---- ------ --------------------
<C> <C> <S>
Robert L. Bailey........ 42 President, Chief Executive Officer and
Chairman of the Board of Directors, PMC
James V. Diller......... 64 Vice Chairman, PMC; President, Chief
Executive Officer and Chairman of the Board
of Directors, Elantec Semiconductor, Inc.
Alexandre Balkanski..... 39 President and Chief Executive Officer, C-
Cube Microsystems, Inc.
Colin Beaumont.......... 59 Management Consultant
Frank J. Marshall....... 53 Private Investor and Management Consultant
Greg Aasen ............. 44 Chief Operating Officer, PMC
John W. Sullivan........ 53 Vice President, Finance and Chief Financial
Officer, PMC
</TABLE>
--------
(1) As of April 16, 2000
Mr. Bailey has been a director of the Company since October 1996. Mr. Bailey
has served as the Company's President and Chief Executive Officer since July
1997 and was appointed as Chairman of the Board in February 2000. Prior to his
present position, Mr. Bailey has served as President, Chief Executive Officer
and director of PMC-Sierra, Ltd., a Canadian corporation, the Company's
principal subsidiary ("LTD"), since December 1993. Prior to joining LTD, Mr.
Bailey was employed by AT&T-Microelectronics from August 1989 to November 1993
where he served as Vice President of Integrated Microperipheral Products and at
Texas Instruments in various management assignments from June 1979 to August
1989. He also serves as a member of the Board of Directors of Copper Mountain
Networks.
Mr. Diller, a founder of the Company, served as the Company's Chief
Executive Officer from 1983 to July 1997 and as President from 1983 to July
1993. Mr. Diller has served as a director of the Company since the Company's
formation in 1983. Mr. Diller served as the Chairman of the Company's Board of
Directors from July 1993 until February 2000, at which time he became Vice
Chairman of the Board. Mr. Diller served as Chief Financial Officer of the
Company from its formation until July 1987. He has served on the Board of LTD
since its formation. He also serves as the President and Chief Executive
Officer and Chairman of the Board of Elantec Semiconductor, Inc. and is
Chairman of the Board of Directors of Summit Microelectronics, a privately held
company.
Dr. Balkanski has been a director of the Company since August 1993. In July
1988, Dr. Balkanski co-founded C-Cube Microsystems, Inc., a developer of
integrated circuits and software. Dr. Balkanski has held a variety of senior
management positions with C-Cube, and is currently its President, Chief
Executive Officer and a director.
Mr. Beaumont has been a director of the Company since April 1997. Mr.
Beaumont served as Chief Executive Officer of Plaintree Systems, Inc. from June
1998 until February 1999 and as Chief Technology Officer from February 1999
until July 1999. Mr. Beaumont is currently a management consultant.
Mr. Beaumont served as a board member of Plaintree Systems, Incorporated until
August 1999 and as a board member of Bell Emergis from August 1998 until March
1999. In 1995 Mr. Beaumont retired from Nortel where he was the Chief Engineer
of BNR, the largest commercial research and development facility in Canada. Mr.
Beaumont has served as a director of LTD since 1992.
I-56
<PAGE>
Mr. Marshall has been a director of the Company since April 1996. Mr.
Marshall is currently a private investor and management consultant. Previously,
Mr. Marshall was Vice President, General Manager of Cisco Systems Inc.'s Core
Products Business Unit. Mr. Marshall has also served as Vice President of
Engineering for Cisco Systems Inc. from April 1992 to July 1995. He also serves
on the Board of Directors of Covad Communications Inc. and several private
companies. Mr. Marshall also serves on the technical advisory board of several
high technology companies, is a member of the technical advisory Board of
Interwest Partners and is a Venture Partner at Sequoia Capital.
Mr. Aasen has served as Chief Operating Officer of the Company since
February 1997. Mr. Aasen is a founder of LTD and served as its Chief Operating
Officer and Secretary since its formation in June 1992. He has served as a
director of LTD since August 1994. Prior to joining LTD, Mr. Aasen was a
General Manager of PMC, a division of MPR Teltech, Ltd.
Mr. Sullivan joined the Company in April 1997 as Vice President, Finance and
Chief Financial Officer. Prior to joining the Company, he was employed by
Semitool Inc., a semiconductor equipment manufacturer, as Vice President
Finance from 1993 to 1997. Prior to his employment with Semitool Inc., Mr.
Sullivan was employed by United Dominion Industries and Arthur Young & Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of the Company's Common Stock, to
file certain reports regarding ownership of, and transactions in, the Company's
securities with the Securities and Exchange Commission (the "SEC"). Such
officers, directors and 10% stockholders are also required by SEC rules to
furnish the Company with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by the
Company, or written representations from certain reporting persons, the Company
believes that during fiscal 1999 all the reporting persons complied with
Section 16(a) filing requirements except that in January 2000, Mr. Diller
reported on an amended Form 4 for November 1999 a gift of 40,000 shares of the
Company's Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Tables
Summary Compensation Table. The following table sets forth the compensation
paid by any person for all services rendered in all capacities to the Company,
for each of the three fiscal years ending in fiscal 1999, to the Chief
Executive Officer and each of the other executive officers of the Company in
fiscal 1999:
<TABLE>
<CAPTION>
Long-Term
Compensation(1)
Annual Compensation Securities All other
Name and Principal ------------------------- Underlying Compensation
Position Year Salary ($) Bonus ($) Options (#) ($)(2)
------------------ ---- ---------- --------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Robert L. Bailey........ 1999 254,279 469,735 1,260,000 7,248(3)
President, Chief
Executive Officer and 1998 230,185 456,019 600,000 9,765(4)
Chairman of the Board
of Directors 1997 211,415 459,837 600,000 7,751(5)
Gregory Aasen........... 1999 198,634 231,314 820,000 362
Chief Operating Officer 1998 168,968 238,060 400,000 364
1997 147,810 186,102 400,000 198
John W. Sullivan(6)..... 1999 164,919 140,420 240,000 1,150
Vice President Finance 1998 140,165 141,376 100,000 483
and Chief Financial
Officer 1997 87,916 84,552 300,000 27,003(7)
</TABLE>
--------
(1) The Company made no restricted stock awards during the periods presented.
I-57
<PAGE>
(2) Life insurance premiums, except as indicated in Notes (3), (4) , (5) and
(7).
(3) Includes $486 for life insurance premium and $6,762 for tax preparation.
(4) Includes $798 for life insurance premium and $8,967 for tax preparation.
(5) Includes $107 for life insurance premium and $7,644 for tax preparation.
(6) Mr. Sullivan joined the Company in April 1997 and was elected as Vice
President Finance and Chief Financial Officer in July 1997.
(7) Includes $110 for life insurance premium and $26,893 for relocation
expenses.
Option Grants in Last Fiscal Year. The following table sets forth each stock
option grant made during fiscal 1999 to each of the executive officers named in
the Summary Compensation Table above:
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------
Potential Realizable
Value at Assumed Annual
Number of Rates of Stock Price
Securities % of Total Exercise Appreciation for Option
Underlying Options Granted or Base Term(5)
Options to Employees in Price Expiration -----------------------
Name Granted(1)(2) Fiscal Year(3) ($/Sh)(4) Date 5%($) 10%($)
---- ------------- --------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Bailey........ 780,000 8.0% 15.9844 01/04/2009 $ 7,840,953 $19,870,513
480,000 4.9% 52.3750 12/15/2009 $15,810,411 $40,066,685
Gregory Aasen........... 520,000 5.4% 15.9844 01/04/2009 $ 5,227,302 $13,247,009
300,000 3.1% 52.3750 12/15/2009 $ 9,881,507 $25,041,678
John W. Sullivan........ 140,000 1.4% 15.9844 01/04/2009 $ 1,407,350 $ 3,566,502
100,000 1.0% 52.3750 12/15/2009 $ 3,293,836 $ 8,347,226
</TABLE>
--------
(1) The listed options become exercisable as to 1/4th of the shares subject to
the option one year after the date of grant and thereafter monthly as to
1/48th of the shares subject to the option with full vesting occurring on
the fourth anniversary of the date of grant.
(2) Under the terms of the Company's 1994 Incentive Stock Plan, the Board of
Directors retains discretion, subject to plan limits, to modify the terms
of outstanding options and to reprice the options.
(3) The Company granted options to purchase 9,677,486 shares of Common Stock to
employees in fiscal 1999.
(4) The exercise price and tax withholding obligations related to exercise may
in some cases be paid by delivery to the Company of other shares or by
offset of the shares subject to the option.
(5) The 5% and 10% assumed annualized rates of compound stock price
appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent the Company's estimate or a projection by
the Company of future Common Stock prices.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values.
The following table sets forth, for each of the executive officers named in the
Summary Compensation Table above, stock options exercised during fiscal 1999
and the fiscal year-end value of unexercised options:
<TABLE>
<CAPTION>
Number of Securities Value(1) of Unexercised In
Shares Value Underlying Unexercised the Money Options at Fiscal
Acquired on Realized(1)(2) Options at Fiscal Year-End: Year-End:
Name Exercise(1) ($) Exercisable/Unexercisable(3) Exercisable/Unexercisable($)
---- ----------- -------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Robert L. Bailey........ 1,093 $ 28,279 957,497/1,739,167(4) 65,143,972/85,915,219
Gregory Aasen........... 922 $ 24,856 683,332/1,136,668 46,452,355/56,681,957
John W. Sullivan........ 126,533 $2,768,423 122,514/ 392,086 8,246,701/20,212,636
</TABLE>
--------
(1) Shares acquired includes shares purchased pursuant to the Company's
Employee Stock Purchase Plan. Value realized includes the difference
between the closing market price of the Common Stock on the purchase date
and the purchase price of the shares purchased.
I-58
<PAGE>
(2) Market value of underlying securities at exercise date (for value realized)
or year-end (for value at year-end), minus the exercise price. At December
26, 1999 the closing market price for the Company's stock was $72.625.
(3) Does not include outstanding LTD Special Shares redeemable for shares of
Common Stock of the Company.
(4) Includes 36,664 shares issuable upon redemption of LTD Special Shares
subject to options.
Compensation of Directors
Non-employee directors receive an annual retainer of $12,000 per year plus
$1,000 per board meeting attended for their services as members of the Board of
Directors. Presently, under the Company's 1994 Stock Incentive Plan, non-
employee directors are automatically granted options to purchase 20,000 shares
of the Company's Common Stock upon appointment and thereafter 5,000 shares per
year, provided they are re-elected to the Board of Directors. In 1999, without
taking into account the stock splits effected in May 1999 and February 2000,
Mr. Marshall, Mr. Beaumont and Dr. Balkanski each received an automatic annual
option grant to purchase 5,000 shares of the Company's Common Stock. As
adjusted for the stock splits effected in May 1999 and February 2000, in April
1999, Mr. Marshall and Mr. Beaumont received automatic annual option grants to
purchase 20,000 shares of the Company's Common Stock at exercise prices of
$20.6407 per share and $23.8750 per share, respectively. As adjusted for the
February 2000 stock split, in June 1999, Dr. Balkanski received an automatic
annual option grant to purchase 10,000 shares of the Company's Common Stock at
an exercise price of $23.0625 per share. These options become exercisable as to
1/4th of the shares subject to the option after one year; thereafter, 1/48th of
the shares subject to the option become exercisable at the end of each calendar
month.
The Company has agreed to indemnify each director and officer against
certain claims and expenses for which the director might be held liable in
connection with past or future services to the Company and its subsidiaries. In
addition, the Company maintains an insurance policy insuring its officers and
directors against such liabilities.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Robert L. Bailey, Gregory Aasen and John W. Sullivan each have entered into
employment agreements with the Company. Under the terms of the employment
agreements, upon a termination without cause as defined in the employment
agreements and no change of control as defined in the employment agreements is
reasonably expected within the next 60 days or has occurred in the past two
years, the executive officers are entitled to receive their base salary and
accrued vacation through the date of termination. If the officers are
terminated without cause or constructively terminated as defined in the
employment agreements and a change of control is reasonably expected to occur
within 60 days of the termination or has occurred within the past two years,
the officers are entitled to the following benefits: (1) their base salary
through the date of termination; (2) a lump-sum payment equal to four percent
of their current base salary for each full month they were employed with the
Company, provided that the total payment shall not exceed two times their
current base salary; (3) a lump-sum payment equal to two percent of their prior
year's bonus for each full month they were employed with the Company; and (4)
all accrued vacation through the date of termination. In addition, the
executive officers are entitled to execute consulting agreements with the
Company that would require them to provide service to the Company during each
calendar quarter and maintain the confidentiality of the Company's trade
secrets. While they serve as consultants to the Company, their stock options
would continue to vest and be exercisable until 30 days after the options have
vested. Each of Mr. Bailey and Mr. Sullivan also has the right to terminate
employment and become a consultant to the Company on these terms if on the
first anniversary of a change of control of the Company, he is an employee of
the Company.
Under the terms of the employment agreements, "cause" means (i) gross
dereliction of duties which continues after at least two notices, each 30 days
apart, from the Chief Executive Officer (or in the case of the Chief Executive
Officer, from a director designated by a majority of the board of directors),
specifying in
I-59
<PAGE>
reasonable detail the tasks which must be accomplished and a timeline for their
accomplishment to avoid termination for Cause; (ii) willful and gross
misconduct which injures the Company; (iii) willful and material violation of
laws applicable to the Company; or (iv) embezzlement or theft of Company
property. "Change of control" under the employment agreements means the
occurrence of any of the following events:
(i) any "person" or "group" as such terms are defined under Sections 13
and 14 of the Securities Exchange Act of 1934 ("Exchange Act") (other
than the Company, a subsidiary of the Company, or a Company employee
benefit plan) is or becomes the "beneficial owner" (as defined in
Exchange Act Rule 13d-3), directly or indirectly, of Company
securities representing 50% or more of the combined voting power of
the Company's then outstanding securities;
(ii) the closing of (a) the sale of all or substantially all of the assets
of the Company if the holders of Company securities representing all
voting power for the election of directors before the transaction
hold less than a majority of the total voting power for the election
of directors of all entities which acquire such assets, or (b) the
merger of the Company with or into another corporation if the holders
of Company securities representing all voting power for the election
of directors before the transaction hold less than a majority of the
total voting power for the election of directors of the surviving
entity;
(iii) the issuance of securities which would give a person or group
beneficial ownership of Company securities representing 50% or more
of all voting power for the election of directors; or
(iv) a change in the board of directors such that the incumbent directors
and nominees of the incumbent directors are no longer a majority of
the total number of directors.
"Constructive termination" under the employment agreements means (i) a
material reduction in Executive's Base Salary, target bonus or benefits; (ii) a
material reduction in title, authority, status, obligations or
responsibilities; or (iii) the requirement that Executive relocate more than
100 miles from the current Company headquarters.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Mr. Diller and Dr. Balkanski. The
Stock Option Committee consists of Mr. Bailey and any other director. The
Benefit Plans Committee consists of Mr. Bailey and any other director.
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<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1999, 1998 and 1997
(in thousands)
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to
beginning of costs and other Balance at
Year year expenses accounts Write-offs end of year
---- ------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1999................. $1,128 130 -- 14 $1,244
1998................. $1,070 241 -- 183 $1,128
1997................. $ 842 500 -- 272 $1,070
</TABLE>
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding beneficial ownership of Common Stock of the Company as of March 31,
2000 by (i) all persons known to the Company to be the beneficial owners of
more than 5% of the Company's Common Stock, (ii) each executive officer named
in the Summary Compensation table below, (iii) each of the Company's directors,
and (iv) all current directors and executive officers as a group.
<TABLE>
<CAPTION>
Approximate
Number of Percentage
Name(1) Shares Ownership
------- --------- -----------
<S> <C> <C>
AMVESCAP PLC(2)(5)...................................... 9,743,060 7.0%
Capital Research and Management Company(2)(3)........... 7,973,200 5.7%
Putnam Investments, Inc.(2)(4).......................... 7,291,536 5.2%
FMR Corp.(2)(6)......................................... 7,303,158 5.2%
James V. Diller(7)...................................... 3,205,887 2.3%
Robert L. Bailey(8)..................................... 2,848,420 2.0%
Gregory D. Aasen(9)..................................... 1,474,974 1.1%
John W. Sullivan(10).................................... 272,449 *
Alexandre Balkanski(11)................................. 155,012 *
Colin Beaumont(12)...................................... 61,498 *
Frank Marshall(13)...................................... 258,278 *
All current directors and executive officers as a group
(7 person)(14)......................................... 8,276,518 5.8%
</TABLE>
--------
* Less than 1%.
(1) The beneficial owners named in the table have sole voting and investment
power with respect to the shares, except as indicated.
(2) Based on statements filed with the Securities and Exchange Commission
pursuant to Sections 13(d) or 13(g) of the Securities Exchange Act of
1934, as amended. The Company has not independently verified these
statements or more current holdings of such stockholders.
(3) Capital Research and Management Group advises Smallcap World Fund, Inc.
Smallcap World Fund, Inc. is the beneficial owner of 3,990,000 shares of
the Company's Common Stock. The address of Capital Research and Management
Company and Smallcap World Fund, Inc. is 333 South Hope Street,
Los Angeles, California 90071.
(4) Putnam Investments, Inc. ("PI") beneficially own 7,291,536 shares. PI's
wholly-owned investment advisers Putnam Investment Management, Inc.
("PIM") has shared dispositive power with respect to 6,489,880 of those
shares, and Putnam Advisory Company, Inc. ("PAC") has shared dispositive
power with respect to 801,656 of those shares. PAC also holds shared
voting power with PI with respect to 173,300 of those shares. PI's, PIM's
and PAC's address is One Post Office Square, Boston, Massachusetts 02109.
(5) AMVESCAP PLC has shared voting and dispositive power with respect to all
9,743,060 shares with AVZ, Inc., AIM Management Group, Inc. AMVESCAP Group
Services, Inc., INVESCO, Inc., INVESCO (NY) Asset Management, Inc.,
INVESCO North American Holdings, Inc., INVESCO Capital Management, Inc.,
INVESCO Funds Group, Inc. and INVESCO Realty Advisors, Inc., all of which
are holding companies, and with INVESCO Capital Management, Inc., INVESCO
Funds Group, Inc., INVESCO Management & Research, Inc., and INVESCO Realty
Advisers, Inc., its investment advisers. The address for AMVESCAP PLC and
its other holding companies and investment advisers is 11 Devonshire
Square, London EC2M 4YR, England or 1315 Peachtree Street, N.E., Atlanta,
Georgia 30309.
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<PAGE>
(6) Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp. ("FMR"), is an investment adviser to FMR and the
beneficial owner of 6,705,100 shares. Edward C. Johnson, III, Chairman of
FMR, and FMR through its control of Fidelity, has sole dispositive power
over 6,705,100 shares. FMR through its control of Fidelity, has sole
voting power over 6,705,100 shares. FMR Corp.'s address is 82 Devonshire
Street, Boston, Massachusetts 02109.
(7) Includes 1,215,401 shares subject to options exercisable within 60 days
after March 31, 2000. Mr. Diller's address is c/o PMC-Sierra, Inc., 105-
8555 Baxter Place, Burnaby, British Columbia, V5A 4V7, Canada.
(8) Includes 1,310,000 shares subject to options exercisable within 60 days
after March 31, 2000. Also includes 1,251,804 shares issuable upon
redemption of LTD Special Shares, and 73,328 shares issuable upon
redemption of LTD Special Shares subject to options exercisable within 60
days after March 31, 2000.
(9) Includes 939,999 shares subject to options exercisable within 60 days
after March 31, 2000 and 23,600 shares held by Mr. Aasen's two sons. Also
includes 331,923 shares issuable upon redemption of LTD Special Shares,
101,534 shares issuable upon redemption of LTD Special Shares held by Mr.
Aasen's wife and 63,012 shares issuable upon redemption of LTD Special
Shares held by Mr. Aasen's two sons.
(10) Includes 210,847 shares subject to options exercisable within 60 days of
March 31, 2000, 4,802 shares held by Mr. Sullivan's wife and 10,000 shares
held in an investment retirement account.
(11) Includes 154,166 shares subject to options exercisable within 60 days
after March 31, 2000. Dr. Balkanski's address is c/o C-Cube Microsystems,
1778 McCarthy Boulevard, Milpitas, California 94062.
(12) Includes 57,498 shares subject to options exercisable within 60 days after
March 31, 2000. Mr. Beaumont's address is 200 Elgin Street, Suite 602,
Ottawa, Ontario, Canada K2P1L5.
(13) Includes 111,248 shares subject to options exercisable within 60 days of
March 31, 2000. Also includes 108,066 shares held by Timark, L.P. Mr.
Marshall is a General Partner of Timark, L.P. and disclaims beneficial
ownership except to the extent of his pecuniary interest therein. Mr.
Marshall's address is 14585 Big Basin Way, Saratoga, California 95070.
(14) Includes 3,999,159 shares subject to options exercisable within 60 days
after March 31, 2000 held by the current executive officers and directors
listed above. Also includes 73,328 shares issuable upon redemption of LTD
Special Shares subject to options exercisable within 60 days after March
31, 2000 held by one executive officer listed above and 1,746,273 shares
issuable upon redemption of LTD Special Shares held by two executive
officers listed above. See notes (7) through (13) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Balkanski and Mr. Diller each received 846 shares of the Company's
Common Stock issued in connection with a distribution of shares from Sequoia
Technology Partners VIII (Q). Sequoia Technology Partners VIII (Q) received
shares of the Company's Common Stock through the acquisition by the Company of
Abrizio, Inc.
Mr. Marshall received an aggregate of 127,030 shares of the Company's Common
Stock as a result of the acquisition by the Company of Abrizio, Inc. Of the
shares of the Company's Common Stock received by Mr. Marshall, he received
2,110 shares in connection with a distribution of shares from Sequoia
Technology VIII (Q), which shares are held by Timark L.P. ("Timark") of which
Mr. Marshall is a general partner. Mr. Marshall received the remaining 124,920
shares of the Company's Common Stock upon exchange of shares of Abrizio, Inc.,
which amount includes 105,956 shares held by Timark and 18,964 shares
beneficially held by Mr. Marshall.
During the fiscal year ended December 26, 1999, members of the Board of
Directors of the Company and executive officers of the Company received grants
of options and shares of the Company's Common Stock as set forth under "Item
11--Executive Compensation."
I-63
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements
The financial statements (including the notes thereto) listed in the
accompanying index to financial statements and financial statement schedules
are filed within this Annual Report on Form 10-K.
2. Financial Statement Schedules
The financial statement schedule listed on page 36 in the accompanying
index to financial statements and financial statement schedule is filed
within this Annual Report on Form 10-K.
3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this Form 10-K
Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company in the quarter ended
December 31, 1999.
(c) Exhibits pursuant to Item 601 of Regulation S-K
<TABLE>
<CAPTION>
Page
Item Description Number
---- ----------- ------
<C> <S> <C>
2.1 Exchange Agreement dated September 2, 1994 between the Company (C)
and PMC-Sierra, Ltd.
2.2 Amended and Restated Shareholders' Agreement dated September 2, (C)
1994 among the Shareholders of PMC Sierra, Inc.
2.3 Amendment to Exchange Agreement effective August 9, 1995 (F)
2.4 Agreement and Plan of Reorganization dated as of April 15, 1998 (O)
by and among PMC-Sierra, Inc., Integrated Telecom Technology,
Inc., PMC-Sierra (Maryland), Inc. and Samsung Electronics Co.,
Ltd.
3.1 Certificate of Incorporation (I)
3.1A Certificate of Amendment to the Certificate of Incorporation (N)
filed June 13, 1997
3.1B Certificate of Amendment to the Certificate of Incorporation (N)
filed July 11, 1997
3.1C Certificate of Amendment to Certificate of Incorporation of (P)
PMC-Sierra, Inc. filed on June 4, 1998.
3.1D Certificate of Amendment to Certificate of Incorporation of (S)
PMC-Sierra, Inc. filed on July 14, 1998.
3.2 Bylaws, as amended (Q)
4.1 Specimen of Common Stock Certificate (K)
4.3 Terms of PMC-Sierra, Inc. Special Shares (D)
10.1B 1987 Incentive Stock Plan, as amended (B)
10.2 1991 Employee Stock Purchase plan, as amended (Q)
10.4 Form of Indemnification Agreement between the Company and its (A)
directors (H) and officers 10.8 Warrants to Purchase Common
Stock
10.8B Warrant Purchase Agreement and Warrants to Purchase Shares of (J)
Common Stock dated August 28, 1996
</TABLE>
I-64
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
The certificate of incorporation of PMC eliminates the liability of
directors to PMC for monetary damages for breach of fiduciary duty as a
director to the fullest extent permissible under Delaware law, as such law
exists currently or as it may be amended in the future. Under Delaware law,
such provision may not eliminate or limit director monetary liability for:
--breaches of the director's duty of loyalty to PMC or its stockholders;
--acts or omissions not in good faith or involving intentional misconduct
or knowing violations of law;
--the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or
--transactions in which the director received an improper personal benefit.
Such limitation of liability provisions also may not limit a director's
liability for violation of, or otherwise relieve PMC or its directors from the
necessity of complying with, federal or state securities laws, or affect the
availability of non-monetary remedies such as injunctive relief or rescission.
PMC's bylaws provide that PMC shall indemnify its directors and officers and
may indemnify its employees and other agents to the fullest extent permitted by
law. PMC believes that indemnification under its bylaws covers at least
negligence and gross negligence on the part of indemnified parties. PMC's
bylaws also permit PMC to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether PMC would have the power to indemnify him
or her against such liability under the General Corporation Law of Delaware.
PMC currently has secured such insurance on behalf of its officers and
directors. PMC has entered into agreements to indemnify its directors and
officers, in addition to indemnification provided for in PMC's bylaws. Subject
to certain conditions, these agreements, among other things, indemnify PMC's
directors and officers for certain expenses (including attorney's fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of PMC, arising
out of such person's services as a director or officer of PMC, any subsidiary
of PMC or any other company or enterprise to which the person provides services
at the request of PMC.
Under Section [5.10] of the reorganization agreement, from and for a period
of six years after the effective time of the merger, PMC is required to
maintain in effect the current provisions regarding directors' and officers'
indemnification contained in QED's certificate of incorporation and bylaws and
in any agreements between any of such directors and officers and QED. PMC is
also, from and for a period of six years after the effective time of the
merger, required to maintain the current policies of directors' and officers'
liability insurance to the extent available, provided however, that in no event
will PMC be required to expend an annual premium for such coverage in excess of
150% of the amount of the last annual premium paid by PMC prior to the date of
the reorganization agreement for such coverage, and provided further that if
the annual premium payable for such insurance coverage exceeds such amount, PMC
shall be obligated to obtain a policy with the greatest coverage available for
an annual premium not exceeding such amount.
Item 21. Exhibits and Financial Statement Schedules
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of July 11, 2000, by
and among PMC-Sierra, Inc., Penn Acquisition Corporation and Quantum
Effect Devices, Inc. [See Annex A]
3.1 PMC's Certificate of Incorporation, as amended to date
3.2 PMC's Bylaws
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, together with consent
8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
8.2* Tax Opinion of Cooley Godward LLP
11.1 Statement Regarding Earnings Per Share
21.1 Subsidiaries of PMC-Sierra, Inc.
23.1 Consent of Deloitte & Touche LLP, independent auditors
23.2 Consent of PricewaterhouseCoopers, LLP, independent accountants
23.3 Consent of Deloitte & Touche LLP, independent auditors
23.4 Consent of Wilson Sonsini Goodrich & Rosati, see Exhibit 5.1
23.5 Consent of Morgan Stanley & Co. Incorporated
23.6* Consent of Cooley Godward LLP, see Exhibit 8.2
27.1 Financial Data Schedule
99.1* Form of Proxy Card for Quantum Effect Devices, Inc.
</TABLE>
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*File by Amendment.
Item 22. Undertakings.
The undersigned Registrant hereby undertakes:
(a) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(b) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(c) That every prospectus: (i) that is filed pursuant to paragraph (b)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to this registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Campbell, State of
California on July 20, 2000.
PMC-Sierra, Inc.
/s/ Robert L. Bailey
By: _________________________________
Robert L. Bailey
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert Bailey and John Sullivan, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Registration
Statement on Form S-4, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert L. Bailey President, Chief Executive July 20, 2000
______________________________________ Officer (Principal
Robert L. Bailey Executive Officer) and
Chairman of the Board of
Directors
/s/ John Sullivan Vice President, Finance July 20, 2000
______________________________________ (Principal Financial and
John Sullivan Accounting Officer)
/s/ James Diller Vice Chairman of the Board July 20, 2000
______________________________________ of Directors
James Diller
/s/ Alexandre Balkanski Director July 20, 2000
______________________________________
Alexandre Balkanski
/s/ Frank Marshall Director July 20, 2000
______________________________________
Frank Marshall
/s/ Colin Beaumont Director July 20, 2000
______________________________________
Colin Beaumont
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of July 11, 2000, by
and among PMC-Sierra, Inc., Penn Acquisition Corporation and Quantum
Effect Devices, Inc. [See Annex A]
3.1 PMC's Certificate of Incorporation, as amended to date
3.2 PMC's Bylaws
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, together with consent
8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
8.2* Tax Opinion of Cooley Godward LLP
11.1 Statement Regarding Earnings Per Share
21.1 Subsidiaries of PMC-Sierra, Inc.
23.1 Consent of Deloitte & Touche LLP, independent auditors
23.2 Consent of PricewaterhouseCoopers, LLP, independent accountants
23.3 Consent of Deloitte & Touche LLP, independent auditors
23.4 Consent of Wilson Sonsini Goodrich & Rosati, see Exhibit 5.1
23.5 Consent of Morgan Stanley & Co. Incorporated
23.6* Consent of Cooley Godward LLP, see Exhibit 8.2
27.1 Financial Data Schedule
99.1* Form of Proxy Card for Quantum Effect Devices, Inc.
</TABLE>
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* File by Amendment.
