----------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended September 24, 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
900 East Hamilton Avenue
Suite 250
Campbell, CA 95008
(408) 369-1176
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes ___X____ No _______
Common shares outstanding at October 31, 2000 -- 160,036,082
------------------------------------------------
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Condensed consolidated statements of operations
- Condensed consolidated balance sheets
- Condensed consolidated statements of cash flows
- Notes to condensed consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote by Stockholders
Item 5. Description of Capital Stock
Item 6. Exhibits and Reports on Form 8 - K
<PAGE>
<TABLE>
<CAPTION>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
------------------------- ------------------------
<S> <C> <C> <C> <C>
Sep 24, Sep 26, Sep 24, Sep 26,
2000 1999 2000 1999
Net revenues
Networking 189,242 77,288 441,686 190,010
Non-networking 8,893 5,184 20,885 12,983
---------- --------- --------- ---------
Net revenues 198,135 82,472 462,571 202,993
Cost of revenues 46,582 21,130 108,443 50,477
---------- --------- --------- ---------
Gross Profit 151,553 61,342 354,128 152,516
Other costs and expenses:
Research and development 46,171 21,723 114,082 57,472
Marketing, general and administrative 27,854 12,941 68,749 35,779
Amortization of deferred stock compensation:
Research and development 14,638 1,018 21,137 2,417
Marketing, general and administrative 1,550 528 2,520 1,009
Amortization of goodwill 17,770 478 18,688 1,434
Costs of merger 23,180 866 36,858 866
Acquisition of in process research and development 38,200 - 38,200 -
---------- --------- --------- ---------
Income (loss) from operations (17,810) 23,788 53,894 53,539
Interest and other income, net 4,841 2,224 12,822 4,404
Gain on sale of investments 14,173 - 41,282 26,800
---------- --------- --------- ---------
Income before provision for income taxes 1,204 26,012 107,998 84,743
Provision for income taxes 30,893 10,213 67,516 29,202
---------- --------- --------- ---------
Net income (loss) $ (29,689) $ 15,799 $ 40,482 $ 55,541
========== ========= ========= =========
Net income (loss) per common share - basic $ (0.18) $ 0.11 $ 0.25 $ 0.38
========== ========= ========= =========
Net income (loss) per common share - diluted $ (0.18) $ 0.10 $ 0.23 $ 0.35
========== ========= ========= =========
Shares used in per share calculation - basic 162,933 148,877 159,783 144,720
Shares used in per share calculation - diluted 162,933 163,698 179,591 157,562
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
Sep 24, Dec 26,
2000 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 252,484 $ 93,534
Short-term investments 80,810 112,752
Restricted cash - 2,000
Accounts receivable, net 98,081 42,209
Inventories, net 32,502 14,277
Deferred income taxes 9,270 9,270
Prepaid expenses and other current assets 22,565 8,967
Short-term deposits for wafer fabrication capacity - 4,637
--------- ---------
Total current assets 495,712 287,646
Property and equipment, net 99,178 51,461
Goodwill and other intangible assets, net 342,460 15,280
Investments and other assets 31,451 11,827
Deposits for wafer fabrication capacity 23,001 14,483
--------- ---------
$ 991,802 $ 380,697
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,548 $ 17,195
Accrued liabilities 55,964 20,008
Deferred income 59,872 34,657
Income taxes payable 40,763 25,912
Current portion of obligations under capital leases and long-term debt 4,993 3,863
--------- ---------
Total current liabilities 201,140 101,635
Deferred income taxes 13,534 9,091
Noncurrent obligations under capital leases and long-term debt 1,135 4,897
PMC special shares convertible into 3,773 shares of (1999 - 4,242) common stock 6,394 6,998
Stockholders' equity
Preferred stock, par value $0.001; 5,000 shares authorized:
none issued or outstanding in 2000 and 1999
Preferred stock, par value $0.001; 10,000 shares authorized:
none issued or outstanding in 2000 (13,619 in 1999); - 14
Common stock and additional paid in capital, par value $0.001;
900,000 shares authorized (200,000 shares in 1999):
159,821 shares issued and outstanding (146,516 in 1999) 763,637 270,222
Deferred stock compensation (36,574) (5,238)
Retained earnings (deficit) 33,560 (6,922)
Accumulated other comprehensive income 8,976 -
--------- ---------
Stockholders' equity 769,599 258,076
--------- ---------
$ 991,802 $ 380,697
========= =========
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
<PAGE>
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
--------------------------
Sep 24, Sep 26,
2000 1999
Cash flows from operating activities:
Net income $ 40,482 $ 55,541
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of plant and equipment 24,192 13,931
Amortization of intangibles 20,192 2,649
Amortization of deferred stock compensation 23,657 3,426
Acquisition of in process research and development 38,200 -
Equity in income of investee (574) (241)
Gain on sale of investments (41,283) (26,800)
Changes in operating assets and liabilities
Accounts receivable (55,835) (9,031)
Inventories (18,225) (7,998)
Prepaid expenses and other (13,934) (379)
Accounts payable and accrued liabilities 57,135 11,868
Income taxes payable 15,334 3,207
Deferred income 25,215 14,573
--------- ---------
Net cash provided by operating activities 114,556 60,746
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (195,644) (129,736)
Proceeds from sales and maturities of
short-term investments 227,586 66,614
Restricted cash 2,000 (2,000)
Investments in other companies (13,433) (4,000)
Purchases of plant and equipment (65,225) (21,619)
Acquisition of Malleable, net of cash acquired 248 -
Acquisition of Datum, net of cash acquired (14,272) -
Proceeds from sale of investments 42,249 28,628
Purchase of intangible assets - (411)
Investment in wafer fabrication deposits (8,584) -
Proceeds from refund of wafer fabrication deposits 4,703 4,000
--------- ---------
Net cash used in investing activities (20,372) (58,524)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 68 4,038
Repayment of notes payable and long-term debt (4,955) (3,243)
Principal payments under capital lease obligations (2,250) (7,286)
Proceeds from issuance of preferred stock - 19,478
Proceeds from issuance of common stock 71,903 11,289
--------- ---------
Net cash provided by financing activities 64,766 24,276
--------- ---------
Net increase in cash and cash equivalents 158,950 26,498
Cash and cash equivalents, beginning of the period 93,534 49,008
--------- ---------
Cash and cash equivalents, end of the period $ 252,484 $ 75,506
========= =========
See notes to condensed consolidated financial statements
<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-Sierra")
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 and AANetcom, Inc. in the
first quarter of fiscal 2000, Extreme Packet Devices, Inc. in the second quarter
of fiscal 2000 and Quantum Effect Devices, Inc. in the third 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 restated consolidated financial statements and
related notes thereto included in Amendment No. 1 to PMC-Sierra's Registration
Statement on Form S-4 dated July 26, 2000 (File No. 333-41878). The results of
operations for the interim period are not necessarily indicative of results to
be expected in future periods.
Recently issued accounting standards. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Financial Accounting Standard ("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.
Management does not expect the adoption of SFAS 133 to have a material effect on
the Company's operations or financial position. The Company is required to adopt
SFAS 133 in the first quarter of fiscal 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101("SAB 101"), "Revenue Recognition", which outlines
the basic criteria that must be met to recognize revenue and provides guidance
for presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. The Company believes the
adoption of SAB 101 will not have a material impact on the Company's financial
position and results of operations. The Company is required to adopt SAB 101 no
later than the fourth quarter of fiscal 2000.
<PAGE>
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:
(in thousands) Sep 24, Dec 26,
2000 1999
(unaudited)
Work-in progress $ 22,359 $ 10,275
Finished goods 10,143 4,002
-------- ----------
$ 32,502 $ 14,277
======== =========
NOTE 2. Business Combinations.
Poolings of Interests:
Acquisition of Quantum Effect Devices, Inc.
In August 2000, the Company acquired Quantum Effect Devices, Inc., a public
company located in the United States. QED develops embedded microprocessors that
perform information processing in networking equipment. Under the terms of the
agreement approximately 12,300,000 shares of common stock were exchanged and
options assumed to acquire QED.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
During the quarter ended September 24, 2000, PMC-Sierra recorded merger related
costs of $23,180,000 related to the acquisition of QED. These costs, which
consist primarily of investment banking and other professional fees, were
included under costs of merger in the Condensed Consolidated Statements of
Operations in the quarter ended September 24, 2000.
The historical results of operations of the Company and QED for the periods
prior to the merger are as follows:
(in thousands) Six Months Ended Year ended
--------------------------- ------------
Jun 25, Jun 27, Dec 26,
2000 1999 1999
Net revenues
PMC, as previously reported $ 236,915 $ 110,286 $ 263,281
QED 27,521 10,235 31,462
--------- ---------- ----------
Combined $ 264,436 $ 120,521 $ 294,743
========= ========== ==========
Net income (loss)
PMC, as previously reported $ 70,084 $ 44,646 $ 81,602
QED 87 (4,904) (7,163)
--------- ---------- ----------
Combined $ 70,171 $ 39,742 $ 74,439
========= ========== ==========
<PAGE>
Acquisition of Extreme Packet Devices, Inc.
-------------------------------------------
In April 2000, the Company acquired Extreme Packet Devices, Inc., a privately
held fabless semiconductor company located in Canada. Extreme specializes in
developing semiconductors for high speed IP and ATM traffic management at 10
Gigabits per second rates. Under the terms of the agreement approximately
2,000,000 exchangeable shares were issued and stock options were assumed to
acquire Extreme.
As a result of the acquisition of Extreme, each holder of an Extreme common
share received 0.2240 exchangeable shares. 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 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 stockholder meetings of PMC-Sierra. As at
September 24, 2000, approximately 1,131,000 of these exchangeable shares were
outstanding.
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
costs, which consisted primarily of investment banking and other professional
fees, were included under costs of merger in the Condensed Consolidated
Statements of Operations in the quarter ended June 25, 2000.
Acquisition of AANetcom, Inc.
----------------------------
In March 2000, the Company acquired AANetcom, Inc., a privately held fabless
semiconductor company located in the United States. AANetcom's technology is
designed for use in gigabit or terabit switches and routers, telecommunication
access equipment, and optical networking switches in applications ranging from
the enterprise to the core of the Internet. Under the terms of the agreement
approximately 4,800,000 shares of common stock were exchanged and options
assumed to acquire 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
costs, which consisted primarily of investment banking and other professional
fees, were included under costs of merger in the Condensed Consolidated
Statements of Operations in the quarter ended March 26, 2000.
Acquisition of Toucan Technology.
--------------------------------
In January 2000, the Company acquired Toucan Technology, 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 per cent of Toucan and purchased the remainder for approximately 300,000
shares of PMC-Sierra common stock and assumption of Toucan stock options.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
<PAGE>
During the quarter ended March 26, 2000, PMC-Sierra recorded merger related
transaction costs of $534,000 related to the acquisition of Toucan. These costs,
which consisted primarily of professional fees, were included under costs of
merger in the Condensed Consolidated Statements of Operations in the quarter
ended March 26, 2000.
The historical results of operations of the Company, Toucan, AANetcom, and
Extreme for the periods prior to the mergers are as follows:
(in thousands) Three Months Ended Year ended
----------------------------- --------------
Mar 26, Mar 27, Dec 26,
2000 1999 1999
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
============ ========== ===========
Purchase Combinations:
During the quarter ended September 24, 2000, the Company completed the
acquisitions described below which were accounted for under the purchase method
of accounting. Accordingly, the Condensed Consolidated financial statements
include the operating results of each business from the date of acquisition.
Malleable Technologies, Inc.
---------------------------
On June 27, 2000, the Company exercised an option to acquire the 85% interest of
Malleable Technologies, Inc. that it did not already own in exchange for the
issuance of PMC-Sierra common shares, options and warrants with a fair value of
$293,010,000 and acquisition related costs of $825,000. Malleable is a fabless
semiconductor company located in San Jose, CA. 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 IP packets.
<PAGE>
Datum Telegraphic, Inc.
----------------------
On July 21, 2000, the Company completed the purchase of the 92% interest of
Datum Telegraphic, Inc. that it did not already own in exchange for the issuance
of PMC-Sierra common shares and options with a fair value of $107,414,000, cash
of $17,025,000 and acquisition related expenditures of $875,000. Datum is a
wireless semiconductor company located in Vancouver, Canada. Datum makes digital
signal processors that allow traffic for all major digital wireless standards to
be transmitted using a single digitally controlled power amplifier architecture.
The total consideration, including acquistion costs, was allocated based on the
estimated fair values of the net assets acquired on the acquisition date as
follows:
(in thousands) Malleable Datum Total
----------- --------- ---------
Tangible Assets $ 2,031 $ 3,788 $ 5,819
Intangible assets:
Internally developed software 500 - 500
Assembled workforce 400 250 650
Goodwill 232,303 107,419 339,722
Unearned compensation 29,033 7,300 36,333
In process research and development 31,500 6,700 38,200
Liabilities assumed (1,932) (143) (2,075)
----------- ---------- ----------
$ 293,835 $ 125,314 $ 419,149
=========== ========== ==========
Purchased In Process Research and Development
---------------------------------------------
The amounts allocated to in process research and development ("IPR&D") were
determined through independent valuations using established valuation techniques
in the high-technology industry. The value allocated to IPR&D was based upon the
forecasted operating after-tax cash flows from the technology acquired, giving
effect to the stage of completion at the acquisition date. Future cash flows
were adjusted for the value contributed by any core technology and development
efforts expected to be completed post acquisition. These forecasted cash flows
were then discounted at rates commensurate with the risks involved in completing
the acquired technologies taking into consideration the characteristics and
applications of each product, the inherent uncertainties in achieving
technological feasibility, anticipated levels of market acceptance and
penetration, market growth rates and risks related to the impact of potential
changes in future target markets.
Based on this analysis the acquired technology that had reached technological
feasibility was capitalized. Acquired technology that had not yet reached
technological feasibility and for which no alternative future uses existed was
expensed upon acquisition.
Malleable:
Malleable is a developer of programmable integrated circuits that perform high
density Voice Over Packet applications. The in process technology acquired from
Malleable detects incoming voice channels and processes them using voice
compression algorithms. The compressed voice is converted, using the appropriate
protocols, to ATM cells or IP packets to achieve higher channel density and
support multiple speech compression protocols and different packetization
requirements. The amount allocated to IPR&D of $ 31,500,000 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.
<PAGE>
Datum:
Datum designs power amplifiers for use in wireless communications network
equipment. The technology acquired from Datum is a digitally controlled
amplifier architecture, which was designed to increase base station system
capacities, while reducing cost, size and power consumption of radio networks.
The amount allocated to IPR&D of $ 6,700,000 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.
Other Intangible Assets
-----------------------
A description of the other intangible assets acquired is set out below:
Internally developed software acquired facilitates the completion of in process
research and development projects and can be utilized in future development
projects. The Company is amortizing the value assigned to internally developed
software acquired from Malleable on a straight-line basis over an estimated
useful life of five years. At the acquisition date, Datum had no developed
products.
The acquired assembled workforce is comprised of skilled employees across each
of Malleable and Datum's executive, research and development and general and
administrative groups. The Company is amortizing the value assigned to the
assembled workforces on a straight-line basis over their estimated useful life
of five years.
Goodwill, which represents the excess of the purchase price of an investment in
an acquired business over the fair value of the underlying net identifiable
assets, is being amortized on a straight-line basis over its estimated remaining
useful life of five years.
Pro Forma Information:
---------------------
The following table presents the unaudited pro forma results of operations for
informational purposes, assuming that the Company had acquired Malleable and
Datum at the beginning of the 1999 fiscal year.
Nine Months Ended
---------------------
Sep 24, Sep 26,
(in thousands, except for per share amounts) 2000 1999
Net revenues $ 463,981 $ 204,416
Net income $ (13,119) $ (23,411)
Pro forma basic and diluted net loss per share $ (0.08) $ (0.16)
The pro forma results of operations give effect to certain adjustments including
amortization of purchased intangibles, goodwill and unearned compensation.
Included in the pro forma net income for the nine months ended September 24,
2000 is a $38,200,000 charge for IPR&D. This information may not necessarily be
indicative of the future combined results of operations of the Company.
<PAGE>
NOTE 3. Sale of Investment
During the quarter ended September 24, 2000, the Company realized a pre-tax gain
of $14.2 million related to the disposition of 235,500 common shares of Sierra
Wireless, Inc., a publicly held company. These shares were previously subject to
escrow restrictions and were not available for sale until the third quarter of
fiscal 2000. The Company currently holds 2.7 million common shares of Sierra
Wireless, of which 233,638 shares are currently available for sale and the
balance is subject to certain resale provisions.
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. Comprehensive Income
The following table presents the calculation of comprehensive income as required
by SFAS No. 130. Comprehensive income has no impact on the Company's net income,
balance sheet, or stockholders' equity. The components of comprehensive income,
net of tax, are as follows (in thousands):
Three Months Ended Nine Months Ended
----------------------- --------------------
Sep 24, Sep 26, Sep 24, Sep 26,
2000 1999 2000 1999
(Unaudited) (Unaudited)
Net income (loss) $ (29,689) $ 15,799 $ 40,482 $ 55,541
Other comprehensive income:
Change in unrealized gain on
investments, net 8,976 - 8,976 -
----------- ---------- ---------- ---------
Total comprehensive income(loss) $ (20,713) $ 15,799 $ 49,458 $ 55,541
=========== ========== ========== =========
NOTE 5. 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.
Three Months Ended Nine Months Ended
----------------------- ---------------------------
(in thousands) Sep 24, Sep 26, Sep 24, Sep 26,
2000 1999 2000 1999
(Unaudited) (Unaudited)
Net revenues
Networking $ 189,242 $ 77,288 $ 441,686 $ 190,010
Non-networking 8,893 5,184 20,885 12,983
------------- ----------- ----------- ------------
Total $ 198,135 $ 82,472 $ 462,571 $ 202,993
============= =========== =========== ============
Gross profit
Networking $ 147,674 $ 59,037 $ 344,824 $ 146,573
Non-networking 3,879 2,305 9,304 5,943
------------- ----------- ----------- ------------
Gross profit $ 151,553 $ 61,342 $ 354,128 $ 152,516
============= =========== =========== ============
<PAGE>
NOTE 6. Net Income Per Share
The following table sets forth the computation of basic and diluted net income
(loss) per share:
(in thousands, except for per share amounts)
Three Months Ended Nine Months Ended
------------------- -------------------
Sep 24, Sep 26, Sep 24, Sep 26,
2000 1999 2000 1999
Numerator:
Net income (loss) $(29,689) $ 15,799 $ 40,482 $ 55,541
========= ========= ======== ==========
Denomintor:
Basic weighted average common shares
outstanding (1) 162,933 148,877 159,783 144,720
--------- --------- -------- ----------
Effect of dilutive securities:
Stock options - 14,726 19,615 12,751
Stock warrants - 95 193 91
--------- --------- -------- ----------
Shares used in calculation of diluted
net income per share 162,933 163,698 179,591 157,562
========= ========= ======== ==========
Net income per common share - basic $ (0.18) $ 0.11 $ 0.25 $ 0.38
Net income per common share - diluted $ (0.18) $ 0.10 $ 0.23 $ 0.35
(1) Exchangeable shares (see note 2) and PMC-Sierra, Ltd. special shares are
included in the calculation of basic net income (loss) per share.
NOTE 7. 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.
NOTE 8. Subsequent Events
On September 29, 2000, the Company acquired SwitchOn Technologies, Inc., a
privately held fabless semiconductor company located in the United States. Under
the terms of the agreement, approximately 2,113,000 shares of common stock were
exchanged and options assumed to acquire SwitchOn. This transaction will be
accounted for as a pooling of interests.
<PAGE>
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:
- our mergers and their accounting treatment;
- 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.
PMC releases earnings at regularly scheduled times after the end of each
reporting period. Typically within one hour of the release, we will hold a
conference call to discuss our performance during the period. We welcome all PMC
stockholders to listen to these calls either by phone or over the Internet by
accessing our website at www.pmc-sierra.com.
Acquisitions
------------
On June 27, 2000, we acquired Malleable Technologies Inc., a privately held
fabless semiconductor company located in the United States. We issued
approximately 1,250,000 PMC-Sierra common shares and options in exchange for the
remaining 85% interest of Malleable's outstanding common stock, options and
warrants that we did not already own. This transaction was accounted for as a
purchase.
On July 21, 2000, we acquired Datum Telegraphic Inc., a privately held fabless
semiconductor company located in Canada. We issued approximately 681,000
PMC-Sierra common shares and options and approximately $17 million in cash in
exchange for the remaining 92% interest of Datum's outstanding common stock and
options that we did not already own. This transaction was accounted for as a
purchase.
On August 24, 2000, we acquired Quantum Effect Devices, Inc., a publicly held
semiconductor company located in the United States and listed on the Nasdaq
National Market. We issued 12,300,000 shares of common stock and options at an
exchange ratio of 0.385 PMC common shares in exchange for all outstanding common
stock and options of QED. This transaction was accounted for as a pooling of
interests.
<PAGE>
On September 29, 2000, subsequent to quarter end, we completed the acquisition
of SwitchOn Networks, Inc., a privately held company with locations in the
United States and India. SwitchOn makes processors that inspect the packets of
data that make up a data communications signal. Once a packet is inspected,
SwitchOn's products generate statistics for traffic monitoring, classify packets
for bandwidth allocation and other value-added services, and facilitate customer
billing. Under the terms of the agreement, approximately 2.1 million shares of
common stock were issued and stock options and warrants were assumed to acquire
SwitchOn. We will account for this acquisition as a pooling of interests in the
fourth quarter of 2000.
Results of Operations
Third Quarters of 2000 and 1999
Net Revenues ($000,000)
----------------------- Third Quarter
----------------------
2000 1999 Change
Networking products $ 189.2 $ 77.3 145%
Non-networking products 8.9 5.2 71%
-----------------------
Total net revenues $ 198.1 $ 82.5 140%
=======================
Net revenues increased by 140% in the third quarter of 2000 compared to the same
quarter in 1999. Our networking revenue increased 145% in the same periods and
our non-networking revenues grew 71%.
Networking revenue grew as a result of an increase in the volume of our product
sales. Our volume grew due to the continued growth of our customers' networking
equipment businesses, 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.
However, we expect non-networking revenues to decline to zero by the end of 2001
as our principal customer intends to redesign their product. Their new product
will no longer incorporate our non-networking device.
Gross Profit ($000,000)
Third Quarter
----------------------
2000 1999 Change
Networking $ 147.7 $ 59.0 150%
Non-networking 3.9 2.3 70%
-----------------------
Total gross profit $ 151.6 $ 61.3 147%
=======================
Percentage of net revenues 77% 74%
<PAGE>
Total gross profit grew 147% from $61.3 million in the third quarter of 1999 to
$151.6 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 third 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 as
the market for our networking products grows and our customers purchase in
greater volumes, we will experience pricing pressure and our gross profit as a
percentage of revenue will decline.
The gross margins of each of our networking products vary significantly. Our
gross margins may decline in the future as a result of a shift in revenue mix to
lower margin products.
Non-networking gross profit as a percentage of non-networking revenue was the
same in the third quarter of 2000 compared to the third quarter of 1999 as
prices and costs remained relatively stable as these products mature.
Operating Expenses and Charges ($000,000)
-----------------------------------------
Third Quarter
---------------------
2000 1999 Change
Research and development $ 46.2 $ 21.7 113%
Percentage of net revenues 23% 26%
Marketing, general & administrative $ 27.9 $ 12.9 116%
Percentage of net revenues 14% 16%
Amortization of deferred stock compensation:
Research and development $ 14.6 $ 1.0
Marketing, general and administrative 1.6 0.5
---------------------
Total $ 16.2 $ 1.5
=====================
Percentage of net revenues 8% 2%
Amortization of goodwill $ 17.8 $ 0.5
Costs of merger $ 23.2 $ 0.9
Acquisition of in process research and
development $ 38.2 $ -
Our research and development ("R&D") expenses of $46.2 million in the third
quarter of 2000 increased 113% over the third quarter of 1999. Our R&D expenses
increased in absolute dollars reflecting our ongoing R&D efforts related to
networking products. R&D expenditures increased in the third quarter of 2000 due
to the addition of new personnel, partly through acquisitions. We expect R&D
expenses to continue to increase in future periods.
<PAGE>
R&D decreased as a percentage of net revenues primarily due to an increase in
net revenues at a higher rate than R&D expenses We expect R&D expenses as a
percentage of net revenues to continue to fluctuate in future periods.
We increased marketing, general and administrative expenses by 116% in the third
quarter of 2000 compared to the third quarter of 1999. Marketing, general and
administrative expenses increased due to the addition of new personnel, an
increase in the size of our direct sales force and related commissions and
investments in infrastructure. Marketing, general and administrative expenses
decreased as a percentage of net revenue compared to the third quarter of 1999
because many marketing, general and administrative expenses are fixed in the
short term. Therefore, in periods of rising revenues, these expenses may decline
as a percentage of revenues.
We recorded a $16.2 million charge for amortization of deferred stock
compensation in the third quarter of 2000 compared to a $1.5 million charge in
the prior year's third quarter. Deferred compensation charges increased as a
result of the acquisitions we completed in the first three quarters of 2000.
Extreme and AANetcom had, in the past, issued stock at prices lower than the
deemed fair value of the stock and we are amortizing related stock compensation
using the accelerated method over the vesting period. In addition, a portion of
the purchase price related to the Malleable and Datum acquisition was allocated
to unearned compensation resulting in additional unearned compensation
amortization.
Non-cash goodwill charges increased to $17.8 million in the third quarter of
2000 from $0.5 million in the third quarter of 1999 as a result of the increase
in goodwill recorded in connection with the Malleable and Datum acquisitions.
Merger costs increased from $0.9 million in the third quarter of 1999 to $23.2
million in the third quarter of 2000 as a result of the QED acquisition. These
charges consist primarily of investment banking and other professional fees. We
expect to incur significant merger costs related to future 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 or in process research and development charges in future
periods which could materially impact our operating results.
The amounts expensed to in process research and development in the third quarter
of fiscal 2000 arose from the completed acquisitions of Malleable and Datum.
The fair value of the existing intangible assets as well as the technology
currently under development was determined by using the income approach, which
discounts expected future cash flows to present value.
We derived the discount rates used in the present value calculations from a
weighted average cost of capital analysis, weighted average return on assets,
and venture capital rates of return, adjusted upward to reflect additional risks
inherent in the development life cycle. These risk factors have increased the
overall discount rate for these acquisitions.
We consider the pricing model for products related to these acquisitions to be
standard within the high-technology communications semiconductor industry. We do
not expect to achieve a material amount of expense reductions or synergies as a
result of integrating the acquired in-process technology. Therefore, the
valuation assumptions do not include anticipated cost savings. After considering
these factors, we estimated that the discount rate for Malleable was 35% and the
discount rate for Datum was 30%.
<PAGE>
We expect that products incorporating the acquired technology from these
acquisitions will be completed and begin to generate cash flows over the six to
nine months period after integration. However, development of these technologies
remains a significant risk to us due to the remaining effort to achieve
technical viability, rapidly changing customer markets, uncertain standards for
new products, and significant competitive threats from numerous companies. The
nature of the efforts to develop the acquired technology into commercially
viable products consists principally of planning, designing, and testing
activities necessary to determine that the product can meet market expectations,
including functionality and technical requirements. If we fail to bring these
products to market in a timely manner, we could lose an opportunity to
capitalize on emerging markets, and our business and operating results could be
materially and adversely impacted.
At the date of acquisition, we estimated that Datum's technology was 59% and
Malleable's technology was 58% complete. These estimates were determined by
comparing the time and cost spent to date, and the complexity of the technology
achieved to date to the total cost, time and complexity that would be expended
or achieved to bring the technology to completion.
To date, progress on the acquired technologies has been in line with the
Company's expectations at the date of acquisition. Development costs incurred
subsequent to acquisition have been $ 2 million on Malleable's technology and $
1 million on Datum's technology.
We have not yet introduced products from these acquisitions to the market. If we
fail to achieve the expected levels of revenues and net income from these
products, our return on investment expected at the time that the acquisition was
completed will be negatively impacted and any other assets related to the
development activities may become impaired.
Interest and other income, net
------------------------------
Net interest and other income increased to $4.8 million in the third quarter of
2000 from $2.2 million in last year's third quarter due to higher cash balances
available to earn interest.
Gain on sale of investment
--------------------------
During the third quarter of 2000, we realized a pre-tax gain of approximately
$14.2 million as a result of our disposition of a portion of our investment in
Sierra Wireless, Inc., a publicly held company. These shares were previously
subject to escrow restrictions and were not available for sale until the third
quarter of fiscal 2000. We currently own 2.7 million common shares of Sierra
Wireless of which approximately 234,000 are available for sale and the remainder
are subject to certain resale provisions. We expect the resale restrictions to
be lifted on 50% of the shares in May, 2001, and the restrictions on the
remaining shares to be lifted in May, 2002.
Provision for income taxes
--------------------------
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations.
<PAGE>
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 until 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101("SAB 101"), "Revenue Recognition", which outlines
the basic criteria that must be met to recognize revenue and provides guidance
for presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. The Company believes the
adoption of SAB 101 will not have a material impact on the Company's financial
position and results of operations. The Company is required to adopt SAB 101 no
later than the fourth quarter of fiscal 2000.
First Nine Months of 2000 and 1999
Net Revenues ($000,000)
First nine months
----------------------
2000 1999 Change
Networking products $ 441.7 $ 190.0 132%
Non-networking products 20.9 13.0 61%
------------------------
Total net revenues $ 462.6 $ 203.0 128%
========================
Net revenue of $462.6 million in the first nine months of 2000 increased 128%
over the comparable period of 1999 as a result of strong networking revenue
growth and relatively moderate non-networking growth.
Gross Profit ($000,000)
First nine months
----------------------
2000 1999 Change
Networking $ 344.8 $ 146.6 135%
Non-networking 9.3 5.9 58%
-----------------------
Total gross profit $ 354.1 $ 152.5 132%
=======================
Percentage of net revenues 76.6% 75.1%
<PAGE>
Gross profit increased in the first nine months of 2000 compared to the first
nine months of 1999 as a result of increased net revenues. Gross profit as a
percentage of sales increased for the same periods as higher gross margin
networking products represented a greater percentage of overall net revenue.
Operating Expenses and Charges ($000,000)
First nine months
----------------------
2000 1999 Change
Research and development $ 114.1 $ 57.5 98%
Percentage of net revenues 25% 28%
Marketing, general & administrative $ 68.7 $ 35.8 92%
Percentage of net revenues 15% 18%
Amortization of deferred stock compensation:
Research and development $ 21.1 $ 2.4
Marketing, general and administrative 2.5 1.0
------------------
Total $ 23.6 $ 3.4
==================
Percentage of net revenues 5% 2%
Amortization of goodwill $ 18.7 $ 1.4
Costs of merger $ 36.9 $ 0.9
Acquisition of in process research and
development $ 38.2 $ -
R&D expenses increased in dollars but decreased as a percentage of net revenues
in the first nine months of 2000 compared to the first nine months of 1999 as we
increased R&D spending at a slower rate than our revenue growth. All of the R&D
spending in 2000 and 1999 related to our networking products.
Marketing, general and administrative expenses increased in dollars and
decreased as a percentage of net revenues in the nine months of 2000 compared to
the nine months of 1999.
Amortization of deferred stock compensation increased in the first nine months
of 2000 compared to the first nine months of 1999 as a result of the
acquisitions during the first nine months of 2000.
We incurred goodwill amortization charges in the first nine months of 2000 as a
result of prior acquisitions as well as the Datum and Malleable acquisitions
completed in the third quarter. We expect additional significant goodwill
charges in the future.
We incurred $36.9 million in merger costs in the first nine months of 2000
related to the Toucan, Extreme, AANetcom and QED acquisitions which were
completed during the first nine months of 2000. These costs related primarily to
investment banking and other professional fees.
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents and short term investments increased from $206.3
million at the end of 1999 to $333.3 million at September 24, 2000.
During the first nine months of 2000, operating activities provided $114.6
million in cash. Net income of $40.5 million includes non-cash charges of $24.2
million for depreciation, $20.2 million for amortization of intangibles, $23.7
million amortization of deferred stock compensation, a $38.2 million in process
research and development charge, and non-cash gains on sale of investments of
$41.3 million.
Our year to date investing activities included the maturity of and reinvestment
in short-term investments. We also made investments in other companies of $13.4
million, purchased $65.2 million of plant and equipment, spent net cash of $14.0
million on the acquisitions of Datum and Malleable and received $42.2 million of
proceeds from the sale of investments and paid out $ 3.9 million in net wafer
fabrication deposits.
Our year to date financing activities provided $64.8 million. We used $7.2
million for debt and lease repayments and received $71.9 million of proceeds
from issuing common stock.
Our principal source of liquidity at September 24, 2000 was our cash, cash
equivalents and short term investments of $333.3 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 believe that existing sources of liquidity and anticipated funds from
operations will satisfy our projected working capital, venture investing,
capital expenditure and wafer deposit requirements through the end of 2000. We
expect to spend approximately $44 million on new capital additions and to make
additional venture investments as opportunities arise in the balance of 2000.
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.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance
PMC has closed seven acquisitions in fiscal 2000. 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.
<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.
PMC may not realize the anticipated benefits of the Quantum Effect
Devices merger
On August 24, 2000, PMC completed the acquisition of Quantum Effect Devices,
Inc., a publicly traded semiconductor company. PMC may not realize the
anticipated benefits of this merger 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, and
- Integrating different enterprise resource planning and accounting
systems
The integration of PMC and QED will be complex, time consuming and expensive and
may disrupt PMC's and QED's businesses. In particular, PMC does not have
manufacturing, selling or support experience for these products, some of which
are sold to customers that PMC does not normally service.
Some of QED's suppliers, vendors, licensees and licensors are PMC's competitors
and as a result may alter their business relationship with PMC in the future.
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.
PMC has not yet achieved revenues from its recent acquisitions
The products from six of the companies PMC has acquired in fiscal 2000 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. The timing of revenues from newly designed products is often
uncertain. In the past, we have had to redesign products which we acquired when
buying other businesses, resulting in increased expenses and delayed revenues.
This may occur in the future as we commercialize the new products resulting from
recent acquisitions.
PMC initiated its presence in the digital signal processing market with the
acquisitions 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.
<PAGE>
Datum's technology is applicable to the radio frequency wireless networking
market - a market in which PMC has no current presence.
PMC's operating results may be impacted differently depending on which
method we use to account for acquisitions
A future acquisition could adversely affect operating results, particularly if
we record the acquisition as a purchase such as the Malleable and Datum
acquisitions. In purchase acquisitions, we may incur a significant charge for
purchased in process research and development, or IPR&D, in the period in which
the acquisition is closed. In addition, we may capitalize a significant goodwill
asset that would be amortized over its expected period of benefit. The resulting
amortization expense could seriously impact operating results for many years.
PMC may enter into additional purchase acquisitions in the future.
We have accounted for a number of our recent mergers as pooling of interests.
If, after completion of these mergers, events occur that cause the merger to
fail to qualify for pooling of interests accounting treatment, the purchase
method of accounting would apply. Purchase accounting treatment would seriously
harm the reported operating results of the combined company because the
estimated fair value of PMC common stock issued in the mergers is much greater
than the historical net book value of the assets in each of the acquired
company's accounts.
PMC's rapid growth has strained our resources, and we may not be able to manage
future growth
PMC has experienced a period of rapid growth which has placed and will continue
to place a significant strain on our resources. We have increased our employee
headcount from 660 at the end of 1999 to 1,451 at the end of the third quarter
of 2000, expanded our operations and facilities, and increased the
responsibilities of management. We are experiencing typical challenges in
integrating a number of acquisitions. This process is absorbing a high
percentage of management time which must be diverted from other areas of our
operations. We expect to continue the growth of our operations. This may
significantly strain our management, manufacturing, product development,
financial, information systems and other resources.
We cannot be certain that our systems, procedures, controls and existing space
will be adequate to support our operations.
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, Cisco Systems and
Lucent Technologies each accounted for more than 10% of our fiscal 1999 and year
to date 2000 revenues. We do not have long-term volume purchase commitments from
any of our major customers.
<PAGE>
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. Fluctuation in our revenues may cause our
operating results to fluctuate. 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 the product life and design-in cycles in many of our
customers' products.
Increasing competition in our industry will make it more difficult to
earn design wins in our customer's equipment.
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,
Globespan, Integrated Device Technology, IBM, Infineon, Intel, Lucent
Technologies, Motorola, 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. Larger competitors in our market
have recently acquired or announced plans to acquire both publicly traded and
privately held companies with advanced technologies. These acquisitions could
enhance the ability of larger competitors to obtain new business which PMC might
have otherwise won.
<PAGE>
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 subsequently reduced
their orders and impacted our operating results. This is likely to happen again.
Several telecom service providers have recently reported difficulty accessing
the capital needed to build their networks. This has affected recent operating
results at several telecom and networking equipment makers. If this decline in
end-user purchasing continues or expands to other equipment manufacturers,
demand for PMC's products could decline.
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.
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
<PAGE>
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 the market does not accept the recently developed specifications and
protocols on which our new products are based, we may not be able to
sustain or increase our revenues
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 continued 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.
A significant portion of PMC's revenue relate to sales of our MIPS-based
processors. If MIPS Technologies develops future generations of its technology,
we may not be able to obtain a licence 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 we are currently licensing
from MIPS Technologies. A significant part of our success could depend on our
ability to develop products that incorporate those improvements. We may not be
able to license the technology for any new improvements from MIPS Technologies
on commercially reasonable terms or at all. If we cannot obtain required
licenses from MIPS Technologies, we could encounter delays in product
development while we attempt to develop similar technology, or we may not be
able to develop, manufacture and sell products incorporating this technology.
In addition, our current microprocessor products and planned future products are
based upon the microprocessor technology we license from MIPS Technologies. If
we fail to comply with any of the terms of its license agreement, MIPS
Technologies could terminate our rights, preventing us from marketing our
current and planned microprocessor products.
We anticipate lower margins on mature and high volume products, which could
adversely affect our profitability
<PAGE>
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. Our networking products range widely in terms of the margins
they generate. A change in product mix sales could impact our operating results
materially.
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 expect to be supply
constrained on our shipments of microprocessors in the near term.
We rely on limited sources of wafer fabrication, the loss of which
could delay and limit our product shipments
We do not own or operate a wafer fabrication facility. Three 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.
<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 is conducted outside of the United States.
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.
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
<PAGE>
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 sheer 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.
<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.
<PAGE>
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 spot 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 three months to
avoid undue exposure of our asset position to further foreign currency
fluctuation. While we expect to utilize this method of hedging our foreign
currency risk in the future, we may change our hedging methodology and utilize
foreign exchange contracts that are currently available under our operating line
of credit agreement.
Occasionally, we may not be able to correctly forecast our operational needs. If
our forecasts are overstated or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses. At the
end of the third quarter of 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. In the future, we expect to hold the short-term
investments we buy through to maturity.
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
- 11.1 Calculation of earnings per share 1
- 27 Financial Data Schedule
(b) Reports on Form 8-K -
- A Current Report on Form 8-K was filed on October 3,
2000 to disclose the completion of the Company's
acquisition of SwitchOn Networks, Inc.
- An amended Current Report on Form 8-K/A was filed on
September 29,2000 to report financial information
required under Item 7 relating to the acquisition of
Datum Telegraphic, Inc.
- A Current Report on Form 8-K was filed on September
1, 2000 to disclose the completion of the Company's
acquisition of Quantum Effect Devices, Inc.
- A Current Report on Form 8-K was filed on August 28,
2000 to disclose the completion of the Company's
acquisition of Datum Telegraphic, Inc.
- An amended Current Report on Form 8-K/A was filed on
August 7,2000 to report financial information
required under Item 7 relating to the acquisition of
Malleable Technologies, Inc.
- A Current Report on Form 8-K was filed on July 25,
2000 to disclose that the Company had signed a
definitive agreement to acquire Quantum Effect
Devices, Inc.
- A Current Report on Form 8-K was filed on July 12,
2000 to disclose the completion of the Company's
acquisition of Malleable Technologies, Inc.
- A Current Report on Form 8-K was filed on June 30,
2000 to disclose that the Company had signed a
definitive agreement to purchase Datum Telegraphic,
Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC-SIERRA, INC.
(Registrant)
Date: November 8, 2000 /S/ John W. Sullivan
----------------- ------------------------------------------------
John W. Sullivan
Vice President, Finance (duly authorized officer)
Principal Accounting Officer
------------------------
(1) Refer to Note 6 of the financial statements included in Item I of Part I of
this Quarterly Report.
