-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S0SCElwMkRjcZcAXqshMel3+hmWe6BGqem8Ve/ZJvkDuls6hleLd32EAobgdto8N 7eBDnC3Q3upkrWLel0ak+Q== 0000767920-98-000002.txt : 19980325 0000767920-98-000002.hdr.sgml : 19980325 ACCESSION NUMBER: 0000767920-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980324 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PMC SIERRA INC CENTRAL INDEX KEY: 0000767920 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942925073 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19084 FILM NUMBER: 98571499 BUSINESS ADDRESS: STREET 1: 8555 BAXTER PLACE STE 105 STREET 2: BURABURY BRITISH COLUMBIA CITY: CANADA V5A 4V7 STATE: A1 ZIP: 00000 BUSINESS PHONE: 6044156000 MAIL ADDRESS: STREET 1: 8555 BAXTER PLACE STE 105 STREET 2: BURABURY BRITISH COLUMBIA CITY: CANADA V5A 4V7 STATE: A1 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: SIERRA SEMICONDUCTOR CORP DATE OF NAME CHANGE: 19950419 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 28, 1997 [ ] 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) Delaware 94-2925073 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 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 17, 1998, as reported by the Nasdaq National Market, was approximately $845,732,084. 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 17, 1998, the Registrant had 29,937,325 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the Proxy Statement for Registrant's 1998 Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12 and 13 Part III of this Form 10-K Report. PART I ITEM 1. Business. General PMC-Sierra, Inc. ("PMC" or the "Company") designs, develops, markets and supports high-performance semiconductor system solutions for advanced communications markets. The Company's products are used in broadband communications infrastructures and high bandwidth networks. The Company is a leading supplier of ATM, SONET/SDH, T1/E1 and D3/E3 integrated circuits in the communications infrastructure and networking markets and also provides fast ethernet integrated circuits to the networking markets. In August 1996 the Company announced its decision to exit the personal computer modem chipset business, to restructure its other non-networking products and focus on its networking products. All of the Company's modem products were disposed of in 1997. The Company's remaining non-networking products are still being sold but no development or follow-on products are planned. The Company was incorporated in the State of California in 1983 and reincorporated in the State of Delaware in 1997. All references to "PMC" or the "Company" include the Company's subsidiaries, unless the context requires otherwise. The Company's principal executive office is located at 105-8555 Baxter Place, Burnaby, B.C., Canada V5A 4V7. The Company's Common Stock trades on the Nasdaq National Market under the symbol "PMCS." Industry Background There are three primary drivers of internetworking equipment demand which are important to PMC-Sierra's semiconductor business: the Internet, the upgrade of current corporate data networks and remote access. The Internet and its increased usage by corporate and residential customers through Internet Protocol ("IP"), is putting a great strain on the public wide area network ("WAN") telecommunications infrastructure. This infrastructure supports a worldwide hybrid network designed for both data and voice communications. The Internet is driving a new wave of residential data traffic carried over telephone modems and new high performance digital subscriber lines ("DSL"). The public WAN infrastructure, originally designed for Plain Old Telephone Service ("POTS"), is now having to merge the increased data traffic requirements of the corporate world as businesses upgrade their current low speed Ethernet local area networks ("LANs") to much higher speed Fast Ethernet and Gigabit Ethernet LANs. In addition, the trends toward mobile computing and telecommuting are enabling new remote access equipment opportunities for Frame Relay, Asynchronous Transfer Mode ("ATM") and cellular wireless services. All of this voice and data traffic is delivered into the public core WAN for transmission along its high bandwidth fiberoptic pipes. The resultant total traffic increase far exceeds the bandwidth capacity deployed in the core WAN. The mismatch between supply and demand of network bandwidth is driving the design and manufacture of high performance internetworking equipment. This equipment primarily makes more efficient use of existing network pipe bandwidth while simultaneously supporting increased bandwidth resulting from the deployment of more and larger pipes. These trends are creating the following opportunities for PMC-Sierra's internetworking semiconductor solutions: - - A core WAN infrastructure is being developed to interface to existing fiberoptic backbone pipes through the SONET/SDH transmission protocol. SONET/SDH is a global transmission hierarchy designed to scale from 51 megabits to upwards of terabit rates. Key equipment being developed by carrier telecommunication companies includes digital access cross connects and core SONET/SDH switches. - - For LAN corporate data networks, existing 10 megabit Ethernet workgroup hubs are being upgraded to 10/100 megabit Ethernet workgroup switches with advanced management features. These workgroup switches are in turn being connected to advanced enterprise Ethernet switches that have the ability to switch combinations of 100 megabit and 1 gigabit data traffic. A key requirement of these LANs is the ability to provide for the connection of this high speed Ethernet traffic into the core WAN backbone. - - For Remote Access data opportunities, Frame Relay networks are being upgraded to carry and aggregate increased levels of traffic. Internet Service Providers utilize multi-platform Point-of-Presence and Remote Access Concentrator equipment to aggregate 64 kilobit DS0, n*64 kilobit Fractional T1, 1.5 megabit T1, 2.0 megabit E1, 45 megabit T3 and 34 megabit E3 data streams into larger pipes. The High-speed Data Link Control ("HDLC") protocol is essential to connect these low speed Frame Relay streams into the core WAN backbone. - - For data, voice and video traffic opportunities which require great predictability, ATM networks are being created which can scale very effectively from 1.5 megabits to 2.4 gigabits. ATM networks are very valuable for edge and core network switching and transmission because they offer a complete range of network services from direct connections and guaranteed bandwidth for single protocol and multiprotocol traffic. The fixed length ATM cell enhances effective connectivity of data, voice or video traffic into the core WAN backbone. - - The current Internet infrastructure is dominated by router entry into WAN backbone fiberoptic pipes. There are certain cost and bandwidth sensitive IP applications that will not require routing intelligence or ATM quality of service. For these applications, IP-over-SONET is a new protocol for more effective mapping of IP traffic into the Internet backbone using existing WAN backbone pipes. IP-over-SONET is used in fast ethernet and gigabit ethernet switches, high speed gigabit routers and remote access concentrators to map IP, Ethernet and Frame Relay packets directly into large SONET/SDH bandwidth pipes without direct routing or ATM cell conversion. - - For residential data opportunities that require greater than current 56 kilobit analog modem speed, new DSL technology enables up to several megabits of bandwidth for Internet content download. Several versions of DSL services are becoming available which seek to provide increased speed in the downstream and upstream directions over current POTS phone wire. New DSL access multiplexor equipment is being developed to aggregate this increased residential IP data traffic into the WAN. ATM appears to be the preferred vehicle for DSL to WAN connection. - - Wireless voice and data opportunities are being generated by the deployment of Base Transceiver Stations. These stations convert waves of radio frequency air traffic into wireline backhaul pipes primarily at 1.5 megabit T1 and 2.0 megabit E1 rates. These backhaul pipes are aggregated and networked by advanced Base Station Controllers that provide switching capability and processing intelligence. HDLC and ATM protocols are important for this equipment as they provide the interface and processing for these pipes. - - The Telecommunications Act of 1996 and other legislation have deregulated the industry worldwide and spurred a rush of new competitive local exchange carriers ("CLECs") which are competing with the incumbent local exchange carriers ("ILECs"). In response, telecommunications companies and service providers are now upgrading their current product offerings and developing new products. Many traditional phone companies are now attempting to provide additional data services to increase revenue and profit. Some CLECs are also seeking an ownership position in "the local loop", the last mile of copper phone wire to the customer's premise. All of the above trends are driving a need for the effective convergence of data and voice traffic from the LAN, customer premises and remote access into the core WAN fiber backbones. The gateway into the WAN infrastructure is the add-drop multiplexor ("ADM") which aggregates lower rate IP, Ethernet, ATM and Frame Relay traffic and provides for more efficient provisioning into core WAN fiber backbones. Networking Products PMC provides internetworking semiconductor devices and related technical service and support to equipment manufacturers for use in their communications and networking equipment. The Company's objective is to continue to develop internetworking "systems on a chip" that enable network systems vendors to get to market quickly with high performance, cost effective and scalable systems. PMC provides internetworking semiconductor solutions that address the industry trends and span the key internetworking and communications equipment markets. The Company's product offerings are grouped into four general areas: ATM, Ethernet switching, Remote Access and SONET/SDH. PMC provides the industry's largest and broadest array of merchant market ATM semiconductor devices and believes it is the market leader in ATM physical layer solutions. The S/UNI product line offers physical layer solutions in a range from 1.5 megabits to 622 megabits. Single channel and Dual channel port densities are available. LAN, Edge and WAN core ATM switch feature set options are available. The company has also produced a line of RCMP ATM layer processors that handle higher layer ATM protocol such as policing, operations and management, fault and performance monitoring. The Company has introduced a new line of Ethernet Switching products which address 10 and 100 megabit as well as gigabit speeds. The ELAN 8-port 10 megabit switch-on-a-chip and ELAN 10/100 megabit uplink/switch-on-a-chip products offer an onboard central processing unit and a full range of firmware capable of flexible management customization. Most recently the Company announced plans for a next generation Ethernet switching architecture and connectivity bus design. The new Exact chipset allows, at speeds reaching 32 gigabits per second, switched LAN networks to scale from Layer 2 Ethernet bridging to complex Layer 3 routing with packet prioritization features along with added management as desired. In the Remote Access arena, the Company has responded to emerging telecom and datacom opportunities with its line of T1/E1 framers and its newly introduced line of high density Frame Relay and HDLC controllers. The Company introduced the world's first 3.3 volt 8-channel T1 framer, the TOCTL, to complement its already production released TQUAD quad-channel version. The single channel T1XC combines digital framing technology with high performance analog line interface technology. To meet European protocol standards, the Company has also introduced E1 framing equivalents, the E1XC and EQUAD. The Freedm family of HDLC controllers combine the industry's highest link density of 32 with the highest channel density of 128 for Internet equipment requiring maximum T1 and E1 aggregation. The recent Quad-JET product introduction provides for effective mapping between J2, E3 and T3 frame/packet environments and ATM cell environments. Its four channel density is highly suitable for small access cards which let ATM edge switches connect to Remote Access concentrator and multiplexor equipment. With demand increasing for framers, multiplexors, terminators and mappers, SONET/SDH remains a core business of the Company. It will be important for the company to provide new solutions which interface to SONET/SDH fiberoptic backbone pipes. The Company's newest product introduction is the Spectra-155, a highly integrated 155 megabit SONET/SDH telecom terminator which also provides ability to map IP and datacom traffic into T3 45 megabit pipes. User Interface Products The Company restructured its product line to exit the modem chipset business and discontinue development of its graphics, multimedia and custom chipsets. Modem sales in 1997 were limited to the disposal of existing inventories which was completed by mid year. Revenues from other user interface products have declined rapidly and, due to the lack of any follow-on products, are expected to experience a further significant decline in 1998. Sales, Marketing and Distribution The Company's sales and marketing strategy is to achieve design wins by developing products with superior functionality. The Company maintains close working relationships with its customers in order to design and develop solutions which specifically address their needs. Technical support to customers is provided through field application engineers, technical marketing and factory systems engineers. The Company believes that providing equipment vendors with comprehensive product service and support is critical to maintaining a competitive position in the networking market and is critical to shortening customers' design cycles. PMC sells its products primarily through independent manufacturers' representatives and, to a lesser extent, distributors. International sales were 30%, 53% and 39% of net revenues in 1997, 1996 and 1995, respectively. In 1997, the country purchasing the largest percentage of the Company's products outside of the US was Canada at 10%. Indonesia, Thailand and Korea, which experienced significant currency and economic fluctuations at the end of 1997, accounted, in the aggregate, for less than 2% of the Company's revenues. The higher percentage of international sales in 1996 and 1995 was principally the result of modem products being sold to customers in the Far East. See "Risk Factors - International Operations". SCI Systems, Inc., an electronic manufacturing service provider for a number of user interface and networking end customers, accounted for 18% of the Company's 1997 sales and less than 10% for 1996 and 1995. In 1997, 1996 and 1995, sales of user interface products to Apple Computer accounted for 4%, 10% and 24%, respectively, of the Company's net revenues. Manufacturing The Company relies on independent foundries and chip assemblers for the manufacture of its products. The Company currently receives substantially all of its wafers in finished form from Chartered Semiconductor Manufacturing Ltd. ("Chartered"), and Taiwan Semiconductor Manufacturing Corporation ("TSMC"). These independent foundries produce the Company's networking products at feature sizes down to 0.35 micron. The Company believes that by using independent foundries to fabricate its wafers, it is better able to concentrate its resources on designing and testing new products and is able to avoid much of the capital cost associated with owning and operating a fabrication facility. The Company has wafer supply agreements with its foundry suppliers which include deposits to secure access to wafer fabrication capacity. One of those supply agreements was amended in the fourth quarter of 1996 while the other was rewritten in the fourth quarter of 1996 and amended in the third quarter of 1997. Non-compliance with the terms of the agreements may be cause for termination of the agreement by either party. Wafers supplied by outside foundries must meet the Company's incoming quality and test standards. The Company conducts the majority of its test operations on advanced mixed signal and digital test equipment in its Burnaby, British Columbia, Canada facility with the remainder tested by independent companies, primarily in Asia. Tested wafers are assembled into packages by independent suppliers, predominantly in Asia. There are risks associated with outsourcing the manufacture and assembly of the Company's products. See "Risk Factors - Access to Wafer Fabrication and Other Manufacturing Capacity. " The Company has placed substantial deposits with its independent foundry suppliers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. " Research and Development PMC believes that the continued introduction of new products in its target markets is essential to its growth. PMC's current research and development efforts focus on increasing the functionality and integration of its products. The Company's research and development in the telecommunications infrastructure and local area networking markets is targeted at increasing the speed at which its chips operate, integrating multiple channels on single devices, and broadening the portfolio of products which comply with the varying protocols in these markets. As a result of the Company's decision to exit from the modem chipset business, and the associated restructuring of the Company's non-networking product operations, the Company has discontinued research and development on any future modem and other non-networking products. The Company expended $22.9 million, $29.4 million, and $23.4 million on research and development in fiscal 1997, 1996 and 1995, respectively. The Company also expensed $7.8 million of in process research and development in 1996 related to its acquisition of certain assets of Bit, Inc. See "Consolidated Financial Statements - Note 2" There can be no assurance that any new products will be successfully developed or will achieve market acceptance. A failure in any of these areas would have a material and adverse affect on the Company. See "Risk Factors - Technological Change." Backlog Sales are made primarily pursuant to standard short-term purchase orders for delivery of standard products. The quantity actually purchased by the customer, as well as the shipment schedules, are frequently revised to reflect changes in the customer's needs. As of December 31, 1997, the Company's backlog of products scheduled for shipment within six months totaled $36.3 million. A significant portion of the backlog may be cancelled without penalty at the discretion of the customer. Accordingly, the Company believes that its backlog at any given time is not a meaningful indicator of future revenues. The Company's 1996 backlog of $38.3 million included products now discontinued and was calculated based on purchase orders expected to ship within twelve months for semi-custom products and within seven months for other products. The Company believes that the six month horizon for inclusion in backlog is more appropriate for its changed mix of business in 1997. Competition The semiconductor industry is intensely competitive and is characterized by rapid technological change and by price erosion. The industry consists of major domestic and international semiconductor companies, many of which have substantially greater financial and other resources than the Company. Emerging companies also provide significant competition in this segment of the semiconductor market. The Company believes that its ability to compete successfully in this market depends on a number of factors, including, among others, the price, quality and performance of the Company's and its competitors' products, the timing and success of new product introductions by the Company, its customers and its competitors, the emergence of new standards, the development of technical innovations, the ability to obtain adequate manufacturing capacity, the efficiency of production, the rate at which the Company's customers design the Company's products into their products, the number and nature of the Company's competitors in a given market, the assertion of the Company's and its competitors' intellectual property rights and general market and economic conditions. The Company's competitors in this market include, among others, Cypress Semiconductor, Dallas Semiconductor, Galileo Technology, Integrated Device Technology, Level One Communications, Lucent Technologies, MMC Networks, Rockwell International, Siemens, Texas Instruments, and Transwitch. The number of competitors in this market and the technology platforms on which their products will compete may change in the future. It is likely that over the next few years additional competitors will enter the market with new products. These new competitors may have substantially greater financial and other resources than the Company. Competition among manufacturers of semiconductors like the Company's products typically occurs at the design stage, where the customer evaluates alternative design approaches that require integrated circuits. Because of shortened product life cycles and design-in cycles in certain of the Company's customers products, the Company's competitors have increasingly frequent opportunities to achieve design wins in next generation systems. Any success by the Company's competitors in supplanting the Company's products would have a material adverse effect on the Company. Historically, average selling prices ("ASPs") in the semiconductor industry have decreased over the life of the particular product. The willingness of prospective customers to design the Company's products into their products depends to a significant extent upon the ability of the Company to price its products at a level that is cost effective for such customers. If the Company is unable to reduce its costs sufficiently to offset declines in ASPs or is unable to introduce new higher performance products with higher ASPs, the Company would be materially and adversely affected. Any yield or other production problems, shortages of supply that increase the Company's manufacturing costs, or failure to reduce manufacturing costs, would have a material adverse effect on the Company. Licenses, Patents and Trademarks The Company has granted Chartered Semiconductor a non-exclusive license to manufacture and sell integrated circuits licensed for sale by PMC and integrated circuits designed by Chartered Semiconductor or its parent company. Chartered Semiconductor also has a worldwide non-exclusive right to manufacture digital integrated circuits for third parties, unless PMC designed the circuit or previously supplied the circuit to the customer. Chartered Semiconductor has also licensed its manufacturing technology to PMC for non-exclusive use outside Singapore. The license agreement expires in November 1999. Upon termination of the agreement, the licenses to use the technology continue, but obligations to update licensed technology terminate. The Company has 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, the Company believes that a strong patent position is becoming increasingly important to compete effectively in the industry and has an active program to acquire additional patent protection. The Company applies for mask work protection on its circuit designs. The Company attempts to protect its software, trade secrets and other proprietary information by entering into proprietary information agreements with employees and other security measures. Although the Company intends to protect its rights vigorously, there can be no assurance that these measures will be successful. See "Risk Factors - Patents and Proprietary Rights." PMC and its logo are registered trademarks and service marks of the Company. The Company owns 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. Employees As of December 31, 1997, the Company had 297 employees, including 136 in research and development, 56 in production and quality assurance, 68 in marketing and sales and 37 in administration. None of the Company's employees is represented by a collective bargaining agreement, nor has the Company ever experienced any work stoppage. RISK FACTORS THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE SUBJECT TO A NUMBER OF RISKS, SOME OF WHICH ARE DESCRIBED BELOW. THE FACT THAT SOME OF THE RISK FACTORS MAY BE THE SAME OR SIMILAR TO THOSE IN THE COMPANY'S PAST SEC FILINGS MEANS ONLY THAT THE RISKS ARE PRESENT IN MULTIPLE PERIODS. THE COMPANY BELIEVES THAT MANY OF THE RISKS DETAILED HERE AND IN THE COMPANY'S OTHER SEC FILINGS ARE PART OF DOING BUSINESS IN THE FABLESS NETWORKING SEMICONDUCTOR INDUSTRY AND WILL LIKELY BE PRESENT IN ALL PERIODS REPORTED. THE FACT THAT CERTAIN RISKS ARE ENDEMIC TO THE INDUSTRY DOES NOT LESSEN THE SIGNIFICANCE OF THE RISK. SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS Certain statements in this Report constitute "forward-looking statements" within the meaning of the federal securities laws. The actual results, performance, or achievements of the Company may be materially different from those expressed or implied by such forward-looking statements. Reference to the Company includes its subsidiary PMC-Sierra Ltd., a Canadian corporation and its other subsidiaries. The forward-looking statements include projections relating to trends in markets, revenues, particularly expectations of long-term revenues, gross margin, and future expenditures on research and development, marketing, general and administrative expense and the year 2000 issue. The Company undertakes no obligation to release revisions to forward-looking statements to reflect subsequent events. FLUCTUATIONS IN OPERATING RESULTS The Company's quarterly and annual operating results may vary due to a number of factors, including, among others, the timing of new product introductions, decreased demand or average selling prices for products, market acceptance of products, demand for products of the Company's customers, the introduction of products or technologies by the Company's competitors, competitive pressure on product pricing, the Company's and its customers' inventory levels of the Company's products, product availability from outside foundries, variations in manufacturing yields for the Company's products, expenditures for new product and process development, the acquisition of wafer fabrication and other manufacturing capacity, and the acquisition of businesses, products or technologies. At various times in the past, the Company's foundry and other suppliers have experienced lower than anticipated yields that have adversely affected production and, consequently, the Company. There can be no assurance that the Company's existing or future foundry and other suppliers will not experience irregularities which could have a material adverse effect on the Company. The Company from time to time may order in advance of anticipated customer demand from its suppliers in response to anticipated long lead times to obtain inventory and materials, which might result in excess inventory levels if expected orders fail to materialize or other factors render the Company's product or its customer's products less marketable. The Company's ability to forecast sales of networking chips is limited due to customer uncertainty regarding future demand for end-user networking equipment and price competition in the market for networking equipment. Any delay or cancellation of existing orders, or any decline in projected future orders, by the Company's customers could have a material adverse effect on the Company. Margins will vary depending on product mix. In the longer term, the Company may experience declining gross profits as a percentage of total net revenues if anticipated decreases in average selling prices of existing networking products are not offset by commensurate reductions in product costs, or by an offsetting increase in gross profit contribution from new, higher gross margin, networking products. The Company is also affected by the state and direction of the electronics industry and the economy in the United States and other markets the Company serves. The occurrence of any of the foregoing or other factors could have a material adverse effect on the Company. Due to these factors, past results may not be indicative of future results. TECHNOLOGICAL CHANGE The markets for the Company's products are characterized by evolving industry standards, rapid technological change and product obsolescence. Technological change may be particularly pronounced in the developing markets for communications semiconductor devices used in high-speed networks. The Company's future success will be highly dependent upon the timely completion and introduction of new products at competitive price and performance levels. The success of new products depends on a number of factors, including proper definition of such products, successful and timely completion of product development and introduction to market, correct judgment with respect to product demand, market acceptance of the Company's and its customers' products, fabrication yields by the Company's independent foundries and the continued ability of the Company to offer innovative new products at competitive prices. Many of these factors are outside the control of the Company. There can be no assurance that the Company will be able to identify new product opportunities successfully, develop and bring to market new products, achieve design wins or be able to respond effectively to new technological changes or product announcements by others. A failure in any of these areas would have a material and adverse affect on the Company. The Company's current strategy is focused on high-speed networking interface chips. Products for telecommunications and data communications applications are based on industry standards that are continually evolving. Future transitions in customer preferences could quickly make the Company's products obsolete. A material part of the Company's products are in the ATM telecommunications and networking market, which is in an early stage of development. The emergence and adoption of new industry standards that compete with ATM or maintenance by the industry of existing standards in lieu of new standards could render the Company's ATM products unmarketable or obsolete. The market for ATM equipment has not developed as rapidly as industry observers have predicted, and alternative networking technologies such as "fast ethernet" and "gigabit ethernet" have developed to meet consumer requirements. A substantial portion of the Company's development efforts are focused on ATM and related products. Net revenues derived from sales of ATM, T1/E1, DS3/E3 and SONET/SDH based products amounted to 67% and 33% of the Company's total net revenues in 1997 and 1996, respectively. As a result of the Company's 1996 restructuring, revenues from non-networking products have declined significantly over the last several quarters, making the Company's results depend primarily on networking products. The Company, through a business combination, acquired in-process research and development and developed technology relating to ethernet switching in September 1996. During 1997, the Company announced a 100 Mbit/s fast ethernet switch on a chip and an 8-port, 10 Mbit/s ethernet switch chip. Gigabit Ethernet switching chips are in development. Ethernet switching is a new product area for the Company and there can be no assurance that announced products or products in development will have correctly anticipated the needs of the networking industry or that they will receive sufficient design wins to achieve commercial success. Many of the Company's products under development are complex semiconductor devices that require extensive design and testing before prototypes can be manufactured. The integration of a number of functions in a single chip or in a chipset requires the use of advanced semiconductor manufacturing techniques. This can result in chip redesigns if the initial design does not permit acceptable manufacturing yields. The Company's products are often designed for customers who in many instances have not yet fully defined their hardware products. Design delays or redesigns by these customers could in turn delay completion or require redesign of the semiconductor devices needed for the final hardware product. In this regard, many of the relevant standards and protocols for products based on high speed networking technologies have not been widely adopted or ratified by the relevant standard-setting bodies. Redesigns or design delays often are required for both the hardware manufacturer's products and the Company's chips as industry and customer standards, protocols or design specifications are determined. Any resulting delay in the production of the Company's products could have a material adverse effect on the Company. COMPETITION The semiconductor industry is intensely competitive and is characterized by rapid technological change and by price erosion. The industry consists of major domestic and international semiconductor companies, many of which have substantially greater financial and other resources than the Company. Emerging companies also provide significant competition in this segment of the semiconductor market. The Company believes that its ability to compete successfully in this market depends on a number of factors, including, among others, the price, quality and performance of the Company's and its competitors' products, the timing and success of new product introductions by the Company, its customers and its competitors, the emergence of new standards, the development of technical innovations, the ability to obtain adequate manufacturing capacity, the efficiency of production, the rate at which the Company's customers design the Company's products into their products, the number and nature of the Company's competitors in a given market, the assertion of the Company's and its competitors' intellectual property rights and general market and economic conditions. The Company's competitors in this market include, among others, Cypress Semiconductor, Dallas Semiconductor, Galileo Technology, Integrated Device Technology, Level One Communications, Lucent Technologies, MMC Networks, Rockwell International, Siemens, Texas Instruments, and Transwitch. The number of competitors in this market and the technology platforms on which their products will compete may change in the future. It is likely that over the next few years additional competitors will enter the market with new products. These new competitors may have substantially greater financial and other resources than the Company. Competition among manufacturers of semiconductors like the Company's products typically occurs at the design stage, where the customer evaluates alternative design approaches that require integrated circuits. Because of shortened product life cycles and design-in cycles in certain of the Company's customers products, the Company's competitors have increasingly frequent opportunities to achieve design wins in next generation systems. Any success by the Company's competitors in supplanting the Company's products would have a material adverse effect on the Company. Historically, average selling prices ("ASPs") in the semiconductor industry have decreased over the life of the particular product. The willingness of prospective customers to design the Company's products into their products depends to a significant extent upon the ability of the Company to price its products at a level that is cost effective for such customers. If the Company is unable to reduce its costs sufficiently to offset declines in ASPs or is unable to introduce new higher performance products with higher ASPs, the Company would be materially and adversely affected. Any yield or other production problems, shortages of supply that increase the Company's manufacturing costs, or failure to reduce manufacturing costs, would have a material adverse effect on the Company. ACCESS TO WAFER FABRICATION AND OTHER MANUFACTURING CAPACITY The Company does not own or operate a wafer fabrication facility, and all of its semiconductor device requirements are supplied by outside foundries. Substantially all of the Company's semiconductor products are currently manufactured by third party foundry suppliers. The Company's foundry suppliers fabricate products for other companies and produce products of their own design. The Company's reliance on independent foundries involves a number of risks, including the absence of adequate capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over delivery schedules, manufacturing yields and costs. In the event that these foundries are unable or unwilling to continue to manufacture the Company's products in required volumes, the Company will have to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. No assurance can be given that any such source would become available to the Company or that any such source would be in a position to satisfy the Company's production requirements on a timely basis, if at all. Any significant interruption in the supply of semiconductors to the Company would result in the allocation of products to customers, which in turn could have a material adverse effect on the Company. All of the Company's semiconductor products are assembled by sub-assemblers in Asia. Shortages of raw materials or disruptions in the provision of services by the Company's assembly houses or other circumstances that would require the Company to seek additional or alternative sources of supply or assembly could lead to supply constraints or delays in the delivery of the Company's products. Such constraints or delays may result in the loss of customers or other adverse effects on the Company. The Company's reliance on independent assembly houses involves a number of other risks, including reduced control over delivery schedules, quality assurances and costs, the possible discontinuance of such contractors' assembly processes and fluctuations of regional economies. Any supply or other problems resulting from such risks would have a material adverse effect on the Company. CUSTOMER CONCENTRATION The Company has no long-term volume purchase commitments from any of its major customers. The Company has only one customer that accounted for more than 10% of its 1997 revenues, but depends on a limited number of customers for a major portion of its revenues. The reduction, delay or cancellation of orders from one or more significant customers could have a material and adverse affect on the Company. Due to the relatively short product life cycles in the telecommunications and data communications markets, the Company would be materially and adversely affected if one or more of its significant customers were to select devices manufactured by one of the Company's competitors for inclusion in future product generations. There can be no assurance that the Company's current customers will continue to place orders with the Company, that orders by existing customers will continue at the levels of previous periods, or that the Company will be able to obtain orders from new customers. Loss of one or more of the Company's current customers or a disruption in the Company's sales and distribution channels could have a material and adverse affect on the Company. INTERNATIONAL OPERATIONS In fiscal years 1997, 1996 and 1995, international sales accounted for approximately 30%, 53% and 39% of the Company's net revenues, respectively. The Company's networking products must accommodate numerous worldwide communications standards and sales to US based customers are often for products that they in turn export worldwide. The Company expects that international sales will continue to represent a significant portion of the Company's and its customers' net revenues for the foreseeable future. The majority of the Company's development, test, marketing and administrative functions occur in Canada. In addition, substantially all of the Company's products are manufactured, assembled and tested by independent third parties in Asia. Due to its reliance on international sales and operations, the Company is subject to the risks of conducting business outside of the United States. These risks include unexpected changes in, or impositions of, legislative or regulatory requirements and policy changes affecting the telecommunications and data communications markets, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas, exchange rates and other trade barriers and restrictions, longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse taxes, the burdens of complying with a variety of foreign laws and other factors beyond the Company's control. The Company is also subject to general geopolitical risks in connection with its international operations, such as political, social and economic instability, potential hostilities and changes in diplomatic and trade relationships. Sales of the Company's networking products are denominated in U.S. dollars as are costs related to the manufacture and assembly of products by the Company's Asian suppliers. Costs related to the majority of the Company's development, test, marketing and administrative functions are denominated in Canadian dollars. Selling costs are denominated in a variety of currencies. As a result, the Company is subject to the risks of currency fluctuations. There can be no assurance that one or more of the foregoing factors will not have a material adverse effect on the Company. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant extent upon the continued services of its key technical personnel, particularly those highly skilled at the design and test functions involved in the development of high speed networking products and related software. The competition for such employees is intense. The Company has no employment agreements in place with these key personnel. However, the Company from time to time issues shares of Common Stock or options to purchase Common Stock of the Company subject to vesting. To the extent shares purchased from or options granted by the Company have economic value, these securities could create retention incentives. The loss of the services of one or more of these key personnel, and any difficulties the Company may experience in hiring qualified replacements, would have a material and adverse affect on the Company. PATENTS AND PROPRIETARY RIGHTS The Company's ability to compete is affected by its ability to protect its proprietary information. The Company relies on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. The Company currently holds several patents and has a number of pending patent applications. There can be no assurance that patents will be issued from any of the Company's pending applications or that any claims allowed will be of sufficient scope or strength, or be issued in all countries where the Company's products can be sold, to provide meaningful protection or any commercial advantage to the Company. In addition, competitors of the Company may be able to design around the Company's patents. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold, including various countries in Asia, may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. There can be no assurance that the steps taken by the Company to protect its proprietary information will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. The Company or its customers or foundries have in the past, and may from time to time in the future, be notified of claims that the Company may be infringing patents or other intellectual property rights owned by third parties. If it is necessary or desirable, the Company may seek licenses under patents or intellectual property rights. There can be no assurance that licenses will be available or that the terms of any offered license will be acceptable to the Company. Failure to obtain a license from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of products or the use by the Company's foundry suppliers requiring the technology. In the past, the Company's customers have been required to obtain licenses from and pay royalties to third parties for the sale of systems incorporating the Company's semiconductor devices. If this occurs in the future, the customers' businesses may be materially and adversely affected, which in turn would have a material and adverse affect on the Company. The Company has provided its customers with indemnity up to the dollar amount of their purchases of any Company products found to be infringing on technology owned by third parties. Although the Company discontinued the practice of indemnifying its customers in December of 1997, third party or customer claims may still be made against the Company with respect to the infringement of the technology of third parties. Furthermore, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Litigation by or against the Company could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable determination for the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, spend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. There can be no assurance that the Company would be successful in such development or that such licenses would be available on reasonable terms, or at all, and any such development or license could require expenditures by the Company of substantial time and other resources. Patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements. Because the Company currently does not have a substantial portfolio of patents, the Company may not be able to settle an alleged patent infringement claim through a cross-licensing arrangement. Any successful third party claim against the Company or its customers for patent or intellectual property infringement could have a material adverse effect on the Company. ACQUISITIONS The Company's strategy may involve, in part, acquisitions of products, technologies or businesses from third parties. Identifying and negotiating these acquisitions may divert substantial management time away from the Company's operations. An acquisition could absorb substantial cash resources, could require the Company to incur or assume debt obligations, or could involve the issuance of additional equity securities of the Company. The issuance of additional equity securities could dilute, and could represent an interest senior to the rights of, then outstanding PMC common stock. An acquisition which is accounted for as a purchase, like the acquisition of the Canadian networking business in 1994 and the acquisition of certain assets of Bipolar Integrated Technology, ("Bit") in September 1996, could involve significant one-time write-offs, and could involve the amortization of goodwill over a number of years, which would adversely affect earnings in those years. Any acquisition will require attention from the Company's management to integrate the acquired entity into the Company's operations, may require the Company to develop expertise outside its existing businesses and may result in departures of management of the acquired entity. An acquired entity may have unknown liabilities, and its business may not achieve the results anticipated at the time of the acquisition. FUTURE CAPITAL NEEDS The Company must continue to make significant investments in research and development as well as capital equipment and expansion of facilities for networking products. The Company's future capital requirements will depend on many factors, including, among others, product development, investments in working capital, and acquisitions of complementary businesses, products or technologies. To the extent that existing resources and future earnings are insufficient to fund the Company's operations, the Company may need to raise additional funds through public or private debt or equity financings. If additional funds are raised through the issuance of equity securities, the percentage ownership of current stockholders will be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. No assurance can be given that additional financing will be available or that, if available, it can be obtained on terms favorable to the Company and its stockholders. If adequate funds are not available, the Company may be required to delay, limit or eliminate some or all of its proposed operations. VOLATILITY OF STOCK PRICE Factors such as announcements of the introduction of new products by the Company or its competitors, quarterly fluctuations in the Company's financial results or the financial results of other semiconductor companies or of companies in the personal computer industry, general conditions in the semiconductor industry and conditions in the worldwide financial markets have, in the past, caused the price of the Company's Common Stock to fluctuate substantially, and may do so in the future. In addition, increases in the Company's stock price and expansion of its price-to-earnings multiple may have made it attractive to so-called momentum investors. Momentum investors are generally thought to shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction. The price of the Company's stock may also be impacted by investor sentiment toward technology stocks, in general, which often is unrelated to the operating performance of a specific company. YEAR 2000 COMPUTER SYSTEMS ISSUES The Company is aware of the issues associated with the limitations of the programming code in many existing computer systems, whereby the computer systems may not properly recognize date sensitive information as the next millennium (year 2000) approaches. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail, resulting in disruptions of the Company's operations. The Company uses commercially available standard software for its critical operating and financial applications. One vendor of software used by the Company is still modifying its code to become year 2000 compliant and anticipates completion in 1998. If the vendor does not successfully modify its code the Company could be forced to purchase a competing system that is year 2000 compliant and incur installation and other costs in order to mitigate the Year 2000 Issue. The installation of a replacement system for those applications that are currently not year 2000 compliant is not anticipated to be material to the Company's financial position or results of operations in any given year. The Company's suppliers and customers are generally much larger organizations than the Company with a greater number of suppliers and customers of their own. The Company believes that many of its suppliers and customers have not completed their own systems modification to be year 2000 compliant. The failure of significant suppliers or customers of the Company to become year 2000 compliant could have material adverse consequences to the Company. Those consequences could include the inability to receive product in a timely manner or lost sales opportunities either of which could result in a material decline in the Company's revenues and profits. In addition, there can be no guarantee that a conversion by a third party's system on which the Company's systems rely would be compatible with the Company's systems. ITEM 2. Properties. The Company occupies approximately 85,000 square feet of leased office space at its headquarters in Burnaby, B.C., Canada for its testing, administration, sales and marketing and design and engineering operations. This facility is leased through April 2001. The Company has also leased approximately 9,000 square feet of office space in Beaverton, Oregon through to March 1999. PMC also leases offices for its staff in California, Massachusetts, North Carolina, Texas, California, Ontario (Canada), Quebec (Canada), Barbados and England. ITEM 3. Legal Proceedings. Not applicable. ITEM 4. Submission of matters to a vote of Security Holders. Not applicable. PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters. Stock Price Information. The Company's 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 the Company's Common Stock as reported by the Nasdaq National Market: 1996 High Low First Quarter...................................... $24.75 $11.38 Second Quarter..................................... 20.88 11.00 Third Quarter...................................... 13.75 8.38 Fourth Quarter..................................... 17.50 12.00 1997 High Low First Quarter...................................... $18.13 $13.88 Second Quarter..................................... 26.38 13.88 Third Quarter...................................... 35.13 24.50 Fourth Quarter..................................... 31.88 22.00 The information provided above is based on the beginning and end of each calendar quarter. As of February 17, 1998, there were approximately 456 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. ITEM 6. Selected Financial Data. Summary Consolidated Financial Data (in thousands, except for per share data)
Year Ended December 31,(1) (2) ------------------------------------------------------------------------------ STATEMENT OF OPERATIONS DATA: 1997 (3) 1996 (4) 1995 (5) 1994 (6) 1993 (7) Net revenues $ 127,166 $ 188,371 $ 188,724 $ 104,764 $ 83,360 ----------- ------------ ------------ ------------ ----------- Gross profit 94,101 93,423 91,614 46,960 37,660 Research and development 22,880 29,350 23,428 15,702 15,439 In process research and development - 7,783 - 12,748 - Marketing, general and administrative 23,663 30,691 30,051 23,683 22,487 Purchase price adjustment - compensation - - 10,624 - - Restructuring and other charges (1,383) 64,670 - (1,559) 12,669 ----------- ------------ ------------ ------------ ----------- Income (loss) from operations 48,941 (39,071) 27,511 (3,614) (12,935) =========== ============ ============ ============ =========== Income (loss) from continuing operations 34,258 (48,150) 23,976 (7,916) (12,983) Loss from discontinued operations - - (22,497) (666) - ----------- ------------ ------------ ------------ ----------- Net income (loss) $ 34,258 $ (48,150) $ 1,479 $ (8,582) $ (12,983) =========== ============ ============ ============ =========== Basic net income (loss) per share: (8) from continuing operations $ 1.10 $ (1.62) $ 0.89 $ (0.36) $ (0.64) from discontinued operations $ - $ - $ (0.83) $ (0.03) $ - ----------- ------------ ------------ ------------ ----------- Net income (loss) $ 1.10 $ (1.62) $ 0.06 $ (0.39) $ (0.64) =========== ============ ============ ============ =========== Diluted net income (loss) per share: (8) from continuing operations $ 1.05 $ (1.62) $ 0.84 $ (0.36) $ (0.64) from discontinued operations $ - $ - $ (0.79) $ (0.03) $ - ----------- ------------ ------------ ------------ ----------- Net income (loss) $ 1.05 $ (1.62) $ 0.05 $ (0.39) $ (0.64) =========== ============ ============ ============ =========== Shares used to calculate: Basic net income (loss) per share 31,043 29,719 27,018 22,030 20,222 Diluted net income (loss) per share 32,642 29,719 28,620 22,030 20,222 As of December 31,(1) (2) ------------------------------------------------------------------------------ BALANCE SHEET DATA: 1997 1996 1995 1994 1993 Cash, cash equivalents and short-term investments $ 69,240 $ 42,062 $ 45,937 $ 15,830 $ 21,693 Working capital 58,595 20,438 32,741 23,813 14,803 Total assets 149,378 129,914 184,860 85,959 71,850 Long term debt (including current portion) 13,744 24,637 12,718 9,069 11,872 Shareholders' equity 90,565 48,444 81,000 34,865 40,153 (1) The Company's fiscal year ends on the Sunday closest to December 31. December 31 has been used as the fiscal year end for ease of presentation. See Note 1 to Consolidated Financial Statements. (2) For 1995, amounts related to Prometheus previously reported within net revenues were $19.0 million; gross profit (loss) was ($0.1) million; and net profits were ($4.6) million. For 1994, net revenues were $3.8 million; gross profit was $0.3 million; and net loss was ($0.7) million. All previously reported amounts have been included in "Loss from discontinued operations". Net revenues, gross profit, research and development, and marketing, general and administrative expenses have been restated to exclude amounts relating to Prometheus Products, Inc. Balance sheet data has been restated to exclude amounts relating to Prometheus. (3) 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. (4) 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. $4.7 million of this charge was recorded in cost of sales as an inventory write down, and $64.7 million was recorded as a restructuring cost in operating expenses. An in process research and development charge of $7.8 million was recorded in the third quarter for the acquisition of ethernet switching technology and other assets from Bipolar Integrated Technology. Results of operations include costs of continuing the development of ethernet switching products and related activities from the date of the acquisition on September 3, 1996. (5) Results for the year ended December 31, 1995 include the loss from discontinued operations related to Prometheus Products, Inc. of $22.5 million, purchase price adjustment relating to the finalization of the acquisition of the Company's Canadian networking product operations of $10.6 million, and gain on sale of shares of SiTel Sierra B.V. of $6.7 million. (6) Results for the year ended December 31, 1994 include the operations of the networking business from the date of acquisition, September 2, 1994, and include in process research and development of $12.7 million, settlement of the class action lawsuit of $2.4 million, reversal of restructuring and other charges of $1.6 million and a loss from discontinued operations of Prometheus of $0.7 million. (7) Results for the year ended December 31, 1993 include restructuring and other charges of $15.6 million. (8) Share and per share information has been adjusted for the 2 for 1 stock split effective October 5, 1995.
Quarterly Comparisons The following tables set forth consolidated statements of operations for each of the Company's last eight quarters and the percentage of the Company's net revenues represented by each line item reflected in each consolidated statement of operations. 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)
Year Ended December 31, 1997 (1) Year Ended December 31, 1996 (2) ----------------------------------------- ------------------------------------------- Fourth Third Second First Fourth Third Second First STATEMENT OF OPERATIONS DATA: Net revenues $ 31,713 $ 27,815 $ 34,064 $ 33,574 $ 36,227 $ 34,726 $ 53,022 $ 64,396 ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit 24,170 21,757 24,451 23,723 21,679 13,790 27,665 30,289 Research and development 6,395 5,136 5,309 6,040 5,979 7,080 7,885 8,406 In process research and development - - - - - 7,783 - - Marketing, general and administrative 5,013 5,735 6,614 6,301 5,778 7,406 8,842 8,665 Restructuring and other charges (1,383) - - - - 64,670 - - ---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations 14,145 10,886 12,528 11,382 9,922 (73,149) 10,938 13,218 ========== ======== ========== ========== ========== ========== ========== ========== Net income (loss) $ 9,556 $ 7,291 $ 8,931 $ 8,480 $ 9,120 $ (73,294) $ 7,198 $ 8,826 ========== ======== ========== ========== ========== ========== ========== ========== Basic net income (loss) per share $ 0.30 $ 0.23 $ 0.29 $ 0.28 $ 0.30 $ (2.46) $ 0.25 $ 0.30 Common shares outstanding (3) 31,334 31,146 30,918 30,774 30,509 29,782 29,355 29,231 Diluted net income (loss) per share $ 0.29 $ 0.22 $ 0.28 $ 0.27 $ 0.29 $ (2.46) $ 0.24 $ 0.29 Common shares outstanding assuming dilution 33,111 33,188 32,374 31,895 31,655 29,782 30,578 30,790 As a Percentage of Net Revenues (Unaudited) Year Ended December 31, 1997 (1) Year Ended December 31, 1996 (2) ---------------------------------------- ------------------------------------------ Fourth Third Second First Fourth Third Second First Net revenues 100% 100% 100% 100% 100% 100% 100% 100% Gross profit 76% 78% 72% 71% 60% 40% 52% 47% Research and development 20% 18% 16% 18% 17% 20% 15% 13% In process research and development - - - - - 22% - - Marketing, general and administrative 16% 21% 19% 19% 16% 21% 17% 14% Restructuring and other charges (4%) - - - - 186% - - Income (loss) from operations 45% 39% 37% 34% 27% (211%) 21% 21% (1) Results for the year ended December 31, 1997 include a restructuring charge recovery of $1.4 million from the reversal of the excess accrued restructure charge from the conclusion of the restructuring in the fourth quarter. (2) Results for the year ended December 31, 1996 include a restructuring charge of $69.4 million in the third quarter related to the Company's exit from the modem chipset business and the associated restructuring of its non-networking operations. $4.7 million of this charge was recorded in cost of sales as an inventory write down, and $64.7 million was recorded as a restructuring cost in operating expenses. An in process research and development charge of $7.8 million was recorded in the third quarter for the acquisition of ethernet switching technology and other assets from Bit, Inc. Results of operations include costs of continuing the development of ethernet switching products and related activities from the date of the acquisition on September 3, 1996. (3) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic net income (loss) per share.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Description of Forward-looking Statements. This portion of this Annual Report contains forward-looking statements relating to revenues, gross margins, expenditures on research and development, and sufficiency of capital resources. Actual results may differ from those projected in the forward-looking statements for a number of reasons, including those described in "Risk Factors." General. PMC designs, develops, markets and supports high-performance silicon solutions for advanced communications markets. The Company's products are used in the broadband communications infrastructure and high bandwidth networks. In the third quarter of 1996, the Company announced its decision to exit from the personal computer modem chipset business, to restructure its non-networking operations and to focus on its networking semiconductor businesses. Consistent with this strategy, the Company acquired, in the third quarter of 1996, ethernet switching assets, intellectual property and certain other assets from Bipolar Integrated Technology ("Bit"). In the fourth quarter of 1995, the Company discontinued operations of Prometheus Products Inc. ("Prometheus"). Results of Operations Net Revenues ($000,000)
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Networking products $85.6 36% $62.8 60% $39.2 User interface - other $35.7 (46%) $66.6 (28%) $92.8 User interface - modem $5.9 (90%) $59.0 4% $56.7 ----------- ---------- --------- Total net revenues $127.2 (32%) $188.4 - $188.7 =========== ========== =========
Net revenues declined 32% in 1997 as a result of the Company's third quarter 1996 strategic decision to exit the modem chipset business, restructure its other non-networking business and to focus on its networking semiconductor business. Networking product revenue grew 36% in 1997 compared to 1996 due to the continued strong demand for the broadband networking equipment in which the Company's products are used. Industry analysts expect sales of networking equipment to increase in the coming year. The Company expects that if such increase occurs, the Company's revenues from networking products will increase. Revenue from products classified as User Interface - other, which include custom, graphic, and other semiconductors declined 46% in 1997 from 1996 levels. The Company is supporting these products for its existing customers, but has decided not to do any follow on products of this type. Further substantial declines are expected in User Interface-other revenue in the coming year. The disposal of the Company's modem chipset inventories and the exit from that business was completed in 1997. No future revenues are expected from that business. Net revenues in 1996 remained approximately at the same level as 1995 revenues. Substantial growth in sales of networking products, and a small increase in modem chipset product sales, were offset by declines in other user interface products, which were primarily due to lower sales of graphic chip products. The small increase in 1996 modem chipset sales over 1995 resulted from increased unit sales of both V.34 and V.32 modem products in the first half of the year, while in the second half of the year the Company experienced declining unit sales and substantially lower prices for modem products. Gross Profit ($000,000)
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Networking products $68.9 48% $46.4 58% $29.3 Percentage of net networking revenues 80% 74% 75% User interface products $25.2 (46%) $47.0 (25%) $62.3 Percentage of net user interface revenues 61% 37% 42% Total gross profit $94.1 1% $93.4 2% $91.6 Percentage of net revenues 74% 50% 49%
Total gross profit increased from 1996 to 1997 as a result of increased sales of higher gross margin networking products offsetting the decline in gross profit due to lower revenues from the Company's user interface products and due to lower wafer costs in 1997 than in the prior year. User interface gross profit in 1996 was reduced by a $4.7 million inventory charge related to the Company's decision to exit the modem chipset business. Gross profits on user interface products in 1997, which includes the gross profits from modem chipset sales, as well as the gross profits on sales from other non-networking products, were higher than historical levels due to the sales and cost of sales of modem chipset inventories. In establishing its reserve for the write down of its modem chipset inventories, the Company took into account both the costs of completion and disposal in revaluing the inventory to the lower of cost or market. The higher amount of gross profit recognized during the first half of 1997 and included in the 1997 results represents the amount necessary to cover the relatively higher period expenses incurred relating to the disposal effort. There was no operating profit recognized from the sale of modem chipset products. Total gross profit increased from 1995 to 1996 as a result of increased sales of higher gross margin networking products as a percentage of total net revenues. The Company expects that networking gross profits as a percentage of networking net revenues may experience a decline if anticipated decreases in average selling prices of existing networking products are not offset by commensurate reductions in production costs, or by an offsetting increase in gross profit contribution from new higher gross margin networking products. Other Costs and Expenses ($000,000)
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Research and development $22.9 (22%) $29.4 26% $23.4 Percentage of net revenues 18% 16% 12% In-process research & development - - $7.8 - - Percentage of net revenues - 4% - Marketing, general & administrative $23.7 (23%) $30.7 2% $30.1 Percentage of net revenues 19% 16% 16% Purchase price adjustment-compensation - - - - $10.6 Percentage of net revenues - - 6% Restructure costs $(1.4) - $64.7 - - Percentage of net revenues (1%) 34% -
Research and Development. Research and development expenses decreased in 1997 primarily due to the discontinuance of spending on user interface products, partially offset by increased spending on networking products. As a percentage of net revenues, research and development spending on the company's networking products is higher in all periods than research and development spending on the Company's user interface products. The increase in research and development spending in 1996 over 1995 was primarily due to greater spending on the development of networking products. The Company expects research and development costs to increase in the future with all spending related to its networking products. In Process Research and Development. In process research and development charges incurred in 1996 are a result of the acquisition of the ethernet switching and other assets from Bit. Marketing, General, and Administrative. Marketing, general and administrative expenses declined primarily due to the reduction in expenses and personnel resulting from the third quarter 1996 restructuring of the non-networking operations. The increase in these expenses as a percentage of net sales reflects increased spending on networking products and a decline in total net revenues. Spending on marketing, general and administrative expenses did not change substantially between 1995 and 1996 as increases related to its networking products, primarily related to increased staffing, were offset by declines in these expenses and the headcount of user interface groups due to the restructuring. Purchase Price Adjustment. In completing the acquisition of the networking business in the third quarter of 1995, the Company recorded a $10.6 million charge relating to the compensation expense associated with the purchase price adjustment shares reserved for issuance to the employee shareholders of the acquired business. The $9.1 million balance of the acquisition cost was allocated to goodwill. (See Note 2 to Consolidated Financial Statements.) Restructure and Other Costs. 1996 restructure costs are part of a $69.4 million charge recorded in connection with the Company's decision to exit from the modem chipset business and the associated restructuring of the Company's other non-networking product operations. All material aspects of the restructuring were completed by the end of 1997 when the Company recorded a recovery of $1.4 million from the reversal of the excess accrued restructure charge. (See Note 11 to Consolidated Financial Statements). Year 2000 Computer Systems Issues. The Company is aware of the issues associated with the limitations of the programming code in many existing computer systems, whereby the computer systems may not properly recognize date sensitive information as the next millennium (year 2000) approaches. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company uses commercially available standard software for its critical operating and financial applications. One vendor of software used by the Company is still modifying its code to become year 2000 compliant and anticipates completion early in 1998. If the vendor does not successfully modify its code the Company could be forced to purchase a competing system that is year 2000 compliant and incur installation and other costs. The installation of a replacement system for those applications that are currently not year 2000 compliant is not anticipated to be material to the Company's financial position or results of operations in any given year. The Company's suppliers and customers are generally much larger organizations than the Company with a greater number of suppliers and customers of their own. The Company believes that many of its suppliers and customers have not completed their own systems modification to be year 2000 compliant. The failure of significant suppliers or customers of the Company to become year 2000 compliant could have material adverse consequences to the Company. Those consequences could include the inability to receive product in a timely manner or lost sales opportunities either of which could result in a material decline in the Company's revenues and profits. Interest Income, Net ($000,000) 1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Interest income (expense), net $1.0 54% $0.7 37% $0.5 Percentage of net revenues 0.8% 0.4% 0.3% Interest Income, net. Interest income increased in 1997 and 1996 due to higher cash balances available to invest and earn interest. Interest expense increased in 1997 and 1996 due principally to increased debt associated with capital lease obligations. Gain on sale of SiTel Sierra. During the fourth quarter of 1995, the Company sold its interest in SiTel-Sierra, B.V. to National Semiconductor Corporation for $7.0 million in cash. This transaction resulted in a pre-tax gain of $6.7 million. The Company acquired its shares of SiTel-Sierra, B.V., a joint venture with TriTech Microelectronics Pte. Ltd. of Singapore, in 1994 in exchange for the contribution of a license to certain technology owned by the Company and certain assets of Sierra Semiconductor B.V, the Company's subsidiary. Provision for Income Taxes. The 1997 income tax provision reflects taxes provided for the Company's foreign operations which are primarily in Canada. U.S. taxes for 1997 were eliminated by tax losses realized from the Company's 1996 restructuring. The 1996 income tax rate reflects the effect of a nondeductible $7.8 million charge for the purchase of in-process research and development relating to the Bit acquisition and taxes on foreign operations. The 1996 U.S. tax provision was reduced by the utilization of net operating losses and tax credit carry forwards. The 1996 modem chipset business restructure charge of $69.4 million did not result in a tax benefit because of the uncertainty of future U.S. income as required by Statement of Financial Accounting Standards No. 109. The 1995 income tax provision reflects the effect of a nondeductible $10.6 million charge for the purchase price adjustment of the Company's Canadian networking business Discontinued Operations. During the fourth quarter of 1995, the Company and its Board of Directors reached a decision to offer Prometheus for sale and, as a result, it was reported as a discontinued operation in the Company's consolidated financial statements. The Company recorded a $17.9 million charge to discontinued operations to write down the assets and accrue additional liabilities including a provision for future losses from operations. The effort to sell Prometheus was not successful and the Company has subsequently completed the closure of Prometheus. Hardware and technical support functions related to product warranty support on the installed base of products previously sold were carried out in 1996 and 1997 with costs recorded against the discontinued operations provision established in 1995. Liquidity and Capital Resources. The Company's cash and cash equivalents and short term investments increased from $42.1 million at the end of 1996 to $69.2 million at the end of 1997. During 1997 the Company's operating activities provided $39.0 million in cash which included $34.3 million in net income and $9.2 million in depreciation and amortization as well as the working capital impact of completing the restructuring. Investing activities included $8.2 million in purchases of new plant and equipment during 1997 and proceeds from the disposal of assets, most of which were related to the non-networking business, of $7.6 million. The Company increased its short term investments by $34.3 million during the year. The Company used a net $14.4 million in cash during 1997 to decrease its debt and capital lease obligations. Proceeds from the issuance of common stock, principally under the Company's stock option and purchase plans, totaled $6.2 million. As at December 31, 1997, the Company's principal sources of liquidity included cash and cash equivalents and short-term investments of $69.2 million. In the fourth quarter of 1996, as a result of the restructure charge, the Company's line of credit agreement with a bank was renegotiated to allow the Company to borrow up to $10 million under the line of credit, provided that each borrowing is fully secured by cash. There were no amounts outstanding under the line of credit at the end of either 1996 or 1997. The Company cannot sell, transfer, assign, mortgage, pledge, lease, grant a security interest or encumber any of its assets without the bank's prior written consent. The completion of the restructuring in the fourth quarter of 1997 has resulted in the Company being able to negotiate with a number of banks to obtain a new line of credit. The Company expects that a less restrictive line will be available in 1998 to replace the current line of credit which expires March 31, 1998. The Company has wafer supply agreements with two independent foundries that together supply substantially all of the Company's products and include deposits made to secure access to wafer fabrication capacity. One of those supply agreements was amended in the fourth quarter of 1996 while the other was rewritten in the fourth quarter of 1996 and amended in the third quarter of 1997. At December 31, 1997 and 1996, the Company had $27.1 million in deposits with those foundries and was in compliance with its foundry agreements. Although there are no minimum unit volume requirements, the Company is obligated under one of the foundry 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. Non-compliance with the terms of the agreements may be cause for termination of the agreement by either party. The Company purchased $13.2 million from its foundry suppliers during 1997 compared to $46.1 million under agreements in existence in 1996. Those amounts may or may not be indicative of any future period since wafers are sold 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 able to receive a portion of the deposits provided to the foundries based on the annual purchases from those foundries as compared to the target levels in the agreements. Based on 1997 purchases the Company is expected to receive a $4.0 million refund from one of the foundries in the first quarter of 1998. If the Company does not receive the balance of its deposits back during the course of the agreements, then the deposits will be returned to the Company at the termination of the agreements. The Company believes that existing sources of liquidity and anticipated funds from operations will satisfy the Company's projected working capital and capital expenditure requirements through the end of 1998. The Company expects to purchase or arrange capital leases for approximately $21 million of new capital expenditures during 1998. In 1997 actual capital expenditures and capital leases totaled $12 million. No additional deposits to secure foundry capacity are expected in 1998. The Company's future capital requirements will depend on many factors, including, among others, product development, deposits for additional wafer fabrication capacity, and acquisitions of complementary businesses, products or technologies. To the extent that existing resources and funds generated by future earnings are insufficient to fund the Company's operations, the Company may need to raise additional funds through public or private debt or equity financing. If additional funds are raised through the issuance of equity securities, the percentage ownership of current stockholders will be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. No assurance can be given that additional financing will be available or that, if available, it can be obtained on terms favorable to the Company and its stockholders. If adequate funds are not available, the Company may be required to delay, limit or eliminate some or all of its proposed operations which could have a material adverse impact on the Company. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Disclosures under this item are not required for the current fiscal year. 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. PMC-Sierra, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Consolidated Financial Statements Included in Item 8: Page Report of Deloitte & Touche, Independent Auditors...................... -- Report of Ernst & Young LLP, Independent Auditors...................... -- Consolidated Balance Sheets at December 31, 1997 and 1996.............. -- Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997........................ -- Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1997.............. -- Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997........................ -- Notes to Consolidated Financial Statements............................. -- Schedules for each of the three years in the period ended December 31, 1997 included in Item 14 (d): II Valuation and Qualifying Accounts.................................. -- 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. Report of Deloitte & Touche, Independent Auditors The Board of Directors and Stockholders of PMC-Sierra, Inc. We have audited the accompanying consolidated balance sheet of PMC-Sierra, Inc. as of December 31, 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended December 31, 1997 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides 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 the Company as at December 31, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. 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 DELOITTE & TOUCHE Vancouver, British Columbia January 22, 1998 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders of PMC-Sierra, Inc. (formerly Sierra Semiconductor Corporation) We have audited the accompanying consolidated balance sheet of PMC-Sierra, Inc. (formerly Sierra Semiconductor Corporation) as of December 31, 1996 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the index at Item 14(a). These 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. 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. (formerly Sierra Semiconductor Corporation) as of December 31, 1996 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP ERNST & YOUNG LLP San Jose, California January 22, 1997 PMC-Sierra, Inc. (Formerly Sierra Semiconductor Corporation) CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, --------------------------- 1997 1996 ASSETS: Current assets: Cash and cash equivalents $ 27,906 $ 35,038 Short-term investments 41,334 7,024 Accounts receivable, net of allowance for doubtful accounts of $1,070 and $842 in 1997 and 1996, respectively (including $469 and $3,662 due from related parties in 1997 and 1996, respectively, see Note 9) 15,103 13,907 Inventories 3,199 9,232 Prepaid expenses and other current assets 1,958 3,104 Short-term deposits for wafer fabrication capacity 4,000 - ----------- ----------- Total current assets 93,500 68,305 Property and equipment, net 19,699 16,678 Goodwill and other intangible assets, net of accumulated amortization of $3,668 ($2,305 in 1996) 8,635 10,188 Investments and other assets 4,424 7,623 Deposits for wafer fabrication capacity 23,120 27,120 ----------- ----------- $ 149,378 $ 129,914 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 7,421 $ 9,648 Accrued liabilities 13,751 9,546 Accrued income taxes 8,780 4,050 Accrued restructure costs - 16,754 Current portion of obligations under capital leases and long-term debt 4,652 6,269 Net liabilities of discontinued operations 301 1,600 ----------- ----------- Total current liabilities 34,905 47,867 Deferred income taxes 4,023 2,741 Noncurrent obligations under capital leases and long-term debt 9,092 18,368 Commitments and contingencies (Note 6) - - Special shares convertible into PMC common stock 1,618 shares in 1997 (1,937 shares in 1996) 10,793 12,494 Shareholders' equity: Preferred stock, par value $0.001; 5,000 shares authorized, - - none outstanding Common stock, par value $0.001; 50,000 shares authorized; 30 135,320 29,750 issued and outstanding in 1997 (28,647 in 1996) Additional paid in captial 143,153 - Accumulated deficit (52,618) (86,876) ----------- ----------- Total shareholders' equity 90,565 48,444 ----------- ----------- $ 149,378 $ 129,914 =========== =========== See notes to consolidated financial statements.
PMC-Sierra, Inc. (Formerly Sierra Semiconductor Corporation) CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except for per share amounts)
Year Ended December 31, ------------------------------------------------- 1997 1996 1995 Net revenues (1) $ 127,166 $ 188,371 $ 188,724 Cost of revenues 33,065 94,948 97,110 ------------ ------------ ----------- Gross profit 94,101 93,423 91,614 Other costs and expenses: Research and development 22,880 29,350 23,428 Marketing, general and administrative 23,663 30,691 30,051 In process research and development - 7,783 - Purchase price adjustment - compensation - - 10,624 Restructure and other costs (1,383) 64,670 - ------------ ------------ ----------- Income (loss) from operations 48,941 (39,071) 27,511 Interest income, net 1,044 679 497 Gain on sale of SiTel Sierra - - 6,700 ------------ ------------ ----------- Income (loss) before provision for income taxes 49,985 (38,392) 34,708 Provision for income taxes 15,727 9,758 10,732 ------------ ------------ ----------- Income (loss) from continuing operations 34,258 (48,150) 23,976 ------------ ------------ ----------- Loss from discontinued operations - - (4,591) Loss on disposal of discontinued operations - - (17,906) ------------ ------------ ----------- Loss from discontinued operations - - (22,497) ------------ ------------ ----------- Net income (loss) $ 34,258 $ (48,150) $ 1,479 ============ ============ =========== Basic net income (loss) per share: from continuing operations $ 1.10 $ (1.62) $ 0.89 from discontinued operations - - (0.83) ------------ ------------ ----------- Net income (loss) $ 1.10 $ (1.62) $ 0.06 ============ ============ =========== Diluted net income (loss) per share: from continuing operations $ 1.05 $ (1.62) $ 0.84 from discontinued operations - - (0.79) ------------ ------------ ----------- Net income (loss) $ 1.05 $ (1.62) $ 0.05 ============ ============ =========== Shares used to calculate: Basic net income (loss) per share 31,043 29,719 27,018 Diluted net income (loss) per share 32,642 29,719 28,620 See notes to consolidated financial statements.
(1) Including $9,221, $25,520 and $46,074 from related parties in 1997, 1996 and 1995 respectively. See Note 9. PMC-Sierra, Inc. (Formerly Sierra Semiconductor Corporation) Consolidated Statement of Shareholders' Equity (in thousands)
Convertible Preferred Stock Common Stock Additional Shareholders' Total -------------------- -------------------- Paid in Accumulated Notes Shareholders' Shares Amount Shares Amount Capital Deficit Receivable Equity Balances at December 31, 1994 11 $ 234 20,913 $ 74,897 $ - $ (40,204) $ (62) $ 34,865 Conversion of convertible preferred stock into common shares (11) (235) 25 235 - - - - Issuance of common shares under stock benefit plans - - 793 3,520 - - - 3,520 Accretion of redeemable convertible preferred stock - 1 - - - (1) - - Sale of common shares, net of issuance costs of $1,484 - - 1,150 19,216 - - - 19,216 Conversion of special shares into common shares - - 3,722 19,906 - - - 19,906 Tax benefit of stock option transactions - - - 1,984 - - - 1,984 Payment of shareholders' notes receivable - - - - - - 30 30 Net income - - - - - 1,479 - 1,479 --------- ----------- -------- ----------- ---------- ----------- ----------- ----------- Balances at December 31, 1995 - - 26,603 119,758 - (38,726) (32) 81,000 Issuance of common shares under stock benefit plans - - 604 3,072 - - - 3,072 Issuance of common stock to capitalize PMC-Portland and acquire assets of Bit, Inc. - - 804 6,788 - - - 6,788 Adjustment to prior year common stock issuance costs - - - 38 - - - 38 Conversion of special shares into common shares - - 636 3,036 - - - 3,036 Tax benefit of stock option transactions - - - 2,628 - - - 2,628 Payment of shareholders' notes receivable - - - - - - 32 32 Net loss - - - - - (48,150) - (48,150) --------- ----------- -------- ----------- ---------- ----------- ----------- ----------- Balances at December 31, 1996 - - 28,647 135,320 - (86,876) - 48,444 Conversion of special shares into common shares - - 319 6,162 - - - 6,162 Issuance of common shares under stock benefit plans - - 784 1,701 - - - 1,701 Reclassification on reincorporation - - - (143,153) 143,153 - - - Net income - - - - - 34,258 - 34,258 --------- ----------- -------- ----------- ---------- ----------- ----------- ----------- Balances at December 31, 1997 - $ - 29,750 $ 30 $ 143,153 $ (52,618) $ - $ 90,565 ========= =========== ======== =========== ========== =========== =========== =========== See notes to consolidated financial statements.
PMC-Sierra, Inc. (Formerly Sierra Semiconductor Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in cash and cash equivalents (in thousands)
Year Ended December 31, --------------------------------------------------- 1997 1996 1995 Cash flows from operating activities: Net income (loss) $ 34,258 $ (48,150) $ 1,479 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 9,150 10,922 8,888 Loss on disposal of equipment 258 - - Acquisition of in process technology and development from purchase of net assets of Bit, Inc. - 7,783 - Compensation expense from purchase price adjustment of PMC-Sierra Ltd. acquisition - - 10,624 Loss on discontinued operations of Prometheus Products, Inc. - - 17,906 Loss (recovery) related to restructure reserve (Note 11): Accounts receivable - 5,047 - Inventory 1,371 23,000 - Prepaid expenses - 1,061 - Impairment of long-lived assets (942) 16,425 - Impairment of goodwill of Holland operations - 2,459 - Accruals for restructure related costs: Severance and related costs 376 6,985 - Purchase commitments and other accruals (2,340) 9,002 - Excess facilities costs (496) 3,411 - Costs for closure of European subsidiaries 648 1,980 - Changes in assets and liabilities Accounts receivable (1,196) 20,023 (16,855) Inventories 4,662 (17,389) (3,772) Prepaid expenses and other 1,146 (711) (11,390) Accounts payable and accrued liabilities 8,380 (15,109) 17,801 Accrued restructuring costs (14,942) (4,624) - Net assets/liabilities associated with discontinued operations (1,299) (2,496) (4,733) --------------------------------------------------- Net cash provided by operating activities 39,034 19,619 19,948 --------------------------------------------------- Cash flows from investing activities: Proceeds from sales/maturities of short-term investments 24,877 15,984 3,188 Purchases of short-term investments (59,187) (19,004) (3,984) Investments in other companies (3,000) (3,162) (1,430) Decrease in investments and other - - 150 Purchase of Bit, Inc. assets, net of cash acquired - 71 - Proceeds from sale of equipment and capacity assets 7,631 - - Purchases of plant and equipment (8,221) (4,000) (10,909) --------------------------------------------------- Net cash used in investing activities (37,900) (10,111) (12,985) --------------------------------------------------- Cash flows from financing activities: Proceeds from payments of notes receivable - 32 30 Proceeds from issuance of long-term debt - 353 2,592 Repayment of notes payable and long-term debt (2,640) (17,588) (1,794) Proceeds from sale/leaseback of captial equipment 1,107 - - Principal payments under capital lease obligations (12,895) (2,310) (1,217) Proceeds from issuance of common stock 6,162 3,110 22,737 --------------------------------------------------- Net cash provided by (used in) financing activities (8,266) (16,403) 22,348 --------------------------------------------------- Net increase (decrease) in cash and cash equivalents (7,132) (6,895) 29,311 Cash and cash equivalents, beginning of the year 35,038 41,933 12,622 --------------------------------------------------- Cash and cash equivalents, end of the year $ 27,906 $ 35,038 $ 41,933 =================================================== See notes to consolidated financial statements.
PMC SIERRA, INC. (Formerly Sierra Semiconductor Corporation) Consolidated Statement of Cash Flows (in thousands)
Year Ended December 31, -------------------------------------------------- 1997 1996 1995 Supplemental disclosures of cash flow information: Cash paid for interest $ 1,954 $ 1,278 $ 926 Cash paid for income taxes 7,227 11,820 1,851 Supplemental disclosures of noncash investing and financing activities: Conversion of convertible preferred stock into common stock - - 235 Capital lease obligations incurred for purchase of property and equipment 3,536 16,145 4,069 Issuance of PMC special shares to be exchanged for common shares - - 18,935 Conversion of PMC special shares into common stock 1,701 3,036 19,906 Short-term debt obligations incurred for wafer fabrication capital deposits - - 30,240 Cancellation of short-term debt obligations incurred for wafer fabrication capacity - (15,120) - During the years ended December 31, 1997, 1996 and 1995, the Company retired assets with an original cost of $11,091, $10,377, and $2,851, respectively, and related accumulated depreciation of $10,270, $9,858, and $2,839, respectively. See notes to consolidated financial statements.
PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 NOTE 1. Summary of Significant Accounting Policies Name Change and Delaware Reincorporation. The Company changed its name from Sierra Semiconductor Corporation to PMC-Sierra, Inc. on June 13, 1997 and reincorporated in Delaware on July 10, 1997. Basis of presentation. The accompanying consolidated financial statements include the accounts of PMC-Sierra, Inc. (formerly Sierra Semiconductor Corporation) ("the Company" or "PMC") and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated from the consolidated financial statements. The Company's fiscal year ends on the Sunday closest to December 31. For ease of presentation, December 31 has been utilized as the fiscal year end for all financial statement captions. Fiscal years 1997, 1996 and 1995 each consisted of 52 weeks. 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 as of the dates and for the periods presented. 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 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. The Company maintains its cash, cash equivalents and short-term investments in various financial instruments with various banks and investment banking institutions. The diversification of risk is consistent with Company policy to preserve the principal and maintain liquidity. 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 or losses on available-for-sale securities have not been included in equity as such amounts are immaterial. Realized gains and losses judged to be other-than-temporary on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 Investments at December 31, 1997 mature through February 1998 and are classified as follows (in thousands):
Gross Unrealized Amortized -------------------------- Estimated Cost Gains Losses Fair Value Held-to-maturity investments Daily demand investments $ 22,501 $ - $ - $ 22,501 Commercial paper 44,345 66 - 44,411 ------------ ------------ ------------- ------------ Total Investments $ 66,846 $ 66 $ - $ 66,912 ============ ============ ============= ============ Total included in cash and cash equivalents $ 25,512 $ 2 $ - $ 25,514 Total included in short-term investments 41,334 64 - 41,398 ------------ ------------ ------------- ------------ Total Investments $ 66,846 $ 66 $ - $ 66,912 ============ ============ ============= ============
Investments at December 31, 1996 matured through February 1997 and were classified as follows (in thousands):
Gross Unrealized Amortized -------------------------- Estimated Cost Gains Losses Fair Value Held-to-maturity investments Banker's acceptances $ 1,711 $ - $ - $ 1,711 Commercial paper 21,470 2 - 21,472 ------------ ------------ ------------- ------------ Total Investments $ 23,181 $ 2 $ - $ 23,183 ============ ============ ============= ============ Total included in cash and cash equivalents $ 16,157 $ 1 $ - $ 16,158 Total included in short-term investments 7,024 1 - 7,025 ------------ ------------ ------------- ------------ Total Investments $ 23,181 $ 2 $ - $ 23,183 ============ ============ ============= ============
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 (in thousands): December 31, ------------------------------ 1997 1996 Work-in-progress $ 2,316 $ 3,335 Finished goods 883 5,897 -------------- ------------ $ 3,199 $ 9,232 ============== ============ Property and equipment, net. Depreciation and amortization of property and equipment are provided on 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. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 The components of property and equipment are as follows (in thousands): December 31, ------------------------------ 1997 1996 Machinery and equipment $ 31,353 $ 39,854 Leasehold improvements 2,006 1,117 Furniture and fixtures 1,666 1,890 -------------- -------------- Total cost 35,025 42,861 Accumulated depreciation (15,326) (26,183) -------------- -------------- $ 19,699 $ 16,678 ============== ============== Goodwill and other intangible assets. Goodwill associated with acquisitions is being amortized on a straight-line basis over ten years and is carried at a net book value of $7.0 million and $7.9 million at December 31, 1997 and 1996, respectively. Purchased technology is being amortized on a straight-line basis over seven years. Among other considerations, to assess impairment, the Company periodically estimates undiscounted future cash flows to determine that they exceed the unamortized balance of the related intangible asset. Deposits for wafer fabrication capacity. The Company has wafer supply agreements with two independent foundries that together supply substantially all of the Company's products and include deposits made to secure access to wafer fabrication capacity. One of those supply agreements was amended in the fourth quarter of 1996 while the other was rewritten in the fourth quarter of 1996 and amended in the third quarter of 1997. At December 31, 1997, the Company had $27.1 million in deposits with those foundries and was in compliance with its foundry agreements. Although there are no minimum unit volume requirements, the Company is obligated under one of the foundry 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. Non-compliance with the terms of the agreements may be cause for termination of the agreement by either party. The Company purchased $13.2 million from its foundry suppliers during 1997 compared to $46.1 million under agreements in existence in 1996. Those amounts may or may not be indicative of any future period since wafers are sold 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 able to receive a portion of the deposits provided to the foundries based on the annual purchases from those foundries as compared to the target levels in the agreements. Based on 1997 purchases, the Company expects to receive a $4.0 million refund from one of the foundries in the first quarter of 1998. If the Company does not receive the balance of its deposits back during the course of the agreements, then the deposits will be returned to the Company at the termination of the agreements. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 Accrued liabilities. The components of accrued liabilities are as follows (in thousands): December 31, ------------------------------ 1997 1996 Accrued compensation and benefits $ 4,590 $ 3,846 Accrued royalties 521 1,628 Other accrued liabilities 8,640 4,072 -------------- -------------- $ 13,751 $ 9,546 ============== ============== Foreign currency translation. For all foreign operations, the U.S. dollar is the functional currency. Assets and liabilities are remeasured at the year-end exchange rates. Statements of operations are remeasured at the average exchange rates during the year. Gains and losses from foreign currency remeasurement are included in interest income and other, net. The Company may enter into foreign currency forward exchange contracts (forward contracts) to reduce the impact of currency fluctuations on monetary asset and liability positions of its foreign subsidiaries. At December 31, 1997 and 1996, the Company had no outstanding forward contracts. Concentration of credit risk. The Company believes that the concentration of credit risk in its trade receivables with respect to the high-technology industry 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. Revenue recognition. Net revenues are stated net of discounts and allowances. Revenue is recognized at the time of shipment to the customer. In addition, reserves are provided currently for estimated product returns and price protection that may occur under Company programs. At December 31, 1997 and 1996, this reserve was approximately $2 million. In conjunction with the 1996 restructure reserve, the Company accrued $5 million which included a provision for price protection and product returns. Such reserves were not material at December 31, 1995. Interest income, net. The components of interest income, net are as follows (in thousands): Year Ended December 31, ----------------------------------------------- 1997 1996 1995 Interest income $ 3,146 $ 1,840 $ 1,244 Interest expense (1,949) (1,278) (892) Other (153) 117 145 --------------- -------------- -------------- $ 1,044 $ 679 $ 497 =============== ============== ============== Net income (loss) per common share. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.128, "Earnings per Share" (SFAS 128), which established new standards for computing and presenting earnings per share effective for fiscal years ending after December 15, 1997. With SFAS 128, primary earnings per share is replaced by basic earnings per share which is computed by dividing income available to common shareholders by the weighted average number of shares outstanding for the period. In addition, SFAS 128 requires the presentation of diluted earnings per share which includes the potential dilution that could occur if common stock equivalents or other potentially dilutive securities were exercised or converted into common stock. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive, except pursuant to the Securities and Exchange Commission Staff Accounting Bulletins. The PMC-Sierra Ltd. Special Shares have been included in the calculation of basic net income (loss) per share. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 Income Taxes. Taxes are reported under Statement of Financial Accounting Standards No. 109 and, accordingly, deferred income taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes. Stock Compensation. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," (SFAS 123) permits, but does not require, companies to recognize compensation expense for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation expense for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant or modification over the amount an employee must pay to acquire the stock. As prescribed by SFAS 123, Note 7 to the Consolidated Financial Statements contains a summary of the proforma effects to reported net income and earnings per share for 1997, 1996 and 1995, had the Company elected to recognize compensation expense based on the fair value of the options granted at the grant date. The effects of applying SFAS 123 proforma disclosures may not be likely to be representative of the effects on reported net income for future years. NOTE 2. Acquisitions, Divestitures and Investments in Other Companies Bipolar Integrated Technology, Inc. During the third quarter of 1996, the Company acquired the ethernet switching assets, intellectual property, and certain other assets of Bipolar Integrated Technology, Inc. ("Bit") in exchange for shares of PMC common stock and other consideration. The aggregate value of this transaction was approximately $8.1 million, which includes acquisition costs incurred by the Company. The assets of Bit were acquired in exchange for 804,407 shares of PMC common stock with a value of approximately $6.8 million (based on the market value on the issuance date of PMC common stock issued subject to restrictions on transfer), approximately $0.5 million of net liabilities assumed by the Company's subsidiary, the value of options to purchase common stock of the Company, forgiveness of principal and interest on loans provided by the Company, and cash. The acquisition resulted in a $7.8 million charge for the purchase of in-process research and development. The remaining $0.3 million of technology assets have been capitalized as long term assets which will be amortized over seven years. Results of operations include the costs of continuing the development of products and related activities acquired from Bit after the closure of the acquisition on September 3, 1996. The proforma effect of combining the Bit transaction with the Company's operations in 1995 and prior to the acquisition in 1996 are not reported separately because they are not considered to be material. I.C. Works, Inc. In order to secure additional access to wafer fabrication capacity, in 1996 the Company acquired $3 million of preferred stock of I.C. Works Inc. ("ICW"), a foundry located in San Jose, California. Under the arrangement with ICW, the Company also provided semiconductor manufacturing equipment to ICW, which it financed through capital leases. In 1996, as a result of the restructuring of non-networking operations, the Company identified that it would not be able to benefit from the arrangement with ICW and included a $6.9 million provision for impairment of these assets in the restructuring charge. In 1997, the Company advanced an additional $3 million to ICW and subsequently, ICW sold substantially all of its assets, including the manufacturing assets contributed by the Company. On settlement of its arrangement with ICW, the Company received proceeds of $4.8 million, resulting in the requirement for an additional provision for impairment of $3.5 million. This additional provision was included in the overall recovery from disposal of excess fixed assets and assets related to capacity commitments of $942,000 (see note 11) recorded on completion of the restructuring. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 SiTel Sierra B.V. During the fourth quarter of 1995, the Company sold its interest in SiTel-Sierra B.V. to National Semiconductor Corporation. Proceeds from the sale of this investment of $7 million in cash were received during the first quarter of 1996. This transaction resulted in a pre-tax gain of $6.7 million. Sierra Wireless, Inc. On July 7, 1993, the Company and MPR Teltech Ltd. ("MPR") of British Columbia, Canada announced an investment in a new company called Sierra Wireless Inc. (Sierra Wireless). MPR contributed technology licenses in exchange for Sierra Wireless's non-voting preferred stock. In 1993, the Company invested approximately $2.5 million of cash in exchange for shares of Sierra Wireless's non-voting preferred stock. This initial investment was expensed in 1993 as Sierra Wireless was still in its development stage. In 1996, 1995, and 1994, the Company invested an additional approximately $0.2, $1.4, and $2.5 million, respectively, in Sierra Wireless. These investments were capitalized and are being accounted for as an investment in equity shares recorded on the cost basis, since Sierra Wireless is now an operating company. Sierra Wireless has developed and is marketing portable computer modems and modem sub-systems built to Cellular Digital Packet Data (CDPD) performance specifications. Prometheus Products, Inc. Prometheus Products, Inc. ("Prometheus") was acquired in 1994 in exchange for the elimination of accounts receivable owed by Prometheus to the Company, a guaranteed cash payment to the shareholders of Prometheus and future cash payments contingent upon future sales and profits for Prometheus. In 1995, the Company decided to dispose of Prometheus and in 1997, the Company has substantially completed the wind-up (See Note 3). PMC-Sierra On September 2, 1994, the Company acquired voting control of PMC-Sierra, Ltd. (formerly PMC-Sierra, Inc.) ("LTD") of Burnaby, British Columbia, Canada. LTD supplies broadband transmission and networking chip set products for ATM, SONET/SDH and T1/E1 applications. LTD was established in July 1992 by the Company, which invested approximately $4.9 million of cash in exchange for LTD's non-voting preferred stock representing approximately 61% of LTD's securities on a fully diluted basis; MPR Teltech Ltd., a Canadian corporation which contributed assets and technology licenses in exchange for non-voting preferred stock; a venture capital investor, which purchased non-voting preferred stock for cash; and LTD's employees, who purchased voting common stock. The Company acquired voting control of LTD through a recapitalization of LTD. In the recapitalization, the Company exchanged its LTD non-voting preferred stock for LTD's voting Ordinary A Shares and LTD's other shareholders exchanged their preferred stock and common stock for LTD A Special Shares. Each LTD A Special Share is currently convertible at the holder's option for two shares of the Company's Common Stock. The Company reserved 5,000,000 shares of its Common Stock for issuance in connection with requests to redeem LTD Special Shares then outstanding or issuable upon exercise. The acquisition of voting control through LTD's recapitalization was accounted for as a purchase of the interests of the other shareholders in LTD. Under the terms of the recapitalization agreement, in the third quarter of 1995 the Company adjusted the 1994 purchase price paid to the other LTD shareholders. Accordingly, the minority shareholders received additional consideration through the right to acquire an additional 1,294,722 shares of Common Stock in exchange for LTD B Special Shares. The issuance of these shares is reflected in the Company's accompanying financial statements as a special charge to income of $10.6 million relating to compensation expense in 1995 and an increase in goodwill of $9.1 million. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 The Special Shares of LTD will be classified outside of shareholders' equity until such shares are exchanged for PMC Common Stock. Before the recapitalization, the Company held only non-voting preferred stock in LTD, and accordingly LTD's assets, liabilities and operating results were not consolidated with those of the Company. From the date of the recapitalization, LTD's balance sheet and operating results have been consolidated in the Company's financial statements. NOTE 3. Discontinued Operations On December 28, 1995, the Company's Board of Directors approved a plan to sell or discontinue the operations of Prometheus. The Company purchased Prometheus in the third quarter of 1994, and has operated it as a separate business unit. Accordingly, Prometheus has been treated as a discontinued operation and the Company's results of continuing operations have been reclassified to remove Prometheus' previously reported results. Revenues of Prometheus were $19,018,000 in 1995. The loss from discontinued operations for the year ended December 31, 1995 is net of an income tax benefit of $742,000. The components of net current liabilities (in 000's) of discontinued operations at December 31, 1997 and 1996 are detailed in the table below. December 31, ----------------------- 1997 1996 Accrued liabilities $ (301) $ (753) Guaranteed royalties - (847) ----------- ----------- Net current liabilities of discontinued operations $ (301) $ (1,600) =========== =========== The Company contracted with an investment banking firm in the first quarter of 1996 to engage in efforts to sell Prometheus. The effort to sell Prometheus did not result in a sale and the Company ceased most of its operations in 1996. All costs and operating results of Prometheus for 1997 and 1996 have been recorded against the provision for discontinued operations established in the fourth quarter of 1995. NOTE 4. Line of Credit At December 31, 1997, the Company had available a revolving line of credit with a bank under which the Company may borrow up to $10 million with interest at the bank's certificate of deposit rate plus 3% (annual rate of 8.0% at December 31, 1997). Drawings on the line require a 100% pledge of certificates of deposit. At December 31, 1997 and December 31, 1996, there were no amounts outstanding under the line of credit. The revolving line of credit expires on March 31, 1998. NOTE 5. Obligations Under Capital Leases and Long Term Debt The Company leases furniture and equipment under long-term capital leases, which have been accounted for as installment purchases. Accordingly, capitalized costs of approximately $19,965,000 and $22,737,000, respectively, at December 31, 1997 and 1996 and accumulated amortization of approximately $10,774,000 and $4,710,000, respectively, are included in property and equipment. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 Future minimum lease payments at December 31, 1997 under capital leases are as follows (in thousands): Year ended December 31 : 1998 $ 5,484 1999 4,194 2000 3,378 2001 1,163 2002 - -------------- Total minimum lease payments 14,219 Less amount representing interest (1,281) -------------- Present value of future net minimum lease payments $ 12,938 ============== Long-term debt and obligations under capital leases are as follows (in thousands): December 31, ---------------------- 1997 1996 Obligations under capital leases with interest ranging from 7.71% to 21.48% $ 12,938 $ 19,347 Secured equipment loans, payable in 48 monthly installments with interest ranging from 7.71% to 9.23% - 3,567 Various unsecured notes, payable in various installments with interest rates ranging from 0% to 9% 806 1,004 Bank term debt, payable in 37 monthly installments commencing on December 1, 1994, interest rate at prime + 1.75% (10% per annum at December 31, 1996) - 719 ---------- ---------- 13,744 24,637 Less current portion (4,652) (6,269) ---------- ---------- $ 9,092 $ 18,368 ========== ========== PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 Maturities of unsecured notes at December 31, 1997 are as follows (in thousands): Year ended December 31: 1998 $ 101 1999 101 2000 101 2001 101 2002 101 Thereafter 301 -------------- $ 806 ============== 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 aggregate fair value of the Company's long-term debt and obligations under capital leases at December 31, 1997 and 1996 approximates their carrying value. NOTE 6. Commitments and Contingencies Operating leases. The Company leases its facilities under operating lease agreements, which expire at various dates through April 2006. Total rent expense for the years ended December 31, 1997, 1996, and 1995 was $1.3 million, $2.1 million, and $2.3 million, respectively. Minimum rental commitments under these leases are as follows: Year ended December 31: 1998 $ 1,365 1999 1,328 2000 1,129 2001 1,125 2002 1,080 Thereafter 3,350 -------------- $ 9,377 ============== Supply agreements. The Company's supply agreement with Chartered Semiconductor ("Chartered") expires on November 17, 1999, but certain provisions have been superceded by a wafer capacity agreement which expires in December 2000 whereby Chartered is obligated to supply the Company with a predetermined number of wafers per quarter. Taiwan Semiconductor Manufacturing Corporation ("TSMC") is obligated to provide certain quantities of wafers per year under an agreement which terminates on December 31, 2000. Neither of the agreements have minimum unit volume 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 infringement. 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. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 Risks and Uncertainties. Technological change - the markets for the Company's products are characterized by evolving industry standards, rapid technological change and product obsolescence. The carrying value of the Company's products in inventory may be materially impaired in the future should these changes occur more quickly than the Company anticipated. Wafer capacity agreements - as discussed above, the Company has entered into various agreements to secure future wafer capacity. Should the Company need more capacity or if there is a decline in demand for the Company's products thereby reducing the need for this contracted capacity, estimates related to the carrying value of deposits could materially change. NOTE 7. Shareholders' Equity Authorized. On July 10, 1997, the Company was reincorporated into 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 are 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. Common Stock. At December 31, 1997 and 1996, the Company maintained a reserve of 1,618,000 and 1,937,000 shares, respectively, of common stock to be issued to holders of LTD Special Shares and options to purchase LTD Special Shares. The holders of the Special Shares have the right to exchange one A Special Share for two shares of the Company's common stock, and one B Special Share for 0.54612 share of the Company's common stock. Upon exchange, amounts will be transferred from the LTD Special Shares account to the Company's common stock on the consolidated balance sheet. During 1996, the Company issued a warrant to purchase 25,000 shares of common stock at $9.25 per share to an investment banking firm in settlement for services previously expensed. The warrant expires in August 2000. The Company has adopted a 1987 Incentive Stock Plan, a 1994 Incentive Stock Plan and its wholly owned subsidiary, PMC-Sierra, Inc. (Portland) has adopted a 1996 Stock Option Plan covering grants of options to purchase the Company's Common Stock (the "Plans"). Under the Plans, Incentive Stock Options may be granted to employees and Non Statutory Options may be granted to employees, directors and consultants, to purchase shares of the Company's Common Stock at not less than 100% and 85%, respectively, of the fair value of the stock on the date granted. The options generally expire within five to ten years and vest over four years. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 Option activity under the option plans was as follows:
Weighted Average Options Available Number of Exercise Price For Issuance Shares Per Share Outstanding at December 31, 1994 1,250,852 2,514,304 $4.41 Authorized 1,600,000 - - Granted (weighted average fair value of $5.99 per share) (1,094,800) 1,094,800 $14.16 Exercised - (588,742) $4.56 Expired (809,038) - - Canceled 305,211 (305,211) $6.21 ----------- ----------- Outstanding at December 31, 1995 (1,037,181 options exercisable at a weighted average price of $5.43). 1,252,225 2,715,151 $8.13 Authorized 1,250,000 - - Granted (weighted average fair value of $6.79 per share) (1,403,574) 1,403,574 $14.11 Exercised - (503,825) $4.74 Expired (85,980) - - Canceled 515,878 (515,878) $12.73 ----------- ----------- Outstanding at December 31, 1996 (1,252,874 options exercisable at a weighted average price of $7.44) 1,528,549 3,099,022 $10.63 Authorized 500,000 - - Granted (weighted average fair value of $7.97 per share) (1,426,450) 1,426,450 $17.48 Exercised - (693,450) $7.22 Expired (36,112) - - Canceled 484,216 (484,216) $14.96 ----------- ----------- Outstanding at December 31, 1997 1,050,203 3,347,806 $13.62 =========== ===========
PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 The following table summarizes information concerning options outstanding for the combined option plans at December 31, 1997:
Options Outstanding Options Exercisable ----------------------------------------------- ------------------------------ Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ----------- --------- ----------- -------- $ 0.89 - $ 5.88 618,808 5.92 $ 4.30 596,952 $ 4.33 $ 8.63 - $12.00 629,775 8.25 $10.16 389,076 $ 9.94 $12.13 - $14.25 520,813 9.05 $14.08 6,611 $12.78 $14.38 - $21.25 1,283,264 8.62 $16.22 312,902 $16.92 $22.25 - $32.75 295,146 9.41 $28.36 18,632 $24.55 ------------ ----------- $ 0.89 - $32.75 3,347,806 8.19 $13.62 1,324,173 $ 9.28 ============ ===========
Employee Stock Purchase Plan In 1991, the Company adopted an Employee Stock Purchase Plan (ESPP) under Section 423 of the Internal Revenue Code and reserved 1,060,000 shares of common stock for issuance under the Plan. Under this Plan, qualified employees may authorize payroll deductions of up to 10% of their compensation (as defined) to purchase common stock at 85% of the lower of fair market value at the beginning or end of the related subscription period. During 1997, 1996 and 1995, respectively, there were 105,149, 79,863 and 164,126 shares issued under the Plan at weighted-average prices of $10.40, $8.38 and $3.99 per share. The weighted-average fair value of the 1997, 1996 and 1995 awards was $6.96, $3.78 and $1.47 per share, respectively. As of December 31, 1997, there were 145,054 shares of common stock available for issuance under the purchase plan. 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. Accordingly, the Company does not generally recognize compensation expense for employee stock arrangements, which are granted with exercise prices equal to the fair market value at the date of grant. Proforma 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 which 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: PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 Options ESPP -------------------------- ------------------------- 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- Expected life (years) 2.6 2.2 2.5 1.4 0.5 0.5 Expected volatility 0.7 0.8 0.6 0.8 0.8 0.6 Risk-free interest rate 6.0% 5.7% 6.5% 5.9% 5.3% 5.9% If the computed fair values of 1997, 1996 and 1995 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): 1997 1996 1995 ---- ---- ---- Net income (loss) $ 29,639 $ (54,006) $ 89 Basic net income (loss) per share $ 0.95 $ (1.82) $ - Diluted net income (loss) per share $ 0.92 $ (1.82) $ - The proforma disclosures above include the effect of SFAS 128 relating to the calculation of earnings per share and 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 proforma adjustments, when the calculation will apply to all applicable stock options. NOTE 8. Income Taxes The income tax provisions, calculated under Statement of Financial Accounting Standard No. 109 ("SFAS 109") consist of the following (in thousands):
Year Ended December 31, -------------------------------------------- 1997 1996 1995 Current: Federal $ (1,289) $ 2,109 $ 3,167 State - 42 315 Foreign 13,934 8,844 5,621 -------------- ------------- ------------- 12,645 10,995 9,103 Deferred: Federal 1,671 (1,799) - Foreign 1,411 562 887 -------------- ------------- ------------- 3,082 (1,237) 887 Provision for income taxes 15,727 9,758 9,990 Benefit allocated to loss from discontinued operations - - 742 -------------- ------------- ------------- Provision attributable to continuing operations $ 15,727 $ 9,758 $ 10,732 ============== ============= =============
1997 deferred tax assets include a tax benefit of $2,097,000 related to employee stock option benefits which, when benefited, will reduce current tax liabilities and be credited to common stock. Actual 1996 current tax liabilities have been decreased by $2,628,000 due to employee stock option related tax benefits, which were credited to common stock. A reconciliation between the Company's effective tax rate and the U.S. statutory rate (35% in 1997, 1996 and 1995) is as follows (in thousands): PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995
Year Ended December 31, ----------------------------------------------- 1997 1996 1995 Tax at U.S. Federal statutory rate $ 17,495 $ (14,522) $ 12,148 Net operating losses (utilized) not utilized (4,508) 11,257 (7,079) In-process research and development costs relating to Bit acquisition - 2,724 - Non-deductible charges arising from acquisition of PMC-Sierra, Ltd. - - 3,710 Incremental taxes on foreign earnings 2,258 9,406 1,988 Other 482 893 (35) -------------- --------------- --------------- Provision for income taxes $ 15,727 $ 9,758 $ 10,732 ============== =============== ===============
Pretax income (loss) from foreign operations was $37,391,000 in 1997, $23,044,000 in 1996 and $14,298,000 in 1995. At December 31, 1997, the Company has federal foreign tax credits of $1,002,000 that expire in 1999 and 2000, if not utilized. The Company has $57,478,000 (including $6,409,000 from Bit) of federal net operating losses which will expire by the year 2012. Utilization of the Bit net operating losses is subject to substantial limitation due to ownership change limitations provided by the Internal Revenue Code of 1986. The Company has state research and investment credit carryforwards of $1,881,000 that expire beginning in 2002. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): December 31, ------------------------------ 1997 1996 Deferred tax assets: Net operating loss carryforwards $ 21,206 $ 2,416 Credit carryforwards 2,436 2,436 Inventory valuation 229 4,638 Restructuring and other charges 5,984 27,662 Employee stock option benefits 2,097 - -------------- -------------- Total deferred tax assets 31,952 37,152 Valuation allowance (31,952) (35,353) -------------- -------------- Total net deferred tax assets - 1,799 -------------- -------------- Deferred tax liabilities: Depreciation (3,554) (2,143) Capitalized technology (469) (598) -------------- -------------- Total deferred tax liabilities (4,023) (2,741) -------------- -------------- Total net deferred taxes $ (4,023) $ (942) ============== ============== During 1997, the valuation allowance decreased by approximately $3,401,000 as a result of utilization of net operating losses. During 1996, the valuation allowance increased by approximately $26,424,000. NOTE 9. Related Parties The Company sold $4,730,000, $18,936,000, and $46,074,000 of products in 1997, 1996 and 1995, respectively, to Apple Computer ("Apple"), a company who's former officer is a director of the Company. Outstanding amounts receivable from Apple were $425,000 and $1,733,000 at December 31, 1997 and 1996, respectively. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 The Company also sold $2,555,000 and $6,584,000 of products in 1997 and 1996, to Cisco Systems, Inc. ("Cisco"), a company who's former officer is a director of the Company. Outstanding accounts receivable from Cisco were $14,185 and $1,929,000 as at December 31, 1997 and 1996 respectively. During 1997, a former officer of Northern Telecom Limited ("Nortel") joined as a director of the Company. The Company sold $1,936,000 of products to Nortel in 1997 and outstanding accounts receivable from Nortel were $30,300 as at December 31, 1997. NOTE 10. Segment Information The Company operates in one industry segment, which is the development, production and sale of high performance semiconductor solutions for the advanced communications markets. The Company markets products internationally. The following table presents a summary of sales by geographical region. Year ended December 31, ---------------------------------------------- 1997 1996 1995 North America $ 101,744 $ 105,310 $ 126,314 Europe and Middle East 11,430 23,684 23,877 Asia 13,693 59,377 38,533 Other 299 - - --------------- -------------- -------------- $ 127,166 $ 188,371 $ 188,724 =============== ============== ============== SCI Systems, Inc. an electronic manufacturing service provider for a number of user interface and networking end customers, accounted for 18% of the Company's 1997 sales and less than 10% for 1996 and 1995. In 1997, 1996 and 1995, sales of user interface products to Apple Computer accounted for 4%, 10% and 24%, respectively, of the Company's net revenues. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 The Company conducts operations in the United States, Canada and other geographical segments. Net revenues, income (loss) from operations and identifiable assets applicable to operations by geographic segments were as follows (in thousands):
Year ended December 31, ---------------------------------------------- 1997 1996 1995 Net revenues: United States $ 41,654 $ 125,493 $ 149,326 Canada 85,512 62,878 39,398 --------------- -------------- -------------- Total net revenues $ 127,166 $ 188,371 $ 188,724 =============== ============== ============== Income (loss) from operations: United States $ 8,388 $ (63,976) $ 10,382 Canada 40,553 24,905 17,129 --------------- -------------- -------------- Total income (loss) from operations $ 48,941 $ (39,071) $ 27,511 =============== ============== ============== Identifiable assets: United States $ 41,962 $ 53,989 Canada 93,904 57,510 Other 13,512 18,415 --------------- -------------- Total assets $ 149,378 $ 129,914 =============== ==============
NOTE 11. Restructuring On September 29, 1996, the Company recorded charges of $69,370,000 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. The charges were recorded in cost of sales as an inventory write down ($4,700,000) and as restructure costs in operating expenses ($64,670,000). 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. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 The elements of the restructuring charge are as follows (in thousands):
Shortfall Accrued Recovery (excess) Restructuring restructuring (Additional in accrued charge Sept. Write-down Actual reserve Dec.31 write down) Actual restructuring 29, 1996 of assets expenditures 1996 of assets expenditures reserve --------------------------------------------------------------------------------------------------- Write down of inventories to net realizable value $ 23,000 $(23,000) $ - $ - $(1,371) $ - $ 1,371 Employee termination benefits 6,985 - (2,411) 4,574 - (4,950) 376 Loss on supplier commitments and write off of prepaid 9,908 (905) (409) 8,594 - (6,254) (2,340) Write down of excess fixed assets and assets related to capacity commitments 16,580 (16,580) - - 942 - (942) Provision for price protection and product returns 5,047 (5,047) - - - - - Excess facility costs 3,411 - (408) 3,003 - (2,507) (496) Write down of goodwill related to Company's B.V. subsidiary in Holland 2,459 (2,459) - - - - - Severance and closure costs related to Europe 1,980 - (1,397) 583 - (1,231) 648 ------------ ----------- ------------ ------------ ----------- ------------ ------------- $ 69,370 $(47,991) $(4,625) $16,754 $ (429) $ (14,942) $ (1,383) ============ =========== ============ ============ =========== ============ =============
As part of this restructuring, the Company ceased manufacturing its modem chipset products in September 1996 and completed the shutdown of the non-networking operations in San Jose by the middle of 1997. As a result of its decision to exit the modem chipset business, the Company identified incremental impairments in the carrying value of its non-networking inventory resulting in a $23,000,000 write down of inventories to net realizable value. In 1997, an additional write down of $1,371,000 was required on disposal of the remaining inventory. The write down has been included in the excess accrued restructure reserve recorded in 1997. Termination benefits for approximately 245 employees associated with the Company's non-networking operations were paid to employees as they reached their termination dates, between November 1996 and July 1997. As of December 31, 1996, 118 had reached their termination dates and had left the Company. In 1996, the Company charged $6,985,000 in costs relating to employee termination benefits and incurred expenditures of $2,411,000. In 1997, the Company incurred expenditures of $4,950,000 completing the payment of employee termination benefits and the shortfall in the accrual of $376,000 is included in the excess accrued restructure reserve recorded in 1997. In 1996, the Company recorded charges of $9,908,000 including a write down of $905,000 and expenditures of $409,000 arising from losses on supplier commitments and write off of prepaid expenses. In 1997, the Company settled the remaining supplier commitments and other charges related to the restructuring through expenditures of $6,254,000 and an excess accrual of $2,340,000 was included in the recovery recorded in 1997. In connection with its decision in 1996 to discontinue non-networking operations, the Company evaluated the ongoing value of the fixed assets and assets related to capacity commitments associated with these operations. Based on this evaluation, the Company identified approximately $2.1 million of non-networking property and equipment that will continue to be utilized in the Company's networking operations. The remaining non-networking assets with a carrying amount of approximately $11.6 million were determined to be impaired and were written down by approximately $9.7 million to their estimated fair market value. In addition, the Company recorded an impairment in value of approximately $6.9 million in certain leased assets related to IC Works Inc. In 1997, on disposal of these assets, the Company realized overall proceeds of $942,000 in excess of the written down value. The excess was included in the recovery recorded in the current year. PMC-Sierra , Inc. (formerly Sierra Semiconductor Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996, 1995 In 1996, the Company charged $3,411,000 relating to excess facility costs primarily consisting of amounts to be incurred by the Company under a seven year non-cancelable operating lease expiring in 2003. In 1996, the Company incurred expenditures of $408,000 related to the charge. In 1997, the Company successfully cancelled the lease resulting in expenditures of $2,507,000 and an adjustment of $496,000 to the excess accrued restructure reserve recovery in the current year. The Company's operations in Europe were closed as a result of the 1996 decision to exit the modem chipset business. The charges related to the shutdown of the European subsidiaries, including severance payments and excess facilities costs, totalled $1,980,000, with expenditures in 1996 totalling $1,397,000. Additionally, the restructuring charge included a write down of the remaining goodwill of $2,459,000 for the Company's Holland operation. In 1997, the Company competed it's closure of the European operations and incurred expenditures of $1,231,000 resulting in an under accrual of $648,000 which was included in the recovery recorded in the current year. In conjunction with the decision to exit the modem chipset business, the Company is subject to incremental pricing pressure and potential returns of modem chipset products. In 1996 a non cash charge of $5,047,000 was recorded as a write down of related assets to provide for the potential impact of price protection and product returns. In 1997, expenditures associated with the restructuring charge were approximately $14.9 million which were funded by the Company's cash flow from operations. (1996 - $4.6 million). NOTE 12. Earnings (loss) per share. The following table sets forth the computation of basic and diluted net income (loss) per share:
December 31, --------------------------------------------- 1997 1996 1995 Numerator: Net Income (loss) $ 34,258 $ (48,150) $ 1,479 --------------- -------------- ------------ Denominator: Basic weighted average common shares outstanding 31,043 29,719 27,018 Effect of dilutive securities: Stock options 1,585 - 1,602 Stock warrants 14 - - --------------- -------------- ------------ Diluted weighted average common shares outstanding 32,642 29,719 28,620 =============== ============== ============ --------------- -------------- ------------ Basic net income (loss) per share $ 1.10 $ (1.62) $ 0.06 =============== ============== ============ --------------- -------------- ------------ Diluted net income (loss) per share $ 1.05 $ (1.62) $ 0.05 =============== ============== ============ (1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic net income per share. Share information has been adjusted for a 2 to 1 stock split effective October 5, 1995.
NOTE 13. Recent Pronouncements. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" (SFAS 130), which is required to be adopted for fiscal years beginning on or after December 15, 1997. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Reclassification of financial statements for earlier periods presented is required. The impact of SFAS 130 on the Company's financial statements is not expected to be material and will be adopted in 1998. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131), which is required to be adopted for fiscal years beginning on or after December 15, 1997. SFAS 131 establishes new standards for the reporting of segmented information in annual financial statements and requires the reporting of certain selected segmented information on interim reports to shareholders. The impact of SFAS 131 on the Company's financial statements is not expected to be material and will be adopted in 1998. 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 The information concerning the Company's directors required by this Item is incorporated by reference to the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders ("Proxy Statement"). The following sets forth information regarding executive officers of the Company as of February 28, 1998. Name Age Position ---- --- -------- Robert L. Bailey 40 President and Chief Executive Officer Greg Aasen 42 Chief Operating Officer John W. Sullivan 51 Vice President, Finance and Chief Financial Officer Officers serve at the discretion of the Board of Directors. There are no family relationships between any of the directors or officers of the Company. Mr. Bailey has served as President, Chief Executive Officer and Director of the Company since July, 1997. In prior years, Mr. Bailey acted as President and Chief Executive Officer of PMC-Sierra, Ltd. Mr. Bailey was also employed by AT&T-Microelectronics from August 1989 to November 1993 where he served as Vice President of Integrated Microperipheral Products. Mr. Bailey became a director of the Company in October 1996. Mr. Aasen has served as Chief Operating Officer of the Company since February 1997. Mr. Aasen is a founder of PMC-Sierra, Ltd. and served as its Chief Operating Officer and Secretary since its formation in June 1992. He has served as a director of PMC-Sierra, Ltd. since August 1994. Prior to joining PMC-Sierra 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 VP Finance from 1993 to 1997. Prior to his employment with Semitool Inc., Mr. Sullivan was employed by United Dominion Industries and Arthur Young & Company. ITEM 11. Executive Compensation. The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 13. Certain Relationships and Related Transactions. The information required by this Item is incorporated by reference to the Company's Proxy Statement. 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 22 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, 1997. (c) Exhibits pursuant to Item 601 of Regulation S-K.
Exhibit Description Page Number Number 2.1 Exchange Agreement dated September 2, 1994 between the Company and Ltd. (C) 2.2 Amended and Restated Shareholders' Agreement dated September 2, 1994 (C) among the Shareholders of PMC-Sierra, Inc. 2.3 Amendment to Exchange Agreement effective August 9, 1995 (F) 2.4 Agreement and Plan of Merger between Delaware PMC Sierra, Inc., a (I) Delaware Corporation and PMC-Sierra, Inc., a California Corporation 3.1 Certificate of Incorporation (M) 3.1A Certificate of Amendment to the Certificate of Incorporation -- filed June 13, 1997 3.1B Certificate of Amendment to the Certificate of Incorporation -- filed July 11, 1997 3.2 Bylaws, as amended -- 4.1 Specimen of Common Stock Certificate (L) 4.3 Terms of PMC-Sierra, Inc. Special Shares (D) 4.4 Silicon Valley Bank Business Loan Agreement and Promissory Note, each (G) dated November 29, 1990 and Security Agreement dated February 22, 1990 4.4B Amendment dated December 29, 1996 to the Silicon Valley Bank Business (K) Loan Agreement and Promissory Note, dated November 29, 1990 and Security Agreement dated February 22, 1990. 10.1B 1987 Incentive Stock Plan, as amended (B) 10.2 1991 Employee Stock Purchase plan, as amended (A) 10.4 Form of Indemnification Agreement between the Company and its directors (I) and officers Exhibit Description Page Number Number 10.8 Warrants to Purchase Common Stock (A) 10.8B Warrant Purchase Agreement and Warrants to Purchase Shares of Common (K) Stock dated August 28, 1996 10.9D Technology License Agreement dated November 18, 1987, as amended (A) July 17, 1990 10.17 PMC-Sierra, Inc. 1994 Incentive Stock Plan (E) 10.18 Deposit Agreement with Chartered Semiconductor Pte. Ltd.* (H) 10.18B Amendment Agreement (No. 1) to Deposit Agreement with Chartered (K) Semiconductor Pte. Ltd.* 10.19 Option Agreement among Sierra Semiconductor Corporation, PMC-Sierra, (K) Inc., and Taiwan Semiconductor Manufacturing Corporation* 10.21 PMC-Sierra Inc. (Portland) 1996 Stock Option Plan -- 10.22 Net Building Lease (PMC-Sierra, Ltd.), dated May 15, 1996 (K) 11.1 Calculation of earnings per share (O) 16.1 Letter regarding change in certifying accountant (N) 21.1 Subsidiaries -- 23.1 Consent of Ernst & Young LLP, Independent Auditors -- 23.2 Consent of Deloitte & Touche, Independent Auditors -- 24.1 Power of Attorney -- * Confidential treatment has been granted as to a portion of this exhibit. (A) Incorporated by reference from the same-numbered exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-39406). (B) Incorporated by reference from the same-numbered exhibit filed with the Registrant's Form 10-K Annual Report for the fiscal year ended January 3, 1993. (C) Incorporated by reference from the same-numbered exhibit filed with the Registrant's Current Report on Form 8-K, filed on September 16, 1994, as amended. (D) Incorporated by reference from exhibit 4 of the Schedule 13-D filed on November 2, 1994 by GTE Corporation. (E) Incorporated by reference from the same numbered exhibit filed with the Registrant's Form 10-K Annual report for the fiscal year ended January 2, 1994. (F) Incorporated by reference from exhibit 2.1 filed with Registrant's Current Report on Form 8-K, filed on September 6, 1995, as amended on October 6, 1995. (G) Incorporated by reference from the same numbered exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-39406). (H) Incorporated by reference from the same numbered exhibit filed with the Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 1995. (I) Incorporated by reference from the same numbered exhibit filed with Registrant's Form 10-Q for the quarter ended June 30, 1997. (J) Incorporated by reference from exhibit 3.1 filed with Registrant's Form 10-Q for the quarter ended June 30, 1997. (K) Incorporated by reference from the same numbered exhibit filed with the Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 1996. (L) Incorporated by reference from exhibit 4.4 filed with Registrant's Current Report on Form 8-K, filed on August 29, 1997. (M) Incorporated by reference from exhibit 3.1(1) filed with Registrant's Current Report on Form 8-K, filed on August 29, 1997. (N) Incorporated by reference from exhibit 16.1 filed with Registrant's Current Report on Form 8-K, filed on April 18, 1997. (O) Refer to Note 12 of the financial statements included in Item 8 of Part II of this report.
(d) Financial Statement Schedules required by this item are listed on page 22 in the accompanying index to the financial statements. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 20, 1998 /s/ Robert L. Bailey -------------------------- Robert L. Bailey, Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert L. Bailey and John W. 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 Report on Form 10-K, 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 or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date /s/ James V. Diller Chairman of the Board and Director March 20, 1998 - ------------------- -------------- James V. Diller /s/ Robert L. Bailey Director and Chief Executive Officer March 20, 1998 - -------------------- -------------- Robert L. Bailey /s/ John W. Sullivan Vice President Finance, Chief Financial Officer March 20, 1998 - -------------------- (and Principal Accounting Officer) -------------- John W. Sullivan /s/ Michael L. Dionne Director March 20, 1998 - --------------------- -------------- Michael L. Dionne /s/ Colin Beaumont Director March 20, 1998 - ------------------ -------------- Colin Beaumont /s/ Frank Marshall Director March 20, 1998 - ------------------ -------------- Frank Marshall /s/ Alexandre Balkanski Director March 20, 1998 - ----------------------- -------------- Alexandre Balkanski
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1997, 1996 and 1995 (in thousands) Allowance for Doubtful Accounts
Additions Balance at charged to Additions beginning of costs and charged to Balance at Year year expenses other accounts Write-offs end of year 1997 $ 842 500 - 272 $ 1,070 1996 $ 1,081 666 - 905 $ 842 1995 $ 1,648 49 - 616 $ 1,081
1993 Accrued Restructure Costs
Additions Balance at charged to Additions beginning of costs and charged to Balance at Year year expenses other accounts Payments end of year 1997 $ 373 (373) - - $ - 1996 $ 373 - - - $ 373 1995 $ 1,150 - - 777 $ 373
1996 Accrued Restructure Costs
Accruals Additions reclassed from Balance at (recovery) Additions (to) other beginning of charged to charged to restructure Balance at Year year expenses other accounts accounts Payments end of year 1997 $ 16,754 (1,383) (429) - 14,942 $ - 1996 $ - 28,154 - (6,775) 4,625 $ 16,754 1995 $ - - - - - $ -
INDEX TO EXHIBITS Exhibit Description Page Number Number 3.1A Certificate of Amendment to the Certificate of Incorporation -- filed June 13, 1997 3.1B Certificate of Amendment to the Certificate of Incorporation -- filed July 11, 1997 3.2 Bylaws, as amended -- 10.21 PMC-Sierra Inc., (Portland) 1996 Stock Option Plan -- 21.1 Subsidiaries -- 23.1 Consent of Ernst & Young LLP, Independent Auditors -- 23.2 Consent of Deloitte & Touche, Independent Auditors -- 24.1 Power of Attorney -- EX-3.1A 2 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF PMC-SIERRA, INC. PMC-Sierra, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies that: 1. The name of the Corporation is PMC-Sierra, Inc. The Corporation was originally incorporated under the same name, and original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on May 2, 1997. 2. Article I of the Certificate of Incorporation of the Corporation shall be amended and restated in its entirety to read as follows: "The name of this corporation is Delaware PMC-Sierra, Inc. (the "Corporation")." 3. This Amendment of the Corporation's Certificate of Incorporation has been duly adopted by the Corporation's board of directors in accordance with Section 242 of the General Corporation Law of the State of Delaware, and by the holders of each class of outstanding stock entitled to vote thereon by written consent given in accordance with Section 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to Certificate of Incorporation to be signed by Glenn C. Jones, its Senior Vice President of Finance and Chief Financial Officer, on this 12th day of June, 1997. PMC-SIERRA, INC. By:/s/ Glenn C. Jones ------------------------------------------------------------ Glenn C. Jones, Senior Vice President of Finance and Chief Executive Officer EX-3.1B 3 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF DELAWARE PMC-SIERRA, INC. A Delaware corporation, Delaware PMC-Sierra, Inc., a corporation organized under the laws of the State of Delaware (the "Corporation"), hereby certifies that: 1. The name of the Corporation is Delaware PMC-Sierra, Inc. The Corporation was originally incorporated under the name of PMC-Sierra, Inc., and the original Certificate of Incorporation was filed with the Secretary of State of Delaware on May 2, 1997. 2. Article I of the Certificate of Incorporation of the Corporation shall be amended to read as follows: "The name of this corporation is PMC-Sierra, Inc. (the "Corporation")." 3. Article IX of the Certificate of Incorporation of the Corporation shall be amended to read as follows: "Holders of stock of any class or series of this Corporation shall be entitled to cumulate their votes for the election of directors pursuant to Section 214 of the Delaware General Corporation Law." 4. Article XII of the Certificate of Incorporation of the Corporation shall be amended to read as follows: "No action shall be taken by the stockholders of the Corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws of the Corporation or by written consent." 5. This Amendment of the Corporation's Amended Certificate of Incorporation has been duly adopted by the Corporation's board of directors in accordance with Section 242 of the General Corporation Law of the State of Delaware, and by the holders of each class of outstanding stock entitled to vote thereon by written consent given in accordance with Section 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to Certificate of Incorporation to be signed by Glenn C. Jones, its Senior Vice President of Finance and Chief Financial Officer, on this 10th day of July, 1997. PMC-SIERRA, INC. By:/s/ Glenn C. Jones -------------------------------------------------- Glenn C. Jones Senior Vice President and Chief Financial Officer EX-3.2 4 BYLAWS OF PMC-SIERRA, INC. BYLAWS OF PMC-SIERRA, INC. (a Delaware Corporation) BYLAWS OF PMC-SIERRA, INC. (a Delaware Corporation) TABLE OF CONTENTS Page ARTICLE I CORPORATE OFFICES.................................................-1- 1.1 REGISTERED OFFICE.......................................-1- 1.2 OTHER OFFICES...........................................-1- ARTICLE II MEETINGS OF STOCKHOLDERS..........................................-1- 2.1 PLACE OF MEETINGS.......................................-1- 2.2 ANNUAL MEETING..........................................-1- 2.3 SPECIAL MEETING.........................................-2- 2.4 NOTICE OF STOCKHOLDERS' MEETINGS........................-2- 2.5 NOTIFICATIONS OF NOMINATIONS AND PROPOSED BUSINESS......-2- 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............-3- 2.7 QUORUM..................................................-3- 2.8 ADJOURNED MEETING; NOTICE...............................-4- 2.9 VOTING..................................................-4- 2.10 WAIVER OF NOTICE........................................-4- 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING..............-5- 2.12 PROXIES.................................................-5- 2.13 ORGANIZATION............................................-5- 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE...................-6- ARTICLE III DIRECTORS.........................................................-6- 3.1 POWERS..................................................-6- 3.2 NUMBER OF DIRECTORS.....................................-6- 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS................-6- 3.4 RESIGNATION AND VACANCIES...............................-6- 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE................-7- 3.6 REGULAR MEETINGS........................................-8- 3.7 SPECIAL MEETINGS; NOTICE................................-8- 3.8 QUORUM..................................................-8- 3.9 WAIVER OF NOTICE........................................-9- 3.10 ADJOURNMENT.............................................-9- 3.11 NOTICE OF ADJOURNMENT...................................-9- 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.......-9- 3.13 FEES AND COMPENSATION OF DIRECTORS......................-9- 3.14 APPROVAL OF LOANS TO OFFICERS...........................-9- ARTICLE IV COMMITTEES........................................................-10- 4.1 COMMITTEES OF DIRECTORS.................................-10- 4.2 MEETINGS AND ACTION OF COMMITTEES.......................-11- 4.3 COMMITTEE MINUTES.......................................-11- ARTICLE V OFFICERS..........................................................-11- 5.1 OFFICERS................................................-11- 5.2 ELECTION OF OFFICERS....................................-11- 5.3 SUBORDINATE OFFICERS....................................-11- 5.4 REMOVAL AND RESIGNATION OF OFFICERS.....................-13- 5.5 VACANCIES IN OFFICES....................................-13- 5.6 CHAIRMAN OF THE BOARD...................................-13- 5.7 PRESIDENT...............................................-13- 5.8 VICE PRESIDENTS.........................................-13- 5.9 SECRETARY...............................................-14- 5.10 CHIEF FINANCIAL OFFICER.....................................-14- ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS..................................................-15- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS...............-15- 6.2 INDEMNIFICATION OF OTHERS...............................-16- 6.3 INSURANCE...............................................-16- ARTICLE VII RECORDS AND REPORTS...............................................-16- 7.1 MAINTENANCE AND INSPECTION OF RECORDS...................-16- 7.2 INSPECTION BY DIRECTORS.................................-17- 7.3 ANNUAL STATEMENT TO STOCKHOLDERS........................-17- 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..........-17- 7.5 CERTIFICATION AND INSPECTION OF BYLAWS..................-17- ARTICLE VIII GENERAL MATTERS...................................................-17- 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING...-17- 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS...............-18- 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED......-18- 8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES........-18- 8.5 SPECIAL DESIGNATION ON CERTIFICATES.....................-19- 8.6 LOST CERTIFICATES.......................................-19- 8.7 TRANSFER AGENTS AND REGISTRARS..........................-20- 8.8 CONSTRUCTION; DEFINITIONS...............................-20- ARTICLE IX AMENDMENTS........................................................-20- BYLAWS OF PMC-SIERRA, INC. (a Delaware Corporation) ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the Corporation shall be fixed in the Certificate of Incorporation of the Corporation. 1.2 OTHER OFFICES The Board of Directors may at any time establish branch or subordinate offices at any place or places where the Corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the Corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board of Directors. In the absence of such designation, the annual meeting of stockholders shall be held on the third Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the Board of Directors, or by the Chairman of the Board, or by the President. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 2.6 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the Board intends to present for election. 2.5 NOTIFICATIONS OF NOMINATIONS AND PROPOSED BUSINESS. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, (a) nominations for the election of directors, and (b) business proposed to be brought before any stockholder meeting may be made by the Board of Directors or proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally if such nomination or business proposed is otherwise proper business before such meeting. However, any such stockholder may nominate one or more persons for election as directors at a meeting or propose business to be brought before a meeting, or both, only if such stockholder has given timely notice in proper written form of his intent to make such nomination or nominations or to propose such business. To be timely, such stockholder's notice must be delivered to or mailed and received by the Secretary of the Corporation not less than thirty-five (35) days nor more than sixty (60) days prior to the meeting; provided, however, that in the event that less than forty-five (45) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. To be in proper form, a stockholder's notice to the Secretary shall set forth: (i) the name and address of the stockholder who intends to make the nominations or propose the business and, as the case may be, of the person or persons to be nominated or of the business to be proposed; (ii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the Board of Directors; and (v) if applicable, the consent of each nominee to serve as director of the Corporation if so elected. The Chairman of the meeting shall refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders shall be given either personally or by first-class mail or by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the Corporation or given by the stockholder to the Corporation for the purpose of notice. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the Secretary, assistant secretary or any transfer agent of the Corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.7 QUORUM The holders of a majority in voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stock holders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting in accordance with Section 2.8 of these bylaws. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the Certificate of Incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of the question. If a quorum be initially present, the stockholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders initially constituting the quorum. 2.8 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time and place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting agreements). Except as may be otherwise provided in the Certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or the Certificate of Incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these bylaws. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat, the Board of Directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the Corporation after the record date. If the Board of Directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. The record date for any other purpose shall be as provided in Section 8.1 of these bylaws. 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the Corporation, but no such proxy shall be voted or acted upon after three (3) years from its date unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, telefacsimile or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. 2.13 ORGANIZATION The President, or in the absence of the President, the Chairman of the Board, or, in the absence of the President and the Chairman of the Board, one of the Corporation's vice presidents, shall call the meeting of the stockholders to order, and shall act as chairman of the meeting. In the absence of the President, the Chairman of the Board, and all of the vice presidents, the stockholders shall appoint a chairman for such meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and the conduct of business. The Secretary of the Corporation shall act as secretary of all meetings of the stockholders, but in the absence of the Secretary at any meeting of the stockholders, the chairman of the meeting may appoint any person to act as secretary of the meeting. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the Certificate of Incorporation and these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of directors. 3.2 NUMBER OF DIRECTORS The Board of Directors shall be six until changed by an amendment to this bylaw, duly adopted by the Board of Directors or by the stockholders, or by a duly adopted amendment to the Certificate of Incorporation. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Each director, including a director elected or appointed to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. Vacancies in the Board of Directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum). Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the Certificate of Incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the Certificate of Incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the Board of Directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the Board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the Corporation. Special meetings of the Board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the Corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the Board of Directors may be held without notice if the times of such meetings are fixed by the Board of Directors. If any regular meeting day shall fall on a legal holiday, then the meeting shall be held next succeeding full business day. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board, the President, any vice president, the Secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the Corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the Corporation. 3.8 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of the Certificate of Incorporation and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meet ing, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the Board of Directors. 3.10 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, provided that all members of the Board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the Board. 3.13 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the Board of Directors. This Section 3.13 shall not be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensa tion for those services. 3.14 APPROVAL OF LOANS TO OFFICERS The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or any of its subsidiaries, including any officer or employee who is a director of the Corporation or any of its subsidiaries, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the Board. The Board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board, but no such committee shall have the power of authority to: (a) amend the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation); (b) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware; (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets; (d) recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution; or (e) amend the bylaws of the Corporation; and, unless the Board resolution estab lishing the committee, the bylaws or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. 4.3 COMMITTEE MINUTES. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the Corporation shall be a president, a secretary, and a chief financial officer. The Corporation may also have, at the discretion of the Board of Directors, a chairman of the Board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the Board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The Board of Directors may appoint, or may empower the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the Board of Directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors at any regular or special meeting of the Board or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The Chairman of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the Board of Directors or as may be prescribed by these bylaws. If there is no President, then the Chairman of the Board shall also be the chief executive officer of the Corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the chief executive officer of the Corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the Corporation. The President shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the Board, at all meetings of the Board of Directors. The President shall have the general powers and duties of manage ment usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the President, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these bylaws, the President or the Chairman of the Board. 5.9 SECRETARY The Secretary shall keep or cause to be kept, at the principal executive office of the Corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office of the Corporation or at the office of the Corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these bylaws. The Secretary shall keep the seal of the Corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the Corporation with such depositaries as may be designated by the Board of Directors. Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his or her transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The Corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the Corporation. For purposes of this Section 6.1, a "director" or "officer" of the Corporation shall mean any person (i) who is or was a director or officer of the Corporation, (ii) who is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. The Corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the Board of Directors of the Corporation. The Corporation shall pay the expenses (including attorney's fees) incurred by a director or officer of the Corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 6.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the Corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should ultimately be determined that the director of officer is not entitled to be indemnified under this Section 6.1 or otherwise. The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Corporation's Certificate of Incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise. Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. 6.2 INDEMNIFICATION OF OTHERS The Corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, to indemnify any person (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the Corporation. For purposes of this Section 6.2, an "employee" or "agent" of the Corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the Corporation, (ii) who is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The Corporation shall, either at its principal executive office or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books and other records of its business and properties. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine (and to make copies of) the Corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The Chairman of the Board, if any, the President, any vice president, the Chief Financial Officer, the Secretary or any assistant secretary of this Corporation, or any other person authorized by the Board of Directors or the President or a vice president, is authorized to vote, represent and exercise on behalf of this Corporation all rights incident to any and all shares of the stock of any other corporation or corporations standing in the name of this Corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 7.5 CERTIFICATION AND INSPECTION OF BYLAWS The original or a copy of these bylaws, as amended or otherwise altered to date, certified by the Secretary, shall be kept at the Corporation's principal executive office and shall be open to inspection by the stockholders of the Corporation, at all reasonable times during office hours. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date so fixed, except as otherwise provided in the General Corporation Law of Delaware. If the Board of Directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the applicable resolution. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the Corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The Board of Directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chairman or vice-chairman of the Board of Directors, or the President or vice-president, and by the treasurer or an assistant treasurer, or the Secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Certificates for shares shall be of such form and device as the Board of Directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a summary statement or reference to the powers, designations, preferences or other special rights of such stock and the qualifications, limitations or restrictions of such preferences and/or rights, if any; a statement or summary of liens, if any; a conspicuous notice of restrictions upon transfer or registration of transfer, if any; a statement as to any applicable voting trust agreement; if the shares be assessable, or, if assessments are collectible by personal action, a plain statement of such facts. Upon surrender to the Secretary or transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The Corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the Corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the Corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.5 SPECIAL DESIGNATION ON CERTIFICATES If the Corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.6 LOST CERTIFICATES Except as provided in this Section 8.6, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Corporation and canceled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the Board may require; the Board may require indemnification of the Corporation secured by a bond or other adequate security sufficient to protect the Corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.7 TRANSFER AGENTS AND REGISTRARS The Board of Directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, each of which shall be an incorporated bank or trust company -- either domestic or foreign, who shall be appointed at such times and places as the requirements of the Corporation may necessitate and the Board of Directors may designate. 8.8 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS The original or other bylaws of the Corporation may be adopted, amended or repealed by the stockholders entitled to vote or by the Board of Directors of the Corporation. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Whenever an amendment or new bylaw is adopted, it shall be copied in the book of bylaws with the original bylaws, in the appropriate place. If any bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or the filing of the operative written consent(s) shall be stated in said book. EX-10.21 5 PMC-SIERRA, INC. (PORTLAND) 1996 STOCK OPTION PLAN PMC-SIERRA, INC. (PORTLAND) 1996 STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this Stock Option Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the legal requirements relating to the administration of stock option plans under state corporate and securities laws and the Code. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a Committee appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of PMC-Sierra, Inc. (g) "Company" means PMC-Sierra, Inc. (Portland), a Delaware corporation. (h) "PMC" means PMC-Sierra, Inc., a Delaware corporation. (i) "Consultant" means any person, including an advisor, Sales Representative or Distributor engaged by the Company or a Parent or Subsidiary to render services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (j) "Continuous Status as an Employee, Consultant or Outside Director" means that the employment, consulting or director relationship with the Company or any Parent or Subsidiary is not interrupted or terminated. Continuous Status as an Employee, Consultant or Outside Director shall not be considered interrupted in the case of: (i) any leave of absence approved by the Company, including sick leave, military leave, or any other personal leave; provided, however, that for purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; provided, further, that on the ninety-first (91st) day of any such leave (where reemployment is not guaranteed by contract or statute) the Optionee's Incentive Stock Option shall cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option; or (ii) transfers between locations of the Company or between the Company, its Parent, its Subsidiaries or its successor. (k) "Director" means a member of the Board or a member of the board of directors of any Parent or Subsidiary of Company. (l) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (m) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (o) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (p) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (q) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (r) "Notice of Grant" means a written notice evidencing certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (s) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (t) "Option" means a stock option granted pursuant to the Plan. (u) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (v) "Option Exchange Program" means a program whereby outstanding options are surrendered in exchange for options with a lower exercise price. (w) "Optioned Stock" means the Common Stock subject to an Option. (x) "Optionee" means an Employee, Consultant or Outside Director who holds an outstanding Option. (y) "Outside Director" shall mean a Director who is not an Employee of the Company. (z) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (aa) "Plan" means this 1996 Stock Option Plan. (bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (cc) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan. (dd) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 450,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. However, should the Company reacquire Shares which were issued pursuant to the exercise of an Option, such Shares shall not become available for future grant under the Plan. If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, upon exercise of an Option, shall not be returned to the Plan and shall not become available for future distribution under the Plan. For purposes of the preceding sentence, voting rights shall not be considered a benefit of Share ownership. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers. (ii) Administration With Respect to Directors and Officers Subject to Section 16(b). With respect to Option grants made to Employees who are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in compliance with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted to comply with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3. (iii) Administration With Respect to Other Persons. With respect to Option grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted to satisfy Applicable Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(n) of the Plan; (ii) to select the Consultants and Employees to whom Options may be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option (subject to Section 14(c) of the Plan); (xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xii) to institute an Option Exchange Program; (xiii) to determine the terms and restrictions applicable to Options; and (xiv) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. Eligibility. (a) Nonstatutory Stock Options may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. Options may also be granted to Outside Directors but only in accordance with the provisions of Section 5(b) hereof. Subject to Section 5(b) with respect to Outside Directors, if otherwise eligible, an Optionee who has been granted an Option may be granted additional Options. (b) The provisions set forth in this Section 5(b) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 6. Limitations. (a) Each Option shall be designated in the Notice of Grant as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares subject to an Optionee's incentive stock options granted by the Company, any Parent or Subsidiary, which become exercisable for the first time during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time of grant. (b) Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's employment or consulting relationship with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such employment or consulting relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options to Employees: (i) No Employee shall be granted, in any fiscal year of the Company, Options to purchase more than 450,000 Shares. (ii) The foregoing limitation shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 12(a). (iii) If an Option is canceled (other than in connection with a transaction described in Section 12), the canceled Option will be counted against the limit set forth in Section 6(c)(i). For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 18 of the Plan, the Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company as described in Section 18 of the Plan. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 14 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Notice of Grant; provided, however, that in the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Notice of Grant. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until the completion of a service period. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a stockholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment, Consulting or Outside Director Relationship. Upon termination of an Optionee's Continuous Status as an Employee, Consultant or Outside Director (but not in the event of a change of status from Employee to Consultant or Outside Director (in which case an Employee's Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option on the ninety-first (91st) day following such change of status) or from Consultant or Outside Director to Employee), other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option, but only within such period of time as is specified in the Notice of Grant, and only to the extent that the Optionee was entitled to exercise it at the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). In the absence of a specified time in the Notice of Grant, the Option shall remain exercisable for 90 days following the Optionee's termination of Continuous Status as an Employee or Consultant. In the case of an Incentive Stock Option, such period of time shall not exceed ninety (90) days from the date of termination. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. Notwithstanding the foregoing, Options granted in connection with the acquisition of assets of Bipolar Integrated Technology, Inc. shall be governed by the provisions concerning events upon termination of Employment stated in the option agreements evidencing such Options. (c) Disability of Optionee. In the event that an Optionee's Continuous Status as an Employee or Consultant terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within twelve (12) months from the date of such termination, but only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. In the event of the death of an Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Rule 16b-3. Options granted to individuals subject to Section 16 of the Exchange Act ("Insiders") must comply with the applicable provisions of Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 11. Non-Transferability of Options. An Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset Sale or Change of Control. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option that was granted as substitution of non-qualified options to purchase common stock of Bipolar Integrated Technology, Inc. shall become exercisable immediately upon the closing of such transaction as to all or a portion of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. Any other outstanding Option and each Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. The Administrator may, in lieu of such assumption or substitution, provide for the Optionee to have the right to exercise the Option or Stock Purchase Right as to all or a portion of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. If the Administrator makes an Option or Stock Purchase Right exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right will terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Date of Grant. The date of grant of an Option shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Stockholder Approval. The Company shall obtain stockholder approval of any Plan amendment to the extent necessary to comply with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such stockholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 15. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Liability of Company. (a) Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. (b) Grants Exceeding Allotted Shares. If the Optioned Stock covered by an Option exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional stockholder approval, such Option shall be void with respect to such excess Optioned Stock, unless stockholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 14(b) of the Plan. 17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. EX-21.1 6 PMC-SIERRA, INC. LIST OF SUBSIDIARIES PMC-SIERRA, INC. LIST OF SUBSIDIARIES 1. PMC-Sierra Ltd., organized under the laws of Canada, doing business only under its official name. 2. PMC-Sierra, Inc. (Portland), organized under the laws of Delaware, doing business only under its official name. 3. PMC-Sierra, Inc. (U.S.), organized under the laws of Washington, doing business only under its official name. 4. Sierra Semiconductor B.V., organized under the laws of The Netherlands, doing business only under its official name. EX-23.1 7 CONSENT OF AUDITORS CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-86930, 33-90392, 33-96620, 33-97490 and 333-15519), and in the Registration Statements (Form S-8 Nos. 33-41027, 33-80988, 333-13387, 33-80992, 33-94790, 333-13359, 333-34671 and 333-13357) pertaining to the 1991 Employee Stock Purchase Plan, the 1994 Incentive Stock Plan, and the PMC-Sierra, Inc. (Portland) 1996 Stock Option Plan of PMC-Sierra, Inc. (formerly Sierra Semiconductor Corporation) and in the related Prospectuses, of our report dated January 22, 1997, with respect to the consolidated financial statements and schedule of PMC-Sierra, Inc. (formerly Sierra Semiconductor Corporation) included in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ ERNST & YOUNG LLP San Jose, California March 19, 1998 EX-23.2 8 CONSENT OF AUDITORS CONSENT OF DELOITTE & TOUCHE, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-86930, 33-90392, 33-96620, 33-97490 and 333-15519), and in the Registration Statements (Form S-8 Nos. 33-41027, 33-80988, 333-13387, 33-80992, 33-94790, 333-13359, 333-34671, 333-13357) pertaining to the 1991 Employee Stock Purchase Plan, the 1994 Incentive Stock Plan and the PMC-Sierra, Inc. (Portland) 1996 Stock Option Plan of PMC-Sierra, Inc. and in the related Prospectuses, of our report dated January 22, 1998, with respect to the consolidated financial statements and schedule of PMC-Sierra, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Deloitte & Touche Vancouver, B.C. 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