-----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, O1bmu8xZmow0Qt+Kubi2joh6YiIzij8lMKrxTmAgAVRu9PTOv249SFPT/65IUVV8 1qMHKOa6O686l/MhdDL6QQ== /in/edgar/work/0000767920-00-000059/0000767920-00-000059.txt : 20001109 0000767920-00-000059.hdr.sgml : 20001109 ACCESSION NUMBER: 0000767920-00-000059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000924 FILED AS OF DATE: 20001108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PMC SIERRA INC CENTRAL INDEX KEY: 0000767920 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 942925073 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19084 FILM NUMBER: 755907 BUSINESS ADDRESS: STREET 1: 900 E HAMILTON AVE STREET 2: SUITE 250 CITY: CAMPBELL STATE: CA ZIP: 95008 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-Q 1 0001.txt PMC-SIERRA,INC. FORM 10Q ---------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10 - Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 24, 2000 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Transition Period From to Commission File Number 0-19084 PMC-Sierra, Inc. (Exact name of registrant as specified in its charter) A Delaware Corporation - I.R.S. NO. 94-2925073 900 East Hamilton Avenue Suite 250 Campbell, CA 95008 (408) 369-1176 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X____ No _______ Common shares outstanding at October 31, 2000 -- 160,036,082 ------------------------------------------------ INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements - Condensed consolidated statements of operations - Condensed consolidated balance sheets - Condensed consolidated statements of cash flows - Notes to condensed consolidated financial statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote by Stockholders Item 5. Description of Capital Stock Item 6. Exhibits and Reports on Form 8 - K
Part I - FINANCIAL INFORMATION Item 1 - Financial Statements PMC-Sierra, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except for per share amounts) (unaudited) Three Months Ended Nine Months Ended ------------------------- ------------------------ Sep 24, Sep 26, Sep 24, Sep 26, 2000 1999 2000 1999 Net revenues Networking 189,242 77,288 441,686 190,010 Non-networking 8,893 5,184 20,885 12,983 ---------- --------- --------- --------- Net revenues 198,135 82,472 462,571 202,993 Cost of revenues 46,582 21,130 108,443 50,477 ---------- --------- --------- --------- Gross Profit 151,553 61,342 354,128 152,516 Other costs and expenses: Research and development 46,171 21,723 114,082 57,472 Marketing, general and administrative 27,854 12,941 68,749 35,779 Amortization of deferred stock compensation: Research and development 14,638 1,018 21,137 2,417 Marketing, general and administrative 1,550 528 2,520 1,009 Amortization of goodwill 17,770 478 18,688 1,434 Costs of merger 23,180 866 36,858 866 Acquisition of in process research and development 38,200 - 38,200 - ---------- --------- --------- --------- Income (loss) from operations (17,810) 23,788 53,894 53,539 Interest and other income, net 4,841 2,224 12,822 4,404 Gain on sale of investments 14,173 - 41,282 26,800 ---------- --------- --------- --------- Income before provision for income taxes 1,204 26,012 107,998 84,743 Provision for income taxes 30,893 10,213 67,516 29,202 ---------- --------- --------- --------- Net income (loss) $ (29,689) $ 15,799 $ 40,482 $ 55,541 ========== ========= ========= ========= Net income (loss) per common share - basic $ (0.18) $ 0.11 $ 0.25 $ 0.38 ========== ========= ========= ========= Net income (loss) per common share - diluted $ (0.18) $ 0.10 $ 0.23 $ 0.35 ========== ========= ========= ========= Shares used in per share calculation - basic 162,933 148,877 159,783 144,720 Shares used in per share calculation - diluted 162,933 163,698 179,591 157,562 See notes to condensed consolidated financial statements
PMC-Sierra, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value) (unaudited) Sep 24, Dec 26, 2000 1999 ASSETS Current assets: Cash and cash equivalents $ 252,484 $ 93,534 Short-term investments 80,810 112,752 Restricted cash - 2,000 Accounts receivable, net 98,081 42,209 Inventories, net 32,502 14,277 Deferred income taxes 9,270 9,270 Prepaid expenses and other current assets 22,565 8,967 Short-term deposits for wafer fabrication capacity - 4,637 --------- --------- Total current assets 495,712 287,646 Property and equipment, net 99,178 51,461 Goodwill and other intangible assets, net 342,460 15,280 Investments and other assets 31,451 11,827 Deposits for wafer fabrication capacity 23,001 14,483 --------- --------- $ 991,802 $ 380,697 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 39,548 $ 17,195 Accrued liabilities 55,964 20,008 Deferred income 59,872 34,657 Income taxes payable 40,763 25,912 Current portion of obligations under capital leases and long-term debt 4,993 3,863 --------- --------- Total current liabilities 201,140 101,635 Deferred income taxes 13,534 9,091 Noncurrent obligations under capital leases and long-term debt 1,135 4,897 PMC special shares convertible into 3,773 shares of (1999 - 4,242) common stock 6,394 6,998 Stockholders' equity Preferred stock, par value $0.001; 5,000 shares authorized: none issued or outstanding in 2000 and 1999 Preferred stock, par value $0.001; 10,000 shares authorized: none issued or outstanding in 2000 (13,619 in 1999); - 14 Common stock and additional paid in capital, par value $0.001; 900,000 shares authorized (200,000 shares in 1999): 159,821 shares issued and outstanding (146,516 in 1999) 763,637 270,222 Deferred stock compensation (36,574) (5,238) Retained earnings (deficit) 33,560 (6,922) Accumulated other comprehensive income 8,976 - --------- --------- Stockholders' equity 769,599 258,076 --------- --------- $ 991,802 $ 380,697 ========= ========= See notes to condensed consolidated financial statements
PMC-Sierra, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine Months Ended -------------------------- Sep 24, Sep 26, 2000 1999 Cash flows from operating activities: Net income $ 40,482 $ 55,541 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of plant and equipment 24,192 13,931 Amortization of intangibles 20,192 2,649 Amortization of deferred stock compensation 23,657 3,426 Acquisition of in process research and development 38,200 - Equity in income of investee (574) (241) Gain on sale of investments (41,283) (26,800) Changes in operating assets and liabilities Accounts receivable (55,835) (9,031) Inventories (18,225) (7,998) Prepaid expenses and other (13,934) (379) Accounts payable and accrued liabilities 57,135 11,868 Income taxes payable 15,334 3,207 Deferred income 25,215 14,573 --------- --------- Net cash provided by operating activities 114,556 60,746 --------- --------- Cash flows from investing activities: Purchases of short-term investments (195,644) (129,736) Proceeds from sales and maturities of short-term investments 227,586 66,614 Restricted cash 2,000 (2,000) Investments in other companies (13,433) (4,000) Purchases of plant and equipment (65,225) (21,619) Acquisition of Malleable, net of cash acquired 248 - Acquisition of Datum, net of cash acquired (14,272) - Proceeds from sale of investments 42,249 28,628 Purchase of intangible assets - (411) Investment in wafer fabrication deposits (8,584) - Proceeds from refund of wafer fabrication deposits 4,703 4,000 --------- --------- Net cash used in investing activities (20,372) (58,524) --------- --------- Cash flows from financing activities: Proceeds from notes payable and long-term debt 68 4,038 Repayment of notes payable and long-term debt (4,955) (3,243) Principal payments under capital lease obligations (2,250) (7,286) Proceeds from issuance of preferred stock - 19,478 Proceeds from issuance of common stock 71,903 11,289 --------- --------- Net cash provided by financing activities 64,766 24,276 --------- --------- Net increase in cash and cash equivalents 158,950 26,498 Cash and cash equivalents, beginning of the period 93,534 49,008 --------- --------- Cash and cash equivalents, end of the period $ 252,484 $ 75,506 ========= ========= See notes to condensed consolidated financial statements PMC-Sierra, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1. Summary of Significant Accounting Policies Description of business. PMC-Sierra, Inc (the "Company" or "PMC-Sierra") provides customers with internetworking semiconductor system solutions for high-speed transmission and networking systems. Basis of presentation. All historical financial information has been restated to reflect the acquisitions of Toucan Technology Limited and AANetcom, Inc. in the first quarter of fiscal 2000, Extreme Packet Devices, Inc. in the second quarter of fiscal 2000 and Quantum Effect Devices, Inc. in the third quarter of fiscal 2000. These acquisitions were accounted for as poolings of interests. The accompanying financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of results for the interim periods presented. These financial statements should be read in conjunction with the restated consolidated financial statements and related notes thereto included in Amendment No. 1 to PMC-Sierra's Registration Statement on Form S-4 dated July 26, 2000 (File No. 333-41878). The results of operations for the interim period are not necessarily indicative of results to be expected in future periods. Recently issued accounting standards. In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. The Statement will require the recognition of all derivatives on the Company's consolidated balance sheet at fair value. Management does not expect the adoption of SFAS 133 to have a material effect on the Company's operations or financial position. The Company is required to adopt SFAS 133 in the first quarter of fiscal 2001. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101("SAB 101"), "Revenue Recognition", which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. The Company believes the adoption of SAB 101 will not have a material impact on the Company's financial position and results of operations. The Company is required to adopt SAB 101 no later than the fourth quarter of fiscal 2000. Inventories. Inventories are stated at the lower of cost (first-in, first out) or market (estimated net realizable value). The components of inventories are as follows: (in thousands) Sep 24, Dec 26, 2000 1999 (unaudited) Work-in progress $ 22,359 $ 10,275 Finished goods 10,143 4,002 -------- ---------- $ 32,502 $ 14,277 ======== ========= NOTE 2. Business Combinations. Poolings of Interests: Acquisition of Quantum Effect Devices, Inc. In August 2000, the Company acquired Quantum Effect Devices, Inc., a public company located in the United States. QED develops embedded microprocessors that perform information processing in networking equipment. Under the terms of the agreement approximately 12,300,000 shares of common stock were exchanged and options assumed to acquire QED. The transaction was accounted for as a pooling of interests and accordingly, all prior periods have been restated. During the quarter ended September 24, 2000, PMC-Sierra recorded merger related costs of $23,180,000 related to the acquisition of QED. These costs, which consist primarily of investment banking and other professional fees, were included under costs of merger in the Condensed Consolidated Statements of Operations in the quarter ended September 24, 2000. The historical results of operations of the Company and QED for the periods prior to the merger are as follows: (in thousands) Six Months Ended Year ended --------------------------- ------------ Jun 25, Jun 27, Dec 26, 2000 1999 1999 Net revenues PMC, as previously reported $ 236,915 $ 110,286 $ 263,281 QED 27,521 10,235 31,462 --------- ---------- ---------- Combined $ 264,436 $ 120,521 $ 294,743 ========= ========== ========== Net income (loss) PMC, as previously reported $ 70,084 $ 44,646 $ 81,602 QED 87 (4,904) (7,163) --------- ---------- ---------- Combined $ 70,171 $ 39,742 $ 74,439 ========= ========== ========== Acquisition of Extreme Packet Devices, Inc. - ------------------------------------------- In April 2000, the Company acquired Extreme Packet Devices, Inc., a privately held fabless semiconductor company located in Canada. Extreme specializes in developing semiconductors for high speed IP and ATM traffic management at 10 Gigabits per second rates. Under the terms of the agreement approximately 2,000,000 exchangeable shares were issued and stock options were assumed to acquire Extreme. As a result of the acquisition of Extreme, each holder of an Extreme common share received 0.2240 exchangeable shares. The exchangeable shares are exchangeable, at the option of the holder, for PMC-Sierra common stock on a share-for-share basis. The exchangeable shares entitle the holders to dividend and other rights economically equivalent to that of PMC-Sierra common stock and, through a voting trust, to vote at stockholder meetings of PMC-Sierra. As at September 24, 2000, approximately 1,131,000 of these exchangeable shares were outstanding. The transaction was accounted for as a pooling of interests and accordingly, all prior periods have been restated. During the quarter ended June 25, 2000, PMC-Sierra recorded merger related transaction costs of $5,776,000 related to the acquisition of Extreme. These costs, which consisted primarily of investment banking and other professional fees, were included under costs of merger in the Condensed Consolidated Statements of Operations in the quarter ended June 25, 2000. Acquisition of AANetcom, Inc. - ---------------------------- In March 2000, the Company acquired AANetcom, Inc., a privately held fabless semiconductor company located in the United States. AANetcom's technology is designed for use in gigabit or terabit switches and routers, telecommunication access equipment, and optical networking switches in applications ranging from the enterprise to the core of the Internet. Under the terms of the agreement approximately 4,800,000 shares of common stock were exchanged and options assumed to acquire AANetcom. The transaction was accounted for as a pooling of interests and accordingly, all prior periods have been restated. During the quarter ended March 26, 2000, PMC-Sierra recorded merger related transaction costs of $7,368,000 related to the acquisition of AANetcom. These costs, which consisted primarily of investment banking and other professional fees, were included under costs of merger in the Condensed Consolidated Statements of Operations in the quarter ended March 26, 2000. Acquisition of Toucan Technology. - -------------------------------- In January 2000, the Company acquired Toucan Technology, a privately held integrated circuit design company located in Ireland. Toucan offers expertise in telecommunications semiconductor design. At December 31, 1999, the Company owned seven per cent of Toucan and purchased the remainder for approximately 300,000 shares of PMC-Sierra common stock and assumption of Toucan stock options. The transaction was accounted for as a pooling of interests and accordingly, all prior periods have been restated. During the quarter ended March 26, 2000, PMC-Sierra recorded merger related transaction costs of $534,000 related to the acquisition of Toucan. These costs, which consisted primarily of professional fees, were included under costs of merger in the Condensed Consolidated Statements of Operations in the quarter ended March 26, 2000. The historical results of operations of the Company, Toucan, AANetcom, and Extreme for the periods prior to the mergers are as follows: (in thousands) Three Months Ended Year ended ----------------------------- -------------- Mar 26, Mar 27, Dec 26, 2000 1999 1999 Net revenues PMC $ 102,807 $ 50,399 $ 262,477 Toucan - - 24 AANetcom - - 780 Extreme - - - ------------ ---------- ----------- Combined $ 102,807 $ 50,399 $ 263,281 ============ ========== =========== Net income (loss) PMC $ 28,708 $ 11,076 $ 90,020 Toucan (404) (452) (221) AANetcom (5,311) (1,209) (6,210) Extreme (2,847) - (1,987) ------------ ---------- ----------- Combined $ 20,146 $ 9,415 $ 81,602 ============ ========== =========== Purchase Combinations: During the quarter ended September 24, 2000, the Company completed the acquisitions described below which were accounted for under the purchase method of accounting. Accordingly, the Condensed Consolidated financial statements include the operating results of each business from the date of acquisition. Malleable Technologies, Inc. - --------------------------- On June 27, 2000, the Company exercised an option to acquire the 85% interest of Malleable Technologies, Inc. that it did not already own in exchange for the issuance of PMC-Sierra common shares, options and warrants with a fair value of $293,010,000 and acquisition related costs of $825,000. Malleable is a fabless semiconductor company located in San Jose, CA. Malleable makes digital signal processors for voice-over-packet processing applications which bridge voice and high speed data networks by compressing voice traffic into ATM or IP packets. Datum Telegraphic, Inc. - ---------------------- On July 21, 2000, the Company completed the purchase of the 92% interest of Datum Telegraphic, Inc. that it did not already own in exchange for the issuance of PMC-Sierra common shares and options with a fair value of $107,414,000, cash of $17,025,000 and acquisition related expenditures of $875,000. Datum is a wireless semiconductor company located in Vancouver, Canada. Datum makes digital signal processors that allow traffic for all major digital wireless standards to be transmitted using a single digitally controlled power amplifier architecture. The total consideration, including acquistion costs, was allocated based on the estimated fair values of the net assets acquired on the acquisition date as follows: (in thousands) Malleable Datum Total ----------- --------- --------- Tangible Assets $ 2,031 $ 3,788 $ 5,819 Intangible assets: Internally developed software 500 - 500 Assembled workforce 400 250 650 Goodwill 232,303 107,419 339,722 Unearned compensation 29,033 7,300 36,333 In process research and development 31,500 6,700 38,200 Liabilities assumed (1,932) (143) (2,075) ----------- ---------- ---------- $ 293,835 $ 125,314 $ 419,149 =========== ========== ========== Purchased In Process Research and Development - --------------------------------------------- The amounts allocated to in process research and development ("IPR&D") were determined through independent valuations using established valuation techniques in the high-technology industry. The value allocated to IPR&D was based upon the forecasted operating after-tax cash flows from the technology acquired, giving effect to the stage of completion at the acquisition date. Future cash flows were adjusted for the value contributed by any core technology and development efforts expected to be completed post acquisition. These forecasted cash flows were then discounted at rates commensurate with the risks involved in completing the acquired technologies taking into consideration the characteristics and applications of each product, the inherent uncertainties in achieving technological feasibility, anticipated levels of market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets. Based on this analysis the acquired technology that had reached technological feasibility was capitalized. Acquired technology that had not yet reached technological feasibility and for which no alternative future uses existed was expensed upon acquisition. Malleable: Malleable is a developer of programmable integrated circuits that perform high density Voice Over Packet applications. The in process technology acquired from Malleable detects incoming voice channels and processes them using voice compression algorithms. The compressed voice is converted, using the appropriate protocols, to ATM cells or IP packets to achieve higher channel density and support multiple speech compression protocols and different packetization requirements. The amount allocated to IPR&D of $ 31,500,000 was expensed upon acquisition, as it was determined that the underlying projects had not reached technological feasibility, had no alternative future use and successful development was uncertain. Datum: Datum designs power amplifiers for use in wireless communications network equipment. The technology acquired from Datum is a digitally controlled amplifier architecture, which was designed to increase base station system capacities, while reducing cost, size and power consumption of radio networks. The amount allocated to IPR&D of $ 6,700,000 was expensed upon acquisition, as it was determined that the underlying projects had not reached technological feasibility, had no alternative future use and successful development was uncertain. Other Intangible Assets - ----------------------- A description of the other intangible assets acquired is set out below: Internally developed software acquired facilitates the completion of in process research and development projects and can be utilized in future development projects. The Company is amortizing the value assigned to internally developed software acquired from Malleable on a straight-line basis over an estimated useful life of five years. At the acquisition date, Datum had no developed products. The acquired assembled workforce is comprised of skilled employees across each of Malleable and Datum's executive, research and development and general and administrative groups. The Company is amortizing the value assigned to the assembled workforces on a straight-line basis over their estimated useful life of five years. Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets, is being amortized on a straight-line basis over its estimated remaining useful life of five years. Pro Forma Information: - --------------------- The following table presents the unaudited pro forma results of operations for informational purposes, assuming that the Company had acquired Malleable and Datum at the beginning of the 1999 fiscal year. Nine Months Ended --------------------- Sep 24, Sep 26, (in thousands, except for per share amounts) 2000 1999 Net revenues $ 463,981 $ 204,416 Net income $ (13,119) $ (23,411) Pro forma basic and diluted net loss per share $ (0.08) $ (0.16) The pro forma results of operations give effect to certain adjustments including amortization of purchased intangibles, goodwill and unearned compensation. Included in the pro forma net income for the nine months ended September 24, 2000 is a $38,200,000 charge for IPR&D. This information may not necessarily be indicative of the future combined results of operations of the Company. NOTE 3. Sale of Investment During the quarter ended September 24, 2000, the Company realized a pre-tax gain of $14.2 million related to the disposition of 235,500 common shares of Sierra Wireless, Inc., a publicly held company. These shares were previously subject to escrow restrictions and were not available for sale until the third quarter of fiscal 2000. The Company currently holds 2.7 million common shares of Sierra Wireless, of which 233,638 shares are currently available for sale and the balance is subject to certain resale provisions. During the quarter ended March 26, 2000, the Company realized a pre-tax gain of $4.1 million related to the disposition of 92,360 common shares of Cypress Semiconductor, Inc., a publicly held company. These shares were previously subject to escrow restrictions and were not available for sale until the first quarter of fiscal 2000. NOTE 4. Comprehensive Income The following table presents the calculation of comprehensive income as required by SFAS No. 130. Comprehensive income has no impact on the Company's net income, balance sheet, or stockholders' equity. The components of comprehensive income, net of tax, are as follows (in thousands): Three Months Ended Nine Months Ended ----------------------- -------------------- Sep 24, Sep 26, Sep 24, Sep 26, 2000 1999 2000 1999 (Unaudited) (Unaudited) Net income (loss) $ (29,689) $ 15,799 $ 40,482 $ 55,541 Other comprehensive income: Change in unrealized gain on investments, net 8,976 - 8,976 - ----------- ---------- ---------- --------- Total comprehensive income(loss) $ (20,713) $ 15,799 $ 49,458 $ 55,541 =========== ========== ========== ========= NOTE 5. Segment Information The Company has two operating segments: networking and non-networking products. The networking segment consists of internetworking semiconductor devices and related technical service and support to equipment manufacturers for use in their communications and networking equipment. The non-networking segment includes custom user interface products. The Company is supporting the non-networking products for existing customers, but has decided not to develop any further products of this type. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on revenues and gross margins from operations of the two segments. Three Months Ended Nine Months Ended ----------------------- --------------------------- (in thousands) Sep 24, Sep 26, Sep 24, Sep 26, 2000 1999 2000 1999 (Unaudited) (Unaudited) Net revenues Networking $ 189,242 $ 77,288 $ 441,686 $ 190,010 Non-networking 8,893 5,184 20,885 12,983 ------------- ----------- ----------- ------------ Total $ 198,135 $ 82,472 $ 462,571 $ 202,993 ============= =========== =========== ============ Gross profit Networking $ 147,674 $ 59,037 $ 344,824 $ 146,573 Non-networking 3,879 2,305 9,304 5,943 ------------- ----------- ----------- ------------ Gross profit $ 151,553 $ 61,342 $ 354,128 $ 152,516 ============= =========== =========== ============ NOTE 6. Net Income Per Share The following table sets forth the computation of basic and diluted net income (loss) per share: (in thousands, except for per share amounts) Three Months Ended Nine Months Ended ------------------- ------------------- Sep 24, Sep 26, Sep 24, Sep 26, 2000 1999 2000 1999 Numerator: Net income (loss) $(29,689) $ 15,799 $ 40,482 $ 55,541 ========= ========= ======== ========== Denomintor: Basic weighted average common shares outstanding (1) 162,933 148,877 159,783 144,720 --------- --------- -------- ---------- Effect of dilutive securities: Stock options - 14,726 19,615 12,751 Stock warrants - 95 193 91 --------- --------- -------- ---------- Shares used in calculation of diluted net income per share 162,933 163,698 179,591 157,562 ========= ========= ======== ========== Net income per common share - basic $ (0.18) $ 0.11 $ 0.25 $ 0.38 Net income per common share - diluted $ (0.18) $ 0.10 $ 0.23 $ 0.35 (1) Exchangeable shares (see note 2) and PMC-Sierra, Ltd. special shares are included in the calculation of basic net income (loss) per share. NOTE 7. Stock Split In February 2000, the Company effected a two-for-one stock split in the form of a stock dividend. Accordingly, all references to share and per-share data for all periods presented have been adjusted to reflect this event. NOTE 8. Subsequent Events On September 29, 2000, the Company acquired SwitchOn Technologies, Inc., a privately held fabless semiconductor company located in the United States. Under the terms of the agreement, approximately 2,113,000 shares of common stock were exchanged and options assumed to acquire SwitchOn. This transaction will be accounted for as a pooling of interests. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Some statements in this report constitute "forward looking statements" within the meaning of the federal securities laws, including those statements relating to: - - our mergers and their accounting treatment; - - revenues; - - gross margins; - - gross profit; - - research and development expenses; - - marketing, general and administrative expenditures; and - - capital resources sufficiency. Our results may differ materially from those expressed or implied by the forward-looking statements for a number of reasons, including those described below in "Factors That You Should Consider Before Investing in PMC-Sierra." We may not, nor are we obliged to, release revisions to forward-looking statements to reflect subsequent events. PMC releases earnings at regularly scheduled times after the end of each reporting period. Typically within one hour of the release, we will hold a conference call to discuss our performance during the period. We welcome all PMC stockholders to listen to these calls either by phone or over the Internet by accessing our website at www.pmc-sierra.com. Acquisitions - ------------ On June 27, 2000, we acquired Malleable Technologies Inc., a privately held fabless semiconductor company located in the United States. We issued approximately 1,250,000 PMC-Sierra common shares and options in exchange for the remaining 85% interest of Malleable's outstanding common stock, options and warrants that we did not already own. This transaction was accounted for as a purchase. On July 21, 2000, we acquired Datum Telegraphic Inc., a privately held fabless semiconductor company located in Canada. We issued approximately 681,000 PMC-Sierra common shares and options and approximately $17 million in cash in exchange for the remaining 92% interest of Datum's outstanding common stock and options that we did not already own. This transaction was accounted for as a purchase. On August 24, 2000, we acquired Quantum Effect Devices, Inc., a publicly held semiconductor company located in the United States and listed on the Nasdaq National Market. We issued 12,300,000 shares of common stock and options at an exchange ratio of 0.385 PMC common shares in exchange for all outstanding common stock and options of QED. This transaction was accounted for as a pooling of interests. On September 29, 2000, subsequent to quarter end, we completed the acquisition of SwitchOn Networks, Inc., a privately held company with locations in the United States and India. SwitchOn makes processors that inspect the packets of data that make up a data communications signal. Once a packet is inspected, SwitchOn's products generate statistics for traffic monitoring, classify packets for bandwidth allocation and other value-added services, and facilitate customer billing. Under the terms of the agreement, approximately 2.1 million shares of common stock were issued and stock options and warrants were assumed to acquire SwitchOn. We will account for this acquisition as a pooling of interests in the fourth quarter of 2000. Results of Operations Third Quarters of 2000 and 1999 Net Revenues ($000,000) - ----------------------- Third Quarter ---------------------- 2000 1999 Change Networking products $ 189.2 $ 77.3 145% Non-networking products 8.9 5.2 71% ----------------------- Total net revenues $ 198.1 $ 82.5 140% ======================= Net revenues increased by 140% in the third quarter of 2000 compared to the same quarter in 1999. Our networking revenue increased 145% in the same periods and our non-networking revenues grew 71%. Networking revenue grew as a result of an increase in the volume of our product sales. Our volume grew due to the continued growth of our customers' networking equipment businesses, our customers' continued transition from internally developed application specific semiconductors to our standard semiconductors, and our introduction and sale of chips addressing additional network functions. Non-networking revenues grew as a result of our customers' ordering patterns. However, we expect non-networking revenues to decline to zero by the end of 2001 as our principal customer intends to redesign their product. Their new product will no longer incorporate our non-networking device. Gross Profit ($000,000) Third Quarter ---------------------- 2000 1999 Change Networking $ 147.7 $ 59.0 150% Non-networking 3.9 2.3 70% ----------------------- Total gross profit $ 151.6 $ 61.3 147% ======================= Percentage of net revenues 77% 74% Total gross profit grew 147% from $61.3 million in the third quarter of 1999 to $151.6 million in the same quarter of 2000. Total gross profit grew as a result of higher sales volumes of both networking and non-networking products. Total gross profit as a percentage of net revenue increased in the third quarter of 2000 as our networking revenues comprised a greater portion of our total revenues. Our networking gross profit as a percentage of net revenue is high relative to the overall gross margins in the semiconductor industry because our products are complex and are sold in relatively low volumes. We believe that as the market for our networking products grows and our customers purchase in greater volumes, we will experience pricing pressure and our gross profit as a percentage of revenue will decline. The gross margins of each of our networking products vary significantly. Our gross margins may decline in the future as a result of a shift in revenue mix to lower margin products. Non-networking gross profit as a percentage of non-networking revenue was the same in the third quarter of 2000 compared to the third quarter of 1999 as prices and costs remained relatively stable as these products mature. Operating Expenses and Charges ($000,000) - ----------------------------------------- Third Quarter --------------------- 2000 1999 Change Research and development $ 46.2 $ 21.7 113% Percentage of net revenues 23% 26% Marketing, general & administrative $ 27.9 $ 12.9 116% Percentage of net revenues 14% 16% Amortization of deferred stock compensation: Research and development $ 14.6 $ 1.0 Marketing, general and administrative 1.6 0.5 --------------------- Total $ 16.2 $ 1.5 ===================== Percentage of net revenues 8% 2% Amortization of goodwill $ 17.8 $ 0.5 Costs of merger $ 23.2 $ 0.9 Acquisition of in process research and development $ 38.2 $ - Our research and development ("R&D") expenses of $46.2 million in the third quarter of 2000 increased 113% over the third quarter of 1999. Our R&D expenses increased in absolute dollars reflecting our ongoing R&D efforts related to networking products. R&D expenditures increased in the third quarter of 2000 due to the addition of new personnel, partly through acquisitions. We expect R&D expenses to continue to increase in future periods. R&D decreased as a percentage of net revenues primarily due to an increase in net revenues at a higher rate than R&D expenses We expect R&D expenses as a percentage of net revenues to continue to fluctuate in future periods. We increased marketing, general and administrative expenses by 116% in the third quarter of 2000 compared to the third quarter of 1999. Marketing, general and administrative expenses increased due to the addition of new personnel, an increase in the size of our direct sales force and related commissions and investments in infrastructure. Marketing, general and administrative expenses decreased as a percentage of net revenue compared to the third quarter of 1999 because many marketing, general and administrative expenses are fixed in the short term. Therefore, in periods of rising revenues, these expenses may decline as a percentage of revenues. We recorded a $16.2 million charge for amortization of deferred stock compensation in the third quarter of 2000 compared to a $1.5 million charge in the prior year's third quarter. Deferred compensation charges increased as a result of the acquisitions we completed in the first three quarters of 2000. Extreme and AANetcom had, in the past, issued stock at prices lower than the deemed fair value of the stock and we are amortizing related stock compensation using the accelerated method over the vesting period. In addition, a portion of the purchase price related to the Malleable and Datum acquisition was allocated to unearned compensation resulting in additional unearned compensation amortization. Non-cash goodwill charges increased to $17.8 million in the third quarter of 2000 from $0.5 million in the third quarter of 1999 as a result of the increase in goodwill recorded in connection with the Malleable and Datum acquisitions. Merger costs increased from $0.9 million in the third quarter of 1999 to $23.2 million in the third quarter of 2000 as a result of the QED acquisition. These charges consist primarily of investment banking and other professional fees. We expect to incur significant merger costs related to future acquisitions. We may acquire products, technologies or companies in the future for which the purchase method of accounting may be used. This could result in significant goodwill amortization or in process research and development charges in future periods which could materially impact our operating results. The amounts expensed to in process research and development in the third quarter of fiscal 2000 arose from the completed acquisitions of Malleable and Datum. The fair value of the existing intangible assets as well as the technology currently under development was determined by using the income approach, which discounts expected future cash flows to present value. We derived the discount rates used in the present value calculations from a weighted average cost of capital analysis, weighted average return on assets, and venture capital rates of return, adjusted upward to reflect additional risks inherent in the development life cycle. These risk factors have increased the overall discount rate for these acquisitions. We consider the pricing model for products related to these acquisitions to be standard within the high-technology communications semiconductor industry. We do not expect to achieve a material amount of expense reductions or synergies as a result of integrating the acquired in-process technology. Therefore, the valuation assumptions do not include anticipated cost savings. After considering these factors, we estimated that the discount rate for Malleable was 35% and the discount rate for Datum was 30%. We expect that products incorporating the acquired technology from these acquisitions will be completed and begin to generate cash flows over the six to nine months period after integration. However, development of these technologies remains a significant risk to us due to the remaining effort to achieve technical viability, rapidly changing customer markets, uncertain standards for new products, and significant competitive threats from numerous companies. The nature of the efforts to develop the acquired technology into commercially viable products consists principally of planning, designing, and testing activities necessary to determine that the product can meet market expectations, including functionality and technical requirements. If we fail to bring these products to market in a timely manner, we could lose an opportunity to capitalize on emerging markets, and our business and operating results could be materially and adversely impacted. At the date of acquisition, we estimated that Datum's technology was 59% and Malleable's technology was 58% complete. These estimates were determined by comparing the time and cost spent to date, and the complexity of the technology achieved to date to the total cost, time and complexity that would be expended or achieved to bring the technology to completion. To date, progress on the acquired technologies has been in line with the Company's expectations at the date of acquisition. Development costs incurred subsequent to acquisition have been $ 2 million on Malleable's technology and $ 1 million on Datum's technology. We have not yet introduced products from these acquisitions to the market. If we fail to achieve the expected levels of revenues and net income from these products, our return on investment expected at the time that the acquisition was completed will be negatively impacted and any other assets related to the development activities may become impaired. Interest and other income, net - ------------------------------ Net interest and other income increased to $4.8 million in the third quarter of 2000 from $2.2 million in last year's third quarter due to higher cash balances available to earn interest. Gain on sale of investment - -------------------------- During the third quarter of 2000, we realized a pre-tax gain of approximately $14.2 million as a result of our disposition of a portion of our investment in Sierra Wireless, Inc., a publicly held company. These shares were previously subject to escrow restrictions and were not available for sale until the third quarter of fiscal 2000. We currently own 2.7 million common shares of Sierra Wireless of which approximately 234,000 are available for sale and the remainder are subject to certain resale provisions. We expect the resale restrictions to be lifted on 50% of the shares in May, 2001, and the restrictions on the remaining shares to be lifted in May, 2002. Provision for income taxes - -------------------------- The provision for income taxes consists primarily of estimated taxes on Canadian and other foreign operations. Recently issued accounting standards - ------------------------------------ In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and hedging activities. The Statement will require the recognition of all derivatives on our consolidated balance sheet at fair value. The Financial Accounting Standards Board has subsequently delayed implementation of the standard until financial years beginning after June 15, 2000. We expect to adopt the new Statement effective January 1, 2001. We expect the impact of this accounting standard will be immaterial to our financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101("SAB 101"), "Revenue Recognition", which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. The Company believes the adoption of SAB 101 will not have a material impact on the Company's financial position and results of operations. The Company is required to adopt SAB 101 no later than the fourth quarter of fiscal 2000. First Nine Months of 2000 and 1999 Net Revenues ($000,000) First nine months ---------------------- 2000 1999 Change Networking products $ 441.7 $ 190.0 132% Non-networking products 20.9 13.0 61% ------------------------ Total net revenues $ 462.6 $ 203.0 128% ======================== Net revenue of $462.6 million in the first nine months of 2000 increased 128% over the comparable period of 1999 as a result of strong networking revenue growth and relatively moderate non-networking growth. Gross Profit ($000,000) First nine months ---------------------- 2000 1999 Change Networking $ 344.8 $ 146.6 135% Non-networking 9.3 5.9 58% ----------------------- Total gross profit $ 354.1 $ 152.5 132% ======================= Percentage of net revenues 76.6% 75.1% Gross profit increased in the first nine months of 2000 compared to the first nine months of 1999 as a result of increased net revenues. Gross profit as a percentage of sales increased for the same periods as higher gross margin networking products represented a greater percentage of overall net revenue. Operating Expenses and Charges ($000,000) First nine months ---------------------- 2000 1999 Change Research and development $ 114.1 $ 57.5 98% Percentage of net revenues 25% 28% Marketing, general & administrative $ 68.7 $ 35.8 92% Percentage of net revenues 15% 18% Amortization of deferred stock compensation: Research and development $ 21.1 $ 2.4 Marketing, general and administrative 2.5 1.0 ------------------ Total $ 23.6 $ 3.4 ================== Percentage of net revenues 5% 2% Amortization of goodwill $ 18.7 $ 1.4 Costs of merger $ 36.9 $ 0.9 Acquisition of in process research and development $ 38.2 $ - R&D expenses increased in dollars but decreased as a percentage of net revenues in the first nine months of 2000 compared to the first nine months of 1999 as we increased R&D spending at a slower rate than our revenue growth. All of the R&D spending in 2000 and 1999 related to our networking products. Marketing, general and administrative expenses increased in dollars and decreased as a percentage of net revenues in the nine months of 2000 compared to the nine months of 1999. Amortization of deferred stock compensation increased in the first nine months of 2000 compared to the first nine months of 1999 as a result of the acquisitions during the first nine months of 2000. We incurred goodwill amortization charges in the first nine months of 2000 as a result of prior acquisitions as well as the Datum and Malleable acquisitions completed in the third quarter. We expect additional significant goodwill charges in the future. We incurred $36.9 million in merger costs in the first nine months of 2000 related to the Toucan, Extreme, AANetcom and QED acquisitions which were completed during the first nine months of 2000. These costs related primarily to investment banking and other professional fees. Liquidity and Capital Resources Cash and cash equivalents and short term investments increased from $206.3 million at the end of 1999 to $333.3 million at September 24, 2000. During the first nine months of 2000, operating activities provided $114.6 million in cash. Net income of $40.5 million includes non-cash charges of $24.2 million for depreciation, $20.2 million for amortization of intangibles, $23.7 million amortization of deferred stock compensation, a $38.2 million in process research and development charge, and non-cash gains on sale of investments of $41.3 million. Our year to date investing activities included the maturity of and reinvestment in short-term investments. We also made investments in other companies of $13.4 million, purchased $65.2 million of plant and equipment, spent net cash of $14.0 million on the acquisitions of Datum and Malleable and received $42.2 million of proceeds from the sale of investments and paid out $ 3.9 million in net wafer fabrication deposits. Our year to date financing activities provided $64.8 million. We used $7.2 million for debt and lease repayments and received $71.9 million of proceeds from issuing common stock. Our principal source of liquidity at September 24, 2000 was our cash, cash equivalents and short term investments of $333.3 million. We also have a line of credit with a bank that allows us to borrow up to $15 million provided, along with other restrictions, that we do not pay cash dividends or make any material divestments without the bank's written consent. We believe that existing sources of liquidity and anticipated funds from operations will satisfy our projected working capital, venture investing, capital expenditure and wafer deposit requirements through the end of 2000. We expect to spend approximately $44 million on new capital additions and to make additional venture investments as opportunities arise in the balance of 2000. FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA - --------------------------------------------------------------- Our company is subject to a number of risks - some are normal to the fabless networking semiconductor industry, some are the same or similar to those disclosed in previous SEC filings, and some may be present in the future. You should carefully consider all of these risks and the other information in this report before investing in PMC. The fact that certain risks are endemic to the industry does not lessen the significance of the risk. As a result of these risks, our business, financial condition or operating results could be materially adversely affected. This could cause the trading price of our common stock to decline, and you may lose part or all of your investment. Our business strategy contemplates acquisition of other companies or technologies, which could adversely affect our operating performance PMC has closed seven acquisitions in fiscal 2000. Acquiring products, technologies or businesses from third parties is an integral part of our business strategy. Management may be diverted from our operations while they identify and negotiate these acquisitions and integrate an acquired entity into our operations. Also, we may be forced to develop expertise outside our existing businesses, and replace key personnel who leave due to an acquisition. We have not previously attempted to integrate several acquisitions simultaneously and may not succeed in this effort. An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or issue additional equity. If we issue more equity, we may dilute our common stock with securities that have an equal or a senior interest. Acquired entities also may have unknown liabilities, and the combined entity may not achieve the results that were anticipated at the time of the acquisition. PMC may not realize the anticipated benefits of the Quantum Effect Devices merger On August 24, 2000, PMC completed the acquisition of Quantum Effect Devices, Inc., a publicly traded semiconductor company. PMC may not realize the anticipated benefits of this merger because of the following challenges. - - Incorporating QED's microprocessor technology into PMC's next generation of products - - Integrating QED's relatively small technical team with PMC's larger and more widely dispersed engineering organization, without losing the services of QED's technical experts in the microprocessor field - - Integrating QED's non-networking products with PMC's business, and - - Integrating different enterprise resource planning and accounting systems The integration of PMC and QED will be complex, time consuming and expensive and may disrupt PMC's and QED's businesses. In particular, PMC does not have manufacturing, selling or support experience for these products, some of which are sold to customers that PMC does not normally service. Some of QED's suppliers, vendors, licensees and licensors are PMC's competitors and as a result may alter their business relationship with PMC in the future. PMC and QED employees may experience uncertainty about their future role with the combined company. This may harm the combined company's ability to attract and retain key management, marketing and technical personnel. PMC has not yet achieved revenues from its recent acquisitions The products from six of the companies PMC has acquired in fiscal 2000 have been incorporated into customer equipment designs that have yet to generate significant revenue for PMC. These or any follow-on products may not achieve commercial success. These acquisitions may not generate future revenues or earnings. The timing of revenues from newly designed products is often uncertain. In the past, we have had to redesign products which we acquired when buying other businesses, resulting in increased expenses and delayed revenues. This may occur in the future as we commercialize the new products resulting from recent acquisitions. PMC initiated its presence in the digital signal processing market with the acquisitions of Toucan, Malleable and Datum. Prior to these acquisitions, PMC had limited design expertise in this technology, and may fail to bring digital signal processing products to market successfully. Datum's technology is applicable to the radio frequency wireless networking market - a market in which PMC has no current presence. PMC's operating results may be impacted differently depending on which method we use to account for acquisitions A future acquisition could adversely affect operating results, particularly if we record the acquisition as a purchase such as the Malleable and Datum acquisitions. In purchase acquisitions, we may incur a significant charge for purchased in process research and development, or IPR&D, in the period in which the acquisition is closed. In addition, we may capitalize a significant goodwill asset that would be amortized over its expected period of benefit. The resulting amortization expense could seriously impact operating results for many years. PMC may enter into additional purchase acquisitions in the future. We have accounted for a number of our recent mergers as pooling of interests. If, after completion of these mergers, events occur that cause the merger to fail to qualify for pooling of interests accounting treatment, the purchase method of accounting would apply. Purchase accounting treatment would seriously harm the reported operating results of the combined company because the estimated fair value of PMC common stock issued in the mergers is much greater than the historical net book value of the assets in each of the acquired company's accounts. PMC's rapid growth has strained our resources, and we may not be able to manage future growth PMC has experienced a period of rapid growth which has placed and will continue to place a significant strain on our resources. We have increased our employee headcount from 660 at the end of 1999 to 1,451 at the end of the third quarter of 2000, expanded our operations and facilities, and increased the responsibilities of management. We are experiencing typical challenges in integrating a number of acquisitions. This process is absorbing a high percentage of management time which must be diverted from other areas of our operations. We expect to continue the growth of our operations. This may significantly strain our management, manufacturing, product development, financial, information systems and other resources. We cannot be certain that our systems, procedures, controls and existing space will be adequate to support our operations. If one or more of our customers changes their ordering pattern or if we lose one or more of our customers, our revenues could decline We depend on a limited number of customers for a major portion of our revenues. Through direct, distributor and subcontractor purchases, Cisco Systems and Lucent Technologies each accounted for more than 10% of our fiscal 1999 and year to date 2000 revenues. We do not have long-term volume purchase commitments from any of our major customers. Our customers often shift buying patterns as they manage inventory levels, decide to use competing products, are acquired or divested, market different products, change production schedules or change their orders for other reasons. If one or more customers were to delay, reduce or cancel orders, our overall order levels may fluctuate greatly, particularly when viewed on a quarterly basis. If our customers use our competitors' products instead of ours, suffer a decline in demand for their products or are acquired or sold, our revenues may decline Our expenses are relatively fixed. Fluctuation in our revenues may cause our operating results to fluctuate. Demand for our products and, as a result our revenues, may decline for the following reasons outside our control. As our customers increase the frequency by which they design next generation systems and select the chips for those new systems, our competitors have an increased opportunity to convince our customers to switch to their products, which may cause our revenues to decline The markets for our products are intensely competitive and subject to rapid technological advancement in design tools, wafer manufacturing techniques, process tools and alternate networking technologies. We must identify and capture future market opportunities to offset the rapid price erosion that characterizes our industry. We may not be able to develop new products at competitive pricing and performance levels. Even if we are able to do so, we may not complete a new product and introduce it to market in a timely manner. Our customers may substitute use of our products in their next generation equipment with those of current or future competitors. We typically face competition at the design stage, where customers evaluate alternative design approaches that require integrated circuits. Our competitors have increasingly frequent opportunities to supplant our products in next generation systems because the product life and design-in cycles in many of our customers' products. Increasing competition in our industry will make it more difficult to earn design wins in our customer's equipment. Major domestic and international semiconductor companies, such as Intel, IBM, and Lucent Technologies, are concentrating an increasing amount of their substantially greater financial and other resources on the markets in which we participate. This represents a serious competitive threat to PMC. Emerging companies also provide significant competition in our segment of the semiconductor market. Our competitors include Applied Micro Circuits Corporation, Broadcom, Conexant Systems, Cypress Semiconductor, Dallas Semiconductor, Galileo Technology, Globespan, Integrated Device Technology, IBM, Infineon, Intel, Lucent Technologies, Motorola, Texas Instruments, Transwitch and Vitesse Semiconductor. Over the next few years, we expect additional competitors, some of which also may have greater financial and other resources, to enter the market with new products. In addition, we are aware of venture-backed companies that focus on specific portions of our broad range of products. Competition is particularly strong in the market for optical networking and optical telecommunication chips, in part due to the market's growth rate, which attracts larger competitors, and in part due to the number of smaller companies focused on this area. These companies, individually or collectively, could represent future competition for many design wins, and subsequent product sales. Larger competitors in our market have recently acquired or announced plans to acquire both publicly traded and privately held companies with advanced technologies. These acquisitions could enhance the ability of larger competitors to obtain new business which PMC might have otherwise won. We must often redesign our products to meet rapidly evolving industry standards and customer specifications, which may delay an increase in our revenues We sell products to a market whose characteristics include rapidly evolving industry standards, product obsolescence, and new manufacturing and design technologies. Many of the standards and protocols for our products are based on high speed networking technologies that have not been widely adopted or ratified by one of the standard setting bodies in our customers' industry. Our customers often delay or alter their design demands during this standard-setting process. In response, we must redesign our products to suit these changing demands. Redesign usually delays the production of our products. Our products may become obsolete during these delays. If demand for our customers' products changes, including due to a downturn in the networking industry, our revenues could decline Our customers routinely build inventories of our products in anticipation of end demand for their products. Many of our customers have numerous product lines, numerous component requirements for each product, and sizeable and very complex supplier structures. This makes forecasting their production requirements difficult and can lead to an inventory surplus of certain of their suppliers' components. In the past, some of our customers have built PMC component inventories that exceeded their production requirements. Those customers subsequently reduced their orders and impacted our operating results. This is likely to happen again. Several telecom service providers have recently reported difficulty accessing the capital needed to build their networks. This has affected recent operating results at several telecom and networking equipment makers. If this decline in end-user purchasing continues or expands to other equipment manufacturers, demand for PMC's products could decline. In addition, while all of our sales are denominated in US dollars, our customers' products are sold worldwide. Any major fluctuations in currency exchange rates could materially affect our customers' end demand, and force them to reduce orders, which could cause our revenues to decline. Since we develop products many years before their volume production, if we inaccurately anticipate our customers' needs, our revenues may not increase Our products generally take between 18 and 24 months from initial conceptualization to development of a viable prototype, and another 6 to 18 months to be designed into our customers' equipment and into production. They often need to be redesigned because manufacturing yields on prototypes are unacceptable or customers redefine their products to meet changing industry standards. As a result, we develop products many years before volume production and may inaccurately anticipate our customers' needs. There have been times when we either designed products that had more features than were demanded when they were introduced to the market or conceptualized products that were not sufficiently feature-rich to meet the needs of our customers or compete effectively against our competitors. This may happen again. If the recent trend of consolidation in the networking industry continues, our customers may be acquired or sold, which could cause those customers to cancel product lines or development projects and our revenues to decline The networking equipment industry has experienced significant merger activity and partnership programs. Through mergers or partnerships, our customers could seek to remove redundancies in their product lines or development initiatives. This could lead to the cancellation of a product line into which PMC products are designed or a development project on which PMC is participating. In the cases of a product line cancellation, PMC revenues could be materially impacted. In the case of a development project cancellation, we may be forced to cancel development of one or more products, which could mean opportunities for future revenues from this development initiative could be lost. If the market does not accept the recently developed specifications and protocols on which our new products are based, we may not be able to sustain or increase our revenues Some of our other recently introduced products adhere to specifications developed by industry groups for transmissions of data signals, or packets, over high-speed fiber optics transmission standards. These transmission standards are called synchronous optical network, or SONET, in North America, and synchronous data hierarchy, or SDH, in Europe. The specifications, commonly called packet-over-SONET/SDH, may be rejected for other technologies, such as mapping IP directly onto fiber. In addition, we can not be sure whether our products will compete effectively with packet-over-SONET/SDH offerings of other companies. A substantial portion of our business also relies on continued industry acceptance of asynchronous transfer mode, or ATM, products. ATM is a networking protocol. While ATM has been an industry standard for a number of years, the overall ATM market has not developed as rapidly as some observers had predicted it would. As a result, competing communications technologies, including gigabit and fast ethernet and packet-over-SONET/SDH, may inhibit the future growth of ATM and our sales of ATM products. A significant portion of PMC's revenue relate to sales of our MIPS-based processors. If MIPS Technologies develops future generations of its technology, we may not be able to obtain a licence on reasonable terms. MIPS Technologies has introduced, and will likely continue to introduce, new generations of its microprocessor technology architecture containing improvements that are not covered by the technology we are currently licensing from MIPS Technologies. A significant part of our success could depend on our ability to develop products that incorporate those improvements. We may not be able to license the technology for any new improvements from MIPS Technologies on commercially reasonable terms or at all. If we cannot obtain required licenses from MIPS Technologies, we could encounter delays in product development while we attempt to develop similar technology, or we may not be able to develop, manufacture and sell products incorporating this technology. In addition, our current microprocessor products and planned future products are based upon the microprocessor technology we license from MIPS Technologies. If we fail to comply with any of the terms of its license agreement, MIPS Technologies could terminate our rights, preventing us from marketing our current and planned microprocessor products. We anticipate lower margins on mature and high volume products, which could adversely affect our profitability We expect the average selling prices of our products to decline as they mature. Historically, competition in the semiconductor industry has driven down the average selling prices of products. If we price our products too high, our customers may use a competitor's product or an in-house solution. To maintain profit margins, we must reduce our costs sufficiently to offset declines in average selling prices, or successfully sell proportionately more new products with higher average selling prices. Yield or other production problems, or shortages of supply may preclude us from lowering or maintaining current operating costs. Our networking products range widely in terms of the margins they generate. A change in product mix sales could impact our operating results materially. We may not be able to meet customer demand for our products if we do not accurately predict demand or if we fail to secure adequate wafer fabrication or assembly capacity Anticipating demand is difficult because our customers face volatile pricing and demand for their end-user networking equipment. If our customers were to delay, cancel or otherwise change future ordering patterns, we could be left with unwanted inventory. Recently, our suppliers, particularly silicon wafer suppliers, have experienced an increase in the demand for their products or services. If our silicon wafer or other suppliers are unable or unwilling to increase productive capacity in line with the growth in demand, we may suffer longer production lead times. Longer production lead times require that we forecast the demand for our products further into the future. Thus, a greater proportion of our manufacturing orders will be based on forecasts, rather than actual customers orders. This increases the likelihood of forecasting errors. These forecasting errors could lead to excess inventory in certain products and insufficient inventory in others, which could adversely affect our operating results. In addition, if our suppliers are unable or unwilling to increase productive capacity in line with demand, we may suffer supply shortages or be allocated supply. A shortage in supply could adversely impact our ability to satisfy customer demand, which could adversely affect our customer relationships along with our current and future operating results. We expect to be supply constrained on our shipments of microprocessors in the near term. We rely on limited sources of wafer fabrication, the loss of which could delay and limit our product shipments We do not own or operate a wafer fabrication facility. Three outside foundries supply most of our semiconductor device requirements. Our foundry suppliers also produce products for themselves and other companies. In addition, we may not have access to adequate capacity or certain process technologies. We have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the foundries we use are unable or unwilling to manufacture our products in required volumes, we may have to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough, if ever, to satisfy our production requirements. Some companies which supply our customers are similarly dependent on a limited number of suppliers to produce their products. These other companies' products may be designed into the same networking equipment into which we are designed. Our order levels could be reduced materially if these companies are unable to access sufficient production capacity to produce in volumes demanded by our customers because our customers may be forced to slow down or halt production on the equipment into which we are designed. We depend on third parties in Asia for assembly of our semiconductor products which could delay and limit our product shipments Sub-assemblers in Asia assemble all of our semiconductor products. Raw material shortages, political and social instability, assembly house service disruptions, currency fluctuations, or other circumstances in the region could force us to seek additional or alternative sources of supply or assembly. This could lead to supply constraints or product delivery delays which, in turn, may result in the loss of customers. We have less control over delivery schedules, assembly processes, quality assurances and costs than competitors that do not outsource these tasks. We depend on a limited number of design software suppliers, the loss of which could impede our product development A limited number of suppliers provide the computer aided design, or CAD, software we use to design our products. Factors affecting the price, availability or technical capability of these products could affect our ability to access appropriate CAD tools for the development of highly complex products. In particular, the CAD software industry has been the subject of extensive intellectual property rights litigation, the results of which could materially change the pricing and nature of the software we use. We also have limited control over whether our software suppliers will be able to overcome technical barriers in time to fulfill our needs. We are subject to the risks of conducting business outside the United States to a greater extent than companies which operate their businesses mostly in the United States, which may impair our sales, development or manufacturing of our products We are subject to the risks of conducting business outside the United States to a greater extent than most companies because, in addition to selling our products in a number of countries, a significant portion of our research and development and manufacturing is conducted outside of the United States. PMC's geographic expansion, acquisitions and growth rate could hinder its ability to coordinate design and sales activities. If PMC is unable to develop systems and communication processes to support its expanding geographic diversity, it may suffer product development delays or strained customer relationships. We may lose our ability to design or produce products, could face additional unforeseen costs or could lose access to key customers if any of the nations in which we conduct business impose trade barriers or new communications standards We may have difficulty obtaining export licenses for certain technology produced for us outside the United States. If a foreign country imposes new taxes, tariffs, quotas, and other trade barriers and restrictions or the United States and a foreign country develop hostilities or change diplomatic and trade relationships, we may not be able to continue manufacturing or sub-assembly of our products in that country and may have fewer sales in that country. We may also have fewer sales in a country that imposes new communications standards or technologies. This could inhibit our ability to meet our customers' demand for our products and lower our revenues. If foreign exchange rates fluctuate significantly, our profitability may decline We are exposed to foreign currency rate fluctuations because a significant part of our development, test, marketing and administrative costs are denominated in Canadian dollars, and our selling costs are denominated in a variety of currencies around the world. In addition, a number of the countries in which we have sales offices have a history of imposing exchange rate controls. This could make it difficult to withdraw the foreign currency denominated assets we hold in these countries. We may have difficulty collecting receivables from customers based in foreign countries, which could adversely affect our earnings We sell our products to customers around the world. Payment cycle norms in these countries may not be consistent with our standard payment terms. Thus, we may have greater difficulty collecting receivables on time from customers in these countries. This could impact our financial performance, particularly on our balance sheet. In addition, we may be faced with greater difficulty in collecting outstanding balances due to the sheer distances between our collection facilities and our customers, and we may be unable to enforce receivable collection in foreign nations due to their business legal systems. If one or more of our foreign customers do not pay their outstanding receivable, we may be forced to write-off the account. This could have a material impact on our earnings. The loss of personnel could preclude us from designing new products To succeed, we must retain and hire technical personnel highly skilled at the design and test functions used to develop high speed networking products and related software. The competition for such employees is intense. We, along with our peers, customers and other companies in the communications industry, are facing intense competition for those employees from our peers and an increasing number of startup companies which are emerging with potentially lucrative employee ownership arrangements. We do not have employment agreements in place with our key personnel. We issue common stock options that are subject to vesting as employee incentives. These options, however, are effective as retention incentives only if they have economic value. If we cannot protect our proprietary technology, we may not be able to prevent competitors from copying our technology and selling similar products, which would harm our revenues To compete effectively, we must protect our proprietary information. We rely on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We hold several patents and have a number of pending patent applications. We might not succeed in attaining patents from any of our pending applications. Even if we are awarded patents, they may not provide any meaningful protection or commercial advantage to us, as they may not be of sufficient scope or strength, or may not be issued in all countries where our products can be sold. In addition, our competitors may be able to design around our patents. We develop, manufacture and sell our products in Asian and other countries that may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes piracy of our technology and products more likely. Steps we take to protect our proprietary information may not be adequate to prevent theft of our technology. We may not be able to prevent our competitors from independently developing technologies that are similar to or better than ours. Our products employ technology that may infringe on the proprietary rights of third parties, which may expose us to litigation and prevent us from selling our products Vigorous protection and pursuit of intellectual property rights or positions characterize the semiconductor industry. This often results in expensive and lengthy litigation. We, as well as our customers or suppliers, may be accused of infringing on patents or other intellectual property rights owned by third parties. This has happened in the past. An adverse result in any litigation could force us to pay substantial damages, stop manufacturing, using and selling the infringing products, spend significant resources to develop non-infringing technology, discontinue using certain processes or obtain licenses to the infringing technology. In addition, we may not be able to develop non-infringing technology, nor might we be able to find appropriate licenses on reasonable terms. Patent disputes in the semiconductor industry are often settled through cross-licensing arrangements. Because we currently do not have a substantial portfolio of patents compared to our larger competitors, we may not be able to settle an alleged patent infringement claim through a cross-licensing arrangement. We are therefore more exposed to third party claims than some of our larger competitors and customers. In the past, our customers have been required to obtain licenses from and pay royalties to third parties for the sale of systems incorporating our semiconductor devices. Until December of 1997, we indemnified our customers up to the dollar amount of their purchases of our products found to be infringing on technology owned by third parties. Customers may also make claims against us with respect to infringement. Furthermore, we may initiate claims or litigation against third parties for infringing our proprietary rights or to establish the validity of our proprietary rights. This could consume significant resources and divert the efforts of our technical and management personnel, regardless of the litigation's outcome. Securities we issue to fund our operations could dilute your ownership We may need to raise additional funds through public or private debt or equity financing to fund our operations. If we raise funds by issuing equity securities, the percentage ownership of current stockholders will be reduced and the new equity securities may have priority rights to your investment. We may not obtain sufficient financing on terms we or you will find favorable. We may delay, limit or eliminate some or all of our proposed operations if adequate funds are not available. Our stock price has been and may continue to be volatile In the past, our common stock price has fluctuated significantly. This could continue as our or our competitors announce new products, our and our peers or customers' results fluctuate, conditions in the networking or semiconductor industry change or investors change their sentiment toward technology stocks. In addition, increases in our stock price and expansion of our price-to-earnings multiple may have made our stock attractive to momentum or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion regarding our risk management activities contains "forward-looking statements" that involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. We are exposed to foreign currency fluctuations through our operations in Canada and elsewhere. In our effort to hedge this risk, we typically forecast our operational currency needs, purchase such currency on the spot market at the beginning of an operational period, and classify these funds as a hedge against operations. We usually limit the operational period to less than three months to avoid undue exposure of our asset position to further foreign currency fluctuation. While we expect to utilize this method of hedging our foreign currency risk in the future, we may change our hedging methodology and utilize foreign exchange contracts that are currently available under our operating line of credit agreement. Occasionally, we may not be able to correctly forecast our operational needs. If our forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses. At the end of the third quarter of 2000, we did not have significant foreign currency denominated net asset or net liability positions, and we had no outstanding foreign exchange contracts. We maintain investment portfolio holdings of various issuers, types, and maturity dates with various banks and investment banking institutions. We sometimes hold investments beyond 120 days, and the market value of these investments on any day during the investment term may vary as a result of market interest rate fluctuations. We do not hedge this exposure because short-term fluctuations in interest rates would not likely have a material impact on interest earnings. We classify our investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluate this designation as of each balance sheet date. In the future, we expect to hold the short-term investments we buy through to maturity. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - - 11.1 Calculation of earnings per share 1 - 27 Financial Data Schedule (b) Reports on Form 8-K - - A Current Report on Form 8-K was filed on October 3, 2000 to disclose the completion of the Company's acquisition of SwitchOn Networks, Inc. - An amended Current Report on Form 8-K/A was filed on September 29,2000 to report financial information required under Item 7 relating to the acquisition of Datum Telegraphic, Inc. - A Current Report on Form 8-K was filed on September 1, 2000 to disclose the completion of the Company's acquisition of Quantum Effect Devices, Inc. - A Current Report on Form 8-K was filed on August 28, 2000 to disclose the completion of the Company's acquisition of Datum Telegraphic, Inc. - An amended Current Report on Form 8-K/A was filed on August 7,2000 to report financial information required under Item 7 relating to the acquisition of Malleable Technologies, Inc. - A Current Report on Form 8-K was filed on July 25, 2000 to disclose that the Company had signed a definitive agreement to acquire Quantum Effect Devices, Inc. - A Current Report on Form 8-K was filed on July 12, 2000 to disclose the completion of the Company's acquisition of Malleable Technologies, Inc. - A Current Report on Form 8-K was filed on June 30, 2000 to disclose that the Company had signed a definitive agreement to purchase Datum Telegraphic, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PMC-SIERRA, INC. (Registrant) Date: November 8, 2000 /S/ John W. Sullivan ----------------- ------------------------------------------------ John W. Sullivan Vice President, Finance (duly authorized officer) Principal Accounting Officer - ------------------------ (1) Refer to Note 6 of the financial statements included in Item I of Part I of this Quarterly Report. EX-27 2 0002.txt FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FILED FOR THE NINE MONTHS ENDED SEPTEMBER 24,2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 DEC-27-1999 SEP-24-2000 252,484 80,810 99,489 (1,408) 32,502 495,712 175,524 (76,346) 991,802 201,140 0 0 0 763,637 5,962 991,802 462,571 462,571 108,443 108,443 300,234 0 119 107,998 67,516 40,482 0 0 0 40,482 0.25 0.23
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