UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 28, 2013

or

¨ 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 of incorporation or organization)	(I.R.S. Employer Identification No.)

1380 Bordeaux Drive

Sunnyvale, CA 94089

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 239-8000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of exchange on which registered
Common Stock, $0.001 Par Value Preferred Stock Purchase Rights	NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated  filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

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 June 29, 2013 as reported by the NASDAQ Global Select Market, was approximately $0.6 billion. Shares of Common Stock held by each executive officer and director and by each person known to the registrant who owns more than 5% 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 19, 2014, the registrant had 194,431,257 shares of Common Stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant’s 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K Report. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 28, 2013.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		4
Item 1A.	Risk Factors		10
Item 1B.	Unresolved Staff Comments		21
Item 2.	Properties		21
Item 3.	Legal Proceedings		22
Item 4.	Mine Safety Disclosures		22
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		23
Item 6.	Selected Financial Data		26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		43
Item 8.	Financial Statements and Supplementary Data		45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		89
Item 9A.	Controls and Procedures		89
Item 9B.	Other Information		91
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		94
Item 11.	Executive Compensation		94
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		94
Item 13.	Certain Relationships and Related Transactions and Director Independence		95
Item 14.	Principal Accountant Fees and Services		95
PART IV
Item 15.	Exhibits and Financial Statement Schedules		95
	SIGNATURES		100

Unless the context requires otherwise, “PMC-Sierra”, “PMC”, “the Company”, “us”, “our” or “we”, mean PMC-Sierra, Inc. together with our subsidiary companies.

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Annual Report”) and the portions of our Proxy Statement incorporated by reference into this Annual Report contain forward-looking statements. We often use words such as “anticipates”, “believes”, “plans”, “expects”, “future”, “intends”, “may”, “should”, “estimates”, “predicts”, “potential”, “continue”, “becoming”, “transitioning” and similar expressions to identify such forward-looking statements.

These forward-looking statements apply only as of the date of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements made herein or elsewhere, whether as a result of new information, future events or otherwise. Our actual results could differ materially and adversely from those anticipated in forward-looking statements, including without limitation the risks described under “Item IA. Risk Factors” and elsewhere in this Annual Report and our other filings with the SEC. Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Such forward-looking statements include statements as to, among other topics:

• business strategy;

• business outlook;

• sales, marketing and distribution;

• wafer fabrication capacity;

• competition and pricing;

• critical accounting policies and estimates;

• customer product inventory levels, needs and order levels;

• demand for communications network infrastructure equipment;

• net revenues;

• gross profit;

• research and development expenses;

• selling, general and administrative expenses;

• other income (expense), including interest income (expense);

• foreign exchange rates;

• taxation rates and tax provision;

• sources of liquidity and liquidity sufficiency;

• capital resources;

• capital expenditures;

• restructuring activities, expenses and associated annualized savings;

• cash commitments;

• purchase commitments;

• use of cash;

• expectation regarding our amortization of purchased intangible assets; and

• expectations regarding distribution from certain investments.

This Annual Report should be read in conjunction with our periodic filings made with the SEC subsequent to the date of the original filing, including any amendments to those filings, as well as any current reports filed on Form 8-K subsequent to the date of the original filing.

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PART I

ITEM 1. BUSINESS.

OVERVIEW

PMC-Sierra, Inc. (the “Company” or “PMC”) is a semiconductor and software solution innovator transforming networks that connect, move and store Big Data. The Company designs, develops, markets and supports semiconductor, embedded software, and board level solutions by integrating its mixed-signal, software and systems expertise through a network of offices in North America, Europe and Asia.

We have approximately 700 different semiconductor devices that are sold to leading equipment and design manufacturers, who in turn supply their equipment principally to enterprises, Cloud Data Centers and carriers worldwide. We provide solutions for our customers by leveraging our intellectual property, design expertise and systems knowledge across a broad range of applications and industry protocols. PMC’s portfolio of semiconductor devices is used in various applications of storage and communications network infrastructure equipment. Building on a track record of technology leadership, we are driving innovation across storage, optical and mobile networks. Our highly integrated solutions increase performance and enable next generation services to accelerate the network transformation.

PMC was incorporated in the state of California in 1983 and reincorporated in the state of Delaware in 1997. Our Common Stock trades on the NASDAQ Global Select Market under the symbol “PMCS”. Our fiscal year ended on the last Sunday of the calendar year in 2011. Since fiscal year 2012, our fiscal year has ended on the last Saturday of the calendar year. Fiscal year 2013 and 2012 consisted of 52 weeks and fiscal year 2011 consisted of 53 weeks.

INDUSTRY OVERVIEW

Mobile and Internet traffic is growing at an unprecedented rate, driven by the continued rise of mobile broadband, Data Center-based cloud services and Internet-based video content. Cisco predicts that by 2017, global Internet IP traffic will have tripled to 120 petabytes per month and mobile data traffic will have grown to nearly 12 exabytes per month. This bandwidth growth in conjunction with industry wide momentum behind cloud-based service delivery is placing an incredible strain on mobile, metro optical and enterprise Data Center networks in order to meet the needs of new applications such as social media, cloud-storage and video-streaming to name a few. This insatiable demand for real-time access to high bandwidth digital content is driving traditional service providers and Data Center operators to upgrade and improve their network infrastructure and storage management capabilities to better connect, move and store Big Data efficiently and securely.

We operate in one reportable segment—semiconductor solutions for communications network infrastructure. Our semiconductor devices enable networking equipment primarily in the following three end market segments: Storage, Optical and Mobile networks described in the overview of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Storage market segment is made up of enterprise storage equipment manufacturers and covers two broad areas: server storage, and stand-alone external storage systems. The Optical market segment refers to infrastructure suppliers of transport and access networks that use optical transport protocol and/or physical optical medium. The Mobile market segment is mainly infrastructure equipment suppliers, including base station and backhaul equipment, supporting the wireless transmission of content from and to mobile hand devices.

OUR BUSINESS STRATEGY

Our mission is to be the semiconductor and software solution innovator transforming networks that connect, move and store Big Data. We achieve this by integrating our mixed-signal, software, and systems expertise to deliver industry-leading products with best-in-class quality, service, and technical support. The semiconductor solutions we develop are based on our in-depth knowledge of network applications, system requirements and

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networking protocols, as well as high-speed mixed-signal and system-on-chip design expertise. To realize our mission while expanding our business profitably, our business strategy can be summarized as follows:

1. Leverage our mixed signal, software and systems expertise to be the leading supplier of silicon and embedded software solutions for Storage, Optical, and Mobile networks;

2. Deliver best-in-class performance and integration to lead the server and storage system market segments, for both Enterprise and Cloud Data Centers;

3. Build on our position as the leading telecom silicon provider to enable the most integrated Optical Transport Network (“OTN”) and Passive Optical Network (“PON”) solutions in the metro and access networks; and

4. Enable mobile broadband via 4G LTE by providing a seamless transition to packet based backhaul with our multi-service network processor platform and integrated Radio solutions to allow our customers to leverage available spectrum.

OUR PRODUCTS AND MARKET SEGMENTS  THAT WE SERVE

Our portfolio of semiconductor devices are used in various applications of communications network infrastructure equipment and enable the transporting and storing of large quantities of digital data, in a secure manner.

Our semiconductor devices enable networking equipment primarily in three market segments: Storage, Optical and Mobile networks. In 2013, the storage network represented 67% of total revenues, the optical network represented 19% of total revenues, and the mobile network represented 14% of total revenues.

Storage

Our Storage products are supplied directly to Original Equipment Manufacturers (“OEMs”) and channel customers. Our products and solutions for the Storage market segment enable high-speed communications between the servers, switches and storage devices that comprise these systems thus allowing large quantities of data to be stored, managed and moved securely. As storage demand continues to grow, managing the data becomes more critical for the operation of the entire company or service provider. Our focus in this area is in developing controllers and switches for high-performance storage systems in Cloud and Enterprise Data Center applications. Our solutions range from chip level offerings to full board, RAID stack, management and application software (e.g. SSD Caching). We also include printer Application-specific Integrated Circuits (“ASICs”) and Microprocessors for Enterprise Networking in this market segment as they are most aligned with our Enterprise storage customers. In 2013, PMC acquired Integrated Device Technology, Inc.’s (“IDT”) Enterprise Flash Controller business and certain PCI express (“PCIe”) switch assets (see Item 8—Financial Statements and Supplemental Data, Note 2—Business Combinations). The acquisition accelerates the Company’s product offering in the Enterprise Flash Controller and PCI Express Switch businesses, including the world’s first NVM Express (“NVMe”) flash controller. Currently, the Storage market segment represents 67% of our net revenues.

Storage products and/or applications incorporating PMC’s semiconductor solutions	PMC Products	Examples of OEMs(1)
Storage Area Networks	RAID-on-Chip (RoC)	Dell
Server Attached Storage	Controllers	EMC
SSD Cache Performance	Expanders	Huawei-Symantec
Enterprise Networking	Loop Switches/Microprocessors	HP
Data Center	Physical Layer Products	Hitachi
High Speed Laser and Multi-Function Printers	MIPs Processors	IBM, NetApp

(1) Examples in the order listed refer to Dell Inc., EMC Corp., Chengdu Huawei-Symantec Technologies Co., Hewlett-Packard Company, Hitachi, Ltd., International Business Machines Corporation, NetApp, Inc.

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Optical

Our Optical products include our Wide Area Network communication products focused on Metro and access networks, including Optical Transport Networks (“OTN”), Synchronous Optical Networks (“SONET”), Asynchronous Transfer Mode (“ATM”) and Fiber to the Home. Our Metro products are used in equipment such as edge routers, multi-service provisioning platforms, and optical transport platforms where signals are gathered, processed and transmitted to the next destination as quickly and efficiently as possible in the metro area network. For high-capacity data communication over fiber optic systems, the standard used for more than a decade is SONET in North America and parts of Asia, and is Synchronous Digital Hierarchy (“SDH”) in the rest of the world. Carriers are now starting to migrate their metro networks to packet-based networks based on OTN standards. OTN equipment is starting to be deployed in the metro and access portions of the network. PMC’s OTN product family is on track to put us in a lead position in this emerging network technology. Currently, the Optical market segment represents 19% of our net revenues.

Optical products and/or applications incorporating PMC’s semiconductor solutions	PMC Products	Examples of OEMs(1)
Optical Transport Network	OTN switches	Alcatel-Lucent
— P-OTP/P-OTS	OTN Framers	Ciena
— ROADM/DWDM	Ethernet (Framers, Mappers, MAC)	Cisco
Carrier/Ethernet/Switch/Routers	SONET/SDH Framers	FiberHome
Multi-service switches	Cross Connects	Huawei
— MSPP/MSTP/ADM	T1/E1 Mappers/Framers	Juniper
Passive Optical Network	DS-3/E3 Mappers/Framers	Nokia Siemens
— EPON & 10G-EPON		Tellabs
— GPON & XG-PON		ZTE

(1) Examples in the order listed refer to Alcatel-Lucent, S.A., Ciena Corp., Cisco Systems, Inc., Fiberhome Telecommunication Technologies Co., Ltd., Huawei Technology Co. Ltd., Juniper Networks, Inc., Nokia Corporation, Tellabs Inc., and ZTE Corporation.

Mobile

Our Mobile products include Winpath processors, T1/E1 and SERDES devices sold into Mobile access markets and include devices that are used in 2G, 3G and 4G wireless base stations and mobile backhaul equipment. Our highly integrated network processors are optimized for fiber and microwave backhaul, and cell site aggregation networks. PMC initiated new efforts within the remote radio head developing product that takes advantage of our mixed signal expertise and intellectual property for integrated solution that lowers power and offers smaller size. Currently, the Mobile market segment represents 14% of our net revenues.

Mobile products and/or applications incorporating PMC’s semiconductor solutions	PMC Products	Examples of OEMs(1)
Mobile Backhaul	WinPath Processors	Alcatel-Lucent
3GPP Wireless Base Stations	UFE Family	Cisco
Remote Radio Heads	Combiner/Serializers	Ericsson
	Transceivers/Framers	Huawei
	Radio devices	Nokia Siemens
		Tellabs
		ZTE

(1) Examples in the order listed refer to Alcatel-Lucent, S.A., Cisco Systems, Inc., Telefonaktiebolaget LM Ericsson, Huawei Technology Co. Ltd., Nokia Corporation, Tellabs Inc., and ZTE Corporation.

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SALES, MARKETING AND DISTRIBUTION

Our sales and marketing strategy is to have our products designed into our customers’ equipment by developing superior products for which we provide best-in-class service and technical support. Our marketing team is focused on developing new products and solutions that meet the needs of our customers, including OEMs and original design manufacturers. We are often involved in the early stages of design concerning our customers’ plans for new equipment. This helps us determine if our existing products can be used in their new equipment or if new devices or software need to be developed for the application. To assist us in our planning process, we are in regular contact with our key customers to discuss industry trends, emerging standards and ways in which we can assist in their new product requirements.

Our sales team is focused on selling and supporting our chips and chipsets for equipment providers who are in turn selling their products to service providers, enterprises, or consumers. To better match our available sales resources to market opportunities, we also focus our sales and support efforts on targeted customers.

We sell our products to end customers directly and through distributors and independent contract manufacturers’ representatives. In 2013, approximately 25% of our orders were shipped through distributors, approximately 47% were shipped by us directly to contract manufacturers selected by OEMs, and the balance was shipped directly to our OEM customers.

In 2013, our largest distributor was Macnica Inc. which sold our products into Japan and Taiwan. In 2013, sales shipped through Macnica represented 10% of our total net revenues. Our second largest distributor is Avnet Inc. Sales shipped through Avnet in 2013 represented 9% of our total net revenues.

In 2013, we had two end customers, Hewlett-Packard Company and EMC Corp., which each accounted for more than 10% of our net revenues.

Our sales outside of the United States, based on customer billing location, accounted for 89%, 86% and 83% of total revenue in 2013, 2012 and 2011, respectively. Our sales to customers in Asia, including Japan and China, were 78%, 78% and 73% of total revenues in 2013, 2012 and 2011, respectively.

MANUFACTURING

PMC-Sierra is a fabless company, meaning that we do not own or operate foundries for the production of the silicon wafers from which our products are made. Instead, we work with independent merchant foundries and chip assemblers for the manufacture of our products. We believe our fabless approach to manufacturing provides us with the benefit of superior manufacturing capability, scalability, as well as the flexibility to move wafer manufacture, assembly and test of our products to the vendors that offer the best technology and service at a competitive price.

Our lead-time, or the time required to manufacture our devices, is typically 12 to 18 weeks. Based on this lead-time, our team of production planners initiates purchase orders with our wafer suppliers and with our chip assemblers for the assembly and test of our parts so that, to the best of our ability, our products are available to meet customer demand.

Wafer Fabrication

We manufacture our products at independent foundries using standard Complementary Metal Oxide Semiconductor process techniques. We have in the past purchased silicon wafers from which we manufacture our products from Globalfoundries Inc., Taiwan Semiconductor Manufacturing Corporation (“TSMC”), Texas Instruments Incorporated and United Microelectronics Corporation (“UMC”). These independent foundries produce the wafers for our networking semiconductor products ranging in sizes from 0.18 microns to 28 nanometers. By using independent foundries to fabricate our wafers, we are better able to concentrate our resources on designing, developing and testing new products. In addition, we avoid the fixed costs associated

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with owning and operating fabrication and chip assembly facilities and the costs associated with updating these facilities to manage constantly evolving process technologies.

We have existing supply agreements with UMC and TSMC. Generally, terms include but are not limited to, supply terms without minimum unit volume requirements for PMC, indemnification and warranty provisions, quality assurances and termination conditions.

Assembly and Test

Once our wafers are fabricated, they must be probed or inspected to identify which individual units, referred to as die, were properly manufactured. Most wafers that we purchase are sent directly to an outside assembly house where the die are individually cut and packaged into semiconductor devices. The individual devices are then run through various electrical, mechanical and visual tests before customer delivery. PMC outsources all of its wafer probe, assembly and final testing to independent subcontractors.

Quality Assurance

The industries that we serve require high quality, reliable semiconductors for incorporation into their equipment. We pre-qualify each vendor, foundry, assembly and test subcontractor. Wafers supplied by outside foundries must meet our incoming quality and test standards. The testing function is performed predominantly by independent Asian and U.S. companies.

PMC also manufactures and sells Printed Circuit Board-based products. These products are assembled and tested by an independent contract manufacturer before shipping to a distribution center. The design, materials, production test and packaging are specified by PMC and the manufacturing subcontractors are qualified and regularly audited by PMC.

RESEARCH AND DEVELOPMENT

Our research and development efforts are market and customer focused and can involve the development of both hardware and software. These devices and reference designs are targeted for use in enterprise, storage and service provider markets. Increasingly, our OEM customers that serve these end markets are demanding complete solutions with software support and complex feature sets, and we are developing products to fill this need.

From time to time we announce new products to the public once development of the product is substantially completed and there are no longer significant technical risks and costs to be incurred. As we have a portfolio of approximately 700 products, we do not consider any individual new product or group of products released in a year to be material, beyond our continuing development of a portfolio of products that meet our customers’ needs.

At the end of fiscal 2013, we had design centers in the United States (California, Pennsylvania, Texas, Oregon, Colorado and New Jersey), Canada (British Columbia, Alberta, Saskatchewan and Quebec), Israel (Herzliya), China (Shanghai), Germany (Ismaning and Neckarsulm) and India (Bangalore).

Our research and development spending was $211.0 million in 2013, $220.9 million in 2012, and $227.1 million in 2011.

BACKLOG

Our sales originate from customer purchase orders. However, our customers frequently revise order quantities and shipment schedules to reflect changes in their requirements. As of December 28, 2013, our backlog of products scheduled for shipment within three months totaled approximately $87 million. Unless our customers cancel or defer to a subsequent year with respect to a portion of this backlog, we expect this entire

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backlog to be filled in 2014. As of December 29, 2012, our backlog of products scheduled for shipment within three months totaled approximately $89 million.

Our backlog includes our backlog of shipments to direct customers, minor distributors and a portion of shipments by our major distributor to end customers. Our customers may cancel or defer backlog orders. Accordingly, we believe that our backlog at any given time is not a meaningful indicator of future long-term revenues. Backlog may not be comparable between companies.

COMPETITION

We typically face competition at the customer design stage when our customers are determining which semiconductor components to use in their equipment designs.

Most of our customers choose a particular semiconductor component primarily based on whether the component:

• meets the functional requirements;

• interfaces easily with other components in the product;

• meets power usage requirements;

• is priced competitively; and

• is commercially available on a timely basis.

OEMs also consider the quality of the supplier when determining which component to include in a design. Many of our customers will consider the breadth and depth of the supplier’s technology, as using one supplier for a broad range of technologies can often simplify and accelerate the design of next generation equipment. OEMs will also consider a supplier’s design execution reputation, as many OEMs design their next generation equipment concurrently with the semiconductor component design. OEMs also consider whether a supplier has been pre-qualified, as this ensures that components made by that supplier will meet the OEM’s quality standards.

We compete against established peer-group semiconductor companies that focus on the communications and storage semiconductor business. These companies include the following: Altera Corp., Applied Micro Circuits Corp.; Broadcom Corp.; Cortina Systems, Inc.; Emulex Corp.; Exar Corp.; Infineon Technologies AG; Intel Corp.; Texas Instrument Inc; LSI Corp.; Maxim Integrated Products, Inc.; Marvell Technology Group Ltd.; Mindspeed Technologies, Inc.; QLogic Corp.; Vitesse Semiconductor; and Xilinx, Inc. Many of these companies are well financed, have significant communications semiconductor technology assets and established sales channels, and depend on the market in which we participate for the bulk of their revenues.

It is possible for additional competitors to enter the market with new products, some of which may also have greater financial and other resources than we do.

LICENSES, PATENTS AND TRADEMARKS

We rely in part on patents to protect our intellectual property and have a total of 673 U.S. and 24 foreign patents for circuit designs and other innovations used in the design and architecture of our products. In addition, we have 124 patent applications pending in the U.S. Patent and Trademark office and 9 patent applications pending in foreign countries. Our patents typically expire 20 years from the patent application date, with our existing patents expiring between 2014 and 2034.

We believe that a strong portfolio of patents combined with other factors such as our ability to innovate, technological expertise and the experience of our personnel are important to compete effectively in our industry. Our patent portfolio also provides the flexibility to negotiate or cross license intellectual property with other semiconductor companies to broaden the features in our products. We do not consider our business to be materially dependent upon any one patent.

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We also rely on mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements, and licensing arrangements to protect our intellectual property.

PMC, PMC-Sierra and our logo are registered trademarks and service marks. Any other trademarks used in this Annual Report are owned by other entities. We own other trademarks and service marks not appearing in this Annual Report.

EMPLOYEES

As of December 28, 2013, we had 1,448 employees, including 878 in Research and Development, 102 in Production and Quality Assurance, 309 in Sales and Marketing and 159 in Administration. Our employees are not represented by a collective bargaining agreement and we have never experienced any related work stoppage.

ADDITIONAL INFORMATION AND SEC  REPORTS

Our principal executive offices are located at 1380 Bordeaux Drive, Sunnyvale, CA 94089. Our website is www.pmcs.com. The information accessed on or through our website is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on our webpage after we electronically file or furnish such material with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

ITEM 1A. RISK FACTORS.

Our company is subject to a number of risks. Some of these risks are common in the fabless 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 the following risks, our business, financial condition, operating results and/or liquidity could be materially adversely affected. This could cause the trading price of our securities to decline, and you may lose part or all of your investment.

Our global business is subject to a number of economic risks.

We conduct business throughout the world, including in Asia, North America, Europe and the Middle East. Instability in the global credit markets, including the recent European economic and financial turmoil related to sovereign debt issues in certain countries, the instability in the geopolitical environment in many parts of the world and other disruptions, such as changes in energy costs, may continue to put pressure on global economic conditions. The world has recently experienced a global macroeconomic downturn. To the extent global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, business, operating results, and financial condition may be materially adversely impacted.

Additionally, given the greater credit restrictions that are being invoked by lenders around the world, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access such capital markets, which could have an impact on our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in the future.

Our operating results may be impacted by rapid changes in demand due to the following:

• variations in our turns business;

• short order lead-time;

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• customer inventory levels;

• production schedules; and

• fluctuations in demand.

As a result, there could be significant variability in the demand for our products, and our past operating results may not be indicative of our future operating results.

Fluctuation in demand is dependent on, among other things the size of the markets for our products, the rate at which such markets develop, and the level of capital spending by end customers. We cannot assure you of the rate, or extent to which, capital spending by end customers will grow, if at all.

Our revenues and profits may fluctuate because of factors that are beyond our control. As a result, we may fail to meet the expectations of securities analysts and investors, which could cause our stock price to decline.

Our ability to project revenues is limited because a significant portion of our quarterly revenues may be derived from orders placed and shipped in the same quarter, which we call our “turns business.” Our turns business varies widely from quarter to quarter. Our customers may delay product orders and reduce delivery lead-time expectations, which may reduce our ability to project revenues beyond the current quarter. While we regularly evaluate end users’ and contract manufacturers’ inventory levels of our products to assess the impact of their inventories on our projected turns business, we do not have complete information on their inventories. This could cause our projections of a quarter’s turns business to be inaccurate, leading to lower or higher revenues than projected.

We may fail to meet our forecasts if our customers cancel or delay the purchase of our products or if we are unable to meet their demand.

We rely on customer forecasts in order to estimate the appropriate levels of inventory to build and to project our future revenues. Many of our customers have numerous product lines, numerous component requirements for each product, sizeable and complex supplier structures, and typically engage contract manufacturers for additional manufacturing capacity. This complex supply chain creates several variables that make it difficult to accurately forecast our customers’ demand and accurately monitor their inventory levels of our products. If customer forecasts are not accurate, we may build too much inventory, potentially leaving us with excess and obsolete inventory, which would reduce our profit margins and adversely affect our operating results. Conversely, we may build too little inventory to meet customer demand causing us to miss revenue-generating opportunities. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to the failure of anticipated orders to materialize, could result in our holding excess or obsolete inventory, which could in turn result in write-downs of inventory. This difficulty may be compounded when we sell to OEMs indirectly through distributors and other resellers or contract manufacturers, or both, as our forecasts of demand are then based on estimates provided by multiple parties.

Our customers often shift buying patterns as they manage inventory levels, market different products, or change production schedules. This makes forecasting their production requirements difficult and can lead to an inventory surplus or shortage of certain components. In addition, our products vary in terms of the profit margins they generate. If our customers purchase a greater proportion of our lower margin parts in a particular period, it would adversely impact our results of operations.

Further, our distributors provide us with periodic reports of their backlog to end customers, sales to end customers and quantities of our products that they have on hand. If the data that is provided to us is inaccurate, it could lead to inaccurate forecasting of our revenues or errors in our reported revenues, gross profit and net income.

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While backlog is our best estimate of our next quarter’s expectations of revenues, it is industry practice to allow customers to cancel, change or defer orders with limited advance notice prior to shipment. As such, backlog may be an unreliable indicator of future revenue levels. Because a significant portion of our operating expenses is fixed, even a small revenue shortfall can have a disproportionately negative effect on our operating results.

We rely on a few customers for a major portion of our sales, any one of which could materially impact our revenues should they change their ordering pattern. The loss of a key customer could materially impact our results of operations.

We depend on a limited number of customers for large portions of our net revenues. In 2013, 2012 and 2011, we had two end customers that accounted for more than 10% of our net revenues, namely, HP and EMC.

In 2013, 2012 and 2011, our top ten customers accounted for more than 60% of our net revenues. We do not have long-term volume purchase commitments from any of our major customers. We sell our products solely on the basis of purchase orders. Those customers could decide to cease purchasing products with little or no notice and without significant penalties. A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, delays in manufacturing their own product offerings into which our products are incorporated, and natural disasters. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities.

The loss of a key customer, or a reduction in our sales to any major customer or our inability to attract new significant customers could materially and adversely affect our business, financial condition or results of operations. In addition, if we fail to win new product designs from our major customers, our business and results of operations may be harmed.

We use indirect channels of product distribution, in many locations across the world, over which we have limited control.

We generate a portion of our sales through third-party distribution and reseller agreements. Termination of a distributor agreement either by us or a distributor, could result in a temporary or permanent loss of revenue, if we cannot establish an alternative distributor to manage this portion of our business, or we are unable to service the related end customers directly. Further, if we terminate a distributor agreement, we may be required to repurchase unsold inventory held by the distributor. We maintain a reserve for estimated returns. If actual returns exceed our estimate, there may be an adverse effect on our operating results. Our distributors are located all over the world and are of various sizes and financial profiles. Lower sales, lower earnings, debt downgrades, the inability to access capital markets and higher interest rates could potentially affect our distributors’ operations.

If the demand for our customers’ products declines, demand for our products will be similarly affected and our revenues, gross margins and operating performance will be adversely affected.

Our customers are subject to their own business cycles, most of which are unpredictable in commencement, depth and duration. We cannot accurately predict the continued demand of our customers’ products and the demands of our customers for our products. In the past, networking customers have reduced capital spending without notice, adversely affecting our revenues. As a result of this uncertainty, our past operating results may not be indicative of our future operating results. It is possible that, in future periods, our results may be below the expectations of public market analysts and investors. This could cause the market price of our common stock to decline.

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Changes in the political and economic climate in the countries in which we do business may adversely affect our operating results.

We earn a substantial proportion of our revenues in Asia. We conduct an increasing portion of our research and development and manufacturing activities outside North America. We procure substantially all of our wafers from Taiwan and use assemblers and testers throughout Asia.

Given the depth of our sales and operations in Asia, we face risks that could negatively impact our results of operations, including economic sanctions imposed by the U.S. government, imposition of tariffs and other potential trade barriers or regulations, uncertain protection for intellectual property rights and generally longer receivable collection periods. In addition, fluctuations in foreign currency exchange rates could adversely affect the revenues, net income, earnings per share and cash flow of our operations in affected markets. Similarly, fluctuations in exchange rates may affect demand for our products in foreign markets or our cost competitiveness and may adversely affect our profitability.

Our results of operations continue to be influenced by our sales to customers in Asia. Government agencies in this region have broad discretion and authority over many aspects of the telecommunications and information technology industry. Accordingly, their decisions may impact our ability to do business in this region, and significant changes in this region’s political and economic conditions and governmental policies could have a substantial negative impact on our business.

Laws and regulations to which we are subject, as well as customer requirements in the area of environmental protection and social responsibility, could impose substantial costs on us and may adversely affect our business.

Our business is subject to or may be impacted by various environmental protection and social responsibility legal and customer requirements. For example, we are subject to the European Union Directive on the Restriction of the use of certain Hazardous Substances in Electrical & Electronic Equipment (RoHS) and the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) Regulation in the European Union. Such regulations could require us to redesign our products in order to comply with their requirements and require the development and/or maintenance of compliance administration systems. Redesigned products could be more costly to manufacture or require more costly or less efficient raw materials. If we cannot develop compliant products on a timely basis or properly administer our compliance programs, our revenues could decline due to lower sales. In addition, under certain environmental laws, we could be held responsible, without regard to fault, for costs relating to any contamination at our current or past facilities and at third-party waste-disposal sites. We could also be held liable for consequences arising out of human exposure to such substances or other environmental damage.

Recently there has been increased focus on environmental protection and social responsibility initiatives. We may choose or be required to implement various standards due to the adoption of rules or regulations that result from these initiatives, such as with respect to the use of “conflict minerals”, which are certain minerals that originate in the Democratic Republic of the Congo or adjoining countries. Our customers may also require us to implement environmental or social responsibility procedures or standards before they will continue to do business with us or order new products from us. Our adoption of these procedures or standards could be costly, and our failure to adopt these standards or procedures could result in the loss of business or fines or other costs.

The conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act could result in additional costs and liabilities.

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC established new disclosure and reporting requirements for those companies who use “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries in their products, whether or not these products are manufactured by third parties. These new requirements could affect the sourcing and availability of minerals used in the manufacture of our semiconductor products. There will also be costs associated with complying with

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the disclosure requirements, including for due diligence in regard to the sources of any conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities.

The loss of key personnel could delay us from designing new products.

To succeed, we must retain and hire technical personnel highly skilled at design and test functions needed to develop high-speed networking products. The competition for such employees is intense.

We do not have employment agreements in place with many of our key personnel. As employee incentives, we issue common stock options, restricted stock, and performance-based restricted stock which are subject to vesting. In addition, the options have exercise prices at the market value on the grant date. As our stock price varies substantially, the equity awards to employees are effective as retention incentives only if they have economic value.

Our revenues may decline if we do not maintain a competitive portfolio of products or if we fail to secure design wins.

We are experiencing significantly greater competition in the markets in which we participate. We are expanding into market segments, such as the Storage, Optical, and Mobile market segments, which have established incumbents with substantial financial and technological resources. We expect more intense competition than that which we have traditionally faced as some of these incumbents derive a majority of their earnings from these markets.

We typically face competition at the design stage, where customers evaluate alternative design approaches requiring integrated circuits. We often compete in bid selection processes to achieve design wins. These selection processes can be lengthy and can require us to invest significant effort and incur significant design and development expenditures. We may not win competitive selection processes, and even if we do win such processes, we may not generate the expected level of revenue despite incurring significant design and development expenditures. Because the life cycles of our customers’ products can last several years and changing suppliers involves significant cost, time, effort and risk, our failure to win a competitive bid can result in our foregoing revenue from a given customer’s product line for the life of that product.

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 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, reducing our future revenues. With the shortening product life and design-in cycles in many of our customers’ products, our competitors may have more opportunities to supplant our products in next generation systems.

Our customers are increasingly price conscious, as semiconductors sourced from third party suppliers comprise a greater portion of the total materials cost in networking equipment. We continue to experience aggressive price competition from other companies that wish to enter into the market segments in which we participate. These circumstances may make some of our products less competitive, and we may be forced to decrease our prices significantly to win a design. We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition.

Over the next few years, we expect additional competitors, some of which may also have greater financial and other resources, to enter these markets with new products. These companies, individually or collectively, could represent future competition for many design wins and subsequent product sales.

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Design wins do not translate into near-term revenues and the timing of revenues from newly designed products is often uncertain.

From time to time, we announce new products and design wins for existing and new products. While some industry analysts may use design wins as a metric for future revenues, many design wins have not, and will not, generate any revenues for us, as customer projects are cancelled or unsuccessful in their end market. In the event a design win generates revenues, the amount of revenues will vary greatly from one design win to another. In addition, most revenue-generating design wins do not translate into near-term revenues. Most revenue-generating design wins take more than two years to generate meaningful revenues.

Product quality problems could result in reduced revenues and claims against us.

We produce highly complex products that incorporate leading-edge technology. Despite our testing efforts and those of our subcontractors, defects may be found in existing or new products. Because our product warranties against materials and workmanship defects and non-conformance to our specifications are for varying lengths of time we may incur significant warranty, support and repair or replacement costs. The resolution of any defects could also divert the attention of our engineering personnel from other product development efforts. If the costs for customer or warranty claims increase significantly compared with our historical experience, our revenue, gross margins and net income may be adversely affected.

Increasingly our customers require warranty protection for periods beyond our standard warranty and for expansive remedies that include direct and indirect damages. We negotiate these so called “epidemic failure warranty” provisions rigorously and seek liability caps but, nonetheless, this extraordinary warranty exposure may adversely affect our financial results.

Since many of the products we develop do not reach full production sales volumes for a number of years, we may incorrectly anticipate market demand and develop products that achieve little or no market acceptance.

Our products generally take between 12 and 24 months from initial conceptualization to development of a viable prototype, and another three to 18 months to be designed into our customers’ equipment and sold in production quantities. We sell products whose characteristics include evolving industry standards, short product life spans and new manufacturing and design technologies. As a result, we develop products many years before volume production and may inaccurately anticipate our customers’ needs. From initial product design-in to volume production, many factors, such as unacceptable manufacturing yields on prototypes or our customers’ redefinition of their products, can affect the timing and/or delivery of our products. Our products may become obsolete during these delays, resulting in our inability to recoup our initial investments in product development.

We may be unsuccessful in transitioning the design of our new products to new manufacturing processes.

Many of our new products are designed to take advantage of new manufacturing processes offering smaller device geometries as they become available, since smaller geometries can provide a product with improved features such as lower power requirements, increased performance, more functionality and lower cost. We believe that the transition of our products to, and introduction of new products using, smaller device geometries is critical for us to remain competitive. We could experience difficulties in migrating to future smaller device geometries or manufacturing processes, which would result in the delay of the production of our products. Our products may become obsolete during these delays, or allow competitors’ parts to be chosen by customers during the design process.

The final determination of our income tax liability may be materially different from our initial income tax provision.

We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our

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business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of new legislation, an audit or litigation, if our effective tax rate should change as a result of changes in federal, international or state and local tax laws, or if we were to change the locations where we operate, there could be a material effect on our income tax provision and results of operations in the period or periods in which that determination is made, and potentially to future periods as well.

The ultimate resolution of outstanding tax matters could be for amounts in excess of our reserves established. Such events could have a material adverse effect on our liquidity or cash flows in the quarter in which an adjustment is recorded or the tax payment is due.

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, and selling and administrative costs are incurred in foreign currencies. The U.S. dollar has fluctuated significantly compared to other foreign currencies and this trend may continue. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we enter into foreign currency forward contracts. The contracts reduce, but do not eliminate, the impact of foreign currency exchange rate movements. In addition, this foreign currency risk management policy may not be effective in addressing long-term fluctuations since our contracts do not extend beyond a 12-month maturity.

We regularly limit our exposure to foreign exchange rate fluctuations from our foreign net asset or liability positions. We recorded a net $4.7 million foreign exchange gain on the revaluation of our income tax liability in 2013 because of the fluctuations in the U.S. dollar against certain foreign currencies. A five percent shift in the foreign exchange rates between the U.S. and Canadian dollar would cause an approximately $3.3 million impact to our pre-tax net income.

We are exposed to the credit risk of some of our customers.

Many of our customers employ contract manufacturers to produce their products and manage their inventories. Many of these contract manufacturers represent greater credit risk than our OEM customers, who do not guarantee our credit receivables related to their contract manufacturers.

In addition, a significant portion of our sales flow through our distribution channel. This generally represents a higher credit risk. Should these companies encounter financial difficulties, our revenues could decrease, and collection of our significant accounts receivables with these companies or other customers could be jeopardized.

Our business strategy contemplates acquisition of other products, technologies or businesses, which could adversely affect our operating performance.

Acquiring products, intellectual property, technologies and businesses from third parties is a core part of our business strategy. That strategy depends on the availability of suitable acquisition candidates at reasonable prices and our ability to resolve challenges associated with integrating acquired businesses into our existing business. These challenges include integration of product lines, sales forces, customer lists and manufacturing facilities, development of expertise outside our existing business, diversion of management time and resources, possible divestitures, inventory write-offs and other charges. We also may be forced to replace key personnel who may leave us as a result of an acquisition. We cannot be certain that we will find suitable acquisition candidates or that we will be able to meet these challenges successfully. Acquisitions could also result in customer dissatisfaction, performance problems with the acquired company, investment, or technology, the assumption of

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contingent liabilities, or other unanticipated events or circumstances, any of which could harm our business. Consequently, we might not be successful in integrating any acquired businesses, products or technologies and may not achieve anticipated revenues and cost benefits.

An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or issue additional equity. If we are not able to obtain financing, then we may not be in a position to consummate acquisitions. If we issue equity securities in connection with an acquisition, we may dilute our common stock with securities that have an equal or a senior interest in our company.

From time to time, we license, or acquire, technology from third parties to incorporate into our products. Incorporating technology into our products may be more costly or more difficult than expected, or require additional management attention to achieve the desired functionality. The complexity of our products could result in unforeseen or undetected defects or bugs, which could adversely affect the market acceptance of new products and damage our reputation with current or prospective customers.

Our current product roadmap is dependent, in part, on successful acquisition and integration of intellectual property cores developed by third parties. If we experience difficulties in obtaining or integrating intellectual property from these third parties, it could delay or prevent the development of our products in the future.

Although our customers, our suppliers and we rigorously test our products, our highly complex products may contain defects or bugs. We have in the past experienced, and may in the future experience, defects and bugs in our products. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to buy our products. This could materially and adversely affect our ability to retain existing customers or attract new customers. In addition, these defects or bugs could interrupt or delay sales to our customers.

We may have to invest significant capital and other resources to alleviate problems with our products. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. Moreover, we would likely lose or experience a delay in market acceptance of the affected product or products, and we could lose credibility with our current and prospective customers.

Industry consolidation may lead to increased competition and may harm our operating results.

There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry or are unable to continue operations. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition.

Our business may be adversely affected if our customers or suppliers cannot obtain sufficient supplies of other components needed in their product offerings to meet their production projections and target quantities.

Some of our products are used by customers in conjunction with a number of other components, such as transceivers, microcontrollers and digital signal processors. If, for any reason, our customers experience a shortage of any component, their ability to produce the forecasted quantity of their product offerings may be affected adversely and our product sales would decline until the shortage is remedied.

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Moreover, if any of our suppliers experience capacity constraints or component shortages, encounters financial difficulties, or experiences any other major disruption of its operations, we may need to qualify an alternate supplier, which may take an extended period of time and could result in delays in product shipments. These delays could cause our customers to seek alternate semiconductor companies to provide them with products previously purchased from us. Such a situation could harm our operating results, cash flow and financial condition.

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. In 2013, three outside wafer foundries supplied more than 92% of our semiconductor wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves, thus we may not have access to adequate capacity or certain process technologies. We also have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, or at specified times, 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 or at an acceptable cost, to satisfy our production requirements.

Some companies that supply products to our customers are similarly dependent on a limited number of suppliers. These other companies’ products may represent important components of networking equipment into which our products are designed. If these companies are unable to produce the volumes demanded by our customers, our customers may be forced to slow down or halt production on the equipment for which our products are designed, which could materially reduce our order levels.

We depend on third parties for the assembly and testing of our semiconductor products, which could delay and limit our product shipments.

We depend on third parties in Asia for the assembly and testing of our semiconductor products. In addition, subcontractors in Asia assemble all of our semiconductor products into a variety of packages. Raw material shortages, political, economic and social instability, assembly and testing house service disruptions, currency fluctuations, or other circumstances in the region could force us to seek additional or alternative sources of supply, assembly or testing. This could lead to supply constraints or product delivery delays that, in turn, may result in the loss of revenues. At times, capacity in the assembly industry has become scarce and lead times have lengthened. This capacity shortage may become more severe, which could in turn adversely affect our revenues. We have less control over delivery schedules, assembly processes, testing processes, quality assurances, raw material supplies and costs than competitors that do not outsource these tasks.

Due to the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our components. Any problems that we may encounter with the delivery, quality or cost of our products could damage our customer relationships and materially and adversely affect our results of operations. We are continuing to develop relationships with additional third-party subcontractors to assemble and test our products. However, even if we use these new subcontractors, we will continue to be subject to all of the risks described above.

We have identified a material weakness in our internal controls, and we cannot provide assurance that this weakness will be effectively remediated or that additional material weaknesses will not occur in the future.

We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (the Act). Our controls necessary for continued compliance with the Act may not operate effectively at all times. Our most recent evaluation of our internal controls resulted in our conclusion that our disclosure controls and procedures and our internal control over financial reporting were not effective. If our internal control over

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financial reporting or our disclosure controls and procedures remain ineffective, we may be unable to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

Our business is vulnerable to interruption by earthquake, flooding, fire, power loss, telecommunications failure, terrorist activity and other events beyond our control.

We do not have sufficient business interruption insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could have a material adverse effect on our business. We are vulnerable to a major earthquake and other calamities. We have operations in seismically active regions in California, Japan and British Columbia, Canada, and we rely on third-party suppliers, including wafer fabrication and testing facilities, in seismically active regions in Asia, which have recently experienced natural disasters. To the extent that manufacturing issues and any related component shortages result in delayed shipments in the future, and particularly in periods in which we and our contract manufacturers are operating at higher levels of capacity, it is possible that revenue for a quarter could be adversely affected if such matters occur and are not remediated within the same quarter. We are unable to predict the effects of any such events, but the effects could be seriously harmful to our business.

Hostilities in the Middle East and India may have a significant impact on our Israeli and Indian subsidiaries’ ability to conduct their business.

We have operations, concentrated primarily on research and development, located in Israel and India that employ approximately 142 and 158 people, respectively. A catastrophic event, such as a terrorist attack or the outbreak of hostilities that results in the destruction or disruption of any of our critical business or information technology systems in Israel or India could harm our ability to conduct normal business operations and therefore negatively impact our operating results.

On an on-going basis, some of our Israeli employees are periodically called into active military duty. In the event of severe hostilities breaking out, a significant number of our Israeli employees may be called into active military duty, resulting in delays in various aspects of production, including product development schedules.

From time to time, we become defendants in legal proceedings about which we are unable to assess our exposure and which could become significant liabilities upon judgment.

We become defendants in legal proceedings from time to time. Companies in our industry have been subject to claims related to patent infringement and product liability, as well as contract and personal claims. We may not be able to accurately assess the risk related to these suits and we may be unable to accurately assess our level of exposure. An infringement or product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend and could divert the efforts of our technical and management personnel. These proceedings may result in material charges to our operating results in the future if our exposure is material and if our ability to assess our exposure becomes clearer.

If we cannot protect our proprietary technology, we may not be able to prevent competitors from copying or misappropriating our technology and selling similar products, which would harm our business.

To compete effectively, we must protect our intellectual property. 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 numerous patents and have a number of pending patent applications. However, our portfolio of patents evolves as new patents are issued and older patents expire and the expiration of patents could have a negative effect on our ability to prevent competitors from duplicating certain of our products.

We might not succeed in obtaining 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

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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.

To protect our product technology, documentation and other proprietary information, we enter into confidentiality agreements with our employees, customers, consultants and strategic partners. We require our employees to acknowledge their obligation to maintain confidentiality with respect to PMC’s products. Despite these efforts, we cannot guarantee that these parties will maintain the confidentiality of our proprietary information in the course of future employment or working with other business partners. We develop, manufacture and sell our products in Asia and other countries that may not protect our 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 intellectual property and 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, and our customers or suppliers, may be accused of infringing patents or other intellectual property rights owned by third parties in the future. An adverse result in any litigation against us or a customer or supplier 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 use the infringing technology. In addition, we may not be able to develop non-infringing technology or find appropriate licenses on reasonable terms or at all. Although some of our suppliers have agreed to indemnify us against certain intellectual property infringement claims or other losses relating to their products, these contractual indemnification rights may not cover the full extent of losses we incur as a result of these suppliers’ products.

Patent disputes in the semiconductor industry between industry participants are often settled through cross-licensing arrangements. Our portfolio of patents may not have the breadth to enable us to settle an alleged patent infringement claim through a cross-licensing arrangement. Patent disputes brought by non-practicing entities (patent holders who do not manufacture products but only seek to monetize patent rights) cannot be settled through cross-licensing and cannot be avoided through cross-licensing with industry practitioners. We may therefore be more exposed to third party claims than some of our larger competitors and customers.

Customers may make claims against us in connection with infringement claims made against them that are alleged to relate to our products or components included in our products, even where we obtain the components from a supplier. In such cases, we may incur monetary losses due to cost of defense, settlement or damage award and non-monetary losses as a result of diverting valuable internal resources to litigation support. To the extent that claims against us or our customers relate to third party intellectual property integrated into our products, there is no assurance that we will be fully indemnified by our suppliers against any losses.

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.

We may be subject to intellectual property theft or misuse, which could result in third-party claims and harm our business and results of operations.

We regularly face attempts by others to gain unauthorized access through the Internet to our information technology systems, such as when such parties masquerade as authorized users or surreptitiously introduce software. We might become a target of computer hackers who create viruses to sabotage or otherwise attack our

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products and services. Hackers might attempt to penetrate our network security and gain access to our network and our data centers, misappropriate our or our customers’ proprietary information, including personally identifiable information, or cause interruptions of our internal systems and services. We seek to detect and investigate these security incidents and to prevent their recurrence, but in some cases we might be unaware of an incident or its magnitude and effects. The theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and reduce marketplace acceptance of our products; reduce the value of our investment in R&D, product development, and marketing; and could motivate third parties to assert against us or our customers claims related to loss of confidential or proprietary information, end-user data, or system reliability. Our business could be subject to significant disruption, and we could suffer monetary and other losses, including the cost of product recalls and returns and reputational harm, in the event of such incidents and claims.

Securities we issue to fund our operations could dilute your ownership.

We may decide to raise additional funds through public or private debt or equity financing. If we raise funds by issuing equity securities, the percentage ownership of current stockholders will be reduced and the new equity securities may have rights that take priority over your investment. We may not obtain sufficient financing on terms that are favorable to you or us. 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.

We expect that the price of our common stock may continue to fluctuate significantly, as it has in the past. In particular, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge 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.

Securities class action litigation has often been instituted against a company following periods of volatility and decline in the market price of their securities. If instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of our management’s attention and resources and have a material adverse effect on our business, financial condition and operating results. In addition, we could incur substantial punitive and other damages relating to such litigation.

Provisions in Delaware law and our charter documents may delay or prevent another entity from acquiring us without the consent of our Board of Directors.

Our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

Although we believe these provisions of our charter documents and Delaware law will provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some stockholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

During 2013, we leased properties in 33 locations worldwide. During the year, we reduced our total leased area from approximately 549,000 square feet to approximately 548,000 square feet. Approximately 10% of the space we leased was excess at December 28, 2013 and 63% of the excess space had been subleased.

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We lease approximately 65,000 square feet in Sunnyvale, California, to house our U.S. design, engineering, sales and marketing operations.

Our Canadian operations are primarily located in Burnaby, British Columbia where we lease approximately 138,000 square feet of office space. This location supports a significant portion of our product development, manufacturing, marketing, sales and testing activities.

In addition to the two major sites in Sunnyvale and Burnaby, at the end of 2013 we also operated 14 additional research and development centers: three in Canada, six in the U.S., one in Bangalore, India, one in Israel, two in Germany, and one in Shanghai, China.

At the end of 2013, we also had 15 sales/operations offices located in Europe, Asia, and North America.

ITEM 3. LEGAL PROCEEDINGS.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Stock Price Information

Our Common Stock trades on the NASDAQ Global Select Market under the symbol PMCS. The following table sets forth, for the periods indicated, the high and low closing sale prices for our Common Stock as reported by the NASDAQ Global Select Market:

Fiscal 2013	High		Low
First Quarter	$	6.85		5.28
Second Quarter		6.75		5.56
Third Quarter		7.08		6.16
Fourth Quarter		7.01		5.63
Fiscal 2012	High		Low
First Quarter	$	7.29	$	5.49
Second Quarter		7.69		5.98
Third Quarter		6.37		5.32
Fourth Quarter		5.64		4.69

To maintain consistency, the information provided above is based on the last day of the calendar quarter rather than the last day of the fiscal quarter.

Stockholders

As of February 19, 2014, there were 662 holders of record of our Common Stock.

Dividends

We have never paid cash dividends on our Common Stock. We currently intend to retain earnings, if any, for use in our business or to fund acquisitions and do not anticipate paying any cash dividends in the foreseeable future.

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Stock Performance Graph

The following graph shows a comparison of cumulative total stockholder returns for PMC, the line-of-business index for semiconductors and related devices (SIC code 3674) furnished by Research Data Group, Inc., and the S&P 500 Index. In addition, we have included the Russell 3000 Index, a broad equity market index in which we are included. We have determined that the companies included in the Russell 3000 Index more closely match our company characteristics than the companies included in the S&P 500 Index, as the Russell 3000 Index includes companies in the semiconductor industry and related industries with similar size and median market capitalization. The graph assumes the investment of $100 on December 31, 2008. The performance shown is not necessarily indicative of future performance.

SOURCE: RESEARCH DATA GROUP, INC

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Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchase Program

On March 13, 2012, the Board of Directors of the Company announced a share repurchase program for up to $275 million of its common stock. In connection with this program, on May 2, 2012, the Company entered into an Accelerated Share Buyback agreement (“ASB agreement”) with Goldman, Sachs & Co. to repurchase an aggregate of $160 million of PMC common stock, which was completed on October 5, 2012 with the final delivery of shares.

During 2013, the Company repurchased 13 million shares of PMC common stock for a total of $79 million. The Company acquired these common shares as part of its $275 million stock repurchase program announced on March 13, 2012. The repurchased shares were retired immediately upon delivery. Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.

The following table represents a month-to-month summary of the stock purchase activity pursuant to our share repurchase program in the fourth quarter of fiscal year 2013:

Period	(a) Total Number  of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number  (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)
September 29—October 26, 2013		342,611	$	6.46		342,611	$	90.2
October 27—November 23, 2013		4,911,908	$	5.82		4,911,908	$	61.6
November 24—December 28, 2013		4,198,385	$	6.08		4,198,385	$	36.0
Total		9,452,904	$	5.96		9,452,904

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ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth data from our consolidated financial statements for each of the last five fiscal years.

	Year Ended (in thousands, except for per share data)
	December  28, 2013(1)			December  29, 2012(2)*			December  31, 2011(3)*			December  26, 2010(4)*			December  27, 2009(5)*
STATEMENT OF OPERATIONS DATA:
Net revenues	$	508,028		$	530,997		$	654,304		$	635,082		$	496,139
Cost of revenues		149,213			158,849			211,190			203,646			165,915
Gross profit		358,815			372,148			443,114			431,436			330,224
Research and development		211,047			220,927			227,106			187,467			149,184
Selling, general and administrative		112,770			112,479			118,601			104,117			84,942
Amortization of purchased intangible assets		48,245			45,321			44,182			29,932			39,344
Impairment of goodwill and purchased intangible assets		—			274,637			—			—			—
Restructuring costs and other charges		—			—			—			403			888
(Loss) income from operations		(13,247	)		(281,216	)		53,225			109,517			55,866
Revaluation of liability for contingent consideration		—			—			29,376			—			—
Gain (loss) on investment securities and other		1,879			1,523			845			3,978			(367	)
Amortization of debt issue costs and gain on extinguishment of debt, net		(80	)		(167	)		(200	)		(200	)		(200	)
Foreign exchange gain (loss)		4,043			(1,512	)		344			(2,360	)		(2,371	)
Interest income (expense), net		907			(1,586	)		(2,267	)		(1,248	)		(2,511	)
Gain on investment in Wintegra, Inc.		—			—			—			4,509			—
Provision for income taxes		(25,756	)		(37,301	)		(9,897	)		(37,064	)		(9,089	)
Net (loss) income	$	(32,254	)	$	(320,259	)	$	71,426		$	77,132		$	41,328
Net (loss) income per share—basic	$	(0.16	)	$	(1.48	)	$	0.31		$	0.33		$	0.18
Net (loss) income per share—diluted	$	(0.16	)	$	(1.48	)	$	0.30		$	0.33		$	0.18
Shares used in per share calculation—basic		203,882			216,593			233,210			231,427			226,225
Shares used in per share calculation—diluted		203,882			216,593			235,184			234,787			229,567
	As at
	December 28, 2013(1)			December 29, 2012(2)*			December 31, 2011(3)*			December 26, 2010(4)*			December 27, 2009(5)*
	(in thousands)
BALANCE SHEET DATA:
Working capital	$	89,698		$	187,432		$	216,830		$	110,565		$	231,285
Cash and cash equivalents		100,038			169,970			182,571			203,089			192,841
Short-term investments		10,894			11,431			104,391			98,758			67,928
Long-term investment securities		103,391			91,778			226,619			281,678			192,636
Total assets		849,951			899,275			1,418,461			1,548,927			1,148,545
Credit facility and short-term loan		30,000			—			—			180,991			—
Convertible notes		—			—			65,122			61,605			58,356
Long-term obligations		11,108			22,793			1,284			8,940			6,211
Stockholders’ equity		586,824			648,687			1,109,517			1,031,315			903,079

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There were no cash dividends issued during the years ended December 28, 2013, December 29, 2012, December 31, 2011, December 26, 2010, and December 27, 2009.

* Certain amounts in our 2009—2012 consolidated financial statements presented in these tables have been restated. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 19. Error Corrections and Item 9B, Other Information.

(1) Operating results for the year ended December 28, 2013 include $0.9 million stock-based compensation expense, $0.1 million termination costs, $0.8 million acquisition-related costs, and $2.3 million reversal of accruals included in Cost of revenues; $11.1 million stock-based compensation, $2.8 million acquisition-related costs, $4.1 million termination costs, $0.5 million asset impairment and $2.9 million reversal of accruals included in Research and development expenses; $14.3 million stock-based compensation, $1.1 million acquisition-related costs, $1.8 million termination costs, $2.2 million asset impairment and $1.3 million reversal of accruals included in Selling, general and administrative expense; $4.7 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); and $25.8 million provision for income taxes, including $23.3 million tax recovery related to certain foreign income tax credits, $18.1 million income tax provision relating to intercompany transactions, $6.7 million provision for unrecognized income tax benefits, $6.3 million income tax provision related to stock based compensation and other non-deductible expenses, $10.6 million deferred income tax provision related to non-deductible intangible asset amortization and impairment, $4.2 million income tax provision for true up relating to prior periods, $2.3 million tax recovery for income taxes related to income from operations, $1.3 million income tax benefit related to state income taxes, $10.2 million net income tax benefit relating to foreign subsidiaries and rate differences, $6.3 million deferred tax benefit related to changes in assessments for Federal tax credits, $4.7 million tax recovery from other changes in deferred taxes and $36.3 million income tax provision related to changes in valuation allowance.

(2) Operating results for the year ended December 29, 2012 include $0.9 million stock-based compensation expense, $0.1 million asset impairment, and $0.1 million termination costs included in Cost of revenues; $11.6 million stock-based compensation, $2.2 million acquisition-related costs, $2.7 million termination costs, and $1 million asset impairment included in Research and development expenses; $13.9 million stock-based compensation, $2.4 million lease exit costs, $1.6 million acquisition-related costs, $1.1 million termination costs, and $0.3 million asset impairment included in Selling, general and administrative expense; $1.5 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $3.2 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $37.3 million provision for income taxes, including $104.8 million income tax provision related to an intercompany transactions, $23.7 million tax benefit related to the Federal credits, $19.2 million income tax benefit relating to foreign income tax credits, $17.6 million deferred income tax provision on stock option related loss carry-forwards recognized in stockholders’ equity, $11.6 million income tax provision related to stock based compensation and other non-deductible expenses, $0.9 million unrecognized tax benefits, $104.4 million deferred tax provision related to non-deductible intangible asset amortization and impairment, $12.3 million income tax benefit for adjustments relating to prior periods, $99.0 million income tax benefit relating to income from operations, $6.6 million net tax recovery relating to foreign subsidiaries and rate differences, $1.0 million tax benefit from other changes in deferred taxes and $40.3 million income tax benefit related to changes in valuation allowance.

(3) Operating results for the year ended December 31, 2011 include $0.9 million stock-based compensation expense and $9.1 million acquisition-related costs included in Cost of revenues; $11.6 million stock-based compensation, $3 million asset impairment, and $0.2 million acquisition-related costs included in Research and development expenses; $14.5 million stock-based compensation, $3.5 million acquisition-related costs, and $2.8 million lease exit costs included in Selling, general and administrative expense; $0.5 million recovery of impairment on investment securities and other, included in Gain (loss) on investment securities and other; $0.6 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); $3.5 million of non-cash interest expense for the accretion of the debt discount related to the senior

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convertible notes, $1.2 million accretion of liability for contingent consideration and $0.3 million interest expense related to short-term loan included in Interest expense, net; and $9.9 million provision for income taxes, including $25.9 million deferred income tax benefit for true up relating to prior periods, $33.9 million income tax provision related to intercompany transactions, $28.5 million income tax provision relating to income from operations, $3.3 million income tax provision related to Federal credits, $18.5 million income tax benefit related to foreign tax credits, $2.9 million income tax provision related to State income taxes, $2.1 million of stock option related loss carry-forwards recognized in stockholders’ equity, $28.2 million net tax benefit related to foreign subsidiary and rate differences, $5.1 million of unrecognized income tax benefits, $1.3 million net income tax benefit related to stock-based compensation and other non-deductible expenses, $3.8 million deferred tax recovery related to non-deductible intangible asset amortization, $0.5 million benefit from other changes in deferred taxes and $4.7 million income tax provision related to changes in valuation allowance.

(4) Operating results for the year ended December 26, 2010 include $0.8 million stock-based compensation expense and $1 million acquisition-related costs included in Cost of revenues; $9 million stock-based compensation and $4.9 million asset impairment included in Research and development expenses; $12.1 million stock-based compensation and $6.9 million acquisition related costs included in Selling, general and administrative expense; $3.8 million recovery of impairment on investment securities included in Gain (loss) on investment securities and other; $1.8 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $3.2 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes, and $1.1 million interest expense related to short-term loan included in Interest expense, net; and $37.1 million net income tax provision, including $19.9 million sheltered by the benefit of stock option related loss carry-forwards recognized in stockholders’ equity, $7.8 million income tax provision related to income from operating results, $14.2 million provision for income taxes related to inter-company transactions, $5.5 million income tax provision for adjustments relating to prior periods, $4.1 million net income tax recovery related to foreign exchange translation of a foreign subsidiary, $5.3 million net recovery related to unrecognized income tax benefits, $0.6 million deferred tax recovery related to non-deductible intangible asset amortization, and $0.3 million income tax recovery related to stock-based compensation.

(5) Operating results for the year ended December 27, 2009 include $0.8 million stock-based compensation expense included in Cost of revenues; $8.7 million stock-based compensation expense and $1 million termination costs included in Research and development expenses; $12 million stock-based compensation expense and $0.6 million termination costs included in Selling, general and administrative expenses; $0.5 million loss on subleased facilities included in Gain (loss) on investment securities and other; $2.7 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $3 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $9.1 million provision for income tax which includes $32.7 million income tax provision on stock option related loss carry-forwards recognized in stockholders’ equity, $23.8 million income tax recovery related to inter-company transactions, $6.5 million net income tax recovery related to foreign exchange translation of a foreign subsidiary, $4.8 million income tax provision related to income from operating results, $1.5 million income tax provision based on completed filings and assessments received from tax authorities, $2.5 million relating to unrecognized income tax benefits and $2.1 million deferred income tax recovery related to non-deductible intangible asset amortization.

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Quarterly Comparisons

	Quarterly Data (in thousands except for per share data)
	Year Ended December 28, 2013												Year Ended December 29, 2012
	Fourth(1)			Third(2)*			Second(3)*			First(4)*			Fourth(5)*			Third(6)*			Second(7)*			First(8)*
STATEMENT OF OPERATIONS DATA:
Net revenues	$	126,872		$	128,411		$	127,584		$	125,161		$	129,418		$	131,723		$	137,762		$	132,094
Cost of revenues		37,349			36,840			37,637			37,387			36,747			39,055			41,438			41,609
Gross profit		89,523			91,571			89,947			87,774			92,671			92,668			96,324			90,485
Research and development		54,009			50,733			51,681			54,624			49,553			55,604			56,699			59,071
Selling, general and administrative		27,768			26,383			30,277			28,342			26,432			27,786			29,290			28,971
Amortization of purchased intangible assets		13,547			13,138			10,776			10,784			10,784			11,624			11,626			11,287
Impairment of goodwill and purchased intangible assets		—			—			—			—			—			274,637			—			—
(Loss) income from operations		(5,801	)		1,317			(2,787	)		(5,976	)		5,902			(276,983	)		(1,291	)		(8,844	)
Gain on investment securities and other investments		103			1,762			30			(16	)		777			180			527			39
Amortization of debt issue costs		(50	)		(30	)		—			—			(17	)		(50	)		(50	)		(50	)
Foreign exchange gain (loss)		2,363			(1,898	)		2,213			1,365			439			(2,454	)		1,608			(1,105	)
Interest income (expense), net		83			230			330			264			(47	)		(797	)		(563	)		(179	)
(Provision for) benefit from income taxes		(12,377	)		(4,613	)		(4,602	)		(4,164	)		6,967			5,515			5,457			(55,240	)
Net income (loss)	$	(15,679	)	$	(3,232	)	$	(4,816	)	$	(8,527	)	$	14,021		$	(274,589	)	$	5,688		$	(65,379	)
Net (loss) income per share—basic	$	(0.08	)	$	(0.02	)	$	(0.02	)	$	(0.04	)	$	0.07		$	(1.31	)	$	0.03		$	(0.28	)
Net (loss) income per share—diluted	$	(0.08	)	$	(0.02	)	$	(0.02	)	$	(0.04	)	$	0.07		$	(1.31	)	$	0.03		$	(0.28	)
Shares used in per share calculation—basic		201,615			205,377			205,230			203,307			202,400			209,512			222,316			232,142
Shares used in per share calculation—diluted		201,615			205,377			205,230			203,307			202,900			209,512			222,316			232,142

* Certain amounts in our 2009—2012 consolidated financial statements presented in these tables have been restated. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 19. Error Corrections and Item 9B, Other Information.

(1) Operating results include $0.3 million stock-based compensation expense, and $0.2 million termination costs included in Cost of revenues; $2.9 million stock-based compensation expense, $0.5 million asset impairment, $2.7 million termination costs, and $1.1 million acquisition-related costs included in Research and development expense; $3.7 million stock-based compensation expense, $1.3 million termination costs, $0.6 million asset impairment, and $1.3 million reversal of accruals included in Selling, general and

29

administrative; $2.6 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); $0.1 million interest expense related to credit facility included in Interest expense, net; and $12.4 million provision for income taxes, including $3.3 million income tax provision related to intercompany transactions, $1.6 million income tax benefit for adjustments related to prior periods and other taxable items, $1.9 million tax provision related to unrecognized income tax benefits, $0.6 million deferred income tax provision related to non-deductible intangible asset amortization, $1.8 million tax benefit related to loss carryforwards recorded into shareholder’s equity, $3.5 million income tax provision related to foreign exchange translation and rate difference, $10.4 million deferred income tax provision related to changes in assessments for foreign income tax credits, $8.9 million tax benefit related to foreign income tax credits, and $5.3 million tax provision related to income from operations.

(2) Operating results include $0.2 million stock-based compensation expense, $0.8 million acquisition-related costs, and $2.3 million reversal of accruals included in Cost of revenues; $2.5 million stock-based compensation expense, $1.2 million acquisition-related costs, and $0.2 million termination costs included in Research and development expense; $3.1 million stock-based compensation included in Selling, general and administrative; $1.4 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $1.8 million gain on disposal of investments; and $4.6 million provision for income taxes, including, $3.4 million income tax provision related to intercompany transactions, $1.0 million income tax provision for adjustments related to prior periods, $1.2 million deferred income tax provision related to non-deductible intangible asset amortization, $0.8 million tax provision related to loss carryforwards recorded to shareholder’s equity, $1.0 million related to unrecognized income tax benefits, $0.8 million income tax benefit related to foreign exchange translation of a foreign subsidiary, $5.1 million tax benefit related to foreign income tax credits, and $2.1 million provision for income taxes relating to income from operations.

(3) Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $2.4 million stock-based compensation, $0.3 million acquisition-related costs, $0.9 million termination costs, and $2.9 million reversal of accruals included in Research and development expense; $3.6 million stock-based compensation, $1 million acquisition-related costs, $1.6 million asset impairment, and $0.3 million termination costs included in Selling, general and administrative; $2.2 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); and $4.6 million income tax provision, including $5.1 million tax benefit related to foreign income tax credits, $1.1 million unrecognized tax benefits, $2.4 million income tax provision related to intercompany transactions, $1.5 million income tax provision for adjustments relating to prior periods and other deductible items, $1.0 million deferred income tax recovery related to non-deductible intangible asset amortization, $0.9 million income tax provision related to foreign exchange translation of a foreign subsidiary, and $2.1 million provision for income taxes related to income from operations.

(4) Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $3.3 million stock-based compensation, $0.4 million termination costs, and $0.3 million acquisition-related costs included in Research and development expense; $3.8 million stock-based compensation expense and $0.2 million termination costs included in Selling, general and administrative; $1.3 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); and $4.2 million provision for income taxes, including $2.6 million provision for income taxes related to intercompany transactions, $2.1 million unrecognized income tax benefits, $1.5 million deferred income tax benefit related to non-deductible intangible asset amortization, $4.7 million tax benefit related to foreign income tax credits, $2.2 million provision for income taxes relating to income from operations, and $0.5 million income tax provision for adjustments relating to prior periods and other deductible items.

(5) Operating results include $0.2 million stock-based compensation expense, and $0.1 million termination costs included in Cost of revenues; $2.9 million stock-based compensation expense, $0.5 million asset impairment, $0.3 million termination costs, and $0.3 million acquisition-related costs included in Research and development expense; $3.2 million stock-based compensation expense, $0.2 million termination costs, $0.1 million lease exit recoveries included in Selling, general and administrative; $0.9 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); $0.4 million of non-cash

30

interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $7.0 million recovery of income taxes, including $4.6 million income tax recovery related to an intercompany dividend, $0.2 million income tax provision for adjustments relating to prior periods, $0.6 million recovery relating to unrecognized income tax benefits, $0.8 million deferred tax recovery related to non-deductible intangible asset amortization and impairment, $0.4 million income tax recovery relating to foreign exchange translation of a foreign subsidiary, $0.7 million income tax recovery related to tax deductible items above, and $0.1 million recovery of income taxes relating to income from operations.

(6) Operating results include $0.2 million stock-based compensation expense and $0.1 million asset impairment included in Cost of revenues; $2.9 million stock-based compensation expense, $0.8 million acquisition-related costs, $0.7 million termination costs, and $0.5 million asset impairment included in Research and development expense; $3 million stock-based compensation, $1.8 million lease exit costs, $0.7 million termination costs, $0.3 million asset impairment, and $0.3 million acquisition-related costs included in Selling, general and administrative; $2.1 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $1 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $5.5 million recovery of income taxes, including, $1.9 million income tax recovery related to an intercompany dividend, $2.8 million income tax recovery for adjustments relating to prior periods, $1.1 million income tax provision relating to intercompany transactions, $1.5 million deferred income tax recovery related to non-deductible intangible asset amortization and impairment, $0.8 million relating to unrecognized income tax benefits, $0.5 million income tax recovery relating to foreign exchange translation of a foreign subsidiary, and $0.8 million recovery of income taxes relating to income from operations.

(7) Operating results include $0.3 million stock-based compensation expense included in Cost of revenues; $2.9 million stock-based compensation, $0.5 million acquisition-related costs, and $0.2 million termination costs included in Research and development expense; $4.2 million stock-based compensation, $0.5 million acquisition-related costs, $0.3 million lease exit costs, and $0.1 million termination costs included in Selling, general and administrative; $1.1 million foreign exchange gain on foreign tax liabilities included in Foreign exchange gain (loss); $0.9 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $5.5 million recovery of income taxes, including $34 million benefit of certain U.S. Federal and State income tax credits required to be recognized in advance of their utilization, $2.6 million unrecognized income tax benefits, $29.0 million income tax provision relating to intercompany transactions, $0.9 million income tax recovery for adjustments relating to prior periods, $0.8 million deferred income tax recovery related to non-deductible intangible asset amortization, $1.2 million tax benefit related to the tax effect of stock option tainted losses recognized in stockholders’ equity, $0.3 million income tax provision relating to foreign exchange translation of a foreign subsidiary, and $0.4 million recovery of income taxes relating to income from operations.

(8) Operating results include $0.2 million stock-based compensation expense included in Cost of revenues; $2.8 million stock-based compensation, $1.5 million termination costs, and $0.6 million acquisition-related costs included in Research and development expense; $3.5 million stock-based compensation expense, $0.8 million acquisition-related costs, $0.4 million lease exit costs, and $0.1 million termination costs included in Selling, general and administrative; $1.3 million foreign exchange loss on foreign tax liabilities included in Foreign exchange gain (loss); $0.9 million of non-cash interest expense for the accretion of the debt discount related to the senior convertible notes included in Interest expense, net; and $55.2 million provision for income taxes, including $85.4 million income tax provision related to an intercompany dividend, $8.5 million recovery of income taxes relating to intercompany transactions, $2.2 million unrecognized income tax benefits, $0.8 million deferred tax recovery related to non-deductible intangible asset amortization, $0.2 million net income tax recovery relating to foreign exchange translation of a foreign subsidiary, $22.7 million reduction of stock option related loss carry-forwards recognized in stockholders’ equity, and $0.2 million income tax recovery for adjustments relating to prior periods.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report.

OVERVIEW

PMC-Sierra is a semiconductor and software solution innovator transforming networks that connect, move and store digital content. We generate revenues from the sale of semiconductor, embedded software and board level solutions that we have designed and developed or acquired. Almost all of our revenues in any given year come from the sale of products that are developed prior to that year. For example, 99% of our revenues in 2013 came from products developed or acquired in 2012 and earlier. After an individual product is released for production and announced it may take several years before that product generates any significant revenues.

Our current revenues are generated by a portfolio of approximately 700 products which we have designed and developed, or acquired.

PMC’s diverse product portfolio enables many different types of communications network infrastructure equipment in three market segments: Storage, Optical and Mobile networks.

1. Our Storage products enable high-speed communication servers, switches and storage devices to store, manage and move large quantities of data securely;

2. Our Optical products are used in optical transport platforms, multi-services provisioning platforms, and edge routers where they gather, process and transmit disparate traffic to their next destination in the network; and

3. Our Mobile products are used in wireless base stations, mobile backhaul, and aggregation equipment.

We invest a substantial amount every year for the research and development of new semiconductor solutions. We determine the amount to invest in each semiconductor development based on our assessment of the future market opportunities for those components and the estimated return on investment. To compete globally, we must invest in technologies, products and businesses that are both growing in demand and are cost competitive in the geographic markets that we serve. Going forward, we plan to continue to focus on finding innovative solutions to meet our customers’ needs while maintaining our operational efficiencies.

We expect our microprocessor solutions to continue to ship into the laser printer market as well as the enterprise networking market.

Update to the Interim Condensed Consolidated Financial Statements Included in Earnings Press Release Dated January 30, 2014 for the Fourth Quarter and Year Ended December 28, 2013

On January 30, 2014, the Company filed a Current Report on Form 8-K incorporating the Press Release announcing the Company’s preliminary financial results for its fiscal fourth quarter and year ended December 28, 2013 (the “Preliminary Results”). For presentation in this Annual Report on Form 10-K, the Company adjusted certain current and prior year annual and quarterly financial information presented in the Preliminary Results, including items related to balance sheet classification of valuation allowance against deferred tax balances as at the fiscal December 28, 2013 and December 29, 2012 year ends and capitalizing certain inventory related overhead costs previously expensed through Cost of Revenues. Further details related to these matters are included in Note 19. Error Corrections to the financial statements and in Item 9B. Other Information.

The fiscal 2012 consolidated financial information has been updated within this Management’s Discussion and Analysis of Financial Condition and Results of Operations to reflect the corrections as more fully described

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in Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 19. Error Corrections within this Annual Report.

RESULTS OF OPERATIONS

NET REVENUES

(in millions)	2013		Change			2012		Change			2011
Net revenues	$	508.0		(4	)%	$	531.0		(19	)%	$	654.3

Overall net revenues for 2013 decreased by $23.0 million compared to net revenues for 2012. This 4% decrease was mainly attributable to macro-economic uncertainty and continued cautious enterprise and carrier infrastructure spending, which primarily impacted sales volumes of each of the Storage, Optical and Mobile market segments, while average selling prices remained relatively stable.

Storage represented 67% of our net revenues in 2013 and 2012. Storage net revenues decreased by 3% year-over-year mainly due to macro-economic uncertainty driving continued softness in enterprise spending. Accordingly, sales volume of our server and storage products were lower compared to 2012. This was partially offset by higher volumes of sales to Data Center customers and continued ramp of 6G and 12G SAS products and revenues from our flash controller products as a result of our acquisition of IDT’s enterprise flash controller division during the year.

Optical represented 19% of our net revenues in 2013 and 2012. Optical net revenues decreased by 6% compared to 2012 mainly due to continued weakness in the macro-economic environment, which drove lower levels of carrier spending. Sales volumes were down from our Legacy metro aggregation transport and routing and switching products. This was partially offset by higher volume of sales from our high-capacity system-on-a-chip solutions products.

Mobile represented 14% of our net revenues in 2013 and 2012. Mobile net revenues decreased by 9% compared to 2012 mainly due to continued weakness in the macro-economic environment, which drove lower levels of carrier spending. Accordingly, sales volumes of our mobile backhaul products were lower compared to 2012.

Overall net revenues for 2012 decreased by $123.3 million, or 19% compared to net revenues for 2011. This year-over-year decrease was mainly attributable to lower volumes shipped. We continued to be affected by macro-economic uncertainty, which has our customers delaying investments in network infrastructure, and has impacted each of the Storage, Optical and Mobile market segments.

Storage represented 67% of our net revenues in 2012, compared to 60% in 2011. Storage net revenues decreased by 10% year-over-year mainly due to the macro-economic uncertainty noted above.

Optical represented 19% of our net revenues in 2012, compared to 25% in 2011. Optical net revenues decreased by 37% year-over-year mainly due to the overall macro-economic uncertainty noted above, lower carrier spending and delayed investment by carriers in packet-based technologies to address growth in video and mobile data. This led to a substantial drop in legacy volumes from SONET and ATM but no corresponding increase in new OTN technology revenue.

Mobile represented 14% of our net revenues in 2012, compared to 15% in 2011. Mobile net revenues decreased by 25% year-over-year due mainly to the factors above.

GROSS PROFIT

(in millions)	2013			Change			2012			Change			2011
Gross profit	$	358.8			(4	)%	$	372.1			(16	)%	$	443.1
Percentage of net revenues		71	%					70	%					68	%

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Gross profit for 2013 decreased by $13.3 million over 2012 due to lower volumes. Gross profit as a percentage of net revenues was 71% and 70% in 2013 and 2012, respectively. Our gross margin was favorably impacted during 2013 from warranty provision releases offset by acquisition-related costs and termination costs. The remainder of the change is mainly due to product mix.

Gross profit for 2012 decreased by $71.0 million over 2011. Gross profit as a percentage of net revenues increased 2% to 70% in 2012 from 68% in 2011. This increase is mainly due to $9 million of expense related to our acquisition of Wintegra in November 2010, specifically, the effect of fair value adjustments related to inventory acquired from Wintegra and sold during the first half of 2011. As a result, gross profit as a percentage of net revenues would have been 69% in 2011 had it not been for this fair value adjustment. The remainder of the change is mainly due to product mix. We were able to offset the negative effect on gross margin percentage of fixed costs over the lower net revenues in 2012 through cost saving initiatives.

OTHER COSTS AND EXPENSES

($ millions)	2013			Change			2012			Change			2011
Research and development	$	211.0			(4	)%	$	220.9			(3	)%	$	227.1
Percentage of net revenues		40	%					42	%					35	%
Selling, general and administrative	$	112.8			0	%	$	112.5			(5	)%	$	118.6
Percentage of net revenues		21	%					21	%					18	%
Amortization of purchased intangible assets	$	48.2			6	%	$	45.3			2	%	$	44.2
Percentage of net revenues		9	%					9	%					7	%
Impairment of goodwill and purchased intangible assets	$	—			(100	)%	$	274.6			—	%	$	—
Percentage of net revenues		—	%					52	%					—	%

Research and Development Expenses

Our Research and Development (“R&D”) expenses were $211.0 million in 2013. This was $9.9 million, or 4%, lower compared to 2012. This was primarily the result of the decrease in payroll-related costs, including termination costs, lower outside services due to the timing of projects and lower tape-out related costs incurred in 2013. In addition, R&D expenses in 2013 were favorably impacted by approximately $2.9 million as a result of changes in estimates related to our patent contingency provisions.

Our R&D expenses were $220.9 million in 2012. This was $6.2 million, or 3%, lower compared to 2011. This was primarily the result of lower outside services costs due to the timing of projects and continued expense control, partially offset by higher payroll-related costs associated with planned hiring (although bonuses were lower) and some increased acquisition related costs.

Selling, General and Administrative Expenses

Our selling, general and administrative (“SG&A”) expenses were $112.8 million in 2013. This was $0.3 million higher compared to 2012, mainly due to an increase in asset impairment of $2.2 million and higher payroll related costs of $2.6 million, including termination costs of $1.8 million, partially offset by reversal of accruals of $1.3 million, lower lease and facilities expenses of $1.5 million and certain other decreases including professional fees and lease exit costs.

Our SG&A expenses were $112.5 million in 2012. This was $6.1 million, or 5%, lower compared to 2011, mainly due to lower payroll-related costs, including lower commissions due to lower net revenues, and lower acquisition-related costs.

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Amortization of Purchased Intangible Assets

Amortization expense for acquired intangible assets increased by $2.9 million, or 6%, in 2013 compared to 2012. This was attributable to commencing amortization of intangible assets acquired from IDT during the year.

Amortization expense for acquired intangible assets increased by $1.1 million, or 2%, in 2012 compared to 2011. This was attributable to commencing amortization of core technology assets acquired in minor business combinations at the end of 2011 and in 2012.

Impairment of goodwill and purchased intangible assets

During the third quarter of 2012, the Company recognized impairment charges of $274.6 million due to weaker quarterly results and lower future projections than previously expected in the former Fiber-to-the-Home (“FTTH”) and Wintegra reporting units, respectively, related to the Company’s 2006 acquisition of Passave and 2010 acquisition of Wintegra. This was driven by slower adoption rates of FTTH technology in markets outside of Asia and prolonged weak carrier spending due to unfavorable macroeconomic conditions which negatively impacted Wintegra. These circumstances triggered the Company to perform step one of the impairment test and we determined that the estimated fair values of the reporting units were lower than their respective carrying values.

The Company combined these two reporting units (formerly included in the Fiber-to-the-Home Products and Wireless Infrastructure and Networking Products operating segments) with the Communications Products operating segment, to form the new realigned Communications Business Unit operating segment near the end of 2012. This organizational realignment was made to capitalize on the many areas of synergy between the former three reporting units, to create an integrated and focused product roadmap, and to further strengthen the scale advantage we have in the area of network communications. It also allows us to become more efficient in our product development efforts, which is critical since research and development costs for each new device continue to climb while carrier end market growth has not kept pace in the recent past, and will take some time to return to normal levels as macroeconomic conditions recover. The Communications Business Unit operating segment will continue to introduce new products to grow the operating segment, and we have implemented structural changes to our research and development, and marketing and sales activities to better position the operating segment for growth as macroeconomic conditions recover. These products will be the foundation for our growth in the carrier market for the next several years. It is expected that the Company will continue to steadily increase sales and profitability with this newly realigned operating segment, to come in-line with our targeted financial operating metrics. Although the Company recorded impairment charges during 2012 for these former reporting units, their product technology continues to represent a core strategic part of our future technology road-map and portfolio of product offerings for communications network infrastructure equipment. The impairment loss recorded in 2012 did not have a significant impact on the Company’s operations and/or liquidity in 2013, nor do we expect that it will in the future. We do note, however, that as a result of the write-down of purchased intangible assets of Wintegra (other than goodwill) of $7 million, there has been a corresponding reduction in quarterly amortization expense of approximately $0.8 million. See within Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 18. Impairment of Goodwill and Long-Lived Assets.

OTHER INCOME AND EXPENSES

($ millions)	2013			Change			2012			Change			2011
Revaluation of liability for contingent consideration	$	—			—	%	$	—			(100	)%	$	29.4
Gain on investment securities and other investments	$	1.9			27	%	$	1.5			88	%	$	0.8
Amortization of debt issue costs	$	(0.1	)		50	%	$	(0.2	)		—	%	$	(0.2	)
Foreign exchange gain (loss)	$	4.0			367	%	$	(1.5	)		(600	)%	$	0.3
Interest income (expense), net	$	0.9			156	%	$	(1.6	)		(30	)%	$	(2.3	)
Provision for income taxes	$	(25.8	)		31	%	$	(37.3	)		277	%	$	(9.9	)

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Revaluation of liability for contingent consideration

During 2011, we recognized a revaluation of liability for contingent consideration related to our acquisition of Wintegra. We recognized a fair value adjustment relating to the liability based on the updated assessment during the third quarter of 2011 of Wintegra’s 2011 revenues, which were below earn-out levels due to delayed platform deployment from key suppliers in China and Europe. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 2. Business Combinations. There is no other liability for contingent consideration.

Gain on investment securities and other

We recorded a gain on sale of investment securities and other investments of $1.9 million, $1.5 million, and $0.8 million, related to the disposition of investment securities and other investments in 2013, 2012, and 2011, respectively. We also recognized recoveries of prior impairments of our investments in the Reserve Funds of $0.5 million in 2011, based on distributions received from the Reserve Funds.

Amortization of debt issue costs

We recorded amortization of debt issue costs of $0.1 million in 2013 relating to our credit facility, and $0.2 million in each of 2012 and 2011 relating to our senior convertible notes.

Foreign exchange gain (loss)

We have significant design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the value of the Canadian dollar relative to the United States dollar have been hedged in accordance with our general practice of hedging.

We recognized a net foreign exchange gain of $4.0 million in 2013, a net foreign exchange loss of $1.5 million in 2012, and a net foreign exchange gain of $0.3 million in 2011. This was primarily due to foreign exchange gain and loss on the revaluation of our net foreign denominated assets and liabilities. This was partly driven by the United States Dollar appreciating by approximately 7% during 2013 compared to depreciating by approximately 1% during 2012, and depreciating by approximately 1% during 2011, against currencies applicable to our foreign operations.

Interest income (expense), net

Net interest income for 2013 was $0.9 million and net interest expense for 2012 and 2011 was $1.6 million and $2.3 million, respectively. We retired our senior convertible notes in October 2012 and we drew $30 million in funds from our credit facility in November 2013. This resulted in a lower interest expense to offset interest income from cash in banks and short-term investments in 2013 compared to 2012.

In 2012, the decrease in net interest expense of $0.7 million, compared to 2011 was primarily due to less interest expense as a result of retiring our senior convertible notes in October 2012, and no accretion of the liability for contingent consideration in 2012 compared to 2011, partially offset by lower investment yields on lower cash balances in 2012.

In 2011, the increase in net interest expense of $1.1 million, compared to 2010, was due to lower investment yields and lower cash balances. In addition, we recognized $1.2 million of interest expense related to the accretion of the liability for contingent consideration in 2011, which was offset by the decline of $0.8 million interest on our short-term loan related to our acquisition of Wintegra in 2011 compared to 2010.

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Provision for income taxes

On a consolidated basis, the Company recorded a provision for income taxes of $25.8 million, $37.3 million and $9.9 million for 2013, 2012, and 2011, respectively. The effective tax rates were negative 382%, negative 13% and positive 11% for 2013, 2012 and 2011, respectively.

The difference between our effective tax rates and the 35% US federal statutory rate in each of 2013, 2012, and 2011, resulted primarily from foreign earnings eligible for tax rates lower than the federal statutory rate due to economic incentives subject to certain criteria granted by foreign jurisdictions and extending to approximately 2020, investment tax credits earned, changes in valuation allowance, and adjustments for prior years taxes and tax credits, partially offset by non-deductible intangible asset amortization and impairment of goodwill and purchased intangible assets, the effect of inter-company transactions, utilization of stock option related loss carryforwards recorded in equity, changes in accruals related to the unrecognized tax benefit liabilities, and permanent differences arising from stock-based compensation and other items.

The Company’s 2013 tax rate was higher than the 35% statutory rate primarily due to $32.5 million increase in valuation allowance on deferred tax assets, $18.1 million tax on intercompany transactions, $16.1 million non-deductible amortization and stock-based compensation expense, partially offset by $23.3 million tax credits generated in 2013, $10.2 million tax on profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate, and the balance attributable to deferred tax timing differences and other items.

The Company’s 2012 tax rate was higher than the 35% statutory rate primarily due to the $104.8 million tax impact of an intercompany dividend $109.8 million non-deductible amortization and stock-based compensation expense, and $17.6 million effect of stock option related loss carry-forwards recorded in equity, partially offset by a decrease in valuation allowance of $40.3 million, $19.2 million tax credits generated in 2012, and the balance attributable to deferred tax timing differences and other items.

The Company’s 2011 tax rate was lower than the 35% statutory rate primarily due to $28.2 million profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate and $18.4 million tax credits generated in 2011, partially offset by the tax impact of $33.9 million inter-company transactions, an adjustment of $25.9 million prior year taxes, $9.0 million non-deductible stock-based compensation and amortization expense and write-down, and the balance attributable to deferred tax timing differences and other items.

See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 15. Income Taxes.

BUSINESS OUTLOOK

The following is our outlook for the three months ending March 29, 2014 and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure:

	Non-GAAP measure	Reconciling items	GAAP Measure
(in millions, except for percentages)
Net revenues	$120—$128	N/A(a)	$120—$128
Gross profit %	70%—71%	(0.2)%(b)	69.8%—70.8%
Operating expenses	$71—$73	$21—$22(c)	$92—$95
Provision for income taxes	$1	**	**

(a) As in the past, and consistent with business practice in the semiconductor industry, a portion of our revenue is likely to be derived from orders placed and shipped during the same quarter, which we call our “turns business.” Our turns business varies from quarter to quarter. We expect the turns business percentage from the beginning of the first quarter of 2014 to be approximately 29%. A number of factors such as volatile macroeconomic conditions could impact achieving our revenue outlook.

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(b) This percentage relates to stock-based compensation expense. The gross margin percentage can vary depending on a volume of products sold given certain costs are fixed. The gross margin percentage will also vary depending on the mix of products sold.

(c) The referenced amount consists of $5.7 million to $6.7 million of stock-based compensation expense and $15.1 million of amortization of purchased intangible assets.

** The comparable GAAP measure is not available on a forward-looking basis without unreasonable effort.

The above non-GAAP information is provided as a supplement to the Company’s condensed consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”). A non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The Company believes that the additional non-GAAP measures are useful to investors for the purpose of financial analysis. Management uses these measures internally to evaluate the Company’s in-period operating performance before gains, losses and other charges that are considered by management to be outside of the Company’s core operating results. In addition, the measures are used for planning and forecasting of the Company’s future periods. However, non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. Other companies may use different non-GAAP measures and presentation of results.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash from operations, our short-term investments and long-term investment securities. We employ these sources of liquidity to support ongoing business activities, acquire or invest in critical or complementary technologies, purchase capital equipment, repay any short-term indebtedness, and finance working capital. Currently, our primary objective for use of discretionary cash has been to repurchase and retire a portion of our common stock. The combination of cash, cash equivalents, short-term investments and long-term investment securities at December 28, 2013 and December 29, 2012 totaled $214.3 million and $273.2 million, respectively.

In 2013, we obtained a revolving line of credit with a bank under which the Company may borrow up to $100 million, of which, $30 million was drawn and remained outstanding as at year-end.

In October 2012, we repurchased the remaining outstanding senior convertible notes at 100% of the outstanding principal amount, or $68.3 million.

In the future, we expect our cash on hand and cash generated from operations, together with our short-term investments, long-term investment securities and revolving line of credit, to be our primary sources of liquidity (see Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 4. Fair Value Measurements).

OPERATING ACTIVITIES

Cash generated from operations was $78.8 million in fiscal 2013 compared to cash generated from operations of $58.8 million in 2012. Our net loss for the year was $32.5 million. Net loss, after adding back non-cash expenses of $71.4 million amortization and depreciation and $26.3 million stock based compensation was the main driver of our positive operating cash flow, with some benefit from normal changes in working capital, including improvement in accounts receivable collections at 40 days sales outstanding (2012—43 days) and increase in deferred taxes and income taxes payable. In addition, partially offsetting these were $8.5 million in working capital changes, driven mainly by $5.6 million reduction in accounts payables and accrued liabilities and $3.6 million increase in inventory levels at the end of 2013.

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INVESTING ACTIVITIES

Cash used in investing activities was $126.7 million in fiscal 2013 compared to cash generated by investing activities of $166.3 million in 2012. In 2013, we acquired IDT’s Enterprise Flash Controller division for $96.1 million cash, purchased $16.9 million in property, equipment and intangible assets and purchased $179.80 million of investment securities. This is offset by $162.8 million and $8.5 million cash generated from disposal of investment securities and redemption of short-term investments.

In 2012, we redeemed short-term investments and disposed of investment securities to fund our stock buyback programs and redemption of our Senior Convertible notes. We also used cash of $31.2 million to acquire property and equipment primarily for the implementation of a new ERP system in fiscal 2012.

FINANCING ACTIVITIES

During 2013, we used $76.3 million to repurchase 12.6 million shares of our common stock. In 2012, we used $200 million to repurchase 33.7 million shares of our common stock. During 2013, we drew $30 million from our revolving line of credit to fund the share repurchases. During 2012, we redeemed our senior convertible notes at their face values of $68.3 million. During 2013, we also received $25.2 million (2012—$16 million) from issuances of common stock, and recognized $0.8 million (2012—$14.2 million) from excess tax benefits from stock option transactions.

In connection with the acquisition of Wintegra, we borrowed $220 million in 2010, $40 million of which was repaid in 2010. The remainder was repaid in January 2011.

CONTRACTUAL OBLIGATIONS:

At December 28, 2013, we had the following contractual obligations:

	Payments due in:
(in thousands)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating Lease Obligations:
Minimum Rental Payments	$	36,686	$	9,268	$	13,430	$	8,430	$	5,558
Estimated Operating Cost Payments		16,545		3,903		6,535		4,384		1,723
Purchase and Other Obligations (1)		28,700		6,820		21,880		—		—
Total	$	81,931	$	19,991	$	41,845	$	12,814	$	7,281

(1) Included in the Purchase and Other Obligations is $11.4 million for design software tools, which will be paid between 2014 and 2015. This amount includes $6.5 million classified as long-term obligations in our Consolidated Balance Sheet for the year ended December 28, 2013. We have not included open purchase orders for inventory or other expenses issued in the normal course of business in the purchase obligations shown above. We estimate these other commitments to be approximately $34.4 million at December 28, 2013 for inventory and other expenses that will be received in the coming 90 days and that will require settlement 30 days thereafter.

We expect to spend approximately $17.5 million in 2013 for capital expenditures including purchases of intellectual property. Based on our current operating prospects, we believe that existing sources of liquidity will be sufficient to satisfy our projected operating, working capital, capital expenditure, purchase obligations and debt obligations through the next twelve months.

In addition to the amounts shown in the table above, we have recorded a $82.1 million liability for unrecognized tax benefits as of December 28, 2013, and we are uncertain as to if or when such amounts may be realized.

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OFF-BALANCE SHEET ARRANGEMENTS

As of December 28, 2013, we had no material off-balance sheet financing arrangements.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“ASU”) No. 2013-12, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This new guidance requires companies to present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified based on its source and is effective for public companies in interim and annual reporting periods beginning after December 15, 2012. Accordingly, we adopted these presentation requirements during the first quarter of 2013 and it did not have a material impact on our consolidated financial statements or related disclosures.

New Accounting Pronouncements Not Yet Adopted

In July 2013, FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists”. The new guidance requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If the deferred tax asset is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013, with early adoption permitted. Accordingly, we plan to adopt these presentation requirements during the first quarter of 2014. We are currently assessing the impact of this new guidance on our consolidated financial statements and related disclosures.

CRITICAL ACCOUNTING POLICIES AND  ESTIMATES

General

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are reasonable in the circumstances. These estimates could change under different assumptions or conditions.

Our significant accounting policies are outlined in the notes to the consolidated financial statements. In management’s opinion the following critical accounting policies require the most significant judgment and involve complex estimation. We also have other policies that we consider to be key accounting policies, such as our policies of revenue recognition, including the deferral of revenues on sales to major distributors; however, these policies do not meet the definition of critical accounting estimates as they do not generally require us to make estimates or judgments that are difficult or subjective.

Valuation of Goodwill and Intangible Assets

Purchase price allocations for business acquisitions often require significant judgments, particularly with regards to the determination of value for identifiable assets, liabilities and goodwill. Often third party specialists are used to assist in areas of valuation requiring complex estimation.

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We assess long-lived assets for possible impairment in the fourth quarter, or when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we may consider when determining when to conduct an impairment test include: (i) any declines in our forecasted operating results; (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock; (iii) a further significant slowdown in the worldwide economy or the semiconductor industry; or (iv) any failure to meet the performance projections included in our forecasts of future operating results.

The Company first assesses qualitative factors to determine whether the existence of events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If the Company determines that it is not more likely than not that the fair value of any of its reporting units is less than its carrying amount, no further assessment is performed. If the Company determines that it is more likely than not that the fair value of any of its reporting units is less than its carrying amount, a quantitative assessment will be performed which involves a two-step process to determine: 1) whether the fair value of the relevant reporting unit exceeds the carrying value and 2) the amount of an impairment loss, if any.

To determine whether impairment exists for long-lived intangible assets, other than goodwill, we first compare the undiscounted cash flows of the assets to their carrying value. If the asset’s carrying value exceeds its estimated undiscounted cash flows, we would write down the asset to its estimated fair value based on expected discounted cash flows.

Significant management judgment is required in the forecasts of future operating results and discount rates used in the discounted cash flow method of valuation. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

During the third quarter of 2012, we recognized $274.6 million in impairment of goodwill and purchased intangible assets related to the 2006 acquisition of Passave, Inc. and the 2010 acquisition of Wintegra. All of the goodwill of Passave was written down by $146.3 million due to weaker quarterly results and future projections than previously expected, driven by slower adoption rates of FTTH technology in markets outside of Asia. All of the goodwill and a portion of the other intangible assets of Wintegra were determined to be impaired by $121.3 million and $7 million, respectively, as a result of the continuing weak carrier spending, more so than previously expected. This impairment charge was included in the Consolidated statement of operations as Impairment of goodwill and purchased intangible assets. No goodwill impairment charges were recorded during the year ended December 28, 2013.

Changes in the estimated fair values of intangible assets in the future could result in significant impairment charges or changes to our expected amortization.

Segment reporting

The Company has one reportable segment—semiconductor solutions for communications network infrastructure, comprised of the following operating segments: Communications Products, Enterprise Storage Products, Microprocessor Products, and Broadband Wireless Products. The aggregation of operating segments into one reportable segment requires the management to evaluate whether there are similar expected long-term economic characteristics for each operating segment, and is an area of significant judgment. If the expected long-term economic characteristics were to become dissimilar, then we could be required to re-evaluate the number of reportable segments.

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Stock-Based Compensation

Since January 1, 2006, we have recognized compensation expense for all share-based payment awards. Under ASC Topic 718, Compensation—Stock Compensation, we measure the fair value of awards of equity instruments and recognize the cost, net of an estimated forfeiture rate, on a straight-line basis over the period during which services are provided in exchange for the award, generally the vesting period.

Calculating the fair value of stock-based compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and expected volatility of our stock price. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Our estimates of expected volatilities are based on a weighted historical and market-based implied volatility. In order to determine the expected life of the awards, we use historical data to estimate option exercises and employee terminations; separate groups of employees that have similar historical exercise behavior, such as directors or executives, are considered separately for valuation purposes. The expected forfeiture rate applied in calculating stock-based compensation cost is estimated using historical data and is updated annually.

The assumptions used in calculating the fair value of stock-based awards involve estimates that require management judgment. If factors change and we use different assumptions, our stock-based compensation expense could change significantly in the future. In addition, if our actual forfeiture rate is different from our estimate, our stock-based compensation expense could change significantly in the future.

Restricted Stock Units (“RSUs”). RSUs are stock awards that are granted to employees entitling the holder to shares of our common stock as the award vests. RSUs are measured at fair value based on the number of shares granted and the quoted price of our common stock at the date of grant. We amortize the fair value of RSUs over the vesting term of generally four years on a straight-line basis. Performance-based RSUs vest upon achievement of certain company-based performance conditions and a requisite service period. We then assess whether it is probable that the performance targets would be achieved. If assessed as probable, compensation expense is recorded for these awards over the estimated performance period. At each reporting period, we reassess the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved and/or the performance period required to achieve the targets requires judgment, and to the extent actual results or updated estimates differ from our current estimates, the cumulative effect on the current and prior periods of those changes is recorded in the period estimates are revised. The ultimate number of shares issued and the related compensation expense recognized is based on a comparison of the final performance metrics to the specific targets.

Income Taxes

PMC has operations in several tax jurisdictions, which subjects us to multiple income tax rates that impact our overall effective income tax rate. We use estimates and assumptions in allocating income to each tax jurisdiction. Certain foreign jurisdictions have granted economic incentives, which are subject to meeting certain criteria including levels of employment and investment. Accordingly, material changes in business activity that we conduct in foreign jurisdictions or failure to meet the aforementioned criteria could impact our effective income tax rates.

We have recorded income tax liabilities based on our interpretation of income tax regulations for the countries in which we operate. We believe that the income tax return positions we have taken are fully supportable. However, our estimates are subject to review and assessment by the local tax authorities. Our income tax expense and related reserve for unrecognized income tax benefits reflect amounts that we believe will be adequate if challenged or subject to income tax assessment. Management uses judgment and estimates in determining income tax expense for these challenges in accordance with guidance for accounting for uncertainty in income taxes. Currently, our reserve for uncertain income tax positions is attributable primarily to uncertainties related to allocation of income among different income tax jurisdictions.

The timing of any such review and final assessment of our income tax liabilities is substantially out of our control and is dependent on the actions by those local tax authorities. Any re-assessment of our income tax

42

liabilities may result in adjustments of the income taxes we pay, with a resulting impact on our income tax expense, net income and cash flows. We review our reserves quarterly, and we may adjust such reserves because of changes in facts and circumstances, changes in tax regulations, negotiations between tax authorities and associated proposed tax assessments, the resolution of audits and the expiration of statutes of limitations.

We must also assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not deemed to be more likely than not, we must increase our provision for taxes by recording a reserve in the form of a valuation allowance against the deferred tax assets that we estimate will more likely than not ultimately be recoverable.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Cash, Cash Equivalents, Short-term Investments and Long-term Investment Securities

We regularly maintain a portfolio of short and long-term investments comprised of various types of money market funds, United States Treasury and Government Agency notes, FDIC-insured corporate notes, United States State and Municipal Securities, foreign government and agency notes and corporate bonds and notes. Our investments are made in accordance with an investment policy approved by our Board of Directors. All investments have maturities of 36 months or less. To minimize credit risk, we diversify our investments and select minimum ratings of P-1 or A3 by Moody’s, or A-1 or A- by Standard and Poor’s or equivalent at the time of purchase. We classify these securities as available-for-sale and they are carried at fair market value. Our corporate policies prevent us from holding material amounts of asset-backed commercial paper.

Investments in instruments with both fixed and floating rates carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted because of a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations because of changes in interest rates, or we may suffer losses in principal if we were to sell securities that have declined in market value because of changes in interest rates.

We do not attempt to reduce or eliminate our exposure to interest rate risk through the use of derivative financial instruments.

Based on a sensitivity analysis performed on the financial instruments held at December 28, 2013, the impact to the fair value of our investment portfolio by a shift in the yield curve of plus or minus 100 basis points would result in approximately a decline of $1.9 million or an increase of $1.2 million in portfolio value, respectively. The selected hypothetical change in interest rates does not reflect what could be considered the best or worst case scenarios.

Credit Facility

As of December 28, 2013, the Company had available a revolving line of credit under which the Company may borrow up to $100 million, of which $30 million was drawn. Interest payments are based on LIBOR plus margins, where margins range from 1.75% to 2.25% per annum based on the Company’s leverage ratio. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 8. Credit Facility for further details.

Senior Convertible Notes

In October 2012, the Company retired the remaining 2.25% senior convertible notes at their face value of $68.3 million.

Because we paid fixed interest coupons on these Notes, market interest rate fluctuations did not impact our debt interest payments. However, the fair value of the senior convertible notes fluctuated as a result of changes in the price of our common stock, changes in market interest rates and changes in our credit worthiness.

43

Our senior convertible notes were not listed on any exchange or included in any automated quotation system but were registered for resale under the Securities Act of 1933. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 10. Senior Convertible Notes for further details.

Foreign Currency

Our sales and corresponding receivables are denominated primarily in United States dollars. We generate a significant portion of our revenues from sales to customers located outside the United States including Asia, Europe and Canada. We are subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in these or other factors.

Through our operations in Canada and elsewhere outside of the United States, we incur research and development, sales, customer support and administrative expenses in various foreign currencies. We are exposed, in the normal course of business, to foreign currency risks on these expenditures, primarily in Canada. In our effort to manage such risks, we have adopted a foreign currency risk management policy intended to reduce the effects of potential short-term fluctuations on our operating results stemming from our exposure to these risks. As part of this risk management, we enter into foreign exchange forward contracts. These forward contracts offset the impact of exchange rate fluctuations on forecasted cash flows or firm commitments. We limit the forward contracts operational period to 12 months or less and we do not enter into foreign exchange forward contracts for trading purposes. Because we do not engage in foreign exchange risk management techniques beyond these periods, our cost structure is subject to long-term changes in foreign exchange rates. In the event that one of the counterparties to our forward currency contracts failed to complete the terms of their contracts, we would purchase foreign currencies at the spot rate as of the date the funds were required. If the counterparties to our foreign forward currency contracts that matured in the fiscal year ended December 28, 2013 had not fulfilled their contractual obligations and we were required to purchase the foreign currencies at the spot market rate on respective settlement dates, our income from operations for 2013 would have increased by $0.1 million. See Item 8. Financial Statements and Supplementary Data, the Notes to the Consolidated Financial Statements, Note 3. Derivative Instruments for further details.

As at December 28, 2013, we had 27 foreign currency exchange forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $27.7 million and the contracts had a fair value loss of $0.6 million.

We attempt to limit our exposure to foreign exchange rate fluctuations from our Canadian dollar net asset or liability positions. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates. A 5% shift in the foreign exchange rates between U.S. dollar and the Canadian dollar would impact pre-tax income by approximately $3.3 million. The selected hypothetical change in foreign exchange rates does not reflect what could be considered the best or worst case scenarios.

Other Investments

From time-to-time, our other investments include strategic investments in privately held companies that are carried on our balance sheet at cost, net of write-downs for other than temporary declines in market value. These investments are inherently risky, as they typically are comprised of investments in companies and partnerships that are still in the start-up or development stages. The market for the technologies or products that they have under development is typically in the early stages and may never materialize. We could lose our entire investment in these companies and partnerships or may incur an additional expense if we determine that the value of these assets has been impaired.

44

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The chart entitled “Quarterly Data” contained in Item 6 of Part II hereof is hereby incorporated by reference into the Item 8 of Part II of this Form 10-K.

Consolidated Financial Statements Included in Item 8:
	Page
Reports of Independent Registered Public Accounting Firms		46
Consolidated Balance Sheets		49
Consolidated Statements of Operations		50
Consolidated Statements of Comprehensive (Loss) Income		51
Consolidated Statements of Cash Flows		52
Consolidated Statements of Stockholders’ Equity		53
Notes to Consolidated Financial Statements		54

45

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

PMC-Sierra, Inc.

We have audited the accompanying consolidated balance sheet of PMC-Sierra, Inc. as of December 28, 2013, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedule as of and for the year ended December 28, 2013 listed in the Index at Item 15(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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PMC-Sierra, Inc. at December 28, 2013, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule as of and for the year ended December 28, 2013, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PMC-Sierra, Inc.’s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 26, 2014 expressed an adverse opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

February 26, 2014

46

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

PMC-Sierra, Inc.

We have audited PMC-Sierra, Inc.’s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). PMC-Sierra, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness in controls related to the income tax accounting process. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PMC-Sierra, Inc. as of December 28, 2013 and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity and cash flows for the year ended December 28, 2013. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2013 financial statements, and this report does not affect our report dated February 26, 2014, which expressed an unqualified opinion on those financial statements.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, PMC-Sierra, Inc. has not maintained effective internal control over financial reporting as of December 28, 2013, based on the COSO criteria.

/s/ Ernst & Young LLP

San Jose, California

February 26, 2014

47

REPORT OF DELOITTE LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of PMC-Sierra, Inc.

We have audited the accompanying consolidated balance sheet of PMC-Sierra, Inc. and subsidiaries (the “Company”) as of December 29, 2012, and the related consolidated statements of operations, comprehensive (loss) income, cash flows, and stockholders’ equity for the two year period ended December 29, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PMC-Sierra, Inc. and subsidiaries as of December 29, 2012 and the results of their operations and their cash flows for the two year period ended December 29, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As discussed in Note 19a and Note 19b to the consolidated financial statements, the 2012 and 2011 consolidated financial statements have been restated to correct for certain errors.

/s/ Deloitte LLP

Vancouver, Canada

February 28, 2013 (November 12, 2013 as to the effects of the restatement discussed in Note 19b, and February 26, 2014 as to the effects of the restatement discussed in Note 19a)

48

PMC-Sierra, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	December 28, 2013			December 29, 2012 (As Restated – See Note 19)
ASSETS:
Current assets:
Cash and cash equivalents	$	100,038		$	169,970
Short-term investments		10,894			11,431
Accounts receivable, net of allowance for doubtful accounts of $1,036 (2012—$1,614)		56,112			62,143
Inventories, net		31,074			25,667
Prepaid expenses and other current assets		19,855			22,125
Income taxes receivable		2,640			6,630
Prepaid tax expense		5,695			—
Deferred tax assets		43,131			44,971
Total current assets		269,439			342,937
Investment securities		103,391			91,778
Investments and other assets		10,750			20,133
Prepaid tax expenses		93			19,152
Property and equipment, net		39,149			43,146
Goodwill		278,849			252,419
Intangible assets, net		146,974			128,668
Deferred tax assets		1,306			1,042
	$	849,951		$	899,275
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	23,173		$	27,410
Accrued liabilities		64,257			66,722
Credit facility		30,000			—
Income taxes payable		632			1,450
Liability for unrecognized tax benefit		54,127			51,810
Deferred income taxes		71			—
Deferred income		7,481			8,113
Total current liabilities		179,741			155,505
Long-term obligations		11,108			22,793
Deferred income taxes		43,143			42,898
Liability for unrecognized tax benefit		27,947			28,204
PMC special shares convertible into 1,019 (2012—1,019) shares of common stock		1,188			1,188
Contingencies (Note 11. Commitments and Contingencies)
Stockholders’ equity:
Common stock, par value $.001: 900,000 shares authorized; 194,415 shares issued and outstanding (2012—200,924)		195			201
Additional paid in capital		1,550,190			1,554,886
Accumulated other comprehensive (loss) income		(526	)		616
Accumulated deficit		(963,035	)		(907,016	)
Total stockholders’ equity		586,824			648,687
	$	849,951		$	899,275

See notes to the consolidated financial statements.

49

PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Year Ended
	December 28, 2013			December  29, 2012 (As Restated – See Note 19)			December  31, 2011 (As Restated – See Note 19)
Net revenues	$	508,028		$	530,997		$	654,304
Cost of revenues		149,213			158,849			211,190
Gross profit		358,815			372,148			443,114
Research and development		211,047			220,927			227,106
Selling, general and administrative		112,770			112,479			118,601
Amortization of purchased intangible assets		48,245			45,321			44,182
Impairment of goodwill and purchased intangible assets		—			274,637			—
(Loss) income from operations		(13,247	)		(281,216	)		53,225
Other income (expense):
Revaluation of liability for contingent consideration		—			—			29,376
Gain on investment securities and other investments		1,879			1,523			845
Amortization of debt issue costs		(80	)		(167	)		(200	)
Foreign exchange gain (loss)		4,043			(1,512	)		344
Interest income (expense), net		907			(1,586	)		(2,267	)
(Loss) income before provision for income taxes		(6,498	)		(282,958	)		81,323
Provision for income taxes		(25,756	)		(37,301	)		(9,897	)
Net (loss) income	$	(32,254	)	$	(320,259	)	$	71,426
Net (loss) income per common share—basic	$	(0.16	)	$	(1.48	)	$	0.31
Net (loss) income per common share—diluted	$	(0.16	)	$	(1.48	)	$	0.30
Shares used in per share calculation—basic		203,882			216,593			233,210
Shares used in per share calculation—diluted		203,882			216,593			235,184

See notes to the consolidated financial statements.

50

PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

	Year Ended
	December 28, 2013			December  28, 2012 (As Restated – See Note 19)			December  31, 2011 (As Restated – See Note 19)
Net (loss) income	$	(32,254	)	$	(320,259	)	$	71,426
Other comprehensive (loss) income:
Change in fair value of derivatives, net of tax of ($174), $260, and $619		(983	)		2,065			(2,688	)
Change in fair value of investment securities, net of tax of ($124), ($65), and ($211)		(159	)		(303	)		(530	)
Other comprehensive (loss) income		(1,142	)		1,762			(3,218	)
Comprehensive (loss) income	$	(33,396	)	$	(318,497	)	$	68,208

See notes to the consolidated financial statements.

51

PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended
	December 28, 2013			December 29, 2012 (As  Restated – See Note 19			December 31, 2011 (As  Restated – See Note 19
Cash flows from operating activities:
Net (loss) income	$	(32,254	)	$	(320,259	)	$	71,426
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		71,432			64,535			72,544
Stock-based compensation		26,264			26,315			27,055
Unrealized foreign exchange (gain) loss , net		(2,251	)		1,747			(43	)
Net amortization/(accretion) of premiums/(discounts) and accrued interest on investments		1,580			5,101			4,520
Asset impairment		2,966			1,759			3,589
Loss on disposal of property and equipment		6			—			—
Gain on investment securities and other		(1,796	)		(1,508	)		(671	)
Excess tax benefits from stock option transactions		(842	)		(14,232	)		(6,838	)
Impairment of goodwill and purchased intangible assets		—			274,637			—
Income taxes related to intercompany dividend		—			60,940			—
Accrued interest on short-term loan		—			—			589
Revaluation of liability for contingent consideration		—			—			(29,376	)
Changes in operating assets and liabilities:
Accounts receivable		6,330			(2,929	)		10,177
Inventories		(3,625	)		17,294			1,770
Prepaid expenses and other current assets		1,315			2,635			2,824
Accounts payable and accrued liabilities		(5,551	)		(28,267	)		(9,447	)
Deferred income taxes and income taxes receivables/payables		15,900			(21,085	)		9,669
Accrued restructuring costs		—			—			(1,609	)
Deferred income		(632	)		(7,911	)		(2,202	)
Net cash provided by operating activities		78,842			58,772			153,977
Cash flows from investing activities:
Investment in long term deposits		(1,127	)		—			—
Cash paid in connection with business acquisition, net of cash acquired		(96,098	)		(15,900	)		(1,669	)
Purchases of property and equipment		(16,851	)		(31,229	)		(12,702	)
Purchase of intangible assets		(3,979	)		(7,438	)		(6,116	)
Redemption of short-term investments		8,466			26,473			—
Disposals of investment securities		162,773			315,310			249,789
Purchases of investment securities and other investments		(179,837	)		(120,917	)		(205,903	)
Net cash (used in) provided by investing activities		(126,653	)		166,299			23,399
Cash flows from financing activities:
Proceeds from credit facility		30,000			—			—
Payment of debt issuance costs		(928	)		—			—
Repurchase of senior convertible notes		—			(68,340	)		—
Repurchases of common stock		(76,335	)		(199,999	)		(39,999	)
Repayment of short-term loan		—			—			(180,991	)
Proceeds from issuance of common stock		25,247			16,000			16,764
Excess tax benefits from stock option transactions		842			14,232			6,838
Net cash used in financing activities		(21,174	)		(238,107	)		(197,388	)
Effect of exchange rate changes on cash and cash equivalents		(947	)		435			(506	)
Net decrease in cash and cash equivalents		(69,932	)		(12,601	)		(20,518	)
Cash and cash equivalents, beginning of year		169,970			182,571			203,089
Cash and cash equivalents, end of year	$	100,038		$	169,970		$	182,571
Supplemental disclosures of cash flow information:
Cash paid for interest	$	42		$	1,554		$	1,538
Cash (refund received) paid for income taxes, net		(1,338	)		(2,523	)		379
Supplemental disclosures of non-cash investing and financing activities:
Conversion of PMC-Sierra special shares into common stock		—			40			488

See notes to the consolidated financial statements.

52

PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Shares of Common Stock			Common Stock			Additional Paid in Capital			Accumulated Other Comprehensive Income (Loss) (net of tax)			Accumulated Deficit			Total Stockholders’ Equity
Balance at December 26, 2010 (As Restated—See Note 19)		232,008			252			1,598,444			2,072			(569,453	)		1,031,315
Net income		—			—			—			—			71,426			71,426
Other comprehensive income (loss):
Change in fair value of derivatives, net of tax of $619		—			—			—			(2,688	)		—			(2,688	)
Change in fair value of investment securities, net of tax of $211		—			—			—			(530	)		—			(530	)
Comprehensive income																	68,208
Conversion of special shares into common shares		341			—			488			—			—			488
Issuance of common stock under stock benefit plans		3,968			(16	)		15,772			—			—			15,756
Stock-based compensation expense		—			—			27,055			—			—			27,055
Benefit of stock option related loss carry-forwards		—			—			6,694			—			—			6,694
Repurchases of common stock		(6,084	)		(6	)		(25,447	)		—			(14,546	)		(39,999	)
Balance at December 31, 2011 (As Restated—See Note 19)		230,233			230			1,623,006			(1,146	)		(512,573	)		1,109,517
Net loss		—			—			—			—			(320,259	)		(320,259	)
Other comprehensive income (loss):
Change in fair value of derivatives, net of tax of $260		—			—			—			2,065			—			2,065
Change in fair value of investment securities, net of tax of $65		—			—			—			(303	)		—			(303	)
Comprehensive loss																	(318,497	)
Issuance of common stock under stock benefit plans		4,423			4			15,134			—			—			15,138
Stock-based compensation expense		—			—			26,315			—			—			26,315
Benefit of stock option related loss carry-forwards		—			—			14,263			—			—			14,263
Prior period adjustments (See Note 19)		—			—			1,950			—			—			1,950
Repurchases of common stock		(33,732	)		(33	)		(125,782	)		—			(74,184	)		(199,999	)
Balance at December 29, 2012 (As Restated—See Note 19)		200,924			201			1,554,886			616			(907,016	)		648,687
Net loss		—			—			—			—			(32,254	)		(32,254	)
Other comprehensive loss:
Change in fair value of derivatives, net of tax of ($174)		—			—			—			(983	)		—			(983	)
Change in fair value of investment securities, net of tax of $124		—			—			—			(159	)		—			(159	)
Comprehensive loss																	(33,396	)
Issuance of common stock under stock benefit plans		6,537			7			23,373			—			—			23,380
Stock-based compensation expense		—			—			26,264			—			—			26,264
Benefit of stock option related loss carry-forwards		—			—			842			—			—			842
Repurchases of common stock		(13,046	)		(13	)		(55,175	)		—			(23,765	)		(78,953	)
Balance at December 28, 2013		194,415		$	195		$	1,550,190		$	(526	)	$	(963,035	)	$	586,824

See notes to the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business. PMC-Sierra, Inc. (“PMC” or “the Company”) is a semiconductor and software solution innovator transforming networks that connect, move and store Big Data. Building on a track record of technology leadership, the Company is driving innovation across storage, optical and mobile networks. PMC’s highly integrated solutions increase performance and enable next generation services to accelerate the network transformation.

Basis of presentation. The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and United States Generally Accepted Accounting Principles (“GAAP”). The Company’s 2013 and 2012 fiscal year each consisted of 52 weeks, and fiscal year 2011 consisted of 53 weeks. The 2013 and 2012 fiscal year ended on the last Saturday in December, and the 2011 fiscal years ended on the last Sunday in December. The Company’s reporting currency is the U.S. dollar. The accompanying consolidated financial statements include the accounts of PMC-Sierra, Inc. and all of its subsidiaries. As at December 28, 2013 and December 29, 2012, all subsidiaries included in these consolidated financial statements were wholly owned by PMC. All inter-company accounts and transactions have been eliminated.

Estimates. The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, stock-based compensation, purchase accounting assumptions including those used to calculate the fair value of intangible assets and goodwill, the valuation of investments, allowance for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, revenue recognition, sales returns, warranty costs, income taxes including uncertain tax positions, restructuring costs, assumptions used to measure the fair value of the debt component of the Company’s senior convertible notes, accounting for employee benefit plans, and contingencies (See Note 11. Commitments and Contingencies). Actual results could differ materially from these estimates.

Cash and cash equivalents, short-term investments and long-term investment securities. Cash equivalents are defined as highly liquid interest-earning instruments with maturities at the date of purchase of three months or less. Short-term investments are investments with original maturities greater than three months, but less than one year. Investments with maturities beyond one year are classified as long-term investment securities.

Management classifies investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluates such designation as of each balance sheet date. Investments classified as held-to-maturity securities are stated at amortized cost with corresponding premiums or discounts amortized against interest income over the life of the investment. Marketable equity and debt securities not classified as held-to-maturity are classified as available-for-sale and reported at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on these investments, net of any related tax effect are included in other comprehensive income and as a separate component of stockholders’ equity. For debt securities, if an impairment is considered other than temporary, the entire difference between the amortized cost and the fair value is recognized in earnings in the period this determination is made.

Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount that is expected to be ultimately collected.

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Inventories. Inventories are stated at the lower of cost or market and consist of work-in-progress and finished goods. Inventory costs are determined using standard cost, which approximates actual costs under the weighted average cost method. The Company provides inventory allowances on obsolete inventories and inventories in excess of twelve-month demand for each specific part.

The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

Property and equipment, net. Property and equipment is stated at cost, net of write-downs for impairment, and accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from two to five years. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the lease term.

Goodwill and Intangible assets. Goodwill and indefinite-life intangible assets are tested for impairment on an annual basis in the fourth fiscal quarter, and when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. To evaluate the recoverability of goodwill, the Company first assesses qualitative factors to determine whether the existence of events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If the Company determines that it is not more likely than not that the fair value of any of its reporting units is less than its carrying amount, no further assessment is performed. If the Company determines that it is more likely than not that the fair value of any of its reporting units is less than its carrying amount, a quantitative assessment will be performed which involves a two-step process. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, ranging from less than 1 year to ten years. Purchased intangible assets with indefinite lives are assessed for potential impairment annually or when events or circumstances indicate that their carrying amounts might be impaired. Developed technology assets are carried at cost, less accumulated amortization, of which amortization is computed over the estimated useful lives of 3 years.

Impairment of long-lived assets. Long-lived assets that are held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the difference between the fair value of the asset and its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

See Note 18. Impairment of Goodwill and Long-Lived Assets for discussion of the 2012 asset impairment relating to goodwill and purchased intangible assets.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During 2013 and 2012, the Company recognized other long-lived asset impairments totaling $3.0 million and $1.8 million, respectively, related to certain design tools, property and equipment, and intellectual property that were no longer expected to be utilized. These impairment charges were included in the Consolidated Statements of Operations in Research and development expense in the respective periods.

Foreign currency remeasurement. For all foreign operations, the U.S. dollar is the functional currency. Monetary assets and liabilities in foreign currencies are remeasured into U.S. dollars using the exchange rate as of the balance sheet date. Revenues and expenses are translated at average rates of exchange during the year. Remeasurement gains/losses are recorded in income (loss) from operations. Gains and losses from foreign currency transactions are reported separately as foreign exchange gain (loss) under other income (expense) on the Consolidated Statements of Operations.

Derivatives and Hedging Activities. Fluctuating foreign exchange rates may significantly impact PMC’s net (loss) income and cash flows. The Company periodically hedges forecasted foreign currency transactions related to certain operating expenses. All derivatives are recorded in the consolidated balance sheet at fair value. For a derivative designated as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net (loss) income. For a derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive (loss) income and are recognized in net (loss) income when the hedged item affects net (loss) income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in net income (loss). If the derivative used in an economic hedging relationship is not designated in an accounting hedging relationship or if it becomes ineffective, changes in the fair value of the derivative are recognized in net (loss) income. During the years ended December 28, 2013, December 29, 2012 and December 31, 2011, all hedges were designated as cash flow hedges.

Fair value of financial instruments. The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies as prescribed under GAAP. See Note 7. Investment Securities. 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 use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of the Company’s cash equivalents, short-term investments, long-term investment securities, derivative instruments, debt component of its senior convertible notes, and employee post-retirement healthcare benefits are estimated using available market information and appropriate valuation. The fair value of investments in public companies is determined using quoted market prices for those securities. The fair value of investments in private entities is not readily determinable due to the illiquid market for these investments. See Note 4. Fair Value Measurements. The Company considers various actuarial assumptions, in determining the value of its employee post-retirement healthcare benefits, including the discount rate, current year health care trend and ultimate trend rates. The Company bases the salary increase assumptions on historical experience and future expectations.

The carrying values of cash, accounts receivable, accounts payable and credit facility approximate fair value because of their short term nature.

In October 2012, the Company retired the remaining 2.25% senior convertible notes at their face value of $68.3 million. The senior convertible notes were not listed on any exchange or included in any automated quotation system but were registered for resale under the Securities Act of 1933.

As of and for the year ended December 28, 2013, the use of derivative financial instruments was not material to the results of operations or the Company’s financial position (see Note 3. Derivative Instruments).

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Concentrations of risk. The Company maintains its cash, cash equivalents, short-term investments, and long-term investment securities in investment grade financial instruments with high-quality financial institutions, thereby reducing credit risk concentrations.

At December 28, 2013, there was one distributor that accounted for 10% of accounts receivables, and two other customers that accounted for 19% and 8% of accounts receivables, respectively. At December 29, 2012, there was one distributor that accounted for 12% of accounts receivables, and two other customers that each accounted for 17% and 10% of accounts receivables, respectively. The Company believes that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by the Company’s credit evaluation process, relatively short collection periods and the geographical dispersion of the Company’s sales. The Company does not require collateral security for outstanding amounts.

The Company relies on a limited number of suppliers for wafer fabrication capacity. In 2013 and 2012, there were three outside wafer foundries that supplied more than 92% of our semiconductor wafer requirements.

Revenue recognition. The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. PMC generates revenues from sales made both directly to customers and through distributors.

The Company recognizes revenues on goods shipped directly to customers at the time of shipping, as that is when title passes and all revenue recognition criteria specified above are met.

The Company defers the gross amount of revenues and costs relating to sales to distributors if it grants more than limited rights of return or price credits, such that the level of returns and credits issuable at the time the goods are shipped cannot be reasonably estimated. In these cases, revenue is recognized upon the distributor remitting product resale quantity, price and customer shipment information, as well as confirming period end inventory on hand. The deferred income on shipments to distributors that will ultimately be recognized in the Company’s consolidated statement of operations will be different than the amount shown on the consolidated balance sheet, due to actual price adjustments issued to the distributors when the product is sold to their customers. The Company does not believe that there is any significant exposure related to deferred income based on historical experience and business terms in place.

In cases where agreements with distributors grant only limited rights of return or price credits such that the level of returns or credits issuable at the time the goods are shipped can be reasonably estimated, the Company recognizes revenue at the time of shipment to the distributor.

The Company also maintains inventory or hubbing arrangements with certain of our customers. Pursuant to these arrangements, we deliver products to a customer or a designated third-party warehouse based upon the customers’ projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.

In all cases, sales are recorded, net of estimated returns.

Cost of revenues. Cost of revenues is comprised of the cost of our semiconductor devices, which consists of the cost of purchasing finished silicon wafers manufactured by independent foundries, costs associated with our purchase of assembly, test and quality assurance services, packaging materials for semiconductor products, and in some cases, finished semiconductor devices that are purchased as turnkey products. Also included in cost of revenues is the amortization of purchased technology, royalties paid to vendors for use of their technology, manufacturing overhead, including costs of personnel and equipment associated with manufacturing support,

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

fulfillment costs such as production-related freight and warehousing costs, product warranty costs, provisions for excess and obsolete inventories, and stock-based compensation expense for personnel engaged in manufacturing support.

Research and development expenses. The Company expenses research and development (“R&D”) costs as incurred. R&D costs include payroll and related costs, materials, services and design tools used in product development, depreciation, and other overhead costs including facilities and computer equipment costs. Intellectual property (“IP”) purchased from third parties is capitalized and amortized over the expected useful life of the IP. For the years ended December 28, 2013, December 29, 2012, and December 31, 2011, research and development expenses were $211.0 million, $220.9 million, and $227.1 million, respectively.

Product warranties. The Company provides a limited warranty on most of its standard products and accrues for the expected cost at the time of shipment. The Company estimates its warranty costs based on historical failure rates and related repair or replacement costs (see Note 6. Supplemental Financial Information).

Other Indemnifications. From time to time, on a limited basis, the Company indemnifies customers, as well as suppliers, contractors, lessors, and others with whom it has contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and use of Company products, the use of their goods and services, the use of facilities, the state of assets that the Company sells and other matters covered by such contracts, normally up to a specified maximum amount. The Company evaluates estimated losses for such indemnifications under GAAP. The Company has no history of indemnification claims for such obligations and has not accrued any liabilities related to such indemnifications in the consolidated financial statements.

Stock-based compensation. The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period.

All share-based payments to employees are recognized in the financial statements based upon their respective grant-date fair values.

During 2013, the Company recognized $26.3 million in stock-based compensation expense or $0.13 per share. No domestic tax benefits were attributed to the tax timing differences arising from stock-based compensation expense because a full valuation allowance was maintained for all domestic deferred tax assets (see Note 5. Stock-Based Compensation).

Restricted Stock Units (“RSUs”). RSUs are stock awards that are granted to employees entitling the holder to shares of our common stock as the award vests. RSUs are measured at fair value based on the number of shares granted and the quoted price of our common stock at the date of grant. We amortize the fair value of RSUs over the vesting term of generally four years on a straight-line basis. Performance-based RSUs vest upon achievement of certain company-based performance conditions and a requisite service period. We then assess whether it is probable that the performance targets would be achieved. If assessed as probable, compensation expense is recorded for these awards over the estimated performance period. At each reporting period, we reassess the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved and/or the performance period required to achieve the targets requires judgment, and to the extent actual results or updated estimates differ from our current estimates, the cumulative effect on the current and prior periods of those changes is recorded in the period estimates are revised. The ultimate number of shares issued and the related compensation expense recognized is based on a comparison of the final performance metrics to the specific targets.

Income taxes. Income taxes are reported under GAAP and, accordingly, deferred income taxes are recognized using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Valuation allowances are provided if, after considering available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of operations as provision for income taxes.

The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained (see Note 15. Income Taxes).

Business Combinations. The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over the asset’s estimated useful life. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred (see Note 2. Business Combinations).

Net (loss) income per common share. Basic net (loss) income per share is computed using the weighted average number of common shares outstanding during the period. The PMC-Sierra Ltd. Special Shares have been included in the calculation of basic net (loss) income per share. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options, shares issuable under our Employee Stock Purchase Plan and common shares issuable on conversion of the Company’s senior convertible notes (see Note 17. Net (Loss) Income Per Share).

Segment reporting. The Company has one reportable segment—semiconductor solutions for communications network infrastructure, comprised of the following operating segments: Communications Products, Enterprise Storage Products, Microprocessor Products, and Broadband Wireless Products (see Note 16. Segment Information).

Reclassifications. Reclassifications of deferred rent liabilities in the prior year comparative period have been made to conform to the current-year presentation.

Recently Adopted Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“ASU”) No. 2013-12, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This new guidance requires companies to present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified based on its source and is effective for public companies in interim and annual reporting periods beginning after December 15, 2012. Accordingly, we adopted these presentation requirements during the first quarter of 2013 and it did not have a material impact on our consolidated financial statements or related disclosures.

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

New Accounting Pronouncements Not Yet Adopted

In July 2013, FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists”. The new guidance requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If the deferred tax asset is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013, with early adoption permitted. Accordingly, we plan to adopt these presentation requirements during the first quarter of 2014. We are currently assessing the impact of this new guidance on our consolidated financial statements and related disclosures.

NOTE 2. BUSINESS COMBINATIONS

Acquisition of Integrated Device Technology, Inc’s Enterprise Flash Controller Business

On July 12, 2013, PMC completed the acquisition of (i) substantially all of the assets used by Integrated Device Technology, Inc., a Delaware corporation (“Seller”), and its subsidiaries, in the business of designing, developing, manufacturing, testing, marketing, supporting, maintaining, distributing, provisioning and selling non-volatile memory (flash) controllers and (ii) all technology and intellectual property rights owned by Seller or any of its subsidiaries and used exclusively in, or developed exclusively for use in, (a) switching circuits having the primary function of flexible routing of data from/to multiple switch interface ports, where all switch interface ports conform to the PCIe protocol, or (b) circuits having the primary function of executing all of the capturing, re-timing, re-generating and re-transmitting PCIe signals to help extend the physical reach of the signals in a system (the “Acquisition”), pursuant to the Asset Purchase Agreement with Seller and Integrated Device Technology (Malaysia) Sdn. Bhd., a wholly-owned subsidiary of Seller (“Selling Subsidiary” and, together with PMC, PMC’s subsidiaries and Seller, the “Parties”) dated May 29, 2013. The Parties also entered into a license agreement, effective upon the closing of the Acquisition, whereby Seller and Selling Subsidiary will license certain intellectual property rights and technology to PMC, and PMC will license back to Seller and Selling Subsidiary certain of the intellectual property rights and technology acquired by PMC in the Acquisition. Upon the closing of the Acquisition, the Parties also entered into (a) a transition services agreement and (b) a supply agreement, whereby Seller and Selling Subsidiary provide services to PMC at the option of PMC.

PMC’s completion of the Acquisition accelerates the Company’s product offering in the Enterprise Flash Controller and PCI Express Switch businesses, including the world’s first NVM Express (NVMe) flash controller.

Purchase price

The total fair value of consideration paid for the Acquisition was approximately $96,098 in cash funded by PMC’s available working capital.

Acquisition-related costs of approximately $3.2 million were expensed as incurred in 2013 and are included in selling, general and administrative expense.

Purchase price allocations

The purchase of the IDT assets was accounted for using the acquisition method, and the allocation of fair value of consideration paid to the estimated fair value of related assets acquired and liabilities assumed as of the

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

date of the Acquisition in the table below reflect various estimates and analyses, including work performed by third-party valuation specialists.

Current assets	$	2,423
Intangible assets		67,400
Goodwill		26,430
Total assets		96,253
Assumed liabilities		155
Total purchase consideration	$	96,098

The amortizable intangible assets are being amortized on a straight line basis over their estimated useful lives as follows:

	Estimated fair value		Weighted average useful life
Order backlog	$	100		< 1 year
Existing technology		700		2 years
Customer relationships		3,400		7 years
Core technology		63,200		7 years
Total intangible assets	$	67,400

Acquired Intangible Assets

The existing and core technologies include patents, business processes and tools, and proprietary business methods. In addition to the current products, the acquired developed technologies can be leveraged to assist and improve existing services and create future generation products. The valuation assumptions included information on revenues from existing products and future expected trends for each technology, with an estimated useful life of between two and seven years. Management applied discount rates of 14% and 16% respectively to value the existing and core technology assets, which took into consideration market rates of return on debt and equity capital and the risk associated with achieving forecasted revenues related to these assets.

Customer relationships assets relate primarily to underlying customer relationships. The preliminary estimated fair value of the customer relationships represents the sum of the present value of the expected cash flows attributable to those customer relationships. The cash flows were determined from the revenue and profit forecasts associated with growth opportunities that are expected to be generated from these customer relationships. The Company used the same method to determine the fair value of this intangible asset as the developed technologies and utilized a discount rate of 16%.

Goodwill

The Company’s primary reasons for the Acquisition was to accelerate the Company’s time-to-market with early product leadership and a robust design win pipeline, including wins spanning tier one Data Center, original equipment manufacturer (OEM), and solid-state drive (SSD) customers. The Acquisition also enhanced the Company’s engineering team through the addition of research and development resources. These factors were the basis for the recognition of goodwill. The goodwill is expected to be deductible for tax purposes over 15 years. The acquired goodwill was allocated to our Enterprise Storage Products market segment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Proforma disclosures

The results of operations of the Acquisition have been included in PMC’s consolidated results of operations since the acquisition date. The Acquisition did not have a significant impact on PMC’s net revenues or net earnings (loss) for the periods where pro forma disclosures would be required. Net revenues for 2013 from the Acquisition date were $4.9 million and increased our net loss for the same period was $2.0 million. Included in net loss was $4.6 million related to amortization of purchased intangible assets, $0.8 million of fair value adjustments on acquired inventory, and $1.5 million of payroll accruals.

Acquisition of Wintegra, Inc.

On November 18, 2010, PMC completed its previously announced acquisition of Wintegra, Inc. (“Wintegra”) a privately held Delaware corporation, pursuant to an amendment to the Agreement and Plan of Merger dated as of October 21, 2010 (“the Merger Agreement”). The Company’s acquisition, pursuant to the Merger Agreement, was effected by merging a wholly owned subsidiary of the Company into Wintegra, with Wintegra continuing on as the surviving corporation and as a direct wholly-owned subsidiary of PMC.

PMC purchased Wintegra to accelerate the Company’s product offering in IP/Ethernet packet-based mobile backhaul equipment and because the acquisition fit strategically with the Company’s overall efforts to accelerate the transition of existing communications equipment to converged, packet-centric solutions. Prior to November 18, 2010, the Company owned 2.6% of the outstanding shares of Wintegra, as a cost investment, with a carrying value of $2 million. The fair value immediately prior to the acquisition date was $6.5 million. Upon acquiring the remaining equity interests of Wintegra, the Company recorded a gain on the step-acquisition on this pre-existing investment of $4.5 million which was included in Other (Expense) Income, net in the Consolidated Statement of Operations.

The fair value of the purchase price consideration as of the acquisition date was, as follows:

(in thousands)
Cash	$	218,064
Contingent consideration		28,194
Fair value of replacement equity awards attributable to pre-combination service		1,083
Total purchase price	$	247,341

Certain key employees entered into Holdback Escrow Agreements, whereby a portion of cash consideration otherwise payable per the Merger Agreement was retained and would be distributed under certain conditions, including continued employment over a two-year period. This post-combination expense has been included in the Consolidated Balance Sheet as current prepaid expenses and was amortized straight-line over the two-year period, which ended during the fourth quarter of 2012. Amortization for the year ended December 29, 2012 was $1.2 million.

Former Wintegra equity holders could have been entitled to receive an additional earn-out payment, which ranged from $nil to $60 million, calculated on the basis of Wintegra’s calendar year 2011 revenue above an agreed threshold as described in the Merger Agreement. The fair value of the earn-out reflected in the purchase price as contingent consideration was determined using an income approach, using probability weighted discounted net present values with a discount rate of 4.75%. At acquisition, the Company recorded a liability for contingent purchased consideration of $28.2 million relating to this earn-out. During the three months ended October 2, 2011, the Company determined that Wintegra’s 2011 revenues would be below earn-out levels and the former Wintegra equity holders would not be eligible to receive this additional earn-out payment. Accordingly, the Company recognized a $29.4 million Revaluation of liability on contingent consideration in the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Consolidated Statement of Operations. Since the earn-out requirements were not met, the Company had no obligations in connection with the contingent earn-out consideration and had no liability recorded for this as of December 31, 2011.

Replacement stock options issued in connection with the acquisition were valued at $6.5 million. The fair values of stock options exchanged were determined using a Black-Scholes-Merton valuation model with the following assumptions: weighted average expected life of 5.06 years, weighted average risk-free interest rate of 1.5%, and a weighted average expected volatility of 54%. The fair values of unvested Wintegra stock options will be recorded as operating expenses on a straight-line basis over the remaining vesting periods, while the fair values of vested stock options are included in the purchase price. $1.1 million of this amount was attributed to pre-combination services and accordingly is recorded as purchase consideration, and $5.4 million will be recorded as post-combination compensation expense on a straight-line basis over the remaining vesting period.

On acquisition, the Company recorded a fair value adjustment related to the inventory acquired in the amount of $9.8 million, which was fully expensed through Cost of revenues by the end of the first quarter of 2011. The Company incurred $3.7 million in acquisition-related costs during 2010 and are included in selling, general and administrative expense. In addition, during 2011, the Company incurred $0.3 million in interest expense related to the short-term loan that the Company obtained to facilitate this acquisition, which is included in Other Income, net, in the Consolidated Statement of Operations.

The total purchase price has been allocated to the fair value of assets and liabilities acquired, and the excess of purchase price over the aggregate fair values was recorded as goodwill. The Company has made a correction in the measurement of liabilities and goodwill previously recognized on acquisition. See Note 19. Error Corrections.

The allocation of the purchase price was as follows:

Current assets (including cash acquired of $17.3 million)	$	41,463
Other long-term assets		1,638
Intangible assets		104,000
Goodwill		121,032
Total assets	$	268,133
Current liabilities	$	13,442
Long-term liabilities		7,350
Total liabilities		20,792
Total purchase consideration	$	247,341

Intangible assets acquired, and their respective estimated average remaining useful lives over which they are amortized on a straight-line basis, are:

(in thousands)	Estimated fair value		Estimated average remaining useful life
Existing technology	$	66,300		4 years
Core technology		12,900		5 years
Customer relationships		16,500		5 years
In-process research and development		6,000		4-5 years
Trademarks		2,300		8 years
Total intangible assets	$	104,000

63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Goodwill

The Company’s primary reasons for the Wintegra acquisition were to accelerate the Company’s product offering in IP/Ethernet packet-based mobile backhaul equipment and to capitalize on the strategic fit between Wintegra’s business and the Company’s overall efforts to accelerate the transition of existing communications equipment to converged, packet-centric solutions. The acquisition also enhanced the Company’s engineering team through the addition of Wintegra’s research and development resources. These factors were the basis for the recognition of goodwill. The goodwill is not deductible for tax purposes. See Note 18. Impairment of Goodwill and Long-Lived Assets.

Purchased Intangible Assets

Existing and core technology represent completed technology that has passed technological feasibility and/or is currently offered for sale to customers. The Company used the income method to value existing and core technology by determining cash flow projections related to the identified projects. The assumptions included information on revenues from existing products and future expected trends for each technology, with an estimated useful life of four to five years. Management applied a discount rate of 16% to value the existing and core technology assets, which took into consideration market rates of return on debt and equity capital and the risk associated with achieving forecasted revenues related to these assets.

Customer relationships represent the fair value of future projected revenue that will be derived from the sale of products to existing customers of the acquired company. The Company used the same method to determine the fair value of this intangible asset as core technology assets and utilized a discount rate of 24%.

Trademarks represent the value of the revenues associated with the WinPath registered trademark, which the Company will continue to use on products for which it has established revenue streams. The Company used the same method to determine the fair value of trademarks and utilized a discount rate of 18%.

In-Process Research and Development

The fair value of acquired in-process research and development was determined using the income approach. Under this approach, the expected future cash flows from each project under development are estimated and discounted to their net present values using a risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital, the return on assets, as well as risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates. These projects progressed as expected, and are now completed.

NOTE 3. DERIVATIVE INSTRUMENTS

The Company generates revenues in U.S. dollars but incurs a portion of its operating expenses in various foreign currencies, primarily the Canadian dollar. To minimize the short-term impact of foreign currency fluctuations on the Company’s operating expenses, the Company uses forward currency contracts.

Forward currency contracts that are used to hedge exposures to variability in forecasted foreign currency cash flows are designated as cash flow hedges. The maturities of these instruments are less than twelve months. For these derivatives, the gain or loss from the effective portion of the hedge is initially reported as a component of other comprehensive income in stockholders’ equity and subsequently reclassified to earnings in the same period in which the hedged transaction affects earnings. As the hedge transactions are incurred, the effective portion of the hedge is recognized into operating income. The gain or loss from the ineffective portion of the hedge is recognized as income or expense immediately.

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At December 28, 2013, the Company had 27 foreign currency forward exchange contracts outstanding that qualified and were designated as cash flow hedges. At December 29, 2012, there were 73 such currency forward contracts outstanding. The U.S. dollar notional amount of these contracts was $27.7 million and $22.5 million at December 28, 2013 and December 29, 2012, respectively, and the contracts had a fair value of $0.6 million loss and a fair value of $0.4 million gain in December 28, 2013 and December 29, 2012, respectively. No portion of the hedging instrument’s gain or loss was excluded from the assessment of effectiveness. The ineffective portions of hedges had no significant impact on earnings, nor are they expected to over the next twelve months.

NOTE 4. FAIR VALUE MEASUREMENTS

ASC Topic 820 specifies a hierarchy of valuation techniques which requires an entity to maximize the use of observable inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets are available for identical assets and liabilities. The Company’s Level 1 assets include cash equivalents, short-term investments, money market funds, and long-term investment securities, which are generally acquired or sold at par value and are actively traded.

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 assets and liabilities include corporate bonds and notes and forward currency contracts, respectively, whose value is determined using a pricing model with inputs that are observable in the market or corroborated with observable market data.

Level 3—Pricing inputs include significant inputs that are generally not observable in the marketplace. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At each balance sheet date, the Company performs an analysis of all applicable instruments and would include in Level 3 all of those whose fair value is based on significant unobservable inputs. Level 3 inputs are used on a non-recurring basis to measure the fair value of non-financial assets, including intangible assets, and property and equipment.

The Company’s valuation techniques used to measure the fair value of money market funds and other financial instruments were derived from quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of all other financial instruments were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.

Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis

Financial assets measured on a recurring basis as of December 28, 2013 and December 29, 2012, are summarized below:

	Fair value, December 28, 2013
(in thousands)	Level 1		Level 2
Assets:
Corporate bonds and notes(1)	$	79,653	$	3,166
Money market funds(1)		14,629		—
United States (“US”) treasury and government agency notes(1)		28,985		—
Foreign government and agency notes(1)		2,048		—
US state and municipal securities(1)		433		—
Total assets	$	125,748	$	3,166

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Included in cash and cash equivalents, short-term investments, and long-term investment securities (see Note 7. Investment Securities).

(in thousands)	Fair value, December 29, 2012 Level 1
Assets:
Corporate bonds and notes(1)	$	63,565
Money market funds(1)		50,528
US treasury and government agency notes(1)		33,854
Foreign government and agency notes(1)		4,044
US state and municipal securities(1)		1,746
Total assets	$	153,737

Financial liabilities measured on a recurring basis are summarized below:

(in thousands)	Fair value, December 28, 2013 Level 2
Current liabilities:
Forward currency contracts(1)	$	612

(in thousands)	Fair value, December 29, 2012 Level 2
Current liabilities:
Forward currency contracts(1)	$	—

(1) Included in Accrued liabilities.

Assets/Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis

We measure the fair value of our indebtedness carried at amortized cost only for the purposes of disclosing such amount. As of December 28, 2013, the carrying value of our $30.0 million outstanding drawdown on our line of credit approximated its fair value, given the short-term nature of this borrowing and a lack of significant interest rate changes since the borrowing occured.

Our non-financial assets, such as prepaid expenses and other current assets, property and equipment, and intangible assets are recorded at fair value only if an impairment charge is recognized. The following table presents the non-financial assets that were re-measured due to changes in use and recorded at fair value on a non-recurring basis during 2013 and 2012 on those assets:

	Net Carrying  Value As of December 28, 2013		Fair Value Measured and Recorded Using						Total Losses for Year Ended December 28,
(In thousands)			Level 1		Level 2		Level 3		2013
Prepaid expenses and other current assets	$	—	$	—	$	—	$	—	$	(585	)
Property and equipment, net		—		—		—		—		(2,214	)
Intangible assets		—		—		—		—		(167	)
Total losses for assets held as of December 28, 2013										(2,966	)
Total losses for recorded non-recurring measurement									$	(2,966	)

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Net Carrying  Value As of December 29, 2012		Fair Value Measured and Recorded Using						Total Losses for Year Ended December 29,
(In thousands)			Level 1		Level 2		Level 3		2012
Prepaid expenses and other current assets	$	—	$	—	$	—	$	—	$	(979	)
Property and equipment, net		—		—		—		—		(520	)
Intangible assets		—		—		—		—		(260	)
Total losses for assets held as of December 29, 2012										(1,759	)
Total losses for recorded non-recurring measurement									$	(1,759	)

The losses recorded during 2013 and 2012 were mainly included in Research and Development expenses in the Consolidated Statements of Operations. See Note 1. Summary of Significant Accounting Policies for details on the asset impairments.

NOTE 5. STOCK-BASED COMPENSATION

At December 28, 2013, the Company has two stock-based compensation programs, which are described below. The Company’s stock-based awards under these plans are classified as equity. The Company did not capitalize any stock-based compensation cost and recorded compensation expense as follows:

Stock-based compensation expense:

	Year Ended
(in thousands)	December 28, 2013		December 29, 2012		December 31, 2011
Cost of revenues	$	899	$	875	$	945
Research and development		11,095		11,583		11,648
Selling, general and administrative		14,270		13,857		14,462
Total	$	26,264	$	26,315	$	27,055

The Company received cash of $25.2 million, $16.0 million and $16.8 million from the exercise of stock-based awards during 2013, 2012 and 2011, respectively. The total intrinsic value of stock awards exercised during 2013 was $18.7 million.

As of December 28, 2013, there was $7.8 million of total unrecognized compensation cost related to unvested stock options granted under the Company’s stock option plans, which is expected to be recognized over a period of 2.1 years. As of December 28, 2013, there was $29.4 million of total unrecognized compensation cost related to unvested Restricted Stock Units (“RSUs”) awarded under the Company’s stock option plans, which is expected to be recognized over a period of 2.8 years.

The Company’s estimates of expected volatilities are based on a weighted historical and market-based implied volatility. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the stock option valuation model and represents the period of time that granted options are expected to be outstanding. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of the grant.

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair values of the Company’s stock option and Employee Stock Purchase Plan, awards were estimated using the following weighted average assumptions:

Stock Options:

	December 28, 2013			December 29, 2012			December 31, 2011
Expected life (years)		5.9			5.4			4.5
Expected volatility		40	%		42	%		43	%
Risk-free interest rate		1.6	%		0.8	%		1.9	%

Employee Stock Purchase Plan:

	December 28, 2013			December 29, 2012			December 31, 2011
Expected life (years)		0.5			0.5			0.5
Expected volatility		35	%		42	%		44	%
Risk-free interest rate		0.1	%		0.2	%		0.1	%

Stock Option Plans

The Company issues its common stock under the provisions of the 2008 Equity Plan (the “2008 Plan”). Stock option awards are granted with an exercise price equal to the closing market price of the Company’s common stock at the grant date. The options generally expire within 10 years and vest over four years.

The 2008 Plan was approved by stockholders at the 2008 Annual Meeting. The 2008 Plan became effective on January 1, 2009 (the “Effective Date”). It is a successor to the 1994 Incentive Stock Plan (the “1994 Plan”) and the 2001 Stock Option Plan (the “2001 Plan”). Up to 30,000,000 shares of our common stock have been initially reserved for issuance under the 2008 Plan. At the 2012 Annual Meeting, stockholders approved an increase in shares reserved for issuance under the 2008 plan by 9,500,000 shares which shares were registered on May 14, 2012 on Form S-8 bringing the total number of authorized and registered shares available under the 2008 Plan to 39,500,000. To the extent that a share that is subject to an award that counts as 1.6 shares against the 2008 Plan’s share reserve is added back into the 2008 Plan upon expiration or termination of the award or repurchase or forfeiture of the shares, the number of shares of common stock available for issuance under the 2008 Plan will be credited with 1.6 shares. The implementation of the 2008 Plan did not affect any options or restricted stock units outstanding under the 1994 Plan or the 2001 Plan on the Effective Date. To the extent that any of those options or restricted stock units subsequently terminate unexercised or prior to issuance of shares thereunder, the number of shares of common stock subject to those terminated awards will be added to the share reserve available for issuance under the 2008 Plan, up to an additional 15,000,000 shares. No additional shares may be issued under the 1994 Plan or the 2001 Plan. In 2006, the Company assumed the stock option plans and all outstanding stock options of Passave, Inc. as part of the merger consideration in that business combination. In 2010, the Company assumed the stock option plans and all outstanding stock options of Wintegra as part of that business combination.

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Activity under the option plans during the year ended December 28, 2013 was as follows:

	Number of options			Weighted average exercise price per share		Weighted average remaining contractual term (years)		Aggregate intrinsic value at December 28, 2013
Outstanding, December 29, 2012		28,001,047		$	7.93			$	2,189,509
Granted		1,059,548		$	6.43			$	75,007
Exercised		(2,617,357	)	$	5.30			$	3,231,050
Forfeited		(2,887,766	)	$	7.30			$	—
Outstanding, December 28, 2013		23,555,472		$	8.10		4.88	$	6,834,586
Exercisable, December 28, 2013		20,141,940		$	8.33		4.32	$	6,004,820

No adjustment has been recorded for fully vested options that expired during the year ended December 28, 2013. A reversal of $2.7 million was recorded for pre-vesting forfeitures during the year ended December 28, 2013.

The following table summarizes information on options outstanding and exercisable at December 28, 2013:

	Options Outstanding						Options Exercisable
			Weighted		Weighted				Weighted
			Average		Average				Average
			Remaining		Exercise				Exercise
	Options		Contractual		Price per		Options		Price per
Range of Exercise Prices	Outstanding		Life (years)		Share		Exercisable		Share
$0.05—$6.23		5,061,993		5.68	$	5.05		4,049,922		$	4.94
$6.26—$7.22		5,852,502		6.35		6.87		3,975,722			6.84
$7.24—$8.06		5,246,409		3.57		7.84		5,054,314			7.85
$8.15—$10.97		6,061,701		4.01		9.61		5,729,115			9.65
$11.32—$21.50		1,332,867		0.13		19.20		1,332,867			19.20
$0.05—$21.50		23,555,472		4.64	$	8.10		20,141,940		$	8.33

The weighted-average estimated fair values of each employee stock option granted during 2013, 2012, and 2011, were $2.47, $2.16, and $2.55, respectively.

Restricted Stock Units

On February 1, 2007, the Company amended its stock award plans to allow for the issuance of RSUs to employees and directors. The first grant of RSUs occurred on May 25, 2007. The grants vest over varying terms, to a maximum of four years from the date of grant.

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of RSU activity during the year ended December 28, 2013 is as follows:

	Restricted Stock Units			Weighted Average Remaining Contractual Term		Aggregate intrinsic value
Unvested shares at December 29, 2012		5,358,201			1.61	$	27,433,989
Awarded		3,643,245			—	$	—
Released		(2,069,822	)		—	$	—
Forfeited		(752,587	)		—	$	—
Unvested shares at December 28, 2013		6,179,037			1.74	$	39,545,837
Restricted Stock Units expected to vest December 28, 2013		5,319,515			1.63	$	34,044,896

The weighted-average estimated fair values of each RSU awarded during 2013, 2012, and 2011, were $6.45, $5.95, and $7.09, respectively.

Employee Stock Purchase Plan

In 2011, the Company’s Employee Stock Purchase Plan (“2011 Plan”) was approved by stockholders at the 2010 Annual Meeting. The 2011 Plan became effective on February 11, 2011 and replaced the preceding employee stock purchase plan. 12,000,000 shares of our common stock have been reserved for issuance under the 2011 Plan.

During 2013, 2,156,199 shares were issued under the 2011 Plan at a weighted-average price of $5.19 per share. As of December 28, 2013, 6,296,935 shares were available for future issuance under the 2011 Plan (2012—8,453,523 available for issuance).

The weighted-average estimated fair values of Employee Stock Purchase Plan awards during years 2013, 2012, and 2011, were $1.61, $1.69, and $1.88, respectively.

NOTE 6. SUPPLEMENTAL FINANCIAL INFORMATION

a. Cash and cash equivalents and Short-term investments

At December 29, 2012, cash and cash equivalents included $0.4 million deposited with banks as collateral for leased facilities, and $0.8 million deposited with banks as collateral for hedging transactions.

At December 28, 2013 and December 29, 2012, short-term investments included $1 million, deposited with banks as collateral for leased facilities.

b. Inventories

Inventories (net of reserves of $6.6 million and $7.8 million at December 28, 2013 and December 29, 2012, respectively) were as follows:

(in thousands)	December 28, 2013		December 29, 2012 As Restated – Note 19
Work-in-progress	$	15,847	$	11,986
Finished goods		15,227		13,681
	$	31,074	$	25,667

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company decreased inventory reserves by $1.8 million, $0.5 million and $1.9 million in 2013, 2012 and 2011, respectively for inventory that was scrapped during the year.

c. Property and equipment

The components of property and equipment are as follows:

December 28, 2013 (in thousands)	Gross		Accumulated Amortization			Net
Software	$	37,136	$	(25,640	)	$	11,496
Machinery and equipment		132,109		(111,308	)		20,801
Leasehold improvements		19,654		(13,326	)		6,328
Furniture and fixtures		5,568		(5,044	)		524
Total	$	194,467	$	(155,318	)	$	39,149

December 29, 2012 (in thousands)	Gross		Accumulated Amortization			Net
Software	$	35,248	$	(23,187	)	$	12,061
Machinery and equipment		124,479		(102,912	)		21,567
Leasehold improvements		18,322		(9,247	)		9,075
Furniture and fixtures		5,327		(4,884	)		443
Total	$	183,376	$	(140,230	)	$	43,146

d. Intangible assets

The components of acquired intangible assets are as follows:

December 28, 2013 (in thousands)	Gross		Accumulated Amortization			Net		Estimated life
Core technology	$	245,661	$	(173,772	)	$	71,889		5-9 years
Customer relationships		98,306		(76,591	)		21,715		2-10 years
Existing technology		69,900		(50,126	)		19,774		3-7 years
Trademarks		9,200		(2,857	)		6,343		6 years-indefinite
Developed technology assets		68,802		(55,442	)		13,360		3 years
Backlog		4,500		(4,500	)		0		< 1 year
In-process research and development*		16,746		(2,853	)		13,893		4-5 years
Total	$	513,115	$	(366,141	)	$	146,974

December 29, 2012 (in thousands)	Gross		Accumulated Amortization			Net		Estimated life
Core technology	$	151,861	$	(120,954	)	$	30,907		5-9 years
Customer relationships		94,906		(68,086	)		26,820		2-10 years
Existing technology		115,200		(81,300	)		33,900		3-7 years
Trademarks		9,200		(2,020	)		7,180		6 years-indefinite
Developed technology assets		63,951		(49,743	)		14,208		3 years
Backlog		400		(400	)		0		< 1 year
In-process research and development*		16,746		(1,093	)		15,653		4-5 years
Total	$	452,264	$	(323,596	)	$	128,668

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

* Table above reflects original classification upon acquisition. The majority of this in-process research and development was subsequently completed during 2013 and accordingly is being amortized.

Estimated future amortization expense for intangible assets (in thousands) is as follows:

2014	$	47,480
2015		34,608
2016		18,067
2017		12,827
2018		11,921
Thereafter		18,471
	$	143,374

e. Goodwill

	Balance (in thousands)
Goodwill at December 31, 2011	$	519,454
Goodwill recorded in connection with acquisitions		593
Impairment loss		(267,628	)
Goodwill at December 29, 2012		252,419
Goodwill recorded in connection with acquisitions		26,430
Goodwill at December 28, 2013	$	278,849

The goodwill balance at December 29, 2012 of $252.4 million mainly relates to the Enterprise Storage Products operating segment, which had fair values that substantially exceeded its carrying value when the Company conducted its step 1 goodwill impairment test in 2012. Total accumulated goodwill impairment loss as of December 28, 2013 and December 29, 2012 amounts to $536.6 million. See Note 18. Impairment of Goodwill and Long-Lived Assets for details on the impairment loss of $267.6 million recorded in 2012.

f. Accrued liabilities.

The components of accrued liabilities are as follows:

	December 28, 2013		December 29, 2012
Accrued compensation and benefits	$	36,708	$	34,791
Other accrued liabilities		27,549		31,931
	$	64,257	$	66,722

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

g. Product warranties

The following table summarizes the activity related to the product warranty liability during fiscal 2013, 2012 and 2011:

	Year Ended
(in thousands)	December 28, 2013			December 29, 2012			December 31, 2011
Balance, beginning of the year	$	5,981		$	5,415		$	5,457
Accrual for new warranties issued		402			2,530			1,863
Reduction for payments and product replacements		(1,022	)		(328	)		(290	)
Adjustments related to changes in estimate of warranty accrual		(3,198	)		(1,636	)		(1,615	)
Balance, end of the year	$	2,163		$	5,981		$	5,415

The change in estimate of warranty accrual recorded during the year ended December 28, 2013 includes a reduction for amounts over-accrued in prior periods and for amounts that do not have a material impact on 2013 or prior periods.

h. Restructuring and Other Costs

The Company executed various restructuring plans in 2001, 2005, 2006 and 2007. These plans were completed prior to the periods presented in our consolidated financial statements as of and for the years ended December 28, 2013, December 29, 2012 and December 31, 2011. The final cash payment associated with these plans was made in 2011, totaling approximately $1.6 million. There were no remaining accruals associated with these plans at the end of any of the periods presented and there was no restructuring related severance cost recognized in 2013, 2012 or 2011.

i. Interest expense, net

The components of interest expense, net are as follows:

	Year Ended
(in thousands)	December 28, 2013			December 29, 2012			December 31, 2011
Interest income	$	1,310		$	2,865		$	4,228
Interest expense on debt		(403	)		(4,451	)		(6,495	)
	$	907		$	(1,586	)	$	(2,267	)

NOTE 7. INVESTMENT SECURITIES

At December 28, 2013, the Company had investments in securities of $128.9 million (December 29, 2012—$153.7 million) comprised of money market funds, United States Treasury and Government Agency notes, Federal Deposit Insurance Corporation insured corporate notes, United States State and Municipal Securities, foreign government and agency notes, and corporate bonds and notes.

73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s available for sale investments, by investment type, as classified on the consolidated balance sheets consist of the following as at December 28, 2013 and December 29, 2012:

	December 28, 2013
(in thousands)	Amortized Cost		Gross Unrealized Gains*		Gross Unrealized Losses*			Fair Value
Cash equivalents:
Money market funds	$	14,629	$	—	$	—		$	14,629
Total cash equivalents		14,629		—		—			14,629
Short-term investments:
Corporate bonds and notes		7,735		416		(2	)		8,149
US treasury and government agency notes		2,499		44		—			2,543
Foreign government and agency notes		—		—		—			—
US states and municipal securities		200		2		—			202
Total short-term investments		10,434		462		(2	)		10,894
Long-term investment securities:
Corporate bonds and notes		74,583		121		(34	)		74,670
US treasury and government agency notes		26,421		30		(9	)		26,442
Foreign government and agency notes		2,049		1		(2	)		2,048
US states and municipal securities		230		1		—			231
Total long-term investment securities		103,283		153		(45	)		103,391
Total	$	128,346	$	615	$	(47	)	$	128,914

Gross unrealized gains include accrued interest on investments of $0.5 million, which are included in the Consolidated Statement of Operations. The remainder of the gross unrealized gains and losses are included the Consolidated Balance Sheet as Accumulated other comprehensive income (loss).

	December 29, 2012
(in thousands)	Amortized Cost		Gross Unrealized Gains*		Gross Unrealized Losses*			Fair Value
Cash equivalents:
Money market funds	$	50,528	$	—	$	—		$	50,528
Total cash equivalents		50,528		—		—			50,528
Short-term investments:
Corporate bonds and notes		9,163		522		—			9,685
US states and municipal securities		1,720		26		—			1,746
Total short-term investments		10,883		548		—			11,431
Long-term investment securities:
Corporate bonds and notes		53,567		329		(16	)		53,880
US treasury and government agency notes		33,830		25		(1	)		33,854
Foreign government and agency notes		4,018		26		—			4,044
Total long-term investment securities		91,415		380		(17	)		91,778
Total	$	152,826	$	928	$	(17	)	$	153,737

*Gross unrealized gains include accrued interest on investments of $0.9 million, which are included in the Consolidated Statement of Operations. The remainder of the gross unrealized gains and losses are included the Consolidated Balance Sheet as Accumulated other comprehensive income (loss).

74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our cash equivalents, short-term investments and long-term investment securities are comprised of money market funds, United States Treasury and Government Agency notes, Federal Deposit Insurance Corporation (“FDIC”) insured corporate notes, United States State and Municipal Securities, foreign government and agency notes and corporate bonds and notes with minimum ratings of P-1 or A3 by Moody’s, or A-1 or A- by Standard and Poor’s, or equivalent at the date of purchase. Contractual maturities as of December 28, 2013 for our investment securities do not exceed 3 years.

In relation to the unrealized losses summarized in the tables above, as of December 28, 2013 and December 29, 2012, the fair value of certain of the Company’s available-for-sale securities was less than their cost basis. Management reviewed various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and credit market environment, the financial condition and near-term prospects of the issuer of the investment security, the magnitude of the unrealized loss compared to the cost of the investment, length of time the investment has been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. As of December 28, 2013, the Company determined that the unrealized losses are temporary in nature and recorded them as a component of Accumulated other comprehensive income (loss).

NOTE 8. CREDIT FACILITY

As of December 28, 2013, the Company had available revolving line of credit with a bank under which the Company may borrow up to $100 million, of which $30 million was drawn. The Company may request, from time to time, and subject to customary conditions, including receipt of commitments, that the revolving credit facility be increased by an aggregate amount not to exceed $150 million. Interest payments are based on LIBOR plus margins, where margins ranges from 1.75% to 2.25% per annum based on the Company’s leverage ratio. The revolving credit facility is available for general corporate purposes. The credit facility is collateralized by substantially all of the Company’s personal property. The Company’s obligations under the credit facility are jointly and severally guaranteed by material wholly-owned domestic subsidiaries of the Company.

The Company may prepay amounts outstanding and terminate commitments under the credit agreement, at any time and in whole or in part, without premium or penalty (other than reimbursement of customary breakage costs in the case of Eurodollar Rate loans).

The credit agreement contains customary representations and warranties, affirmative covenants and negative covenants, with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including, without limitation, restrictions and limitations on dividends, asset sales, the ability to incur additional debt and additional liens and certain financial covenants. As of December 28, 2013, the Company was in compliance with these covenants.

The credit agreement also contains customary events of default, including, without limitation, non-payment, breach of representation and warranties, breach of covenants, cross default to other material indebtedness, insolvency events, material judgments, material ERISA events and change of control. The occurrence of an event of default will, in certain circumstances, increase the applicable rate of interest by 2.0% and could result in the termination of commitments under the revolving credit facility, the declaration that all outstanding loans are due and payable in whole or in part, and the requirement of cash collateral deposits in respect of outstanding letters of credit.

At December 29, 2012, the Company did not maintain any lines of credit.

75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. SHORT-TERM LOAN

On November 18, 2010, the Company, PMC-Sierra US Inc., a Delaware wholly owned subsidiary of the Company (the “Borrower”), and Bank of America, N.A., as the Lender, entered into a Credit Agreement (the “Credit Agreement”). The Credit Agreement provides the Borrower with a term loan of $220 million (the “Credit Facility”), which was borrowed on November 18, 2010. The Credit Facility was used to finance, in part, the acquisition of Wintegra by the Company.

The loan had a maturity date of January 17, 2011 but was fully repaid as of January 10, 2011.

NOTE 10. SENIOR CONVERTIBLE NOTES

2.25% Senior Convertible Notes

On October 26, 2005, the Company issued $225 million aggregate principal amount of 2.25% senior convertible notes due 2025 (the “Notes”).

As of December 31, 2011, the carrying amount of the equity component was $35.2 million, and the carrying amount of the debt component was $65.1 million, which represented the principal amount of $68.3 million net of the unamortized discount of $3.2 million.

In October 2012, the Company retired the remaining 2.25% senior convertible notes at their face value of $68.3 million, resulting in no impact to the Consolidated Statements of Operations.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facilities under operating lease agreements, which expire at various dates through March 1, 2025.

Rent expense for 2013, 2012, and 2011 was $9.1 million, $10.5 million, and $12.9 million, respectively. Excluded from rent expense for 2013, 2012, and 2011 was additional rent and operating costs of $0.1 million, $0.2 million, and $0.9 million respectively, related to excess facilities, which were previously accrued.

Minimum future rental payments under operating leases are as follows:

(in thousands)
2014	$	9,268
2015		7,293
2016		6,137
2017		4,346
2018		4,084
Thereafter		5,558
Total minimum future rental payments under operating leases	$	36,686

Long-term obligations

Included in the long-term obligations are purchase obligations for design software tools for $6.5 million, which will be paid between 2014 and 2015, and deferred rent liabilities.

76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Supply Agreements

The Company has existing supply agreements with UMC and TSMC. The terms include but are not limited to, supply terms without minimum unit volume requirements for PMC, indemnification and warranty provisions, quality assurances and termination conditions.

Contingencies

In the normal course of business, the Company receives and makes inquiries with regard to possible patent infringements. Where deemed advisable, the Company may seek or extend licenses or negotiate settlements. The Company estimates the outcomes of such negotiations based on the facts and circumstances at any point in time. Management does not believe that such licenses or settlements will, individually or in the aggregate, have a material effect on the Company’s financial position, results of operations or cash flows.

NOTE 12. SPECIAL SHARES

At December 28 2013 and December 29, 2012, the Company maintained a reserve of 1,019,000 shares, of PMC common stock to be issued to holders of PMC-Sierra, Ltd. (“LTD”) special shares. The special shares of LTD, the Company’s principal Canadian subsidiary, are redeemable or exchangeable for PMC common stock. Special shares do not vote on matters presented to the Company’s stockholders, but in all other respects represent the economic and functional equivalent of PMC common stock for which they can be redeemed or exchanged at the option of the holders. The special shares have class voting rights with respect to transactions that affect the rights of the special shares as a class and for certain extraordinary corporate transactions involving LTD. If LTD files for bankruptcy, is liquidated or dissolved, the special shares receive as a preference the number of shares of PMC common stock issuable on conversion plus a nominal amount per share plus unpaid dividends, or at the holder’s option convert into LTD ordinary shares, which are the functional equivalent of voting common stock. If the Company files for bankruptcy, is liquidated, or dissolved, special shares of LTD receive the cash equivalent of the value of PMC common stock into which the special shares could be converted, plus unpaid dividends, or at the holder’s option convert into LTD ordinary shares. If the Company materially breaches its obligations to special shareholders of LTD (primarily to permit conversion of special shares into PMC common stock), the special shareholders may convert their shares into LTD ordinary shares.

These special shares of LTD are classified outside of stockholders’ equity until such shares are exchanged for PMC common stock. Upon exchange, amounts will be transferred from the LTD special shares account to the Company’s common stock and additional paid-in capital on the consolidated balance sheet.

NOTE 13. STOCKHOLDERS’ EQUITY

Authorized Capital Stock of PMC

At December 28, 2013 and December 29, 2012, the Company had an authorized capital of 905,000,000 shares, 900,000,000 of which are designated “Common Stock”, $0.001 par value, and 5,000,000 of which are designated “Preferred Stock”, $0.001 par value.

Stock Repurchase Program

During 2013, the Company repurchased 13 million shares of PMC common stock for a total of $79.0 million. The Company acquired these common shares as part of its $275.0 million stock repurchase program announced on March 13, 2012. The repurchased shares were retired immediately upon delivery. Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.

77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On May 2, 2012, the Company entered into an Accelerated Stock Buyback agreement (“ASB agreement”) with Goldman, Sachs & Co. (“Goldman”) to repurchase an aggregate of $160.0 million of PMC common stock. The Company acquired these common shares as part of its $275.0 million stock repurchase program announced on March 13, 2012. The aggregate number of shares ultimately purchased was determined based on the weighted-average share price of our common shares over a specified period of time. The contract was settled on October 5, 2012. The total shares repurchased and cancelled under this ASB agreement was 26,829,309 common shares at a price of $5.96. The repurchased shares were retired immediately upon delivery. Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.

On November 10, 2011, the Board of Directors of the Company authorized a share repurchase plan for fiscal year 2012. Under this authorization, the Company may repurchase common stock to offset dilution from employee equity grants and stock purchases, at an aggregate cost not exceeding $40 million. As of December 29, 2012, the Company completed its 2012 repurchase program and repurchased 6,902,625 shares for approximately $40 million in cash. The repurchased shares were retired immediately. Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.

On May 5, 2011, the Board of Directors of the Company authorized a share repurchase plan for fiscal year 2011. Under this authorization, the Company may repurchase common stock to offset dilution from employee equity grants and stock purchases, at an aggregate cost not exceeding $40 million. As of December 31, 2011, the Company completed its 2011 repurchase program and repurchased 6,083,263 shares for approximately $40 million in cash. The repurchased shares were retired immediately. Accordingly, the repurchased shares were recorded as a reduction of common stock, additional paid-in capital and accumulated deficit.

NOTE 14. EMPLOYEE BENEFIT PLANS

Post-Retirement Health Care Benefits

The Company’s unfunded post-retirement benefit plan, which was assumed in connection with the acquisition of the Storage Semiconductor Business provides retiree medical benefits to eligible United States employees who meet certain age and service requirements upon retirement from the Company. These benefits are provided from the date of retirement until the employee qualifies for Medicare coverage. The amount of the retiree medical benefit obligation assumed by the Company was $1.1 million at the time of the acquisition.

At December 28, 2013 and December 29, 2012, the accumulated post-retirement benefit obligation was $1.3 million, with no unrecognized gain/loss or unrecognized prior service cost in both periods. The net period benefit expense was $1.4 million during 2011. No distributions were made from the plan during the period. The Company includes accrued benefit costs for its post-retirement program in Accrued liabilities on the Company’s Consolidated Balance Sheet and recognizes changes in the accumulated post-retirement benefit obligation resulting from annual re-measurement in its results of operations.

The health care accumulated post-retirement benefit obligations were determined at December 28, 2013 using a discount rate of 4.2% and a current year health care trend of 8.4% decreasing to an ultimate trend rate of 4.7% in 2027. The health care accumulated post-retirement benefit obligations were determined at December 29, 2012 using a discount rate of 3.3% and a current year health care trend of 8.7% decreasing to an ultimate trend rate of 4.7% in 2027.

Employee Retirement Savings Plans

The Company sponsors a 401(k) retirement plan for its employees in the United States and similar plans for its employees in Canada and other countries. Employees can contribute a percentage of their annual

78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

compensation to the plans, limited to maximum annual amounts set by local taxation authorities. The Company contributed $4.0 million, $3.9 million, and $3.8 million, and, to the plans in fiscal years 2013, 2012, and 2011, respectively.

Israeli Severance Plans

The Company’s has two types of severance agreements with employees in Israel, which are under Israeli labour laws. Under the first agreement, the Company’s liability for severance pay is calculated pursuant to Israeli severance pay law. Severance is based on the most recent salary of the employee multiplied by the number of years of employment. The severance pay liability of the Company to these employees reflects the undiscounted amount of the liability. The liability is partly covered by insurance policies and by regular deposits to severance pay funds. The Company records changes in the severance liability in the Consolidated Statements of Operations, net of gains and losses related to amounts in the severance pay funds.

Under the second type of severance agreement, the Company’s agreements with employees in Israel which are under Section 14 of the Severance Pay Law, 1963. Under this agreement, the Company satisfies its full obligation by contributing one month of the employee’s salary for each year of service into a fund managed by a third party. Neither the obligation, nor the amounts deposited on behalf of the employee for such obligation are recorded on the Consolidated Balance Sheet, as the Company is legally released from the obligation to the employees once the amounts have been deposited.

Expenses incurred related to the Israeli Severance Plans for 2013, 2012, and 2011 were $1.6 million, $1.8 million, and $2.0 million, respectively. The amount of the liability, net of the amounts funded under the first type of agreement noted above are included within Accrued liabilities on the Consolidated Balance Sheet in the amounts of $0.2 and $0.3 million, for the years ended December 28, 2013 and December 29, 2012, respectively. As at December 28, 2013, the amount of the net liability is comprised of $ 3.4 million for statutory severance pay liability, less $3.2 million in amounts funded. As at December 29, 2012, the amount of the net liability is comprised of $4.2 million for statutory severance pay liability, less $3.9 million of cumulative funding by the Company.

NOTE 15. INCOME TAXES

For financial reporting purposes, the geographic distribution of (loss) income before income taxes includes the following components:

	Year Ended
(in thousands)	December 28, 2013			December 29, 2012 As Restated – Note 19			December 31, 2011 As Restated – Note 19
Domestic	$	(30,038	)	$	(301,764	)	$	29,637
Foreign		23,540			18,806			51,686
	$	(6,498	)	$	(282,958	)	$	81,323

79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The provision for income taxes consists of the following components:

	Year Ended
(in thousands)	December 28, 2013		December 29, 2012 As Restated – Note 19			December 31, 2011 As Restated – Note 19
Current:
Domestic	$	9,528	$	42,710		$	6,276
State		99		(3,630	)		3,805
Foreign		13,910		11,743			13,390
	$	23,537	$	50,823		$	23,471
Deferred:
Domestic	$	1,361	$	2,856		$	(771	)
State		—		(718	)		4,885
Foreign		858		(15,660	)		(17,688	)
	$	2,219	$	(13,522	)	$	(13,574	)
Provision for income taxes	$	25,756		37,301		$	9,897

Reconciliation between the Company’s effective tax rate and the U.S. Federal statutory rate is as follows:

	Year Ended
(in thousands)	December 28, 2013			December 29, 2012 As  Restated – Note 19			December 31, 2011 As Restated – Note 19
(Loss) income before provision for income taxes	$	(6,498	)	$	(282,958	)	$	81,323
Federal statutory tax rate		35	%		35	%		35	%
Income taxes at U.S. Federal statutory rate		(2,274	)		(99,035	)		28,463
Tax on intercompany transactions		18,135			104,757			33,914
Change in liability for unrecognized tax benefit		6,748			938			5,083
Non-deductible intangible asset amortization and impairment of goodwill and purchased intangible assets		10,603			104,421			3,819
Non-deductible stock-based compensation		5,487			5,370			5,234
Non-deductible items and other		852			6,283			(6,521	)
Utilization of stock option related loss carry-forwards recorded in equity		—			17,622			2,055
State taxes		(1,332	)		(50	)		2,947
True-up of prior year taxes and tax credits		(4,230	)		(12,259	)		(25,879	)
Federal credits		(6,344	)		(23,689	)		3,297
Investment tax credits, net		(23,276	)		(19,193	)		(18,455	)
Foreign and other rate differential		(10,208	)		(6,599	)		(28,242	)
Change in valuation allowance		36,346			(40,311	)		4,692
Other changes to deferred taxes		(4,751	)		(954	)		(510	)
Provision for income taxes	$	25,756		$	37,301		$	9,897

On a consolidated basis, the Company recorded a provision for income taxes of $25.8 million, a provision for income taxes of $37.3 million and a provision for income taxes of $9.9 million for 2013, 2012, and 2011, respectively. The effective tax rates were negative 396% for 2013, negative 13% and positive 12% for 2012 and 2011, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The difference between our effective tax rates and the 35% U.S. federal statutory rate in each of 2013, 2012, and 2011, resulted primarily from foreign earnings eligible for tax rates lower than the federal statutory rate due to economic incentives subject to certain criteria granted to PMC International Sdn. Bhd., investment tax credits earned, and adjustments for prior years taxes and tax credits, partially offset by non-deductible intangible asset amortization and impairment of goodwill and purchased intangible assets, the effect of inter-company transactions, utilization of stock option related loss carryforwards recorded in equity, changes in accruals related to the liabilities for uncertain tax positions, and permanent differences arising from stock-based compensation and other items.

The Company is subject to a tax holiday in Malaysia that has the effect of reducing its net income tax rate to zero in that jurisdiction. The Company’s current income tax holiday was granted based on investment and staffing criteria targets to be met by PMC International Sdn. Bhd. (Malaysia). The tax holidays were granted in 2009 by the Government of Malaysia and are effective through 2019, subject to continued compliance with the tax holiday’s requirements. Tax savings associated with the Malaysia tax holidays were approximately $3.9 million, $7.9 million, and $22.1 million in fiscal 2013, 2012, and 2011, respectively, which provided a diluted net income (loss) per share benefit of $0.02, $0.04, and $0.09, respectively.

The Company’s 2013 tax rate was higher than the 35% statutory rate primarily due to non-deductible amortization expense, the tax impact of inter-company transactions, non-deductible stock-based compensation expense, and increases to uncertain tax positions, partially offset by tax credits generated in 2013, a benefit from the recognition of tax credits earned in prior periods, and tax on profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate.

The Company’s 2012 tax rate was higher than the 35% statutory rate primarily due to the tax impact of an intercompany dividend and other inter-company transactions, non-deductible amortization expense and write-downs, non-deductible stock-based compensation expense, partially offset by tax credits generated in 2012, and tax on profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate. See Note 19. Error Corrections.

The Company’s 2011 tax rate was lower than the 35% statutory rate primarily due to profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate and tax credits generated in 2011, partially offset by the tax impact of inter-company transactions, an adjustment of prior year taxes, non-deductible stock-based compensation expense, and the tax impact of non-deductible amortization expense and write-downs.

The consolidated financial statements for the 2013, 2012 and 2011 include the tax effects associated with the sale of certain assets between our wholly-owned subsidiaries. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly prepaid tax expenses were recorded in the years ended December 29, 2012, December 31, 2011 and December 26, 2010. The balance in prepaid expenses as at December 28, 2013 and December 29, 2012, to be recognized in future years was $ 5.8 million and $19.2 million, respectively.

The provisions related to the tax accounting for stock-based compensation prohibit the recognition of a deferred tax asset for an excess benefit that has not yet been realized. As a result, the Company will only recognize an excess benefit from stock-based compensation in additional paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available have been utilized. In addition, the Company continued to elect to account for the indirect benefits of stock-based compensation such as the research and development tax credit through the consolidated statement of operations.

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	Year Ended
(in thousands)	December 28, 2013			December 29, 2012 As Restated – Note 19
Deferred taxes:
Net operating loss carryforwards	$	30,549		$	18,469
Credit carryforwards		88,854			61,322
Reserves and accrued expenses		6,008			6,987
Stock-based compensation		11,688			11,684
Other		358			1,016
Capitalized technology & other		3,290			2,987
Capital loss		1,208			1,051
Depreciation and amortization		15,903			12,139
Total deferred tax assets	$	157,858		$	115,655
Valuation allowance		(92,525	)		(56,179	)
Deferred income tax on credits		(8,864	)		(11,126	)
Goodwill amortization		(44,946	)		(39,791	)
Federal benefits		(10,300	)		(5,444	)
Total deferred tax assets, net	$	1,223		$	3,115

In the table reflecting significant components of the Company’s deferred tax assets and liabilities, the Company had previously presented the total available amounts of its tax attributes, including the amounts relating to excess tax benefits. The disclosures above have been adjusted to exclude the amounts relating to excess tax benefits from the amounts of net operating loss carryforwards, state tax loss carryforwards and credit carryforwards, which have been separately presented in the footnote herein.

The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. Due to the history of losses the Company has incurred, the Company believes that it is not more likely than not that all or a portion of the deferred tax assets in the U.S. and held by its Canadian, and Israeli subsidiaries will be realized.

The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. By comparing source of income and the deferred tax assets being generated on an entity-by-entity basis in each of its legal entities, the Company believes it is more likely than not that such assets will be realized to the extent presented in the balance sheet and income statement.

For the year ended December 28, 2013, the company increased its valuation allowance by $36.3 million compared to the year ended December 29, 2012. The increase was primarily due to the release of reserves on federal and state R&D tax credits and the establishment of valuation allowance on foreign excess credits.

At December 28, 2013, the Company has statutory tax losses as follows: gross $125.4 million of federal domestic loss carryforwards, which expire through 2028; and gross $221.4 million of U.S. state tax loss carryforwards, which expire through 2033, of which $35.1 million, $49.5 million, $37.4 million, $41.2 million and $4.8 million expire in fiscal years 2014, 2015, 2016, 2017 and 2018, respectively, and $55.0 million of foreign tax loss carryforwards with an indefinite carryforward period. The utilization of a portion of these loss

82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

carryforwards may be subject to annual limitations under federal, state and foreign income tax legislation. Substantially all of the Company’s loss carry-forwards relate to the Company’s domestic operations for which no tax benefit has been recorded. The tax benefits relating to approximately $123.2 million of the federal net operating loss carryforwards and $89.3 million of the state net operating loss carryforwards will be credited to additional paid-in-capital when recognized.

At December 28, 2013, the Company has statutory tax credits as follows: $4.5 million of federal domestic alternative minimum tax credits which do not expire; $15.8 million of U.S. state research and development credits which do not expire; $37.2 million of foreign tax credits which expire through 2022; and $65.8 million of federal and foreign research and development credits, of which $1 million expires in 2014 and the remainder expires in years beyond 2018. The tax benefits relating to approximately $46 million of the federal credits will be credited to additional paid-in-capital when recognized.

As of December 28, 2013, the Company’s foreign subsidiaries have accumulated undistributed earnings of approximately $194.1 million that are intended to be indefinitely reinvested outside the U.S., and, accordingly, no provision for U.S. Federal and state tax has been recorded for the distribution of these earnings. At December 28, 2013, the amount of the unrecognized deferred tax liability on the indefinitely reinvested earnings was $70.2 million.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

	Year Ended
(in millions)	December 28, 2013			December 29, 2012 As Restated – Note 19			December 31, 2011 As Restated – Note 19
Gross unrecognized benefit at beginning of the year	$	91.5		$	106.0		$	100.0
Decrease in tax positions for prior years		(9.5	)		(19.0	)		7.8
Increase in tax positions for current year		4.0			4.3			—
Lapse in statute of limitations		(0.5	)		(1.3	)		(1.2	)
Effect on foreign currency (loss) gain on translation		(4.8	)		1.5			(0.6	)
Ending balance before interest accrual	$	80.7		$	91.5		$	106.0

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $43.3 million at December 28, 2013 (2012—$37.3 million, 2011—$32.2 million). The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. During 2013, the Company had accrued interest and penalties related to unrecognized tax benefits of $3.3 million (2012—$3.9 million and 2011—$3.0 million).

The Company and its subsidiaries file income tax returns in the U.S. and in various states, local and foreign jurisdictions. The tax years generally remain subject to examination by federal and most state tax authorities due to the ability to adjust net operating losses and credits. In significant foreign jurisdictions, the 2007 through 2013 tax years generally remain subject to examination by their respective tax authorities.

The Company is in various stages of examinations in connection with its tax audits worldwide and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. We cannot reliably determine either the magnitude or the range of any increase or decrease at this time.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SEGMENT INFORMATION

The Company derives its net revenues from the following operating segments: Communication Products, Enterprise Storage Products, Microprocessor Products, and Broadband Wireless Products.

All operating segments noted above have been aggregated into one reportable segment because they have similar long-term economic characteristics, products, production processes, types or classes of customers and methods used to distribute their products. Accordingly, the Company has one reportable segment—semiconductor solutions for communications network infrastructure.

Enterprise-wide information is provided below. Geographic revenue information is based on the location of the customer invoiced. Long-lived assets include property and equipment and other long-term assets. Geographic information about long-lived assets is based on the physical location of the assets.

	Year Ended
(in thousands)	December 28, 2013		December 29, 2012		December 31, 2011
Net revenues
China	$	194,401	$	206,372	$	236,186
Asia, other		73,164		74,689		74,832
Japan		65,293		70,120		85,999
United States		57,610		73,069		114,224
Taiwan		64,113		62,957		83,274
Europe and Middle East		33,895		40,466		51,115
Other foreign		19,552		3,324		8,674
Total	$	508,028	$	530,997	$	654,304

	As of
(in thousands)	December 28, 2013		December 29, 2012
Long-lived assets
Canada	$	13,166	$	12,944
United States		27,651		36,612
Israel		4,883		9,776
Other		4,199		4,432
Total	$	49,899	$	63,764

	Year Ended
(in thousands)	December 28, 2013		December 29, 2012		December 31, 2011
Net revenues by product groups*
Storage	$	342,900	$	352,993	$	391,552
Carrier		165,128		178,004		262,752
Net revenues	$	508,028	$	530,997	$	654,304

* Storage net revenues are comprised of Enterprise Storage Products and laser printer ASIC products of the Microprocessor Products Division. Carrier net revenues are comprised of Communication and Broadband Wireless Products.

84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During 2013, 2012, and 2011 the Company had two end customers whose purchases represented 10% or more of net revenues. In 2013, those two end customers had purchases that represented 16% and 13% of net revenues, respectively. In 2012, those two end customers had purchases that represented 20% and 12% of net revenues, respectively. In 2011, those two end customers had purchases that represented 20% and 10% of net revenues, respectively.

NOTE 17. NET (LOSS) INCOME PER SHARE

The following table sets forth the computation of basic and diluted net (loss) income per share:

	Year Ended
(in thousands, except per share amounts)	December 28, 2013			December 29, 2012			December 31, 2011
Numerator:
Net (loss) income:	$	(32,254	)	$	(320,259	)	$	71,426
Denominator:
Basic weighted average common shares outstanding(1)		203,882			216,593			233,210
Dilutive effect of employee stock options and awards		—			—			1,974
Diluted weighted average common shares outstanding(1)		203,882			216,593			235,184
Basic net (loss) income per share	$	(0.16	)	$	(1.48	)	$	0.31
Diluted net (loss) income per share	$	(0.16	)	$	(1.48	)	$	0.30

(1) PMC-Sierra,Ltd. Special Shares are included in the calculation of basic weighted average common shares outstanding.

In 2013 and 2012, the Company had approximately 2.0 million and 1.5 million stock-based awards, respectively, that were not included in diluted net loss per share because they would be antidilutive.

NOTE 18. IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS

During fiscal year 2013 the Company performed qualitative assessment for its annual goodwill and indefinite-lived intangible assets impairment assessment for each of its reporting units and concluded that there is no impairment.

In the third quarter of 2012, the Company experienced weaker quarterly results and lower future projections than previously expected in its Fiber-to-the-Home (“FTTH”) and Wintegra reporting units. This was driven by slower adoption rates of FTTH technology in markets outside of Asia and prolonged weak carrier spending which negatively impacted Wintegra. These circumstances triggered the Company to perform step one of the impairment test in the third quarter of 2012 and we determined that the estimated fair value of the reporting units was lower than their respective carrying values.

The fair values of these reporting units in the third quarter of 2012 were estimated using a discounted cash flow model, or income approach. The discounted cash flows for each reporting unit were based on discrete financial forecasts developed by management for planning purposes.

Cash flows beyond the discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for each identified reporting unit and considered terminal growth rates for other publicly traded companies. Future cash flows were discounted to present value by incorporating appropriate present value techniques.

85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Specifically, the income approach valuations included the following assumptions, which were similar to those used in 2011:

	2012
Discount rate		15	%
Terminal growth rate		up to 6	%
Tax rate		0-12	%
Risk free rate		3	%
Beta		1.28

Under step one, the Company estimated that the carrying value of these reporting units exceeded the respective fair values. Thus the Company conducted step two of the test by estimating the fair value of the net assets acquired in these acquisitions, and measuring the estimated fair value of each reporting unit against the carrying value of its net assets. The implied goodwill was then compared to the carrying value of goodwill, resulting in a write-down of $146.3 million for FTTH and $121.3 million for Wintegra.

Also, at the end of the third quarter of 2012, the fair values of acquired intangible assets were calculated using the income approach and determined and recorded impairment charges of $7 million related to purchased intangible assets arising from the acquisition of Wintegra. The main factor contributing to this impairment charge was the reduction of forecasted cash flows as described above.

NOTE 19. ERROR CORRECTIONS

a. The comparative consolidated financial statements as of and for the year ended December 29, 2012 presented herein and for the year ended December 31, 2011 have been restated to correct the misapplication of accounting principles related to our accounting for deferred income taxes and uncertain income tax positions, and related to capitalizing certain inventory-related overhead costs into inventory that had previously been directly expensed through cost of revenues. Most significantly, the Company did not appropriately re-measure its reserves for uncertain income tax positions associated with a decrease in exposure that occurred in 2012 related to the historical utilization of certain income tax credits. The Company also corrected the prior year financial statements for three additional items that impacted our income tax accounts: the Company did not adjust its deferred tax liabilities to reflect the effect of certain tax law changes enacted in 2012; the Company did not appropriately allocate its valuation allowance against its deferred tax assets reflected on the balance sheet; and the Company did not record the deferred tax effect related to a change in the value of certain liabilities in 2012.

The net impact of revising our comparative consolidated financial statements for these items are shown in the tables below. There was no change to the total amount of income tax loss carry-forwards or any other income tax assets available or utilized for tax purposes, nor to the actual amount of income tax payable to taxing authorities as a result of these matters in any period. In addition, the Company’s previously reported unaudited condensed consolidated quarterly financial information that was impacted by these corrections has been restated in Part II, Item 9B. Other Information.

86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The tables below illustrate the effects on the Consolidated Balance Sheets, Statements of Operations and Statements of Comprehensive (Loss) Income presented herein:

	As of
	December 29, 2012
(in thousands)	As Previously Reported*			Adjustments			As Restated
CONSOLIDATED BALANCE SHEETS
Current Assets
Inventories, net	$	23,548		$	2,119		$	25,667
Deferred tax assets	$	43,630		$	1,341		$	44,971
Non-current assets:
Deferred tax assets	$	—		$	1,042		$	1,042
Current Liabilities
Deferred income taxes	$	2,466		$	(2,466	)	$	—
Non-current liabilities
Deferred income taxes	$	41,936		$	962		$	42,898
Liability for unrecognized tax benefits	$	34,957		$	(6,753	)	$	28,204
Equity:
Common stock and additional paid in capital	$	1,553,137		$	1,950		$	1,555,087
Accumulated deficit	$	(917,825	)	$	10,809		$	(907,016	)

	Year ended								Year ended
	December 29, 2012								December 31, 2011
(in thousands, except for per share amounts)	As Previously Reported*			Adjustments		As Restated			As Previously Reported*			Adjustments			As Restated
CONSOLIDATED STATEMENTS OF OPERATIONS
Cost of revenues	$	157,918		$	931	$	158,849		$	211,630		$	(440	)	$	211,190
Provision for income taxes	$	(45,991	)	$	8,690	$	(37,301	)	$	(9,897	)	$	—		$	(9,897	)
Net (loss) income	$	(328,018	)	$	7,759	$	(320,259	)	$	70,986		$	440		$	71,426
Net (loss) income per common share - basic	$	(1.51	)	$	0.03	$	(1.48	)	$	0.30		$	0.01		$	0.31
Net (loss) income per common share - diluted	$	(1.51	)	$	0.03	$	(1.48	)	$	0.30		$	0.00		$	0.30
	Year ended								Year ended
	December 29, 2012								December 31, 2011
(in thousands, except for per share amounts)	As Previously Reported*			Adjustments		As Restated			As Previously Reported*			Adjustments			As Restated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Net (loss) income	$	(328,018	)	$	7,759	$	(320,259	)	$	70,986		$	440		$	71,426
Comprehensive (loss) income	$	(326,256	)	$	7,759	$	(318,497	)	$	67,768		$	440		$	68,208

* As previously reported in our December 29, 2012 Form 10-K/A as filed on November 12, 2013.

The corrections resulted in offsetting changes within the “net cash provided by operating activities” section in the Consolidated Statements of Cash Flows for the years ended December 29, 2012 and December 31, 2011 but did not change the ending net total of that section. There were also no changes in any other sections of the Consolidated Statements of Cash Flows for the same periods.

b. Prior Error Corrections Disclosed in 2012 Form 10-K/A as filed on November 12, 2013

The historical consolidated financial statements for fiscal 2012, 2011, and 2010 were restated in the Form 10-K/A filed on November 12, 2013 to correct the misapplication of accounting principles related to

87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

income tax benefits associated with stock option deductions in excess of the expense recognized in the financial statements. In the prior periods impacted by this matter, the Company understated the income tax benefits of its loss carry-forwards which were required to be included in equity rather than in income tax expense (benefit). These income tax benefits were generated primarily in the 1999 and 2000 years and were utilized to reduce the previously recorded income tax expense beginning in 2006 and through the first two quarters of 2013. From 2006 and forward, the Company should have recorded the income tax benefit of utilizing these stock option related loss carry-forwards as an increase to Additional Paid-in Capital, rather than as a reduction of income tax expense. There was no change to the total amount of income tax loss carry-forwards or any other income tax assets available or utilized for tax purposes, nor to the actual amount of income tax payable to the taxing authorities as a result of this matter, in any period impacted by this matter. In connection with restating our historical financial statements, the Company also made certain other corrections for the timing of recognition of amounts related to amended tax return filings and certain tax credits and for the recognition of a foreign subsidiary’s deferred tax assets not previously recognized. The foreign subsidiary was acquired in 2010 and the deferred tax assets should have been recognized as part of the acquisition accounting, and, therefore, should have resulted in a corresponding adjustment to goodwill.

The tables below illustrate the effects on the Consolidated Balance Sheets and Statements of Operations:

	As of
	December 29, 2012									December 31, 2011
(in thousands)	As Previously Reported in Form 10-K/A*			As Previously Reported in 10-Q**			As Previously Reported in 10-K***			As Previously Reported in Form 10-K/A*			As Previously Reported in 10-Q**			As Previously Reported in 10-K***
CONDENSED CONSOLIDATED BALANCE SHEETS
Non-current assets:
Prepaid tax expenses	$	19,152		$	11,851		$	25,077		$	34,318		$	18,293		$	27,898
Goodwill		252,419			252,419			252,419			519,454			520,899			520,899
Non-current liabilities
Deferred tax and other long-term tax liabilities	$	41,936		$	44,849		$	44,849		$	38,943		$	40,663		$	40,663
Liability for unrecognized tax benefits - non-current	$	34,957		$	29,236		$	38,915		$	33,020		$	26,929		$	38,460
Equity:
Common stock and additional paid in capital	$	1,553,137		$	1,527,710		$	1,527,084		$	1,623,236		$	1,587,587		$	1,577,792
Accumulated deficit	$	(917,825	)	$	(896,891	)	$	(892,718	)	$	(515,623	)	$	(490,183	)	$	(482,314	)

	Year ended
	December 29, 2012									December 31, 2011								December 26, 2010
(in thousands, except for per share amounts)	As Previously Reported in Form 10-K/A*			As Previously Reported  in 10-Q**			As Previously Reported in 10-K***			As Previously Reported in Form 10-K/A*			As Previously Reported in 10-Q**		As Previously Reported in 10-K***			As Previously Reported in Form 10-K/A*			As Previously Reported in 10-Q**			As Previously Reported in 10-K***
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Impairment of goodwill and purchased intangible assets	$	274,637		$	276,082		$	276,082		$	—		$	—	$	—		$	—		$	—		$	—
Provision for income taxes	$	(45,991	)	$	(49,052	)	$	(52,748	)	$	(9,897	)	$	183	$	(720	)	$	(37,064	)	$	(33,507	)	$	(23,940	)
Net (loss) income	$	(328,018	)	$	(332,524	)	$	(336,220	)	$	70,986		$	81,066	$	80,163		$	76,260		$	79,817		$	89,384
Net (loss) income per common share - basic	$	(1.51	)	$	(1.54	)	$	(1.55	)	$	0.30		$	0.35	$	0.34		$	0.33		$	0.34		$	0.39
Net (loss) income per common share - diluted	$	(1.51	)	$	(1.54	)	$	(1.55	)	$	0.30		$	0.34	$	0.34		$	0.32		$	0.34		$	0.38

* As previously reported in our December 29, 2012 Form 10-K/A filed on November 12, 2013

** As previously reported in our March 30, 2013 Form 10-Q

*** As previously reported in our December 29, 2012 Form 10-K

For restated comparative quarterly information corresponding to the error corrections described above, see Item 9B. Other Information.

88

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In connection with a restatement of our financial statements in November 2013, filed on Form 10-K/A for the year ended December 29, 2012, management, with the participation of our CEO and CFO, concluded that, because of an identified material weakness in our internal control over financial reporting relating to our accounting for income taxes, our disclosure controls and procedures were not effective at the reasonable assurance level as of December 29, 2012.

As required by SEC Rule 13a-15(b), management conducted an evaluation, with the participation of our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of December 28, 2013, the end of the period covered by this report. Based upon that evaluation, while remediation efforts are on-going, we determined the material weakness previously described in our Form 10-K/A filed on November 12, 2013, still exists as of December 28, 2013, as described below, and that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 28, 2013.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d -15(f) of the Securities Exchange Act of 1934 as amended). Our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (1992 framework).

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we determined we did not maintain effective internal control over financial reporting as of December 28, 2013. The Company did not maintain effective internal control over the application and monitoring of its accounting for income taxes. Specifically, the Company did not have controls designed and in place to ensure the accuracy and completeness of financial information provided by third party tax advisors used in accounting for income taxes and the determination of uncertain tax positions, deferred income tax assets and liabilities and the related income tax provision and the review and evaluation of the application of generally accepted accounting principles relating to specific complex areas of accounting for income taxes. These

89

deficiencies resulted in certain errors in Company’s prior period income tax accounts which are further detailed in Note 19 to the consolidated financial statements included in Item 8 of this report.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have determined that further improvements are required in our tax accounting processes before we can consider the material weakness remediated.

Management’s Remediation Initiatives

As of the date of this Form 10-K filing, new and enhanced controls have been designed and are being implemented. These controls include:

• Quarterly preparation of additional analysis related to the tracking and recognition of deferred tax assets, including excess tax benefits associated with stock option deductions, completed during the fourth quarter of 2013;

• Hiring of senior level personnel with expertise in the area of tax accounting and reporting and engagement of a new team of external advisors to assist with the Company’s preparation and analysis of its income tax accounts;

• Re-design of certain internal controls and related internal controls documentation related to the income tax accounting processes, including increasing the extent of management’s required internal review procedures over material/non-routine transactions impacting income tax accounting in accordance with U.S. GAAP; and

• Enhancement of management oversight and review procedures over income tax and related financial information provided to and advice received from external advisors on a quarterly basis completed during the fourth quarter of 2013.

While we believe the actions described above will be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting, such initiatives are in process as of the date of this Form 10-K filing. We will continue to monitor and assess the implementation and operation of these controls.

90

ITEM 9B. OTHER INFORMATION.

As supplemental information to Item 8. Financial Statements, the Notes to the Consolidated Financial Statements, Note 19a. Error Correction, provided below is the corresponding restated unaudited comparative quarterly condensed consolidated information:

	As of						As of						As of
	September 28, 2013						June 29, 2013						March 30, 2013
	(Unaudited)						(Unaudited)						(Unaudited)
(in thousands)	As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*
CONDENSED CONSOLIDATED BALANCE SHEETS
Current Assets
Inventories, net	$	34,559		$	32,024		$	32,698		$	30,517		$	27,691		$	25,699
Non-current assets:
Deferred tax assets	$	864		$	145		$	1,389		$	252		$	1,181		$	44
Non-current liabilities
Liability for unrecognized tax benefits—non-current	$	28,133		$	34,886		$	27,610		$	34,363		$	28,489		$	35,242
Deferred tax and other long-term tax liabilities	$	42,002		$	44,752		$	41,395		$	44,145		$	40,134		$	42,884
Equity:
Common stock and additional paid in capital	$	1,584,013		$	1,582,063		$	1,581,116		$	1,579,166		$	1,577,403		$	1,575,453
Accumulated deficit	$	(930,902	)	$	(941,265	)	$	(922,108	)	$	(932,656	)	$	(915,543	)	$	(926,225	)

	As of						As of						As of						As of
	December 29, 2012						September 30, 2012						July 1, 2012						April 1, 2012
							(Unaudited)						(Unaudited)						(Unaudited)
(in thousands)	As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*
CONDENSED CONSOLIDATED BALANCE SHEETS
Current Assets
Inventories, net	$	25,667		$	23,548		$	29,608		$	27,405		$	31,430		$	29,162		$	33,645		$	31,192
Deferred tax assets		44,971		$	43,630		$	42,151		$	42,151		$	37,004		$	37,004		$	32,829		$	32,829
Non-current assets:
Deferred tax assets	$	1,042		$	—		$	777		$	58		$	1,108		$	389			598			598
Current liabilities
Deferred income taxes	$	—		$	2,466		$	2,494		$	2,494		$	2,450		$	2,450			2,535			2,535
Non-current liabilities
Liability for unrecognized tax benefits—non-current	$	28,204		$	34,957		$	29,330		$	36,083		$	28,529		$	35,282			33,532			33,532
Deferred tax and other long-term tax liabilities	$	42,898		$	41,936		$	40,279		$	40,279		$	40,321		$	40,321			39,634			39,634
Equity:
Common stock and additional paid in capital	$	1,555,087		$	1,553,137		$	1,553,971		$	1,552,021		$	1,560,720		$	1,558,770			1,660,192			1,660,192
Accumulated deficit	$	(963,035	)	$	(917,825	)	$	(913,073	)	$	(920,798	)	$	(631,322	)	$	(639,112	)		(577,952	)		(580,405	)

91

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended						Three Months Ended						Three Months Ended
	December 28, 2013						September 28, 2013						September 28, 2013						June 29, 2013						June 29, 2013						March 30, 2013
	(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)
(in thousands, except for per share amounts)	As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Net Revenues	$	126,872		$	126,105		$	381,156		$	381,923		$	128,411		$	128,855		$	252,745		$	253,068		$	127,584		$	127,907		$	125,161		$	125,161
Cost of revenues	$	37,349		$	37,176		$	111,864		$	112,281		$	36,840		$	37,194		$	75,024		$	75,087		$	37,637		$	37,827		$	37,387		$	37,260
Provision for income taxes	$	(12,377	)	$	(12,795	)	$	(13,379	)	$	(12,961	)	$	(4,613	)	$	(4,195	)	$	(8,766	)	$	(8,766	)	$	(4,602	)	$	(4,602	)	$	(4,164	)	$	(4,164	)
Net loss	$	(15,679	)	$	(16,691	)	$	(16,575	)	$	(15,807	)	$	(3,232	)	$	(2,724	)	$	(13,343	)	$	(13,083	)	$	(4,816	)	$	(4,683	)	$	(8,527	)	$	(8,400	)
Net loss per common share—basic	$	(0.08	)	$	(0.08	)	$	(0.08	)	$	(0.08	)	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	(0.06	)	$	(0.02	)	$	(0.02	)	$	(0.04	)	$	(0.04	)
Net loss per common share—diluted	$	(0.08	)	$	(0.08	)	$	(0.08	)	$	(0.08	)	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	(0.06	)	$	(0.02	)	$	(0.02	)	$	(0.04	)	$	(0.04	)

	Nine Months Ended						Three Months Ended						Six Months Ended						Three Months Ended						Three Months Ended
	September 28, 2013						September 28, 2013						June 29, 2013						June 29, 2013						March 30, 2013
	(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)
(in thousands)	As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Net (loss) income	$	(16,575	)	$	(15,807	)	$	(3,232	)	$	(2,724	)	$	(13,343	)	$	(13,083	)	$	(4,816	)	$	(4,683	)	$	(8,527	)	$	(8,400	)
Comprehensive (loss) income	$	(17,132	)	$	(16,364	)	$	(2,393	)	$	(1,885	)	$	(14,739	)	$	(14,479	)	$	(5,768	)	$	(5,635	)	$	(8,971	)	$	(8,844	)

	Three Months Ended				Nine Months Ended						Three Months Ended						Six Months Ended						Three Months Ended					Three Months Ended
	December 29, 2012				September 30, 2012						September 30, 2012						July 1, 2012						July 1, 2012					April 1, 2012
	(Unaudited)				(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)					(Unaudited)
(in thousands, except for per share amounts)	As Restated		As Previously Reported*		As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated		As Previously Reported*			As Restated			As Previously Reported*
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Cost of revenues	$	36,747	$	36,663	$	122,102		$	121,255		$	39,055		$	38,990		$	83,047		$	82,265		$	41,438		41,253		$	41,609		$	41,012
(Provision for) recovery of income taxes	$	6,967	$	3,799	$	(44,268	)	$	(49,790	)	$	5,515		$	5,515		$	(49,783	)	$	(55,305	)	$	5,457	$	(65	)	$	(55,240	)	$	(55,240	)
Net income (loss)	$	14,021	$	10,937	$	(334,280	)	$	(338,955	)	$	(274,589	)	$	(274,524	)	$	(59,691	)	$	(64,431	)	$	5,688	$	351		$	(65,379	)	$	(64,782	)
Net loss per common share—basic	$	0.07	$	0.05	$	(1.51	)	$	(1.53	)	$	(1.31	)	$	(1.31	)	$	(0.26	)	$	(0.28	)	$	0.03	$	0.00		$	(0.28	)	$	(0.28	)
Net loss per common share—diluted	$	0.07	$	0.05	$	(1.51	)	$	(1.53	)	$	(1.31	)	$	(1.31	)	$	(0.26	)	$	(0.28	)	$	0.03	$	0.00		$	(0.28	)	$	(0.28	)

	Three Months Ended				Nine Months Ended						Three Months Ended						Six Months Ended						Three Months Ended					Three Months Ended
	December 29, 2012				September 30, 2012						September 30, 2012						June 29, 2013						June 29, 2013					March 30, 2013
	(Unaudited)				(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)					(Unaudited)
(in thousands)	As Restated		As Previously Reported*		As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated			As Previously Reported*			As Restated		As Previously Reported*			As Restated			As Previously Reported*
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Net income (loss)	$	14,021	$	10,937	$	(334,280	)	$	(338,955	)	$	(274,589	)	$	(274,524	)	$	(59,691	)	$	(64,431	)	$	5,688	$	351		$	(65,379	)	$	(64,782	)
Comprehensive income (loss)	$	13,870	$	10,786	$	(332,367	)	$	(337,042	)	$	(273,703	)	$	(273,638	)	$	(58,664	)	$	(63,404	)	$	3,999	$	(1,338	)	$	(62,663	)	$	(62,066	)

* As previously reported in our December 29, 2012 Form 10-K/A as filed on November 12, 2013, September 28, 2013 Form 10-Q as filed on November 12, 2013, and Earnings Release as filed on January 30, 2014.

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The corrections resulted in offsetting changes within the “net cash provided by operating activities” section in the Consolidated Statements of Cash Flows for the periods presented above but did not change the ending net total of that section. There also were no changes in any other sections of the Consolidated Statements of Cash Flows for the same periods.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information concerning our directors and executive officers required by this Item is incorporated by reference from the information set forth in the sections entitled “Election of Directors”, “Code of Business Conduct and Ethics”, “Executive Officers”, and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2014 Annual Stockholder Meeting.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is incorporated by reference from the information set forth in the sections entitled “Director Compensation,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in our Proxy Statement for the 2014 Annual Stockholder Meeting.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information concerning security ownership of certain beneficial owners that is required by this Item is incorporated by reference from the information set forth in the section entitled “Common Stock Ownership of Certain Beneficial Owners and Management” in our Proxy Statement for the 2014 Annual Stockholder Meeting.

Equity Compensation Plan Information

The following table provides information as of December 28, 2013 with respect to the shares of our common stock that may be issued under our existing equity compensation plans.

Plan Category	Number of Securities to be issued upon exercise of outstanding options and vesting of outstanding RSU’s		Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance  under equity compensation plans
Equity compensation plans approved by security holders(1)		28,355,287	$	7.71		25,607,245	(2)
Equity compensation plans not approved by security holders(3)		1,379,237	$	14.53		—
Balance at December 28, 2013		29,734,524	$	8.11		25,607,245	(4)

(1) Consists of the 1994 Incentive Stock Plan (the “1994 Plan”), the 2008 Equity Plan (the “2008 Plan”) and the 2011 Employee Stock Purchase Plan (“2011 Plan”).

(2) Includes 19,310,310 shares available for issuance in the 2008 Plan and 6,296,935 shares available for issuance in the 2011 Plan.

(3) Consists of the 2001 Stock Option Plan (the “2001 Plan”), which was created to replace a number of stock option plans assumed by us in connection with mergers and acquisitions we completed prior to 2001. The number of options that may be granted under the 2001 Plan equals (i) the number of shares reserved under the assumed stock option plans that were not subject to outstanding or exercised options plus (ii) the number of options that were outstanding at the time the plans were assumed but that have subsequently been cancelled plus (iii) 10 million shares that were added to the plan in 2003. This also includes Passave Inc. 2003 Israeli Option Plan (the “2003 Plan”) and the Passave, Inc. 2005 U.S. Stock Incentive Plan (the “2005 Plan”), which were assumed through the Passave acquisition, as well as, the Wintegra, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) which was assumed through the Wintegra acquisition.

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(4) On April 30, 2008 the security holders of PMC Sierra approved the 2008 Plan. The effective date for the 2008 Plan was January 1, 2009. The 2008 Plan replaced the 1994 Plan and the 2001 Plan, and no further awards shall be made under either the 1994 Plan or the 2001 Plan. On May 6, 2010 the security holders of PMC Sierra approved the 2011 Plan. The effective date for the 2011 Plan was February 11, 2011. The 2011 Plan replaced the 1991 Employee Stock Purchase (the “1991 Plan”), and no further awards shall be made under the 1991 Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

The information required by this Item is incorporated by reference from the information set forth in the section entitled “Executive Compensation Change of Control and Severance Agreements” in our Proxy Statement for the 2014 Annual Stockholder Meeting.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this Item is incorporated by reference from our Proxy Statement for the 2014 Annual Stockholder Meeting.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(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 in Item 8 of Part II.

2. Financial Statement Schedules

The Financial Statement Schedule required by this item is included on page 96 of this Annual Report on Form 10-K.

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3. Exhibits

The exhibits listed under Item 15(b) are filed as part of this Annual Report on Form 10-K.

(b) Exhibits pursuant to Item 601 of Regulation S-K.

Incorporated by Reference

Exhibit Number	Description	Form		Date		Number		Filed herewith
2.1	Agreement and Plan of Merger by and among PMC-Sierra, Inc., Rosewood Acquisition Corp., Wintegra Inc. and Concord (k.t.) Venture Management Ltd., as Stockholders’ Agent, dated as of October 21, 2010		8-K		10/26/2010		2.1
2.2	Amendment, dated as of November 18, 2010, to the Agreement and Plan of Merger by and among PMC-Sierra, Inc., Rosewood Acquisition Corp., Wintegra, Inc. and Concord (k.t.) Venture Management Ltd., as Stockholders’ Agent, dated as of October 21, 2010		8-K		11/19/2010		2.2
2.3	Asset Purchase Agreement by and among PMC-Sierra, Inc., Integrated Device Technology, Inc. and Integrated Device Technology (Malaysia) Sdn. Bhd., dated as of May 29, 2013		8-K		5/29/2013		2.1
3.1	Amended and Restated Certificate of Incorporation of PMC-Sierra, Inc., as amended on May 5, 2011		10-K		2/28/2012		3.1
3.2	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of the Registrant		S-3		11/8/2001		3.2
3.3	Amended and Restated Bylaws of the Registrant		8-K		5/9/2011		3.2
4.1	Specimen of Common Stock Certificate of the Registrant		S-3		8/27/1997		4.4
4.2	Exchange Agreement dated September 2, 1994 by and between the Registrant and PMC-Sierra, Ltd.		8-K		2/19/1994		2.1
4.3	Amendment to Exchange Agreement effective August 9, 1995		8-K		9/6/1995		2.1
4.4	Terms of PMC-Sierra, Ltd. Special Shares		S-3		9/19/1995		4.3
4.6	Purchase and Sale Agreement dated October 28, 2005, between PMC-Sierra, Inc. and Avago Technologies Pte. Limited		8-K		11/3/2005		2.1
4.7	Indenture Agreement dated October 26, 2005, between the Company and U.S. Bank National Association, as trustee		8-K		10/26/2005		4.1
4.8	Agreement and Plan of Merger dated April 4, 2006, between PMC-Sierra, Inc. and Passave Inc.		8-K		4/4/2006		2.1
10.1^	1991 Employee Stock Purchase Plan, as amended		10-K		3/1/2007		10.1
10.2^	1994 Incentive Stock Plan, as amended		10-K		3/1/2007		10.2
10.3^	2001 Stock Option Plan, as amended		10-K		3/1/2007		10.3
10.4^	2008 Equity Plan		S-8		8/12/2008		4.2

96

Exhibit Number	Description	Form		Date		Number		Filed herewith
10.5^	Form of Indemnification Agreement between the Registrant and its directors and officers, as amended and restated		10-K		3/28/2003		10.4
10.6^	Form of Change of Control Agreement by and between the Registrant and the executive officers		10-K		2/24/2010		10.6
10.7	Form of Amended and Restated Change of Control Agreement by and between the Registrant and the executive officers		10-K		2/28/2013		10.7
10.8^	Offer of Employment/Position by and between the Registrant and Steven J. Geiser		10-K		2/28/2013		10.8
10.9	Separation Agreement, dated as of August 7, 2012, by and between the Registrant and Michael W. Zellner		10-Q		8/9/2012		10.2
10.10	Amendment 1 to the Separation Agreement by and between the Registrant and Michael W. Zellner, dated November 5, 2012		10-Q		11/8/2012		10.1
10.11	Net Building Lease dated May 15, 1996 by and between PMC-Sierra, Ltd. And Pilot Pacific Developments Inc.		10-K		4/14/1997		99.A4
10.12	First Amendment to Building Lease Agreements between WHTS Freedom Circle Partners, LLC and the Registrant		10-Q		11/14/2001		10.46
10.13	Building Lease Agreement between Kanata Research Park Corporation and PMC-Sierra, Ltd.		10-K		4/2/2001		10.44
10.14	Building Lease Agreement between Transwestern—Robinson I, LLC and PMC-Sierra US, Inc.		10-K		4/2/2001		10.45
10.15*	Forecast and Option Agreement by and among the Registrant, PMC-Sierra, Ltd., and Taiwan Semiconductor Manufacturing Corporation.		10-K		3/20/2000		10.31
10.16	Sixth Amendment to Building Lease Agreement between PMC-Sierra, Ltd. and Production Court Property Holdings Inc.		10-Q		11/10/2003		10.1
10.17	Amendment for Purchase and Sale of Real Property between WHTS Freedom Circle Partners II, L.L.C. and PMC-Sierra, Inc.		10-Q		11/10/2003		10.2
10.18	Amendment for Purchase and Sale of Real Property between PMC-Sierra, Inc. and WB Mission Towers, L.L.C.		10-Q		11/10/2003		10.3
10.19^	Director Compensation—Equity Acceleration upon Change of Control		10-Q		8/6/2009		10.1
10.20	United States District Court of Northern District of California San Jose Division—In re PMC-Sierra, Inc. Derivative Litigation—Master File No. C-06-05330-RS—Stipulation of Settlement		8-K		1/26/2010		99.2
10.21	Office Lease		10-Q		11/4/2010		10.1

97

Exhibit Number	Description	Form		Date		Number		Filed herewith
10.22	Credit Agreement dated as of November 18, 2010 by and among PMC-Sierra US, Inc. a Delaware corporation, PMC-Sierra, Inc., a Delaware corporation, and Bank of America, N.A.		8-K		11/19/2010		10.1
10.23^	2011 Employee Stock Purchase Plan		DEF 14A		3/10/2010		—
10.24^	Amended and Restated Executive Employment Agreement		10-K		2/28/2012		10.22
10.25^	Second Amended and Restated Executive Employment Agreement		10-K		2/28/2013		10.25
10.26	Master and Supplemental Confirmation For Collared Accelerated Stock Buyback between Goldman, Sachs & Co. and the Registrant dated May 2, 2012		10-Q		8/9/2012		10.1
10.27^	PMC-Sierra, Inc. Restricted Stock Unit Agreement (Performance-Based Vesting Award) between PMC-Sierra, Inc. and Gregory S. Lang		8-K		8/27/2012		10.1
10.28	Letter Agreement dated January 10, 2013 between PMC-Sierra, Inc. and Relational Investors LLC		8-K		1/10/2013		99.1
10.29	Credit Agreement dated as of August 2, 2013 by and among PMC-Sierra, Inc., a Delaware corporation, PMC-Sierra US, Inc., a Delaware corporation, Bank of America, N.A., as administrative agent, and the lenders party thereto		8-K		8/5/2013		10.1
11.1	Calculation of earnings per share(1)								X
12.1	Statement of Computation of Ratio of Earnings to Fixed Charges								X
21.1	Subsidiaries of the Registrant		10-K		2/28/2013		21.1
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm								X
23.2	Consent of Deloitte LLP, Independent Registered Public Accounting Firm								X
24.1	Power of Attorney(2)		10-K		2/28/2013		24.1
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)								X
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)								X
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) (furnished, not filed)								X
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) (furnished, not filed)								X
101.INS	XBRL Instance Document								X
101.SCH	XBRL Taxonomy Extension Schema Document								X

98

Exhibit Number	Description	Form	Date	Number	Filed herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					X

* Confidential portions of this exhibit have been omitted and filed separately with the Commission.

^ Indicates management contract or compensatory plan or arrangement.

(1) Refer to Note 17. Net (Loss) Income Per Share of the consolidated financial statements included in Item 8 of Part II of this Annual Report.

(2) Refer to Signature page of this Annual Report.

99

SIGNATURE

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: February 26, 2014	/s/  Steven J. Geiser
	Steven J. Geiser
	Vice President, Chief Financial Officer and Principal Accounting Officer

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POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gregory S. Lang and Steven J. Geiser, 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 Annual 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 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/    Gregory S. Lang Gregory S. Lang	President, Chief Executive Officer (Principal Executive Officer) and Director	February 26, 2014
/s/    Steven J. Geiser Steven J. Geiser	Vice President, Chief Financial Officer (and Principal Accounting Officer)	February 26, 2014
/s/    Jonathan J. Judge Jonathan J. Judge	Chairman of the Board of Directors	February 26, 2014
/s/    Richard E. Belluzzo Richard E. Belluzzo	Director	February 26, 2014
/s/    Dr. Michael R. Farese Dr. Michael R. Farese	Director	February 26, 2014
/s/ Michael A. Klayko Michael A. Klayko	Director	February 26, 2014
/s/    Kurt P. Karros Kurt P. Karros	Director	February 26, 2014
/s/    William H. Kurtz William H. Kurtz	Director	February 26, 2014
/s/    Dr. Richard N. Nottenburg Dr. Richard N. Nottenburg	Director	February 26, 2014

*By:	/s/ Gregory S. Lang
Name: Gregory S. Lang             Attorney-in-Fact

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SCHEDULE II—Valuation and Qualifying Accounts

	Balance at Beginning of year		Charged to expenses or other accounts			Write-offs			Balance at end of year
Allowance for doubtful accounts
December 28, 2013	$	1,614	$	(558	)	$	(20	)	$	1,036
December 29, 2012	$	1,952	$	(19	)	$	(319	)	$	1,614
December 31, 2011	$	1,888	$	64		$	—		$	1,952

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INDEX TO EXHIBITS

Exhibit Number	Description
12.1	Statement of Computation of Ratio of Earnings to Fixed Charges
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
23.2	Consent of Deloitte LLP, Independent Registered Public Accounting Firm
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

103