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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 26, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: ___ to ___
Commission File Number 0-19084
PMC-Sierra, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-2925073
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
105-8555 BAXTER PLACE
BURNABY, BRITISH COLUMBIA, V5A 4V7
CANADA
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (604) 415-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
15, 2000, as reported by the Nasdaq National Market, was approximately
$15,831,000,000. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding voting stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 15, 2000, the Registrant had 139,210,849 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2000 Annual Meeting
of Stockholders are incorporated by reference in Items 10, 11, 12
and 13 Part III of this Form 10-K Report.
PART I
ITEM 1. Business.
GENERAL
- -------
In this Annual Report, "PMC-Sierra", "PMC", "the Company", "us", "our" or "we",
includes PMC-Sierra, Inc. and all our subsidiary companies.
We issued one two-for-one stock dividend on May 14, 1999 and another on February
14, 2000. The share numbers and prices presented in this report have been
adjusted to reflect these events.
We design, develop, market and support high-performance semiconductor networking
solutions. Our products are used in the high speed transmission and networking
systems which are being used to restructure the global telecommunications and
data communications infrastructure.
We provide components for equipment based on Asynchronous Transfer Mode ("ATM"),
Synchronized Optical Network ("SONET"), Synchronized Digital Hierarchy ("SDH"),
T1/E1/J1 and T3/E3/J2 access transmission, High speed Data Link Control ("HDLC")
and Ethernet. Our networking products adhere to international standards and are
sold on the merchant market to over 100 customers either directly or through our
worldwide distribution channels.
PMC-Sierra was incorporated in the State of California in 1983 and
reincorporated in the State of Delaware in 1997. Our principal executive office
is located at 105-8555 Baxter Place, Burnaby, B.C., Canada V5A 4V7. Our Common
Stock trades on the Nasdaq National Market under the symbol "PMCS" and is
included in the Nasdaq-100 index.
GLOSSARY OF TERMS
- -----------------
We use a number of terms in this report which are familiar to industry
participants but which some investors may not recognize. We have provided a
glossary of some of these terms below.
ATM: Asynchronous Transfer Mode - a high speed switching technology used in both
LAN and WAN applications. ATM packages information in a fixed size (53 byte)
cell format. ATM transmission rates can scale from 25 megabits per second (Mbps)
to 10 gigabits per second (Gbps).
Bandwidth: 1. The range of frequencies that can be utilized without interference
from an outside transmission of data packets between modules. 2. The volume of
data that a transmission line can carry, measured in bits per second.
Traditional copper lines have the lowest bandwidth potential, while fiber optic
lines have the highest.
Constant Bit Rate (CBR): A type of traffic that requires a continuous, specific
amount of bandwidth over the ATM network. This is typically required for high
quality video and digital voice transmission.
Dense Wavelength Division Multiplexing (DWDM): An extension of WDM technology
that allows simultaneous transmission of more than four channels on a single
fiber.
Digital Subscriber Line: Point-to-point public network access technologies that
allow multiple forms of data, voice, and video to be carried over twisted-pair
copper wire on the local loop between a network service provider's central
office and the customer site at limited distances. Most DSL technologies don't
use the full bandwidth of the twisted-pair, leaving enough room for a voice
channel.
Ethernet: A standard protocol used in the LAN that encompasses both layer 1 (the
transmission and reception of bits) and layer 2 (the packaging of data into
frames) functions. Ethernet supports data transfer rates of 10Mbps. The Fast
Ethernet and Gigabit Ethernet standards are compatible with previous standards
generations and support data transfer rates of 100 Mbps and 1,000 Mbps,
respectively.
Frame Relay: A packet-switching technology used to route frames of information
within a WAN. Instead of leasing dedicated lines between all remote sites, a
virtual private network is established in which remote sites are connected to a
central carrier, which routes data accordingly.
Gigabit: One billion bits.
HDLC: High-level Data Link Control - A transmission protocol in which
information that allows devices to control data flow and correct errors is
embedded in a data frame. Typically used for frame relay services.
Internet Protocol (IP): A routing protocol standard that is used by Microsoft
Windows 95, Windows NT, the UNIX operating system, and the Internet. IP
implements the network layer (Layer 3) of the TCP/IP protocol, which contains a
network address and is used to route a message to a different network or
subnetwork.
LAN: Local Area Network - A shared network of computers that spans a relatively
small area, usually confined to a single or close cluster of buildings.
MAN: Metropolitan Area Network - A communications network that covers a
geographic area, such as a city or suburb. A series of LANs at multiple sites
often interconnected by public facilities.
Megabit: One million bits.
Multiplexing: An electronic or optical process that combines a large number of
low-speed transmission lines into one high-speed line by splitting the total
available bandwidth of the high-speed line into narrower bands (known as FDM or
frequency division), or by allotting a common channel to several different
transmitting devices, one at a time in sequence (known as TDM, or time
division).
Packet: A group of binary digits switched as a whole. Each packet contains
information, a destination code, and a sequencing code in order to place the
data in proper place in the sequence of packets that comprise a complete data
transmission and codes used to check the transmission errors.
Point-of-Presence (POP): 1. A geographic area within which a communications
network allows local access. 2. Locations where a long-distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long-distance carrier. 3. The
physical site where an Internet service provider (ISP) has its modems and other
networking gear. Subscribers dial into the POP for Internet access.
Quality of Service (QoS): The ability to define a level of performance in a
system. For example, ATM networks specify modes of service that ensure optimum
performance for traffic, such as real-time voice and video. Voice information
receives priority over data information in order to ensure speech quality and
prevent delay.
Router: Device that connects multiple LANs or the bridge between a LAN and the
WAN.
SDH: Synchronous Digital Hierarchy - An international standard for synchronous
data transmission over fiber; SDH was adapted from SONET, which is employed in
North America.
SONET: Synchronous Optical Network - Standard for synchronous data transmission
over fiber. Rates are measured in optical carrier (OC) units. For example, OC-1
equals rates of 51.84 Mbps and OC-3 equals rates of 155 Mbps.
The international equivalent is SDH.
T1/E1/J1: T1 is a digital transmission link with a capacity of 1.544 Mbps. A T-1
line can normally accommodate 24 voice conversations (channels), each one
digitized at 64 Kbps and one 8-Kpbs channel for signaling and control. E1 is the
European designation for T1 and has a capacity of approximately 2 Mbps. J1 is
the Japanese designation for T1.
T3/E3/J2: A data communications line capable of transmission speeds of 45 Mbps.
A T-3 line can normally accommodate 672 voice conversations. E3 is the European
designation for T3 and J2 is the Japanese designation for T3.
Terabit: One trillion bits.
WANs: Wide Area Network - A shared network of computers that spans a large
geographical area, normally consisting of multiple LANs or MANs.
INDUSTRY BACKGROUND
- -------------------
People are finding new and more demanding ways to use the world's communications
networks. At home, we use the Internet to shop, pay our bills or communicate
with each other. At the work site, we conduct on-line meetings, read the news,
share data across departments, download reports, sell products and order
supplies. These are just a few of the applications for which we use the
worldwide communications infrastructure.
The way we use the world's networks today is a relatively recent phenomenon.
Until just a few years ago, the world's networks were primarily used for
telephone calls and facsimile transmissions. Billions of dollars were spent by
traditional phone companies to supply reliable networks to provide these
services. The Internet was just a dream resident at colleges and universities.
Now the Internet has become much more broadly adopted, and the public expects
the networks of the world to supply the capacity to support large volumes of
data traffic in addition to phone conversations.
The Bandwidth Suppliers
Two major types of network bandwidth suppliers are trying to address these
rapidly evolving networking demands: traditional telephone companies, such as
AT&T, MCI Worldcom and Sprint, and new data-centric competitive carriers such as
Williams, Level 3 and UUNET. These bandwidth suppliers have used a variety of
technologies to deliver their network services. Many of the traditional phone
companies prefer "multi-service" Frame Relay and Asynchronous Transfer Mode
(ATM) networks in order to leverage their existing infrastructures while
providing the Quality of Service (QoS) required to support data, voice and other
communication traffic. The newer carriers are more data-centric, and thus have
preferred more Internet Protocol (IP) packet based data networks.
Today, the newest network deployments are focusing on transporting data, voice
and other communication signals over a single multi-service network. Many
carriers are building networks that converge (IP) layers over ATM and Frame
Relay sub-networks or directly onto fiber.
Carriers which own multi-service networks enter into agreements with their
customers to guarantee bandwidth for data or voice transport or Internet access.
These agreements can enable carriers to increase revenues as the most critical
traffic requirements can be guaranteed at a higher price.
Carriers can commit to particular service levels because the QoS traffic
management techniques made possible by protocols such as ATM have developed an
excellent capability for providing QoS standard guarantees. Protocols such as IP
have less developed, but rapidly improving, QoS characteristics. The current
lack of acceptable IP-related QoS standards has prohibited the implementation of
IP across the emerging global network. Thus, multi-service networks are still
preferred by most of the traditional phone companies.
The Data Wave
Many carriers believe the next generation of communications networks will be
IP-based, as their networks will transport far more data than any other type of
traffic. Eventually, carriers intend to incorporate the exemplary redundancy and
reliability aspects of the voice network infrastructure in new next-generation
packet networks because they recognize that voice and other traffic will still
need to be transported. Consumers expect their telephones to work from the
moment they pick up the receiver and hear the "dial tone" to the moment they
hang it up, and they do not expect to "re-boot" their phones. In keeping with
this performance expectation, the builders of the Internet will attempt to
develop IP networks that offer the same dependability.
The Optical Transport Network
The emergence of the Optical Transport Network (OTN) - a network based on glass
and light transmission, rather than electrical transmission - is one of the
greatest evolutions in the broadband networking arena. Most of the current
Internet infrastructure is based on electrical transmission over copper wire.
Many carriers consider the massive bandwidth capacity provided by fiber optics
and Dense Wave Division Multiplexing (DWDM), a method of using color wavelengths
to create a new network "line" for every color, a more attractive investment for
long distance transmissions.
In 1999 various carriers deployed thousands of miles of glass fiber underground
and alongside railway lines or petroleum pipelines. These deployments provide
communications capacity within or across continents (i.e. the WAN).Emerging
lower cost DWDM systems are now being deployed in Metropolitan Area Networks
(MANs).
The emergence of the OTN has resulted in an optical/electrical convergence where
optical functions mesh with electrically managed functions. In today's networks,
optical wavelengths transport signals and electrical semiconductors manage the
higher layer protocols, such as IP routing or switching. PMC offers products
that merge existing electrical-based communications protocols, such as ATM,
SONET/SDH, Internet Protocol (IP) and Gigabit Ethernet with new optical-based
protocols. In the future, emerging technologies such as optical switching and
routing protocols will become increasingly important.
The standards for this electrical-to-optical interface have not been finalized.
The networking industry's Optical Domain Service Interconnect industry-wide
consortium has over 100 service providers and networking vendors which are
attempting to develop a standards-based approach to convergence. While standards
are evolving, small companies are offering the innovation, time to market, and
new technology required to enable carriers to the upgrade rapidly from their
existing circuit-based networks to an optical multi-service network.
Systems suppliers for optical networking applications require semiconductor
products with greater levels of integration, increased density, and higher speed
capabilities. These high-speed techniques must handle access rates from 1.5
megabits per second to core Internet backbone rates of 10 gigabits per second
and beyond. They must use little power, so that larger networks may be built,
and comply with telephone company signal quality standards.
Specific Trends
The following specific trends are important to PMC-Sierra's internetworking
semiconductor businesses:
- - A growing number of Internet Service Providers are using networking
equipment to aggregate networking traffic from 64 kilobit per second
streams with 155 Mbps or more of traffic that will be sent on fiber lines
onto the MAN and WAN core backbones of the Internet.
- - For Remote Access data and voice networks, network users are upgrading
their Frame Relay networks to aggregate additional dedicated line traffic
(such as telephones) and differentiate data traffic protocol types such as
ATM, Frame Relay and IP. These new applications are referred to as
Any-Service-Any-Port (ASAP).
- - ATM networks are being created which can scale from low-rate 1.5 Mbps
to Terabit rates for data, voice and video traffic which require QoS
guarantees. ATM networks are being used increasingly in switching and
transmission systems that seek to provide QoS to customers.
- - The current Internet infrastructure is dominated by router entry into
WAN backbone fiber networks. Sometimes users sending this traffic require
maximum bandwidth. These users may forego QoS and other management
processing overhead to get more bandwidth. In these cases, mapping IP
directly into SONET/SDH frames is more efficient because it does not use
bandwidth for undesired overhead. IP-Over-SONET/SDH (POS) is a protocol
used in Ethernet switches as an uplink to MAN/WAN fiber backbone rings,
high-speed Terabit routers and remote access concentrators. It maps packet
traffic directly into SONET/SDH lines and is being deployed by carriers for
these users.
- - For residential Internet opportunities, the current 56 kilobit analog
modem is a bottleneck. Emerging Digital Subscriber Line (DSL) technology
uses the traditional phone lines to your home or office to provide up to
several Mbps of bandwidth for Internet access. New DSL access multiplexer
equipment is making the broad deployment of DSLs possible by providing a
manner with which to manage all of the network traffic to and from
customers using DSL services. Cable modems are also providing residential
customers with higher bandwidth access methods to the internet.
- - Carriers are rapidly deploying base transceiver stations for wireless
services. These stations convert waves of radio frequency air traffic into
wired networks. The wired networks then aggregate, switch and process the
signals at primarily T1 or E1 rates. HDLC and ATM protocols are often used
to interface and process the aggregated T1 and E1 lines.
NETWORKING PRODUCTS
- -------------------
We provide networking semiconductor devices and related technical service and
support to equipment manufacturers for use in their communications and
networking equipment. Our objective is to develop networking semiconductors that
enable network systems vendors to get to market quickly with high performance,
cost effective and scalable systems.
Our product offerings can be grouped into four general areas: ATM, SONET/SDH
(including POS), Remote Access and Ethernet switching. These products are
generally used in networking equipment as follows:
Table I - Networking Equipment in which PMC's Products are Used
---------------------------------------------------------------
Networking Equipment ATM SONET/SDH ACCESS ETHERNET
Wide Area Network (WAN)
Remote Access Equipment
Frame Relay Access Devices X
Access Multiplexers/DSLAMs* X X
Wireless Basestations X X
Voice Switches X X X
Digital Loop Carriers X X
Frame Relay Switches X X
Internet Access Concentrators X X
Transmission and Switching Equipment
WAN Edge Switches X X X X
Routers X X X X
WAN Core Switches X X X
Digital Cross - Connects X X X
Add-Drop Multiplexers X X X
Terminal Multiplexers X X X
Local Area Network (LAN)
Switches/Routers X X X
Network Interface Cards X
* DSLAM = Digital Subscriber Line Access Multiplexer
The following is a summary of some of our more significant products currently
available. The purpose of this table is only to provide a general understanding
of where our products fit. Our chips may not perform all the possible features
related to a specific function. For example, we have a number of single port
OC-3 ATM physical layer products which perform different functions within the
physical layer of the networking hierarchy and are generally used in different
applications.
Table II - PMC-Sierra Product Summary
-------------------------------------
No. Product Description Voltage Clock Rates/Throughput Capacities
- --- ------- ----------- ------- ------------------------------------------
T1 E1 T3 E3 J2 OC3 OC12 >OC12
ATM
1 S/UNI-MPH Quad T1/E1 ATM Interface 5v x x
2 S/UNI-PDH T1/E1/T3/E3 + ATM 5v x x x x
3 S/UNI-155 1-port PHY 5v x
4 S/UNI-155-LITE 1-port PHY + analog CRU/CSU 5v x
5 S/UNI-PLUS enhanced 1-port PHY + analog CRU/CSU 5v x
6 S/UNI-155-DUAL 2-port PHY + analog CRU/CSU 5v x
7 S/UNI-QUAD 4-port PHY + analog CRU/CSU 3.3v x
8 S/UNI-155-ULTRA 1-port PHY + UTP-5 + analog CRU/CSU 5v x
9 S/UNI 622 1-port PHY 5v x x
10 S/UNI-622 MAX 1-port PHY + analog CRU/CSU 3.3v x
11 RCMP-800 Routing Control, Monitoring & Policing 5v x x
12 RCMP-200 Routing Control, Monitoring & Policing 5v x
13 S/UNI-ATLAS Full Duplex RCMP + additional features 3.3v x x
14 AAL1gatorII AAL1 SAR 3.3v x x x x x
15 AAL1gator-4 AAL1 SAR - 4 channel 2.5v x x x x x
16 AAL1gator-8 AAL1 SAR - 8 channel 2.5v x x x x x
17 AAL1gator-32 AAL1 SAR - 32 channel 2.5v x x x x x
18 LASAR-155 ATM PHY & SAR 5v x
19 QRT Quad Routing Table 3.3v x x x x x x x
20 QSE Quad Switching Element 3.3v x x x x x x x
SONET/SDH and POS
21 TUPP VT/TU Payload Alignor/Processor 5v x x x x x x
22 TUPP-PLUS TUPP + Performance Monitor 5v x x x x x x
23 TUPP-PLUS 622 TUPP + Performance Monitor 2.5v x x x x x x x
24 TUDX VT/TU X-Connect Switch 5v x x
25 TEMAP VT/TU Mapper and M13 Multiplexer 3.3v x x x x
26 STXC Transport Overhead Terminator 5v x
27 STTX Transport Overhead Terminator 5v x
28 SPECTRA-155 Payload Extractor/Aligner 5v x
29 SPECTRA-622 Payload Extractor/Aligner 3.3v x
30 SPTX Path Terminating Tranceiver 5v x
31 S/UNI TETRA 4-port ATM + POS PHY + analog CRU/CSU 3.3v x
32 S/UNI-622-POS 1-port ATM + POS PHY + analog CRU/CSU 3.3v x
Access
33 T1XC 1-port framer + analog 5v x
34 COMET 1-port framer + long haul analog 3.3v x x
35 E1XC 1-port framer + analog 5v x
36 QDSX 4-port short haul analog LIU 5v x x
37 TQUAD 4-port framer 5v x
38 EQUAD 4-port framer 5v x
39 TOCTL 8-port framer 3.3v x
40 EOCTL 8-port framer 3.3v x
41 S/UNI JET 1-port framer or ATM UNI 3.3v x x x x x
42 S/UNI QJET 4-port framer or ATM UNI 3.3v x x x x x
43 D3MX M13 Multiplexer/Demultiplexer 5v x x
44 TEMUX 28T/21E framer, Sonet mapper & M13 Mux 2.5/3.3 x x x x 3 3
45 FREEDM-8 8 link, 128 ch. HDLC Controller 3.3v x x x x
46 FREEDM-32 32 link, 128 ch. HDLC Controller 3.3v x x x x
47 FREEDM-32P672 32 link, 672 ch. HDLC Controller 3.3v x x x x
48 FREEDM-32A672 32 link, 672 ch. HDLC Controller w' "Any-PHY" 3.3v x x x x
49 FREEDM-84P672 84 link, 672 ch. HDLC Controller 3.3v x x x x x
50 FREEDM-84A672 84 link, 672 ch. HDLC Controller w' "Any-PHY" 3.3v x x x x x
51 S/UNI DUPLEX Dual Serial Link PHY Multiplexer (DSLAM) 3.3v x x x x x x
52 S/UNI VORTEX Octal Serial Link PHY Multiplexer (DSLAM) 3.3v x x x x x
53 S/UNI APEX ATM/Packet Traffic Mgr. & Switch 3.3v x x x x x x x
Ethernet
54 EXACT - PM3370 8x100 port controller 3.3v 100m b/s
55 EXACT - PM3380 1x1000 port controller 3.3v x
56 EXACT - PM3390 8 to 16 port EXACT Switch Matrix 3.3v x
No. Product Description Function
- --- ------- ----------- --------------------------------------------------------------
LIU/Framr SAR Back-plane Cell/Packet Traffic Switch
Processor Mgt
ATM
1 S/UNI-MPH Quad T1/E1 ATM Interface x
2 S/UNI-PDH T1/E1/T3/E3 + ATM x
3 S/UNI-155 1-port PHY x
4 S/UNI-155-LITE 1-port PHY + analog CRU/CSU x
5 S/UNI-PLUS enhanced 1-port PHY + analog CRU/CSU x
6 S/UNI-155-DUAL 2-port PHY + analog CRU/CSU x
7 S/UNI-QUAD 4-port PHY + analog CRU/CSU x
8 S/UNI-155-ULTRA 1-port PHY + UTP-5 + analog CRU/CSU x
9 S/UNI 622 1-port PHY x
10 S/UNI-622 MAX 1-port PHY + analog CRU/CSU x
11 RCMP-800 Routing Control, Monitoring & Policing x
12 RCMP-200 Routing Control, Monitoring & Policing x
13 S/UNI-ATLAS Full Duplex RCMP + additional features x
14 AAL1gatorII AAL1 SAR x
15 AAL1gator-4 AAL1 SAR - 4 channel x
16 AAL1gator-8 AAL1 SAR - 8 channel x
17 AAL1gator-32 AAL1 SAR - 32 channel x
18 LASAR-155 ATM PHY & SAR x x
19 QRT Quad Routing Table x x
20 QSE Quad Switching Element x x
SONET/SDH and POS
21 TUPP VT/TU Payload Alignor/Processor x
22 TUPP-PLUS TUPP + Performance Monitor x
23 TUPP-PLUS 622 TUPP + Performance Monitor x
24 TUDX VT/TU X-Connect Switch x
25 TEMAP VT/TU Mapper and M13 Multiplexer x
26 STXC Transport Overhead Terminator x
27 STTX Transport Overhead Terminator x
28 SPECTRA-155 Payload Extractor/Aligner x
29 SPECTRA-622 Payload Extractor/Aligner x
30 SPTX Path Terminating Tranceiver x
31 S/UNI TETRA 4-port ATM + POS PHY + analog CRU/CSU x
32 S/UNI-622-POS 1-port ATM + POS PHY + analog CRU/CSU x
Access
33 T1XC 1-port framer + analog x
34 COMET 1-port framer + long haul analog x
35 E1XC 1-port framer + analog x
36 QDSX 4-port short haul analog LIU x
37 TQUAD 4-port framer x
38 EQUAD 4-port framer x
39 TOCTL 8-port framer x
40 EOCTL 8-port framer x
41 S/UNI JET 1-port framer or ATM UNI x
42 S/UNI QJET 4-port framer or ATM UNI x
43 D3MX M13 Multiplexer/Demultiplexer x
44 TEMUX 28T/21E framer, Sonet mapper & M13 Mux x
45 FREEDM-8 8 link, 128 ch. HDLC Controller x
46 FREEDM-32 32 link, 128 ch. HDLC Controller x
47 FREEDM-32P672 32 link, 672 ch. HDLC Controller x
48 FREEDM-32A672 32 link, 672 ch. HDLC Controller w' "Any-PHY" x
49 FREEDM-84P672 84 link, 672 ch. HDLC Controller x
50 FREEDM-84A672 84 link, 672 ch. HDLC Controller w' "Any-PHY" x
51 S/UNI DUPLEX Dual Serial Link PHY Multiplexer (DSLAM) x x x
52 S/UNI VORTEX Octal Serial Link PHY Multiplexer (DSLAM) x x x
53 S/UNI APEX ATM/Packet Traffic Mgr. & Switch x x x x
Ethernet
54 EXACT - PM3370 8x100 port controller x x
55 EXACT - PM3380 1x1000 port controller x x
56 EXACT - PM3390 8 to 16 port EXACT Switch Matrix x x
Industry analysts have recognized us as the market leader in ATM physical layer
solutions. We offer LAN, Edge and WAN core ATM switch chip sets. Our ATM
physical layer products come in a variety of packages and provide the interface
to copper or fiber cabling along with framing and mapping functions. The S/UNI
product line offers physical layer solutions in a range from 1.5 megabits to 622
megabits.
Our line of RCMP/ATLAS ATM layer processors handle higher layer ATM protocols
such as policing, operations and management, fault and performance monitoring,
while our ATM Switch chips offer a routing table and switching element solution
capable of running at up to 622 megabytes per second.
In 1998, we added the S/UNI - ATLAS to our product portfolio. This product is a
622 Mbit/s ATM Layer device which integrates traffic policing, fault management,
performance monitoring, address resolution and translation onto one chip. This
full duplex chip is intended for the broadband OC-3 and OC-12 interface required
for ATM edge, enterprise and core switches.
In 1999 we also introduced a chip set consisting of: The SPECTRA - 622, the
TUPP+622 and the TEMAP. These SONET/SDH/T1/E1 products provide the framing,
tributary processing and mapping functions for fully channelized applications
such as multi-service add-drop multiplexers, switches, routers, concentrators
and central office digital cross-connects for rates between DS-O (64 Kbit/s)
through to OC-12/STM4 (622 Mbit/s).
In 1999, we introduced the VORTEX chipset, an ATM or packet-based DSLAM
solution. The chipset provides traffic management, aggregation, switching
maintenance and management functions for all DSL service types. The VORTEX
chipset is comprised of the S/UNI-Duplex line card multiplexer, the S/UNI-VORTEX
core card multiplexer and the S/UNI-APEX traffic manager and switch. The VORTEX
chipset can be combined with the S/UNI-ATLAS in DSLAM equipment used to provide
high speed consumer internet access, as well as third generation wireless base
stations, base station controllers and multi-service access equipment.
Our Remote Access products include T1/E1 framers, and high density Frame Relay
and HDLC controllers. Our devices are used in data communications applications
such as multi-service and digital subscriber line access multiplexers, frame
relay access devices, Internet Protocol routers, wireless base stations and
remote access concentrators. Our access products are also used for
telecommunications applications such as private branch exchanges, digital loop
carriers, Class 5 switches, digital access cross connect systems, add-drop
multiplexers and base transceiver stations.
In 1999, we introduced four new products representing the next generation of our
family of FREEDM high density packet processors. The FREEDM 32P672 and FREEDM
32A672 support up to 672 simultaneous HDLC channels across up to 32 T1 or E1
links while the FREEDM 84P672 and FREEDM 84A672 support up to 672 simultaneous
HDLC channels across up to 84 T1 or E1 links. The "P" variety of FREEDM products
can be used in PCI-based remote access concentrators, while the "A" variety can
be used in voice-over-IP gateways and frame relay interfaces.
In 1999, we introduced the TEMUX chip to work along with the new FREEDM
products. The TEMUX integrates 28 T1 framers, 21 E1 framers, a DS-3
framer/multiplexer and SONET/SDH mappers into a single chip. The FREEDM/TEMUX
chip set provides a solution for packet-based T1/E1 over channelized DS-3 or
SONET/SDH interfaces used in Internet access switch, router and access
multiplexer equipment.
Also in 1999, we introduced the S/UNI-JET, a single channel J2, E3, T3 framer
with ATM cell delineation. The 3.3 volt S/UNI-JET is designed for DSLAMs,
customer premise equipment routers, and access concentrators.
NON-NETWORKING PRODUCTS
- -----------------------
In the third quarter of 1996, we announced our decision to exit the modem
chipset business and discontinue development of our custom chipsets. We disposed
of all modem-related inventories in 1997. Our remaining non-networking products
are still being sold but we are not planning new development or follow-on
products. Revenues from other non-networking products declined rapidly in 1998
and 1999.
SALES, MARKETING AND DISTRIBUTION
- ---------------------------------
Our sales and marketing strategy is to be designed into our customers' equipment
by developing and selling superior products for which we will provide premium
service and technical support. We maintain close working relationships with our
customers in order to make products that address their needs. We provide
technical support to customers through field application engineers, technical
marketing and factory systems engineers. We believe that providing comprehensive
product service and support is critical to shortening customers' design cycles
and maintaining a competitive position in the networking market.
We sell our products directly and through distributors, independent
manufacturers' representatives and manufacturing subcontractors. Based on end
users and ignoring sales to distributors or sub-contractors, Lucent Technologies
and Cisco Systems each represented greater than 10% of our 1999 revenues. In
1999, the country purchasing the largest percentage of our products outside of
the United States was Canada at 15%. Our international sales accounted for 31%
in 1999 , 32% in 1998 and 30% in 1997.
MANUFACTURING
- -------------
Independent foundries and chip assemblers manufacture all of our products. We
receive most of our wafers in finished form from Chartered Semiconductor
Manufacturing Ltd. ("Chartered"), and Taiwan Semiconductor Manufacturing
Corporation ("TSMC"). These independent foundries produce our networking
products at feature sizes down to 0.25 micron. We believe that by using
independent foundries to fabricate our wafers, we are better able to concentrate
our resources on designing and testing new products. In addition, we avoid much
of the capital cost associated with owning and operating a fabrication facility.
We have supply agreements with Chartered and TSMC. We have made deposits to
secure access to wafer fabrication capacity under both of these agreements. At
December 31, 1999 and 1998, we had $19.1 and $23.1 million, respectively, in
deposits with the foundries. Under these agreements, the foundries must supply
certain quantities of wafers per year. Neither of these agreements have minimum
unit volume requirements but we are obliged under one of the agreements to
purchase a minimum percentage of our total annual wafer requirements provided
that the foundry is able to continue to offer competitive technology, pricing,
quality and delivery. The agreements may be terminated if either party does not
comply with the terms. We expect to spend $6.1 million in additional deposits to
secure foundry capacity in 2000 and to receive a refund of $4.6 million of
existing deposits.
Wafers supplied by outside foundries must meet our incoming quality and test
standards. We conduct the majority of our test operations on advanced mixed
signal and digital test equipment in our Burnaby, British Columbia, Canada
facility. The remainder of our testing is performed predominantly by independent
Asian companies.
RESEARCH AND DEVELOPMENT
- ------------------------
Our current research and development efforts are targeted at integrating
multiple channels or functions on single chips, broadening the number of
products we provide to address varying protocols and networking functions, and
increasing the speeds at which our chips operate.
We have design centers in or near Vancouver (Canada), Portland (Oregon),
Gaithersburg (Maryland), San Jose (California), Galway (Ireland), Montreal
(Canada), Ottawa (Canada) and Saskatoon (Canada).
We spent $63.3 million in 1999, $35.9 million in 1998, and $22.9 million in 1997
on research and development. In 1998, we also expensed $39.2 million of in
process research and development, $37.8 million of which related to the
acquisition of Integrated Telecom Technologies and $1.4 million of which related
to the acquisition of other technology.
BACKLOG
- -------
We sell primarily pursuant to standard short-term purchase orders. Our customers
frequently revise the quantity actually purchased and the shipment schedules to
reflect changes in their needs. As of December 31, 1999, our backlog of products
scheduled for shipment within six months totaled $155.2 million. As of December
31, 1998, our backlog of products scheduled for shipment within six months
totaled $56.3 million. Our customers may cancel a significant portion of the
backlog at their discretion without penalty. Accordingly, we believe that our
backlog at any given time is not a meaningful indicator of future revenues.
COMPETITION
- -----------
The markets for our products are intensely competitive and subject to rapid
technological advancement in design tools, wafer manufacturing techniques,
process tools and alternate networking technologies. We must identify and
capture future market opportunities to offset the rapid price erosion that
characterizes our industry. We may not be able to develop new products at
competitive pricing and performance levels. Even if we are able to do so, we may
not complete a new product and introduce it to market in a timely manner. Our
customers may substitute use of our products with those of current or future
competitors.
We typically face competition at the design stage, where customers evaluate
alternative design approaches that require integrated circuits. Our competitors
have increasingly frequent opportunities to supplant our products in next
generation systems because of shortened product life and design-in cycles in
many of our customers' products.
Major domestic and international semiconductor companies, such as Intel, IBM,
and Lucent Technologies, are concentrating an increasing amount of their
substantially greater financial and other resources on the markets in which we
participate. This represents a serious competitive threat to PMC. Emerging
companies also provide significant competition in our segment of the
semiconductor market.
Our competitors include Applied Micro Circuits Corporation, Broadcom, Conexant
Systems, Cypress Semiconductor, Dallas Semiconductor, Galileo Technology,
Integrated Device Technology, IBM, Infineon, Intel, Lucent Technologies,
Motorola, MMC Networks, Texas Instruments, Transwitch and Vitesse Semiconductor.
Over the next few years, we expect additional competitors, some of which may
also have greater financial and other resources, to enter the market with new
products. In addition, we are aware of venture-backed companies that focus on
specific portions of our broad range of products. These companies, individually
or collectively, could represent future competition for many design wins, and
subsequent product sales.
LICENSES, PATENTS AND TRADEMARKS
- --------------------------------
We have several U.S. patents and a number of pending patent applications in the
U.S. and Europe. In addition to such factors as innovation, technological
expertise and experienced personnel, we believe that a strong patent position is
becoming increasingly important to compete effectively in the industry. We
therefore have an active program to acquire additional patent protection.
We apply for mask work protection on our circuit designs. We also attempt to
protect our software, trade secrets and other proprietary information by, among
other security measures, entering into proprietary information agreements with
employees. Although we intend to protect our rights vigorously, we do not know
if the measures we use will be successful.
PMC and its logo are our registered trademarks and service marks. We own other
trademarks and service marks not appearing in this Form 10-K Annual Report.
Other trademarks used in this Form 10-K Annual Report are owned by other
entities.
EMPLOYEES
- ---------
As of December 31, 1999, the Company had 660 employees, including 376 in
research and development, 100 in production and quality assurance, 110 in
marketing and sales and 74 in administration. Our employees are not represented
by a collective bargaining agreement. We have never experienced any work
stoppage. We believe our employee relations are good.
ITEM 2. Properties.
Our executive offices and much of our test, sales and marketing, and design and
engineering operations are located in an approximately 256,000 square foot
leased facility in Burnaby, British Columbia, Canada. This facility is leased
through May 2006. The Company also leases offices for its staff in
Massachusetts, North Carolina, Illinois, Texas, Maryland, California, Ontario
(Canada), Quebec (Canada), Saskatchewan (Canada), Barbados, Ireland, Germany,
Sweden, Taiwan, the Peoples' Republic of China and the United Kingdom.
We lease approximately 3,500, 17,000 and 84,000 square feet of office space in
three locations in or near San Jose. The leases expire in May 2002, May 2004 and
September 2010, respectively. We also lease 16,000 square feet of office space
in Maryland and 42,000 square feet of office space in Oregon. These facilities
are leased through to June 2005 and March 2009, respectively.
ITEM 3. Legal Proceedings.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Stock Price Information. Our common stock trades on the Nasdaq National Market
under the symbol PMCS. The following table sets forth, for the periods
indicated, the high and low closing sale prices for our Common Stock as reported
by the Nasdaq National Market:
1998 High Low
---- ---
First Quarter............................................. $ 9.77 $ 6.50
Second Quarter............................................ 12.82 9.25
Third Quarter............................................. 11.94 6.66
Fourth Quarter............................................ 16.41 5.72
1999 High Low
---- ---
First Quarter............................................. $20.50 $15.82
Second Quarter............................................ 31.03 17.82
Third Quarter............................................. 55.00 32.21
Fourth Quarter............................................ 80.16 40.00
We issued a two-for-one stock dividend on May 14, 1999 and another on February
14, 2000. Accordingly, the prices presented above have been adjusted to reflect
these events.
To maintain consistency, the information provided above is based on calendar
quarters rather than fiscal quarters. As of February 15, 2000, there were
approximately 856 holders of record of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. The
Company's current bank credit agreement prohibits the payment of cash dividends
without the approval of the bank.
ITEM 6. Selected Financial Data.
Summary Consolidated Financial Data *
(in thousands, except for per share data)
Year Ended December 31,(1)
------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1999 (2) 1998 (3) 1997 (4) 1996 (5) 1995 (6)
Net revenues $ 262,477 $ 161,812 $ 127,166 $ 188,371 $ 188,724
Gross profit 207,114 123,592 94,101 93,423 91,614
Research and development 63,333 35,891 22,880 29,350 23,428
In process research and development - 39,176 - 7,783 -
Impairment of intangibles assets - 4,311 - - -
Marketing, general and administrative 45,324 30,161 23,666 30,691 30,051
Costs of merger 866 - - - -
Purchase price adjustment - compensation - - - - 10,624
Restructuring and other charges - - (1,383) 64,670 -
Income (loss) from operations 97,591 14,053 48,938 (39,071) 27,511
Gain on sale of investments 26,800
Income (loss) from continuing operations 90,020 (5,945) 34,184 (48,150) 23,976
Loss from discontinued operations - - - - (22,497)
Net income (loss) $ 90,020 $ (5,945) $ 34,184 $ (48,150) $ 1,479
Net income (loss) per share - basic: (7)
from continuing operations $ 0.66 $ (0.05) $ 0.27 $ (0.41) $ 0.22
from discontinued operations - - - - (0.21)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 0.66 $ (0.05) $ 0.27 $ (0.41) $ 0.01
============= ============= ============= ============= =============
Net income (loss) per share - diluted: (7)
from continuing operations $ 0.60 $ (0.05) $ 0.26 $ (0.41) $ 0.21
from discontinued operations - - - - (0.20)
============= ============= ============= ============= =============
Net income (loss) $ 0.60 $ (0.05) $ 0.26 $ (0.41) $ 0.01
============= ============= ============= ============= =============
Shares used in per-share calculation - basic 137,428 130,760 124,756 118,876 108,072
Shares used in per-share calculation - diluted 151,134 130,760 131,122 118,876 114,480
As of December 31, (1)
------------------------------------------------------------------------
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
Cash, cash equivalents and short-term investments $ 190,727 $ 89,400 $ 69,293 $ 42,062 $ 45,937
Working capital 165,247 73,612 58,744 20,438 32,741
Total assets 341,970 204,496 149,577 129,914 184,860
Long term debt (including current portion) 2,428 11,005 13,794 24,637 12,718
Stockholders' equity 235,686 130,675 90,714 48,444 81,000
* All financial information has been restated to reflect the acquisition of Abrizio Inc. in August 1999, which was accounted
for as a pooling of interests.
(1) The Company's fiscal year ends on the last Sunday of the calendar year. The reference to December 31 has been used as the
fiscal year end for ease of presentation.
(2) Results for the year ended December 31, 1999 includes gains of $26.8 million and the related tax provision of $3.6 million on
sale of investments and a $0.9 million charge for costs of merger for the acquisition of Abrizio Inc.
(3) Results for the year ended December 31, 1998 include an in process research and development charge of $39.2 million and a
charge for impairment of intangible assets of $4.3 million.
(4) Results for the year ended December 31, 1997 include a recovery of $1.4 million from the reversal of the excess accrued
restructure charge resulting from the conclusion of the restructuring.
(5) Results for the year ended December 31, 1996 include a restructuring charge of $69.4 million related to Company's exit from
the modem chipset business and the associated restructuring of its non-networking operations, and a $7.8 million in process
research and development charge.
(6) Results for the year ended December 31, 1995 include a $10.6 million purchase price adjustment relating to the finalization
of the acquisition of the Company's Canadian networking product operations.
(7) Reflects 2-for-1 stock splits effective February 2000, April 1999 and October 1995.
Quarterly Comparisons
The following tables set forth the consolidated statements of operations for
each of the Company's last eight quarters. This quarterly information is
unaudited and has been prepared on the same basis as the annual consolidated
financial statements. In management's opinion, this quarterly information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
Quarterly Data (Unaudited) *
(in thousands, except per share data)
Year Ended December 31, 1999 Year Ended December 31, 1998
----------------------------------------- ------------------------------------------
Fourth Third (1) Second (2) First Fourth Third (3) Second (4) First
STATEMENT OF OPERATIONS DATA:
Net revenues $ 80,600 $ 71,601 $ 59,887 $ 50,389 $ 45,437 $ 42,105 $ 39,975 $ 34,295
Gross profit 64,069 56,831 46,799 39,415 35,355 32,070 30,007 26,160
Research and development 19,228 16,863 14,706 12,536 11,864 10,085 7,919 6,023
In process research and development - - - - - - 39,176 -
Marketing, general and administrative 13,208 11,251 10,733 10,132 8,210 8,144 7,627 6,180
Costs of merger - 866 - - - - - -
Impairment of intangible assets - - - - - 4,311 - -
Income (loss) from operations 31,633 27,851 21,360 16,747 15,281 9,530 (24,715) 13,957
Gain on sale of investments - - 26,800 - - - - -
Net income (loss) $ 22,532 $ 19,443 $ 36,969 $ 11,076 $ 9,697 $ 4,529 $(29,650) $ 9,479
Net income (loss) per share - basic (5) $ 0.16 $ 0.14 $ 0.27 $ 0.08 $ 0.07 $ 0.03 $ (0.23) $ 0.07
Shares used in per-share calculation - basic 140,726 139,828 134,978 134,182 132,800 131,686 129,932 128,626
Net income (loss) per share - diluted (5) $ 0.14 $ 0.13 $ 0.25 $ 0.08 $ 0.07 $ 0.03 $ (0.23) $ 0.07
Shares used in per-share calculation - diluted 157,020 154,648 147,524 145,342 142,464 140,488 129,932 136,710
* All financial information has been restated to reflect the acquisition of Abrizio Inc. in August 1999, which was accounted
for as a pooling of interests.
(1) Income (loss) from operations and net income includes a $0.9 million charge for costs of merger for the acquisition of
Abrizio Inc.
(2) Income (loss) from operations includes gains of $26.8 million and the related tax provision of $3.6 million on sale of
investments.
(3) Income (loss) from operations and net income includes a $4.3 million charge for impairment of intangible
assets.
(4) Income (loss) from operations and net income includes a $39.2 million charge for in process research and development.
(5) Reflects 2-for-1 stock splits effective February 2000 and April 1999.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Some statements in this report constitute "forward looking statements" within
the meaning of the federal securities laws, including those statements relating
to:
- - revenues;
- - gross margins;
- - gross profit;
- - research and development expenses marketing, general and administrative
expenditures; and
- - capital resources sufficiency.
Our results may differ materially from those expressed or implied by the
forward-looking statements for a number of reasons, including those described
below in "Factors You Should Consider Before Investing in PMC-Sierra." We may
not, nor are we obliged to, release revisions to forward-looking statements to
reflect subsequent events.
We issued a two-for-one stock dividend on May 14, 1999 and another on February
14, 2000. Share numbers and prices in this report have been adjusted to reflect
these events.
General. We design, develop, market and support high-performance semiconductor
solutions for advanced telecommunications and data communications networking
markets. Our products are used in the broadband communications infrastructure
and high bandwidth networks. We supply ATM, SONET/SDH, T1/E1, T3/E3 and ethernet
semiconductors.
In January and March 2000, we announced acquisitions of Toucan Technology
Limited, AANetcom Inc. and Extreme Packet Devices ("Extreme") in exchange for
approximately 7 million shares of Common Stock and options to purchase Common
Stock. This includes an estimated 1.9 million shares of Common Stock and Options
for the purchase Extreme. The exact number of shares will vary along with the
market price of our Common Stock until the Extreme transaction closes. We expect
to account for these transactions using the pooling-of-interests method.
In September 1999, we acquired Abrizio, Inc., a fabless semiconductor company
that specializes in broadband switch chip fabrics used in core ATM switches,
digital cross-connects, and terabit routers. We issued approximately 8,704,000
shares of Common Stock and stock options in exchange for all of the equity
securities of Abrizio.
The transaction was accounted for as a pooling of interests under Accounting
Principles Board Opinion No. 16. Accordingly, all prior period consolidated
financial statements presented have been restated to include the results of
operations, financial position and cash flows of Abrizio as though it had always
been a part of PMC.
In the second quarter of 1998, we expanded our portfolio of ATM layer and
switching products by acquiring Integrated Telecom Technology Inc. ("IGT"). IGT
was a fabless semiconductor company headquartered in Gaithersburg, MD. IGT also
had a development site in San Jose, CA. IGT made ATM switching chipsets for wide
area network applications as well as ATM Segmentation-and-Reassembly and other
telecommunication chips.
We paid $55.0 million in total consideration to acquire IGT. We paid $17.8
million cash to IGT shareholders, $9.0 million cash to IGT creditors and issued
approximately 2,516,000 shares of Common Stock and options to purchase Common
Stock. The purchase price also included $850,000 in professional fees and other
direct acquisition costs (see note 2 of the Consolidated Financial Statements).
The IGT acquisition was accounted for as a purchase. The amount allocated to in
process research and development ("IPR&D") of $37.7 million was expensed on the
acquisition date. Our valuation employed the SEC's guidelines regarding
acceptable methodologies for valuing IPR&D. We considered the stage of
completion of individual projects and the risk associated with the stage of
completion of the technology.
During the third quarter of 1998, we determined that a portion of the intangible
assets recognized in connection with the IGT acquisition was impaired as we had
terminated development work on a project. We recorded an impairment of
intangible assets of $4.3 million because we determined that the developed and
core technology related to this project was not technologically feasible and had
no alternative future use.
Results of Operations
Net Revenues ($000,000)
- -----------------------
1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------
Networking products $245.2 76% $139.5 63% $ 85.5
Non-networking - other $ 17.3 (22%) $ 22.3 (38%) $ 35.8
Non-networking - modem - - (100%) $ 5.9
- --------------------------------------------------------------------------------
Total net revenues $262.5 62% $161.8 27% $127.2
===================================================
Net revenues increased 62% in 1999 as the growth in volume of sales of
networking products exceeded the decline in revenues from non-networking
products.
Networking revenues grew 76% in 1999 and 63% in 1998. Our growth was driven by
growth in our customers' networking equipment business and our customers'
continued transition from designs based on custom semiconductors to designs
based on standard semiconductors.
Non-networking - other revenues, which include custom and other semiconductor
revenues, declined 22% from 1998 to 1999 and 38% from 1997 to 1998. This
reflects our strategic decision to restructure our other non-networking business
and to focus on networking semiconductor business. We are supporting
non-networking products for existing customers, but have not developed any
further products of this type since 1996.
Consistent with our 1996 restructuring, we exited the modem chipset business and
sold all our modem chipset inventories in 1997. No future revenues are expected
from that business.
Gross Profit ($000,000)
- -----------------------
1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------
Networking products $199.2 76% $113.1 63% $69.5
Percentage of networking revenues 81% 81% 81%
Non-networking products $7.9 (25%) $10.5 (57%) $24.6
Percentage of non-networking revenues 46% 47% 69%
Total gross profit $207.1 68% $123.6 31% $94.1
Percentage of net revenues 79% 76% 74%
Total gross profit increased 68% from 1998 to 1999 and 31% from 1997 to 1998 as
increased gross profit from higher sales volumes of networking products offset a
decline in gross profit due to lower revenues and margins from non-networking
products.
Networking gross profit in 1999, as a percentage of revenues, was consistent
with 1998 and 1997. Lower wafer costs, higher wafer yields and new product
production ramps offset reductions in average selling prices for sales of
existing products.
The gross margins of these products were high relative to overall gross margins
in the semiconductor industry because our chips are highly complex and are sold
in relatively low volumes. In 1999, each of our networking products accounted
for less than 10% of total networking revenue. We believe that, as the market
for our networking products grows and customers purchase in greater volumes,
gross profit as a percentage of revenues will decline.
Non-networking gross profit decreased by 25% from 1998 to 1999 and 57% from 1997
to 1998. Our non-networking gross profit continues to decline because of the
lack of new products.
Other Costs and Expenses ($000,000)
- -----------------------------------
1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------
Research and development $63.3 76% $35.9 57% $22.9
Percentage of net revenues 24% 22% 18%
Marketing, general & administrative $44.1 51% $29.2 25% $23.4
Percentage of net revenues 17% 18% 18%
Amortization of goodwill $ 1.3 37% $ 0.9 205% $ 0.3
Percentage of net revenues 0% 1% 0%
Costs of merger $ 0.9 - - - -
Percentage of net revenues 0% - -
In process research & development - - $39.2 - -
Percentage of net revenues 24% -
Impairment of intangible assets - - $ 4.3 - -
Percentage of net revenues - 3% -
Restructuring and other costs - - - - $(1.4)
Percentage of net revenues - - (1%)
Research and Development and Marketing, General and Administrative Expenses. Our
research and development ("R&D") expenses increased both in absolute dollars and
as a percentage of net revenues in 1999 and in 1998. R&D expenditures increased
in 1999 and 1998 because we hired more employees, expanded R&D subcontracting
and acquired Abrizio Inc. and IGT. Substantially all R&D activity carried out in
1999, 1998 and 1997 related to networking products.
We incur R&D expenditures in order to attain technological leadership from a
multi-year perspective. This has caused R&D spending to fluctuate from quarter
to quarter. We expect such fluctuations, particularly when measured as a
percentage of net revenues, to occur in the future, primarily due to the timing
of expenditures and changes in the level of net revenues. In the future, we
expect R&D expenses to increase and relate entirely to networking products.
From 1998 to 1999 and from 1997 to 1998, we increased total marketing, general
and administrative expenses by 51% and 25% respectively. From 1998 to 1999,
these expenses as a percentage of total net revenues declined because many
marketing, general and administrative expenses are fixed in the short term.
Therefore, during periods of rising revenues, these expenses decline as a
percentage of revenues. We expect marketing, general and administrative costs to
increase in absolute dollars during 2000.
Amortization of Goodwill. Goodwill amortization increased from 1998 to 1999 and
from 1997 to 1998 as we amortized the goodwill recorded as a result of the
acquisition of IGT. Our strategic plan anticipates acquiring companies or assets
in 2000. The purchase method of accounting may be used to account for these
acquisitions. This could result in significant goodwill amortization charges in
future period which could materially impact our operating results.
Costs of Merger. We incurred approximately $900,000 in merger costs related to
the 1999 acquisition of Abrizio. We expect to incur significant merger costs
related to future acquisitions.
In Process Research and Development ("IPR&D"). No IPR&D charges were incurred in
1999. Our operating earnings could be materially impacted from significant IPR&D
charges if we acquire companies or assets in 2000 and use the purchase method of
accounting.
In 1998, we recorded IPR&D expenses of $39.2 million. These charges include
$37.8 million related to the acquisition of IGT and $1.4 million related to the
acquisition of technology which had not reached technological feasibility and
had no alternative future use.
In our allocation of the IGT acquisition purchase price to IPR&D, we considered
the following for each in process project at the time of the acquisition:
(1) the present value of forecasted cash flows and income that were
expected to result from the projects;
(2) the status of projects;
(3) completion costs;
(4) project risks;
(5) the value of core technology; and
(6) the stage of completion of the individual project.
In valuing the core technology, we ensured that the relative allocations to core
technology and IPR&D were consistent with the relative contributions of each. In
the determination of the value of IPR&D, we ensured that the value of IPR&D only
considered efforts completed as of the date IGT was acquired.
The amount allocated to IPR&D of $37.8 million was expensed upon acquisition, as
it was determined that the underlying projects had not reached technological
feasibility, had no alternative future use and successful development was
uncertain.
As of the acquisition date, IGT had three development projects in process. In
order to develop these projects into commercially viable products, we had to
complete all planning, designing and testing activities necessary to establish
that the products could be produced to meet their design requirements.
The calculations of value assigned to the IPR&D reflected the efforts of IGT
prior to the close of the acquisition. The estimated completion percentage,
estimated technology life and projected introduction date of the three
development projects as of the acquisition date were as follows:
Percent Technology Introduction
Project Completed Life Date
------- --------- ---- ----
Project A 78% 5 years 1999
Project B 83% 5 years 1999
Project C 65% 6 years 1998
Project A related to the development of an ATM switching system. Projects B and
C related to the segmentation and reassembly ("SAR") of data in an ATM network.
We completed project A in the first quarter of 1999 and were in full production
by the end of the year. We completed development of Project B in the fourth
quarter of 1998 and were in full production in the first quarter of 1999. This
was consistent with our initial estimates used in the valuation of the projects.
We terminated development on Project C during the third quarter of 1998 (see
`Impairment of Intangible Assets').
Research and development efforts related to Project A and B are substantially
complete and actual results to date have been consistent, in all material
respects, with our assumptions at the time of the acquisitions. The assumptions
primarily consist of an expected completion date for the in-process projects,
estimated costs to complete the projects, and revenue and expense projections
once the products have entered the market. Products related to Project A and B
from the IGT acquisition have been introduced to the market in the last nine to
twelve months. Shipment volumes of products from acquired technologies are not
material to our overall position at the present time. Therefore, it is difficult
to determine the accuracy of overall revenue projections early in the technology
or product life cycle. Failure to achieve the expected levels of revenues and
net income from these products will negatively impact the return on investment
expected at the time that the acquisition was completed and potentially result
in impairment of any other assets related to the development activities.
Impairment of Intangible Assets. During the third quarter of 1998, we abandoned
a development project. We determined that a portion of the intangible assets
recognized in connection with the IGT acquisition was impaired.
The terminated project related to ongoing development of a
Segmentation-and-Reassembly chip used to convert data packets to ATM data cells
(refer to Project C in "In Process Research and Development" above). The few
customers who were using a predecessor chip were notified of the termination of
all future development of this technology.
The technology was specialized and has no alternative future use.
Interest and Other Income, Net ($000,000)
- -----------------------------------------
1999 Change 1998 Change 1997
- --------------------------------------------------------------------------------
Interest and other income, net $7.2 148% $2.9 190% $1.0
Percentage of net revenues 3% 2% 1%
Interest and Other Income, net. Higher cash balances available to earn interest
caused interest income to increase in 1999, 1998 and 1997. In addition, in 1999
we included approximately $792,000 of income which came as a result of an equity
interest in another company. Interest expense decreased in 1999 and 1998 due to
lower capital leases. This reduction was partially offset by additional interest
expense from debt assumed from Abrizio and leases assumed from IGT.
Provision for Income Taxes. Our 1999 and 1998 income tax provision primarily
reflects the provision for income taxes for our Canadian subsidiary. Our U.S.
taxes for 1999 and 1998 were largely eliminated by tax losses realized from our
1996 restructuring charge. The $39.2 million charge for IPR&D and the related
$4.3 million impairment of intangible assets taken in 1998 are non-deductible
and will not result in any future tax benefits.
Recently issued accounting standards. In June 1998, the FASB issued Statement of
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. We expect to adopt the new Statement effective January 1, 2001. The
Statement will require the recognition of all derivatives on our consolidated
balance sheet at fair value. We anticipate that the adoption of this Statement
will not have a significant effect on our operating results or financial
position.
Liquidity and Capital Resources. Cash and cash equivalents and short-term
investments increased from $89.4 million at the end of 1998 to $190.7 million at
the end of 1999. During 1999, operating activities provided $106.2 million in
cash. The net income of $90.0 million in 1999 includes non-cash charges of $17.6
million for depreciation, $5.9 million for amortization and a non-cash credit of
$26.8 million for gains from the sale of certain investments.
During 1999, we spent $9.1 million on investments and $30.7 million on new plant
and equipment. We also used cash to increase short-term investments by $55.7
million and to reduce our debt and capital lease obligations by $8.6 million. We
received $4.0 million in a wafer fabrication deposit refund, $28.6 million from
our sale of an investment and $11.3 million by issuing Common Stock, principally
under our stock option and purchase plans.
Our principal source of liquidity at December 26, 1999 was our cash, cash
equivalents and short-term investments of $190.7 million. We also have a line of
credit with a bank that allows us to borrow up to $15 million provided, along
with other restrictions, that we do not pay cash dividends or make any material
divestments without the bank's written consent.
We have supply agreements with two independent foundries that supply
substantially all of the wafers for our products. We have made deposits to
secure access to wafer fabrication capacity under both of these agreements. At
December 31, 1999 and 1998, we had $19.1 and $23.1 million, respectively, in
deposits with the foundries. Under these agreements, the foundries must supply
certain quantities of wafers per year. Neither of these agreements have minimum
unit volume requirements but we are obliged under one of the agreements to
purchase a minimum percentage of our total annual wafer requirements provided
that the foundry is able to continue to offer competitive technology, pricing,
quality and delivery. The agreements may be terminated if either party does not
comply with the terms. We expect to spend $6.1 million in additional deposits to
secure foundry capacity in 2000 and to receive a refund of $4.6 million of
existing deposits.
We purchased $39.1 million in goods from our foundry suppliers during 1999
compared to $22.4 million in 1998. Those amounts may not be indicative of any
future period since wafer prices and our volume requirements may change.
In each year, we are entitled to receive a refund of a portion of these
deposits. The amount to be received is based on the annual purchases from those
foundries compared to the target levels in the agreements. Based on 1999
purchases, we received a $4.0 million refund from one of the foundries in the
first quarter of 2000. If we do not receive our deposits back during the term of
the agreements, then they will be returned to us at the end of the term.
We believe that existing sources of liquidity and anticipated funds from
operations will satisfy our projected working capital and capital expenditure
requirements through the end of 2000. We expect to purchase or arrange capital
leases for approximately $55.0 million of new capital expenditures during 2000.
In 1999, actual capital expenditures totaled $30.7 million.
FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA
- ---------------------------------------------------------------
Our company is subject to a number of risks - some are normal to the fabless
networking semiconductor industry, some are the same or similar to those
disclosed in previous SEC filings, and some may be present in the future. You
should carefully consider all of these risks and the other information in this
report before investing in PMC. The fact that certain risks are endemic to the
industry does not lessen the significance of the risk.
As a result of these risks, our business, financial condition or operating
results could be materially adversely affected. This could cause the trading
price of our common stock to decline, and you may lose part or all of your
investment.
If one or more of our customers changes their ordering pattern or if we lose one
or more of our customers, our revenues could decline
We depend on a limited number of customers for a major portion of our revenues.
Through direct, distributor and subcontractor purchases, Lucent Technologies and
Cisco Systems each accounted for more than 10% of our fiscal 1999 revenues. We
do not have long-term volume purchase commitments from any of our major
customers.
Our customers often shift buying patterns as they manage inventory levels,
decide to use competing products, are acquired or divested, market different
products, change production schedules or change their orders for other reasons.
If one or more customers were to delay, reduce or cancel orders, our overall
order levels may fluctuate greatly, particularly when viewed on a quarterly
basis.
If our customers use our competitors' products instead of ours, suffer a decline
in demand for their products or are acquired or sold, our revenues may decline
Our expenses are relatively fixed so that fluctuation in our revenues may cause
our operating results to fluctuate as well. Demand for our products and, as a
result our revenues, may decline for the following reasons outside our control.
As our customers increase the frequency by which they design next
generation systems and select the chips for those new systems, our
competitors have an increased opportunity to convince our customers to
switch to their products, which may cause our revenues to decline
The markets for our products are intensely competitive and subject to rapid
technological advancement in design tools, wafer manufacturing techniques,
process tools and alternate networking technologies. We must identify and
capture future market opportunities to offset the rapid price erosion that
characterizes our industry. We may not be able to develop new products at
competitive pricing and performance levels. Even if we are able to do so, we may
not complete a new product and introduce it to market in a timely manner. Our
customers may substitute use of our products in their next generation equipment
with those of current or future competitors.
We typically face competition at the design stage, where customers evaluate
alternative design approaches that require integrated circuits. Our competitors
have increasingly frequent opportunities to supplant our products in next
generation systems because of shortened product life and design-in cycles in
many of our customers' products.
Major domestic and international semiconductor companies, such as Intel, IBM,
and Lucent Technologies, are concentrating an increasing amount of their
substantially greater financial and other resources on the markets in which we
participate. This represents a serious competitive threat to PMC. Emerging
companies also provide significant competition in our segment of the
semiconductor market.
Our competitors include Applied Micro Circuits Corporation, Broadcom, Conexant
Systems, Cypress Semiconductor, Dallas Semiconductor, Galileo Technology,
Integrated Device Technology, IBM, Infineon, Intel, Lucent Technologies,
Motorola, MMC Networks, Texas Instruments, Transwitch and Vitesse Semiconductor.
Over the next few years, we expect additional competitors, some of which also
may have greater financial and other resources, to enter the market with new
products. In addition, we are aware of venture-backed companies that focus on
specific portions of our broad range of products. Competition is particularly
strong in the market for optical networking and optical telecommunication chips,
in part due to the market's growth rate, which attracts larger competitors, and
in part due to the number of smaller companies focused on this area. These
companies, individually or collectively, could represent future competition for
many design wins, and subsequent product sales.
We must often redesign our products to meet rapidly evolving industry
standards and customer specifications, which may delay an increase in
our revenues
We sell products to a market whose characteristics include rapidly evolving
industry standards, product obsolescence, and new manufacturing and design
technologies. Many of the standards and protocols for our products are based on
high speed networking technologies that have not been widely adopted or ratified
by one of the standard setting bodies in our customers' industry. Our customers
often delay or alter their design demands during this standard-setting process.
In response, we must redesign our products to suit these changing demands.
Redesign usually delays the production of our products. Our products may become
obsolete during these delays.
If demand for our customers' products changes, including due to a
downturn in the networking industry, our revenues could decline
Our customers routinely build inventories of our products in anticipation of end
demand for their products. Many of our customers have numerous product lines,
numerous component requirements for each product, and sizeable and very complex
supplier structures. This makes forecasting their production requirements
difficult and can lead to an inventory surplus of certain of their suppliers'
components.
In the past, some of our customers have built PMC component inventories that
exceeded their production requirements. Those customers materially reduced their
orders and impacted our operating results. This may happen again.
In addition, while all of our sales are denominated in US dollars, our
customers' products are sold worldwide. Any major fluctuations in currency
exchange rates could materially affect our customers' end demand, and force them
to reduce orders, which could cause our revenues to decline.
Since we develop products many years before their volume production, if
we inaccurately anticipate our customers' needs, our revenues may not
increase
Our products generally take between 18 and 24 months from initial
conceptualization to development of a viable prototype, and another 6 to 18
months to be designed into our customers' equipment and into production. They
often need to be redesigned because manufacturing yields on prototypes are
unacceptable or customers redefine their products to meet changing industry
standards. As a result, we develop products many years before volume production
and may inaccurately anticipate our customers' needs.
There have been times when we either designed products that had more features
than were demanded when they were introduced to the market or conceptualized
products that were not sufficiently feature-rich to meet the needs of our
customers or compete effectively against our competitors. This may happen again.
If the recent trend of consolidation in the networking industry
continues, our customers may be acquired or sold, which could cause
those customers to cancel product lines or development projects and our
revenues to decline
The networking equipment industry has experienced significant merger activity
and partnership programs. Through mergers or partnerships, our customers could
seek to remove redundancies in their product lines or development initiatives.
This could lead to the cancellation of a product line into which PMC products
are designed or a development project on which PMC is participating. In the
cases of a product line cancellation, PMC revenues could be materially impacted.
In the case of a development project cancellation, we may be forced to cancel
development of one or more products, which could mean opportunities for future
revenues from this development initiative could be lost.
If there is not sufficient market acceptance of the recently developed
specifications and protocols on which our new products are based, we
may not be able to sustain or increase our revenues
We recently introduced a number of ethernet switch products which function at
gigabit and fast ethernet speeds. Gigabit ethernet involves the transmission of
data over ethernet protocol networks at speeds of up to one billion bits per
second. Fast ethernet transmits data over these networks at speeds of up to 100
megabits per second. While gigabit and fast ethernet are well established, it is
not clear whether products meeting these protocols will be competitive with
products meeting alternative protocols, or whether our products will be
sufficiently attractive to achieve commercial success.
Some of our other recently introduced products adhere to specifications
developed by industry groups for transmissions of data signals, or packets, over
high-speed fiber optics transmission standards. These transmission standards are
called synchronous optical network, or SONET, in North America, and synchronous
data hierarchy, or SDH in Europe. The specifications, commonly called
packet-over-SONET/SDH, may be rejected for other technologies, such as mapping
IP directly onto fiber. In addition, we can not be sure whether our products
will compete effectively with packet-over-SONET/SDH offerings of other
companies.
A substantial portion of our business also relies on industry acceptance of
asynchronous transfer mode, or ATM, products. ATM is a networking protocol.
While ATM has been an industry standard for a number of years, the overall ATM
market has not developed as rapidly as some observers had predicted it would. As
a result, competing communications technologies, including gigabit and fast
ethernet and packet-over-SONET/SDH, may inhibit the future growth of ATM and our
sales of ATM products.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance
We recently acquired or have announced acquisitions of four companies, three of
which have design wins for their products. The design wins have not yet
generated significant revenue. These or any follow on products may not achieve
commercial success. These acquisition may not generate future revenues or
earnings.
Acquiring products, technologies or businesses from third parties is an integral
part of our business strategy. Management may be diverted from our operations
while they identify and negotiate these acquisitions and integrate an acquired
entity into our operations. Also, we may be forced to develop expertise outside
our existing businesses, and replace key personnel who leave due to an
acquisition. We have not previously attempted to integrate several acquisitions
simultaneously and may not succeed in this effort.
A future acquisition could adversely affect operating results. In particular, if
we were to acquire a company or assets and record the acquisition as a purchase,
we may capitalize a significant goodwill asset. This asset would be amortized
over its expected period of benefit. The resulting amortization expense could
seriously impact operating results for many years.
An acquisition could absorb substantial cash resources, require us to incur or
assume debt obligations, or issue additional equity. If we issue more equity, we
may dilute our common stock with securities that have an equal or a senior
interest.
Acquired entities also may have unknown liabilities, and the combined entity may
not achieve the results that were anticipated at the time of the acquisition.
We anticipate lower margins on mature and high volume products, which could
adversely affect our profitability
We expect the average selling prices of our products to decline as they mature.
Historically, competition in the semiconductor industry has driven down the
average selling prices of products. If we price our products too high, our
customers may use a competitor's product or an in-house solution. To maintain
profit margins, we must reduce our costs sufficiently to offset declines in
average selling prices, or successfully sell proportionately more new products
with higher average selling prices. Yield or other production problems, or
shortages of supply may preclude us from lowering or maintaining current
operating costs.
We may not be able to meet customer demand for our products if we do not
accurately predict demand or if we fail to secure adequate wafer fabrication or
assembly capacity
Anticipating demand is difficult because our customers face volatile pricing and
demand for their end-user networking equipment. If our customers were to delay,
cancel or otherwise change future ordering patterns, we could be left with
unwanted inventory.
Recently, our suppliers, particularly silicon wafer suppliers, have experienced
an increase in the demand for their products or services. If our silicon wafer
or other suppliers are unable or unwilling to increase productive capacity in
line with the growth in demand, we may suffer longer production lead times.
Longer production lead times require that we forecast the demand for our
products further into the future. Thus, a greater proportion of our
manufacturing orders will be based on forecasts, rather than actual customers
orders. This increases the likelihood of forecasting errors. These forecasting
errors could lead to excess inventory in certain products and insufficient
inventory in others, which could adversely affect our operating results.
In addition, if our suppliers are unable or unwilling to increase productive
capacity in line with demand, we may suffer supply shortages or be allocated
supply. A shortage in supply could adversely impact our ability to satisfy
customer demand, which could adversely affect our customer relationships along
with our current and future operating results.
We rely on a limited source of wafer fabrication, the loss of which
could delay and limit our product shipments
We do not own or operate a wafer fabrication facility. Two outside foundries
supply most of our semiconductor device requirements. Our foundry suppliers also
produce products for themselves and other companies. In addition, we may not
have access to adequate capacity or certain process technologies. We have less
control over delivery schedules, manufacturing yields and costs than competitors
with their own fabrication facilities. If the foundries we use are unable or
unwilling to manufacture our products in required volumes, we may have to
identify and qualify acceptable additional or alternative foundries. This
qualification process could take six months or longer. We may not find
sufficient capacity quickly enough, if ever, to satisfy our production
requirements.
Some companies which supply our customers are similarly dependent on a limited
number of suppliers to produce their products. These other companies' products
may be designed into the same networking equipment into which we are designed.
Our order levels could be reduced materially if these companies are unable to
access sufficient production capacity to produce in volumes demanded by our
customers because our customers may be forced to slow down or halt production on
the equipment into which we are designed.
We depend on third parties in Asia for assembly of our semiconductor
products which could delay and limit our product shipments
Sub-assemblers in Asia assemble all of our semiconductor products. Raw material
shortages, political and social instability, assembly house service disruptions,
currency fluctuations, or other circumstances in the region could force us to
seek additional or alternative sources of supply or assembly. This could lead to
supply constraints or product delivery delays which, in turn, may result in the
loss of customers. We have less control over delivery schedules, assembly
processes, quality assurances and costs than competitors that do not outsource
these tasks.
We depend on a limited number of design software suppliers, the loss of which
could impede our product development
A limited number of suppliers provide the computer aided design, or CAD,
software we use to design our products. Factors affecting the price,
availability or technical capability of these products could affect our ability
to access appropriate CAD tools for the development of highly complex products.
In particular, the CAD software industry has been the subject of extensive
intellectual property rights litigation, the results of which could materially
change the pricing and nature of the software we use. We also have limited
control over whether our software suppliers will be able to overcome technical
barriers in time to fulfill our needs.
We are subject to the risks of conducting business outside the United States to
a greater extent than companies which operate their businesses mostly in the
United States, which may impair our sales, development or manufacturing of our
products
We are subject to the risks of conducting business outside the United States to
a greater extent than most companies because, in addition to selling our
products in a number of countries, a significant portion of our research and
development and manufacturing are conducted outside of the United States. This
subjects us to the following risks.
We may lose our ability to design or produce products, could face
additional unforeseen costs or could lose access to key customers if
any of the nations in which we conduct business impose trade barriers
or new communications standards
We may have difficulty obtaining export licenses for certain technology produced
for us outside the United States. If a foreign country imposes new taxes,
tariffs, quotas, and other trade barriers and restrictions or the United States
and a foreign country develop hostilities or change diplomatic and trade
relationships, we may not be able to continue manufacturing or sub-assembly of
our products in that country and may have fewer sales in that country. We may
also have fewer sales in a country that imposes new communications standards or
technologies. This could inhibit our ability to meet our customers' demand for
our products and lower our revenues.
If foreign exchange rates fluctuate significantly, our profitability
may decline
We are exposed to foreign currency rate fluctuations because a significant part
of our development, test, marketing and administrative costs are denominated in
Canadian dollars, and our selling costs are denominated in a variety of
currencies around the world. In addition, a number of the countries in which we
have sales offices have a history of imposing exchange rate controls. This could
make it difficult to withdraw the foreign currency denominated assets we hold in
these countries.
We may have difficulty collecting receivables from customers based in
foreign countries, which could adversely affect our earnings
We sell our products to customers around the world. Payment cycle norms in these
countries may not be consistent with our standard payment terms. Thus, we may
have greater difficulty collecting receivables on time from customers in these
countries. This could impact our financial performance, particularly on our
balance sheet.
In addition, we may be faced with greater difficulty in collecting outstanding
balances due to the shear distances between our collection facilities and our
customers, and we may be unable to enforce receivable collection in foreign
nations due to their business legal systems. If one or more of our foreign
customers do not pay their outstanding receivable, we may be forced to write-off
the account. This could have a material impact on our earnings.
The loss of personnel could preclude us from designing new products
To succeed, we must retain and hire technical personnel highly skilled at the
design and test functions used to develop high speed networking products and
related software. The competition for such employees is intense. We, along with
our peers, customers and other companies in the communications industry, are
facing intense competition for those employees from our peers and an increasing
number of startup companies which are emerging with potentially lucrative
employee ownership arrangements.
We do not have employment agreements in place with our key personnel. We issue
common stock options that are subject to vesting as employee incentives. These
options, however, are effective as retention incentives only if they have
economic value.
If we cannot protect our proprietary technology, we may not be able to prevent
competitors from copying our technology and selling similar products, which
would harm our revenues
To compete effectively, we must protect our proprietary information. We rely on
a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We hold several patents and have a number of
pending patent applications.
We might not succeed in attaining patents from any of our pending applications.
Even if we are awarded patents, they may not provide any meaningful protection
or commercial advantage to us, as they may not be of sufficient scope or
strength, or may not be issued in all countries where our products can be sold.
In addition, our competitors may be able to design around our patents.
We develop, manufacture and sell our products in Asian and other countries that
may not protect our products or intellectual property rights to the same extent
as the laws of the United States. This makes piracy of our technology and
products more likely. Steps we take to protect our proprietary information may
not be adequate to prevent theft of our technology. We may not be able to
prevent our competitors from independently developing technologies that are
similar to or better than ours.
Our products employ technology that may infringe on the proprietary rights of
third parties, which may expose us to litigation and prevent us from selling our
products
Vigorous protection and pursuit of intellectual property rights or positions
characterize the semiconductor industry. This often results in expensive and
lengthy litigation. We, as well as our customers or suppliers, may be accused of
infringing on patents or other intellectual property rights owned by third
parties. This has happened in the past. An adverse result in any litigation
could force us to pay substantial damages, stop manufacturing, using and selling
the infringing products, spend significant resources to develop non-infringing
technology, discontinue using certain processes or obtain licenses to the
infringing technology. In addition, we may not be able to develop non-infringing
technology, nor might we be able to find appropriate licenses on reasonable
terms.
Patent disputes in the semiconductor industry are often settled through
cross-licensing arrangements. Because we currently do not have a substantial
portfolio of patents compared to our larger competitors, we may not be able to
settle an alleged patent infringement claim through a cross-licensing
arrangement. We are therefore more exposed to third party claims than some of
our larger competitors and customers.
In the past, our customers have been required to obtain licenses from and pay
royalties to third parties for the sale of systems incorporating our
semiconductor devices. Until December of 1997, we indemnified our customers up
to the dollar amount of their purchases of our products found to be infringing
on technology owned by third parties. Customers may also make claims against us
with respect to infringement.
Furthermore, we may initiate claims or litigation against third parties for
infringing our proprietary rights or to establish the validity of our
proprietary rights. This could consume significant resources and divert the
efforts of our technical and management personnel, regardless of the
litigation's outcome.
Securities we issue to fund our operations could dilute your ownership
We may need to raise additional funds through public or private debt or equity
financing to fund our operations. If we raise funds by issuing equity
securities, the percentage ownership of current stockholders will be reduced and
the new equity securities may have priority rights to your investment. We may
not obtain sufficient financing on terms we or you will find favorable. We may
delay, limit or eliminate some or all of our proposed operations if adequate
funds are not available.
Our stock price has been and may continue to be volatile
In the past, our common stock price has fluctuated significantly. This could
continue as our or our competitors announce new products, our and our peers or
customers' results fluctuate, conditions in the networking or semiconductor
industry change or investors change their sentiment toward technology stocks.
In addition, increases in our stock price and expansion of our price-to-earnings
multiple may have made our stock attractive to momentum or day-trading investors
who often shift funds into and out of stocks rapidly, exacerbating price
fluctuations in either direction particularly when viewed on a quarterly basis.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The following discussion regarding our risk management activities contains
"forward-looking statements" that involve risks and uncertainties. Actual
results may differ materially from those projected in the forward-looking
statements.
We are exposed to foreign currency fluctuations through our operations in Canada
and elsewhere. In our effort to hedge this risk, we typically forecast our
operational currency needs, purchase such currency on the open market at the
beginning of an operational period, and hold these funds as a hedge against
currency fluctuations. We usually limit the operational period to 3 months or
less. While we expect to utilize this method of hedging our foreign currency
risk in the future, we may change our hedging methodology and utilize foreign
exchange contracts that are currently available under our operating line of
credit agreement.
Occasionally, we may not be able to correctly forecast our operational needs. If
our forecasts are overstated or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses. At the
end of 1999, we did not have significant foreign currency denominated net asset
or net liability positions, and we had no outstanding foreign exchange
contracts.
We maintain cash equivalent and short-term investment portfolio holdings of
various issuers, types, and maturity dates with various banks and investment
banking institutions. We occasionally hold short-term investments beyond 120
days, and the market value of these investments on any day during the investment
term may vary as a result of market interest rate fluctuations. We do not hedge
this exposure because short-term fluctuations in interest rates would not likely
have a material impact on interest earnings. We classify our investments as
available-for-sale or held-to-maturity at the time of purchase and re-evaluate
this designation as of each balance sheet date. We had approximately $106.6
million in outstanding short-term investments at the end of 1999.
YEAR 2000 COMPUTER SYSTEMS ISSUES UPDATE
To date our systems and software have not experienced any material disruption
due to the onset of the Year 2000, and we have completed our Year 2000
preparedness activities. All of our systems are operating normally, as are those
of our customers and suppliers. Our expenditures on the year 2000 issue were
immaterial.
ITEM 8. Financial Statements and Supplementary Data.
The chart entitled "Quarterly Data (Unaudited)" contained in Item 6 Part II
hereof is hereby incorporated by reference into this Item 8 of Part II of this
Form 10-K.
PMC-Sierra, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements Included in Item 8:
Page
Report of Deloitte & Touche LLP, Independent Auditors................................. --
Consolidated Balance Sheets at December 31, 1999 and 1998............................. --
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1999........................................................... --
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1999................................................ --
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1999........................................................... --
Notes to Consolidated Financial Statements............................................ --
Schedules for each of the three years in the period ended December 31, 1999
included in Item 14 (d):
II Valuation and Qualifying Accounts................................................. --
Schedules not listed above have been omitted because they are not applicable or
are not required, or the information required to be set forth therein is
included in the financial statements or the notes thereto.
Report of Deloitte & Touche LLP, Independent Auditors
The Board of Directors and Stockholders of PMC-Sierra, Inc.
We have audited the accompanying consolidated balance sheets of PMC-Sierra, Inc.
as of December 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PMC-Sierra, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Vancouver, British Columbia
January 17, 2000 (March 3, 2000, as to Note 14)
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31,
-----------------------------
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 84,091 $ 38,507
Short-term investments 106,636 50,893
Accounts receivable, net of allowance for doubtful accounts
of $1,244 ($1,128 in 1998) 35,698 26,227
Inventories, net 7,208 3,617
Deferred income taxes 9,270 1,506
Prepaid expenses and other current assets 6,822 4,045
Short-term deposits for wafer fabrication capacity 4,637 4,000
------------- -----------
Total current assets 254,362 128,795
Property and equipment, net 45,489 32,452
Goodwill and other intangible assets, net of accumulated
amortization of $9,961 ($6,455 in 1998) 15,280 19,629
Investments and other assets 12,356 4,500
Deposits for wafer fabrication capacity 14,483 19,120
------------ -----------
$ 341,970 $ 204,496
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,333 $ 8,964
Accrued liabilities 15,765 14,694
Deferred income 34,486 12,517
Income taxes payable 26,183 13,897
Current portion of obligations under capital leases and long-term debt 1,348 5,111
------------- -----------
Total current liabilities 89,115 55,183
Deferred income taxes 9,091 4,357
Noncurrent obligations under capital leases and long-term debt 1,080 5,894
Commitments and contingencies (Note 7)
Special shares convertible into 4,242 (5,036 in 1998) common stock 6,998 8,387
Stockholders' equity
Preferred stock, par value $0.001; 5,000 shares authorized:
none issued or outstanding in 1999 and 1998 - -
Common stock and additional paid in capital, par value $0.001;
200,000 shares authorized (100,000 shares in 1998)
136,812 shares issued and outstanding (125,660 in 1998) 206,790 191,134
Deferred stock compensation (2,487) (1,822)
Retained earnings (accumulated deficit) 31,383 (58,637)
------------- ------------
Total stockholders' equity 235,686 130,675
------------- -----------
$ 341,970 $ 204,496
============= ============
See notes to consolidated financial statements.
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
Year Ended December 31,
------------------------------------------------
1999 1998 1997
Net revenues $ 262,477 $ 161,812 $ 127,166
Cost of revenues 55,363 38,220 33,065
-------------- -------------- ---------------
Gross profit 207,114 123,592 94,101
Other costs and expenses:
Research and development 63,333 35,891 22,880
Marketing, general and administrative 44,072 29,246 23,366
Amortization of goodwill 1,252 915 300
Costs of merger 866 - -
Acquisition of in process research and development - 39,176 -
Impairment of intangible assets - 4,311 -
Restructuring and other costs - - (1,383)
-------------- -------------- ---------------
Income from operations 97,591 14,053 48,938
Interest and other income, net 7,232 2,875 973
Gain on sale of investments 26,800 - -
-------------- -------------- ---------------
Income before provision for income taxes 131,623 16,928 49,911
Provision for income taxes 41,603 22,873 15,727
-------------- -------------- ---------------
Net income (loss) $ 90,020 $ (5,945) $ 34,184
============== ============== ===============
Net income (loss) per common share - basic $ 0.66 $ (0.05) $ 0.27
============== ============== ===============
Net income (loss) per common share - diluted $ 0.60 $ (0.05) $ 0.26
============== ============== ===============
Shares used in per share calculation - basic 137,428 130,760 124,756
Shares used in per share calculation - diluted 151,134 130,760 131,122
See notes to consolidated financial statements.
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock
and Additional
Paid in
Common Stock Capital Deferred Total
---------------------------------------- Stock Accumulated Stockholders
Number of Shares Amount Compensation Deficit Equity
Balances at December 31, 1996 114,588 $ 135,320 $ - $ (86,876) $ 48,444
Conversion of special shares
into common stock 1,276 1,701 - - 1,701
Issuance of common stock
under stock benefit plans 3,136 6,385 - - 6,385
Net income - - - 34,184 34,184
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 119,000 143,406 - (52,692) 90,714
Conversion of special shares
into common stock 1,436 2,406 - - 2,406
Issuance of common stock
under stock benefit plans 3,564 14,338 - - 14,338
Issuance of common stock and
stock options to acquire Integrated
Telecom Technology, Inc. 1,660 28,221 - - 28,221
Deferred stock compensation - 2,763 (2,763) - -
Amortization of deferred
stock compensation - - 941 - 941
Net loss - - - (5,945) (5,945)
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 125,660 $ 191,134 $ (1,822) $ (58,637) $ 130,675
Conversion of special shares
into common stock 792 1,389 - - 1,389
Issuance of common stock
under stock benefit plans 10,272 11,180 - - 11,180
Conversion of warrants
into common stock 88 75 - - 75
Deferred stock compensation - 3,012 (3,012) - -
Amortization of deferred
stock compensation - - 2,347 - 2,347
Net income - - - 90,020 90,020
- ------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 136,812 $ 206,790 $ (2,487) $ 31,383 $ 235,686
- ------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in cash and cash equivalents
(in thousands)
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
Cash flows from operating activities:
Net income (loss) $ 90,020 $ (5,945) $ 34,184
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of plant and equipment 17,627 11,440 7,787
Amortization of intangibles 3,599 2,850 1,363
Amortization of deferred stock compensation 2,347 941 -
Deferred income taxes (3,030) (1,172) 3,082
Equity in income of investee (792) - -
Gain on sale of investments (26,800) - -
Acquisition of in process research and development - 39,176 -
Impairment of intangible assets - 4,311 -
Loss on disposal of equipment - - 258
Recovery related to restructuring provision - - (1,383)
Changes in operating assets and liabilities:
Accounts receivable (9,471) (9,861) (1,196)
Inventories (3,591) 137 4,662
Prepaid expenses and other (1,780) (1,370) 1,000
Accounts payable and accrued liabilities 3,842 1,484 (1,530)
Income taxes payable 12,286 5,117 4,730
Deferred income 21,969 10,419 2,098
Accrued restructuring costs - - (14,942)
Net liabilities associated with discontinued operations - (301) (1,299)
-------------- --------------- --------------
Net cash provided by operating activities 106,226 57,226 38,814
-------------- --------------- --------------
Cash flows from investing activities:
Purchases of short-term investments (109,635) (53,001) (59,187)
Proceeds from sales and maturities of short-term investments 53,892 43,442 24,877
Purchases of plant and equipment (30,664) (22,513) (8,221)
Proceeds from sale of equipment and capacity assets - - 7,631
Purchases of investments (9,130) - (3,000)
Proceeds from sale of investments 28,628 - -
Purchase of intangible assets (411) - -
Proceeds from refund of wafer fabrication deposits 4,000 4,000 -
Payment for purchase of Integrated Telecom Technology, Inc.,
net of cash acquired - (27,165) -
Purchase of other in process research and development - (1,419) -
-------------- --------------- --------------
Net cash used in investing activities (63,320) (56,656) (37,900)
-------------- --------------- --------------
Cash flows from financing activities:
Proceeds from notes payable 1,817 1,211 50
Repayment of notes payable and other long-term debt (2,170) (541) (2,640)
Proceeds from sale/leaseback of equipment - - 1,107
Principal payments under capital lease obligations (8,224) (5,030) (12,895)
Proceeds from issuance of common stock 11,255 14,338 6,385
-------------- --------------- --------------
Net cash provided by (used in) financing activities 2,678 9,978 (7,993)
-------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents 45,584 10,548 (7,079)
Cash and cash equivalents, beginning of the year 38,507 27,959 35,038
============== =============== ==============
Cash and cash equivalents, end of the year $ 84,091 $ 38,507 $ 27,959
============== =============== ==============
See notes to consolidated financial statements.
PMC-Sierra, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
NOTE 1. Summary of Significant Accounting Policies
Description of business. PMC-Sierra, Inc (the "Company" or "PMC" ) provides
customers with Internetworking semiconductor system solutions for high speed
transmission and networking systems.
Basis of presentation. The accompanying consolidated financial statements
include the accounts of PMC-Sierra, Inc. and its wholly owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated. The
Company's fiscal year ends on the last Sunday of the calendar year. For ease of
presentation, the reference to December 31 has been utilized as the fiscal year
end for all financial statement captions. Fiscal years 1999, 1998 and 1997 each
consisted of 52 weeks. The Company's reporting currency is the United States
dollar.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities as of the dates
and for the periods presented. Estimates are used for, but not limited to, the
accounting for doubtful accounts, inventory reserves, depreciation and
amortization, sales returns, warranty costs, taxes and contingencies. Actual
results may differ from those estimates.
Cash, cash equivalents and short-term investments. Cash equivalents are defined
as highly liquid debt instruments with original maturities at the date of
acquisition of 90 days or less that have insignificant interest rate risk.
Short-term investments are defined as money market instruments with original
maturities greater than 90 days, but less than one year.
Under Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"), management classifies investments
as available-for-sale or held-to-maturity at the time of purchase and
re-evaluates such designation as of each balance sheet date. Investments
classified as held-to-maturity securities are stated at amortized cost with
corresponding premiums or discounts amortized against interest income over the
life of the investment.
Marketable equity and debt securities not classified as held-to-maturity are
classified as available-for-sale and reported at fair value. Unrealized gains
and losses on these investments are included in equity as a separate component
of stockholders' equity. The cost of securities sold is based on the specific
identification method.
As at December 31, 1999 and 1998, the Company's short-term investments consisted
solely of held-to-maturity investments and their carrying value was
substantially the same as their market value. Proceeds from sales and realized
gains or losses on sales of available-for-sale securities for all years
presented were immaterial.
Inventories. Inventories are stated at the lower of cost (first-in, first out)
or market (estimated net realizable value).
The components of inventories are as follows:
December 31,
--------------------------------
(in thousands) 1999 1998
Work-in-progress $ 4,031 $ 1,761
Finished goods 3,177 1,856
--------------- --------------
$ 7,208 $ 3,617
=============== ==============
Property and equipment, net. Property and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets, ranging from two to five years, or the applicable lease term,
whichever is shorter. The carrying value of property and equipment is reviewed
periodically for any permanent impairment in value.
The components of property and equipment are as follows:
December 31,
-------------------------------
(in thousands) 1999 1998
Machinery and equipment $ 79,521 $ 53,883
Leasehold improvements 5,353 2,683
Furniture and fixtures 4,484 2,653
---------------- ---------------
Total cost 89,358 59,219
Accumulated depreciation (43,869) (26,767)
---------------- ---------------
$ 45,489 $ 32,452
================ ===============
The Company leases furniture and equipment under long-term capital leases.
Accordingly, capitalized costs of approximately $4,301,000 and $17,686,000 at
December 31, 1999 and 1998, respectively, and accumulated amortization of
approximately $3,738,000 and $12,067,000, respectively, are included in property
and equipment.
Goodwill and other intangible assets. Goodwill, developed and core technology
and other intangible assets are carried at cost less accumulated amortization,
and are being amortized on a straight-line basis over the economic lives of the
respective assets, generally three to seven years. Among other considerations,
to assess impairment, the Company periodically estimates undiscounted future
cash flows to determine if they exceed the unamortized balance of the related
intangible asset.
The components of goodwill and other intangible assets, net arose from the
following acquisitions:
December 31,
-------------------------------
(in thousands) 1999 1998
PMC-Sierra, Ltd. $ 5,390 $ 6,665
Bipolar Integrated Technology, Inc. 170 216
Integrated Telecom Technology, Inc. 9,720 12,748
--------------- ---------------
$ 15,280 $ 19,629
=============== ===============
Investments in Non-Public Companies. The Company has certain investments in
non-publicly traded companies in which it has less that 20% of the voting rights
and in which it does not exercise significant influence. These investments are
carried at cost. The Company monitors these investments for impairment and makes
appropriate reductions in carrying value when necessary.
Investments in Equity Accounted investees. Investees in which the Company has
between 20% and 50% of the voting rights, and in which the Company exercises
significant influence, are accounted for using the equity method.
Deposits for wafer fabrication capacity. Two independent foundries supply
substantially all of the Company's products. Under wafer supply agreements with
these foundries, the Company has deposits of $19.1 million (1998 - $23.1
million) to secure access to wafer fabrication capacity. During 1999, the
Company purchased $30.5 million ($18.3 million and $13.2 million in 1998 and
1997, respectively) from these foundries. Purchases in any year may or may not
be indicative of any future period since wafers are purchased based on current
market pricing and the Company's volume requirements change in relation to sales
of its products.
In each year, the Company is entitled to receive a refund of a portion of the
deposits based on the annual purchases from these suppliers compared to the
target levels in the wafer supply agreements. Based on 1999 purchases, the
Company is entitled to receive a $4.6 million refund from these suppliers in the
first quarter of 2000. If the Company does not receive back the balance of its
deposits during the term of the agreements, then the outstanding deposits will
be refunded to the Company at the termination of the agreements.
Accrued liabilities. The components of accrued liabilities are as follows:
December 31,
-------------------------------
(in thousands) 1999 1998
Accrued compensation and benefits $ 7,132 $ 5,482
Accrued royalties - 175
Other accrued liabilities 8,633 9,037
------------- --------------
$ 15,765 $ 14,694
============= ===============
Foreign currency translation. For all foreign operations, the U.S. dollar is the
functional currency. Assets and liabilities in foreign currencies are translated
using the exchange rate at the balance sheet date. Revenues and expenses are
translated at average rates of exchange during the year. Gains and losses from
foreign currency transactions are included in interest and other income, net.
Fair value of financial instruments. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange.
The Company's carrying value of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities
approximates fair value because the instruments have a short-term maturity.
The fair value of the Company's long-term debt and obligations under capital
leases at December 31, 1999 and 1998 also approximates their carrying value.
The fair value of the deposits for wafer fabrication capacity is not practicably
determinable.
Concentrations. The Company maintains its cash, cash equivalents and short-term
investments in investment grade financial instruments with high-quality
financial institutions, thereby reducing credit risk concentrations.
At December 31, 1999, approximately 51% (1998 - 41%) of accounts receivable
represented amounts due from one of the Company's distributors. The Company
believes that this concentration and the concentration of credit risk resulting
from trade receivables owing from high-technology industry customers is
substantially mitigated by the Company's credit evaluation process, large number
of customers, relatively short collection terms, and the geographical dispersion
of sales. The Company generally does not require collateral security for
outstanding amounts.
The Company relies on a limited number of suppliers for wafer fabrication
capacity.
Revenue recognition. Revenues from product sales direct to customers and minor
distributors are recognized at the time of shipment. The Company accrues for
warranty costs, sales returns and other allowances at the time of shipment based
on its experience. Certain of the Company's product sales are made to major
distributors under agreements allowing for price protection and/or right of
return on products unsold. Accordingly, the Company defers recognition of
revenue on such sales until the products are sold by the distributors.
Interest and other income, net. The components of interest and other income, net
are as follows:
Year Ended December 31,
---------------------------------------------
(in thousands) 1999 1998 1997
Interest income $ 7,492 $ 3,846 $ 3,146
Interest expense (*) (812) (1,006) (2,020)
Equity in income of investee 792 - -
Other (240) 35 (153)
----------- ------------- -------------
$ 7,232 $ 2,875 $ 973
=========== ============= =============
* consists primarily of interest on long-term debt and capital leases
Income Taxes. Income taxes are reported under Statement of Financial Accounting
Standards No. 109 and, accordingly, deferred income taxes are recognized using
the asset and liability method, whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis, and operating loss and tax credit carryforwards.
Net income (loss) per common share. Basic net income (loss) per share is
computed using the weighted average number of shares outstanding during the
period. The PMC-Sierra Ltd. Special Shares have been included in the calculation
of basic net income per share. Diluted net income (loss) per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Dilutive common equivalent shares consist
of stock options and warrants.
Share and per share data presented reflect the two-for-one stock splits
effective February 2000 and April 1999.
Segment reporting. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS 131). SFAS 131 uses a management approach to report
financial and descriptive information about a Company's operating segments.
Operating segments are revenue-producing components of the Company for which
separate financial information is produced internally for the Company's
management. Under this definition, the Company operated, for all periods
presented, in two segments: networking and non-networking products.
Comprehensive income. Under Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"), the Company is required to report
total comprehensive income and comprehensive income per share. Comprehensive
income is defined as changes in stockholders' equity exclusive of transactions
with owners such as capital contributions and dividends. The Company has no
comprehensive income items, other than the net income or loss in any of the
years presented.
Recently issued accounting standards. In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on the Company's consolidated balance
sheet at fair value. The FASB has subsequently delayed implementation of the
standard to the financial years beginning after June 15, 2000. The Company
expects to adopt the new Statement effective January 1, 2001. The impact on the
Company's financial statements is not expected to be material.
Reclassifications. Certain prior year amounts have been reclassified in order to
conform with the 1999 presentation.
NOTE 2. Business Combinations and Investments in Other Companies
Acquisition of Abrizio, Inc.
- ---------------------------
In 1999, the Company acquired Abrizio, Inc. ("Abrizio"), a fabless semiconductor
company that specializes in broadband switch chip fabrics used in core ATM
switches, digital cross-connects, and terabit routers. PMC issued approximately
8,704,000 shares in PMC-Sierra common stock and PMC stock options in exchange
for all of the outstanding equity securities and options of Abrizio.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
The historical results of operations of the Company and Abrizio for the periods
prior to the merger are as follows:
Six Months
Ended Year Ended December 31,
------------- -------------------------------
June 27, 1998 1997
1999
Net revenues
PMC $ 109,426 $ 161,812 $ 127,166
Abrizio 850 - -
------------- ------------- --------------
Combined 110,276 161,812 127,166
============= ============= =============
Net income (loss)
PMC 51,715 (2,878) 34,258
Abrizio (3,670) (3,067) (74)
------------- ------------- --------------
Combined $ 48,045 $ (5,945) $ 34,184
============= ============= ==============
During the quarter ended September 26, 1999, PMC recorded merger-related
transaction costs of $866,000 related to the acquisition of Abrizio. These
charges, which consist primarily of investment banking and other professional
fees, have been included under costs of merger in the Consolidated Statements of
Operations.
Acquisition of Integrated Telecom Technology, Inc.
- --------------------------------------------------
In 1998, the Company acquired Integrated Telecom Technology, Inc. ("IGT") in
exchange for total consideration of $55.0 million consisting of cash paid to IGT
stockholders of $17.8 million, cash paid to IGT creditors of $9.0 million and
the balance of $28.2 million by the issuance of approximately 1,660,000 shares
of common stock and options to purchase approximately 214,000 shares of common
stock (based on the market value of PMC common stock on the issuance date). The
purchase price includes professional fees and other direct costs of the
acquisition totaling $850,000. IGT was a fabless semiconductor company
headquartered in Gaithersburg, Maryland with a development site in San Jose,
California. Upon consummation of the transaction, IGT was merged with a
wholly-owned subsidiary of the Company.
The acquisition was accounted for using the purchase method of accounting and
the final allocation among tangible and intangible assets and liabilities was as
follows:
Tangible assets $ 4,598
Intangible assets:
Developed and core technology 7,830
Assembled workforce 1,050
Goodwill 9,284
In process research and development ("IPR&D") 37,757
Liabilities (4,669)
----------
$55,850
==========
The amount allocated to IPR&D of $37.8 million was expensed upon acquisition, as
it was determined that the underlying projects had not reached technological
feasibility, had no alternative future use and successful development was
uncertain. In the allocation of the IGT acquisition purchase price to IPR&D
consideration was given to the following for each in process project at the time
of the acquisition:
(1) the present value of the forecasted cash flows and income that were
expected to result from the projects;
(2) the status of the projects;
(3) completion costs;
(4) project risks;
(5) the value of core technology; and
(6) the stage of completion of the individual project.
In valuing core technology, the relative allocations to core technology and
IPR&D were consistent with the relative contributions of each project. In the
determination of the value of IPR&D was determined based on efforts completed as
of the date IGT was acquired.
As of the acquisition date, IgT had three development projects in process. In
order to develop these projects into commercially viable products, the Company
had to complete all planning, designing and testing activities necessary to
establish that the products could be produced to meet their design requirements.
Project A was completed in the first quarter of 1999 and was in full production
by the end of the year. Project B was in development in the fourth quarter of
1998 and was in full production by the first quarter of 1999. This was
consistent with the initial estimates used in the valuation of the project.
During the third quarter of 1998, the Company determined that the intangible
value of Project C was impaired. The developed and core technology related to
this project in process at the time of acquisition was determined not to be
technologically feasible and had no alternative future use. As a result, the
Company recognized an impairment of $4.3 million in intangible assets and
related goodwill.
NOTE 3. Investments and Other Assets
The components of Investments and Other Assets are as follows:
December 31,
------------------------------
(in thousands) 1999 1998
Investments in Non-Public Companies $ 8,680 $ 4,091
Investments in Equity Accounted Investee 3,506
-
Other Assets 170 409
----------- --------------
$ 12,356 $ 4,500
=========== ==============
Investments in Non-Public Companies
- -----------------------------------
The Company has certain investments in non-publicly traded companies which are
generally recorded at cost. In 1999, the Company made investments in various
non-publicly traded companies for total cash consideration of $9.1 million (1998
- - nil; 1997 - $3 million).
During the second quarter of 1999, the Company recognized a gain related to the
disposition of its investment in IC Works, Inc. ("ICW"). ICW was purchased by
Cypress Semiconductor, Inc. ("Cypress"), a publicly traded company. As part of
the purchase agreement between ICW and Cypress, the Company's preferred shares
in ICW, with a nominal book value, were exchanged for 923,600 common shares of
Cypress which had a fair market value of approximately $8.6 million. During the
same quarter, the Company sold 831,240 of the Cypress common shares resulting in
a total pre-tax gain of $ 12.3 million. The remaining 92,360 Cypress common
shares are subject to certain escrow restrictions, are not available for sale
until first quarter of 2000 and are carried at the nominal book value of the
Company's original investment in ICW.
Investments in Equity Accounted Investee
- ----------------------------------------
During the second quarter of 1999, the Company's investee, Sierra Wireless Inc.
("Sierra Wireless"), which was accounted for under the cost method, completed an
initial public offering ("IPO") in Canada. As part of this IPO, the Company's
investment in non-voting preferred shares of Sierra Wireless were exchanged for
5.1 million common shares of Sierra Wireless, of which 1.7 million shares were
sold as part of the IPO for a pre-tax gain of approximately $14.5 million.
As a result of these transactions, at December 31, 1999, the Company owned
approximately 24% of the common shares of Sierra Wireless and accounts for its
investment under the equity method. The difference between the carrying value of
the investment and the underlying equity in net assets, representing negative
goodwill in the amount of $7.4 million, is being amortized to equity in income
of investee over a five year period. Included in Interest and other income, net
for the year ended December 31, 1999, is equity in income of Sierra Wireless of
$792,000.
As at December 31, 1999, the quoted market value of the Company's investment in
Sierra Wireless was approximately $152.3 million. The common shares of Sierra
Wireless held by the Company are subject to certain resale provisions.
NOTE 4. Line of Credit
At December 31, 1999, the Company had available a revolving line of credit with
a bank under which the Company may borrow up to $15 million with interest at the
bank's alternate base rate (annual rate of 8.5% at December 31, 1999). The
Company cannot pay cash dividends, or make material divestments without the
prior written consent of the bank. The agreement expires in May 2001. At
December 31, 1999 and December 31, 1998, there were no amounts outstanding under
this agreement.
NOTE 5. Obligations Under Capital Leases and Long-Term Debt
Obligations under capital leases and long-term debt are as follows:
December 31,
------------------------
(in thousands) 1999 1998
Obligations under capital leases with interest $ 1,254 $ 9,479
ranging from 7.4% to 17.9%
Various notes, secured by property and equipment, 1,174 873
payable in annual installments of approximatley
$400,000 and with an interest rate of 12.3%
Various unsecured notes, payable in various installments - 653
with interest rates ranging from 0% to 9%
---------- ----------
2,428 11,005
Less current portion (1,348) (5,111)
---------- ----------
$ 1,080 $ 5,894
========== ==========
Future minimum lease payments at December 31, 1999 under capital leases are as
follows:
Year Ending December 31 (in thousands)
2000 $ 1,049
2001 268
----------
Total minimum lease payments 1,317
Less amount representing imputed interest (63)
----------
Present value of future minimum lease payments $ 1,254
==========
NOTE 6. Commitments and Contingencies
Operating leases. The Company leases its facilities under operating lease
agreements, which expire at various dates through April 30, 2006. Total rent
expense for the years ended December 31, 1999, 1998 and 1997 was $3.5 million,
$1.8 million and $1.3 million, respectively. Minimum rental commitments under
these leases are as follows:
Year Ending December 31 (in thousands)
2000 $ 4,122
2001 5,986
2002 5,794
2003 5,771
2004 5,588
thereafter 26,706
----------
$ 53,967
==========
Supply agreements. The Company has wafer supply agreement with two independent
foundries, which expire in December 2000. Under these agreements, the suppliers
are obligated to provide certain quantities of wafers per year. Neither of the
agreements have minimum unit volume purchase requirements but the Company is
obligated under one of the agreements to purchase in future periods a minimum
percentage of its total annual wafer requirements, provided that the foundry is
able to continue to offer competitive technology, pricing, quality and delivery.
Contingencies. In the normal course of business, the Company receives and makes
inquiries with regard to possible patent infringements. Where deemed advisable,
the Company may seek or extend licenses or negotiate settlements. Outcomes of
such negotiations may not be determinable at any point in time; however,
management does not believe that such licenses or settlements will, individually
or in the aggregate, have a material adverse effect on the Company's financial
position, results of operations or liquidity.
NOTE 7. Special Shares
At December 31, 1999 and 1998, the Company maintained a reserve of 4,242,000 and
5,036,000 shares, respectively, of PMC common stock to be issued to holders of
LTD Special Shares and options to purchase LTD Special Shares. The holders of
these Special Shares have the right to exchange one A Special Share for eight
shares of the Company's common stock, and one B Special Share for 2.18448 shares
of the Company's common stock.
These Special Shares of LTD are classified outside of stockholders' equity until
such shares are exchanged for PMC common stock. Upon exchange, amounts will be
transferred from the LTD Special Shares account to the Company's common stock
and additional paid-in capital on the consolidated balance sheet.
NOTE 8. Stockholders' Equity
Authorized. On July 10, 1997, the Company was reincorporated in the State of
Delaware from the State of California. Prior to the reincorporation, the Company
had authorized capital of 55,405,916 shares, 50,000,000 of which were designated
"Common Stock", 5,000,000 of which were designated "Preferred Stock", and
405,916 of which were designated "Series D Preferred Stock". All authorized
shares had no par value. After the reincorporation, the Company had an
authorized capital of 55,000,000 shares, 50,000,000 of which were designated
"Common Stock", $0.001 par value, and 5,000,000 of which were designated
"Preferred Stock", $0.001 par value. The excess of the amount recorded as
capital stock over the par value of capital stock on reincorporation has been
recorded as additional paid in capital at December 31, 1997. The issued and
outstanding shares immediately before and after the reincorporation remained the
same. The reincorporation included no other significant changes with respect to
shares outstanding, reserved shares and various applicable options, rights and
warrants.
During 1998 and 1999, the Company's stockholders elected to add an additional
50,000,000 and 100,000,000 authorized shares of common stock, respectively, to
the 50,000,000 shares of common stock authorized at the end of 1997. The Company
currently has an authorized capital of 205,000,000 shares, 200,000,000 of which
are designated "Common Stock", $0.001 par value, and 5,000,000 of which are
designated "Preferred Stock", $0.001 par value.
Stock Splits. In April 1999, the Company's Board of Directors approved a
two-for-one split of the Company's common stock in the form of a stock dividend
that was applicable to shareholders of record on April 30, 1999, and effective
on May 14, 1999.
In January 2000, the Company's Board of Directors approved another two-for-one
split of the Company's common stock in the form of a stock dividend that was
applicable to shareholders of record on January 31, 2000, and effective on
February 14, 2000.
All references to share and per share data for all periods presented have been
adjusted to give effect to effect to these two-for-one stock splits.
Warrants. During 1996, the Company issued a warrant to purchase 100,000 shares
of common stock at $2.31 per share to an investment banking firm in settlement
for services previously expensed. The warrant expires in August 2000. In August
1999, as a result of the Company's acquisition of Abrizio, Inc., the Company
assumed warrants to purchase 174,580 shares of common stock at $1.66 per share.
At the end 1999, warrants to purchase 84,278 shares of common stock were
outstanding.
NOTE 9. Employee Benefit Plans
Employee Stock Purchase Plan. In 1991, the Company adopted an Employee Stock
Purchase Plan ("ESPP") under Section 423 of the Internal Revenue Code. A total
of 6,497,012 shares of common stock have been reserved for issuance under the
Plan. Under this Plan, eligible employees may purchase a limited amount of
common stock at a minimum of 85% of the market value at certain plan-defined
dates.
During 1999, 1998 and 1997, respectively, there were 229,518, 385,716 and
420,596 shares issued under the Plan at weighted-average prices of $8.12, $3.07
and $2.60, respectively, per share. The weighted-average fair value of the 1999,
1998 and 1997 awards was $9.32, $2.86 and $1.74 per share, respectively. During
1999, the Company's stockholders authorized an additional 1,257,012 shares to be
available under the plan. As of December 31, 1999, there were 2,221,994 shares
of common stock available for issuance under the purchase plan.
During 1998, the Company's stockholders elected to add a provision to the ESPP.
Under the new terms, the number of shares authorized to be available for
issuance under the plan shall be increased automatically on January 1, 1999, and
every year thereafter until the expiration of the plan. The increase will be
limited to the lesser of (i) 1% of the outstanding shares on January 1 of each
year, (ii) 2,000,000 shares, or (iii) an amount to be determined by the Board of
Directors.
Stock Option Plans. The Company has two main stock option plans: the 1987
Incentive Stock Plan and the 1994 Incentive Stock Plan. These plans cover grants
of options to purchase the Company's common stock. The options generally expire
within five to ten years and vest over four years.
During 1998, the Company's common stockholders elected to add a provision to the
1994 Incentive Stock Plan. Under the new terms, the number of shares authorized
to be available for issuance under the plan shall be increased automatically on
January 1, 1999 and every year thereafter until the expiration of the plan. The
increase will be limited to the lesser of (i) 4% of the outstanding shares on
January 1 of each year, (ii) 8,000,000 shares, or (iii) an amount to be
determined by the Board of Directors.
In addition, the Company has, in connection with the acquisitions of various
companies, assumed the stock option plans of each acquired company, and the
related options are included in the following table.
Option activity under the option plans was as follows:
Weighted
Average
Options Available Number of Options Exercise Price
For Issuance Outstanding Per Share
------------------ ----------------- -------------
Outstanding at December 31, 1996 (5,011,496
options exercisable at a weighted average
price of $1.86) 6,114,196 12,396,088 $ 2.66
Authorized 3,897,642 - -
Granted (weighted average fair value of
$2.00 per share) (5,705,800) 5,705,800 $ 4.37
Exercised - (2,773,800) $ 1.81
Expired (144,448) - -
Cancelled 1,936,864 (1,936,864) $ 3.74
------------ -------------
Outstanding at December 31, 1997 (5,296,692
options exercisable at a weighted average
price of $2.32) 6,098,454 13,391,224 $ 3.41
Authorized 5,257,656 - -
Granted (weighted average fair value of
$4.08 per share) (7,119,544) 7,119,544 $ 5.62
Exercised - (3,208,064) $ 1.87
Expired (54,768) - -
Cancelled 653,564 (653,564) $ 5.49
------------ --------------
Outstanding at December 31, 1998 (6,195,466
options exercisable at a weighted average
price of $3.30) 4,835,362 16,649,142 $ 4.57
Authorized 5,028,056
Granted (weighted average fair value of
$16.09 per share) (9,763,486) 9,763,486 $ 31.12
Exercised (3,254,654) $ 2.89
Expired (2,702) - -
Cancelled 328,206 (328,206) $ 12.70
------------- --------------
Outstanding at December 31, 1999 425,436 22,829,768 $ 16.04
============= ==============
The following table summarizes information concerning options outstanding for
the combined option plans at December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Weighted Average
Remaining Weighted Weighted
Contractual Average Average
Range of Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price per share Exercisable Price per share
--------------------- ----------- ---------------- ---------------- --------------- ----------------
$ 0.02 - $ 3.53 4,926,464 7.02 $ 2.11 2,890,980 $ 2.65
$ 3.57 - $ 6.25 3,625,274 6.62 4.11 2,792,114 4.12
$ 6.35 - $ 14.05 4,902,522 8.11 8.21 2,059,532 8.02
$ 15.99 - $ 23.97 5,301,900 9.10 17.37 0 0.00
$ 32.21 - $ 53.07 4,073,608 9.93 51.21 0 0.00
----------- --------------
$ 0.02 - $ 53.07 22,829,768 8.19 16.04 7,742,626 4.61
=========== ==============
Stock-based compensation. In accordance with the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies APB
Opinion 25 and related interpretations in accounting for its stock-based awards.
The Company's ESPP is non-compensatory under APB Opinion 25. The Company also
does not recognize compensation expense for employee stock options, which are
granted with exercise prices equal to the fair market value of the Company's
common stock at the date of grant.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for awards granted or modified after December 31,
1994 as if the Company had accounted for its stock-based awards to employees
under the fair value method of SFAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated using the multiple option approach,
recognizing forfeitures as they occur, assuming no expected dividends and using
the following weighted average assumptions:
Options ESPP
------------------------------- ------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Expected life (years) 3.4 3.4 2.6 1.4 1.5 1.4
Expected volatility 0.7 0.7 0.7 0.7 0.7 0.8
Risk-free interest rate 5.4% 5.2% 6.0% 5.2% 5.2% 5.9%
If the computed fair values of 1999, 1998 and 1997 awards had been amortized to
expense over the vesting period of the awards as prescribed by SFAS 123, net
income (loss) and net income (loss) per share would have been:
(in thousands except per share amounts):
1999 1998 1997
------- -------- --------
Net income (loss) $64,699 $(17,500) $29,654
Basic net income (loss) per share 0.47 (0.13) 0.24
Diluted net income (loss) per share 0.43 (0.13) 0.23
The pro forma disclosures above include the effect of SFAS 128 relating to the
calculation of net income per share and FASB Technical Bulletin 97-1, which
clarified the application of SFAS 123 to the estimation of fair value of awards
under ESPP plans with a multiple year look-back feature.
Because SFAS 123 is applicable only to awards granted or modified subsequent to
December 31, 1994, the pro forma effect is not indicative of future pro forma
adjustments, when the calculation will apply to all applicable stock awards.
NOTE 10. Income Taxes
The income tax provisions, calculated under Statement of Financial Accounting
Standard No. 109 ("SFAS 109"), consist of the following:
Year Ended December 31,
---------------------------------------------
(in thousands) 1999 1998 1997
Current:
Federal $ - $ - $ (1,294)
State 525 190 5
Foreign 44,108 23,855 13,934
------------ ----------- --------------
44,633 24,045 12,645
------------ ----------- --------------
Deferred:
Federal (132) (132) 1,671
Foreign (2,898) (1,040) 1,411
------------ ----------- --------------
(3,030) (1,172) 3,082
------------ ---------- --------------
Provision for income taxes $ 41,603 $ 22,873 $ 15,727
============ =========== ==============
A reconciliation between the Company's effective tax rate and the U.S. Federal
statutory rate is as follows:
Year Ended December 31,
------------------------------------------------
(in thousands) 1999 1998 1997
Income (loss) before provision for income taxes $131,623 $ 16,928 $ 49,911
Federal statutory tax rate 35% 35% 35%
Income taxes (recovery) at U.S. Federal statutory rate $ 46,068 $ 5,925 $ 17,469
State taxes, net of federal benefit 525 - -
Net operating losses (utilized) not utilized (5,805) 1,002 (4,482)
In-process research and development costs
relating to IGT acquisition - 13,214 -
In-process research and development costs
relating to other acquisitions - 497 -
Impairment of intangible assets - 1,509 -
Incremental taxes on foreign earnings (698) 234 2,258
Other 1,513 492 482
--------------- ------------- --------------
Provision for income taxes $ 41,603 $ 22,873 $ 15,727
=============== ============== ==============
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
-------------------------
(in thousands) 1999 1998
Deferred tax assets:
Net operating loss carryforwards $ 53,519 $ 23,968
State tax loss carryforwards 3,690 1,500
Credit carryforwards 5,107 3,497
Reserves and accrued expenses 4,585 430
Restructuring and other charges 372 3,245
Deferred income 9,270 1,506
---------- -----------
Total deferred tax assets 76,543 34,146
Valuation allowance (67,273) (32,640)
---------- ------------
Total net deferred tax assets 9,270 1,506
---------- ------------
Deferred tax liabilities:
Depreciation (8,885) (4,015)
Capitalized technology (206) (342)
---------- -----------
Total deferred tax liabilities (9,091) (4,357)
---------- -----------
Total net deferred taxes $ 179 $ (2,851)
========== ===========
At December 31, 1999, the Company has approximately $157,139,000 of federal net
operating losses, which will expire from 2000 to 2019. Include in the federal
net operating losses is $13,726,000 which is subject to a limitation due to
ownership change limitations provided by the Internal Revenue Code of 1986. The
Company also has approximately $67,591,000 of state tax loss carryforwards,
which expire from 2001 to 2013. The utilization of these state losses is subject
to a limitation due to ownership change limitations provided by the various
state income tax legislation.
Included in the credit carryforwards are $2,258,000 of federal research and
development credits, which will expire from 2000 to 2012, $628,000 of state
manufacturer's investment credits which expire from 2002 to 2006, $1,767,000 of
foreign tax credits which expire from 2000 to 2003, $41,000 of state research
and development credits and $410,000 of federal AMT credits which carryforward
indefinitely.
Not included in the deferred assets are approximately $39,547,000 of cumulative
tax deductions related to equity transactions, the benefit of which will be
credited to stockholders' equity, if and when realized after the other tax
deductions in the carryforwards have been realized.
The pretax income from foreign operations was $119,262,000 in 1999, $62,355,000
in 1998 and $37,391,000 in 1997. Undistributed earnings of the Company's foreign
subsidiaries are considered to be indefinitely reinvested and, accordingly no
provision for federal and state income taxes have been provided thereon. Upon
distribution of those earnings in the form of a dividend or otherwise, the
Company would be subject to both US income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to the various foreign
countries. It is not practical to estimate the income tax liability that might
be incurred on the remittance of such earnings.
NOTE 11. Segment Information
The Company has two operating segments: networking and non-networking products.
The networking segment consists of internetworking semiconductor devices and
related technical service and support to equipment manufacturers for use in
their communications and networking equipment. The non-networking segment
includes user interface products such as custom, modem and other semiconductors.
The Company is supporting these products for existing customers, but has decided
not to develop any further products of this type.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on gross margins from operations of the two segments.
Summarized financial information by segment is as follows:
Year Ended December 31,
------------------------------------------------
(in thousands) 1999 1998 1997
Net revenues
Networking $ 245,186 $ 139,539 $ 85,512
Non-Networking 17,291 22,273 41,654
-------------- -------------- --------------
Total $ 262,477 $ 161,812 $ 127,166
============== ============== ==============
Gross profit
Networking $ 199,186 $ 113,063 $ 69,529
Non-Networking 7,928 10,529 24,572
-------------- -------------- --------------
Total $ 207,114 $ 123,592 $ 94,101
============== ============== ==============
Enterprise-wide information is provided in accordance with SFAS 131. Geographic
revenue information is based on the location of the customer invoiced.
Long-lived assets include property and equipment, goodwill and other intangible
assets, investments and other assets and deposits for wafer fabrication capacity
and is based on the physical location of the assets.
Year Ended December 31,
-----------------------------------------------
(in thousands) 1999 1998 1997
Net revenues
United States $ 181,161 $ 110,256 $ 89,371
Canada 38,575 15,780 12,373
Europe and Middle East 14,764 12,431 11,430
Asia 27,789 23,246 13,693
Other foreign 188 99 299
------------- -------------- --------------
Total $ 262,477 $ 161,812 $ 127,166
============= ============== ==============
Long-lived assets
United States $ 30,342 $ 36,796 $ 26,581
Canada 56,577 38,865 29,297
Other 689 40 -
------------- ------------- --------------
Total $ 87,608 $ 75,701 $ 55,878
============= ============= ==============
The Company has revenues from external customers (1999 and 1998 - 2, 1997 - 1)
that exceed 10% of total net revenues as follows:
Year Ended December 31,
------------------------------------------------
(in thousands) 1999 1998 1997
Networking $ 98,050 $ 31,549 $ 1,757
Non-Networking - 18,579 21,403
NOTE 12. Restructuring
On September 29, 1996, the Company recorded a restructuring charge in connection
with the Company's decision to exit from the modem chipset business and the
associated restructuring of the Company's non-networking product operations. In
1997, the company recorded a recovery of $1,383,000 from the reversal of the
excess accrued restructuring charge related to the completion of the
restructuring. There were no additional amounts incurred related to this
restructuring in 1999 and 1998.
NOTE 13. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income
(loss) per share:
December 31,
---------------------------------------
1999 1998 1997
Numerator:
Net income (loss) $ 90,020 $ (5,945) $ 34,184
---------- ---------- ----------
Denominator:
Basic weighted average common shares outstanding (1) 137,428 130,760 124,756
Effect of dilutive securities:
Stock options 13,590 - 6,310
Stock warrants 116 - 56
---------- --------- ----------
Diluted weighted average common shares outstanding 151,134 130,760 131,122
========== ========= ==========
Basic net income (loss) per share $ 0.66 $ (0.05) $ 0.27
========== ========== ==========
Diluted net income (loss) per share $ 0.60 $ (0.05) $ 0.26
========== ========== ==========
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic net
income per share.
NOTE 14. Subsequent Event
In January 2000, the Company acquired Toucan Technology ("Toucan"), a privately
held integrated circuit design company located in Ireland. At December 31, 1999,
the Company owned seven per cent of Toucan and purchased the remainder for
approximately 300,000 shares of PMC Common Stock and options to purchase Common
Stock. The acquisition will be accounted as a pooling of interests.
On March 3, 2000, the Company acquired AANetcom, Inc. ("AANetcom"), a privately
held fabless semiconductor located in the USA. The Company issued 4.8 million
PMC common shares in exchange for all outstanding stock and options of AANetcom.
The transaction will be accounted for as a pooling of interests.
On March 3, 2000, the Company also announced the intent to acquire Extreme
Packet Devices, Inc. ("Extreme"), a privately held fabless semiconductor company
located in Canada. This agreement provides for the Company to issue PMC common
shares valued at $415 million (US) in exchange for all outstanding stock and
options of Extreme. This transaction, subject to completion, will also be
accounted for as a pooling of interests.
The pro forma effects of these combinations on the reported financial position
and the results of operation are not presented in this document.
PART III
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
ITEM 10. Directors and Executive Officers of the Registrant
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement for its 2000 Annual
Meeting of Stockholders ("Proxy Statement"). The following sets forth
information regarding executive officers of the Company as of March 14, 2000.
Name Age Position
- ----------------- ---- --------------------------------------------------
Robert L. Bailey 42 Chairman of the Board of Directors, President
and Chief Executive Officer
Greg Aasen 44 Chief Operating Officer
John W. Sullivan 53 Vice President, Finance and Chief Financial
Officer
Officers serve at the discretion of the Board of Directors. There are no family
relationships between any of the directors or officers of the Company.
Mr. Bailey has served as Director of the Company since October 1996 and as
President and Chief Executive Officer since July 1997 and Chairman of the Board
of Directors since February 2000. In prior years, Mr. Bailey acted as President
and Chief Executive Officer of PMC-Sierra, Ltd. Prior to joining the Company,
Mr. Bailey was employed by AT&T-Microelectronics from August 1989 to November
1993, where he served as Vice President of Integrated Microperipheral Products.
Mr. Bailey was formerly employed by Texas Instruments in various management
assignments from June 1979 to August 1989.
Mr. Aasen has served as Chief Operating Officer of the Company since February
1997. Mr. Aasen is a founder of PMC-Sierra, Ltd. and served as its Chief
Operating Officer and Secretary since its formation in June 1992. He has served
as a director of PMC-Sierra, Ltd. since August 1994. Prior to joining PMC-Sierra
Ltd., Mr. Aasen was a General Manager of PMC, a division of MPR Teltech, Ltd.
Mr. Sullivan joined the Company in April 1997 as Vice President, Finance and
Chief Financial Officer. Prior to joining the Company, he was employed by
Semitool Inc., a semiconductor equipment manufacturer, as VP Finance from 1993
to 1997. Prior to his employment with Semitool Inc., Mr. Sullivan was employed
by United Dominion Industries and Arthur Young & Company.
ITEM 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements
---------------------------------
The financial statements (including the notes thereto) listed in
the accompanying index to financial statements and financial
statement schedules are filed within this Annual Report on Form
10-K.
2. Financial Statement Schedules
-----------------------------
The financial statement schedule listed on page 36 in the
accompanying index to financial statements and financial statement
schedule is filed within this Annual Report on Form 10-K.
3. Exhibits
--------
The exhibits listed under Item 14(c) are filed as part of this Form
10-K Annual Report.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company in the quarter ended
December 31, 1999.
(c) Exhibits pursuant to Item 601 of Regulation S-K.
------------------------------------------------
Exhibit Description Page
Number Number
------- ----------------------------------------------------------------- --------
2.1 Exchange Agreement dated September 2, 1994 between the Company and (C)
PMC-Sierra, Ltd.
2.2 Amended and Restated Shareholders' Agreement dated September 2, 1994 (C)
among the Shareholders of PMC-Sierra, Inc.
2.3 Amendment to Exchange Agreement effective August 9, 1995 (F)
2.4 Agreement and Plan of Reorganization dated as of April 15, 1998 by and (O)
among PMC-Sierra, Inc., Integrated Telecom Technology, Inc., PMC-Sierra
(Maryland), Inc. and Samsung Electronics Co., Ltd.
3.1 Certificate of Incorporation (I)
3.1A Certificate of Amendment to the Certificate of Incorporation (N)
filed June 13, 1997
3.1B Certificate of Amendment to the Certificate of Incorporation (N)
filed July 11, 1997
3.1C Certificate of Amendment to Certificate of Incorporation of PMC-Sierra, (P)
Inc. filed on June 4, 1998.
3.1D Certificate of Amendment to Certificate of Incorporation of PMC-Sierra, (S)
Inc. filed on July 14, 1999.
3.2 Bylaws, as amended (Q)
4.1 Specimen of Common Stock Certificate (K)
4.3 Terms of PMC-Sierra, Inc. Special Shares (D)
10.1B 1987 Incentive Stock Plan, as amended (B)
10.2 1991 Employee Stock Purchase plan, as amended (Q)
10.4 Form of Indemnification Agreement between the Company and its
directors (H) and officers
10.8 Warrants to Purchase Common Stock (A)
10.8B Warrant Purchase Agreement and Warrants to Purchase Shares of Common (J)
Stock dated August 28, 1996
10.17 PMC-Sierra, Inc. 1994 Incentive Stock Plan (E)
10.18 Deposit Agreement with Chartered Semiconductor Pte. Ltd.* (G)
10.18B Amendment Agreement (No. 1) to Deposit Agreement with Chartered (J)
Semiconductor Pte. Ltd.*
10.21 PMC-Sierra Inc. (Portland) 1996 Stock Option Plan (P)
10.22 Net Building Lease (PMC-Sierra, Ltd.), dated May 15, 1996 (J)
10.23 Revolving Operating Line of Credit Agreement between PMC-Sierra, Inc. (S)
and CIBC Inc. dated 11th day of June 1999.
10.24 Revolving Operating Line of Credit Agreement between PMC-Sierra, Ltd. (S)
And CIBC dated 11th day of June 1999.
10.25 Pledge Agreement between PMC-Sierra, Inc and CIBC Inc. with
respect to shares of PMC-Sierra Ltd dated 11th day of March,
1998. (P)
10.26 Pledge Agreement between PMC-Sierra, Inc and CIBC Inc. with
respect to shares of PMC-Sierra International Inc. dated 27th day
of April 1998. (P)
10.27 Guarantee Agreement between PMC-Sierra, Inc. and CIBC dated 27th day of (P)
April, 1998.
10.28 1998 PMC-Sierra (Maryland), Inc. Stock Option Plan (P)
10.30 Abrizio Inc. 1997 Stock Option Plan (T)
10.31 Forecast and Option Agreement among PMC-Sierra, Inc., PMC-Sierra, Ltd.,
and Taiwan Semiconductor Manufacturing Corporation* --
10.32 Executive Employment Agreement among PMC-Sierra, Inc. and Robert L. --
Bailey
10.33 Executive Employment Agreement among PMC-Sierra, Inc. and Gregory Aasen --
10.34 Executive Employment Agreement among PMC-Sierra, Inc. and John W. --
Sullivan
11.1 Calculation of earnings per share (M)
16.1 Letter regarding change in certifying accountant (L)
21.1 Subsidiaries --
23.1 Consent of Deloitte & Touche LLP, Independent Auditors --
24.1 Power of Attorney (Q)
* Confidential treatment has been requested as to a portion of this exhibit.
(A) Incorporated by reference from the same-numbered
exhibit filed with the Registrant's Registration
Statement on Form S-1 (No. 33-39406).
(B) Incorporated by reference from the same-numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended January 3, 1993.
(C) Incorporated by reference from the same-numbered
exhibit filed with the Registrant's Current Report on
Form 8-K, filed on September 16, 1994, as amended.
(D) Incorporated by reference from exhibit 4 of the Schedule
13-D filed on November 2, 1994 by GTE Corporation.
(E) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended January 2, 1994.
(F) Incorporated by reference from exhibit 2.1 filed with
Registrant's Current Report on Form 8-K, filed on
September 6, 1995, as amended on October 6, 1995.
(G) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1995.
(H) Incorporated by reference from exhibit 10.21 filed with
Registrant's Form 10-Q for the quarter ended June 30,
1997.
(I) Incorporated by reference from exhibit 3.1 filed with
Registrant's Form 10-Q for the quarter ended June 30, 1997.
(J) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1996.
(K) Incorporated by reference from exhibit 4.4 filed with the
Registrant's Current Report on Form 8-K, filed on August 29, 1997.
(L) Incorporated by reference from exhibit 16.1 filed with
the Registrant's Current Report on Form 8-K, filed on
April 18, 1997.
(M) Refer to Note 12 of the financial statements included in
Item 8 of Part II of this Annual Report.
(N) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended December 31, 1997.
(O) Incorporated by reference from exhibit 2.1 filed with
the Registrant's Current Report on Form 8-K, filed on
June 3, 1998.
(P) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-Q Quarterly
Report for the quarterly period ended June 28, 1998.
(Q) Incorporated by reference from Signatures page of this Annual
Report.
(R) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended December 27, 1998.
(S) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-Q Quarterly
Report for the quarterly period ended June 27, 1999.
(T) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-Q Quarterly
Report for the quarterly period ended September 28,
1999.
(d) Financial Statement Schedules required by this item are listed on page
__ in the accompanying index to the financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PMC-SIERRA, INC.
(Registrant)
Date: March 17, 2000 /s/ Robert L. Bailey
-----------------------------------------
Robert L. Bailey, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert L. Bailey and John W. Sullivan, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ James V. Diller Chairman of the Board and Director March 17, 2000
James V. Diller
/s/ Robert L. Bailey Director and Chief Executive Officer March 17, 2000
Robert L. Bailey
/s/ John W. Sullivan Vice President Finance, Chief March 17, 2000
John W. Sullivan Financial Officer (and
Principal Accounting Officer)
/s/ Colin Beaumont Director March 17, 2000
Colin Beaumont
/s/ Frank Marshall Director March 17, 2000
Frank Marshall
/s/ Alexandre Balkanski Director March 17, 2000
Alexandre Balkanski
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1999, 1998 and 1997
(in thousands)
Allowance for Doubtful Accounts
Additions Additions
Year Balance at charged to charged to
beginning of costs and other Balance at
year expenses accounts Write-offs end of year
1999 $ 1,128 130 - 14 $ 1,244
1998 $ 1,070 241 - 183 $ 1,128
1997 $ 842 500 - 272 $ 1,070
INDEX TO EXHIBITS
Exhibit Description Page
Number Number
- ------- ---------------------------------------------------- ------
10.31 Forecast and Option Agreement among PMC-Sierra, Inc., --
PMC-Sierra, Ltd.and Taiwan Semiconductor
Manufacturing Corporation*
10.32 Executive Employment Agreement among PMC-Sierra, Inc. --
and Robert L. Bailey
10.33 Executive Employment Agreement among PMC-Sierra, Inc. --
and Gregory Aasen
10.34 Executive Employment Agreement among PMC-Sierra, Inc. --
and John W.Sullivan
21.1 Subsidiaries --
23.1 Consent of Deloitte & Touche LLP, Independent Auditors --
27 Financial Data Schedule --
* Confidential treatment has been requested as to a portion of this exhibit.