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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.)
3975 Freedom Circle
Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 369-1176
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, 2001, as reported by the Nasdaq National Market, was approximately $
8,171,165,000. Shares of Common Stock held by each executive officer and
director and by each person known to the Registrant 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 March 15, 2001, the Registrant had 163,299,799 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 2001 Annual Meeting of
Stockholders to be held on May 31, 2001 are incorporated by reference
into Part III, Items 10, 11, 12 and 13 of this Form 10-K Report.
PART I
ITEM 1. Business.
GENERAL
PMC-Sierra, Inc. designs, develops, markets and supports high-performance
semiconductor networking solutions. Our products are used in high-speed
transmission and networking systems which are being used to restructure the
global telecommunications and data communications infrastructure.
PMC-Sierra was incorporated in the State of California in 1983 and
reincorporated in the State of Delaware in 1997. Our Common Stock trades on the
Nasdaq National Market under the symbol "PMCS" and is included in the Nasdaq-100
index.
In this Annual Report on Form 10-K, "PMC-Sierra", "PMC", "the Company", "us",
"our" or "we", includes PMC-Sierra, Inc. and all of our subsidiary companies.
This Annual Report and the portions of our Proxy Statement incorporated by
reference into this Annual Report contain forward-looking statements that
involve risks and uncertainties. We use words such as "anticipates", "believes",
"plans", "expects", "future", "intends", "may", "will", "should", "estimates",
"predicts", "potential", "continue" and similar expressions to identify such
forward-looking statements. These forward-looking statements include, but are
not limited to, statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (including the "Outlook for 2001"
subsection within) and "Business".
Forward-looking statements are subject to known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of activity,
performance, achievements and prospects to be materially different from those
expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include, among others, those identified under
"Factors that You Should Consider Before Investing In PMC-Sierra" and elsewhere
in this Annual Report.
These forward-looking statements apply only as of the date of this Annual
Report. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this report might not occur. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks we face as described in this
Annual Report and readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Such forward-looking statements include statements as to, among
others:
* our mergers and their accounting treatment;
* revenues;
* gross profit;
* research and development expenses;
* marketing, general and administrative expenditures; and
* capital resources sufficiency.
This report contains terms used within our industry that some investors may not
recognize. We refer investors to the glossary of terms provided at the end of
this Item.
INDUSTRY BACKGROUND
Increasing demand for Internet bandwidth is straining the global information
infrastructure. At home, individuals use the Internet for shopping, downloading
music and video files, working at home, checking investment portfolios, paying
bills and communicating. At work, more and more companies are "web-enabling"
their sales, budgeting, production, purchasing, human resources, and finance
applications. Companies are conducting on-line meetings, sharing data across
departments, downloading reports and sending in timesheets over networks. The
demand for these applications, and the bandwidth required to successfully
implement them, has resulted in an increased interest for higher speed Internet
connections.
The Bandwidth Suppliers
Two major types of network bandwidth suppliers are trying to address these
rapidly evolving networking demands: (a) incumbent telephone companies, such as
AT&T, British Telecom, NTT, MCI Worldcom, Sprint and the Regional Bell Operating
Companies, and (b) new data-centric competitive carriers, such as Williams and
Level 3 at the core of the Internet infrastructure, and Competitive Local
Exchange Carriers, or CLECs, such as Covad and Northpoint at the access points
of the Internet infrastructure.
Historically, traditional phone companies spent significant capital building
networks that supplied reliable phone services to their customers. As a result
of the deregulation of the telecommunications industry, traditional phone
service has become much more competitive and much less profitable. Hence,
established carriers facing reduced margins in their phone businesses and new
carriers are expanding their focus to include the higher growth data market.
They will invest billions of dollars to build new networks that will address
public demand for massive data and voice capacity.
Access to High Bandwidth Internet
One of the major factors behind the growth of the Internet infrastructure market
is demand by the end-user to transmit more information at faster speeds. This
bandwidth demand by individuals, organizations and businesses grows as more
sophisticated and enhanced user applications consumes much of the available
access bandwidth.
For residential Internet access, the more commonly used 56 kilobit analog modem
is a bottleneck. Digital Subscriber Line, or DSL, technology uses traditional
phone lines connected to your home or office to provide substantially increased
bandwidth for Internet access. New DSL access multiplexer equipment is making
the broad deployment of DSLs possible by efficiently managing all of the network
traffic to and from customers using DSL services. In areas where cable services
are available, cable modems are also providing residential customers with higher
bandwidth access methods to the Internet.
Many businesses are finding that their ISDN or even T1 access lines provide
insufficient bandwidth for the file sharing, online procurement, production,
sales, service and other management applications they use. Some CLECs are
deploying new DSL technologies and higher bandwidth connections for businesses
in an effort to meet these growing demands.
Equipment manufacturers are supplying network equipment to bandwidth suppliers
that enables more and higher bandwidth connections, often within the limitations
of traditional phone networking facilities and the power supply infrastructure.
To be effective, this networking equipment must feature low power consumption
per port served, as well as more ports served per equipment line card. PMC
develops lower power and higher port density networking products, such as the
TEMUX-84, to address the requirements of these equipment manufacturers.
Wireless Infrastructure
Some of the major catalysts driving the expansion of wireless infrastructure
are: the accelerated growth of mobile phone usage, increased call duration and
call frequency, and new third generation licenses.
Many carriers are upgrading their existing wireless infrastructures to
facilitate the change from session-oriented, voice conversations to data-rich,
continuous connections with the Internet. Emerging next-generation personal web
companions will integrate features such as voice service, text messaging, web
content, enterprise data, and global positioning. Users are demanding wireless
handsets and personal digital assistants that are "always on" for use as
Internet access devices.
Carriers are deploying base transceiver stations to connect these wireless
services to the Internet. These base stations convert wireless communication
traffic into wired networks. The wired networks then aggregate, switch and
process the signals at primarily T1 or E1 rates.
All IP/Ethernet Networks
Today, many incumbent carriers supplement their existing network infrastructure
with new "multi-service" Frame Relay and Asynchronous Transfer Mode, or ATM,
networks that support data, voice and other communication traffic. These
carriers use Quality of Service, or QoS, management techniques to differentiate
service and pricing for different types of communication traffic carried over
their networks.
To date, purely Internet Protocol, or IP, and Ethernet based networks have not
been able to provide carriers with the management and control required to
provide different quality levels for different types of traffic. For instance,
purely IP or Ethernet networks may have difficulty differentiating between a
voice signal or an email, or may cause unwanted pauses or delays during a normal
telephone conversation.
As networks transport significantly more data than any other type of traffic,
many carriers believe the next generation of communications networks will be
IP-based. Some of these carriers are deploying large networks that support
traffic on purely IP or Ethernet transmissions. For example, many ISPs deploy
multiple high-capacity routers that have Ethernet interconnects and communicate
with WAN optical transport equipment using IP-over-Sonet/SDH. PMC is developing
networking products such as the S/UNI 2xGE and the S/UNI-2488 that support our
customers' increased demand for WAN compliant Ethernet and IP-over-Sonet
applications.
Optics Deployment to Handle High Volume Traffic
The emergence of the Optical Transport Network, or OTN, - a network based on the
transmission of light, rather than electrical signals - is one of the greatest
evolutions in the broadband networking arena. In 2000, carriers continued to
deploy and light thousands of miles of fiber optic cable underground and
alongside railway lines or petroleum pipelines. These deployments have provided
increased communications capacity throughout the core of the Wide Area Network,
or WAN.
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 traffic while electrical semiconductors are used
to manage traffic. PMC offers networking products that merge existing
electrical-based communications protocols, such as ATM, SONET/SDH, IP and
Gigabit Ethernet, with new optical-based protocols.
As a more attractive investment for long distance transmissions, many carriers
consider the massive bandwidth capacity provided by fiber optics and Dense Wave
Division Multiplexing, or DWDM, which is a method of using color wavelengths to
create a new network "line" for every color. Today, more and more carriers are
deploying lower cost DWDM systems throughout Metropolitan Area Networks, or
MANs, and networks on the "edge" of the WAN to manage the large volumes of
bandwidth driven by increased DSL, Cable, Frame Relay and other network access
technologies.
The MANs and edge networks being deployed by carriers have high bandwidth
capacities (such as OC-3, OC-12 and OC-48) that traditionally have been used in
Core or Transport parts of the WAN. Core networks, however, are migrating to
higher OC-48 and OC-192 speeds, and using primarily large capacity
"concatenated" signals, which are signals that do not have individually managed
channels within them. MANs and Edge networks must look inside the high capacity
signals to aggregate, filter, manage and disaggregate individual communications
channels.
This need for granularity or channelized management presents a variety of new
challenges for networking equipment manufacturers and their customers. In
addition, our customers require high density and lower power solutions due to
the real estate and power supply limitations in the densely populated locations
where the Metro and Edge equipment is deployed. PMC introduced the SPECTRA and
CHESS (Channelized Engine for Sonet/SDH) set of networking products, among
others, to directly address our customers concerns in these areas.
The Shift from ASIC to ASSP
As the networking equipment markets become more competitive, and as
technological advances accelerate, our customers continue to look for ways to
reduce development risk, reduce research and development costs and shorten the
time it takes to bring their products to market. In the past, equipment
manufacturers looked for off-the-shelf Application Specific Standard Product, or
ASSP, solutions to solve their immediate design needs before undertaking the
risky and often resource inefficient task of designing their own custom
Application Specific Integrated Circuit, or ASIC. If our customers applied ASSP
solutions to their technology challenges, they were often able to allocate their
valuable and scarce design resources to functions that were unavailable from
standard product suppliers and would help differentiate their product.
Traditionally, the ASSPs demanded by customers were fixed function standard
PHYs. In recent years, equipment manufacturers have been demanding ASSPs that
perform additional networking equipment functions. Some equipment manufacturers
are demanding the additional flexibility derived from ASSP microprocessor
products along with ASSPs which perform traffic management, processing and
switching.
OUR STRATEGY
Our overall strategy is to provide our customers with networking semiconductor
solutions that address a broad range of products and applications. Our approach
is as follows:
* Address a number of classes of networking equipment;
* Provide a selection of specialized products within each networking function;
* Provide a selection of products that address multiple networking functions;
and
* Develop or acquire new technologies and products in anticipation of
our customers' needs.
Classes of Equipment Served
The internet infrastructure is comprised of a complex structure of linked
networks, many of which are owned by separate organizations and follow a unique
approach to manage and transmit networking traffic. These networks are made more
complex by the variety of equipment used in the networks, each of which performs
a separate function. In addition, there may be a number of manufacturers that
design and market numerous types of networking equipment. We have a diverse
customer base comprised of large customers that produce a variety of networking
equipment products and some small customers that provide one or two networking
equipment products.
Our strategy is to provide products that adhere to the major networking
standards and perform the most common networking functions required by the most
widely deployed types of Internet infrastructure equipment. Our goal is to
provide products that can be used in the majority of the applications used to
build the Internet.
Thus, we design our products for a wide variety of networking equipment types,
including:
WAN Access Equipment WAN Transmission and Switching Equipment
* Remote Access Equipment * WAN Edge Switches
* Frame Relay Access Devices * Routers
* Wireless Basestations * WAN Core Switches
* Digital Loop Carriers * Digital Cross Connects
* Frame Relay Switches * Add-Drop Multiplexers
* Internet Access Concentrators * Terminal Multiplexers
* Digital Subscriber Line Access
Multiplexers (DSLAMs)
LAN equipment
* Switches/Routers
* Network Interface Cards
* Network Appliances
Provide a Broad Range of Products
We provide our customers with a variety of products from which to choose. This
allows them to select the equipment design that is appropriate for the segment
of the equipment market they are attempting to address. We sell products that
vary within certain functions, such as our line of S/UNI physical layer
products, and we sell products that vary across functions. This is further
discussed below.
The following is a summary of some of our more significant products currently
available.
Table I - PMC-Sierra Product Summary
------------------------------------
Function
-----------------------------------------------------
Through- LIU / Traf-
put/Clock Granu- PHY / Tributary Cell/Packet Back- fic
No.Product Description Rate larity Framer SAR Processor Processor plane Mgr Switch
- --------- ----------- --------- ------ ------ --- --------- ----------- ----- ---- ------
1 T1XC 1-port framer + LIU T1 - x
2 E1XC 1-port framer + LIU E1 - x
3 QDSX 4-port short haul analog LIU T1/E1 - x
4 COMET 1-port framer + long haul LIU T1/E1 - x
5 COMET-QUAD 4-port framer + long haul LIU T1/E1 - x
6 TQUAD 4-port framer T1 - x
7 EQUAD 4-port framer E1 - x
8 TOCTL 8-port framer T1 - x
9 EOCTL 8-port framer E1 - x
10 D3MX M13 Multiplexer/Demultiplexer T3 - x
11 TEMUX 28T/21E framer, Sonet mapper
& M13 Mux T1/E1 - T3/E3 - x
12 TEMUX-84 84T/63E framer, Sonet mapper
& 3xM13 Muxes T1/E1 - T3/E3 - x
13 S/UNI-IMA-8 8 link inverse multiplexer
for ATM/UNI PHY T1/E1 - x
14 S/UNI-IMA-32 32 link inverse multiplexer
for ATM/UNI PHY T1/E1 - x
15 S/UNI-IMA-84 84 link inverse multiplexer
for ATM/UNI PHY T1/E1 - x
16 S/UNI-MPH Quad T1/E1 ATM Interface T1/E1 - x
17 S/UNI-PDH T1/E1/T3/E3 + ATM T1/E1 - T3/E3 - x
18 S/UNI JET 1-port framer or ATM UNI T1/E1/J2 - T3/E3 - x
19 S/UNI QJET 4-port framer or ATM UNI T1/E1/J2 - T3/E3 - x
20 S/UNI-4xD3F 4-port J2, E3 and DS-3 Framer T3/E3/J2 - x
21 S/UNI-CDB 4 channel cell delineation block 52mb/s - x
22 S/UNI-155 1-port PHY OC3 - x
23 S/UNI-155-LITE 1-port PHY + analog CRU/CSU OC3 - x
24 S/UNI-PLUS enhanced 1-port PHY + analog
CRU/CSU OC3 - x
25 S/UNI-155-ULTRA 1-port PHY + UTP-5 + analog
CRU/CSU OC3 - x
26 S/UNI-155-DUAL 2-port PHY + analog CRU/CSU OC3 - x
27 S/UNI-QUAD 4-port PHY + analog CRU/CSU OC3 - x
28 S/UNI-16x155 16-port PHY + analog CRU/CSU OC3 - x
29 LASAR-155 ATM PHY & AAL5 SAR OC3 - x x
30 S/UNI STAR 1-port SONET/SDH framer OC3 - x
31 S/UNI TETRA 4-port ATM + POS PHY + analog
CRU/CSU OC3 - x
32 S/UNI 622 1-port PHY OC12 - x
33 S/UNI-622 MAX 1-port PHY + analog CRU/CSU OC12 - x
34 S/UNI-4x622 4-port PHY + analog CRU/CSU OC12 - x
35 S/UNI-2488 1-port PHY + analog CRU/CSU OC48 - x
36 S/UNI-2xGE 2-port SERDES & Gigabit MAC 2 x 1 Gbps - x
37 S/UNI-622-POS 1-port ATM + POS PHY + analog
CRU/CSU OC12 - x
38 TEMAP VT/TU Mapper and M13 Multiplexer STS-1 - x
39 SPTX Path Terminating Tranceiver OC3 STS-1 x
40 STXC Transport Overhead Terminator OC3 - x
41 STTX Transport Overhead Terminator OC12 - x
42 SPECTRA-155 Payload Extractor/Aligner OC3 STS-1 x
43 SPECTRA-4x155 4-port Payload Extractor/Aligner
(Chess) OC3 STS-1 x
44 SPECTRA-622 Payload Extractor/Aligner OC12 STS-1 x
45 SPECTRA-2488 Payload Extractor/Aligner
(Chess) OC48 STS-1 x
46 S/UNI-MACH 48 48-channel POS/ATM Cell
Processor/Mapper (Chess) OC48 STS-1 x
47 QUAD-PHY 4-port SERDES 5 Gbps - x
48 OCTAL-PHY 8-port SERDES 10 Gbps - x
49 AAL1gatorII AAL1 SAR Processor T3/E3 DS0 x
50 AAL1gator-4 4-channel AAL1 SAR T3/E3 DS0 x
51 AAL1gator-8 8-channel AAL1 SAR T3/E3 DS0 x
52 AAL1gator-32 32-channel AAL1 SAR T3/E3 DS0 x
53 TUPP VT/TU Payload Alignor/Processor OC3 T1 x
54 TUPP-PLUS TUPP + Performance Monitor OC3 T1 x
55 TUPP-PLUS 622 TUPP + Performance Monitor OC12 T1 x
56 TUDX VT/TU X-Connect Switch 2 x OC3 T1 x
57 PALADIN-10 DSP for Amplification Correction n/a n/a x
58 FREEDM-32P32 32 link, 32 ch. HDLC Controller 2 x T3 DS0 x
59 FREEDM-8 8 link, 128 ch. HDLC Controller 2 x T3 DS0 x
60 FREEDM-32 32 link, 128 ch. HDLC Controller 2 x T3 DS0 x
61 FREEDM-32P672 32 link, 672 ch. HDLC Controller OC3 DS0 x
62 FREEDM-32A672 32 link, 672 ch. HDLC Controller
w' "Any-PHY" OC3 DS0 x
63 FREEDM-84P672 84 link, 672 ch. HDLC Controller OC3 DS0 x
64 FREEDM-84A672 84 link, 672 ch. HDLC Controller
w' "Any-PHY" OC3 DS0 x
65 MECA-4A Multi-Channel Voice over ATM DSP n/a n/a x
66 MECA-4I Multi-Channel Voice over IP DSP n/a n/a x
67 RCMP-200 Routing Control, Monitoring &
Policing OC3 Cell x
68 RCMP-800 Routing Control, Monitoring &
Policing OC12 Cell x
69 S/UNI-ATLAS Full Duplex RCMP + additional
features OC12 Cell x
70 S/UNI-ATLAS-3200 Full Duplex RCMP + additional
features OC48 Cell x
71 RM5231A 64-bit MIPS RISC Microprocessor n/a - x
72 RM5261A 64-bit MIPS RISC Microprocessor n/a - x
73 RM7000A 64-bit MIPS RISC Microprocessor
with L2 Cache x
74 QRT ATM Quad Routing Table OC12 Cell x
75 QSE ATM Quad Switching Element 5 Gbps Cell x
76 TBS Telecom Bus Serializer (Chess) OC48 STS-1 x
77 TSE Transmission Switching Element
(Chess) 40Gbps STS-1 x
78 S/UNI DUPLEX Dual Serial Link PHY Multiplexer
(Vortex) OC3 - x x x
79 S/UNI VORTEX Octal Serial Link PHY Multiplexer
(Vortex) OC12 - x x x
80 S/UNI APEX ATM/Packet Traffic Mgr. & Switch
(Vortex) OC12 - x x x
81 PM9311 TT1 Scheduler C192/
320 Gbps OC 48
82 PM9312 TT1 Cross Bar
x
83 PM9313 TT1 Data Slice
84 PM9315 TT1 Enhanced Port Processor
85 EXACT - PM3370 8x100 port controller 100 Mbps - x x
86 EXACT - PM3380 1x1000 port controller 1 Gbps - x x
87 EXACT - PM3390 8 to 16 port EXACT Switch Matrix 8 Gbps - x x
This table is intended only to provide a general understanding of our products.
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 that perform different functions within the physical layer of the
networking hierarchy and are generally used in different applications.
Our Strategy Includes Addressing More Networking Functions
While we provide our customers with single function products, such as our S/UNI
products, in a variety of formats, we also develop products that address a
variety of networking functions. The following product map provides examples of
how our products address our customers' needs based on target equipment market
(access, edge, core) and functionality (PHY/Framer, Layer 2+, traffic management
and switch fabrics):
Table II - Product Function Table
------------------- ------------------- -------------------
ACCESS EDGE CORE
------------------- ------------------- -------------------
Switch Fabrics and
Traffic Management S/UNI-APEX, S/UNI-APEX TT1
S/UNI-VORTEX,
S/UNI- DUPLEX
................... ................... ...................
Layer 2+ MECA, FREEDM, CLASSIPI,
S/UNI-ATLAS, S/UNI-ATLAS, CHESS-2488,
AAL1gator, PALADIN AAL1gator S/UNI-ATLAS-2500
................... ................... ...................
PHY/FRAMER COMET, TEMUX SPECTRA, S/UNI-2488
S/UNI 155/622
-----------------------------------------------------------
MIPS MICROPROCESSORS
-----------------------------------------------------------
By providing architectural solutions, our goal is to provide our customers with
solutions that enable them to bring their next generation products to market
faster.
We Develop and Acquire New Technologies to Address the Needs of Next
Generation Networks
While some of the next generation products we introduce are based on
technologies we develop ourselves, we intend to fill some of our technology gaps
through acquisitions. The following is a table that summarizes the acquisitions
where we acquired technology in the three years ended December 31, 2000.
Table III - Acquisition Summary
- --------------------------------------------------------------------------------
Acquired Company Date Acquired Technology Acquired
- --------------------------------------------------------------------------------
Integrated Telecom Technology, Inc. May 1998 SARs, Traffic Management
and Switch Fabrics
- --------------------------------------------------------------------------------
Abrizio, Inc. September 1999 High Capacity/Protocol
Agnostic Switch Fabrics
- --------------------------------------------------------------------------------
Toucan Technology Ltd. January 2000 Digital Signal
Processing (DSP)
- --------------------------------------------------------------------------------
AANetcom, Inc. March 2000 High Speed Serial/
Deserialisers
- --------------------------------------------------------------------------------
Extreme Packet Devices Inc. April 2000 Traffic Management
- --------------------------------------------------------------------------------
Malleable Technologies, Inc. June 2000 Voice-over-IP/ATM DSPs
- --------------------------------------------------------------------------------
Datum Telegraphic Inc. July 2000 Power Linearization DSPs
for Wireless Basestations
- --------------------------------------------------------------------------------
Quantum Effect Devices, Inc. August 2000 MIPS Microprocessors
- --------------------------------------------------------------------------------
SwitchOn Networks, Inc. September 2000 Layer 3-7 Classification
DSPs
- --------------------------------------------------------------------------------
Some of the technologies we acquired not only addressed different functions in
our customers' equipment, but also provided us with new semiconductor
technologies that our customers demand. For instance, we acquired DSP
technologies through the acquisitions of Toucan, Malleable and Datum, and
microprocessor technology through the acquisition of Quantum Effect Devices.
New Networking Product Development
In 2000, we introduced the S/UNI 16x155, S/UNI 4x622 and S/UNI 2488. These
represent our next generation of ATM and Packet-over-Sonet physical layer
products that traffic at OC-48 line rates on next generation routers and
multi-service switches.
We introduced the CHESS chip set in 2000 to address the challenging networking
task of managing channelized signals. Channelized signals carry a number of
smaller channels on one high speed signal. The CHESS chip set includes the
Spectra 2488, Spectra 4x155, TBS, TSE and S/UNI MACH 48. These products provide
framing, channelizing, serializing, traffic grooming, and mapping in channelized
OC-48 streams. With the CHESS chip set, we provide our customers with a range of
products which can help them build new classes of digital cross connects,
add-drop multiplexers and switches.
We introduced the S/UNI Atlas 3200, which performs address resolution, traffic
policing, fault and performance management and statistics gathering channelized
and unchannelized communication streams at OC-48. The S/UNI Atlas 3200 is
targeted at multi-service core, edge, access and metro-optical equipment.
We began sampling our S/UNI 2xGE in 2000 to support our customers' efforts to
handle IP traffic in their core and edge routers, multi-service platforms and
point-of-presence equipment. The S/UNI 2xGE is a physical layer dual port
gigabit ethernet transceiver with integrated media access controllers.
We announced three new members of our AAL1gator family of ATM adaptation layer
processors. These chips allow our customers to develop equipment that aggregates
multiple lines of voice and other traffic onto an ATM network.
We introduced the S/UNI STAR, S/UNI CDB and S/UNI 4xD3F. These products provide
flexible physical layer solutions to our customers for use in next generation
multi-service equipment, customer premise equipment routers and wireless
basestations.
In 2000, we also introduced a variety of next generation products for use in
lower speed traffic aggregation and management equipment applications. The
TEMUX-84 is a next generation T1/E1 product that combines 84 ports of T1 framing
or 63 ports of E1 framing with three DS-3 multiplexers. This product, along with
our other physical layer access products, addresses key market concerns of high
port density, low power consumption and small packaging. Also in keeping with
these needs, we introduced the COMET QUAD, the four-port next generation of our
COMET product line.
We introduced the PALADIN-10, a DSP chip that improves the effectiveness of
wireless base-station amplifiers by reducing power consumption by eliminating
transmitter distortions and spectral inefficiencies. We also introduced the
MECA-4I and MECA-4A, a family of voice-over-IP or voice-over-ATM DSP chips which
convert voice signals into IP packets or ATM cells for transport over IP or ATM
networks.
We also introduced our next generation MIPS based microprocessor called the
RM7000A. The RM7000A is designed for software-intensive data networking
applications.
Finally, we introduced the Tiny Tera One, or TTI, chip set and switch fabric for
high bandwidth switching applications. The TT1 chip set enables scalable terabit
routers, ATM switches and optical switches to provide aggregate bandwidth of up
to 320 gigabits per second. The TT1 chip set uses an architecture that allows
for the multiple rack system implementations required to deal with the power and
mechanical demands of these high performance systems.
OUR NON-NETWORKING PRODUCTS
In the third quarter of 1996, we announced our decision to exit the modem chip
set business and discontinue development of our custom chip sets. Our remaining
non-networking products are still being sold but we are not planning new
development or follow-on products. Most of our remaining non-networking revenue
is generated by one custom semiconductor that is used in a portable health
monitoring device.
Revenues from other non-networking products declined rapidly in 1998 and 1999
and increased in 2000. We expect that our primary non-networking customer's next
generation health monitoring device will be released in 2001. This product does
not incorporate any of our semiconductors in its design. As a result, we expect
revenue from non-networking products to decline rapidly in 2001 and end in 2002.
SEGMENT PERFORMANCE
We evaluate performance based on gross profits from operations of our networking
and non-networking segments. Summarized financial information by segment is as
follows:
Year Ended December 31,
-------------------------------------------
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Net revenues
Networking $ 665,700 $ 278,477 $ 152,015
Non-networking 28,984 17,291 22,273
- --------------------------------------------------------------------------------
Total $ 694,684 $ 295,768 $ 174,288
===========================================
Gross profit
Networking $ 515,712 $ 214,401 $ 118,469
Non-networking 12,811 7,928 10,529
- --------------------------------------------------------------------------------
Total $ 528,523 $ 222,329 $ 128,998
===========================================
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 2000 revenues. In
2000, the country purchasing the largest percentage of our products outside of
the United States was Canada at 12%. Our international sales accounted for 38%
of total revenue in 2000, 30% in 1999 and 32% in 1998.
MANUFACTURING
Independent foundries and chip assemblers manufacture all of our products. We
receive most of the silicon wafers with which we derive our products from
Chartered Semiconductor Manufacturing Ltd. ("Chartered"), Taiwan Semiconductor
Manufacturing Corporation ("TSMC"), LSI Logic Corporation and IBM. These
independent foundries produce our networking products at feature sizes down to
0.18 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, 2000 and 1999, we had $23.0 and $19.1 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.
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, Canada, facility. The
remainder of our testing is performed predominantly by independent US and 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 Gaithersburg (Maryland), Galway (Ireland),
Dublin (Ireland), Montreal (Canada), Portland (Oregon), Ottawa (Canada), Pune
(India), San Jose (California), Saskatoon (Canada), Toronto (Canada), Vancouver
(Canada) and Winnipeg (Canada).
We spent $178.8 million in 2000, $83.7 million in 1999, and $50.9 million in
1998 on research and development. In 2000, we also expensed $38.2 million of in
process research and development, $31.5 million of which related to the
acquisition of Malleable Technologies and $6.7 million of which related to the
acquisition of Datum Telegraphic.
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, 2000, our backlog of products
scheduled for shipment within six months totaled $216.0 million. As of December
31, 1999, our backlog of products scheduled for shipment within six months
totaled $165.3 million. Our backlog includes backlog to our major distributor,
which may not result in revenues as we do not recognize revenue until our
distributor has sold our products through to the end customer. Also, 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.
During December 2000 and into the first quarter of 2001, many of our customers
experienced decreased demand, order cancellations or postponements and had
accumulated significant inventories of our networking products. See "Outlook for
2001" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
COMPETITION
Our competitors include Applied Micro Circuits Corporation, Broadcom, Conexant
Systems, Cypress Semiconductor, Dallas Semiconductor, Exar Corporation,
Integrated Device Technology, IBM, Infineon, Intel, Lucent Technologies
(including Agere), Marvell Technology Group, Motorola, Multilink Technology
Corporation, Nortel 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.
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.
We are expanding into some markets, such as the wireless infrastructure and
generic microprocessor markets, that have established incumbents that have
substantial financial and other resources. Some of these incumbents derive a
majority of their earnings from these markets. We expect fiercer competition in
these markets.
In addition, 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, while our peers are becoming mature, successful and
sophisticated.
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, represent
strong competition for many design wins, and subsequent product sales. Larger
competitors in our market have recently acquired or announced plans to acquire
both publicly traded and privately held companies with advanced technologies.
These acquisitions could enhance the ability of larger competitors to obtain new
business that PMC might have otherwise won.
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 Annual Report. Any other
trademarks used in this Annual Report are owned by other entities.
EMPLOYEES
As of December 31, 2000, we had 1,726 employees, including 1,083 in Research &
Development, 207 in Production and Quality Assurance, 245 in Marketing and Sales
and 191 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.
GLOSSARY OF TERMS
We use a number of terms in this Annual 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 40 gigabits per second (Gbps). An "ATM Network" is a network based on the ATM
protocol.
Bandwidth: Commonly defined as 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 multiple channels on a single fiber.
Digital Cross Connect: An electronic switching system that routes digital
signals among multiple paths without demultiplexing them.
Digital Subscriber Line: A public network access technology that allows multiple
forms of high bandwidth data, voice, and video to be carried over twisted-pair
copper wire between a network service provider's central office and the customer
site.
Digital Signal Processor (DSP): A specialized computer chip designed to perform
a variety of possible complex operations digitally rather than by traditional
analog methods. DSPs are useful in processing sound (like voice phone calls),
graphics or video. For example, some DSPs are used in compressing real-time
video signals before they are sent on a communications pipe to help reduce the
amount of bandwidth used by the signals.
Ethernet: A standard protocol that encompasses both layer 1 (the transmission
and reception of bits) and layer 2 (the packaging of data into frames)
functions.
Frame Relay: A packet-switching technology used to route frames of information
within a WAN. Instead of leasing dedicated lines between all remote sites, frame
relay allows virtual private networks to be 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 to transport
traffic over 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.
ISDN: A traditional communications line that allows users to transmit data at
128 Kbps over copper cable.
LAN: Local Area Network - A shared network of computers that spans a relatively
small area, usually confined to a single or cluster of buildings.
MAN: Metropolitan Area Network - A communications network that covers a
geographic area, such as a city or suburb, or a series of LANs at multiple sites
often interconnected by public facilities. "Edge" networks are similar to MANs,
but generally relate to equipment that acts as a bridge onto an ATM network.
Megabit: One million bits.
MIPS Microprocessor: Microprocessors based on reduced instruction set computing,
or RISC architectures; these devices can perform computations and control the
flow of information in networking/communications infrastructure equipment,
business network equipment and consumer network products.
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 channels.
Demultiplexing is the reverse of multiplexing.
OC Units: See "SONET" below.
Packet: A group of binary digits transmitted and routed 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 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 glass fiber. Rates are measured in optical carrier (OC) units. For example,
OC-1 equals rates of 51.84 Mbps, OC-3 equals 155 Mbps, OC-12 equals 622 Mbps and
OC-48 equals 2.5 Gbps. The international equivalent is SDH.
T1/E1: 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-Kbps channel for signaling and control. E1 is the
European designation for T1 and has a capacity of approximately 2 Mbps.
T3/E3: A digital transmission link capable of transmission speeds of 45 Mbps. A
T-3 line can normally accommodate 672 voice conversations. E3 is the European
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.
ITEM 2. Properties.
The following is a summary of our more significant properties, all of which are
currently leased:
------------------------- ------------------------- -------------------------
Location Square Footage Lease Expiry Date
------------------------- ------------------------- -------------------------
Burnaby, Canada 260,000 Various to July 2007
------------------------- ------------------------- -------------------------
Santa Clara region 18,000 May 2004
38,000 May 2002
356,000 September 2011
------------------------- ------------------------- -------------------------
Pennsylvania 32,000 August 2003
------------------------- ------------------------- -------------------------
Maryland 12,000 June 2005
72,000 February 2011
------------------------- ------------------------- -------------------------
Oregon 42,000 March 2009
------------------------- ------------------------- -------------------------
Kanata, Canada 90,000 December 2010
------------------------- ------------------------- -------------------------
Our executive offices and much of our test, sales and marketing, and design and
engineering operations are located in our Santa Clara and Burnaby offices. We
also lease offices in Massachusetts, North Carolina, Illinois, Texas, Maryland,
Pennsylvania, Oregon, California, Toronto (Canada), Quebec (Canada),
Saskatchewan (Canada), Manitoba (Canada), Barbados, Ireland, India, Germany,
Sweden, Taiwan, the Peoples' Republic of China and the United Kingdom.
In 2000, we purchased 18.72 acres of land in Burnaby, Canada for $14.3 million.
We intend to build a facility on this land, which will replace our existing
Burnaby office.
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:
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
2000 High Low
First Quarter........................................ $ 245.44 $ 62.75
Second Quarter....................................... 231.56 118.44
Third Quarter........................................ 245.00 169.81
Fourth Quarter....................................... 227.19 69.50
We issued a two-for-one stock dividend on February 14, 2000 and May 14, 1999.
Accordingly, the prices presented above have been adjusted to reflect these
events.
To maintain consistency, the information provided above is based on calendar
quarter ends rather than fiscal quarter ends. As of February 15, 2001, there
were approximately 1,873 holders of record of our Common Stock.
We have never paid cash dividends on our Common Stock. We currently intend to
retain earnings, if any, for use in our business and do not anticipate paying
any cash dividends in the foreseeable future. Our current bank credit agreement
prohibits the payment of cash dividends without the approval of the bank.
Sale of Unregistered Shares
On December 12, 2000, we acquired all the outstanding stock of Octera
Corporation ("Octera"), and merged Octera into one of our wholly owned
subsidiaries. Under the terms of the related merger agreement, all of the
outstanding capital stock of Octera was exchanged for cash and approximately
128,000 shares of PMC's Common Stock. At the time of the transaction, the shares
of our Common Stock issued to the former Octera stockholders were not registered
under the Securities Act because the transaction involved a non-public offering
exempt from registration under Section 4(2) of the Securities Act and Regulation
D promulgated thereunder.
ITEM 6. Selected Financial Data.*
Year Ended December 31, (1)
(in thousands, except for per share data)
-------------------------------------------------------
2000 (2) 1999 (3) 1998 (4) 1997 (5) 1996 (6)
STATEMENT OF OPERATIONS DATA:
Net revenues $ 694,684 $ 295,768 $ 174,288 $ 139,337 $ 193,992
Gross profit 528,523 222,329 128,998 105,274 99,044
Research and development 211,064 87,414 52,219 34,608 37,650
In process research and development 38,200 - 39,176 - 7,783
Impairment of intangible assets - - 4,311 - -
Marketing, general and administrative 104,595 53,684 33,982 26,502 32,148
Costs of merger 37,974 866 - - -
Amortization of goodwill 36,397 1,912 915 300 300
Restructuring and other charges - - - (1,383) 64,670
Income (loss) from operations 100,293 78,453 (1,605) 45,247 (43,507)
Gain on sale of investments 58,491 26,800 - - -
Net income (loss) 75,298 71,829 (21,699) 30,535 (51,774)
Net income (loss) per share - basic: (7) $ 0.46 $ 0.49 $ (0.16) $ 0.24 $ (0.43)
Net income (loss) per share - diluted: (7) $ 0.41 $ 0.45 $ (0.16) $ 0.23 $ (0.43)
Shares used in per share calculation - basic 162,377 146,818 137,750 127,767 121,177
Shares used in per share calculation - diluted 181,891 160,523 137,750 134,133 121,177
BALANCE SHEET DATA: As of December 31, (1)
(in thousands)
-------------------------------------------------------
Cash, cash equivalents and short-term investments $ 375,116 $ 214,265 $ 100,578 $ 76,060 $ 47,760
Working capital 340,986 191,019 83,039 61,752 24,004
Total assets 1,126,090 388,750 225,303 161,454 140,129
Long-term debt (including current portion) 2,333 9,198 16,807 16,873 24,637
Stockholders' equity 851,318 224,842 119,225 94,309 54,323
* All financial information has been restated to reflect the mergers with
Abrizio, Toucan, AANetcom, Extreme, QED and SwitchOn, which were accounted
for as poolings 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, 2000 include amortization of
deferred stock compensation of $36.3 million, amortization of goodwill of $
36.4 million, costs of merger of $38.0 million, an in process research and
development charge of $38.2 million and gains of $58.5 million and the
related tax provision of $13.7 million on sale of investments
(3) Results for the year ended December 31, 1999 includes amortization of
deferred stock compensation of $5.1 million, amortization of goodwill of
$1.9 million, a $0.9 million charge for costs of merger for the acquisition
of Abrizio Inc. and gains of $26.8 million and the related tax provision of
$3.6 million on sale of investments.
(4) Results for the year ended December 31, 1998 include amortization of
deferred stock compensation of $1.5 million, amortization of goodwill of
$0.9 million, an in process research and development charge of $39.2
million and a charge for impairment of intangible assets of $4.3 million.
(5) 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.
(6) Results for the year ended December 31, 1996 include a restructuring charge
of $69.4 million related to Company's exit from the modem chip set business
and the associated restructuring of its non-networking operations, and a
$7.8 million in process research and development charge.
(7) Reflects 2-for-1 stock splits effective February 2000 and May 1999.
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 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 for per share data)
Year Ended December 31, 2000 Year Ended December 31, 1999
------------------------------------------- ----------------------------------------
Fourth (1) Third (2) Second (3) First(4) Fourth(5) Third(6) Second(7) First (8)
STATEMENT OF OPERATIONS DATA:
Net revenues $ 231,652 $ 198,152 $ 150,514 $ 114,366 $ 91,941 $ 82,734 $ 66,862 $ 54,231
Gross profit 173,934 151,570 114,825 88,194 69,648 61,415 50,118 41,148
Research and development 68,091 64,883 42,153 35,937 27,011 23,046 19,953 17,404
In process research and development - 38,200 - - - - - -
Marketing, general and administrative 31,504 30,308 24,287 18,496 16,221 13,704 12,488 11,271
Amortization of goodwill 17,680 17,770 488 459 478 478 478 478
Costs of merger 1,116 23,180 5,776 7,902 - 866 - -
Income (loss) from operations 55,543 (22,771) 42,121 25,400 25,938 23,321 17,199 11,995
Gain on sale of investments 17,208 14,173 22,993 4,117 - - 26,800 -
Net income (loss) $ 43,854 $ (34,645) $ 48,574 $ 17,515 $ 17,322 $ 15,327 $ 32,979 $ 6,201
Net income (loss) per share - basic (9) $ 0.26 $ (0.21) $ 0.30 $ 0.11 $ 0.11 $ 0.10 $ 0.23 $ 0.04
Net income (loss) per share - diluted (9) $ 0.24 $ (0.21) $ 0.27 $ 0.10 $ 0.10 $ 0.09 $ 0.21 $ 0.04
Shares used in per-share calculation - basic 165,609 164,488 161,611 157,798 151,472 149,063 144,216 142,520
Shares used in per-share calculation - diluted 184,245 164,488 180,694 177,658 167,767 163,884 156,762 153,679
* All financial information has been restated to reflect the mergers with
Abrizio, Toucan, AANetcom, Extreme, QED and SwitchOn, which were accounted
for as poolings of interests.
(1) Results include $11.5 million amortization of deferred stock compensation,
$17.7 million amortization of goodwill, $1.1 million costs of merger
related to the acquisition of SwitchOn and gains of $17.2 million gain on
sale of investments and the related tax provision of $5.5 million.
(2) Results include $16.8 million amortization of deferred stock compensation,
$17.8 million amortization of goodwill, $23.2 million costs of merger
related to the QED acquisition, $38.2 million of in process research and
development related to the Malleable and Datum acquisitions and $14.2
million gain on sale of investments net of the related tax provision of
$4.5 million.
(3) Results include $3.9 million amortization of deferred stock compensation,
$0.5 million amortization of goodwill, $5.8 million costs of merger related
to the Extreme acquisition and $23.0 million gain on the sale of
investments net of the related tax provision of $2.3 million.
(4) Results include $4.1 million amortization of deferred stock compensation,
$0.5 million amortization of goodwill, $7.9 million costs of merger related
to the AANetcom and Toucan acquisitions, and $4.1 million gain on the sale
of investments net of the related tax provision of $1.4 million.
(5) Results include $1.5 million amortization of deferred stock compensation
and $0.5 million amortization of goodwill.
(6) Results include $1.7 million amortization of deferred stock compensation,
$0.5 million amortization of goodwill, $0.9 million costs of merger related
to the Abrizio acquisition.
(7) Results include $1.2 million amortization of deferred stock compensation,
$0.5 million amortization of goodwill and $26.8 million gain on sale of
investments net of related tax provision of $3.6 million.
(8) Results include $0.8 million amortization of deferred stock compensation
and $0.5 million amortization of goodwill.
(9) Reflects 2-for-1 stock splits effective February 2000 and May 1999.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the financial condition and results of our
operations should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report. This
discussion contains forward-looking statements that are subject to known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, achievements and prospects to be
materially different from those expressed or implied by such forward-looking
statements. These risks, uncertainties and other factors include, among others,
those identified under "Factors that You Should Consider Before Investing In
PMC-Sierra" and elsewhere in this Annual Report.
These forward-looking statements apply only as of the date of this Annual
Report. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this report might not occur. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks we face as described in this
Annual Report and readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Such forward-looking statements include statements as to, among
others:
* our mergers and their accounting treatment;
* revenues;
* gross profit;
* research and development expenses;
* marketing, general and administrative expenditures;
* capital resources sufficiency; and
* Outlook for 2001.
All historical financial information has been restated to reflect the
acquisitions of Abrizio, Toucan, AANetcom, Extreme, QED and SwitchOn, which were
accounted for as poolings of interests.
PMC releases earnings at regularly scheduled times after the end of each
reporting period. Typically within one hour of the release, we will hold a
conference call to discuss our performance during the period. We welcome all PMC
stockholders to listen to these calls either by phone or over the Internet by
accessing our website at www.pmc-sierra.com.
Acquisitions
One of our business strategies is to acquire companies to obtain key
technologies that will enable us to expand our product portfolio. We continue to
evaluate opportunities for strategic acquisitions from time to time and may make
additional acquisitions in the future.
In the past three years, we have completed the following acquisitions:
Consideration Paid:
-------------------------
Number of
shares of PMC Accounting
Cash common stock method
Acquired Company Location Date Acquired (in 000's) and options applied Technology Acquired
---------------- -------- ------------- ---------- ------------- ---------- -------------------
Integrated Telecom Gaithersburg, MD May 1998 $ 38,050 1,660,000 Purchase SARs, Traffic Management
Technology, Inc. and Switch Fabrics
Abrizio, Inc. Mountainview, CA September 1999 - 8,704,000 Pooling High Capacity/Protocol
Agnostic Switch Fabrics
Toucan Technology Ltd. Galway, Ireland January 2000 - 300,000 Pooling Digital Signal
Processing (DSP)
AANetcom, Inc. Pennsylvania, PA March 2000 - 4,800,000 Pooling High Speed Serial/
Deserialisers
Extreme Packet Devices Inc. Kanata, Canada April 2000 - 2,000,000 Pooling Traffic Management
Malleable Technologies, Inc. San Jose, CA June 2000 - 1,250,000 Purchase Voice-over-IP/ATM DSPs
Datum Telegraphic Inc. Vancouver, Canada July 2000 $ 17,025 681,000 Purchase Power Linearization DSPs
for Wireless Basestations
Quantum Effect Devices, Inc. Santa Clara, CA August 2000 - 12,300,000 Pooling MIPS Microprocessors
SwitchOn Networks, Inc. Milpitas, CA September 2000 - 2,112,000 Pooling Layer 3-7 Classification
DSPs
Octera Corporation San Diego, CA December 2000 $ 1,500 127,965 Purchase Semiconductor design
For acquisitions accounted for as a purchase, we included the acquired business'
results of operations in our results of operations after the acquisition dates.
For acquisitions that were accounted for as a pooling of interests, we restated
all historical financial information to reflect the results of operations of the
acquired businesses. For more information, see Note 2 to the accompanying
Consolidated Financial Statements.
Results of Operations
Net Revenues ($000,000)
2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Networking products $ 665.7 139% $ 278.5 83% $ 152.0
Non-networking products $ 29.0 68% $ 17.3 (22%) $ 22.3
Total net revenues $ 694.7 135% $ 295.8 70% $ 174.3
Net revenues were $694.7 million in 2000, $295.8 million in 1999 and $174.3
million in 1998, which equates to 135% growth in 2000 and 70% growth in 1999.
Our networking revenue increased 139% in 2000 and 83% in 1999 due to increased
customer demand that was relatively evenly spread across most of our networking
products. Our volume grew due to the growth of our customers' networking
equipment businesses, our customers' continued transition from internally
developed application specific semiconductors to our standard semiconductors,
and our introduction and sale of our products that address additional network
functions.
During December 2000 and into the first quarter of 2001, many of our customers
experienced decreased demand, order cancellations or postponements and had
accumulated significant inventories of our networking products. See "Outlook for
2001".
Our non-networking revenue grew 68% in 2000 and declined 22% in 1999 as a result
of our customers' fluctuating ordering patterns. We expect non-networking
revenues to decline to zero in 2002 as our principal customer intends to
redesign the product into which our products are incorporated.
Gross Profit ($000,000)
2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Networking products $ 515.7 141% $ 214.4 81% $ 118.5
Percentage of networking revenues 77% 77% 78%
Non-networking products $ 12.8 62% $ 7.9 (25%) $ 10.5
Percentage of non-networking revenues 44% 46% 47%
Total gross profit $ 528.5 138% $ 222.3 72% $ 129.0
Percentage of net revenues 76% 75% 74%
Total gross profit was $528.5 million in 2000, $222.3 million in 1999 and $129.0
million in 1998. This represented growth of 138% in 2000 and 72% in 1999. Total
gross profit grew in 2000 compared to 1999 due to increased demand for both
networking and non-networking products. In 1999, total gross profit increased
compared to 1998 as networking product revenue growth exceeded the decline in
non-networking product revenue.
Total gross profit as a percentage of net revenue increased in 2000 and 1999 as
our higher gross margin networking revenues comprised a greater portion of our
total revenues. Because we sell highly complex networking products in lower
volumes, we charge higher prices and generate higher gross margins relative to
the overall semiconductor industry. We believe that if the market for our
networking products grows, we introduce products that typically sell in higher
volumes or our customers purchase our products in greater quantities, we will
experience pricing pressure and our gross profit as a percentage of revenue will
decline.
The gross margins of each of our networking products vary significantly. Our
gross margins may decline in the future as a result of a shift in revenue mix to
lower margin products.
Non-networking gross profit as a percentage of non-networking revenue declined
in 2000 and 1999 due to our reduction of selling prices on these products as
they mature.
Other Costs and Expenses ($000,000)
2000 Change 1999 Change 1998
- -------------------------------------------------------------------------------
Research and development $178.8 114% $83.7 64% $50.9
Percentage of net revenues 26% 28% 29%
Marketing, general & administrative $100.6 92% $52.3 55% $33.8
Percentage of net revenues 14% 18% 19%
Amortization of deferred stock
compensation:
Research and development $ 32.3 773% $ 3.7 185% $ 1.3
Marketing, general & administrative 4.0 186% 1.4 600% 0.2
-----------------------------------------
$ 36.3 612% $ 5.1 240% $ 1.5
-----------------------------------------
Percentage of net revenues 5% 2% 1%
Amortization of goodwill $ 36.4 1,816% $ 1.9 111% $ 0.9
Percentage of net revenues 5% 1% 1%
Costs of merger $ 38.0 - $ 0.9 - -
Percentage of net revenues 5% - -
In process research & development $ 38.2 - - - $39.2
Percentage of net revenues 5% - 22%
Impairment of intangible assets - - - - $ 4.3
Percentage of net revenues - - 2%
Research and Development Expenses and Marketing, General and
Administrative Expenses
Our research and development, or R&D, expenses were $178.8 million in 2000,
$83.7 million in 1999 and $50.9 million in 1998, an increase of 114% in 2000 and
64% in 1999. The increase in R&D expenses reflects our ongoing R&D efforts
relating to networking products. R&D expenditures increased in 2000 and 1999 due
to an increase in personnel costs as a result of acquisitions and internal
hiring of R&D personnel, and increased service and material costs associated
with our expanding product development efforts. R&D decreased as a percentage of
net revenues primarily because net revenues increased at a faster rate than R&D
expenses.
We increased marketing, general and administrative or MG&A expenses by 92% to
$100.6 million in 2000 and by 55% to $52.3 million in 1999. MG&A expenses
increased due to the addition of new personnel, an increase in the size of our
direct sales force and related commissions, increased marketing costs related to
new products and our investment in infrastructure. In 2000, MG&A expenses
decreased as a percentage of net revenue compared to 1999 because many of our
MG&A costs are fixed in the short term and because we obtained benefits from
some of our MG&A infrastructure investments. Since many of our MG&A expenditures
are fixed in the short term, these expenses may decline as a percentage of
revenues in periods of rising revenues and may increase as a percentage of
revenues in periods of declining revenue.
Amortization of Deferred Stock Compensation
We recorded total deferred stock compensation expense of $36.3 million in 2000
compared to $5.1 million in 1999 and $1.5 million in 1998. Deferred compensation
charges increased as a result of our acquisitions of Toucan, Extreme, AANetcom,
QED and SwitchOn. These acquisitions contributed $14.5 million to deferred stock
compensation amortization in 2000 and all of the expense in 1999 and 1998. In
addition, $20.1 million of the expense in 2000 related to the unearned
compensation recognized on the Malleable and Datum purchase acquisitions.
Amortization of Goodwill
Non-cash goodwill charges increased to $36.4 million in 2000 from $1.9 million
in 1999 and $0.9 million in 1998 primarily as a result of the increase in
goodwill recorded in connection with the Malleable and Datum acquisitions.
We may acquire products, technologies or companies in the future for which the
purchase method of accounting may be used. This could result in significant
additional goodwill amortization or in process research and development charges
in future periods, which could materially impact our operating results.
Costs of Merger
Merger costs were $38.0 million in 2000 and $0.9 million in 1999. The increase
in merger costs resulted from the five pooling acquisitions we completed during
2000 compared to one pooling acquisition completed in 1999. These charges
consist primarily of investment banking and other professional fees. We may
incur significant merger costs related to future acquisitions.
In Process Research and Development ("IPR&D")
IPR&D charges were $38.2 million in 2000, nil in 1999 and $39.2 million in 1998.
The amounts expensed to in process research and development in 2000 arose from
the acquisitions of Malleable and Datum.
We determined the fair value of the existing products as well as the technology
that was currently under development using the income approach. Under the income
approach, expected future after-tax cash flows from each of the projects under
development are estimated and discounted to their net present value at an
appropriate risk-adjusted rate of return. Revenues were estimated based on
relevant market size and growth factors, expected industry trends, individual
product sales cycles and the estimated life of each product's underlying
technology. Estimated operating expenses, income taxes and charges for the use
of contributory assets were deducted from estimated revenues to determine
estimated after-tax cash flows for each project. These projected future cash
flows were further adjusted for the value contributed by any core technology and
development efforts expected to be completed post acquisition.
These forecasted cash flows were then discounted based on rates derived from our
weighted average cost of capital, weighted average return on assets and venture
capital rates of return adjusted upward to reflect additional risks inherent in
the development life cycle. The risk adjusted discount rates used involved
consideration of the characteristics and applications of each product, the
inherent uncertainties in achieving technological feasibility, anticipated
levels of market acceptance and penetration, market growth rates and risks
related to the impact of potential changes in future target markets. After
considering these factors, we determined the risk adjusted discount rates for
Malleable and Datum to be 35% and 30%, respectively.
We believe that the pricing model used for products related to these
acquisitions are standard within the high-technology industry and that the
estimated IPR&D amounts so determined represent fair value and do not exceed the
amounts that a third party would pay for these projects. When we acquire
companies we do not expect to achieve a material amount of expense reductions or
synergies as a result of integrating the acquired in process technology.
Therefore, the valuation assumptions do not include anticipated cost savings.
A description of the IPR&D projects acquired are set forth below:
The in process technology acquired from Malleable detects incoming voice
channels and processes them using voice compression algorithms. The compressed
voice is converted, using the appropriate protocols, to ATM cells or IP packets
to achieve higher channel density and support multiple speech compression
protocols and different packetization requirements. At the date of acquisition
we estimated that Malleable's technology was 58% complete and the costs to
complete the project to be $4.4 million.
The technology acquired from Datum is a digitally controlled amplifier
architecture, which was designed to increase basestation system capacities,
while reducing cost, size and power consumption of radio networks. At the date
of acquisition, we estimated that Datum's technology was 59% complete and the
costs to complete the project to be $1.8 million.
The above estimates were determined by comparing the time and costs spent to
date and the complexity of the technologies achieved to date to the total costs,
time and complexities that were expected to be expended to bring the
technologies to completion.
To date, progress and development costs incurred on the Datum technology
acquired from Datum have been in line with the Company's initial expectation.
Progress on the Malleable technology acquired has been slower than originally
estimated and as a result, costs incurred on this project have exceeded our
original estimates. To date, costs incurred on development of this project have
been $7.0 million. Development of these technologies remains a significant risk
to us due to the remaining effort to achieve technical viability, rapidly
changing customer markets, uncertain standards for new products, and significant
competitive threats from numerous companies. The nature of the efforts to
develop the acquired technology into commercially viable products consists
principally of planning, designing, and testing activities necessary to
determine that the product can meet market expectations, including functionality
and technical requirements. If we fail to bring these products to market in a
timely manner, we could lose an opportunity to capitalize on emerging markets,
and our business and operating results could be materially and adversely
impacted.
We have not achieved significant revenues from these acquisitions. If we fail to
achieve expected levels of revenues and net income from these products, our
return on investment expected at the time that the acquisition was completed
will be negatively impacted and any other assets related to the development
activities may become impaired.
In 1998, we recorded IPR&D expenses of $39.2 million. These charges include
$37.8 million related to the acquisition of Integrated Telecom Technology, or
IGT, and $1.4 million related to the acquisition of technology that had not
reached technological feasibility and had no alternative future use.
The allocation of the IGT acquisition purchase price to IPR&D, represented the
estimated fair value of acquired IPR&D using the methodology described above.
As of the acquisition date, IGT had three development projects in process. These
projects were between 65% and 83% complete and the value assigned to each
project was determined based on projected future cash flows discounted at a
risk-adjusted discount rate of between 28% and 30%. The total estimated cost to
complete these projects at the time of acquisition was $1.8 million.
One of the IGT projects related to the development of an ATM switching system.
The second and third projects related to the segmentation and reassembly ("SAR")
of data in an ATM network.
We completed the first project in the first quarter of 1999 and were in full
production by the end of the year. We completed development of the second
project in the fourth quarter of 1998 and were in full production in the first
quarter of 1999. The time of completion and costs to complete were consistent
with our initial estimates used in the valuation of the projects.
Products related to these two projects have been introduced to the market in
Fiscal 1999. Shipment volumes of products from acquired technologies are not
material to our overall position at the present time and we are currently not
able to determine the accuracy of overall revenue projections due to the early
stage of the product life cycles. 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 the acquisition was completed and could
potentially result in impairment of other assets related to the development
activities.
Impairment of Intangible Assets.
During the third quarter of 1998, we terminated development work on a project
and determined that a portion of the intangible assets recognized in connection
with the IGT acquisition was impaired. We recorded a charge of $4.3 million
because the developed and core technology related to this project was not
technologically feasible and had no alternative future use.
Interest and Other Income, Net ($000,000)
2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------
Interest and other income, net $ 18.9 139% $ 7.9 172% $2.9
Percentage of net revenues 3% 3% 2%
Interest income increased in 2000 compared to 1999 and in 1999 compared to 1998
as a result of higher cash balances available to earn interest. Other income in
2000 and 1999 included income from an equity interest in another company of $0.6
million and $0.8 million, respectively. We decreased interest expense to $0.8
million in 2000 from $1.5 million in 1999 by retiring debt from loans and
capital leases. This reduction was partially offset by additional interest
expense from debt assumed from the companies we acquired.
Gain on Sale of Investments ($000,000)
2000 Change 1999 Change 1998
- ------------------------------------------------------------------------------
Gain on sale of investments $ 58.5 118% $ 26.8 - -
Percentage of net revenues 8% 9%
Our gains on sale of investments were $58.5 million in 2000, $26.8 million in
1999 and nil in 1998.
In 2000, gains of $54.4 million resulted from the sale of a portion of our
investment in Sierra Wireless, Inc., a public company. Additionally, we sold our
remaining shares of Cypress Semiconductor, Inc. resulting in a gain of $4.1
million.
In 1999, we had gains of $14.5 million from the sale of a portion of our Sierra
Wireless shares. During the year, we also had an investment in IC Works, Inc.,
or ICW, a private company that was subsequently purchased by Cypress
Semiconductor, a public company. As a result of that transaction, we exchanged
our preferred shares of ICW for common shares of Cypress Semiconductor. We
disposed of a portion of our shares in Cypress Semiconductor, resulting in a
gain of $12.3 million.
Provision for Income Taxes.
Our annual effective tax rate for the year ended December 31, 2000 was 57.6%
compared to a statutory tax rate of 35%. The increase in effective tax rate
primarily reflects the higher provision for income taxes for our Canadian
subsidiary and the non-tax deductible charges for in process research and
development, goodwill amortization, deferred stock compensation and acquisition
costs related to acquisitions completed during the year. These factors were
partially offset by the utilization of tax losses and other deferred tax assets
for which benefits were previously not recognized.
Our annual effective tax rate for the year ended December 31, 1999 was 36.5%,
which approximated the statutory tax rate of 35%.
Our annual effective tax rate for the year ended December 31, 1998 was
substantially higher than the statutory rate effective tax rate of 35% due to
the non-tax deductible charges for in process research and development, goodwill
amortization and impairment of intangible assets related to acquisitions
completed during the year. In addition a valuation allowance was taken against
certain deferred tax assets during the year.
We have provided a valuation allowance on certain of our deferred tax assets
because of uncertainty regarding their realizability.
See Note 11 to the Consolidated Financial Statements for additional information
regarding income taxes.
Recently issued accounting standards.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133, as
amended, will require the recognition of all derivatives on the Company's
consolidated balance sheet at fair value. The Company will adopt the new
Statement effective January 1, 2001. The initial adoption of SFAS 133 will not
have a material effect on the Company's financial statements.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased to $375.1 million
at the end of 2000 from $214.3 million at the end of 1999. During 2000,
operating activities provided $182.5 million in cash. Net income of $75.3
million included non-cash charges of $35.4 million for depreciation, $38.8
million for amortization of intangibles, $36.3 million amortization of deferred
stock compensation, a $38.2 million in process research and development charge
and non-operating gains on sale of investments of $58.5 million.
Our investing activities included the maturity of and reinvestment in short-term
investments. We also made investments in other companies of $24.8 million,
purchased $104.3 million of plant and equipment, spent net cash of $15.5 million
on the acquisitions of Malleable, Datum and Octera, received $59.7 million of
proceeds from the sale of investments and paid out $3.9 million in net wafer
fabrication deposits.
In 2000, our financing activities provided $67.1 million. We used $11.4 million
for net debt and lease repayments, and received $78.4 million of proceeds from
issuing common stock.
Our principal source of liquidity at December 31, 2000 was our cash, cash
equivalents and short-term investments of $375.1 million. We also have a line of
credit with a bank that allows us to borrow up to $25 million provided, along
with other restrictions, that we do not pay cash dividends or make any material
divestments without the bank's written consent. By December 31, 2000, we had
committed $6.8 million of the available facility under letters of credit.
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, 2000 and 1999, we had $23.0 and $19.1 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.
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. 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 purchased $81.1 million in wafers from our foundry suppliers during 2000
compared to $30.5 million in 1999. Those amounts may not be indicative of any
future period since wafer prices and our volume requirements may change.
We believe that existing sources of liquidity and anticipated funds from
operations will satisfy our projected working capital, venture investing,
capital expenditure and wafer deposit requirements through 2001. We expect to
spend approximately $118 million on new capital additions and to make additional
venture investments as opportunities arise in 2001. We will decrease our
expenditures on capital additions if we do not grow as planned (See Outlook for
2001).
Outlook for 2001
Several of our customers' clients, particularly Internet Service Providers and
Competitive Local Exchange Carriers, have recently reported lower than expected
demand growth for their services or products. For most of these companies, this
has resulted in poor operating results and difficulty obtaining the capital
required to build their networks. Many of these companies may delay equipment
purchases or become insolvent in the near future. The larger incumbent carriers,
as a group, have announced plans to slow the rate of growth of their capital
expenditures. These factors, along with symptoms of a general economic slowdown
in the United States, have lowered the demand for equipment at several of our
significant customers, many of whom have announced large component inventories
and declines in expected operating results.
We expect softening demand for our customers' services and products, and our
customers' depletion of large inventories of our networking products will have a
negative impact on our total revenue and gross profit. We expect revenues and
gross profit to decline materially in at least the first two quarters of 2001 as
our networking customers adjust to lower demand for their equipment and absorb
their inventories of our networking products.
We intend to reduce spending on R&D and MG&A because of our expected revenue
decline, we expect these expenses to increase as a percentage of revenues in the
near term as we continue to focus on developing additional networking products.
We expect that any cost rationalization efforts, such as employee layoffs or
office consolidation, will result in a restructuring charge when implemented.
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.
We are subject to rapid changes in demand for our products due to customer
inventory levels, production schedules, end networking equipment demand
fluctuations and our customer concentration
Our customers may cancel or delay the purchase of our products to
manage their inventory or for various other reasons
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, sizeable and complex supplier
structures, and often engage contract manufacturers to supplement their
manufacturing capacity. This makes forecasting their production requirements
difficult and can lead to an inventory surplus of certain of their suppliers'
components.
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.
Recently, many of our customers indicated that they have accumulated significant
inventories of our chips when compared to their own recently reduced shipment
forecasts and have consequently reduced or delayed the desired shipment date of
their orders. This has materially reduced our visibility of future revenue
streams and caused an increase in our inventory levels. We expect that this will
significantly reduce our operating results, in at least the next two fiscal
quarters.
If demand for our customers' products changes, including due to a
downturn in the networking industry, our revenues could decline
Several of our customers' clients, particularly Competitive Local Exchange
Carriers and Internet Service Providers, have recently reported lower than
expected demand growth for their services or products, which has resulted in
poor operating results and difficulty accessing the capital needed to build
their networks or survive to profitability. Many of these companies may become
insolvent in the near future. This, along with symptoms of a general economic
slowdown in the United States, has affected the end demand at several of our
significant customers, many of whom have announced large component inventories
and declines in expected operating results.
In response, many of our customers and their contract manufacturers have
undertaken expenditure and inventory reduction initiatives and have canceled or
rescheduled orders with us. These actions may continue in future periods and may
accelerate if conditions worsen for our customers. We expect these business
conditions to materially affect our operating results in at least the next two
fiscal quarters.
In addition, while all of our sales are denominated in US dollars, our
customers' products are sold worldwide. While the current networking equipment
market downturn may have been limited to the United States, the networking
markets in the rest of the world could soon follow. Any decline in the world
networking markets could seriously depress our customers' order levels for PMC
products. This effect could be further exacerbated if fluctuations in currency
exchange rates further depress the demand for our customers' products.
We rely on a few customers for a major portion of our sales, any one of
which could materially impact our revenues should they change their
ordering pattern
We depend on a limited number of customers for a major portion of our revenues.
Through direct, distributor and subcontractor purchases, Cisco Systems and
Lucent Technologies each accounted for more than 10% of our fiscal 2000 and
fiscal 1999 revenues. Both of these companies have recently announced order
shortfalls for their products. We do not have long-term volume purchase
commitments from any of our major customers.
Because our operating expenses are relatively fixed in the short term,
fluctuations in our revenues can cause proportionately greater
fluctuations in our operating results
Many of our research, development, marketing, general and administrative
expenses are fixed from a short term perspective, while our revenues are not.
Thus, if our revenues fluctuate, our profit will fluctuate at a greater
percentage than our revenues.
PMC's rapid growth has strained our resources, and we may not be able to manage
future growth
PMC has experienced a period of rapid growth, which has placed and will continue
to place a significant strain on our resources. We increased our employee
headcount to 1,728 at the end of 2000 from 660 at the end of 1999, expanded our
operations and facilities, and increased the responsibilities of management. We
are experiencing typical challenges in integrating the number of acquisitions.
This process is absorbing a high percentage of management time that must be
diverted from other areas of our operations.
While we expect our revenue to decline in the near term, we may return to
historical growth levels over the long term. If this revenue swing occurs, our
management, manufacturing, product development, financial, information systems
and other resources may be strained. In addition, our systems, procedures,
controls and existing space may not be adequate to support growth in our
operations.
We rely on a continuous power supply to conduct our operations, and California's
current energy crisis could disrupt our operations and increase our expenses.
Our sales headquarters and a significant proportion of our research and
development and production facilities reside in California. California is in the
midst of an energy crisis that could disrupt our operations and increase our
expenses. In the event of an acute power shortage, that is, when power reserves
for the State of California fall below 1.5%, California has on some occasions
implemented, and may in the future continue to implement, rolling blackouts
throughout California.
We currently do not have backup generators or alternate sources of power in the
event of a blackout. If blackouts interrupt our power supply, we would be
temporarily unable to continue operations at our facilities. Any such
interruption in our ability to continue operations at our facilities could delay
the introduction of new products, frustrate our sales efforts, damage our
reputation, harm our ability to retain existing customers and to obtain new
customers, and could result in lost revenue, any of which could substantially
harm our business and results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996 by the
California government has caused power prices to increase. Under deregulation,
utilities were encouraged to sell their plants, which traditionally had produced
most of California's power, to independent energy companies that were expected
to compete aggressively on price. Instead, due in part to a shortage of supply,
wholesale prices have skyrocketed over the past year. If wholesale prices
continue to increase, our operating expenses will likely increase.
We are exposed to the credit risk of some of our customers and we may have
difficulty collecting receivables from customers based in foreign countries
Many of our customers outsource the manufacturing of their products to contract
manufacturers and the inventory management of our product through our major
distributor. Many of these entities have built large inventories of our products
and generally represent greater credit risk than our networking equipment
customers.
The bulk of the revenues for several of our customers come from companies that
have recently reported lower than expected demand growth for their services or
products, such as Competitive Local Exchange Carriers and Internet Service
Providers. This has materially and adversely affected some of our customers,
some of which may become insolvent in the near future.
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. In addition, we may be faced with greater difficulty in collecting
outstanding balances due to the sheer distances between our collection
facilities and our customers, and we may be unable to enforce receivable
collection in foreign nations due to their business legal systems.
If one or more of our customers delays payment or does not pay their outstanding
receivable, our balance sheet may be materially impacted or we may be forced to
write-off the account.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance
PMC closed eight acquisitions in fiscal 2000. Acquiring products, technologies
or businesses from third parties is an integral part of our business strategy.
Management may be diverted from our operations while they identify and negotiate
these acquisitions and integrate an acquired entity into our operations. Also,
we may be forced to develop expertise outside our existing businesses, and
replace key personnel who leave due to an acquisition. We have not previously
attempted to integrate several acquisitions simultaneously and may not succeed
in this effort.
An acquisition could absorb substantial cash resources, require us to incur or
assume debt obligations, or issue additional equity. If we issue more equity, we
may dilute our common stock with securities that have an equal or a senior
interest.
Acquired entities also may have unknown liabilities, and the combined entity may
not achieve the results that were anticipated at the time of the acquisition.
PMC has not yet achieved revenues from some of its recent acquisitions
The products from six of the companies PMC has acquired in fiscal 2000 have been
incorporated into customer equipment designs that have yet to generate
significant revenue for PMC. These or any follow-on products may not achieve
commercial success. These acquisitions may not generate future revenues or
earnings.
The timing of revenues from newly designed products is often uncertain. In the
past, we have had to redesign products that we acquired when buying other
businesses, resulting in increased expenses and delayed revenues. This may occur
in the future as we commercialize the new products resulting from recent
acquisitions.
PMC began designing digital signal processors with the acquisitions of Toucan,
Malleable and Datum. Prior to these acquisitions, PMC had limited design
expertise in this technology, and may fail to bring digital signal processing
products to market successfully. In addition, Datum's technology is applicable
to the radio frequency wireless networking market - a market in which PMC had
little experience.
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
We are experiencing significantly greater competition from many different market
participants as the market in which we participate matures. In addition, we are
expanding into markets that have established incumbents that have substantial
financial and technological resources. We expect fiercer competition than that
which we have traditionally faced as some of these incumbents derive a majority
of their earnings from these markets.
All of our competitors pose the following threats to PMC:
As our customers increase the frequency by which they design next
generation systems and select the chips for those new systems, our
competitors have an increased opportunity to convince our customers to
switch to their products, which may cause our revenues to decline
The markets for our products are intensely competitive and subject to rapid
technological advancement in design tools, wafer manufacturing techniques,
process tools and alternate networking technologies. We must identify and
capture future market opportunities to offset the rapid price erosion that
characterizes our industry. We may not be able to develop new products at
competitive pricing and performance levels. Even if we are able to do so, we may
not complete a new product and introduce it to market in a timely manner. Our
customers may substitute use of our products in their next generation equipment
with those of current or future competitors.
We typically face competition at the design stage, where customers evaluate
alternative design approaches that require integrated circuits. Our competitors
have increasingly frequent opportunities to supplant our products in next
generation systems because the product life and design-in cycles in many of our
customers' products.
Increasing competition in our industry will make it more difficult to
earn design wins in our customer's equipment
Major domestic and international semiconductor companies, such as Intel, IBM,
Lucent Technologies and Motorola, 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, while our peers are becoming mature, successful and
sophisticated.
Our competitors include Applied Micro Circuits Corporation, Broadcom, Conexant
Systems, Cypress Semiconductor, Dallas Semiconductor, Exar Corporation,
Integrated Device Technology, IBM, Infineon, Intel, Lucent Technologies
(including Agere), Marvell Technology Group, Motorola, Multilink Technology
Corporation, Nortel 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.
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, represent
strong competition for many design wins, and subsequent product sales. Larger
competitors in our market have recently acquired or announced plans to acquire
both publicly traded and privately held companies with advanced technologies.
These acquisitions could enhance the ability of larger competitors to obtain new
business that PMC might have otherwise won.
We must often redesign our products to meet rapidly evolving industry
standards and customer specifications, which may delay an increase in
our revenues
We sell products to a market whose characteristics include rapidly evolving
industry standards, product obsolescence, and new manufacturing and design
technologies. Many of the standards and protocols for our products are based on
high speed networking technologies that have not been widely adopted or ratified
by one or more 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.
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 or customer specifications. 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.
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. As
employee incentives, we issue common stock options that generally have exercise
prices at the market value at the time of grant and that are subject to vesting.
Recently, our stock price has declined substantially. The stock options we grant
to employees are effective as retention incentives only if they have economic
value.
PMC's operating results may be impacted differently depending on which method we
use to account for acquisitions
A future acquisition could adversely affect operating results, particularly if
we record the acquisition as a purchase such as the Malleable and Datum
acquisitions. In purchase acquisitions, we may incur a significant charge for
purchased in process research and development in the period in which the
acquisition is closed. In addition, we may capitalize a significant goodwill or
other intangible assets that would be amortized over their expected period of
benefit. The resulting amortization expense could seriously impact operating
results for many years. PMC may enter into additional purchase acquisitions in
the future.
We have accounted for a number of our recent mergers as pooling of interests.
If, after completion of these mergers, events occur that cause the merger to
fail to qualify for pooling of interests accounting treatment, the purchase
method of accounting would apply. Purchase accounting treatment would seriously
harm the reported operating results of the combined company because the
estimated fair value of PMC common stock issued in the mergers is much greater
than the historical net book value of the assets in each of the acquired
company's accounts.
If the market does not accept the recently developed specifications and
protocols on which our new products are based, we may not be able to sustain or
increase our revenues
Some of our other recently introduced products adhere to specifications
developed by industry groups for transmissions of data signals, or packets, over
high-speed fiber optics transmission standards. These transmission standards are
called synchronous optical network, or SONET, in North America, and synchronous
data hierarchy, or SDH, in Europe. The specifications, commonly called
packet-over-SONET/SDH, may be rejected for other technologies, such as mapping
IP directly onto fiber. In addition, we cannot be sure whether our products will
compete effectively with packet-over-SONET/SDH offerings of other companies.
A substantial portion of our business also relies on continued industry
acceptance of asynchronous transfer mode, or ATM, products. ATM is a networking
protocol. While ATM has been an industry standard for a number of years, the
overall ATM market has not developed as rapidly as some observers had predicted
it would. As a result, competing communications technologies, including gigabit
and fast ethernet and packet-over-SONET/SDH, may inhibit the future growth of
ATM and our sales of ATM products.
A significant portion of PMC's revenues relate to sales of our MIPS-based
processors. If MIPS Technologies develops future generations of its technology,
we may not be able to obtain a license on reasonable terms.
MIPS Technologies has introduced, and will likely continue to introduce, new
generations of its microprocessor technology architecture containing
improvements that are not covered by the technology we are currently licensing
from MIPS Technologies. A significant part of our success could depend on our
ability to develop products that incorporate those improvements. We may not be
able to license the technology for any new improvements from MIPS Technologies
on commercially reasonable terms or at all. If we cannot obtain required
licenses from MIPS Technologies, we could encounter delays in product
development while we attempt to develop similar technology, or we may not be
able to develop, manufacture and sell products incorporating this technology.
In addition, our current microprocessor products and planned future products are
based upon the microprocessor technology we license from MIPS Technologies. If
we fail to comply with any of the terms of its license agreement, MIPS
Technologies could terminate our rights, preventing us from marketing our
current and planned microprocessor products.
We anticipate lower margins on mature and high volume products, which could
adversely affect our profitability
We expect the average selling prices of our products to decline as they mature.
Historically, competition in the semiconductor industry has driven down the
average selling prices of products. If we price our products too high, our
customers may use a competitor's product or an in-house solution. To maintain
profit margins, we must reduce our costs sufficiently to offset declines in
average selling prices, or successfully sell proportionately more new products
with higher average selling prices. Yield or other production problems, or
shortages of supply may preclude us from lowering or maintaining current
operating costs. Our networking products range widely in terms of the margins
they generate. A change in product sales mix could impact our operating results
materially.
We may not be able to meet customer demand for our products if we do not
accurately predict demand or if we fail to secure adequate wafer fabrication or
assembly capacity
We currently do not have the ability to accurately predict what products our
customers will need in the future. Anticipating demand is difficult because our
customers face volatile pricing and demand for their end-user networking
equipment and because we supply a large number of products to a variety of
customers and contract manufacturers who have many equipment programs for which
they purchase PMC products. If we do not accurately predict what mix of products
our customers may order, we may not be able to meet our customers' demand in a
timely manner and may be left with unwanted inventory.
Recently, our customers have significantly delayed, canceled or otherwise
changed future ordering patterns. If these or other customers do not order the
products we have in stock, we could be left with unwanted inventory.
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. Additionally, since our products use a wide range of process
technologies, we may not be able to secure the specific wafer capacity for the
specific mix of products we demand. 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.
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.
We rely on limited sources of wafer fabrication, the loss of which
could delay and limit our product shipments
We do not own or operate a wafer fabrication facility. Three outside foundries
supply most of our semiconductor device requirements. Our foundry suppliers also
produce products for themselves and other companies. In addition, we may not
have access to adequate capacity or certain process technologies. We have less
control over delivery schedules, manufacturing yields and costs than competitors
with their own fabrication facilities. If the foundries we use are unable or
unwilling to manufacture our products in required volumes, we may have to
identify and qualify acceptable additional or alternative foundries. This
qualification process could take six months or longer. We may not find
sufficient capacity quickly enough, if ever, to satisfy our production
requirements.
Some companies that 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 our products 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 our products are designed.
We depend on third parties in Asia for assembly of our semiconductor
products that 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 that, 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 that operate their businesses mostly in the
United States, which may impair our sales, development or manufacturing of our
products
We are subject to the risks of conducting business outside the United States to
a greater extent than most companies because, in addition to selling our
products in a number of countries, a significant portion of our research and
development and manufacturing is conducted outside of the United States.
PMC's geographic expansion, acquisitions and growth rate could hinder its
ability to coordinate design and sales activities. If PMC is unable to develop
systems and communication processes to support its expanding geographic
diversity, it may suffer product development delays or strained customer
relationships.
We may lose our ability to design or produce products, could face
additional unforeseen costs or could lose access to key customers if
any of the nations in which we conduct business impose trade barriers
or new communications standards
We may have difficulty obtaining export licenses for certain technology produced
for us outside the United States. If a foreign country imposes new taxes,
tariffs, quotas, and other trade barriers and restrictions or the United States
and a foreign country develop hostilities or change diplomatic and trade
relationships, we may not be able to continue manufacturing or sub-assembly of
our products in that country and may have fewer sales in that country. We may
also have fewer sales in a country that imposes new communications standards or
technologies. This could inhibit our ability to meet our customers' demand for
our products and lower our revenues.
If foreign exchange rates fluctuate significantly, our profitability
may decline
We are exposed to foreign currency rate fluctuations because a significant part
of our development, test, marketing and administrative costs are denominated in
Canadian dollars, and our selling costs are denominated in a variety of
currencies around the world. In addition, a number of the countries in which we
have sales offices have a history of imposing exchange rate controls. This could
make it difficult to withdraw the foreign currency denominated assets we hold in
these countries.
We are defendants in several outstanding legal proceedings about which we are
unable to assess our exposure and which could become significant liabilities
upon judgment.
We are defendants in a number of legal proceedings that we believe will have
immaterial consequences or are unable to assess our level of exposure. These
proceedings could create a material charge to our operating results in the
future if our exposure increases or if our ability to assess our exposure
becomes clearer.
If we cannot protect our proprietary technology, we may not be able to prevent
competitors from copying 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 we or our competitors announce new products, our customers' results
fluctuate, conditions in the networking or semiconductor industry change or
investors change their sentiment toward technology stocks.
In addition, fluctuations in our stock price and our price-to-earnings multiple
may have made our stock attractive to momentum, hedge or day-trading investors
who often shift funds into and out of stocks rapidly, exacerbating price
fluctuations in either direction particularly when viewed on a quarterly basis.
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.
Short term Investments:
We maintain a short term investment portfolio of various holdings, types and
maturities of less than one year. To minimize credit risk the short term
investments are diversified and generally consist of either Commercial Paper,
rated P-1 by Moody's and A-1 or higher by Standard and Poor's, or Auction Rate
Preferred's with a rating of Aaa/AAA. These securities are generally classified
as held to maturity and accordingly are recorded on the balance sheet at cost.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted because of a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations because of changes in interest rates or we may suffer losses in
principal if we were to sell securities which have declined in market value
because of changes in interest rates.
Our investments are made in accordance with an investment policy approved by our
Board of Directors. Under this policy, all short term investments must be made
in investment grade securities with original maturities of less than one year at
the time of acquisition.
We do not attempt to reduce or eliminate our exposure to interest rate risk
through the use of derivative financial instruments due to the short-term nature
of the investments.
Based on a sensitivity analysis performed on the financial instruments held at
December 31, 2000 that are sensitive to changes in interest rates, the fair
value of our short-term investment portfolio would not be significantly impacted
by an immediate hypothetical parallel shift in the yield curve of plus or minus
50 basis points ("BPS"), 100 BPS or 150 BPS.
Other Investments:
Other investments at December 31, 2000 include a minority investment in Sierra
Wireless Inc., a publicly traded company, half of which has been classified as
available for sale. Consequently, these securities are recorded on the balance
sheet at fair value with unrealized gains or losses reported as a separate
component of accumulated other comprehensive income, net of tax. The value of
our investment in these shares is subject to considerable market price
volatility. For example, as a result of recent market price volatility, the
unrealized gain on this investment, net of tax, recorded at December 31, 2000 of
$32.6 million has, as of March 15, 2001, been reduced to an unrealized gain, net
of tax, of approximately, $20.3 million.
Our other investments also include numerous investments in privately held
companies and our remaining investment in Sierra Wireless Inc. shares which are
subject to certain resale restrictions and are therefore carried at cost. Our
investments in private companies are inherently risky as they typically consist
of investments in companies which are still in the start-up or development
stages. The market for the technologies or products that they have under
development are typically in the early stages and may never materialize. Our
investment in the Sierra Wireless Inc. shares which are subject to certain
resale restrictions are subject to the same market volatility as the available
for sale securities noted above with an additional risk due to the resale
restriction. Accordingly, we could lose our entire investment in these
companies.
Foreign Currency
We generate a significant portion of our revenues from sales to customers
located outside of the United States including Canada, Europe and the Middle
East and Asia. We are subject to risks typical of an international business
including, but not limited to, differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions
and foreign exchange rate volatility. Accordingly, our future results could be
materially adversely affected by changes in these or other factors.
Our sales and corresponding receivables are made primarily in United States
dollars. Through our operations in Canada and elsewhere outside of the United
States, we incur research and development, customer support costs and
administrative expenses in Canadian and other local currencies. We are exposed,
in the normal course of business, to foreign currency risks on these
expenditures. In our effort to manage such risks, we have adopted a foreign
currency risk management policy intended to reduce the effects of potential
short-term fluctuations on the results of operations stemming from our exposure
to these risks. As part of this risk management, 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 managing our foreign currency
risk in the future, we may change our foreign currency risk management
methodology and utilize foreign exchange contracts that are currently available
under our operating line of credit agreement.
The purpose of our foreign currency risk management policy is to reduce the
effect of exchange rate fluctuations on our results of operations. Therefore,
while our foreign currency risk management policy may reduce our exposure to
losses resulting from unfavorable changes in currency exchange rates, it also
reduces or eliminates our ability to profit from favorable changes in currency
exchange rates.
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 2000, we did not have significant foreign currency denominated net asset
or net liability positions, and we had no outstanding foreign exchange
contracts.
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 the Item 8 of Part II of this
Form 10-K.
Consolidated Financial Statements Included in Item 8:
Page
Report of Deloitte & Touche LLP, Independent Auditors -
Consolidated Balance Sheets at December 31, 2000 and 1999 -
Consolidated Statements of Operations for each of the three -
years in the period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the three -
years in the period ended December 31, 2000
Consolidated Statements of Stockholders' Equity for each -
of the three years in the period ended December 31, 2000
Notes to Consolidated Financial Statements -
Schedules for each of the three years in the period ended December 31, 2000
included in Item 14 (a):
II Valuation and Qualifying Accounts S-1
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 of PMC-Sierra, Inc.
We have audited the accompanying consolidated balance sheets of PMC-Sierra, Inc.
as of December 31, 2000 and 1999 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. 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 19, 2001
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands except par value)
December 31,
-----------------------
2000 1999
ASSETS:
Current assets:
Cash and cash equivalents $ 256,198 $ 101,514
Short-term investments 118,918 112,751
Accounts receivable, net of allowance for
doubtful accounts of $1,934 ($1,553 in 1999) 93,852 42,251
Inventories, net 54,913 14,277
Deferred income taxes 13,947 9,330
Prepaid expenses and other current assets 26,910 9,012
Short-term deposits for wafer fabrication capacity 6,265 4,637
------------ ----------
Total current assets 571,003 293,772
Property and equipment, net 127,534 51,978
Goodwill and other intangible assets, net of
accumulated amortization of $48,326 ($9,961 in 1999) 326,150 16,690
Investments and other assets 84,667 11,827
Deposits for wafer fabrication capacity 16,736 14,483
------------ ----------
$ 1,126,090 $ 388,750
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 60,978 $ 17,860
Accrued liabilities 39,724 20,242
Deferred income 64,055 34,658
Income taxes payable 63,491 25,912
Current portion of obligations under capital
leases and long-term debt 1,769 4,081
------------ ----------
Total current liabilities 230,017 102,753
Deferred income taxes 37,824 9,091
Non-current obligations under capital leases
and long-term debt 564 5,117
Commitments and contingencies (Note 6)
PMC special shares convertible into 3,746
(1999 - 4,242) shares of common stock 6,367 6,998
Preferred stock - 39,949
Stockholders' equity:
Common stock and additional paid in capital,
par value $0.001; 900,000 shares authorized;
162,284 shares issued and outstanding
(148,009 shares in 1999) 796,229 240,373
Deferred stock compensation (43,128) (5,887)
Accumulated other comprehensive income 32,563 -
Retained earnings (accumulated deficit) 65,654 (9,644)
----------- ----------
Total stockholders' equity 851,318 224,842
------------ ----------
$ 1,126,090 $ 388,750
============ ==========
See notes to consolidated financial statements
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Year Ended December 31,
---------------------------------
2000 1999 1998
Net revenues $ 694,684 $ 295,768 $ 174,288
Cost of revenues 166,161 73,439 45,290
---------------------------------
Gross profit 528,523 222,329 128,998
Other costs and expenses:
Research and development 178,806 83,676 50,890
Marketing, general and administrative 100,589 52,301 33,842
Amortization of deferred stock compensation:
Research and development 32,258 3,738 1,329
Marketing, general and administrative 4,006 1,383 140
Amortization of goodwill 36,397 1,912 915
Costs of merger 37,974 866 -
Acquisition of in process research and
development 38,200 - 39,176
Impairment of intangible assets - - 4,311
---------------------------------
Income (loss) from operations 100,293 78,453 (1,605)
Interest and other income, net 18,926 7,922 2,903
Gain on sale of investments 58,491 26,800 -
---------------------------------
Income before provision for income taxes 177,710 113,175 1,298
Provision for income taxes 102,412 41,346 22,997
---------------------------------
Net income (loss) $ 75,298 $ 71,829 $ (21,699)
=================================
Net income (loss) per common share - basic $ 0.46 $ 0.49 $ (0.16)
=================================
Net income (loss) per common share - diluted $ 0.41 $ 0.45 $ (0.16)
=================================
Shares used in per share calculation - basic 162,377 146,818 137,750
Shares used in per share calculation - diluted 181,891 160,523 137,750
See notes to consolidated financial statements.
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
-----------------------------------
2000 1999 1998
Cash flows from operating activities:
Net income (loss) $ 75,298 $ 71,829 $(21,699)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of plant and equipment 35,424 19,866 12,928
Amortization of intangibles 38,757 3,599 2,850
Amortization of deferred stock compensation 36,264 5,121 1,469
Deferred income taxes 1,268 (2,921) (1,192)
Equity in income of investee (574) (792) -
Gain on sale of investments (58,491) (26,800) -
Acquisition of in process research and development 38,200 - 39,176
Impairment of intangible assets - - 4,311
Changes in operating assets and liabilities
Accounts receivable (51,580) (13,435) (9,981)
Inventories (40,668) (9,061) (1,462)
Prepaid expenses and other current assets (18,233) (2,700) (2,435)
Accounts payable and accrued liabilities 59,417 9,426 2,561
Deferred income 29,397 21,710 9,666
Income taxes payable 38,062 11,821 5,742
Net liabilities associated with discontinued operations - - (301)
----------- ----------- ----------
Net cash provided by operating activities 182,541 87,663 41,633
----------- ----------- ----------
Cash flows from investing activities:
Purchases of short-term investments (309,269) (137,556) (53,001)
Proceeds from sales and maturities of short-term investments 303,102 75,697 43,442
Purchases of plant and equipment (104,296) (34,731) (23,582)
Purchase of investments (24,834) (8,500) -
Proceeds from sale of investments 59,737 28,628 -
Purchase of intangible assets - (411) -
Investment in wafer fabrication deposits (8,584) -
Proceeds from refund of wafer fabrication deposits 4,703 4,000 4,000
Acquisition of businesses, net of cash acquired (15,473) - (27,165)
Purchase of other in process research and development - - (1,419)
----------- ----------- ----------
Net cash used in investing activities (94,914) (72,873) (57,725)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 2,066 2,971 2,168
Repayment of notes payable and long-term debt (8,279) (2,687) (764)
Proceeds from sale/leaseback of equipment - - 140
Principal payments under capital lease obligations (5,156) (8,590) (5,280)
Proceeds from issuance of preferred stock - 19,479 11,950
Proceeds from issuance of common stock 78,426 25,866 22,837
----------- ----------- ----------
Net cash provided by financing activities 67,057 37,039 31,051
----------- ----------- ----------
Net increase in cash and cash equivalents 154,684 51,829 14,959
Cash and cash equivalents, beginning of the year 101,514 49,685 34,726
----------- ----------- ----------
Cash and cash equivalents, end of the year $ 256,198 $ 101,514 $ 49,685
=========== =========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 698 $ 1,060 $ 1,315
Cash paid for income taxes 61,519 33,203 13,001
Supplemental disclosures of non-cash investing and
financing activities:
Issuance of common stock and stock options for acquisitions
under the purchase method of accounting 414,938 - 28,221
Capital lease obligations incurred for purchase of property
and equipment 3,634 408 689
Notes payable issued for purchase of property and equipment - 2,206 757
Conversion of PMC-Sierra special shares into common stock 631 1,389 2,406
See notes to consolidated financial statements.
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock
and Additional Accumulated Retained
Common Stock Paid in Deferred Other Earnings Total
Number Capital Stock Comprehensive (Accumulated) Stockholders'
of Shares (1) Amount (1) Compensation Income (Deficit) Equity
- -------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 124,028 $ 145,486 $ - $ - $ (59,774) $ 85,712
Net loss - - - - (21,699) (21,699)
Conversion of special shares
into common stock 1,436 2,406 - - - 2,406
Issuance of common stock
under stock benefit plans 6,082 22,704 - - - 22,704
Issuance of common stock
for contribution of assets 491 279 - - - 279
Issuance of common stock
for cash 234 133 - - - 133
Issuance of common stock
on acquisition of subsidiaries 1,660 28,221 - - - 28,221
Deferred stock compensation - 4,917 (4,917) - - -
Amortization of deferred - - 1,469 - - 1,469
stock compensation
Balances at December 31, 1998 133,931 204,146 (3,448) - (81,473) 119,225
Net income - - - - 71,829 71,829
Conversion of special shares
into common stock 792 1,389 - - - 1,389
Issuance of common stock
under stock benefit plans 12,432 18,643 - - - 18,643
Issuance of common stock
for services rendered 9 142 - - - 142
Issuance of common stock
for cash 757 8,418 - - - 8,418
Conversion of warrants
into common stock 88 75 - - - 75
Deferred stock compensation - 7,560 (7,560) - - -
Amortization of deferred - - 5,121 - - 5,121
stock compensation
Balances at December 31, 1999 148,009 240,373 (5,887) - (9,644) 224,842
Net income - - - - 75,298 75,298
Change in net unrealized gains
on investments - - - 32,563 - 32,563
Conversion of special shares
into common stock 496 631 - - - 631
Conversion of preferred stock
into common stock 5,243 39,949 - - - 39,949
Issuance of common stock
under stock benefit plans 4,421 27,359 - - - 27,359
Issuance of common stock
for cash 1,949 50,804 - - - 50,804
Issuance of common stock on
acquisition of subsidiaries 1,896 414,938 - - - 414,938
Conversion of warrants
into common stock 270 263 - - - 263
Deferred stock compensation - 21,912 (21,912) - - -
Deferred stock compensation
on acquisition of subsidiaries - - (51,593) - - (51,593)
Amortization of deferred - - 36,264 - - 36,264
stock compensation
Balances at December 31, 2000 162,284 $ 796,229 $(43,128) $ 32,563 $ 65,654 $ 851,318
=============================================================================================
(1) includes exchangeable shares
See notes to consolidated financial statements.
NOTE 1. Summary of Significant Accounting Policies
Description of business. PMC-Sierra, Inc (the "Company" or "PMC-Sierra")
designs, develops, markets and supports 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.
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 year 2000 consisted of 53 weeks
and fiscal years 1999 and 1998 each consisted of 52 weeks. The Company's
reporting currency is the United States dollar.
Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and disclosures made in the accompanying notes.
Estimates are used for, but not limited to, the accounting for doubtful
accounts, inventory reserves, depreciation and amortization, sales returns,
warranty costs, income taxes and contingencies. Actual results could differ from
those estimates.
Cash, cash equivalents and short-term investments. Cash equivalents are defined
as highly liquid debt instruments with original maturities or remaining
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 or remaining 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", 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, net of any related tax effect 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, 2000, the Company's short-term investments consisted of
held-to-maturity investments, and their carrying value was substantially the
same as their market value. As at December 31, 1999, $6.1 million of short-term
investments were classified as available-for-sale securities. The carrying value
of short-term investments was substantially the same as their market value. The
proceeds from sales and realized gains or losses on sales of short-term
investments classified as 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). Cost is computed using standard
cost, which approximates actual average cost.
The components of inventories are as follows:
December 31,
---------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Work-in-progress $ 31,035 $ 10,275
Finished goods 23,878 4,002
- --------------------------------------------------------------------------------
$ 54,913 $ 14,277
==================================
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 components of property and equipment are as follows:
December 31,
----------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Machinery and equipment $ 170,757 $ 91,689
Land 14,090 -
Leasehold improvements 13,794 5,426
Furniture and fixtures 13,612 5,043
Building 701 701
Construction-in-progress 2,256 -
- --------------------------------------------------------------------------------
215,210 102,859
Less accumulated depreciation and amortization (87,676) (50,881)
----------------------------------
Total $ 127,534 $ 51,978
==================================
The Company leases furniture, computer equipment and application software under
long-term capital leases. Accordingly, capitalized costs of approximately
$8,972,000 and $8,287,000 at December 31, 2000 and 1999, respectively, and
accumulated amortization of approximately $6,334,000 and $5,999,000,
respectively, are included in property and equipment.
Goodwill and other intangible assets. Goodwill, developed technology and other
intangible assets are carried at cost less accumulated amortization.
Amortization is computed on a straight-line basis over the economic lives of the
respective assets, which are generally three to seven years.
The components of goodwill and other intangible assets that arose through
acquisitions are as follows:
December 31,
---------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Goodwill $ 362,946 $ 15,907
Developed technology 9,830 9,694
Other 1,700 1,050
- --------------------------------------------------------------------------------
374,476 26,651
Accumulated amortization (48,326) (9,961)
- --------------------------------------------------------------------------------
$ 326,150 $ 16,690
==================================
Impairment of long-lived assets. The Company periodically reviews its long-lived
assets and certain intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying value of such assets may not be
recoverable. To determine recoverability, the Company compares the carrying
value of the assets to estimated future undiscounted cash flows. Measurement of
an impairment loss for long-lived assets or certain identifiable intangible
assets held for use is based on the fair value of the asset. Long-lived assets
and certain identifiable intangible assets to be disposed of are reported at the
lower of carrying value or fair value.
Investments in non-public companies. The Company has certain investments in
non-publicly traded companies in which it has less than 20% of the voting rights
and in which it does not exercise significant influence. These investments are
included in Investments and other assets on the Company's balance sheet and are
carried at cost. The Company monitors these investments for impairment and makes
appropriate reductions in carrying values 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. These
investments are included in Investments and other assets on the Company's
balance sheet.
Deposits for wafer fabrication capacity. Two independent foundries provide
substantially all of the Company's wafer supply. Under wafer supply agreements
with these foundries, the Company has deposits of $23.0 million (1999 - $19.1
million) to secure access to wafer fabrication capacity. During 2000, the
Company purchased $81.1 million ($30.5 million and $18.3 million in 1999 and
1998, 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 2000 purchases, the
Company is entitled to receive a $6.3 million refund from these suppliers in the
first quarter of 2001. 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) 2000 1999
- -----------------------------------------------------------------------------
Accrued compensation and benefits $ 19,600 $ 9,392
Other accrued liabilities 20,124 10,850
- -----------------------------------------------------------------------------
$ 39,724 $ 20,242
===============================
Foreign currency translation. For all foreign operations, the U.S. dollar is the
functional currency. Assets and liabilities in foreign currencies are translated
into U.S. dollars 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 of their short maturities.
The fair value of the Company's long-term debt and obligations under capital
leases at December 31, 2000 and 1999 also approximates their carrying value. The
fair value of investments in public companies is determined using quoted market
prices for those securities. The fair value of investments in non-public
companies is not readily determinable.
The fair value of the deposits for wafer fabrication capacity is not readily
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, 2000, approximately 26% (1999 - 43%) 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, relatively
short collection terms or the geographical dispersion of our 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.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and disclosure related to revenue recognition policies
in financial statements filed with the SEC. The Company adopted SAB 101 in the
fourth quarter of 2000 with no material impact on the Company's financial
position and results of operations.
Advertising costs. The Company expenses all advertising costs as incurred.
Interest and other income, net. The components of interest and other income, net
are as follows:
Year Ended December 31,
------------------------------------------------
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Interest income $ 19,243 $ 8,511 $ 4,378
Interest expense ( * ) (808) (1,549) (1,434)
Equity in income of investee 574 792 -
Other (83) 168 (41)
- --------------------------------------------------------------------------------
$ 18,926 $ 7,922 $ 2,903
================================================
* consists primarily of interest on long-term debt and obligations under 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.
Valuation allowances are provided if, after considering available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
Net income (loss) per common share. Basic net income (loss) per share is
computed using the weighted average number of common shares outstanding during
the period. The PMC-Sierra Ltd. Special Shares have been included in the
calculation of basic net income (loss) 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 common share data presented reflect the two-for-one stock splits
effective February 2000 and May 1999.
Segment reporting. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information". 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.
Recently issued accounting standards. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS 133, as amended, will require the recognition of
all derivatives on the Company's consolidated balance sheet at fair value. The
Company will adopt the new Statement effective January 1, 2001. The initial
adoption of SFAS 133 will not have a material effect on the Company's financial
statements.
Reclassifications. Certain prior year amounts have been reclassified in order to
conform to the 2000 presentation.
NOTE 2. Business Combinations
Poolings of Interests:
Fiscal 2000
Acquisition of SwitchOn Networks Inc.
In September 2000, the Company acquired SwitchOn Networks Inc., a privately held
packet content processor company, with offices in the United States and India.
Under the terms of the agreement, approximately 2,112,000 shares of common stock
were exchanged and options assumed to acquire SwitchOn.
PMC-Sierra recorded merger related transaction costs of $1,116,000 related to
the acquisition of SwitchOn. These charges, which consist primarily of legal and
accounting fees, were included under costs of merger in the Consolidated
Statement of Operations for the year ended December 31, 2000.
Acquisition of Quantum Effect Devices, Inc.
In August 2000, the Company acquired Quantum Effect Devices, Inc., a public
company located in the United States. QED develops embedded microprocessors that
perform information processing in networking equipment. Under the terms of the
agreement, approximately 12,300,000 shares of common stock were exchanged and
options assumed to acquire QED.
PMC-Sierra recorded merger-related transaction costs of $23,180,000 related to
the acquisition of QED. These charges, which consist primarily of investment
banking and other professional fees, were included under costs of merger in the
Consolidated Statements of Operations for the year ended December 31, 2000.
Acquisition of Extreme Packet Devices, Inc.
In April 2000, the Company acquired Extreme Packet Devices, Inc., a privately
held fabless semiconductor company located in Canada. Extreme specializes in
developing semiconductors for high speed IP and ATM traffic management at 10
Gigabits per second rates. Under the terms of the agreement, approximately
2,000,000 exchangeable shares (see note 9) were exchanged and options assumed to
acquire Extreme.
PMC-Sierra recorded merger-related transaction costs of $5,776,000 related to
the acquisition of Extreme. These charges, which consist primarily of investment
banking and other professional fees, were included under costs of merger in the
Consolidated Statements of Operations for the year ended December 31, 2000.
Acquisition of AANetcom, Inc.
In March 2000, the Company acquired AANetcom, Inc., a privately held fabless
semiconductor company located in the United States. AANetcom's technology is
designed for use in gigabit or terabit switchers and routers, telecommunication
access equipment, and optical networking switches in applications ranging from
the enterprise to the core of the Internet. Under the terms of the agreement,
approximately 4,800,000 shares of common stock were exchanged and options
assumed to acquire AANetcom.
PMC-Sierra recorded merger-related transaction costs of $7,368,000 related to
the acquisition of AANetcom. These charges, which consist primarily of
investment banking and other professional fees, were included under costs of
merger in the Consolidated Statements of Operations for the year ended December
31, 2000.
Acquisition of Toucan Technology Ltd.
In January 2000, the Company acquired Toucan Technology Ltd., a privately held
integrated circuit design company located in Ireland. Toucan offers expertise in
telecommunications semiconductor design. At December 31, 1999, the Company owned
seven per cent of Toucan and purchased the remainder for approximately 300,000
shares of common stock and stock options.
PMC-Sierra recorded merger-related transaction costs of $534,000 related to the
acquisition of Toucan. These charges, which consist primarily of investment
banking and other professional fees, were included under costs of merger in the
Consolidated Statements of Operations for the year ended December 31, 2000.
The acquisitions of SwitchOn, QED, Extreme, AANetcom and Toucan were accounted
for as poolings of interests and accordingly, all prior periods have been
restated.
The historical results of operations of the Company, Toucan, AANetcom, Extreme,
QED and SwitchOn for the periods prior to the mergers are as follows:
Nine months
ended
September 30, Year ended December 31,
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Net revenues
PMC (including Abrizio) $ 411,046 $ 262,477 $ 161,812
Toucan - 24 739
AANetcom 68 780 830
Extreme 50 - -
QED 51,407 31,462 9,035
SwitchOn 461 1,025 1,872
- --------------------------------------------------------------------------------
Combined $ 463,032 $ 295,768 $ 174,288
=========================================
Net income (loss)
PMC (including Abrizio) $ 83,691 $ 90,020 $ (5,945)
Toucan (1,963) (221) (1,057)
AANetcom (17,965) (6,210) (1,733)
Extreme (11,327) (1,987) -
QED (11,954) (7,163) (12,852)
SwitchOn (9,038) (2,610) (112)
- --------------------------------------------------------------------------------
Combined $ 31,444 $ 71,829 $ (21,699)
=========================================
Fiscal 1999
Acquisition of Abrizio, Inc.
In 1999, the Company 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. Under the terms of the agreement,
approximately 8,704,000 shares of common stock were exchanged and options
assumed to acquire Abrizio.
PMC-Sierra 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 for the year ended December 31, 1999.
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 Year Ended
Ended June 30, December 31,
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Net revenues
PMC $ 109,426 $ 161,812
Abrizio 850 -
- --------------------------------------------------------------------------------
Combined $ 110,276 $ 161,812
================================
Net income (loss)
PMC $ 51,715 $ (2,878)
Abrizio (3,670) (3,067)
- --------------------------------------------------------------------------------
Combined $ 48,045 $ (5,945)
================================
Purchase Combinations:
Fiscal 2000
Octera Corporation.
On December 12, 2000, the Company completed the purchase of Octera Corporation,
a privately held company located in San Diego, CA. that provides digital design
services for Application Specific Integrated Circuits ("ASICs"), boards and
systems with its primary focus on ASIC design. The Company paid cash and issued
common stock with an aggregate fair value of approximately $16,000,000 to effect
this transaction.
Datum Telegraphic, Inc.
On July 21, 2000, the Company completed the purchase of the 92% interest of
Datum Telegraphic, Inc. that it did not already own in exchange for the issuance
of approximately 681,000 exchangeable shares (see note 9) and options with a
fair value of $107,414,000, cash of $17,025,000 and acquisition related
expenditures of $875,000. Datum is a wireless semiconductor company located in
Vancouver, Canada. Datum makes digital signal processors that allow traffic for
all major digital wireless standards to be transmitted using a single digitally
controlled power amplifier architecture.
Malleable Technologies, Inc.
On June 27, 2000, the Company exercised an option to acquire the 85% interest of
Malleable Technologies, Inc. that it did not already own in exchange for the
issuance of approximately 1,250,000 common shares, options and warrants with a
fair value of $293,010,000 and acquisition related costs of $825,000. Malleable
is a fabless semiconductor company located in San Jose, CA. Malleable makes
digital signal processors for voice-over-packet processing applications which
bridge voice and high speed data networks by compressing voice traffic into ATM
or IP packets.
The acquisitions of Octera, Datum and Malleable have each been accounted for
using the purchase method of accounting and accordingly the consolidated
financial statements include the operating results of each acquisition from the
respective acquisition dates.
The total consideration, including acquisition costs, was allocated based on the
estimated fair values of the net assets acquired on the respective acquisition
dates as follows:
(in thousands) Octera Datum Malleable Total
---------- ----------- ----------- -----------
Tangible assets $ 258 $ 3,788 $ 2,031 $ 6,077
Intangible assets:
Internally developed software - - 500 500
Assembled workforce - 250 400 650
Goodwill 1,881 106,356 232,303 340,540
Unearned compensation 14,197 8,363 29,033 51,593
In process research and
development - 6,700 31,500 38,200
Liabilities assumed (316) (143) (1,932) (2,391)
---------- ----------- ----------- -----------
$ 16,020 $ 125,314 $ 293,835 $ 435,169
========== =========== =========== ===========
Purchased In Process Research and Development
The amounts allocated to in process research and development ("IPR&D") were
determined through independent valuations using established valuation techniques
in the high-technology industry. The value allocated to IPR&D was based upon the
forecasted operating after-tax cash flows from the technology acquired, giving
effect to the stage of completion at the acquisition date. Estimated future cash
flows related to the IPR&D were made for each project based on the Company's
estimates of revenues, operating expenses and income taxes from the project.
These estimates were consistent with historical pricing, margins and expense
levels for similar products.
Revenues were estimated based on relevant market size and growth factors,
expected industry trends, individual product sales cycles and the estimated life
of each product's underlying technology. Estimated operating expenses, income
taxes and charges for the use of contributory assets were deducted from
estimated revenues to determine estimated after-tax cash flows for each project.
These future cash flows were further adjusted for the value contributed by any
core technology and development efforts expected to be completed post
acquisition.
These forecasted cash flows were then discounted based on rates derived from the
Company's weighted average cost of capital, weighted average return on assets
and venture capital rates of return adjusted upward to reflect additional risks
inherent in the development life cycle. The risk adjusted discount rate used
involved consideration of the characteristics and applications of each product,
the inherent uncertainties in achieving technological feasibility, anticipated
levels of market acceptance and penetration, market growth rates and risks
related to the impact of potential changes in future target markets.
Based on this analysis, the acquired technology that had reached technological
feasibility was capitalized. Acquired technology that had not yet reached
technological feasibility and for which no alternative future uses existed was
expensed upon acquisition.
Malleable and Datum:
Malleable is a developer of programmable integrated circuits that perform
high-density Voice Over Packet applications. The in process technology acquired
from Malleable detects incoming voice channels and processes them using voice
compression algorithms. The compressed voice is converted, using the appropriate
protocols, to ATM cells or IP packets to achieve higher channel density and
support multiple speech compression protocols and different packetization
requirements. At the date of acquisition the Company estimated that Malleable's
technology was 58% complete and the costs to complete the project to be $4.4
million.
Datum designs power amplifiers for use in wireless communications network
equipment. The technology acquired from Datum is a digitally controlled
amplifier architecture, which was designed to increase base station system
capacities, while reducing cost, size and power consumption of radio networks.
At the date of acquisition, the Company estimated that Datum's technology was
59% complete and the costs to complete the project to be $1.8 million.
These estimates were determined by comparing the time and costs spent to date
and the complexity of the technologies achieved to date to the total costs, time
and complexities that were expected to be expended to bring the technologies to
completion.
To date, progress and development costs incurred on the Datum technology
acquired from Datum has been in line with the Company's initial expectation.
Progress on the Malleable technology acquired from Malleable has been slower
than originally estimated and as a result, costs incurred on this project have
exceeded our original estimates. To date, costs incurred on development of this
project have been $7.0 million.
The amounts allocated to IPR&D for Malleable and Datum of $31,500,000 and
$6,700,000, respectively, were expensed upon acquisition, as it was determined
that the underlying projects had not reached technological feasibility, had no
alternative future uses and successful development was uncertain. The
risk-adjusted discount rates used to determine the value of IPR&D for Malleable
was 35% and for Datum was 30%.
Other Intangible Assets
A description of the other intangible assets acquired is set out below:
Internally developed software acquired facilitates the completion of in process
research and development projects and can be utilized in future development
projects. The Company is amortizing the value assigned to internally developed
software acquired from Malleable on a straight-line basis over an estimated
useful life of three years. At the acquisition date, Datum had no developed
products.
The acquired assembled workforce is comprised of skilled employees across each
of Malleable and Datum's executive, research and development and general and
administrative groups. The Company is amortizing the value assigned to the
assembled workforces on a straight-line basis over their estimated useful life
of three years.
Goodwill, which represents the excess of the purchase price of an investment in
an acquired business over the fair value of the underlying net identifiable
assets, is being amortized on a straight-line basis over its estimated remaining
useful life of five years.
Pro Forma Information:
The following table presents the unaudited pro forma results of operations for
informational purposes, assuming that the Company had acquired Malleable and
Datum at the beginning of the 1999 fiscal year.
Year ended December 31,
--------------------------------
(in thousands, except for per share amounts) 2000 1999
Net revenues $ 696,094 $ 297,643
Net income (loss) $ 26,733 $ (31,017)
Pro forma basic earnings (loss) per share $ 0.16 $ (0.21)
Pro forma diluted earnings (loss) per share $ 0.15 $ (0.21)
The pro forma results of operations give effect to certain adjustments including
amortization of purchased intangibles, goodwill and unearned compensation.
Included in the pro forma net income for the year ended December 31, 2000 is a
$38,200,000 charge for IPR&D. The pro forma results do not include the results
of operations for Octera because the effect of the acquisition was not material.
This information may not necessarily be indicative of the future combined
results of operations of the Company.
Fiscal 1998
Acquisition of Integrated Telecom Technology, Inc.
In 1998, the Company acquired Integrated Telecom Technology, Inc., or IGT, in
exchange for the issuance of approximately 1,660,000 common shares and options
with a fair value $28,200,000, cash paid to IGT stockholders of $17,800,000,
cash paid to IGT creditors of $9,000,000 and acquisition related costs of
$850,000. IGT was a fabless semiconductor company headquartered in Gaithersburg,
Maryland with a development site in San Jose, California. The acquisition of IGT
has been accounted for using the purchase method of accounting and accordingly
the consolidated financial statements include the operating results of IGT from
the acquisition date.
The total consideration, including acquisition costs was allocated based on the
estimated fair values of the net assets acquired on the acquisition date as
follows:
(in thousands)
Tangible assets $ 4,598
Intangible assets:
Developed and core technology 7,830
Assembled workforce 1,050
Goodwill 9,284
In process research and development 37,757
Liabilities assumed (4,669)
----------
$ 55,850
==========
Purchased In Process Research and Development
In valuing core technology, the relative allocations to core technology and
IPR&D were consistent with the relative contributions of each project. 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. The estimated fair value of IPR&D was determined using the
methodology described above.
As of the acquisition date, IGT had three development projects in process. These
projects were between 65% and 83% complete and the value assigned to each
project was determined based on projected future cash flows discounted at a
risk-adjusted discount rates of 28-30%. The total estimated costs to complete
these projects at the time of acquisition were $1.8 million.
One of the IGT projects related to the development of an ATM switching system.
The second and third projects related to the segmentation and re-assembly of
data ("SAR") in an ATM network.
The first project was completed in the first quarter of 1999 and was in full
production by the end of the year. Development of the second project was
completed in the fourth quarter of 1998 and was in full production in the first
quarter of 1999. The time of completion and costs to complete were consistent
with the initial estimates used in the valuation of these projects.
During the third quarter of 1998, the Company terminated development work on the
third project and determined that a portion of the intangible assets recognized
in connection with the IGT acquisition was impaired. The Company recorded an
impairment charge of $4.3 million because the developed and core technology
related to this project was not technologically feasible and had no alternative
future use.
Other Intangible Assets
The amounts allocated to developed and core technology, assembled workforce and
goodwill are being amortized on a straight-line basis over their respective
estimated useful lives of three, three and five years, respectively.
NOTE 3. Investments and Other Assets
The components of Investments and Other Assets are as follows:
December 31,
------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Investment in Sierra Wireless Inc.
At fair value $ 56,637 $ -
At cost (1999 - equity method) 1,445 3,506
Investments in non-public companies 26,378 8,050
Other assets 207 271
- --------------------------------------------------------------------------------
$ 84,667 $ 11,827
==============================
In 2000, the Company made investments in various non-publicly traded companies
for total cash consideration of $24.8 million (1999 - $8.5 million; 1998 - nil).
In 1999, the Company owned approximately 24% of the common shares of Sierra
Wireless Inc., a public company, and accounted for this investment under the
equity method. During 2000, the Company sold a portion of its investment in
Sierra Wireless and at December 31, 2000, held less than 20% of Sierra Wireless
common shares.
Fifty percent of the remaining shares of Sierra Wireless held are subject to
certain resale restrictions and are not available for sale until May 2002. These
shares are recorded on the balance sheet at cost. The unrestricted portion of
the investment in Sierra Wireless is classified as available-for-sale and is
recorded on the balance sheet at fair value, based upon quoted market prices. As
of December 31, 2000, unrealized gains of $ 32.6 million (net of income taxes of
$22.6 million) on this investment are included in other comprehensive income.
During the year ended December 31, 2000, the Company sold certain
available-for-sale investments for proceeds of $59.7 million (1999 - $28.6
million ; 1998 - nil) and recorded gross realized gains of $58.5 million (1999 -
$26.8 million ; 1998 - nil).
NOTE 4. Lines of credit
At December 31, 2000, the Company had available a revolving line of credit with
a bank under which the Company may borrow up to $25 million with interest at the
bank's alternate base rate (annual rate of 9.5% at December 31, 2000). The
Company cannot pay cash dividends, or make material divestments without the
prior written consent of the bank. The agreement expires in May 2002. At
December 31, 2000, $6.8 million of the available line of credit was committed
under letters of credit.
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) 2000 1999
- --------------------------------------------------------------------------------
Obligations under capital leases with interest $ 1,504 $ 2,084
ranging from 7.4% to 8.25%
Various loans, secured by property and equipment, 829 4,146
payable in annual installments of approximately
$400,000 and with interest of 12.3%
Various unsecured notes, with unspecified maturity
dates and with interest rates ranging from 5% to 10% - 2,968
- --------------------------------------------------------------------------------
2,333 9,198
Less current portion (1,769) (4,081)
- --------------------------------------------------------------------------------
$ 564 $ 5,117
======================
As of December 31, 2000, future minimum lease payments for capital leases are
$1.6 million, including $96,000 of imputed interest, and future minimum payments
on long-term debt are $0.9 million including $71,000 of imputed interest.
NOTE 6. Commitments and Contingencies
Operating leases. The Company leases its facilities under operating lease
agreements, which expire at various dates through September 30, 2011. Total rent
expense for the years ended December 31, 2000, 1999 and 1998 was $8.3 million,
$4.4 million and $2.4 million, respectively.
Minimum future rental payments under these leases are as follows:
Year Ending December 31 (in thousands)
- --------------------------------------------------------------------------------
2001 $ 18,869
2002 28,372
2003 27,339
2004 25,971
2005 24,910
Thereafter 133,128
- --------------------------------------------------------------------------------
$ 258,589
===========
Supply agreements. The Company has wafer supply agreements with two independent
foundries, which expire in December 2003. 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 cash flows.
NOTE 7. Special Shares
At December 31, 2000 and 1999, the Company maintained a reserve of 3,746,000 and
4,242,000 shares, respectively, of PMC-Sierra common stock to be issued to
holders of PMC-Sierra, Ltd. (LTD) Special Shares and options to purchase LTD
Special Shares. The holders of these Special Shares have the right to exchange
these special shares for 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-Sierra 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. Preferred Stock
Convertible Preferred Stock of QED. Preferred stock is comprised of QED $0.001
par value per share Series A, B, C, D convertible preferred shares. At December
31, 1999, QED had outstanding convertible preferred shares as follows (in
thousands):
December 31, 1999
---------------------------------------
Shares Shares Proceeds Net
Authorized Outstanding of Issuance Costs
----------------- ----------------- -------------------
Series A 1,800 1,800 $ 2,520
Series B 2,594 2,500 6,000
Series C 4,804 4,800 11,950
Series D 4,700 4,519 19,479
----------------- ----------------- -------------------
13,898 13,619 $ 39,949
================= ================= ===================
On February 1, 2000, QED completed its initial public offering of common stock.
Simultaneously with the closing of the initial public offering, all issued and
outstanding shares of QED's convertible preferred stock were automatically
converted into 13,619,000 shares of QED common stock. All shares of common stock
of QED were exchanged for shares of PMC-Sierra common stock at an exchange ratio
of 0.385 (see note 2) per QED common share.
NOTE 9. Stockholders' Equity
Authorized share capital of PMC-Sierra. At December 31, 1997, 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.
During 2000, 1999 and 1998, the Company's stockholders elected to add an
additional 700,000,000, 100,000,000 and 50,000,000 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 905,000,000
shares, 900,000,000 of which are designated "Common Stock", $0.001 par value,
and 5,000,000 of which are designated "Preferred Stock", $0.001 par value.
Stock 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 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. This warrant was fully exercised in August
2000.
In 1999, as a result of the Company's acquisition of Abrizio, the Company
assumed warrants to purchase 174,580 shares of common stock at $1.66 per share.
In 2000, as a result of the Company's acquisitions of AANetcom, Extreme, QED and
SwitchOn, the Company assumed warrants to purchase 50,759, 63,162, 68,434 and
780 shares of common stock at $9.36, $3.06, $5.26 and $89.76 per share,
respectively. These warrants expire between October 2002 and December 2005. At
December 31, 2000 and 1999, there were 92,897 warrants outstanding at a weighted
average exercise price of $5.87 per share and 366,633 warrants outstanding at a
weighted average exercise price of $3.87 per share, respectively.
Exchangeable Shares. As a result of the acquisition of Extreme, each holder of
the Extreme common stock received shares exchangeable into common stock of
PMC-Sierra. As a result of the Datum acquisition, each holder of Datum special
shares received shares exchangeable into common stock of PMC-Sierra. The shares
are exchangeable, at the option of the holder, for PMC-Sierra common stock on a
share-for-share basis. The exchangeable shares remain securities of PMC-Sierra
and entitle the holders to dividend and other rights economically equivalent to
that of PMC-Sierra common stock and, through a voting trust, to vote at
shareholder meetings of PMC-Sierra. At December 31, 2000, 1,386,000 of these
exchangeable shares were outstanding.
NOTE 10. 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. 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.
In 2000, in connection with the acquisition of QED, the Company assumed the QED
Employee Stock Purchase Plan. A total of 115,000 shares of common stock have
been reserved for issuance under this 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 2000, 1999 and 1998, there were 235,104, 229,518 and 385,716 shares,
respectively, issued under the Plans at weighted-average prices of $16.21, $8.12
and $3.07 per share, respectively. The weighted-average fair value of the 2000,
1999 and 1998 awards was $41.90, $9.32 and $2.86 per share, respectively. During
2000, an additional 1,367,504 shares became available under the plans. At
December 31, 2000, there were 3,469,894 shares of common stock available for
issuance under the purchase plans.
Stock Option Plans. The Company has various stock option plans that 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 2000, the Company's stockholders elected to add a provision to the 1994
Incentive Stock Plan, under which plan substantially all outstanding options
have been issued. Under the new terms, the number of shares authorized to be
available for issuance under the plan shall be increased automatically on
January 1, 2001 and every year thereafter until the expiration of the plan. The
increase will be limited to the lesser of (i) 5% of the outstanding shares on
January 1 of each year, (ii) 45,000,000 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 (see note 2),
and the related options are included in the following tables.
Option activity under the option plans was as follows:
Weighted
Average
Options Number of Exercise
Available Options Price
For Issuance Outstanding Per Share
------------ ----------- ---------
Balance at December 31, 1997 8,963,883 14,897,847 $ 3.10
Additional shares reserved 5,257,656
Granted (7,849,446) 7,849,446 $ 5.30
Exercised - (3,963,286) $ 1.59
Expired (54,768) - -
Cancelled 665,756 (665,756) $ 5.41
------- ---------
Balance at December 31, 1998 6,983,081 18,118,251 $ 4.30
Additional shares reserved 5,999,487
Granted (11,053,619) 11,053,619 $ 28.83
Exercised - (3,658,690) $ 2.73
Expired (2,702) - -
Repurchased 4,568 - -
Cancelled 398,836 (398,836) $ 11.96
------- ---------
Balance at December 31, 1999 2,329,651 25,114,344 $ 15.20
Additional shares reserved 6,442,687
Granted (3,855,369) 3,855,369 $ 132.97
Exercised - (4,059,790) $ 5.46
Expired (12,214) - -
Repurchased 2,012 - -
Cancelled 873,870 (873,870) $ 32.59
------- ---------
Balance at December 31, 2000 5,780,637 24,036,053 $ 34.91
========= ==========
The following table summarizes information concerning options outstanding and
exercisable for the combined option plans at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Number Life Price per Number Price per
Prices Outstanding (years) share Exercisable share
----------------- ----------- ----------- ----- ----------- -----
$ 0.02 - $ 3.53 4,573,162 6.46 $ 2.16 3,209,172 $ 2.68
$ 3.56 - $ 7.02 4,843,742 6.22 $ 5.32 4,064,847 $ 5.14
$ 7.05 - $ 15.98 6,009,865 7.72 $ 12.96 3,138,604 $ 12.67
$ 16.94 - $ 52.38 5,255,908 8.77 $ 43.48 1,501,627 $ 42.23
$ 53.06 - $207.13 3,199,164 9.37 $143.52 91,540 $ 70.01
$224.68 - $245.00 154,212 9.67 $244.87 - -
----------- -----------
$ 0.02 - $245.00 24,036,053 7.64 $ 34.91 12,005,790 $ 11.59
=========== ===========
Stock-based compensation. In accordance with the provisions of Statement of
Financial Accounting Standards 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 Accounting Principles Board (APB) Opinion 25. The Company
also does not recognize compensation expense for employee stock options that 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 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
------------------------ -----------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Expected life (years) 3.1 3.4 3.3 1.4 1.4 1.5
Expected volatility 0.7 0.6 0.5 0.9 0.7 0.7
Risk-free interest rate 6.1% 5.4% 5.2% 5.9% 5.2% 5.2%
The weighted-average estimated fair values of employee stock options granted
during fiscal 2000, 1999 and 1998 were $74.32, $14.27 and $3.69 per share,
respectively.
If the computed fair values of 2000, 1999 and 1998 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 shares amounts) 2000 1999 1998
---- ---- ----
Net income (loss) $18,682 $51,238 $(32,834)
Basic net income (loss) per share $ 0.12 $ 0.35 $ (0.24)
Diluted net income (loss) per share $ 0.10 $ 0.32 $ (0.24)
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 11. 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) 2000 1999 1998
- --------------------------------------------------------------------------------
Current:
Federal $ 40 $ (102) $ 109
State 224 526 212
Foreign 100,880 43,843 23,868
- --------------------------------------------------------------------------------
101,144 44,267 24,189
- --------------------------------------------------------------------------------
Deferred:
Federal (72) (23) (150)
State - - (2)
Foreign 1,340 (2,898) (1,040)
- --------------------------------------------------------------------------------
1,268 (2,921) (1,192)
- --------------------------------------------------------------------------------
Provision for income taxes $102,412 $ 41,346 $ 22,997
===========================================
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) 2000 1999 1998
- --------------------------------------------------------------------------------
Income before provision for income taxes $177,710 $113,175 $ 1,298
Federal statutory tax rate 35% 35% 35%
Income taxes at U.S. Federal statutory rate $ 62,198 $ 39,611 $ 454
State taxes, net of federal benefit 224 526 20
In process research and development costs 13,370 - 13,214
Goodwill 11,297 - 497
Impairment of intangible assets - - 1,509
Acquisition costs 13,291 - -
Deferred stock compensation 9,576 - -
Incremental taxes on foreign earnings 9,093 (697) 234
Other 530 1,933 648
Valuation allowance (17,167) (27) 6,421
- --------------------------------------------------------------------------------
Provision for income taxes $102,412 $ 41,346 $ 22,997
====================================
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
----------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 117,416 $ 63,247
State tax loss carryforwards 8,126 4,404
Credit carryforwards 14,407 7,508
Reserves and accrued expenses 12,186 6,690
Deferred income 13,525 9,328
Deferred stock compensation 221 842
- --------------------------------------------------------------------------------
Total deferred tax assets 165,881 92,019
Valuation allowance (154,409) (82,689)
- --------------------------------------------------------------------------------
Total net deferred tax assets 11,472 9,330
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (8,995) (8,885)
Capitalized technology (1,600) (206)
Unrealized gain on investments (22,629) -
Other (2,125) -
- --------------------------------------------------------------------------------
Total deferred tax liabilities (35,349) (9,091)
- --------------------------------------------------------------------------------
Total net deferred taxes $ (23,877) $ 239
============================
At DeCember 31, 2000, the Company has approximately $335,470,000 of federal net
operating losses, which will expire from 2005 to 2020. Approximately $14,397,000
of the federal net operating losses are subject to ownership change limitations
provided by the Internal Revenue Code of 1986. The Company also has
approximately $135,436,000 of state tax loss carryforwards, which expire from
2001 to 2014. The utilization of a portion of these state losses is also subject
to ownership change limitations provided by the various states' income tax
legislation.
Included in the credit carryfowards are $6,530,000 of federal research and
development credits which expire from 2001 to 2020, $925,000 of foreign tax
credits which expire from 2000 to 2003, $410,000 of federal AMT credits which
carryforward indefinitely, $4,868,000 of state research and development credits
which do not expire, $735,000 of state manufacturer's investment credits which
expire from 2002 to 2009, and $939,000 of foreign subsidiary investment tax
credits which expire from 2007 to 2009.
Included in the above net operating loss carryforwards are $21,928,000 and
$6,555,000 of federal and state net operating losses related to acquisitions
accounted for under the purchase method of accounting. The benefit of such
losses, if and when realized, will be credited first to reduce to zero any
goodwill related to the respective acquisition, second to reduce to zero other
non-current intangible assets related to the respective acquisition, and third
to reduce income tax expense.
Included in the deferred tax assets before valuation allowance are approximately
$109,947,000 of cumulative tax deductions related to equity transactions, the
benefit of which will be credited to stockholder's equity if and when realized.
Included in the change in valuation allowance for 2000 is the benefit from
utilization of federal, state and foreign net operating losses and credits of
$19,971,000, $3,663,000 and $1,505,000, respectively.
The pretax income from foreign operations was $254,511,000, $119,262,000, and
$62,355,000 in 2000, 1999, and 1998, respectively. Undistributed earnings of the
Company's foreign subsidiaries are considered to be indefinitely reinvested and
accordingly, no provision for federal and state income taxes has 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 12. 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 non-networking products for existing customers, but
has decided not to develop any further products of this type.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on gross profits from operations of the two segments.
Summarized financial information by segment is as follows:
Year Ended December 31,
-------------------------------------------
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Net revenues
Networking $ 665,700 $ 278,477 $ 152,015
Non-networking 28,984 17,291 22,273
- --------------------------------------------------------------------------------
Total $ 694,684 $ 295,768 $ 174,288
===========================================
Gross profit
Networking $ 515,712 $ 214,401 $ 118,469
Non-networking 12,811 7,928 10,529
- --------------------------------------------------------------------------------
Total $ 528,523 $ 222,329 $ 128,998
===========================================
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) 2000 1999 1998
- --------------------------------------------------------------------------------
Net revenues
United States $ 432,649 $ 206,498 $ 118,941
Canada 83,747 42,731 17,723
Europe and Middle East 43,101 14,830 13,449
Asia 134,039 31,521 24,076
Other foreign 1,148 188 99
- --------------------------------------------------------------------------------
Total $ 694,684 $ 295,768 $ 174,288
===========================================
Long-lived assets
United States $ 341,361 $ 36,627
Canada 210,006 57,311
Other 3,720 1,040
- ----------------------------------------------------------------
Total $ 555,087 $ 94,978
===========================
The Company has revenues from external customers (2000 - 1, 1999 - 3, 1998 - 2)
that exceed 10% of total net revenues as follows:
Year Ended December 31,
-------------------------------------------
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Networking $ 128,997 $ 110,392 $ 44,681
Non-networking - 17,208 21,294
NOTE 13. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income
(loss) per share:
Year ended December 31,
--------------------------------
(in thousands except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------
Numerator:
Net income (loss) $ 75,298 $ 71,829 $(21,699)
================================
Denominator:
Basic weighted average common shares
outstanding (1) 162,377 146,818 137,750
Effect of dilutive securities:
Stock options 19,341 13,590 -
Stock warrants 173 115 -
--------------------------------
Diluted weighted average common shares
outstanding 181,891 160,523 137,750
================================
Basic net income (loss) per share $ 0.46 $ 0.49 $ (0.16)
================================
Diluted net income (loss) per share $ 0.41 $ 0.45 $ (0.16)
================================
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic
weighted average common shares outstanding.
NOTE 14. Comprehensive Income
The components of comprehensive income, net of tax, are as follows:
Year Ended December 31,
-----------------------------------------
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Net income (loss) $ 75,298 $ 71,829 $ (21,699)
Other comprehensive income:
Change in net unrealized gains on
investments, net of tax of $22,629 in
2000 (1999 and 1998 - nil) 32,563 - -
- --------------------------------------------------------------------------------
Total $ 107,861 $ 71,829 $ (21,699)
=========================================
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information concerning the Company's directors and executive officers
required by this Item is incorporated by reference from the Company's Proxy
Statement for its 2001 Annual Meeting of Stockholders ("Proxy Statement").
ITEM 11. Executive Compensation.
The information required by this Item is incorporated by reference from 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 from the
Company's Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference from 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
Financial Statement Schedules required by this item are listed on
page 45 of in this Annual Report on Form 10k.
3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this Form
10-K Annual Report.
Reports on Form 8-K
- An amended Current Report on Form 8-K/A1 was filed on September
29, 2000 to report financial information required under Item 7
relating to the acquisition of Datum Telegraphic, Inc.
- A Current Report on Form 8-K was filed on October 3, 2000 to
report under Item 2 the completion of the Company's acquisition of
SwitchOn Networks, Inc.
- An amended Current Report on Form 8-K/A1 was filed on October 13,
2000 to - report financial information required under Item 7
relating to the acquisition of Quantum Effect Devices, Inc.
- A Current Report on Form 8-K was filed on November 30, 2000 to
provide, under Item 7, historical financial statements and
additional disclosure to reflect combined operating results of
PMC-Sierra, Inc. and Quantum Effect Devices, Inc.
- A Current Report on Form 8-K/A December 1, 2000 to provide, under
Item 7, historical financial statements and additional disclosure
to reflect combined operating results of PMC-Sierra, Inc. and
Quantum Effect Devices, Inc.
(c) Exhibits pursuant to Item 601 of Regulation S-K.
------------------------------------------------
Exhibit Page
Number Description Number
------- ----------- ------
2.1 Exchange Agreement dated September 2, 1994 between the (B)
Company and PMC-Sierra, Ltd.
2.2 Amended and Restated Shareholders' Agreement dated (B)
September 2, 1994
among the Shareholders of PMC-Sierra, Inc.
2.3 Amendment to Exchange Agreement effective August 9, 1995 (E)
3.1 Certificate of Incorporation (H)
3.1A Certificate of Amendment to the Certificate of Incorporation (M)
filed June 13, 1997
3.1B Certificate of Amendment to the Certificate of Incorporation (M)
filed July 11, 1997
3.1C Certificate of Amendment to Certificate of Incorporation of (N)
PMC-Sierra, Inc. filed on June 4, 1998.
3.1D Certificate of Amendment to Certificate of Incorporation of (Q)
PMC-Sierra, Inc. filed on July 14, 1999.
3.1E Certificate of Amendment to Certificate of Incorporation of (S)
PMC-Sierra, Inc. filed on July 10, 2000.
3.2 Bylaws, as amended (P)
4.1 Specimen of Common Stock Certificate (J)
4.3 Terms of PMC-Sierra, LTD. Special Shares (C)
10.1B 1987 Incentive Stock Plan, as amended (A)
10.2 1991 Employee Stock Purchase plan, as amended (P)
10.4 Form of Indemnification Agreement between the Company and its (G)
directors and officers
10.17 PMC-Sierra, Inc. 1994 Incentive Stock Plan --
10.18 Deposit Agreement with Chartered Semiconductor Pte. Ltd.* (F)
10.18B Amendment Agreement (No. 1) to Deposit Agreement with Chartered (L)
Semiconductor Pte. Ltd.*
10.21 PMC-Sierra Inc. (Portland) 1996 Stock Option Plan (N)
10.22 Net Building Lease (PMC-Sierra, Ltd.), dated May 15, 1996 (L)
10.23 Revolving Operating Line of Credit Agreement between --
PMC-Sierra, Inc. and CIBC Inc. dated 28th day of December, 2000.
10.27 Guarantee Agreement between PMC-Sierra, Inc. and CIBC dated (N)
27th day of April, 1998.
10.28 1998 PMC-Sierra (Maryland), Inc. Stock Option Plan (N)
10.30 Abrizio Inc. 1997 Stock Option Plan (R)
10.31 Forecast and Option Agreement among PMC-Sierra, Inc., (T)
PMC-Sierra, Ltd., and Taiwan Semiconductor Manufacturing
Corporation*
10.32 Executive Employment Agreement among PMC-Sierra, Inc. and (T)
Robert L. Bailey
10.33 Executive Employment Agreement among PMC-Sierra, Inc. and (T)
Gregory Aasen
10.34 Executive Employment Agreement among PMC-Sierra, Inc. and (T)
John W. Sullivan
10.36 Building Lease Agreements between WHTS Freedom Circle (S)
Partners and PMC-Sierra, Inc.
10.37 Extreme Packet Devices Inc. 1999 Stock Option Plan (U)
10.38 AANetcom, Inc. Stock Option Plan Effective June 15, 1998 (V)
10.39 Malleable Technologies, Inc. 1998 Stock incentive plan (W)
10.40 Quantum Effect Devices, Inc. 1999 Equity Incentive Plan (X)
10.41 Quantum Effect Devices, Inc. 1999 Non-Employee Directors (X)
Stock Options Plan
10.42 Quantum Effect Devices, Inc. 1999 Employee Stock Purchase Plan (X)
10.43 SwitchOn Networks, Inc. 1998 Stock Plan (Y)
10.44 Building Lease Agreement Kanata Research Park Corporation and --
PMC-Sierra, LTD.
10.45 Building Lease Agreement between Transwestern - Robinson I, --
LLC and PMC-Sierra US, Inc.
11.1 Calculation of earnings per share (L)
16.1 Letter regarding change in certifying accountant (K)
21.1 Subsidiaries --
23.1 Consent of Deloitte & Touche LLP, Independent Auditors --
24.1 Power of Attorney (O)
* 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 Form 10-K Annual
Report for the fiscal year ended January 3, 1993.
(B) 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.
(C) Incorporated by reference from exhibit 4 of the
Schedule 13-D filed on November 2, 1994 by GTE
Corporation.
(D) 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.
(E) 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.
(F) 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.
(G) Incorporated by reference from exhibit 10.21 filed with
Registrant's Form 10-Q for the quarter ended June 30,
1997.
(H) Incorporated by reference from exhibit 3.1 filed with
Registrant's Form 10-Q for the quarter ended June 30,
1997.
(I) 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.
(J) Incorporated by reference from exhibit 4.4 filed with
the Registrant's Current Report on Form 8-K, filed on
August 29, 1997.
(K) Incorporated by reference from exhibit 16.1 filed with
the Registrant's Current Report on Form 8-K, filed on
April 18, 1997.
(L) Refer to Note 13 of the financial statements included
in Item 8 of Part II of this Annual Report.
(M) 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.
(N) 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.
(O) Incorporated by reference from Signatures page of this
Annual Report.
(P) 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, 1998.
(Q) 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.
(R) 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.
(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 25, 2000.
(T) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended December 26, 2000.
(U) Incorporated by reference from the Registrant's Current
Report on Form S-8, filed on April 12, 2000.
(V) Incorporated by reference from the Registrant's Current
Report on Form S-8, filed on April 20, 2000.
(W) Incorporated by reference from the Registrant's Current
Report on Form S-8, filed on June 29, 2000.
(X) Incorporated by reference from the Registrant's Current
Report on Form S-8, filed on September 11, 2000.
(Y) Incorporated by reference from the Registrant's Current
Report on Form S-8, filed on October 18, 2000.
(d) Financial Statement Schedules required by this item are listed on page
45 of this Annual Report on Form 10k.
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 29, 2001 /s/ John Sullivan
-----------------------------------------------
John W. Sullivan
Vice President, Finance (duly authorized officer)
Principal Accounting 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/ Robert L. Bailey President, Chief Executive Officer March 29, 2001
- ------------------------- (Principal Executive Officer)
Robert L. Bailey and Chairman of the Board of Directors
/s/ John W. Sullivan Vice President Finance, Chief March 29, 2001
- ------------------------- Financial Officer (and
John W. Sullivan Principal Accounting Officer)
/s/ Alexandre Balkanski Director March 29, 2001
- -------------------------
Alexandre Balkanski
/s/ Colin Beaumont Director March 29, 2001
- -------------------------
Colin Beaumont
/s/ James V. Diller Vice Chairman March 29, 2001
- -------------------------
James V. Diller
/s/ Frank Marshall Director March 29, 2001
- -------------------------
Frank Marshall
SCHEDULE II - Valuation and Qualifying Accounts
Years ended December 31, 2000, 1999 and 1998
(in thousands)
Allowance for Doubtful Accounts
Additions Additions
Balance at charged to charged to
beginning of costs and other Balance of
Year year expenses accounts Write-offs end of year
2000 $ 1,553 420 - 39 $ 1,934
1999 $ 1,128 439 - 14 $ 1,553
1998 $ 1,070 299 - 183 $ 1,128
INDEX TO EXHIBITS
Exhibit
Number Description Page
- -------- ----------------------------------------------------------------- ----
10.17 PMC-Sierra, Inc. 1994 Incentive Stock Plan, as ammended --
10.23 Revolving Operating Line of Credit Agreement between PMC-Sierra, --
Inc. and CIBC Inc. dated 28th day of December, 2000.
10.44 Building Lease Agreement Kanata Research Park Corporation and --
PMC-Sierra, LTD.
10.45 Building Lease Agreement between Transwestern - Robinson I, LLC --
and PMC-Sierra US, Inc.
21.1 Subsidiaries --
23.1 Consent of Deloitte & Touche LLP, Independent Auditors --
Financial Data Schedule
MULTIPLIER 1,000
PERIOD-TYPE 12-MOS
FISCAL-YEAR-END Dec-31-2000
PERIOD-START Dec-27-1999
PERIOD-END Dec-31-2000
EXCHANGE-RATE 1.000
CASH 256,198
SECURITIES 118,918
RECEIVABLES 95,786
ALLOWANCES (1,934)
INVENTORY 54,913
CURRENT-ASSETS 571,003
PP&E 215,210
DEPRECIATION (87,676)
TOTAL-ASSETS 1,126,090
CURRENT-LIABILITIES 230,017
BONDS 2,333
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 796,229
OTHER-SE 55,089
TOTAL-LIABILITY-AND-EQUITY 1,126,090
SALES 694,684
TOTAL-REVENUES 694,684
CGS 166,161
TOTAL-COSTS 166,161
OTHER-EXPENSES 428,230
LOSS-PROVISION 420
INTEREST-EXPENSE 808
INCOME-PRETAX 177,710
INCOME-TAX 102,412
INCOME-CONTINUING 75,298
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 75,298
EPS-BASIC 0.46
EPS-DILUTED 0.41