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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2002
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the Transition Period From __ to__
Commission File Number 0-19084
PMC-Sierra, Inc.
(Exact name of registrant as specified in its charter)
A Delaware Corporation - I.R.S. NO. 94-2925073
3975 Freedom Circle
Santa Clara, CA 95054
(408) 239-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X____ No _______
Common shares outstanding at August 2, 2002 - 167,259,696
------------------------------------------------
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
- Condensed consolidated statements of operations 3
- Condensed consolidated balance sheets 4
- Condensed consolidated statements of cash flows 5
- Notes to the condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 33
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote by Stockholders 35
Item 6. Exhibits and Reports on Form 8 - K 35
2
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
Three Months Ended Six Months Ended
------------------------------ --------------------------------
Jun 30, Jul 1, Jun 30, Jul 1,
2002 2001 2002 2001
Net revenues
Networking $ 53,885 $ 86,391 $ 100,737 $ 202,537
Non-networking 626 7,739 5,216 11,488
-------------- -------------- --------------- ---------------
Total 54,511 94,130 105,953 214,025
Cost of revenues 20,774 48,834 41,317 86,761
-------------- -------------- --------------- ---------------
Gross profit 33,737 45,296 64,636 127,264
Other costs and expenses:
Research and development 34,438 53,769 70,672 111,237
Marketing, general and administrative 16,451 24,067 33,562 49,160
Amortization of deferred stock compensation:
Research and development 764 2,090 1,685 29,990
Marketing, general and administrative 61 425 127 944
Amortization of goodwill - 17,811 - 35,622
Restructuring costs and other special charges - - - 19,900
Impairment of goodwill and purchased intangible assets - 189,042 - 189,042
-------------- -------------- --------------- ---------------
Income (loss) from operations (17,977) (241,908) (41,410) (308,631)
Interest and other income, net 1,339 4,684 2,760 9,551
Gain on sale of investments 619 - 3,064 401
-------------- -------------- --------------- ---------------
Income (loss) before provision for income taxes (16,019) (237,224) (35,586) (298,679)
Provision for (recovery of) income taxes (4,428) (4,179) (10,315) (2,108)
-------------- -------------- --------------- ---------------
Net income (loss) $ (11,591) $ (233,045) $ (25,271) $ (296,571)
============== ============== =============== ===============
Net income (loss) per common share - basic and diluted $ (0.07) $ (1.39) $ (0.15) $ (1.77)
============== ============== =============== ===============
Shares used in per share calculation - basic and diluted 169,798 167,817 169,656 167,302
See notes to the condensed consolidated financial statements.
3
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
Jun 30, Dec 30,
2002 2001
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 132,005 $ 152,120
Short-term investments 292,007 258,609
Accounts receivable, net 13,835 16,004
Inventories, net 31,370 34,246
Deferred tax assets 14,964 14,812
Prepaid expenses and other current assets 21,174 18,435
---------------- ---------------
Total current assets 505,355 494,226
Investment in bonds and notes 147,516 171,025
Other investments and assets 29,087 68,863
Deposits for wafer fabrication capacity 21,992 21,992
Property and equipment, net 70,557 89,715
Goodwill and other intangible assets, net 8,950 9,520
---------------- ---------------
$ 783,457 $ 855,341
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 25,082 $ 21,320
Accrued liabilities 49,368 49,348
Income taxes payable 20,910 19,742
Accrued restructuring costs 141,663 161,198
Deferred income 23,229 27,677
Current portion of obligations under capital leases and long-term debt 158 470
---------------- ---------------
Total current liabilities 260,410 279,755
Convertible subordinated notes 275,000 275,000
Deferred tax liabilities 7,596 23,042
PMC special shares convertible into 3,250 (2001 - 3,373)
shares of common stock 5,164 5,317
Stockholders' equity
Common stock and additional paid in capital, par value $.001:
900,000 shares authorized; 167,008 shares issued and
outstanding (2001 - 165,702) 833,292 824,321
Deferred stock compensation (2,382) (4,186)
Accumulated other comprehensive income 3,048 25,492
Accumulated deficit (598,671) (573,400)
---------------- ---------------
Total stockholders' equity 235,287 272,227
---------------- ---------------
$ 783,457 $ 855,341
================ ===============
See notes to the condensed consolidated financial statements.
4
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
-------------------------------
Jun 30, Jul 1,
2002 2001
Cash flows from operating activities:
Net income (loss) $ (25,271) $ (296,571)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and other amortization 21,936 26,571
Amortization of goodwill and other intangibles 570 37,312
Amortization of deferred stock compensation 1,812 30,934
Gain on sale of investments (3,074) (122)
Noncash restructuring costs and asset write-downs - 3,988
Impairment of goodwill and purchased intangible assets - 189,042
Write down of excess inventory - 14,151
Changes in operating assets and liabilities:
Accounts receivable 2,169 68,262
Inventories 2,876 (9,302)
Prepaid expenses and other current assets (2,739) 3,331
Accounts payable and accrued liabilities 2,336 (31,291)
Income taxes payable 1,168 (42,371)
Accrued restructuring costs (18,089) 9,005
Deferred income (4,448) (20,178)
-------------- --------------
Net cash used in operating activities (20,754) (17,239)
-------------- --------------
Cash flows from investing activities:
Purchases of short-term investments (5,439) (23,453)
Proceeds from sales and maturities of short-term investments 64,148 142,371
Purchases of long-term bonds and notes (89,853) -
Proceeds from sales and maturities of long-term bonds and notes 20,879 -
Other investments 4,391 (4,347)
Net investment in wafer fabrication deposits - (3,256)
Purchases of property and equipment (1,985) (23,307)
-------------- --------------
Net cash provided by (used in) investing activities (7,859) 88,008
-------------- --------------
Cash flows from financing activities:
Repayment of capital leases and long-term debt (312) (672)
Proceeds from issuance of common stock 8,810 18,113
-------------- --------------
Net cash provided by financing activities 8,498 17,441
-------------- --------------
Net increase (decrease) in cash and cash equivalents (20,115) 88,210
Cash and cash equivalents, beginning of the period 152,120 256,198
-------------- --------------
Cash and cash equivalents, end of the period $ 132,005 $ 344,408
============== ==============
5
PMC-Sierra, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Summary of Significant Accounting Policies
Description of business. PMC-Sierra, Inc (the "Company" or "PMC") designs,
develops, markets and supports high-performance semiconductor networking
solutions. The Company's products are used in high-speed transmission and
networking systems, which are being used to restructure the global
telecommunications and data communications infrastructure.
Basis of presentation. The accompanying financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules or
regulations. The interim financial statements are unaudited, but reflect all
adjustments which are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. These financial
statements should be read in conjunction with the consolidated financial
statements and related notes thereto in the Company's Annual Report on Form 10-K
for the year ended December 30, 2001. The results of operations for the interim
periods are not necessarily indicative of results to be expected in future
periods.
Estimates. The preparation of financial statements and related disclosures 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 accompanying notes. Estimates
are used for, but not limited to, the accounting for doubtful accounts,
inventory reserves, depreciation and amortization, asset impairments, sales
returns, warranty costs, income taxes, restructuring costs and other special
charges, and contingencies. Actual results could differ from these estimates.
Inventories. Inventories are stated at the lower of cost (first-in, first out)
or market (estimated net realizable value). The components of inventories are as
follows:
Jun 30, Dec 30,
(in thousands) 2002 2001
- --------------------------------------------------------------------------
Work-in-progress $ 13,587 $ 10,973
Finished goods 17,783 23,273
- --------------------------------------------------------------------------
$ 31,370 $ 34,246
===========================
Goodwill and other intangible assets. In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard No. 141
(SFAS 141), "Business Combinations" and Statement of Financial Accounting
Standard No. 142 (SFAS 142), "Goodwill and Other Intangible Assets".
6
SFAS 141 requires that business combinations be accounted for under the
purchase method of accounting and addresses the initial recognition and
measurement of assets acquired, including goodwill and intangibles, and
liabilities assumed in a business combination. The Company adopted SFAS 141 on a
prospective basis effective July 1, 2001. The adoption of SFAS 141 did not have
a material effect on the Company's financial statements, but will impact the
accounting treatment of future acquisitions.
SFAS 142 requires goodwill to be allocated to, and assessed as part of, a
reporting unit. Further, SFAS 142 specifies that goodwill will no longer be
amortized but instead will be subject to impairment tests at least annually. In
conjunction with the implementation of SFAS 142, the Company completed the
transitional impairment test as of the beginning of 2002 and determined that a
transitional impairment charge would not be required.
The Company adopted SFAS 142 on a prospective basis at the beginning of fiscal
2002 and stopped amortizing goodwill totaling $7.1 million, thereby eliminating
annual goodwill amortization of approximately $2.0 million in 2002. Net loss and
net loss per share adjusted to exclude goodwill and workforce amortization for
the comparative periods ended July 1, 2001 are as follows:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
Jun 30, Jul 1, Jun 30, Jul 1,
(in thousands except per share amounts) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------ ----------------------------------
Net income (loss), as reported $ (11,591) $ (233,045) $ (25,271) $ (296,571)
Adjustments:
Amortization of goodwill - 17,811 - 35,622
Amortization of other intangibles - 183 - 395
---------------- ---------------- ---------------- ----------------
Net income (loss) $ (11,591) $ (215,051) $ (25,271) $ (260,554)
================ ================ ================ ================
Basic and diluted net income (loss) per share, as reported $ (0.07) $ (1.39) $ (0.15) $ (1.77)
================ ================ ================ ================
Basic and diluted net income (loss) per share, adjusted $ (0.07) $ (1.28) $ (0.15) $ (1.56)
================ ================ ================ ================
Accounting for the impairment or disposal of long-lived assets. In October
2001, the FASB issued Statement of Financial Accounting Standard No. 144 (SFAS
144), "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
supersedes Statement of Financial Accounting Standard No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30 for the disposal of a business segment. SFAS 144 establishes a single
accounting model, based on the framework established in SFAS 121, for long-lived
assets to be disposed of by sale. The Statement also broadens the presentation
of discontinued operations to include disposals of a component of an entity and
provides additional implementation guidance with respect to the classification
of assets as held-for-sale and the calculation of an impairment loss. The
Company adopted SFAS 144 at the beginning of fiscal 2002. The adoption of SFAS
144 did not have a material impact on the Company's financial statements.
Recently issued accounting standards. In June 2002, the FASB issued Statement
of Financial Accounting Standard No. 146 (SFAS 146), "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires that the
liability for a cost associated with an exit or disposal activity be recognized
at its fair value when the liability is incurred. Under previous guidance, a
liability for certain exit costs was recognized at the date that management
committed to an exit plan, which was generally before the actual liability has
been incurred. As SFAS 146 is effective only for exit or disposal activities
initiated after December 31, 2002, the Company does not expect the adoption of
this statement to have a material impact on the Company's financial statements.
7
NOTE 2. Restructuring and Other Costs
Restructuring - March 26, 2001
In the first quarter of 2001, PMC implemented a restructuring plan in response
to the decline in demand for its networking products and consequently recorded a
restructuring charge of $19.9 million. The restructuring plan included the
involuntary termination of 223 employees across all business functions, the
consolidation of a number of facilities and the curtailment of certain research
and development projects.
The following summarizes the activity in the March 2001 restructuring liability
during the six month period ended June 30, 2002:
Restructuring
Balance at Cash Liability at
(in thousands) Dec 30, 2001 Payments Jun 30, 2002
- --------------------------------------------------------------------------------
Total $ 4,204 $ (2,758) $ 1,446
================================================
PMC has completed the restructuring activities contemplated in the March 2001
restructuring plan. The remaining restructuring liability relates primarily to
facility lease payments, net of estimated sublease revenues, and has been
classified as accrued liabilities on the balance sheet.
Restructuring - October 18, 2001
Due to the continued decline in market conditions, PMC implemented a second
restructuring plan in the fourth quarter of 2001 to reduce its operating cost
structure. This restructuring plan included the termination of 341 employees,
the consolidation of additional excess facilities, and the curtailment of
additional research and development projects. As a result, the Company recorded
a second restructuring charge of $175.3 million in the fourth quarter of 2001.
The following summarizes the activity in the October 2001 restructuring
liability during the six month period ended June 30, 2002:
Restructuring
Balance at Cash Liability at
(in thousands) Dec 30, 2001 Payments Jun 30, 2002
- ------------------------------------------------------------------------------------------------------
Workforce reduction $ 6,784 $ (3,184) $ 3,600
Facility lease and contract settlement costs 150,210 (12,147) 138,063
- ------------------------------------------------------------------------------------------------------
Total $ 156,994 $ (15,331) $ 141,663
====================================================
We expect to complete the restructuring activities contemplated in the October
2001 restructuring plan by the fourth quarter of 2002.
8
NOTE 3. 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
consists of custom user interface products. The Company is supporting the
non-networking products for existing customers, but has decided not to develop
any further products of this type.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies contained in the Company's Annual
Report on Form 10-K. The Company evaluates performance based on net revenues and
gross profits from operations of the two segments.
Three Months Ended Six Months Ended
----------------------------- -------------------------------
Jun 30, Jul 1, Jun 30, Jul 1,
(in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------
Net revenues
Networking $ 53,885 $ 86,391 $ 100,737 $ 202,537
Non-networking 626 7,739 5,216 11,488
- -------------------------------------------------------------------------------
Total $ 54,511 $ 94,130 $ 105,953 $ 214,025
============================================================
Gross profit
Networking $ 33,469 $ 42,059 $ 62,403 $ 122,396
Non-networking 268 3,237 2,233 4,868
- -------------------------------------------------------------------------------
Total $ 33,737 $ 45,296 $ 64,636 $ 127,264
============================================================
NOTE 4. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended Six Months Ended
------------------------------ -------------------------------
Jun 30, Jul 1, Jun 30, Jul 1,
(in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $ (11,591) $ (233,045) $ (25,271) $ (296,571)
Other comprehensive income (loss):
Change in net unrealized gains on investments (8,829) 13,665 (22,444) (7,627)
- --------------------------------------------------------------------------------------------------------------
Total $ (20,420) $ (219,380) $ (47,715) $ (304,198)
===============================================================
9
NOTE 5. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income
(loss) per share:
Three Months Ended Six Months Ended
------------------------------- -------------------------------
Jun 30, Jul 1, Jun 30, Jul 1,
(in thousands except per share amounts) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Numerator:
Net income (loss) $ (11,591) $ (233,045) $ (25,271) $ (296,571)
=============================== ===============================
Denominator:
Basic weighted average common shares outstanding (1) 169,798 167,817 169,656 167,302
Effect of dilutive securities:
Stock options - - - -
Stock warrants - - - -
------------------------------- -------------- ---------------
Diluted weighted average common shares outstanding 169,798 167,817 $ 169,656 $ 167,302
=============================== ===============================
Basic and diluted net income (loss) per share $ (0.07) $ (1.39) $ (0.15) $ (1.77)
=============================== ===============================
(1) PMC-Sierra, Ltd. special shares are included in the calculation of basic
weighted average common shares outstanding.
Item 2. 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 condensed consolidated
financial statements and notes thereto included elsewhere in this Quarterly
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 Quarterly Report.
These forward-looking statements apply only as of the date of this Quarterly
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
Quarterly 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:
- customer networking product inventory levels, needs and order levels;
- revenues;
- research and development expenses;
- marketing, general and administrative expenses;
- interest and other income;
- capital resources sufficiency;
- capital expenditures;
- restructuring activities, expenses and associated annualized savings; and
- our business outlook.
10
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.
-------------------
Results of Operations
Second Quarters of 2002 and 2001
Net Revenues ($000,000)
Second Quarter
-------------------------
2002 2001 Change
Networking products $ 53.9 $ 86.4 (38%)
Non-networking products 0.6 7.7 (92%)
-------------------------
Total net revenues $ 54.5 $ 94.1 (42%)
=========================
Net revenues decreased by $39.6 million, or 42%, in the second quarter of 2002
compared to the same quarter a year ago.
Networking revenues declined $32.5 million, or 38%, in the second quarter of
2002 compared to the second quarter of 2001 due to decreased unit sales of our
networking products caused by reduced demand for our customers' products and
excess customer inventories of some of our products.
Non-networking revenues decreased 92% in the second quarter of 2002 compared to
the second quarter of 2001 due to decreased unit sales to our principal customer
in this segment as this product has reached the end of its life.
Gross Profit ($000,000)
Second Quarter
--------------------------
2002 2001 Change
Networking products $ 33.5 $ 42.1 (20%)
Non-networking products 0.2 3.2 (94%)
--------------------------
Total gross profit $ 33.7 $ 45.3 (26%)
==========================
Percentage of net revenues 62% 48%
Total gross profit declined $11.6 million, or 26%, in the second quarter of
2002 compared to the same quarter a year ago.
Networking gross profit for the second quarter of 2002 decreased by $8.6
million from the second quarter of 2001. Our networking gross profit decreased
by $20.7 million as a result of lower sales volume in the second quarter of
2002. This decrease in networking gross profit was offset in part due to a $12.1
million write-down of excess inventory recorded in the second quarter of 2001.
There was no write-down of excess inventory in the second quarter of 2002.
11
Networking gross profit as a percentage of networking revenues increased 13
percentage points from 49% in the second quarter of 2001 to 62% in the second
quarter of 2002. This increase resulted primarily from the following factors:
- the effect of recording a $12.1 million write-down of excess inventory
in the second quarter of 2001 compared to none in the second quarter of
2002, which resulted in higher gross profit by 22 percentage points,
- the effect of applying manufacturing costs over reduced shipment
volumes, which lowered gross profit by 10 percentage points, and
- a change in cost/mix of products sold that improved gross profit by 1
percentage point.
Non-networking gross profit for the second quarter of 2002 decreased by $3.0
million from the second quarter of 2001 due to a reduction in sales volume.
Operating Expenses and Charges ($000,000)
Second Quarter
---------------------------
2002 2001 Change
Research and development $ 34.4 $ 53.8 ( 36%)
Percentage of net revenues 63% 57%
Marketing, general and administrative $ 16.5 $ 24.1 ( 32%)
Percentage of net revenues 30% 26%
Amortization of deferred stock compensation:
Research and development $ 0.7 $ 2.1
Marketing, general and administrative 0.1 0.4
---------------------------
$ 0.8 $ 2.5
---------------------------
Percentage of net revenues 1% 3%
Amortization of goodwill $ - $ 17.8
Impairment of goodwill and purchased
intangible assets $ - $ 189.0
Research and Development and Marketing, General and Administrative Expenses:
Our research and development, or R&D, expenses decreased by $19.4 million, or
36%, in the second quarter of 2002 compared to the same quarter a year ago due
to the restructuring and cost reduction programs implemented in the first and
fourth quarters of 2001. As a result, we reduced our R&D personnel and related
costs by $8.8 million and other R&D expenses by $10.6 million compared to the
second quarter of 2001. See also Restructuring costs and other special charges.
Our marketing, general and administrative, or MG&A, expenses decreased by $7.6
million, or 32%, in the second quarter of 2002 compared to the same quarter a
year ago. Of this decrease, $1.2 million was attributable to lower sales
commissions as a result of lower revenues. The remainder was attributable to the
restructuring and cost reduction programs implemented in 2001, which reduced our
MG&A personnel and related costs by $1.9 million and other MG&A expenses by $4.5
million compared to the second quarter of 2001. See also Restructuring costs and
other special charges.
12
Amortization of Deferred Stock Compensation:
We recorded a non-cash charge of $0.8 million for amortization of deferred
stock compensation in the second quarter of 2002 compared to a $2.5 million
charge in the second quarter of 2001. Deferred stock compensation charges
decreased compared to the same quarter last year because we follow the
accelerated method to amortize deferred stock compensation, which results in a
declining amortization expense over the amortization period.
Amortization of Goodwill:
We adopted the Statement of Financial Accounting Standard No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets" on a prospective basis at the beginning
of 2002 and stopped amortizing goodwill in accordance with the non-amortization
provisions of SFAS 142. The impact of not amortizing goodwill on the net income
and net income per share for the comparative prior period is provided in Note 1
to the condensed consolidated financial statements.
Impairment of Goodwill and Purchased Intangible Assets:
In conjunction with the implementation of SFAS 142, we completed the
transitional impairment test as of the beginning of 2002 and determined that a
transitional impairment charge would not be required.
In the second quarter of 2001, we recorded a charge of $189.0 million to
recognize an impairment of goodwill recorded in connection with the June 2000
purchase of Malleable Technologies. In June 2001, management decided to
discontinue further development of the technology acquired from Malleable. The
related goodwill was determined to be impaired as we did not expect to receive
any future cash flows related to this asset and we had no alternative use for
this technology.
Restructuring costs and other special charges:
Restructuring - March 26, 2001
In the first quarter of 2001, we implemented a restructuring plan in response
to the decline in demand for our networking products and consequently recorded a
restructuring charge of $19.9 million. The restructuring plan included the
involuntary termination of 223 employees across all business functions, the
consolidation of a number of facilities and the curtailment of certain research
and development projects.
During the second quarter of 2002, we made the following payments related to
the March 2001 restructuring:
Restructuring
Balance at Cash Liability at
(in thousands) Mar 31, 2002 Payments Jun 30, 2002
- --------------------------------------------------------------------------------
Total $ 3,023 $ (1,577) $ 1,446
====================================================
13
We have completed the restructuring activities contemplated in this plan. As a
result of this restructuring, we have achieved annualized savings of
approximately $28.2 million in cost of revenues and operating expenses based on
the expenditure levels at the time of this restructuring. The remaining
restructuring liability relates primarily to facility lease payments, net of
estimated sublease revenues, and has been classified as accrued liabilities on
the balance sheet.
Restructuring - October 18, 2001
Due to the continued decline in market conditions, we implemented a second
restructuring plan in the fourth quarter of 2001 to reduce our operating cost
structure. This restructuring plan included the termination of 341 employees,
the consolidation of additional excess facilities, and the curtailment of
additional research and development projects. As a result, we recorded a second
restructuring charge of $175.3 million in the fourth quarter of 2001.
During the second quarter of 2002, we made the following payments related to
the October 2001 restructuring:
Restructuring
Balance at Cash Liability at
(in thousands) Mar 31, 2002 Payments Jun 30, 2002
- ---------------------------------------------------------------------------------------------------------
Workforce reduction $ 4,030 $ (430) $ 3,600
Facility lease and contract settlement costs 144,101 (6,038) 138,063
- ---------------------------------------------------------------------------------------------------------
Total $ 148,131 $ (6,468) $ 141,663
====================================================
Interest and other income, net
Net interest and other income decreased to $1.3 million in the second quarter
of 2002 from $4.7 million in the second quarter of 2001. An increase in interest
income due to higher cash balances resulting from the issuance of convertible
subordinated notes in the third quarter of 2001 was offset by lower investment
yields and interest expense and amortized issuance costs related to the notes.
Gain on sale of investments
During the second quarter of 2002, we realized a pre-tax gain of $0.6 million
as a result of our disposition of a portion of our investment in Sierra Wireless
Inc. We continue to hold 2.1 million shares of Sierra Wireless Inc.
Provision for income taxes
We recorded a tax recovery of $4.4 million in the second quarter of 2002
relating to losses and tax credits generated in Canada which will result in a
recovery of taxes paid in prior periods. We have provided a valuation allowance
on other deferred tax assets generated in the quarter because of uncertainty
regarding their realization.
14
First Six Months of 2002 and 2001
First Six Months of 2001:
Net Revenues ($000,000)
First Six Months
-----------------------------
2002 2001 Change
Networking products $ 100.7 $ 202.5 (50%)
Non-networking products 5.2 11.5 (55%)
-----------------------------
Total net revenues $ 105.9 $ 214.0 (51%)
=============================
Net revenues decreased by 51% in the first six months of 2002 compared to the
same period a year ago.
Networking revenues declined 50% in the first six months of 2002 compared to
the first six months of 2001 due to decreased unit sales of our networking
products caused by reduced demand for our customers' products and excess
inventories of some of our products accumulated by our customers.
Non-networking revenues declined 55% in the first six months of 2002 compared
to the first six months of 2001 due to decreased unit sales to our principal
customer in this segment as this product has reached the end of its life.
Gross Profit ($000,000)
First Six Months
-----------------------------
2002 2001 Change
Networking products $ 62.4 $ 122.4 (49%)
Non-networking products 2.2 4.9 (55%)
-----------------------------
Total gross profit $ 64.6 $ 127.3 (49%)
=============================
Percentage of net revenues 61% 59%
Total gross profit declined $62.7 million, or 49%, in the first six months of
2002 compared to the same period a year ago.
Networking gross profit for the first six months of 2002 decreased by $60.0
million from the first six months of 2001. Our networking gross profit decreased
by approximately $74.2 million as a result of lower sales volume in the first
six months of 2002. This decrease in networking gross profit was offset in part
due to a $14.2 million write-down of excess inventory recorded in the first six
months of 2001. There was no write-down of excess inventory in the first six
months of 2002.
Networking gross profit as a percentage of networking revenues increased two
percentage points from 60% in the first six months of 2001 to 62% in the first
six months of 2002. This increase resulted from the following factors:
- the effect of recording a $14.2 million write-down of excess inventory
in the first six months of 2001 compared to none in the first six
months of 2002, which resulted in higher gross profit by 14 percentage
points, and
15
- the effect of applying manufacturing costs over reduced shipment
volumes, which lowered gross profit by 12 percentage points.
Non-networking gross profit for the first six months of 2002 decreased by $2.7
million from the first six months of 2001 due to a reduction in sales volume.
Operating Expenses and Charges ($000,000)
First Six Months
--------------------------
2002 2001 Change
Research and development $ 70.7 $ 111.2 (36%)
Percentage of net revenues 67% 52%
Marketing, general and administrative $ 33.6 $ 49.2 (32%)
Percentage of net revenues 32% 23%
Amortization of deferred stock compensation:
Research and development $ 1.7 $ 30.0
Marketing, general and administrative 0.1 0.9
-------------------------
Total $ 1.8 $ 30.9
-------------------------
Percentage of net revenues 2% 14%
Amortization of goodwill $ - $ 35.6
Restructuring Costs $ - $ 19.9
Impairment of goodwill and purchased
intangible assets $ - $ 189.0
Research and Development and Marketing, General and Administrative Expenses:
Our research and development, or R&D, expenses decreased by $40.5 million, or
36%, in the first six months of 2002 compared to the same period a year ago due
to the restructuring and cost reduction programs implemented in the first and
fourth quarters of 2001. As a result of these restructuring and cost reduction
initiatives, we reduced our R&D personnel and related costs by $22.8 million and
other R&D expenses by $17.7 million compared to the first six months of 2001.
See also Restructuring costs and other special charges.
Our marketing, general and administrative, or MG&A, expenses decreased by $15.6
million, or 32%, in the first six months of 2002 compared to the same period a
year ago. Of this decrease, $3.2 million was attributable to lower sales
commissions as a result of lower revenues. The remainder was attributable to the
restructuring and cost reduction programs implemented in 2001, which reduced our
MG&A personnel and related costs by $7.0 million and other MG&A expenses by $5.4
million compared to the first six months of 2001. See also Restructuring costs
and other special charges.
16
Amortization of Deferred Stock Compensation:
We recorded a non-cash charge of $1.8 million for amortization of deferred
stock compensation in the first six months of 2002 compared to a $30.9 million
charge in the first six months of 2001. Deferred stock compensation charges
decreased in 2002 compared to the same period last year primarily because in the
first quarter of 2001 we accelerated the amortization of deferred stock
compensation for some of the employees who were terminated as a result of our
March 2001 restructuring.
Amortization of Goodwill:
We adopted the Statement of Financial Accounting Standard No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets" on a prospective basis at the beginning
of 2002 and stopped amortizing goodwill in accordance with the non-amortization
provisions of SFAS 142. The impact of not amortizing goodwill on the net income
and net income per share for the comparative prior period is provided in Note 1
to the condensed consolidated financial statements.
Restructuring costs and other special charges:
Restructuring - March 26, 2001
In the first quarter of 2001, we implemented a restructuring plan in response
to the decline in demand for our networking products and consequently recorded a
restructuring charge of $19.9 million. The restructuring plan included the
involuntary termination of 223 employees across all business functions, the
consolidation of a number of facilities and the curtailment of certain research
and development projects.
During the first six months of 2002, we made the following payments related to
the March 2001 restructuring:
Restructuring
Balance at Cash Liability at
(in thousands) Dec 30, 2001 Payments Jun 30, 2002
- --------------------------------------------------------------------------------
Total $ 4,204 $ (2,758) $ 1,446
====================================================
We have completed the restructuring activities contemplated in this plan. As a
result of this restructuring, we have achieved annualized savings of
approximately $28.2 million in cost of revenues and operating expenses based on
the expenditure levels at the time of this restructuring. The remaining
restructuring liability relates primarily to facility lease payments, net of
estimated sublease revenues, and has been classified as accrued liabilities on
the balance sheet.
Restructuring - October 18, 2001
Due to the continued decline in market conditions, we implemented a second
restructuring plan in the fourth quarter of 2001 to reduce our operating cost
structure. This restructuring plan included the termination of 341 employees,
the consolidation of additional excess facilities, and the curtailment of
additional research and development projects. As a result, we recorded a second
restructuring charge of $175.3 million in the fourth quarter of 2001.
17
During the first six months of 2002, we made the following payments related to
the October 2001 restructuring:
Restructuring
Balance at Cash Liability at
(in thousands) Dec 30, 2001 Payments Jun 30, 2002
- --------------------------------------------------------------------------------
Workforce reduction $ 6,784 $ (3,184) $ 3,600
Facility lease and contract
settlement costs 150,210 (12,147) 138,063
- --------------------------------------------------------------------------------
Total $ 156,994 $ (15,331) $ 141,663
=================================================
Impairment of Goodwill and Purchased Intangible Assets:
In conjunction with the implementation of SFAS 142, we completed the
transitional impairment test as of the beginning of 2002 and determined that a
transitional impairment charge would not be required.
In the second quarter of 2001, we recorded a charge of $189.0 million to
recognize an impairment of goodwill recorded in connection with the June 2000
purchase of Malleable Technologies. In June 2001, management decided to
discontinue further development of the technology acquired from Malleable. The
related goodwill was determined to be impaired as we did not expect to receive
any future cash flows related to this asset and we had no alternative use for
this technology.
Interest and other income, net
Net interest and other income decreased to $2.8 million in the first six months
of 2002 from $9.6 million in the first six months of 2001. An increase in
interest income due to higher cash balances resulting from the issuance of
convertible subordinated notes in the third quarter of 2001 was offset by lower
investment yields and interest expense and amortized issuance costs related to
the notes.
Gain on sale of investments
During the first six months of 2002, we realized a pre-tax gain of $3.1 million
as a result of our disposition of a portion of our investment in Sierra Wireless
Inc. and one other publicly held company. We continue to hold 2.1 million shares
of Sierra Wireless Inc.
Provision for income taxes
We recorded a tax recovery of $10.3 million in the first six months of 2002
relating to losses and tax credits generated in Canada which will result in a
recovery of taxes paid in prior periods. We have provided a valuation allowance
on other deferred tax assets generated in 2002 because of uncertainty regarding
their realization.
18
Business Outlook
In the second quarter of 2002, we experienced our second quarterly sequential
increase in shipments of our networking products. However, most of our
customers, the networking equipment providers, and their customers, the network
service providers, continue to experience decreased demand for their products,
contend with high debt levels and focus on cost reduction. Our newer products
generated the majority of this revenue growth, as our customers continued to
hold excess inventories of our older networking products.
We expect our networking product revenue to grow sequentially in the third
quarter of 2002 as our customers demand more of our newer products and as they
may replenish a portion of the inventories of our older components. Our
expectations for third quarter revenue growth are based on shipments made and
backlog scheduled as of the date of this filing plus an estimate of orders we
will receive and ship within the balance of the quarter. We expect that the
level of our quarterly networking revenues will vary in the future as a result
of fluctuating customer demand caused by our customers' clients adjusting their
capital spending plans.
Our non-networking product has reached the end of its life. We expect
insignificant revenues from this segment in the future.
We expect that our quarterly research and development and marketing, general
and administrative expenses, excluding any special charges, will remain in the
low to mid $50 million range for the next two fiscal quarters.
We expect to complete the restructuring activities contemplated in the October
2001 restructuring plan by the fourth quarter of 2002. Upon conclusion of this
restructuring and the final disposition of our surplus leased facilities, we
expect to achieve annualized savings of approximately $67.6 million in cost of
revenues and operating expenses based on the expenditure levels at the time of
this restructuring.
We anticipate that interest and other income will decline in the third quarter
of 2002 as we earn lower investment yields on our cash and bond investments, and
as we dispose of portions of our publicly traded equity portfolio at lower
market prices.
Liquidity & Capital Resources
Our principal source of liquidity at June 30, 2002 was our cash, cash
equivalents and short-term investments of $424.0 million, which increased from
$410.7 million at the end of 2001. We also held $147.5 million in 12 to 30 month
maturity bonds and notes at the end of the second quarter of 2002, which
decreased from $171.0 million at the end of 2001.
In the first six months of 2002, we used $20.8 million in cash for operating
activities. Our net loss of $25.3 million included $24.3 million for
depreciation and amortization and $3.1 million of gains on the sale of
investments.
With respect to changes in working capital, we generated cash by decreasing our
accounts receivable by $2.2 million and our inventories by $2.9 million and
increasing our accounts payable and accrued liabilities by $2.3 million and
income taxes payable by $1.2 million. We used cash by increasing our prepaid
expenses and other assets by $2.7 million and decreasing our accrued
restructuring costs by $18.1 million and deferred income by $4.4 million.
19
Our year to date investing activities include the maturity and reinvestment of
short-term investments. We also invested an additional $89.9 million in and
received proceeds of $20.9 million from the sale and maturity of 12 to 30 month
maturity bonds and notes. We reclassified a total of $92.5 million of 12 to 30
month maturity bonds and notes as short-term investments during the first six
months of 2002. We purchased $2.0 million of property and equipment, and
received net proceeds of $4.4 million from other investments and assets.
Our year to date financing activities in 2002 generated $8.5 million. We
received $8.8 million of proceeds from issuing common stock under our equity
incentive plans and used $0.3 million for debt and capital lease repayments.
We 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. At the end of
the second quarter of 2002, we had committed approximately $5.3 million of this
facility under letters of credit as security for leased facilities. These
letters of credit renew automatically each year and expire in 2011.
We have cash commitments made up of the following:
As at June 30, 2002 (in thousands) Payments Due
- ------------------------------------------------------------------------------------------------------------------------------------
Balance After
Contractual Obligations Total 2002 2003 2004 2005 2006 2006
Capital Lease Obligations 158 158 - - - - -
Operating Lease Obligations:
Minimum Rental Payments 287,013 15,630 31,830 31,520 30,684 29,821 147,528
Estimated Operating Cost Payments 65,565 3,702 7,473 7,151 7,067 8,710 31,462
Long Term Debt:
Principal Repayment 275,000 - - - - 275,000 -
Interest Payments 46,408 5,156 10,313 10,313 10,313 10,313 -
-----------------------------------------------------------------------------------
674,144 24,646 49,616 48,984 48,064 323,844 178,990
========================================================================
Venture Investment Commitments (see below) 40,200
------------
Total Contractual Cash Obligations 714,344
============
Our long-term debt includes semi-annual interest payments of approximately $5.2
million to holders of our convertible notes. These interest payments are due on
February 15th and August 15th of each year, with the last payment being due on
August 15th, 2006.
We participate in four professionally managed venture funds that invest in
early-stage private technology companies in markets of strategic interest to us.
From time to time these funds request additional capital for private placements.
We have committed to invest an additional $40.2 million into these funds, which
may be requested by the fund managers at any time over the next eight years.
We believe that existing sources of liquidity will satisfy our projected
restructuring, operating, working capital, venture investing, debt interest,
capital expenditure and wafer deposit requirements through the end of 2002. We
expect to spend approximately $7.4 million on new capital additions during the
remainder of 2002.
20
Recently issued accounting standards
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 141 (SFAS 141), "Business Combinations" and
Statement of Financial Accounting Standard No. 142 (SFAS 142), "Goodwill and
Other Intangible Assets".
SFAS 141 requires that business combinations be accounted for under the
purchase method of accounting and addresses the initial recognition and
measurement of assets acquired, including goodwill and intangibles, and
liabilities assumed in a business combination. We adopted SFAS 141 on a
prospective basis effective July 1, 2001. The adoption of SFAS 141 did not have
a material effect on our financial statements, but will impact the accounting
treatment of future acquisitions.
SFAS 142 requires goodwill to be allocated to, and assessed as part of, a
reporting unit. Further, SFAS 142 specifies that goodwill will no longer be
amortized but instead will be subject to impairment tests at least annually. In
conjunction with the implementation of SFAS 142, we completed the transitional
impairment test as of the beginning of 2002 and determined that a transitional
impairment charge would not be required.
We adopted SFAS 142 on a prospective basis at the beginning of fiscal 2002 and
stopped amortizing goodwill totaling $7.1 million, thereby eliminating annual
goodwill amortization of approximately $2.0 million in 2002. If we had stopped
amortizing goodwill at the beginning of fiscal 2001, our net loss for the second
quarter of 2001 would have been reduced by $18.0 million, or $0.11 per share,
and our net loss for the first six months of 2001 would have been reduced by
$36.0 million, or $0.21 per share.
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS 144 supersedes Statement of Financial Accounting Standard No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions
of APB Opinion No. 30 for the disposal of a business segment. SFAS 144
establishes a single accounting model, based on the framework established in
SFAS 121, for long-lived assets to be disposed of by sale. The Statement also
broadens the presentation of discontinued operations to include disposals of a
component of an entity and provides additional implementation guidance with
respect to the classification of assets as held-for-sale and the calculation of
an impairment loss. We adopted SFAS 144 at the beginning of fiscal 2002. The
adoption of SFAS 144 did not have a material impact on our financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standard No.
146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS 146 requires that the liability for a cost associated with an
exit or disposal activity be recognized at its fair value when the liability is
incurred. Under previous guidance, a liability for certain exit costs was
recognized at the date that management committed to an exit plan, which was
generally before the actual liability has been incurred. As SFAS 146 is
effective only for exit or disposal activities initiated after December 31,
2002, we do not expect the adoption of this statement to have a material impact
on our financial statements.
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.
21
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 securities 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, fluctuations in demand for networking
equipment and our customer concentration.
As a result of these factors, we have very limited revenue visibility and the
rate by which revenues are booked and shipped within the same reporting period
is typically volatile. In addition, our net bookings can vary sharply up and
down within a quarter.
Our revenues have declined compared to the second quarter of 2001 due
to reduced demand in the markets we serve. While we predict sequential
networking revenue growth into the third quarter of 2002, our revenues
may decline during the quarter or thereafter.
Many networking service providers, the customers served by the networking
equipment companies that we supply with communications components, have reported
lower than expected demand for their services or products, increased
competition, poor operating results, and significant debt loads. Many of these
companies, including some of the largest companies in the networking industry,
have either filed for bankruptcy or may become insolvent in the near future.
Most service providers have changed their strategies from rapid growth to cash
preservation, which has resulted in decreased capital expenditures on the
networking equipment that our customers sell and a focus on equipment which may
generate financial return in a shorter time horizon, which may not incorporate,
or may incorporate fewer, of our products. Recent news releases further indicate
that these service providers continue to struggle financially and may decrease
or change the nature of capital expenditures further.
In response to the actual and anticipated declines in networking equipment
demand, many of our customers and their contract manufacturers have undertaken
initiatives to significantly reduce expenditures and excess component
inventories. Consequently, they have cancelled or rescheduled orders for our
networking products. Many platforms into which our products are designed have
been cancelled as our customers cancel or restructure product development
initiatives or as venture-financed startup companies fail. Our revenues may be
materially and adversely impacted if these conditions continue or worsen.
While we believe that our customers and their contract manufacturers are
consuming a portion of their inventory of PMC products, we believe that those
inventories as well as the weakened demand that our customers are experiencing
for their products, will continue to depress revenues and profit margins for the
foreseeable future. We cannot accurately predict how quickly, or how much,
demand will strengthen, how quickly our customers will consume their inventories
of our products or whether the resumption in demand will continue.
Our customers may cancel or delay the purchase of our products for
reasons other than the industry downturn described above.
22
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 components.
Our customers often shift buying patterns as they manage inventory levels,
decide to use competing products, are acquired or divested, market different
products, or change production schedules.
In addition, we believe that uncertainty in our customers' end markets and our
customers' increased focus on cash management has caused our customers to delay
product orders and reduce delivery lead-time expectations. We expect this will
increase the proportion of our networking revenues in future periods that will
be from orders placed and fulfilled within the same period. We have recently
experienced customer requests to considerably expedite delivery times for
orders. This will decrease our ability to accurately forecast, and may lead to
greater fluctuations in, operating results.
We occasionally estimate the size and consumption of our customers'
inventories of our products. These estimates are based on our limited
survey of selected contract manufacturers and our largest original
equipment manufacturer, or OEM, customers. Our analysis is intended
only to provide us with some information about our market to assist in
our forecasts, which are limited by the precision of the data we
obtain.
- Our surveys are not comprehensive. For instance, we do not include most of
our customers, so our overall estimates may be understated and we cannot
accurately forecast inventory consumption by these customers.
- We are unable to obtain accurate data from survey respondents about the
degree to which our products are included in their work in progress and
finished goods inventories, so our estimates of their inventories of our
products may be understated.
- We selectively attempt to verify and crosscheck the information we receive
from the companies we survey, although system, process and data
inaccuracies can impair the results of the analysis.
- We obtain this information over extended periods and do not adjust the
information for the time at which a response was received.
While we intend to monitor contract manufacturer and large OEM customer
inventories of our products, we may not do this consistently and we may not
provide updates of our expectations resulting from new data we obtain.
Even if our survey proves accurate, our estimate of when these contract
manufacturers and large OEM customers will consume their inventory and return to
purchasing products from us may not be accurate for the following reasons:
- Contract manufacturers and OEMs who consume their inventories of our
products may buy units from our distributors' existing inventories or
unauthorized channels rather than buy additional units from us. While we
will recognize sales by our major distributor as revenue, those sales will
not result in additional cash flow.
23
- Customer inventory consumption may not correlate with purchases of product
from our inventories or the inventories of our distributors. The PMC
products that our customers require may shift as the technologies
underlying their new products evolve.
- Our customers may continue to experience declining demand for their
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
and all of these companies have recently announced order shortfalls for some of
their products.
We do not have long-term volume purchase commitments from any of our major
customers. Accordingly, our future operating results will continue to depend on
the success of our largest customers and on our ability to sell existing and new
products to these customers in significant quantities. The loss of a key
customer, or a reduction in our sales to any key customer or our inability to
attract new significant customers could materially and adversely affect our
business, financial condition or results of operations.
If the recent trend of consolidation in the networking industry
continues, many of our customers may be acquired, sold or may choose to
restructure their operations, which could lead those customers to
cancel product lines or development projects and our revenues could
decline.
The networking equipment industry is experiencing significant merger activity
and partnership programs. Through mergers or partnerships, our customers could
seek to remove duplication or overlap in their product lines or development
initiatives. This could lead to the cancellation of a product line into which
our products are designed or a development project in which we are
participating. In the case of a product line cancellation, our revenues could be
negatively 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.
Design wins do not translate into near-term revenues and the timing of revenues
from newly designed products is often uncertain.
We have announced a large number of new products and design wins for existing
and new products. While some industry analysts may use design wins as a metric
for future revenues, many design wins will not generate any revenues as customer
projects are cancelled or rejected by their end market. In the event a design
win generates revenue, the amount of revenue will vary greatly from one design
win to another. In addition, most revenue-generating design wins do not
translate into near term revenues. Most revenue-generating design wins take
greater than two years to generate meaningful revenue.
Our revenue expectations include growing sales of newer semiconductors based on
early adoption of those products by customers. These expectations would not be
achieved if early sales of new system level products by our customers do not
increase over time. We may experience this more with design wins from early
stage companies, who tend to focus on leading-edge technologies which may be
adopted less rapidly in the current environment by telecommunications service
providers.
Our restructurings have curtailed our resources and may have insufficiently
addressed market conditions.
24
On March 26 and October 18, 2001, we announced plans to restructure our
operations in response to the decline in demand for our networking products. We
implemented this restructuring in an effort to bring our expenses into line with
our reduced revenue expectations. However, we expect to continue to incur net
losses for at least the remainder of 2002.
Restructuring plans require significant management resources to execute and we
may fail to achieve our targeted goals. We may have incorrectly anticipated the
demand for our products, we may be forced to restructure further or may incur
further operating charges due to poor business conditions and some of our
product development initiatives may be delayed due to the reduction in our
development resources.
Our revenues may decline if our customers use our competitors' products instead
of ours, suffer further reductions in demand for their products or are acquired
or sold.
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, such as the wireless infrastructure and generic
microprocessor markets, which have established incumbents with 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 us:
As our customers increase the frequency with 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
use their products, which may cause our revenues to decline.
We typically face competition at the design stage, where customers evaluate
alternative design approaches requiring integrated circuits. Our competitors may
have more opportunities to supplant our products in next generation systems
because of the shortening product life and design-in cycles in many of our
customers' products.
In addition, as a result of the industry downturn, and as semiconductors
sourced from third party suppliers comprise a greater portion of the total
materials cost in our customers' equipment, our customers are becoming more
price conscious than in the past. We have also experienced increased price
aggressiveness from some competitors that wish to enter into the market segments
in which we participate. These circumstances may make some of our products
price-uncompetitive or force us to match low prices. We may lose design
opportunities or may experience overall declines in gross margins as a result of
increased price competition.
The markets for our products are intensely competitive and subject to rapid
technological advancement in design tools, wafer manufacturing techniques,
process tools and alternate networking technologies. We 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.
Increasing competition in our industry will make it more difficult to
achieve design wins.
25
We face significant competition from three major fronts. First, we compete
against established peer-group semiconductor companies that focus on the
communications semiconductor business. These companies include Agere Systems,
Applied Micro Circuits Corporation, Broadcom, Exar Corporation, Conexant
Systems, Marvell Technology Group, Multilink Technology Corporation, Transwitch
and Vitesse Semiconductor. These companies are well financed, have significant
communications semiconductor technology assets, have established sales channels,
and are dependent on the market in which we participate for the bulk of their
revenues.
Other competitors include major domestic and international semiconductor
companies, such as Cypress Semiconductor, Intel, IBM, Infineon, Integrated
Device Technology, Maxim Integrated Products, Motorola, Nortel Networks, and
Texas Instruments. These companies are concentrating an increasing amount of
their substantial financial and other resources on the markets in which we
participate and are incumbents in the new markets we are targeting. This
represents a serious competitive threat to us.
Emerging venture-backed companies also provide significant competition in our
segment of the semiconductor market. These companies tend to focus on specific
portions of our broad range of products and in the aggregate, represent a
significant threat to our product lines. In addition, these companies could
introduce disruptive technologies that may make our technologies and products
obsolete.
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. These companies, individually or collectively, could represent future
competition for many design wins, and subsequent product sales.
Due to long development times and changing market dynamics, we may inaccurately
anticipate customer needs and expend research and development resources but fail
to increase revenues.
We must often redesign our products to meet rapidly evolving industry
standards and customer specifications, which may prevent or delay
future revenue growth.
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 many of the products we develop do not reach full production
sales volumes for a number of years, we may incorrectly anticipate
market demand and develop products that achieve little or no market
acceptance.
Our products generally take between 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. Our
products often must 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.
We are exposed to increased credit risk of some of our customers and we may
have difficulty collecting receivables from customers based in foreign
countries.
26
Many of our customers employ contract manufacturers to produce their products
and manage their inventories. Many of these contract manufacturers represent
greater credit risk than our networking equipment customers, who generally do
not guarantee our credit receivables related to their contract manufacturers.
In addition, international debt rating agencies have significantly downgraded
the bond ratings on a number of our larger customers, which had traditionally
been considered financially stable. Should these companies enter into
receivership or breach debt covenants, our significant accounts receivables with
these companies could be jeopardized.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance.
Acquiring products, technologies or businesses from third parties is 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.
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.
The complexity of our products could result in unforeseen delays or expenses
and in undetected defects or bugs, which could adversely affect the market
acceptance of new products and damage our reputation with current or prospective
customers.
Although we, our customers and our suppliers rigorously test our products, our
highly complex products regularly contain defects or bugs. We have in the past
experienced, and may in the future experience, these defects and bugs. If any of
our products contain defects or bugs, or have reliability, quality or
compatibility problems that are significant to our customers, our reputation may
be damaged and customers may be reluctant to buy our products. This could
materially and adversely affect our ability to retain existing customers or
attract new customers. In addition, these defects or bugs could interrupt or
delay sales to our customers.
We may have to invest significant capital and other resources to alleviate
problems with our products. If any of these problems are not found until after
we have commenced commercial production of a new product, we may be required to
incur additional development costs and product recall, repair or replacement
costs. These problems may also result in claims against us by our customers or
others. In addition, these problems may divert our technical and other resources
from other development efforts. Moreover, we would likely lose, or experience a
delay in, market acceptance of the affected product or products, and we could
lose credibility with our current and prospective customers.
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 needed to develop high-speed networking products and
related software. The competition for such employees is intense.
27
We do not have employment agreements in place with many of 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.
A significant portion of our revenues is derived from sales of microprocessors
based on the MIPS architecture that we license from MIPS Technologies, Inc. If
MIPS Technologies develops future generations of its technology, we may not be
able to obtain a license on reasonable terms.
We use the MIPS microprocessor architecture license from MIPS Technologies Inc.
in the development of our microprocessor-based products. While the desktop
microprocessor market is dominated by the Intel Corporation's "x86" complex
instruction set computing, or CISC, architecture, several microprocessor
architectures have emerged for other microprocessor markets. Because of their
higher performance and smaller space requirements, most of the competing
architectures are reduced instruction set computing, or RISC, architectures. The
MIPS architecture is widely supported through semiconductor design software,
operating systems and companion integrated circuits. Because this license is the
architecture behind our microprocessors, we must be able to retain the MIPS
license in order to produce our follow-on microprocessor products. 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 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 customers are becoming more price conscious than in the past as a result of
the industry downturn, and as semiconductors sourced from third party suppliers
comprise a greater portion of the total materials cost in our customers'
equipment. We have also experienced more aggressive price competition from
competitors that wish to enter into the market segments in which we participate.
These circumstances may make some of our products less competitive and we may be
forced to decrease our prices significantly to win a design. We may lose design
opportunities or may experience overall declines in gross margins as a result of
increased price competition.
In addition, 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.
28
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, our customers are focusing more on cash preservation and tighter
inventory management, 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 our 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 or we may be left with unwanted inventory.
We have recently experienced customer requests to considerably expedite
delivery times for orders. A shortage in supply could adversely impact our
ability to satisfy customer demand, which could adversely affect our customer
relationships along with our current and future operating results.
We rely on 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 greater than 90% 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 most 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 revenues. 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.
29
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 the United States.
The geographic diversity of our business operations could hinder our ability to
coordinate design and sales activities. If we are unable to develop systems and
communication processes to support our geographic diversity, we 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, while our sales are denominated in US dollars, our customers'
products are sold worldwide. Any further decline in the world networking markets
could seriously depress our customers' order levels for our products. This
effect could be exacerbated if fluctuations in currency exchange rates decrease
the demand for our customers' products.
From time to time, we become defendants in legal proceedings about which we are
unable to assess our exposure and which could become significant liabilities
upon judgment.
We become defendants in legal proceedings from time to time. Companies in our
industry have been subject to claims related to patent infringement and product
liability, as well as contract and personal claims. We may not be able to
accurately assess the risk related to these suits, and we may be unable to
accurately assess our level of exposure. These proceedings may result in
material charges to our operating results in the future if our exposure is
material and if our ability to assess our exposure becomes clearer.
If we cannot protect our proprietary technology, we may not be able to prevent
competitors from copying our technology and selling similar products, which
would harm our revenues.
30
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. 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.
We have significantly increased our leverage as a result of the sale of
convertible notes.
On August 6, 2001, we raised $275 million through the issuance of convertible
subordinated notes. As a result, our interest payment obligations have increased
substantially. The degree to which we are leveraged could materially and
adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make us more vulnerable to industry
downturns and competitive pressures. Our ability to meet our debt service
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations, many of which
are beyond our control. On August 15, 2006, we are obliged to repay the full
remaining principal amount of the notes that have not been converted into our
common stock.
31
Securities we issue to fund our operations could dilute your ownership.
We may decide to raise additional funds through public or private debt or
equity financing 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 that are favorable to you or us. We may
delay, limit or eliminate some or all of our proposed operations if adequate
funds are not available.
Our stock price has been and may continue to be volatile.
In the past, our common stock price has fluctuated significantly. In
particular, our stock price declined significantly in the context of
announcements made by us and other semiconductor suppliers of reduced revenue
expectations and of a general slowdown in the markets we serve. Given these
general economic conditions and the reduced demand for our products that we have
experienced, we expect that our stock price will continue to be volatile.
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.
Securities class action litigation has often been instituted against a company
following periods of volatility and decline in the market price of their
securities. If instituted against us, regardless of the outcome, such litigation
could result in substantial costs and diversion of our management's attention
and resources and have a material adverse effect on our business, financial
condition and operating results. We could be required to pay substantial
damages, including punitive damages, if we were to lose such a lawsuit.
Provisions in our charter documents and Delaware law and our adoption of a
stockholder rights plan may delay or prevent acquisition of us, which could
decrease the value of our common stock.
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could make it harder for a third party to acquire us without the consent of
our board of directors. Delaware law also imposes some restrictions on mergers
and other business combinations between us and any holder of 15% or more of our
outstanding common stock. In addition, our board of directors has the right to
issue preferred stock without stockholder approval, which could be used to
dilute the stock ownership of a potential hostile acquirer. Although we believe
these provisions of our certificate of incorporation and bylaws and Delaware law
and our stockholder rights plan will provide for an opportunity to receive a
higher bid by requiring potential acquirers to negotiate with our board of
directors, these provisions apply even if the offer may be considered beneficial
by some stockholders.
Our board of directors adopted a stockholder rights plan, pursuant to which we
declared and paid a dividend of one right for each share of common stock held by
stockholders of record as of May 25, 2001. Unless redeemed by us prior to the
time the rights are exercised, upon the occurrence of certain events, the rights
will entitle the holders to receive upon exercise thereof shares of our
preferred stock, or shares of an acquiring entity, having a value equal to twice
the then-current exercise price of the right. The issuance of the rights could
have the effect of delaying or preventing a change in control of us.
32
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion regarding our risk management activities contains
"forward-looking statements" that involve risks and uncertainties. Actual
results may differ materially from those projected in the forward-looking
statements.
Cash Equivalents, Short-term Investments and Investments in Bonds and Notes:
We regularly maintain a short and long term investment portfolio of various
types of government and corporate bonds and notes. Our investments are made in
accordance with an investment policy approved by our Board of Directors.
Maturities of these instruments are less than 30 months with the majority being
within one year. To minimize credit risk, we diversify our investments and
select minimum ratings of P-1 or A by Moody's, or A-1 or A by Standard and
Poor's, or equivalent. We classify these securities as held-to-maturity or
available-for-sale depending on our investment intention. Held-to-maturity
investments are held at amortized cost, while available-for-sale investments are
held at fair market value. Available-for-sale securities represented less than
15% of our investment portfolio as of June 30, 2002.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate and credit rating 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. In addition, the value of all types of
securities may be impaired if bond rating agencies decrease the credit ratings
of the entities which issue those securities. Due in part to these factors, our
future investment income may fall short of expectations because of changes in
interest rates, or we may suffer losses in principal if we were to sell
securities that have declined in market value because of changes in interest
rates or a decrease in credit ratings.
We do not attempt to reduce or eliminate our exposure to changes in interest
rates or credit ratings through the use of derivative financial instruments.
Based on a sensitivity analysis performed on the financial instruments held at
June 30, 2002 that are sensitive to changes in interest rates, the impact to the
fair value of our investment portfolio by an immediate hypothetical parallel
shift in the yield curve of plus or minus 50, 100 or 150 basis points would
result in a decline or increase in portfolio value of approximately $2.5
million, $5 million and $7.6 million respectively.
Other Investments:
Other investments at June 30, 2002 include a minority investment of
approximately 2.1 million shares of Sierra Wireless Inc., a publicly traded
company. 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 income taxes.
Our other investments also include numerous strategic investments in privately
held companies or venture funds that are carried on our balance sheet at cost,
net of write-downs for non-temporary declines in market value. We expect to make
additional investments like these in the future. These investments are
inherently risky, as they typically are comprised of investments in companies
and partnerships that are still in the start-up or development stages. The
market for the technologies or products that they have under development is
typically in the early stages, and may never materialize. We could lose our
entire investment in these companies and partnerships or may incur an additional
expense if we determine that the value of these assets have been impaired.
33
Foreign Currency
We generate a significant portion of our revenues from sales to customers
located outside of the United States including Canada, Europe, 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. Because we do not engage in foreign currency exchange rate fluctuation
risk management techniques beyond these periods, our cost structure is subject
to long-term changes in foreign exchange rates.
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.
We regularly analyze the sensitivity of our foreign exchange positions to
measure our foreign exchange risk. At June 30, 2002, a 10% shift in foreign
exchange rates would not have materially impacted our other income because our
foreign currency net asset position was immaterial.
34
Part II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE BY STOCKHOLDERS
We held our Annual Meeting of Stockholders on May 30, 2002 to elect our
directors and to ratify the appointment of Deloitte & Touche LLP as our
independent auditors for the 2002 fiscal year.
All nominees for directors were elected and the appointment of auditors was
ratified. The voting on each matter is set forth below:
Election of the Directors of the Company.
Nominee For Withheld
Robert Bailey 140,784,800 2,526,882
Alexandre Balkanski 140,978,777 2,332,905
Colin Beaumont 140,978,359 2,333,323
James Diller 139,501,606 3,810,076
Frank Marshall 140,992,828 2,318,854
Lewis Wilks 140,792,797 2,518,885
Proposal to ratify the appointment of Deloitte & Touche LLP as our independent
auditors for the 2002 fiscal year.
For Against Abstain
137,900,191 4,862,276 546,915
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
- 11.1 Calculation of income (loss) per share (1)
(b) Reports on Form 8-K -
- None.
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC-SIERRA, INC.
(Registrant)
Date: August 13, 2002 /S/ John W. Sullivan
--------------- -------------------------------------------------
John W. Sullivan
Vice President, Finance (duly authorized officer)
Principal Accounting Officer
- --------
1 Refer to Note 5 of the financial statements included in Item I of Part I of
this Quarterly Report.
36