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FORM 10-K
PMC SIERRA INC - PMCS
Filed: February 22, 2008 (period: December 30, 2007)
Annual report which provides a comprehensive overview of the company for the past year

Table of contents

  • Page 1
    FORM 10-K PMC SIERRA INC - PMCS Filed: February 22, 2008 (period: December 30, 2007) Annual report which provides a comprehensive overview of the company for the past year

  • Page 2
    ...4. Business Risk Factors. Properties. Legal Proceedings. Submission of Matters to a Vote of Security Holders. PART II ITEM 5. Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. ITEM 6. Selected Financial Data ITEM 7. Management s Discussion...

  • Page 3
    ...FORM OF CHANGE OF CONTROL AGREEMENT) EX-12.1 (STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES) EX-21.1 (SUBSIDIARIES OF THE REGISTRANT) EX-23.1 (CONSENT OF DELOITTE TOUCHE LLP) EX-31.1 (CERTIFICATION PURSUANT TO SECTION 302 (CHIEF EXECUTIVE OFFICER)) EX-31.2 (CERTIFICATION PURSUANT TO...

  • Page 4
    ...by nonaffiliates of the Registrant, based upon the closing sale price of the Common Stock on June 30, 2007 as reported by the NASDAQ Global Market, was approximately $1.1 billion. Shares of Common Stock held by each executive officer and director and by each Source: PMC SIERRA INC, 10-K, February 22...

  • Page 5
    ... may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 15, 2008, the Registrant had 218,380,467 shares of Common Stock outstanding. Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 6
    Table of Contents DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K Report. Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 7
    ... Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Security Ownership of Certain Beneficial Owners and Management...

  • Page 8
    ... State of Delaware in 1997. Our Common Stock trades on the NASDAQ Global Select Market under the symbol "PMCS". Our principal executive offices are located at 3975 Freedom Circle, Santa Clara, California 95054, and our phone number is (408) 239-8000. Our internet webpage is located at www.pmc-sierra...

  • Page 9
    ...; competition and pricing; critical accounting policies and estimates; customer product inventory levels, needs and order levels; demand for networking, storage and consumer equipment; net revenues; gross profit; research and development expenses; selling, general and administrative expenditures...

  • Page 10
    ..., Inc., a company that develops system-on-chip semiconductor solutions for the Fiber-To-The-Home (FTTH) access market. We purchased Passave due to its market leadership in Passive Optical Networking (PON) solutions for central office and customer premise FTTH applications. 4 Source: PMC SIERRA INC...

  • Page 11
    ... used in wireline communications can be deployed in the transmission of wireless data traffic to the network in wireless base station transceivers. PMC-Sierra also recently introduced a wireless Radio Frequency (RF) device supporting a new protocol known as WiMax. Metro The metropolitan area of the...

  • Page 12
    ... and businesses connect to their data storage either directly or indirectly, the latter using network-attached systems (NAS) or storage area networks (SAN). Fibre Channel protocol, which is the standard for the transfer of information between computers and storage devices (hard disk drives), is...

  • Page 13
    .... Controller products based on Fibre Channel, SAS, and SATA, are enabling technologies for building network-attached storage system architectures that meet cost and capacity needs. Microprocessor-based System-On-Chips (SOCs): these devices perform the high-speed computations that help identify and...

  • Page 14
    ... Channel product line, we have leading edge high-performance interconnect devices designed on protocols such as SAS and SATA. We expect the need for faster and more complex devices based on these protocols to increase as next-generation storage systems are deployed. We offer controllers for server...

  • Page 15
    .... Our sales outside of the United States, based on customer billing location, accounted for 80% of total revenue in 2007, 76% in 2006, and 61% in 2005. Our sales to customers in Asia, including Japan and China, continued to increase in 2007 (65% of sales) from 2006 (57% of 9 Source: PMC SIERRA INC...

  • Page 16
    ... offer the best technology and service, at a competitive price. Our lead-time, or the time required to manufacture our devices, is typically 10 to 14 weeks. Based on this lead-time, our team of production planners initiates purchase orders with our wafer suppliers and with our chip assemblers for...

  • Page 17
    ...development of both hardware and software. These devices and reference designs are targeted for use in enterprise, storage and service provider markets. Increasingly, our OEM customers that serve these end markets are demanding complete solutions with software support and complex feature sets and we...

  • Page 18
    ..., LSI Logic, Marvell, Maxim, and Texas Instrument. Many of these companies are well financed, have significant communications semiconductor technology assets and established sales channels, and depend on the market in which we participate for the bulk of their revenues. 12 Source: PMC SIERRA INC...

  • Page 19
    ... products. This license may be terminated only if we do not make the required royalty payments or breach confidentiality obligations. PMC, PMCS, PMC-Sierra and our logo are our registered trademarks and service marks. We own other trademarks and service marks not appearing in this Annual Report...

  • Page 20
    ... 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 variations in our turns business; short order lead time; customer inventory levels; production schedules; and fluctuations in demand. Our revenues...

  • Page 21
    ... and investors. This could cause the market price of our common stock to decline. We rely on a few customers for a major portion of our sales, any one of which could materially impact our revenues should they change their ordering pattern. The loss of a key customer could materially impact our...

  • Page 22
    ...or the senior management team. Changes in the political and economic climate in the countries we do business may adversely affect our operating results. Our results of operations are increasingly dependent on our sales in China, which accounted for 20% of our revenues in 2007. Government agencies in...

  • Page 23
    ... of current or future competitors, reducing our future revenues. With the shortening product life and design-in cycles in many of our customers' products, our competitors may have more opportunities to supplant our products in next generation systems. 17 Source: PMC SIERRA INC, 10-K, February 22...

  • Page 24
    ... acceptance. Our products generally take between 12 and 24 months from initial conceptualization to development of a viable prototype, and another 3 to 18 months to be designed into our customers' equipment and sold in production quantities. We sell products whose 18 Source: PMC SIERRA INC, 10...

  • Page 25
    ... our tax provision at the end of 2006 due to an increase in our estimated tax liability following receipt in 2007 of a written communication from a tax authority examining the historic transfer pricing policies and practices of certain companies within the PMC-Sierra group. If foreign exchange rates...

  • Page 26
    ...acquired businesses into our existing business. These challenges include integration of product lines, sales forces, customer lists and manufacturing facilities, development of expertise outside our existing business, diversion of management time and resources, possible divestitures, inventory write...

  • Page 27
    ... technologies. We have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, or at specified times, we may have to identify...

  • Page 28
    ... test our products. However, even if we use these new subcontractors, we will continue to be subject to all of the risks described above. Our business is vulnerable to interruption by earthquake, fire, power loss, telecommunications failure, terrorist activity and other events beyond our control. We...

  • Page 29
    ... be sold. In addition, our competitors may be able to design around our patents. To protect our product technology, documentation and other proprietary information, we enter into confidentiality agreements with our employees, customers, consultants and strategic partners. We require our employees to...

  • Page 30
    ...past. In particular, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on...

  • Page 31
    ... which we declared a dividend of one share purchase right for each outstanding share of common stock. If certain events occur, including if an investor tenders for or acquires more than 15% of our outstanding common stock, stockholders (other than the acquirer) may exercise their rights and receive...

  • Page 32
    ... operated seven additional research and development centers: one in Canada, three in the US, one in Bangalore, India, one in Herzliya, Israel and one in Shanghai, China. We have fourteen sales/operations offices located in Europe, Asia, the Middle East and North America. ITEM 3. Legal Proceedings...

  • Page 33
    ...2008. The Court also took argument on a motion to compel the production of certain documents filed by the plaintiffs December 26, 2007. The Court has not yet ruled on the motions. ITEM 4. None. Submission of Matters to a Vote of Security Holders. 27 Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 34
    ...and Issuer Purchases of Equity Securities. Stock Price Information. Our Common Stock trades on the NASDAQ Global Select Market under the symbol PMCS. The following table sets forth, for the periods indicated, the high and low closing sale prices for our Common Stock as reported by the NASDAQ Global...

  • Page 35
    Table of Contents Stock Performance Graph The following graph shows a comparison of cumulative total stockholder returns for PMC, the line-of-business index for semiconductors and related devices (SIC code 3674) furnished by Georgeson Shareholder Communications Inc., and the S&P 500 Index. The graph...

  • Page 36
    ... in Cost of revenues; $16.2 million stock-based compensation expense included in Research and development expenses; $19.9 million stock-based compensation expense, $2.4 million for employee-related taxes, and $0.2 million acquisition-related relocation expenses included in Selling, general and...

  • Page 37
    ... for employee-related taxes included in Selling, general and administrative expenses, $9.2 million gain on sale of investments, $5.1 million recovery of prior year taxes, $9.4 million tax recovery based on agreements and assessments with a tax authority and $1.5 million foreign exchange loss on...

  • Page 38
    ... expenses, $6.0 million stock-based compensation expense and $2.4 million employee-related taxes included in Selling, general and administrative expenses, and $0.1 million foreign exchange gain on our income tax liability. 32 (2) (3) (4) (5) (6) Source: PMC SIERRA INC, 10-K, February...

  • Page 39
    .... Our largest end market for EPON solutions is Japan which is the worldwide leader in FTTH deployment. In China, our EPON products are gaining traction in the marketplace due to the maturity and stability of this technology. We expect revenue growth in our FTTH business in 33 Source: PMC SIERRA INC...

  • Page 40
    ... as video picture sharing, peer-to-peer and data storage. We are closely aligning with leading OEM customers who supply carriers who are investing in their networks to enable delivery of residential video services. We are well positioned for these network upgrade opportunities with solutions that...

  • Page 41
    ... orders by carriers in China, Japan, and North America, in addition to an electronics components supply chain inventory correction primarily in Japan and North America, and US carrier and communications OEM mergers. Over the past three years, we have seen significant growth in net revenues generated...

  • Page 42
    ... due to higher sales volumes, primarily resulting from the acquisitions. In 2005, gross profit improved due in part to the centralizing of our manufacturing logistics teams into a single location through our restructuring activities, as well as tightly managing our manufacturing costs. Gross profit...

  • Page 43
    ... a $2.2 million increase in professional fees related to our settlement of litigation inherited from our Passave acquisition and the ongoing examination of our historic transfer pricing practices and policies of certain companies within the PMC-Sierra group. In 2007, we also received a capital tax...

  • Page 44
    ... alternative uses existed. Projects acquired from Passave included Ethernet Passive Optical Network (EPON) and Analog Front End (AFE) products, which are based on technology that provides a low-cost method of deploying optical access lines between a carrier's central office and a customer site and...

  • Page 45
    ... Contents Restructuring Costs and Other Charges The activity related to excess facility and severance accruals under the Company's restructuring plans during the three years ended December 30, 2007, by year of plan, were as follows: Excess facility and contract termination costs By Year of Plan 2005...

  • Page 46
    ..., we consolidated our two manufacturing facilities (Santa Clara, California and Burnaby, British Columbia) into one facility (Burnaby), which involved the termination of 26 employees from production control, quality assurance, and product engineering. As a result, we recorded total second quarter...

  • Page 47
    ...fewer resources were required to support the reduced level of development and sales activities during these periods. The January 2003 restructuring included the termination of 175 employees and the closure of design centers in Maryland, Ireland and India, and vacating office space in the Santa Clara...

  • Page 48
    ... exchange loss for all years presented relates primarily to the re-measurement each period of accrued income tax amounts in our Canadian subsidiary. We hedge less than twenty percent of our recorded tax accrual, net of deferred tax assets generated in this local jurisdiction. 42 Source: PMC SIERRA...

  • Page 49
    ... company, and a $1.3 million loss on sales of other short-term investments that were redeemed prior to maturity to fund the acquisition of the Storage Semiconductor Business. In 2005, we received $2.2 million as final satisfaction of the mortgage owed to us for a property we sold in 2003. As part...

  • Page 50
    ... receipt in 2007 of a written communication from a tax authority examining the historical transfer pricing policies and practices of certain companies within the PMC-Sierra group. As a result, we increased our provision for periods prior to 2006 by $29.9 million. We recorded $7.1 million tax...

  • Page 51
    ... a stock price is expected to fluctuate during a period. Our estimates of expected volatilities are based on a weighted historical and market-based implied volatility. In order to determine the expected life of the awards, we use historical data to estimate option exercises and employee terminations...

  • Page 52
    ... the income tax credits available in each tax jurisdiction. Our operations are conducted in a number of countries with complex tax legislation and regulations pertaining to our activities. We have recorded income tax liabilities based on our 46 Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 53
    ... past transfer pricing policies and practices of certain companies within the PMC-Sierra group. As a result, we increased our provision for periods prior to and including 2006 by $29.9 million and continued to accrue additional taxes and interest during 2007. The timing of any such review and final...

  • Page 54
    ... 2005, we issued $225 million aggregate principal amount of 2.25% senior convertible notes due 2025 (the "Notes") and have recorded these Notes as long-term debt. Issuance costs of $6.8 million have been deferred and are being amortized over seven years. 48 Source: PMC SIERRA INC, 10-K, February 22...

  • Page 55
    ... 15, 2012, 2015 and 2020 respectively. Holders may convert the notes into the right to receive the conversion value (i) when our stock price exceeds 120% of the approximately $8.80 per share initial conversion price for a specified period, (ii) in certain change in control transactions, and (iii...

  • Page 56
    ... to rapid technological and economic changes. Accordingly, we regularly review our capital structure in light of such market changes and changes in our business or finance strategy. In addition, we may contemplate mergers and acquisitions of other companies or assets as part of our business strategy...

  • Page 57
    ... of joint operating activity. The task force provided indicators to help identify collaborative arrangements and provides for reporting of such arrangements on a gross or net basis pursuant to guidance in existing authoritative literature. The task force also expanded disclosure requirements about...

  • Page 58
    ... will fluctuate as a result of changes in the price of our common stock, changes in market interest rates and changes in our credit worthiness. Our 2.25% senior convertible Notes are not listed on any exchange or included in any automated quotation system, but are registered for resale under the...

  • Page 59
    ... Holders may convert the Notes into the right to receive the conversion value (i) when our stock price exceeds 120% of the approximately $8.80 per share initial conversion price for a specified period, (ii) in certain change in control transactions, and (iii) when the trading price of the Notes...

  • Page 60
    ... second quarter of 2006 we recorded a charge of $3.2 million for impairment of an investment in a private company. We may record additional impairment charges should we determine that our investments have incurred a non-temporary decline in value. 54 Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 61
    ... Statements Reports on Internal Control Over Financial Reporting included in Item 9A: Management's Annual Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Schedules for each of the three years in the period ended December 30, 2007 included...

  • Page 62
    ... Treadway Commission and our report dated February 22, 2008 expressed an unqualified opinion on the Company's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Independent Registered Public Accountants Vancouver, Canada February 22, 2008 56 Source: PMC SIERRA INC, 10-K, February...

  • Page 63
    ... liabilities Liability for unrecognized tax benefit PMC special shares convertible into 2,065 (2006-2,099) shares of common stock Commitments and contingencies (Note 10) Stockholders' equity Common stock, par value $.001; 900,000 shares authorized; 217,285 shares issued and outstanding (2006-210,650...

  • Page 64
    ... PMC-Sierra, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except for per share amounts) (unaudited) Year Ended December 31, 2006 Net revenues Cost of revenues Gross profit Other costs and expenses: Research and development Selling, general and administrative Amortization of purchased...

  • Page 65
    ... disclosures of non-cash investing and financing activities: Issuance of common stock and assumption of stock options on acquisition Conversion of PMC-Sierra special shares into common stock See notes to the consolidated financial statements. 59 December 30, 2007 December 31, 2005 $ (49,104) 35...

  • Page 66
    ...Net loss Adjustments related to adoption of FIN48 Other comprehensive income (loss): Change in fair value of derivatives Comprehensive loss Conversion of special shares into common stock Issuance of common stock under stock benefit plans Stock-based compensation expense Balances at December 30, 2007...

  • Page 67
    ... semiconductors and microprocessor-based System-on-Chips (SOCs) for metro, access, Fiber-To-The-Home, wireless infrastructure, storage, laser printers and customer premise equipment. The Company offers worldwide technical and sales support through a network of offices in North America, Europe and...

  • Page 68
    ... market pricing and the Company's volume requirements change in relation to sales of its products. In each year, the Company is entitled to receive a refund of a portion of the deposits based on the annual purchases from these suppliers compared to the target levels in the wafer supply agreements...

  • Page 69
    ...2,573 500 $ 18,904 Goodwill. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company performs a two-step process on an annual basis, or more frequently if necessary, to determine...

  • Page 70
    ...may significantly impact PMC's net income and cash flows. The Company periodically hedges forecasted foreign currency transactions related to certain operating expenses. All derivatives are recorded in the balance sheet at fair value. For a derivative designated as a fair value hedge, changes in the...

  • Page 71
    ... recognition. The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. PMC generates revenues from direct sales, sales to distributors and sales of consignment...

  • Page 72
    ... by other customers. PMC recognizes revenues from minor distributors at the time of shipment. These distributors are also given business terms to return a portion of inventory and receive credits for changes in selling prices to end customers. At the time of shipment, product prices are fixed and...

  • Page 73
    ... the fair value method to measuring stock-based compensation expense. If the Company had accounted for stock-based compensation in accordance with the fair value method as prescribed by SFAS 123, net loss and net loss per share for 2005 would have been: 67 Source: PMC SIERRA INC, 10-K, February...

  • Page 74
    ... by executive officers. As these options had exercise prices in excess of the current market value of the Company's common stock, based on the closing price of $6.34 per share on October 28, 2005, and were not fully achieving their original objectives of incentive compensation and employee retention...

  • Page 75
    ... income (loss) per share. Diluted net income (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options, shares issuable on our Employee Share Purchase Plan...

  • Page 76
    ... about a company's operating segments. Operating segments are revenue-producing components of a company for which separate financial information is produced internally for the company's management. In all periods presented, the Company operated in one reportable segment: networking products. Recent...

  • Page 77
    ... of the acquired business from the acquisition date. PMC purchased the Storage Semiconductor Business due to its strategic and product fit with PMC, the market position the Storage Semiconductor Business has in the Fibre Channel controller market, the design capabilities of its engineering team, and...

  • Page 78
    ... related to the identified projects. The assumptions included information on revenues from existing products and future expected trends for each technology, with an estimated useful life of 5 to 9 years. The rates used to discount the net cash flows to their present values were based upon a weighted...

  • Page 79
    ...the purchase price, and $46.5 million related to unvested stock and stock options of Passave which will be recorded as stock-based compensation over the requisite service period in accordance with FAS 123R. The fair value of options assumed was calculated using a lattice-binomial method. The Company...

  • Page 80
    ... acquisition. PMC acquired IPR&D projects related to EPON and AFE products from Passave. The value assigned to IPR&D was calculated using the income approach by determining cash flow projections related to identified projects. The assumptions included information on revenues from existing products...

  • Page 81
    .... For these derivatives, the gain or loss from the effective portion of the hedge is initially reported as a component of other comprehensive income in stockholders' equity and subsequently reclassified to earnings in the same period in which the hedged transaction affects earnings. The gain or...

  • Page 82
    ...-based implied volatility. The Company uses historical data to estimate option exercises and employee terminations within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The 76 Source: PMC SIERRA...

  • Page 83
    ...The fair values of the Company's stock option and ESPP awards were estimated using the following weighted average assumptions: Stock Options: December 30, 2007 December 31, 2006 December 31, 2005 Expected life (years) Expected volatility Risk-free interest rate Employee Share Purchase Plan: 4.1 61...

  • Page 84
    ... Number of Options Weighted average price per share 9.55 6.67 4.87 10.77 14.01 9.74 9.85 10.85 Aggregate intrinsic value per share 6.67 6.52 5.76 $ $ $ 0.47 0.51 0.51 No adjustment has been recorded for fully vested options that expired during the year ended December 30, 2007. A reversal...

  • Page 85
    ...Employee Stock Purchase Plan ("ESPP") under Section 423 of the Internal Revenue Code. The ESPP allows eligible participants to purchase shares of the Company's common stock through payroll deductions at a purchase price of 85% of the lower of the fair market value of the Company's stock on the close...

  • Page 86
    ... NOTE 5. Restructuring and Other Costs The activity related to excess facility and severance accruals under the Company's restructuring plans during the three years ended December 30, 2007, by year of plan, were as follows: Excess facility and contract termination costs By Year of Plan 2005 2003...

  • Page 87
    ..., the Company consolidated two manufacturing facilities (Santa Clara, California and Burnaby, British Columbia) into one facility (Burnaby), which involved the termination of 26 employees from production control, quality assurance, and product engineering. As a result, the Company recorded total...

  • Page 88
    ... of development and sales activities during these periods. The January 2003 restructuring included the termination of 175 employees and the closure of design centers in Maryland, Ireland and India, and vacating office space in the Santa Clara facility. To date, PMC has recorded restructuring charges...

  • Page 89
    ... of the companies and venture funds. As of December 30, 2007 the Company had deposits of $4 million related to long-term design tool contracts. These costs are recorded as other assets and are being amortized according to usage over the contract term, which ends in 2010. 83 Source: PMC SIERRA INC...

  • Page 90
    .... Holders may convert the notes into the right to receive the conversion value (i) when the Company's stock price exceeds 120% of the approximately $8.80 per share initial conversion price for a specified period, (ii) in certain change in control transactions, and (iii) when the trading price of the...

  • Page 91
    .... These notes bore interest at 3.75% payable semi-annually and were convertible into an aggregate of approximately 6.5 million shares of PMC's common stock at any time prior to maturity at a conversion price of approximately $42.43 per share. NOTE 10. Commitments and Contingencies Legal Matters: SEC...

  • Page 92
    ... $9.1 million, respectively. Excluded from rent expense for 2007 was additional rent and operating costs of $4.6 million (2006-$4.2 million; 2005-$4.2 million) related to excess facilities, which were accrued as part of the restructuring programs. 86 Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 93
    ...a class and for certain extraordinary corporate transactions involving LTD. If LTD files for bankruptcy, is liquidated or dissolved, the special shares receive as a preference the number of shares of PMC common stock issuable on conversion plus a nominal amount per share plus unpaid dividends, or at...

  • Page 94
    ... benefit plan, which was assumed in connection with the acquisition of the Storage Semiconductor Business, provides retiree medical benefits to eligible United States employees who meet certain age and service requirements upon retirement from the Company. These benefits are provided from the...

  • Page 95
    ...311 2,108 Despite the net loss for 2007, income taxes were incurred primarily from a $28 million additional accrual relating to an ongoing FIN 48 liability arising from the examination of our historic transfer pricing policies and practices of certain companies within the PMC Group by a certain tax...

  • Page 96
    ... from a tax authority examining the historic transfer pricing policies and practices of certain companies within the PMC-Sierra group. As a result, in 2006, the Company increased its provision for periods prior to 2006 by $29.9 million. Significant components of the Company's deferred tax assets and...

  • Page 97
    ..., and $65.7 million in 2007, 2006, and 2005, respectively. The Company recorded $7.1 million tax expense related to earnings it repatriated in 2006 to fund the purchase of the Storage Semiconductor Business in 2006. This distribution does not change the Company's intent to indefinitely reinvest...

  • Page 98
    ... 2005. Net revenues from a second customer were 11% in 2007, and 12% in 2006 and 2005. In 2007 and 2006, the Company had two end customers, Cisco Systems and EMC Corporation, whose purchases represented greater than 10% of our total net revenues (2005 - Cisco Systems). 92 Source: PMC SIERRA INC, 10...

  • Page 99
    ... 189,132 0.15 0.15 $ $ $ $ $ $ PMC-Sierra, Ltd. Special Shares are included in the calculation of basic weighted average common shares outstanding. In 2007, the Company had approximately 5.5 million options that were not included in diluted net loss per share because they would be antidilutive...

  • Page 100
    ... officer, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Management's Annual Report on Internal Control...

  • Page 101
    ... LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on the registrant's internal control over financial reporting. The report is included herein. Changes in Internal Controls over Financial...

  • Page 102
    Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of PMC-Sierra, Inc. We have audited the internal control over financial reporting of PMC-Sierra, Inc. and subsidiaries (the "Company") as of December 30, 2007, based on criteria ...

  • Page 103
    ... the Company's adoption of Financial Accounting Standards Board Interpretation No. 48 "Accounting for Uncertainty in Income Taxes". /s/ DELOITTE & TOUCHE LLP Independent Registered Public Accountants Vancouver, Canada February 22, 2008 ITEM 9B. None. Other Information. 97 Source: PMC SIERRA INC...

  • Page 104
    ... by reference from the information set forth in the sections entitled "Election of Directors", "Code of Business Conduct and Ethics", "Executive Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement for the 2008 Annual Stockholder Meeting. ITEM 11...

  • Page 105
    ... by reference from the information set forth in the section entitled "Executive Compensation Change of Control and Severance Agreements" in our Proxy Statement for the 2008 Annual Stockholder Meeting. ITEM 14. Principal Accountant Fees and Services The information required by this Item...

  • Page 106
    ... Terms of PMC-Sierra, Ltd. Special Shares Preferred Stock Rights Agreement, as amended and restated as of July 27, 2001, by and between the Registrant and American Stock Transfer and Trust Company Purchase and Sale Agreement dated October 28, 2005, between PMC-Sierra, Inc. and Avago Technologies Pte...

  • Page 107
    ... of Change of Control Agreement by and between the Registrant and the executive officers Net Building Lease dated May 15, 1996 by and between PMC-Sierra, Ltd. and Pilot Pacific Developments Inc. Building Lease Agreements between WHTS Freedom Circle Partners, LLC and the Registrant First Amendment...

  • Page 108
    ... share (1) Statement of Computation of Ratio of Earnings to Fixed Charges Subsidiaries of the Registrant Consent of Deloitte & Touche LLP, Independent Registered Public Accountants Power of Attorney (2) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer...

  • Page 109
    ... financial statements included in Item 8 of Part II of this Annual Report. Refer to Signature page of this Annual Report. (c) Financial Statement Schedules required by this item are listed on page 106 of this Annual Report on Form 10-K. 103 Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 110
    ... report to be signed on its behalf by the undersigned, thereunto duly authorized. PMC-SIERRA, INC. (Registrant) Date: February 22, 2008 /s/ Michael W. Zellner Michael W. Zellner Vice President, (duly authorized officer) Chief Financial Officer and Principal Accounting Officer 104 Source: PMC SIERRA...

  • Page 111
    ...the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date /s/ Robert L. Bailey Robert L. Bailey /s/ Michael W. Zellner Michael W. Zellner...

  • Page 112
    ...2007 December 31, 2006 December 31, 2005 Allowance for warranty claims: December 30, 2007 December 31, 2006 December 31, 2005 106 Balance at beginning of year Write-offs Balance at end... 1,093 712 $ $ $ (584) (759) (207) $ $ $ 6,239 4,331 3,997 Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 113
    ....2 Form of Change of Control Agreement by and between the Registrant and the executive officers Statement of Computation of Ratio of Earnings to Fixed Charges Subsidiaries of the Registrant Consent of Deloitte & Touche LLP, Independent Registered Public Accountants Certification Pursuant to Section...

  • Page 114
    ... in control of the Company. NOW, THEREFORE, the Company and Executive, in consideration of the mutual promises set forth herein, hereby agree as follows: 1. Termination Without Cause or Constructive Termination in Connection With a Change in Control. If the Company terminates Executive's employment...

  • Page 115
    ... by a Competitor of the Company. Accordingly, until one year after Executive's Separation from Service, Executive will not, as an employee, agent, consultant, advisor, independent contractor, general partner, officer, director, stockholder, investor or in any other capacity directly or indirectly...

  • Page 116
    ... its revenues from developing, manufacturing, marketing or selling any products which directly compete with the products manufactured, marketed or sold by the Company or its subsidiaries as at the date Executive's employment or consulting agreement (if applicable) terminates. Source: PMC SIERRA INC...

  • Page 117
    ... Termination will not be deemed to have occurred. (vi) "Separation from Service" means the cessation of Executive's status as an employee of the Company and shall be deemed to occur at such time as the level of the bona fide services Executive is to perform as an employee (or as a consultant...

  • Page 118
    ... day after being sent by Federal Express or a similar commercial overnight service, or (iii) three days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to Company at its principal office, attention: Chief Executive Officer, or to Executive at his...

  • Page 119
    ...Either the Company or Executive can terminate the employment relationship at any time, with or without cause. 11. No Oral Modification, Cancellation or Discharge. This Agreement may only be amended, canceled or discharged in writing signed by Executive and the Chairman and Chief Executive Officer of...

  • Page 120
    ... has carefully read and fully understands all the provisions of this agreement, and is knowingly and voluntarily entering into this Agreement. PMC-SIERRA, INC.: Robert L. Bailey Chairman, President and CEO EXECUTIVE: Date [Executive Officer] Date Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 121
    ...my Change of Control Agreement (the "Agreement"): 1. I agree that I fully and forever release and discharge the Company and all of its parents, divisions, subsidiaries, affiliates, related entities, and their predecessors, successors, and past and present officers, directors, shareholders, employees...

  • Page 122
    ...AND KNOW THAT I AM GIVING UP IMPORTANT RIGHTS; I AM AWARE OF MY RIGHT TO CONSULT WITH AN ATTORNEY OF MY OWN CHOOSING BEFORE SIGNING IT AND I HAVE BEEN ENCOURAGED TO CONSULT WITH SUCH AN ATTORNEY; AND I SIGN IT VOLUNTARILY: Signed: , 20 . Employee's Signature: Print Name: Source: PMC SIERRA INC, 10...

  • Page 123
    ... to be one-third of total operating lease rental expense. Earnings were inadequate to cover fixed charges by $32.3 million, $50.7 million and $16.7 million for fiscal years ended December 30, 2007, December 31, 2006 and December 28, 2003 respectively. Source: PMC SIERRA INC, 10-K, February 22, 2008

  • Page 124
    ... PMC-Sierra. PMC-Sierra US, Inc., organized under the laws of Delaware, doing business only under its official name, PMC-Sierra, or under PMC-Sierra, Inc. Palau Acquisition Corporation, organized under the laws of Delaware, doing business only under its official name, PMC-Sierra, or under PMC-Sierra...

  • Page 125
    ... of internal control over financial reporting appearing in the Annual Report on Form 10-K of PMC-Sierra Inc. for the year ended December 30, 2007. /s/ DELOITTE & TOUCHE LLP Independent Registered Public Accountants Vancouver, Canada February 22, 2008 Source: PMC SIERRA INC, 10-K, February...

  • Page 126
    ... end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual...

  • Page 127
    ... or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Robert L. Bailey Robert L. Bailey President and Chief Executive Officer b) Date: February 21, 2008 Source: PMC SIERRA INC, 10-K, February 22...

  • Page 128
    ... end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual...

  • Page 129
    ..., that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Michael W. Zellner Michael W. Zellner Vice President Chief Financial Officer and Principal Accounting Officer Date: February 21, 2008 Source: PMC SIERRA INC...

  • Page 130
    ... to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of PMC-Sierra, Inc. ("PMC"), that, to my knowledge, the Annual Report of PMC on Form 10-K for the annual period ended December 30, 2007, fully complies with the requirements of Section 13 (a) or 15(d) of the Securities...

  • Page 131
    ... to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of PMC-Sierra, Inc. ("PMC"), that, to my knowledge, the Annual Report of PMC on Form 10-K for the annual period ended December 30, 2007, fully complies with the requirements of Section 13 (a) or 15(d) of the Securities...