----------------------------------------------------
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 September 30, 1997
[ ] 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
105-8555 BAXTER PLACE
BURNABY, BRITISH COLUMBIA, V5A 4V7
CANADA
Telephone (604) 415-6000
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 September 30, 1997 - 29,653,061
----------------------------------------------------
<PAGE>
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated condensed statements of operations 3
- Consolidated condensed balance sheets 4
- Consolidated condensed statements of cash flows 5
- Notes to consolidated condensed financial statements 6
- RISK FACTORS 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K 24
<PAGE>
<TABLE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PMC-Sierra, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Revenues $ 27,815 $ 34,726 $ 95,453 $ 152,144
Cost of Revenues 6,058 20,936 25,522 80,400
------------- ------------ ------------ -------------
Gross profit 21,757 13,790 69,931 71,744
Other costs and expenses:
Research and development 5,136 7,080 16,485 23,371
In process research and development - 7,783 - 7,783
Marketing, general and administrative 5,735 7,406 18,650 24,913
Restructure and other costs - 64,670 - 64,670
------------- ------------ ------------ -------------
Income (loss) from operations 10,886 (73,149) 34,796 (48,993)
Interest income, net 331 33 488 529
------------- ------------ ------------ -------------
Income (loss) before provision for income taxes 11,217 (73,116) 35,284 (48,464)
Provision for income taxes 3,926 178 10,582 8,806
------------- ------------ ------------ -------------
Net income (loss) $ 7,291 ($ 73,294) $ 24,702 ($ 57,270)
============= ============ ============ =============
Net income (loss) per share $ 0.22 ($ 2.46) $ 0.76 ($ 1.94)
============= ============ ============ =============
Shares used in calculation of net income per share 33,188 29,782 32,486 29,456
============= ============ ============ =============
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<CAPTION>
Sept. 30, Dec. 31,
1997 1996
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 22,358 $ 35,038
Short-term investments 44,702 7,024
Accounts receivable, net 10,270 13,907
Inventories 2,670 9,232
Prepaid expenses and other current assets 3,578 3,104
-------------- --------------
Total current assets 83,578 68,305
Property and equipment, at cost 37,067 42,861
Accumulated depreciation and amortization (19,792) (26,183)
-------------- --------------
17,275 16,678
Goodwill and other intangible assets, net 8,971 10,188
Investments and other assets 10,513 7,623
Deposits for wafer fabrication capacity 27,120 27,120
============== ==============
$ 147,457 $ 129,914
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 4,497 $ 9,648
Accrued liabilities 11,275 9,546
Accrued income tax 6,371 4,050
Accrued restructure costs 6,138 16,754
Deferred income 787 -
Short-term debt and current portion of obligations under
capital leases and long-term debt 6,124 6,269
Net liabilities of discontinued operations 1,087 1,600
-------------- --------------
Total current liabilities 36,279 47,867
Deferred income taxes 2,645 2,741
Noncurrent obligations under capital leases and long-term debt 17,331 18,368
Special shares of subsidiary convertible into PMC-Sierra common stock 10,837 12,494
-------------- --------------
Total Liabilities 67,092 81,470
-------------- --------------
Shareholders' equity:
Common stock, par value of $0.001 142,539 135,320
Accumulated deficit (62,174) (86,876)
-------------- --------------
Total shareholders' equity 80,365 48,444
-------------- --------------
$ 147,457 $ 129,914
============== ==============
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
------------------------------
Sept 30, Sept 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,702 $ (57,270)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,280 8,675
Acquisition of in process technology and development
from purchase of net assets of BIT - 7,783
Loss related to restructure reserve - 69,370
Changes in assets and liabilities
Accounts receivable 3,637 9,490
Inventories 6,562 (21,110)
Prepaid expenses and other (341) (2,254)
Accounts payable and accrued expenses (411) (9,671)
Accrued restructuring costs (10,616) (690)
Net assets/liabilities associated with discontinued operations (513) (1,707)
-------------- --------------
Net cash provided by operating activities 29,300 2,616
-------------- --------------
Cash flows from investing activities:
Proceeds from sales/maturities of short-term investments 19,926 15,984
Purchases of short-term investments (57,604) (18,949)
Investments in other companies (3,000) (3,000)
Purchase of BIT assets, net of cash acquired - 71
Proceeds from sale of equipment 2,515 -
Purchases of plant and equipment (4,826) (3,334)
-------------- --------------
Net cash used in investing activities (42,989) (9,228)
-------------- --------------
Cash flows from financing activities:
Proceeds from payments of notes receivable - 31
Proceeds from issuance of long-term debt - 353
Repayment of notes payable and long-term debt (2,446) (16,832)
Proceeds from sale/leaseback of equipment 1,107 -
Principal payments under capital lease obligations (3,214) (1,379)
Proceeds from issuance of common stock 5,562 2,607
-------------- --------------
Net cash provided by (used in) financing activities 1,009 (15,220)
-------------- --------------
Net decrease in cash and cash equivalents (12,680) (21,832)
Cash and cash equivalents, beginning of the period 35,038 41,933
============== ==============
Cash and cash equivalents, end of the period $ 22,358 $ 20,101
============== ==============
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
PMC-SIERRA, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. 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 present a fair statement of
results for the interim periods presented. These financial statements should be
read in conjunction with the financial statements and the notes thereto in the
Annual Report (filed under the company's former name of Sierra Semiconductor
Corporation) on Form 10-K for the year ended December 31, 1996. The results of
operations for the three and nine months ended September 30, 1997 are not
necessarily indicative of results to be expected in future periods.
2. On September 29, 1996 the Company recorded charges of $69,370,000 in
connection with its decision to exit from the modem chipset business and the
associated restructuring of its non-networking product operations. The charges
were recorded in 1996 in cost of sales as an inventory write-down and as
operating expenses in restructure costs. The remaining elements of the
restructuring reserve as of December 31, 1996 and September 30, 1997 are as
follows:
Restructure Reserve: Sept. 30, Dec. 31,
1997 1996
(unaudited)
Employee termination payments $ 321 $ 4,574
Loss on supplier commitments and
write-off of prepaid expenses 3,646 8,594
Excess facility costs 1,889 3,003
Severance and closure costs related to Europe
282 583
------------- -------------
$ 6,138 $ 16,754
============= =============
Cash expenditures associated with the restructuring plan were approximately
$10.6 million in the first nine months of 1997. Cash expenditures in the fourth
quarter of 1997 are expected to be approximately $2.0 million. Subsequent cash
expenditures related to the restructuring are expected to be approximately $4.1
million.
<PAGE>
3. The components of inventories are as follows (in thousands):
Sept. 30, Dec. 31,
1997 1996
(unaudited)
Work-in-progress $ 1,169 $ 3,335
Finished goods 1,501 5,897
------------- -------------
$ 2,670 $ 9,232
============= =============
4. Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods, basic
EPS would have been $0.23 and ($2.40) for the quarters ended September 30, 1997
and 1996, respectively. Diluted EPS under SFAS 128 would not have been
significantly different than primary EPS currently reported for the periods.
In June 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income), which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and No.
131 (Disclosures about Segments of an Enterprise and Related Information), which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas,
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
<PAGE>
RISK FACTORS
THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE
SUBJECT TO A NUMBER OF RISKS, SOME OF WHICH ARE DESCRIBED BELOW. THE FACT THAT
SOME OF THE RISK FACTORS MAY BE THE SAME OR SIMILAR TO THOSE IN THE COMPANY'S
PAST SEC FILINGS MEANS ONLY THAT THE RISKS ARE PRESENT IN MULTIPLE PERIODS. THE
COMPANY BELIEVES THAT MANY OF THE RISKS DETAILED HERE AND IN THE COMPANY'S OTHER
SEC FILINGS ARE PART OF DOING BUSINESS IN THE FABLESS NETWORKING SEMICONDUCTOR
INDUSTRY AND WILL LIKELY BE PRESENT IN ALL PERIODS REPORTED. THE FACT THAT
CERTAIN RISKS ARE ENDEMIC TO THE INDUSTRY DOES NOT LESSEN THE SIGNIFICANCE OF
THE RISK.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements" within
the meaning of the federal securities laws. The actual results, performance, or
achievements of the Company may be materially different from those expressed or
implied by such forward-looking statements. Reference to the Company includes
its subsidiary PMC-Sierra, Ltd., a Canadian corporation and its other
subsidiaries. The forward-looking statements include projections relating to
trends in markets, revenues, particularly expectations of long-term revenues,
gross margin, and future expenditures on research and development, marketing,
general and administrative expense and the Year 2000 issue. The Company
undertakes no obligation to release revisions to forward-looking statements to
reflect subsequent events.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results may vary due to a number of
factors, including, among others, the timing of new product introductions,
decreased demand or average selling prices for products, market acceptance of
products, demand for products of the Company's customers, the introduction of
products or technologies by the Company's competitors, competitive pressure on
product pricing, the Company's and its customers' inventory levels of the
Company's products, product availability from outside foundries, variations in
manufacturing yields for the Company's products, expenditures for new product
and process development, the acquisition of wafer fabrication and other
manufacturing capacity, and the acquisition of businesses, products or
technologies. At various times in the past, the Company's foundry and other
suppliers have experienced lower than anticipated yields that have adversely
affected production and, consequently, the Company's operating results. There
can be no assurance that the Company's existing or future foundry and other
suppliers will not experience irregularities which could have a material adverse
effect on the Company's operating results. The Company from time to time may
order in advance of anticipated customer demand from its suppliers in response
to anticipated long lead times to obtain inventory and materials, which might
result in excess inventory levels if expected orders fail to materialize or
other factors render the Company's product or its customer's products less
marketable. The Company's visibility on sales of networking chips is limited due
<PAGE>
to customer uncertainty regarding future demand for end-user networking products
and price competition in the market for networking. Any delay or cancellation of
existing orders, or any decline in projected future orders, by the Company's
customers could have a material adverse effect on the Company's operating
results. Margins will vary depending on product mix. In the longer term, the
Company may experience declining gross profits as a percentage of total net
revenues if anticipated decreases in average selling prices of existing
networking products are not offset by commensurate reductions in product costs,
or by an offsetting increase in gross profit contribution from new higher gross
margin networking products. The Company's operating results also are affected by
the state and direction of the electronics industry and the economy in the
United States and other markets the Company serves. The Company's operating
results could also be adversely affected if restructuring reserves are
insufficient for the costs of discontinuing operations. The occurrence of any of
the foregoing or other factors could have a material adverse effect on the
Company's operating results. Due to these factors, past results may not be
indicative of future results.
TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by evolving industry
standards, rapid technological change and product obsolescence. Technological
change may be particularly pronounced in the developing markets for
communications semiconductor devices used in high-speed networks. The Company's
future success will be highly dependent upon the timely completion and
introduction of new products at competitive price and performance levels. The
success of new products depends on a number of factors, including proper
definition of such products, successful and timely completion of product
development and introduction to market, correct judgment with respect to product
demand, market acceptance of the Company's and its customers' products,
fabrication yields by the Company's independent foundries and the continued
ability of the Company to offer innovative new products at competitive prices.
Many of these factors are outside the control of the Company. There can be no
assurance that the Company will be able to identify new product opportunities
successfully, develop and bring to market new products, achieve design wins or
be able to respond effectively to new technological changes or product
announcements by others. A failure in any of these areas would materially and
adversely affect the Company's operating results.
The Company's current strategy is focused on high-speed networking interface
chips. Products for telecommunications and data communications applications are
based on industry standards that are continually evolving. Future transitions in
customer preferences could quickly obsolete the Company's products. A material
part of the Company's products are in the Asynchronous Transfer Mode ("ATM")
telecommunications and networking market, which is in an early stage of
development. The emergence and adoption of new industry standards that compete
with ATM or maintenance by the industry of existing standards in lieu of new
standards could render the Company's ATM products unmarketable or obsolete. The
market for ATM equipment has not developed as rapidly as industry observers have
predicted, and alternative networking technologies such as "fast ethernet" have
developed to meet consumer requirements. A substantial portion of the Company's
development efforts are focused on ATM and related products. A material portion
<PAGE>
of the Company's revenues and a substantial portion of the Company's profits are
derived from sales of ATM, T1/E1, DS3/E3 and SONET/SDH based products. Net
revenues derived from sales of ATM, T1/E1, DS3/E3 and SONET/SDH based products
amounted to 33% and 64% of the Company's total net revenues in 1996 and the
first nine months of 1997, respectively. The gross profit derived from those
products amounted to 50% and 70% of the Company's total gross profit in 1996 and
the first nine months of 1997, respectively. Revenues from non-networking
products have declined significantly over the last several quarters, making the
Company's results depend primarily on networking products.
The Company acquired in-process research and development and developed
technology relating to ethernet switching in September 1996. During the second
quarter of 1997, the Company announced a 100 Mbit/s fast ethernet switch on a
chip and an 8-port, 10 Mbit/s ethernet switch chip. Other Ethernet switching
chips remain in development. Ethernet switching is a new product area for the
Company and there can be no assurance that announced products or products in
development will have correctly anticipated the needs of the networking industry
or that they will receive sufficient design wins to achieve commercial success.
Many of the Company's products under development are complex semiconductor
devices that require extensive design and testing before prototypes can be
manufactured. The integration of a number of functions in a single chip or in a
chipset requires the use of advanced semiconductor manufacturing techniques.
This can result in chip redesigns if the initial design does not permit
acceptable manufacturing yields. The Company's products are often designed for
customers who in many instances have not yet fully defined their hardware
products. Design delays or redesigns by these customers could in turn delay
completion or require redesign of the semiconductor devices needed for the final
hardware product. In this regard, many of the relevant standards and protocols
for products based on high speed networking technologies have not been widely
adopted or ratified by the relevant standard-setting bodies. Redesigns or design
delays often are required for both the hardware manufacturer's products and the
Company's chips as industry and customer standards, protocols or design
specifications are determined. Any resulting delay in the production of the
Company's products could have a material adverse effect on the Company's
operating results.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change and by price erosion. The industry consists of major
domestic and international semiconductor companies, many of which have
substantially greater financial and other resources than the Company. Emerging
companies also provide significant competition in this segment of the
semiconductor market. The Company believes that its ability to compete
successfully in this market depends on a number of factors, including, among
others, the price, quality and performance of the Company's and its competitors'
products, the timing and success of new product introductions by the Company,
its customers and its competitors, the emergence of new standards, the
development of technical innovations, the ability to obtain adequate
manufacturing capacity, the efficiency of production, the rate at which the
Company's customers design the Company's products into their products, the
number and nature of the Company's competitors in a given market, the assertion
of the Company's and its competitors' intellectual property rights and general
market and economic conditions.
<PAGE>
The Company's competitors in this market include, among others, Texas
Instruments, Level One Communications, Lucent Technologies, Dallas
Semiconductor, Galileo Technology, MMC Networks, Integrated Device Technology
and Transwitch. The number of competitors in this market and the technology
platforms on which their products will compete may change in the future. It is
likely that over the next few years additional competitors will enter the market
with new products. These new competitors may have substantially greater
financial and other resources than the Company. Competition among manufacturers
of semiconductors like the Company's products typically occurs at the design
stage, where the customer evaluates alternative design approaches that require
integrated circuits. Because of shortened product life cycles and design-in
cycles in certain of the Company's customers products, the Company's competitors
have increasingly frequent opportunities to achieve design wins in next
generation systems. Any success by the Company's competitors in supplanting the
Company's products would have a material adverse effect on the Company's
operating results.
ACCESS TO WAFER FABRICATION AND OTHER MANUFACTURING CAPACITY
The Company does not own or operate a wafer fabrication facility, and all of its
semiconductor device requirements are supplied by outside foundries.
Substantially all of the Company's semiconductor products are currently
manufactured by third party foundry suppliers. The Company's foundry suppliers
fabricate products for other companies and produce products of their own design.
The Company's reliance on independent foundries involves a number of risks,
including the absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
delivery schedules, manufacturing yields and costs. In the event that these
foundries are unable or unwilling to continue to manufacture the Company's
products in required volumes, the Company will have to identify and qualify
acceptable additional or alternative foundries. This qualification process could
take six months or longer. No assurance can be given that any such source would
become available to the Company or that any such source would be in a position
to satisfy the Company's production requirements in a timely basis, if at all.
Any significant interruption in the supply of semiconductors to the Company
would result in the allocation of products to customers, which in turn could
have a material adverse effect on the Company's operating results.
All of the Company's semiconductor products are assembled by sub-assemblers in
Asia. Shortages of raw materials or disruptions in the provision of services by
the Company's assembly houses or other circumstances that would require the
Company to seek additional or alternative sources of supply or assembly could
lead to supply constraints or delays in the delivery of the Company's products.
Such constraints or delays may result in the loss of customers or other adverse
effects on the Company's operating results. The Company's reliance on
independent assembly houses involves a number of other risks, including reduced
control over delivery schedules, quality assurances and costs and the possible
discontinuance of such contractors' assembly processes. Any supply or other
problems resulting from such risks would have a material adverse effect on the
Company's operating results.
<PAGE>
CUSTOMER CONCENTRATION
The Company has no long-term volume purchase commitments from any of its major
customers. In 1996 two modem and graphic board manufacturers, each, represented
approximately 11% of the Company's net revenues. In 1995 and 1996, sales to
Apple Computer, Inc. represented 24% and 10%, respectively, of net revenues. Due
to the Company's exit from the modem chipset business, and its decision to
discontinue investment in its graphics and other non-networking businesses,
these customers are not expected to be significant customers in the future. The
Company's networking products are sold to networking equipment manufacturers
such as Cisco Systems, Inc. and Lucent Technologies Inc., or their
subcontractors.
The reduction, delay or cancellation of orders from one or more significant
customers could materially and adversely affect the Company's operating results.
Due to the relatively short product life cycles in the telecommunications and
data communications markets, the Company's operating results would be materially
and adversely affected if one or more of its significant customers were to
select devices manufactured by one of the Company's competitors for inclusion in
future product generations. There can be no assurance that the Company's current
customers will continue to place orders with the Company, that orders by
existing customers will continue at the levels of previous periods or that the
Company will be able to obtain orders from new customers. Loss of one or more of
the Company's current customers or a disruption in the Company's sales and
distribution channels could materially and adversely affect the Company's
operating results.
INTERNATIONAL OPERATIONS
In fiscal years 1996, 1995 and 1994, international sales accounted for
approximately 53%, 39% and 38% of the Company's net revenues, respectively. The
Company's networking products are designed to accommodate numerous worldwide
communications standards and sales to US based customers are often for products
that they in turn export worldwide. The Company expects that international sales
will continue to represent a significant portion of its net revenues for the
foreseeable future. The majority of the Company's development, test, marketing
and administrative functions occur in Canada. In addition, substantially all of
the Company's products are manufactured, assembled and tested by independent
third parties in Asia. Due to its reliance on international sales and
operations, the Company is subject to the risks of conducting business outside
of the United States. These risks include unexpected changes in, or impositions
of, legislative or regulatory requirements and policy changes affecting the
telecommunications and data communications markets, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs, quotas,
exchange rates and other trade barriers and restrictions, longer payment cycles,
greater difficulty in accounts receivable collection, potentially adverse taxes,
the burdens of complying with a variety of foreign laws and other factors beyond
the Company's control. The Company is also subject to general geopolitical risks
in connection with its international operations, such as political, social and
<PAGE>
economic instability, potential hostilities and changes in diplomatic and trade
relationships. Sales of the Company's networking products are denominated in
U.S. dollars as are costs related to the manufacture and assembly of products by
the Company's Asian suppliers. Costs related to the majority of the Company's
development, test, marketing and administrative functions are denominated in
Canadian dollars. Selling costs are denominated in a variety of currencies. As a
result, the Company is subject to the risks of currency fluctuations. There can
be no assurance that one or more of the foregoing factors will not have a
material adverse effect on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
services of its key technical personnel, particularly those highly skilled at
the design and test functions involved in the development of high speed
networking products and related software. The competition for such employees is
intense. The Company has no employment agreements in place with these key
personnel. However, the Company from time to time issues shares of Common Stock
or options to purchase Common Stock of the Company subject to vesting. To the
extent shares purchased from or options granted by the Company have economic
value, these securities could create retention incentives. The loss of the
services of one or more of these key personnel, and any difficulties the Company
may experience in hiring qualified replacements, would materially and adversely
affect the Company's operating results.
PATENTS AND PROPRIETARY RIGHTS
The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company relies on a combination of patents,
trademarks, copyrights, trade secret laws, confidentiality procedures and
licensing arrangements to protect its intellectual property rights. The Company
currently holds several patents and has a number of pending patent applications.
There can be no assurance that patents will be issued from any of the Company's
pending applications or that any claims allowed will be of sufficient scope or
strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company. In addition, competitors of the Company may be able to design around
the Company's patents. The laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. There can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. The Company or its customers or
foundries have in the past, and may from time to time in the future, be notified
of claims that the Company may be infringing patents or other intellectual
<PAGE>
property rights owned by third parties. If it is necessary or desirable, the
Company may seek licenses under patents or intellectual property rights. There
can be no assurance that licenses will be available or that the terms of any
offered license will be acceptable to the Company. The failure to obtain a
license from a third party for technology used by the Company could cause the
Company to incur substantial liabilities and to suspend the manufacture of
products or the use by the Companys' foundry suppliers requiring the technology.
In the past, the Company's customers have been required to obtain licenses from
and pay royalties to third parties for the sale of systems incorporating the
Company's semiconductor devices. If this occurs in the future, the customers'
businesses may be materially and adversely affected, which in turn would have a
material adverse effect on the Company's operating results. Customers may also
request indemnity by the Company. Providing indemnification could be expensive,
and denying it could adversely effect customer relations. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products, spend significant
resources to develop non-infringing technology, discontinue the use of certain
processes or obtain licenses to the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Patent disputes in the semiconductor industry have
often been settled through cross-licensing arrangements. Because the Company
currently does not have a substantial portfolio of patents, the Company may not
be able to settle an alleged patent infringement claim through a cross-licensing
arrangement. Any successful third party claim against the Company or its
customers for patent or intellectual property infringement would have a material
adverse effect on the Company's operating results.
ACQUISITIONS
The Company's strategy may involve, in part, acquisitions of products,
technologies or businesses from third parties. Identifying and negotiating these
acquisitions may divert substantial management time away from the Company's
operations. An acquisition could absorb substantial cash resources, could
require the Company to incur or assume debt obligations, or could involve the
issuance of additional equity securities of the Company. The issuance of
additional equity securities could dilute, and could represent an interest
senior to the rights of, then outstanding common stock. An acquisition which is
accounted for as a purchase, like the acquisition of PMC in 1994 and the
acquisition of certain assets of Bit in September 1996, could involve
significant one-time non-cash write-offs, and could involve the amortization of
goodwill over a number of years, which would adversely affect earnings in those
years. Any acquisition will require attention from the Company's management to
integrate the acquired entity into the Company's operations, may require the
Company to develop expertise outside its existing businesses and may result in
departures of management of the acquired entity. An acquired entity may have
unknown liabilities, and its business may not achieve the results anticipated at
the time of the acquisition.
<PAGE>
FUTURE CAPITAL NEEDS
The Company must continue to make significant investments in research and
development as well as capital equipment and expansion of facilities for
networking products. The Company's future capital requirements will depend on
many factors, including, among others, product development, investments in
working capital, and acquisitions of complementary businesses, products or
technologies. To the extent that existing resources and future earnings are
insufficient to fund the Company's operations, the Company may need to raise
additional funds through public or private debt or equity financings. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of current shareholders will be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. No assurance can be given that additional
financing will be available or that, if available, it can be obtained on terms
favorable to the Company and its shareholders. If adequate funds are not
available, the Company may be required to delay, limit or eliminate some or all
of its proposed operations.
The Company has available a line of credit with a bank under which the Company
may borrow up to $10 million. The agreement expires on November 30, 1997.
Advances made under the line will be fully secured by cash deposited by the
Company. The agreement requires the Company to maintain, on a quarterly basis,
minimum cash equal to three times the then current outstanding principal balance
of the term loan. The agreement prohibits dividend payments, without the bank's
prior written consent, and other major transactions except that the Company may
(i) acquire other companies, using up to $1 million in cash, (ii) enter into off
balance sheet equipment leases, not to exceed $15 million in the aggregate, and
(iii) issue convertible securities with subordination provisions satisfactory to
the bank.
VOLATILITY OF STOCK PRICE
Factors such as announcements of the introduction of new products by the Company
or its competitors, quarterly fluctuations in the Company's financial results or
the financial results of other semiconductor companies or of companies in the
personal computer industry, general conditions in the semiconductor industry and
conditions in the worldwide financial markets have in the past caused the price
of the Common Stock to fluctuate substantially, and may do so in the future. In
addition, the recent increases in the Company's stock price and expansion of its
price-to-earnings multiple may have made it attractive to so-called momentum
investors. Momentum investors are generally thought to shift funds into and out
of stocks rapidly exacerbating price fluctuations in either direction. The price
of the Company's stock may also be impacted by investor sentiment toward
technology stocks, in general, which often is unrelated to the operating
performance of a specific company.
<PAGE>
YEAR 2000 COMPUTER SYSTEMS ISSUES
The Company is aware of the issues associated with the limitations of the
programming code in many existing computer systems, whereby the computer systems
may not properly recognize date sensitive information as the millennium (year
2000) approaches. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. The Company uses commercially
available standard software for its critical operating and financial
applications. One vendor of software used by the Company is still modifying its
code to become year 2000 compliant and anticipates completion early in 1998. If
the vendor does not successfully modify its code the Company could be forced to
purchase a competing system that is year 2000 compliant and incur installation
and other costs.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Third Quarters of 1997 and 1996
Net Revenues
- ------------
Third Third
Quarter Quarter
1997 Change 1996
---- ------ ----
Net revenues ($000,000)
Networking products $24.0 50% $16.0
User interface - other $3.8 (70%) $12.7
User interface - modem $0.0 (100%) $6.0
------ ------ ----
Total net revenues $27.8 (20%) $34.7
Third quarter networking revenues were $24.0 million, up 50% from the prior year
third quarter. The decline in overall revenues was due to a reduction of sales
of non-networking products from $18.7 million to $3.8 million, in line with the
Company's third quarter 1996 strategic decision to exit the modem chipset
business, restructure its non-networking business and to focus on its networking
semiconductor business.
The Company has disposed of its modem chipset inventory and consolidated the
account servicing of its User interface - other products into the ongoing
networking semiconductor group. In the near term, the Company expects a limited
amount of revenue from User interface - other products to continue, but the
decision to eliminate all further development of follow-on products is expected
to result in these products being discontinued as each current customer
completes its next product redesign.
Third quarter networking revenue increased 13% over the second quarter of 1997
while second quarter revenue was 37% over the first quarter of 1997. The Company
believes that in the latter part of 1996 certain of its customers reduced their
inventory levels of the Company's networking products in response to shortened
lead times from the Company's foundry suppliers and conditions in the customer's
own end markets. The Company believes that the sequential revenue growth
experienced in the second quarter and to a lesser extent the growth experienced
in the third quarter was partially related to refilling channel inventory. The
Company's customers have both increased and reduced their inventory of
networking semiconductors in the past and are expected to continue to do so in
the future. Networking semiconductor revenue is not expected to grow
significantly in the near term. In the longer term, the Company expects the
growth of its networking products revenue will be most strongly influenced by
demand for its customers' networking products and acceptance of the Company's
own new product offerings by its customers. Because the Company is a supplier to
a dynamic and changing industry, the Company expects to see future variations,
when viewed from a quarterly results perspective, around its long term growth
rate similar to the variations it has experienced in the past two years.
<PAGE>
Gross Profit
- ------------
Third Third
Quarter Quarter
1997 Change 1996
---- ------ ----
Gross profit ($000,000)
Networking products $19.9 70% $11.7
Percentage of networking net revenues 83% 73%
User interface products $1.9 (10%) $2.1
Percentage of user interface net revenues 49% 11%
Total gross profit $21.8 58% $13.8
Percentage of net revenues 78% 40%
Total gross profit increased as a result of increased sales of the Company's
networking products at lower production costs than in the prior year. The
decrease in user interface gross profit was related to a substantial reduction
in revenues, partially offset by an improvement in gross margin. User interface
gross profit in the third quarter of 1996 was reduced by a $4.7 million
inventory charge related to the Company's decision to exit the modem chipset
business.
Gross profit in absolute dollars and as percentage of net revenues increased as
the mix of higher margin networking products increased as a percentage of total
net revenues, and as the costs of wafers were reduced over the same quarter a
year ago.
In the longer term, the Company may experience declining gross profits as a
percentage of net revenues if anticipated decreases in average selling prices of
existing networking products are not offset by commensurate reductions in
production costs, or by an offsetting increase in gross profit contribution from
new higher gross margin networking products.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
Third Third
Quarter Quarter
1997 Change 1996
---- ------ ----
Research and development $5.1 (27%) $7.1
Percentage of net revenues 18% 20%
Marketing, general & administrative $5.7 (23%) $7.4
Percentage of net revenues 21% 21%
Research and development expenses decreased primarily due to decreases in
research and development personnel in user interface products as a result of the
third quarter 1996 restructuring of the Company's non-networking operations,
offset partially by significant increases in research and development spending
and personnel in the Company's networking product lines. All of third quarter
research and development spending relates to networking products. The Company
expects research and development spending on its networking products to increase
in absolute dollars.
<PAGE>
Marketing, general and administrative expenses also declined primarily due to
the reduction in expenses and personnel resulting from the third quarter 1996
restructuring. The Company's marketing, general and administrative expense now
relates to the Company's networking business.
Acquisition and Restructuring Charges
- -------------------------------------
No acquisition or restructuring charges were incurred in the third quarter of
1997. The comparable period of 1996 included a write-off of $7.8 million for in
process research and development related to the acquisition of the ethernet
switching assets, intellectual property and certain other assets from Bit,
Incorporated. In the third quarter of 1996 the Company recorded a $64.7 million
charge to operating expenses relating to its decision to exit the modem chipset
business and restructure its other non-networking products. The Company expects
to record any required adjustment to the charges taken to accomplish the
restructuring in the fourth quarter of 1997. Significant items still to be
completed in the restructuring relate to the disposal of the remaining fixed
assets not required for the Company's networking products business, and the
disposal of the San Jose, California leased facility previously used for its
non-networking and headquarters operations. The Company believes that the charge
taken in the third quarter of 1996 will be adequate to complete the
restructuring.
Interest Income (Expense), Net
- ------------------------------
Net interest income increased to $331,000 in the third quarter of 1997 from
$33,000 in the comparable period last year primarily due to higher cash balances
available to invest and earn interest.
Provision for Income Taxes
- --------------------------
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations.
First Nine Months of 1997 and 1996
Net Revenues
- ------------
First First
Nine Months Nine Months
1997 Change 1996
---- ------ ----
Net revenues ($000,000)
Networking products $60.8 22% $49.7
User interface - other $28.8 (43%) $50.7
User interface - modem $5.9 (89%) $51.7
---- ----- -----
Total net revenues $95.5 (37%) $152.1
<PAGE>
The decrease in the Company's total net revenues was due to a decline in sales
of user interface products, primarily modem chipset products and graphics chips,
in connection with the Company's decision to exit the modem chipset business,
restructure its non-networking business and to focus on its networking business.
Partially offsetting these sales reductions was growth in the sale of the
Company's networking-related products.
Gross Profit
- ------------
First First
Nine Months Nine Months
1997 Change 1996
---- ------ ----
Gross profit ($000,000)
Networking products $48.8 33% $36.7
Percentage of networking net revenues 80% 74%
User interface products $21.1 (40%) $35.0
Percentage of user interface net revenues 61% 34%
Total gross profit $69.9 (3%) $71.7
Percentage of net revenues 73% 47%
Total gross profit decreased as a result of lower revenue during this period.
Gross profit as a percentage of net revenues increased as the mix of higher
gross margin networking products increased as a percentage of total net
revenues, and as the costs of wafers were reduced in the first nine months of
1997 compared to the same period in the prior year. Gross profits on user
interface products, which includes the gross profits for modem sales, as well as
the gross profits on sales from other non-networking products, were higher than
historical levels due to the sales and cost of sales of modem inventories. In
establishing its reserve for the write down of its modem inventories, the
Company took into account both the costs of completion and disposal in revaluing
the inventory to the lower of cost or market. The higher amount of gross profit
recognized during the first half of 1997 and included in the first nine months
of 1997 results represents the amount necessary to cover the relatively higher
period expenses incurred relating to the disposal effort. There was no operating
profit recognized from the sale of modem products.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
First First
Nine Months Nine Months
1997 Change 1996
---- ------ ----
Research and development $16.5 (29%) $23.4
Percentage of net revenues 17% 15%
Marketing, general & administrative $18.7 (25%) $24.9
Percentage of net revenues 20% 16%
<PAGE>
Research and development expenses decreased primarily due to decreases in
research and development personnel in user interface products as a result of the
third quarter 1996 restructuring of the Company's non-networking operations,
offset partially by significant increases in research and development spending
and personnel in the Company's networking product lines.
Marketing, general and administrative expenses also declined primarily due to
the reduction in expenses and personnel resulting from the third quarter 1996
restructuring, offset partially by increases in expenses related to the
Company's networking product lines.
Acquisition and Restructuring Charges
- -------------------------------------
No acquisition or restructuring charges were incurred in the first nine months
of 1997. The comparable period of 1996 included a write-off of $7.8 million for
in process research and development related to the acquisition of the ethernet
switching assets, intellectual property and certain other assets from Bit,
Incorporated. In the third quarter of 1996 the Company recorded a $64.7 million
charge to operating expenses relating to its decision to exit the modem chipset
business and restructure its other non-networking products. The Company expects
to record any required adjustment to the charges taken to accomplish the
restructuring in the fourth quarter of 1997. Significant items still to be
completed in the restructuring relate to the disposal of the remaining fixed
assets not required for the Company's networking products business, and the
disposal of the San Jose, California leased facility previously used for its
non-networking and headquarters operations. The Company believes that the charge
taken in the third quarter of 1996 will be adequate to complete the
restructuring.
Interest Income (Expense), Net ($000,000)
- -----------------------------------------
First First
Nine Months Nine Months
1997 Change 1996
---- ------ ----
Interest income (expense), net $0.5 (8%) $0.5
Percentage of net revenues 0.5% 0.3%
Net interest income is comprised primarily of interest income and interest
expense. Net interest income declined from $529,000 in the third quarter of 1996
to $488,000 in the third quarter of 1997.
Provision for Income Taxes
- --------------------------
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations. U.S. taxes in the first nine months of 1997 were
reduced by the utilization of the current portion of net operating losses
associated with the third quarter 1996 restructure charge. The actual results
will be dependent upon the revenue and profits of the various legal entities and
product lines.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's cash and cash equivalents and short term investments increased
from $42.1 million on December 31, 1996 to $67.1 million on September 30, 1997.
The increase was primarily attributable to net income of $24.7 million in the
first nine months of 1997. Sources of cash from operating activities other than
net income were a $6.6 million decrease in inventories, $6.3 million of non-cash
depreciation, and $3.6 million decrease in accounts receivable. Other
non-operating sources of cash included $5.6 million of proceeds from issuance of
common stock (principally under the Company's stock option and purchase plans),
$1.1 million from sale/leaseback transactions and $2.5 million from the sale of
excess non-networking fixed assets. Uses of cash for operations included $10.6
million of cash used for restructuring costs. The Company also used $3.0 million
in cash to invest in another company, $4.8 million in cash for purchases of
fixed assets for use in its networking operations, and $5.7 million in cash to
pay capital lease obligations, notes payable, and long term debt.
As of September 30, 1997, the Company's principal sources of liquidity included
cash and cash equivalents and short term investments of approximately $67
million, and approximately $10 million available under its bank line of credit.
The current line of credit agreement expires in November 1997. The Company
believes that existing cash and cash equivalents, short-term investments, and
anticipated funds from operations will satisfy the Company's projected working
capital requirements, anticipated capital expenditures and debt repayments
through fiscal 1997.
The Company has wafer supply agreements with two independent foundries that
together supply substantially all of the Company's products and include deposits
made to secure access to wafer fabrication capacity. One of those supply
agreements was amended in the fourth quarter of 1996 while the other was
rewritten in the fourth quarter of 1996 and amended in the third quarter of
1997. At September 30, 1997, the Company had $27.1 million in deposits with
those foundries and was in compliance with its foundry agreements. Although
there are no minimum unit volume requirements, the Company is obligated under
one of the foundry agreements to purchase in future periods a minimum percentage
of its total annual wafer requirements, provided that the foundry is able to
continue to offer competitive technology, pricing, quality and delivery.
Non-compliance with the terms of the agreements may be cause for termination of
the agreement by either party. The Company purchased $2.3 million from its
foundry suppliers during the third quarter of 1997 compared to $4.8 million
under agreements in existence in the third quarter of 1996. Those amounts may or
may not be indicative of any future period since wafers are sold based on
current market pricing and the Company's volume requirements change in relation
to sales of its products.
In each year, the Company is able to receive a portion of the deposits provided
to the foundries based on the annual purchases from those foundries as compared
to the target levels in the agreements. If the Company does not receive these
deposits back during the course of the agreements, then the deposits will be
returned to the Company at the termination of the agreements.
<PAGE>
The Company's future capital requirements will depend on many factors,
including, among others, product development and acquisitions of complementary
businesses, products or technologies. To the extent that existing resources and
the funds generated by future earnings are insufficient to fund the Company's
operations, the Company may need to raise additional funds through public or
private debt or equity financing. If additional funds are raised through the
issuance of equity securities, the percentage ownership of current shareholders
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. No
assurance can be given that additional financing will be available or that, if
available, it can be obtained on terms favorable to the Company and its
shareholders. If adequate funds are not available, the Company may be required
to delay, limit or eliminate some or all of its proposed operations.
<PAGE>
Part II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
11 Calculation of earnings per share
(b) Reports on Form 8-K -
A Current Report on Form 8-K was filed on August 8,
1997 to disclose the Company's name change and the
change of its legal domicile from California to
Delaware.
<PAGE>
SIGNATURES
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: November 12, 1997 /s/ Robert L. Bailey
----------------- ---------------------------------------------
Robert L. Bailey
Chief Executive Officer and President
Date: November 12, 1997 /s/ John Sullivan
----------------- ---------------------------------------------
John Sullivan
Vice President, Finance
Chief Financial Officer (Principal Accounting
Officer)
<TABLE>
CALCULATION OF EARNINGS PER SHARE
(In thousands, except for per share amounts)
(unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
Sept. 30, Sept. 30,
1997 1996
<S> <C> <C>
Net income (loss) $ 7,291 ($ 73,294)
================ =================
Weighted average common shares outstanding 31,146 29,782
Common stock equivalents 2,042 -
---------------- -----------------
Shares used in calculation of net income per share 33,188 29,782
================ =================
Net income (loss) per share $ 0.22 ($ 2.46)
================ =================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,358
<SECURITIES> 44,702
<RECEIVABLES> 10,270
<ALLOWANCES> 0
<INVENTORY> 2,670
<CURRENT-ASSETS> 83,578
<PP&E> 37,067
<DEPRECIATION> (19,792)
<TOTAL-ASSETS> 147,457
<CURRENT-LIABILITIES> 36,279
<BONDS> 0
0
0
<COMMON> 142,539
<OTHER-SE> (62,174)
<TOTAL-LIABILITY-AND-EQUITY> 147,457
<SALES> 27,815
<TOTAL-REVENUES> 27,815
<CGS> 6,058
<TOTAL-COSTS> 6,058
<OTHER-EXPENSES> 10,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (331)
<INCOME-PRETAX> 11,217
<INCOME-TAX> 3,926
<INCOME-CONTINUING> 7,291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,291
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
Amendment to Option Agreement
This Amendment, made to Option Agreement between Sierra Semiconductor
Corporation and PMC-Sierra, Inc., and Taiwan Semiconductor Manufacturing Co.,
Ltd., dated November 6, 1996 (the "Option Agreement"), is effective as of July
21, 1997 (the "Effective Date") by and between Sierra Semiconductor Corporation
("Sierra"), a company organized under the laws of California, with its
registered address at 2222 Qume Drive, San Jose, CA 95131 and PMC-Sierra, Inc.
("PMC-Sierra"), a company organized under the laws of California, with its
registered address at 105-8555 Baxter Place, Burnaby, B.C., Canada V5A 4V7
(collectively referred to as "Customers"), and Taiwan Semiconductor
Manufacturing Co., Ltd., a company organized under the laws of the R.O.C, with
its registered address at No. 121, Park Ave. 3, Science-Based Industrial Park,
Hsinchu, Taiwan, R.O.C ("TSMC").
In consideration of mutual covenants and conditions, both parties agree
to amend the Option Agreement as follows:
I. Defined terms used herein but not defined herein shall have the meaning
set forth in the Option Agreement.
II. Amend Sections 2(f) and 7(a) as follows:
2(f) "Wafer" used in this Agreement shall mean 6" physical wafer
without reference to technology and geometry. The conversion rate from
6" wafer to 8" wafer shall be 1.78.
7(a) The term of this Agreement shall commence from the Effective Date,
and expire upon the total consumption of the Option Fee.
III. Delete Section 6.
IV. Add a New Section as Section 18
"Customers shall use their best efforts to increase their annual orders
to TSMC by commitment to have 1997 and 1998 new tape outs made by TSMC
until *[REDACTED] of the Customers' total annual wafer requirement from
outside source is made by TSMC. Customers shall achieve the forgoing
goal no later than *[REDACTED].
Customers shall notify TSMC of Customers' annual total wafer
requirements from outside sources for the subsequent year every
November, and shall notify TSMC of any changes therefrom during the
applicable year. TSMC has the right to conduct audits on Customers'
annual total wafer requirement with a thirty (30) days written notice
to Customers."
* The confidential portion has been so omitted and filed separately with the
Commission
<PAGE>
V. Amend "Wafer Equivalent" in this Agreement to "Wafer".
VI. Delete Original Exhibit A.
Taiwan Semiconductor Sierra Semiconductor Corporation
Manufacturing Co., Ltd.
BY: /s/ Morris Chang BY: /s/ James V. Diller
---------------- -------------------
Morris Chang James V. Diller
Chairman CEO
PMC-Sierra, Inc.
BY: /s/ James V. Diller
-------------------
James V. Diller
CEO
