SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
--- Act of 1934 for the Fiscal Year Ended December 31, 1996
Transition Report Pursuant to Section 13 or 15(b) of the Securities
--- Exchange Act of 1934
Commission File Number 0-19084
SIERRA SEMICONDUCTOR
CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2925073
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
2222 QUME DRIVE
SAN JOSE, CALIFORNIA 95131
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 434-9300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
Securities registered pursuant to Section 12(g)of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on January 31,
1997, as reported by the Nasdaq National Market, was approximately $433,768,664.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding voting stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of January 31, 1997, the Registrant had 28,822,282 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1997 Annual Meeting of
Shareholders are incorporated by reference in Items 10, 11, 12 and 13
Part III of this Form 10-K Report.
================================================================================
<PAGE>
PART I
ITEM 1. Business.
General
Sierra Semiconductor Corporation ("Sierra" or the "Company") designs,
develops, markets and supports high-performance semiconductor system solutions
for advanced communications markets. The Company's products are used in
broadband communications infrastructures, high bandwidth networks and multimedia
personal computers. The Company is a leading supplier of ATM and SONET/SDH
integrated circuits in the communications infrastructure and networking markets,
and also provides these markets with T1/E1 and D3/E3 integrated circuits. The
Company also supplies highly integrated data and voice communications
semiconductor products to personal computer original equipment manufacturers
("PC OEM's"), but is planning to wind-down these product lines, and to focus on
the broadband infrastructure and networking markets. In August 1996 the Company
announced its decision to exit the personal computer modem chipset business and
to put the modem chipset product line up for sale. This action, which included
the restructuring of the Company's non-networking operations, resulted in a
one-time charge to earnings in the quarter ended September 30, 1996, of
approximately $69 million (see Details of Restructuring in Item 7).
The Company was incorporated in the State of California in November
1983 and commenced business in January 1984. All references to "Sierra" or the
"Company" include PMC-Sierra, Inc. ("PMC") and the Company's other subsidiaries,
unless the context otherwise requires. The Company's principal executive office
is located at 2222 Qume Drive, San Jose, California 95131. The Company's Common
Stock trades on the Nasdaq National Market under the symbol "SERA."
Industry Background
The Internet and its increased usage by business and residential
customers have put a strain on the telecommunications infrastructure that
supports the worldwide network of voice and data communications. The broadband
infrastructure, originally intended to support the telephone voice network, is
now increasingly used to transmit data communications. With the addition of data
traffic over the network, the average time that a user currently spends "on
line" is significantly higher than the average time that the same user
previously was connected when using voice communications only. Industry analysts
have predicted that this trend of increasing traffic flow will continue as more
users come "on line" to the Internet, as more services are available on the
Internet, and as more applications, especially video traffic, become widely
available. Also, telecommunications deregulation is occurring in the United
States and abroad. Telecommunications companies are expected to upgrade their
current product offerings and develop new products to handle increased volumes
of data traffic. Corporations are also upgrading their networks to enhance
internal electronic communication and provide greater access to external data
traffic. These trends create the following market opportunities:
<PAGE>
o In the broadband or wide-area-network infrastructure market, high-
performance semiconductor solutions will be needed for Internet
Protocol ("IP"), Frame Relay, and Asynchronous Transfer Mode
("ATM") switching and data transmission protocols.
o In the local-area network ("LAN") equipment market, Sierra's
opportunities include ATM LAN backbone and gigabit ethernet
products.
o The LAN market also offers a new product opportunity in fast
ethernet switches at the workgroup level.
o In the Internet/Intranet infrastructure market, Internet service
providers (ISP's) and other equipment suppliers are expected to
require a greater number of point-of-presence switches to enable
more efficient transmission of data traffic from the users to and
through the Internet.
Products
Sierra provides semiconductor devices, and related service and support,
to equipment manufacturers which incorporate Sierra's products into electronic
communications equipment and systems.
The Company provides several semiconductor devices for ATM products.
The Company's network interface chips, operating at ranges from T1 line rates
(1.5 Megabits per second or Mbps) to OC-3 (622 Mbps) include solutions for the
physical (PHY) layer, the ATM layer, and ATM adapters. The S/UNI chip family
features a range of single- and multi- channel solutions for networks, for
either Local Area Networks (LANs) or Wide Area Networks (WANs). The Company also
provides a line of semiconductor devices, known as RCMP chips, which integrate
traffic policing, performance monitoring, address resolution, translation
algorithms, and fault management.
The Company is also developing physical layer solutions for Synchronous
Optical Network/Synchronous Digital Hierarchy (SONET/SDH) and T1/E1 equipment
manufacturers. The Company's Stel/ar family of products supports both the SONET
and SDH protocol standards, and provides tributary and aggregate interface
solutions, tributary processing, and other switching solutions such as add-drop
multiplexers. For other applications, like Frame Relay or Internet access, the
Company provides multi-channel digital T1/E1 framers, single chip multiplexers,
and analog line interface units under the Asynchronous/Plesiochronous Digital
Hierarchy (ASYNC/PDH) family. The T1/E1 line interface units are now produced as
single-channel as well as quad devices.
The Company announced, in the fourth quarter of 1996, an Ethernet
switch product called EtherDirector, which is an 8-port 10Base-T
switch-on-a-chip that is sold to and incorporated into other equipment
manufacturer's products that provide Ethernet switching to workgroups at the low
end of the LAN.
Sierra's products are sold principally to equipment manufacturers who
in turn sell their communication equipment to enterprises and telephone
installations. The Company's customers range from large WAN equipment providers
such at Alcatel, Lucent, and Stratacom, to LAN equipment providers such as
Cisco, Fore, Cabletron, and Newbridge, and to remote access equipment providers,
such as Ascend or U.S. Robotics. The above list of customers is not inclusive of
all Sierra's customers, but is intended to be illustrative of the type of
customers who buy the Company's products. Sierra's networking products are
standard products, and no products are custom designed for any one customer's
products or applications.
<PAGE>
Personal Computer User Interface (Net Access) Products
Data and Voice Communications. The Company's principal data
communications products are modem integrated circuits operating at industry
standard protocols of up to 33.6 kilobits per second (kbps). These semiconductor
devices can be used by manufacturers to produce modems with a wide range of
features, including facsimile, integrated full duplex speakerphone, voice mail
and Sound Blaster compatible music synthesis capabilities. The Company's modem
products are PC and Macintosh compatible. The Company is in the process of
exiting the modem business and is only selling existing inventory and supporting
previously sold modem products.
Graphics and Multimedia Communications. The Company offers several
graphics and video communications products, primarily to Apple Computer
("Apple"). The Company provides Apple Computer with multimedia controllers, and
a range of phased loop lock ("PLL"), frequency synthesizers, monochrome and
color video digital-to-analog converter ("DAC") products. In 1996, 1995, and
1994, sales to Apple accounted for 10%, 24%, and 20%, respectively of Sierra's
net revenues.
Sales, Marketing and Distribution
Sierra sells its products through a direct sales force, independent
manufacturers' representatives and distributors. International sales were 53%,
39% and 38% of net revenues in 1996, 1995 and 1994, respectively. The increasing
percentage of international sales in 1996 over 1995 was principally the result
of modem products being sold to customers in the Far East. For networking
products, in 1996, North American sales were 75% of networking revenue, compared
to 77% in 1995. Sales are generally denominated in U.S. dollars. See "Risk
Factors--International Operations."
Backlog
Sales are made primarily pursuant to standard short-term purchase
orders for delivery of standard products. The quantity actually purchased by the
customer, as well as the shipment schedules, are frequently revised to reflect
changes in the customer's needs. As of December 31, 1996, the Company's backlog
was approximately $38.3 million, compared to approximately $88.3 million at the
end of the 1995 fiscal year. The decline in backlog is due in part to the
Company's exit from the modem business, which represented the majority of
backlog at the end of fiscal 1995. The Company's backlog includes all purchase
orders expected to be shipped within the next twelve months for semi-custom
products and within the next seven months for other products. A significant
portion of the backlog is cancelable without penalty at the discretion of the
customer. Accordingly, the Company believes that its backlog at any given time
is not a meaningful indicator of future revenues.
<PAGE>
Manufacturing
The Company relies on independent foundries for the manufacture of its
products. The Company currently receives substantially all of its wafers in
finished form from Chartered Semiconductor Ptd. Ltd. ("Chartered"), and Taiwan
Semiconductor Manufacturing Corporation ("TSMC"). The supply agreement with
Chartered Semiconductor expires on November 17, 1999, although certain
provisions have been superseded by a wafer capacity agreement which expires in
December 2000 whereby Chartered Semiconductor is obligated to supply the Company
with a predetermined number of wafers per quarter. TSMC is obligated to provide,
and the Company is obligated to purchase certain quantities of wafers per year.
The Company's agreement with TSMC terminates on December 31, 2000. These
independent foundries produce versions of the Company's networking and
communications products at feature sizes down to 0.35 micron.
The Company has financial arrangements and deposits with certain of its
independent foundries. The Company deposited $3 million in 1995 and an
additional $9 million in 1996 with one foundry to secure capacity. Under an
agreement with another foundry, the Company paid $15 million in 1996 to secure
capacity. These agreements were renegotiated in 1996. These agreements now
require the Company to purchase a minimum number of wafers, scheduled on an
annual or quarterly basis. Under an agreement with a third foundry, the Company
committed to provide approximately $10 million of equipment to the foundry and
purchased $3 million of the foundry's equity stock. If the Company does not
purchase the minimum numbers of wafers, the Company may lose a portion of
amounts deposited or paid to secure capacity. Likewise, by not purchasing the
minimum amounts in any period, the deposits, prepayments, and other
consideration would be amortized over a lower number of wafers purchased, and
thus the cost per wafer would be proportionately higher in that period. See
"Risk Factors--Access to Wafer Fabrication Capacity; Dependence on Third Party
Manufacturers."
Wafers supplied by outside foundries must meet the Company's incoming
quality and electrical test pattern standards. The Company conducts its test
operations on advanced mixed signal and digital test equipment in its Burnaby,
British Columbia, Canada, and San Jose, California facilities and certain of its
foundries, and sends tested wafers to qualified subassemblers in Asia and
Canada. Tested units receive final quality assurance inspection in British
Columbia and in California. The testing currently done in San Jose, California
will be discontinued by the end of June 1997 as a result of the restructuring of
the Company's non-networking operations.
Research and Development
Sierra's current research and development efforts focus on increasing
the functionality and integration of its products. The Company's research and
development in the telecommunications infrastructure and local area networking
markets is targeted at increasing the speed at which its chips operate,
integrating multiple channels on single devices, and broadening the portfolio of
products which comply with the varying protocols in these markets. As a result
of the Company's decision to exit from the modem chipset business, and the
associated restructuring of the Company's non-networking product operations, the
Company has discontinued research and development on any future modem and other
non-networking products. The Company expended $29.4 million, $23.4 million, and
$15.7 million on research and development in fiscal 1996, 1995 and 1994,
respectively.
There can be no assurance that any new products will be successfully
developed or will achieve market acceptance. A failure in any of these areas
would materially and adversely affect the Company's operating results.
See "Risk Factors--Technological Change."
<PAGE>
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 and sources of raw materials, 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.
The Company's competitors include, among others, Texas Instruments,
Level One Communications, Lucent Technologies, Dallas Semiconductor, and
Transwitch. The number of competitors and the technology platforms on which
their products will compete may change in the future. To date there have been
several competing technologies in the telecommunications and networking markets
and not all standards have been established to date. The Company's success will
depend on the successful development of a market for its customers' products. 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.
Historically, average selling prices ("ASPs") in the semiconductor
industry have decreased over the life of the particular product. The willingness
of prospective customers to design the Company's products into their products
depends to a significant extent upon the ability of the Company to price its
products at a level that is cost effective for such customers. If the Company is
unable to reduce its costs sufficiently to offset declines in ASPs or is unable
to introduce new higher performance products with higher ASPs, the Company's
operating results would be materially and adversely affected. Any yield or other
production problems, shortages of supply that increase the Company's
manufacturing costs, or failure to reduce manufacturing costs, would have a
material adverse effect on the Company's operating results.
<PAGE>
Licenses, Patents and Trademarks
The Company has granted Chartered Semiconductor a non-exclusive license
to manufacture and sell integrated circuits licensed for sale by Sierra and
integrated circuits designed by Chartered Semiconductor or its parent company.
Chartered Semiconductor also has a worldwide non-exclusive right to manufacture
digital integrated circuits for third parties, unless Sierra designed the
circuit or previously supplied the circuit to the customer. Chartered
Semiconductor has also licensed its manufacturing technology to Sierra for
non-exclusive use outside Singapore. The license agreement expires in November
1999. Upon termination of the agreement, the licenses to use technology
continue, but obligations to update licensed technology terminate.
The Company has several U.S. patents and a number of pending patent
applications in the U.S. and European countries. In addition to such factors as
innovation, technological expertise and experienced personnel, the Company
believes that a strong patent position is becoming increasingly important to
compete effectively in the industry and has an active program to acquire
additional patent protection. The Company applies for mask work protection on
its circuit designs. The Company attempts to protect its software, trade secrets
and other proprietary information by entering into proprietary information
agreements with employees and other security measures. Although the Company
intends to protect its rights vigorously, there can be no assurance that these
measures will be successful. See "Risk Factors--Patents and Proprietary Rights."
Sierra Semiconductor and its logo are registered trademarks and service
marks of the Company. The Company owns other trademarks and service marks not
appearing in this Form 10-K Annual Report. Other trademarks used in this Form
10-K Annual Report are owned by other entities.
Employees
As of December 31, 1996, the Company had 298 employees, including 122
in research and development, 44 in engineering and quality assurance, 48 in
marketing and sales, 32 in test operations and 52 in corporate and manufacturing
administration. None of the Company's employees is represented by a collective
bargaining agreement, nor has the Company ever experienced any work stoppage.
As of December 31, 1996, 118 employees employed as of the date of the
restructuring in the Company's modem and non-networking operations had reached
their planned termination dates and left the Company. During 1997, 127 employees
employed as of the date of the restructuring in the Company's modem and
non-networking operations will be terminated under the restructuring plan. See
"Risk Factors - Dependence on Key Personnel."
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.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements and information in this Annual Report constitute
"forward-looking statements" within the meaning of the federal securities laws.
Such forward-looking statements involve risks and uncertainties which may cause
the actual results, performance, or achievements of the Company to be materially
different from those expressed or implied by such forward-looking statements.
The forward-looking statements include projections in "Business" relating to
trends in the broadband infrastructure, WAN, LAN and Internet/Intranet markets,
products under development for SONET/SDH and T1/E1 applications and research and
development goals; and projections in "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to gross margin, growth of the broadband communications market, results
of the Company's exit from the modem chip market, continued supply of
semiconductors to the Company by outside foundries and by assembly houses,
export sales, and future expenditures on research and development and marketing,
general and administrative activities. Actual results could differ from those
projected in any forward-looking statements for the reasons detailed below.
<PAGE>
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 (particularly discontinued modem
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 has limited ability to forecast its unit volumes of
discontinued modem chipset sales or the prices at which these sales will occur,
particularly in light of recent introductions by competitors of modems operating
at speeds of up to 56 kbps. The Company expects sales of modem products to
decline over the first two quarters of 1997 and to be minimal after June 30,
1997. The Company's visibility on sales of networking chipsets is limited due to
customer uncertainty regarding future demand for end-user networking products
and price competition in the market for ATM and fast Ethernet switching
chipsets. 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 near term, as the Company continues to sell its existing
inventories of modem chipset products, the overall gross margin of the Company
may decline depending on the percentage of modem chipset product revenues
relative to total revenues. Overall gross margin may also be impacted
unfavorably due to anticipated erosion of modem pricing as the Company
liquidates its existing inventories. 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
liquidating inventory, retaining employees and 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.
<PAGE>
TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by evolving
industry standards and 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 networking high-speed
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 Sierra
products. The Company is developing products for 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
of the Company's revenues and a substantial portion of the Company's gross
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% of the Company's total net revenues for 1996. The
gross profit derived from those products amounted to 50% of the Company's total
gross profit for 1996.
There can be no assurance that a significant market for the Company's
current networking products will emerge or, if it does emerge, that the Company
will be able to develop and market these or other networking products in a
timely and commercially viable manner. The adoption or maintenance by the
industry of high speed transmission standards other than those which the Company
currently addresses, or the inability of the Company to develop and market its
networking-related products, would have a material adverse effect on the
Company's operating results.
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
telecommunications products are 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 chipsets 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.
<PAGE>
A subsidiary of the Company acquired in-process research and
development and developed technology relating to Ethernet switching technology
from Bit, Inc. The acquired technology is generally in the early stages of
development. The Company has redesigned one product acquired from Bit, Inc. and
has announced a customer's intention to include this integrated circuit in the
customer's product. Two other products acquired from Bit, Inc. are in the design
phase, two more are undergoing product definition, and four have been
conceptually outlined. The Company will need to expend significant additional
resources to complete products based on this technology. Completion of products
based on the acquired technology is primarily dependent upon the Company's
ability to hire additional engineering staff in the areas of software and
firmware design, system level application development, product testing, and
evaluation and characterization. The Company estimates that in order to complete
and bring to market the first products based on the acquired technology, it will
need to expend approximately $3.3 million in 1997, and to acquire approximately
$1.0 million of additional capital equipment in 1997. The Company anticipates
that internally generated cash flows will be the source of funds for these
expenditures.
The Company cannot assure that these products will be completed in a
timely manner or at all, or that if completed these products will be
commercially adopted.
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 and sources of raw materials, 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.
The Company's competitors include, among others, Texas Instruments,
Level One Communications, Lucent Technologies, Dallas Semiconductor, and
Transwitch. The number of competitors in this market and the technology
platforms on which their products will compete may change in the future. To date
there have been several competing technologies in the telecommunications and
networking markets and not all standards have been established to date. The
Company's success will depend on the successful development of a market for its
customers' products. 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.
<PAGE>
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 customer, 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.
CUSTOMER CONCENTRATION
The Company has no long-term volume purchase commitments from any of
its major customers. In 1995 and 1996 sales to Apple Computer, Inc. represented
24% and 10%, respectively, of net revenues of the Company. In 1996, two modem
and graphics board manufacturers, SCI Manufacturing, Inc. and Askey Computer
Corporation, each represented approximately 11% of the Company's net revenues.
In the future, sales to these customers are expected to decline, as the Company
shifts its focus away from non-networking products, and exits from the modem
chipset business. Due to the Company's exit from the modem business, these
customers are not expected to be significant customers in the future.
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.
<PAGE>
INTERNATIONAL OPERATIONS
During fiscal years 1996, 1995 and 1994, international sales accounted
for approximately 53%, 39% and 38% of the Company's net revenues, respectively.
The Company expects that international sales will continue to represent a
significant portion of its net revenues for the foreseeable future. PMC's
operations, which are primarily in Canada, are expected to represent a larger
percentage of the Company's overall operations. In addition, substantially all
of the Company's products are manufactured, assembled and tested by independent
third parties in Singapore, Taiwan, Malaysia and the Philippines. Due to its
reliance on international sales and foreign third-party manufacturing, assembly
and testing 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 economic instability, potential hostilities and
changes in diplomatic and trade relationships. Sales in Europe are generally
denominated in local currencies, while sales in the rest of the world are
generally denominated in U.S. dollars. 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. As a result of the
Company's decision to exit the modem chipset business and restructure its other
non-networking operations, certain key administrative and engineering personnel
in non-networking operations may terminate their employment by the Company
earlier than planned by the Company. The Company cannot assure that the
retention incentives which the Company has put in place, which include retention
payments of up to six months salary, will be sufficient to retain these
individuals. If one or more of these personnel terminate their employment with
the Company, the operating results of the Company could be adversely affected.
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 in the networking and non-networking areas and
has a number of pending patent applications. There can be no assurance that
<PAGE>
patents will issue 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 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 licenses 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 Company's 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.
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
<PAGE>
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 write-offs, and could involve the amortization of goodwill
and other intangible assets 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.
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, the Company's
ability to sell existing modem chipset inventories, investments in working
capital, and acquisitions of complementary business, 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. Advances made under the line will be fully
secured by cash deposited by the Company. The agreement expires on July 1, 1997.
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 telecommunications or networking equipment industry, general
conditions in the semiconductor industry and conditions in the 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 stock market has
recently experienced price and volume fluctuations, which have particularly
affected the market prices for many high technology companies and which have
often been unrelated to the operating performance of the specific companies.
<PAGE>
ITEM 2. Properties.
The Company's executive offices and its non-networking test, sales and
marketing, and design and engineering operations are located in an approximately
83,000 square foot leased facility in San Jose, California. The facility is
leased through December 2003. The Company also leases office facilities for its
non-networking sales staff in or near Boston, Dallas and Philadelphia and for
its engineering and design staff near Huntsville, Alabama. The Company is
attempting to sublease these facilities. Estimated commitments for excess
facility costs have been included in the third quarter 1996 restructuring
reserve. To the extent accrued as part of the restructuring, all costs
associated with these excess and redundant facilities have been and will be
charged to this restructure reserve.
PMC's headquarters facility, which includes its test, sales and
marketing, and design and engineering operations, is located in an approximately
72,000 square foot leased facility in Burnaby, British Columbia, Canada. This
facility is leased through April 2001. PMC also leases offices for its sales
staff in Massachusetts, North Carolina, Texas, California, Ontario (Canada) and
England. PMC-Sierra (Portland), Inc. leases an approximately 9,000 square foot
office. This facility is leased through March 1999.
ITEM 3. Legal Proceedings.
Not applicable.
ITEM 4. Submission of matters to a vote of Security Holders.
Not applicable.
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Stock Price Information. The Company's Common Stock trades on the
Nasdaq National Market under the symbol SERA. The following table sets forth,
for the periods indicated, the high and low closing sale prices (adjusted for a
2 for 1 stock split, effective October 5, 1995) for the Company's Common Stock
as reported by the Nasdaq National Market:
1995 High Low
First Quarter....................................... $14.50 $ 8.06
Second Quarter...................................... 16.44 11.94
Third Quarter....................................... 27.38 15.88
Fourth Quarter...................................... 24.25 13.19
1996 High Low
First Quarter....................................... $24.75 $11.38
Second Quarter...................................... 20.88 11.00
Third Quarter....................................... 13.75 8.38
Fourth Quarter...................................... 17.50 12.00
As of January 31, 1997, there were approximately 513 holders of record
of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future. The
Company's current bank credit agreement prohibits the payment of dividends
without prior consent of the lender.
<PAGE>
ITEM 6. Selected Financial Data.
Summary Consolidated Financial Data
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended December 31,* (1)
STATEMENT OF OPERATIONS DATA: 1996(2) 1995(3) 1994(4) 1993(5) 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $188,371 $188,724 $104,764 $83,360 $92,278
Gross profit 93,423 91,614 46,960 37,660 50,158
Research and development 29,350 23,428 15,702 15,439 14,570
In process research and development 7,783 --- 12,748 --- ---
Marketing, general and administrative 30,691 30,051 23,683 22,487 22,053
Purchase price adjustment - compensation --- 10,624 --- --- ---
Restructuring and other charges 64,670 --- (1,559) 12,669 ---
-------- -------- -------- -------- --------
Income (loss) from operations (39,071) 27,511 (3,614) (12,935) 13,535
Income (loss) from continuing operations (48,150) 23,976 (7,916) (12,983) 11,844
Loss from discontinued operations --- (22,497) (666) --- ---
-------- -------- -------- -------- --------
Net income (loss) $(48,150) $1,479 $(8,582) $(12,983) $11,844
======== ======== ======== ======== ========
Per share data: (6)
Income (loss) from continuing operations $(1.62) $0.84 $(0.36) $(0.64) $0.54
Loss from discontinued operations --- $(0.79) $(0.03) --- ---
-------- -------- -------- -------- --------
Net income (loss) $(1.62) $0.05 $(0.39) $(0.64) $0.54
======== ======== ======== ======== ========
Shares used in calculation of net income (loss) 29,719 28,620 22,030 20,222 21,738
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,* (1)
BALANCE SHEET DATA: 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments $42,062 $45,937 $15,830 $21,693 $34,843
Working capital 20,438 32,741 23,813 14,803 42,341
Total assets 129,914 184,860 85,959 71,850 89,540
Long term debt (including current portion) 24,637 12,718 9,069 11,872 14,575
Shareholders' equity 48,444 81,000 34,865 40,153 59,714
<FN>
* The Company's fiscal year ends on the Sunday closest to December 31.
December 31 has been used as the fiscal year end for ease of presentation.
See Note 1 to Consolidated Financial Statements.
(1) Net revenues, gross profit, research and development, and marketing,
general and administrative expenses have been restated to exclude amounts
relating to Prometheus Products, Inc. For 1995, amounts related to
Prometheus previously reported within net revenues were $19.0 million;
gross profit (loss) was ($0.1) million; and net profits were ($4.6)
million. For 1994, net revenues were $3.8 million; gross profit was $0.3
million; and net loss was ($0.7) million. All previously reported amounts
have been included in "Loss from discontinued operations". Balance sheet
data has been restated to exclude amounts relating to Prometheus.
(2) Results for the year ended December 31, 1996 include a restructuring charge
of $69.4 million in the third quarter for the Company's exit from the modem
chipset business and the associated restructuring of its non-networking
operations. $4.7 million of this charge was recorded in cost of sales as an
inventory write down, and $64.7 million was recorded as a restructuring
cost in operating expenses. An in process research and development charge
of $7.8 million was recorded in the third quarter for the acquisition of
ethernet switching technology and other assets from Bit, Inc. Results of
operations include costs of continuing the development of ethernet
switching products and related activities from the date of the acquisition
on September 3, 1996.
(3) Results for the year ended December 31, 1995 include the loss from
discontinued operations related to Prometheus Products, Inc. of $22.5
million, purchase price adjustment relating to the finalization of the
acquisition of PMC-Sierra, Inc. of $10.6 million, and gain on sale of
shares of SiTel Sierra B.V. of $6.7 million.
<PAGE>
(4) Results for the year ended December 31, 1994 include the operations of PMC
from the date of acquisition, September 2, 1994, and include in process
research and development of $12.7 million, settlement of the class action
lawsuit of $2.4 million, reversal of restructuring and other charges of
$1.6 million and a loss from discontinued operations of Prometheus of $0.7
million.
(5) Results for the year ended December 31, 1993 include restructuring and
other charges of $15.6 million.
(6) Share and per share information has been adjusted for the 2 for 1 stock
split effective October 5, 1995.
</FN>
</TABLE>
<PAGE>
Quarterly Comparisons
The following tables set forth consolidated statements of operations
for each of the Company's last eight quarters and the percentage of the
Company's net revenues represented by each line item reflected in each
consolidated statement of operations. This quarterly information is unaudited
and has been prepared on the same basis as the annual consolidated financial
statements. In management's opinion, this quarterly information reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
Quarterly Data (Unaudited)
(in thousands, except per share data)
Year Ended December 31, 1996(1) Year Ended December 31, 1995 (2) (3)
------------------------------------ ------------------------------------
Fourth Third Second First Fourth Third Second First
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $36,227 $34,726 $53,022 $64,396 $58,884 $50,700 $42,201 $36,939
Gross profit 21,679 13,790 27,665 30,289 27,781 24,907 20,836 18,090
Research and development 5,979 7,080 7,885 8,406 6,905 5,969 5,182 5,372
In process research and development --- 7,783 --- --- --- --- --- ---
Marketing, general and administrative 5,778 7,406 8,842 8,665 8,602 7,170 7,286 6,993
Purchase price adjustment --- --- --- --- --- 10,624 --- ---
Restructuring and other charges --- 64,670 --- --- --- --- --- ---
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations 9,922 (73,149) 10,938 13,218 12,274 1,144 8,368 5,725
Income (loss) from continuing 9,120 (73,294) 7,198 8,826 14,321 (1,221) 6,472 4,404
operations
Loss from discontinued operations --- --- --- --- (19,411) (2,249) (533) (304)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $9,120 $(73,294) $7,198 $8,826 $(5,090) $(3,470) $5,939 $4,100
======= ======= ======= ======= ======= ======= ======= =======
Per share data: (4)
Income (loss) from continuing $0.29 $(2.46) $0.24 $0.29 $0.47 $(0.05) $0.23 $0.16
operations
Loss from discontinued operations --- --- --- --- $(0.64) $(0.08) $(0.02) $(0.01)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $0.29 $(2.46) $0.24 $0.29 $(0.17) $(0.13) $0.21 $0.15
======= ======= ======= ======= ======= ======= ======= =======
Shares used in calculation of net
income/ (loss) 31,655 29,782 30,578 30,790 30,158 27,230 27,862 27,374
</TABLE>
<TABLE>
<CAPTION>
As a Percentage of Net Revenues (Unaudited)
Year Ended December 31, 1996(1) (3) Year Ended December 31, 1995 (2) (3)
------------------------------------ ------------------------------------
Fourth Third Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100% 100% 100% 100% 100%
Gross profit 60% 40% 52% 47% 47% 49% 49% 49%
Research and development 17% 20% 15% 13% 12% 12% 12% 15%
In process research and development --- 22% --- --- --- --- --- ---
Marketing, general and administrative 16% 21% 17% 14% 14% 14% 17% 19%
Purchase price adjustment-compensation --- --- --- --- --- 21% --- ---
Restructuring and other charges --- 186% --- --- --- --- --- ---
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations 27% -211% 21% 21% 21% 2% 20% 15%
Income (loss) from continuing operations 25% -211% 14% 14% 24% -2% 15% 12%
Loss from discontinued operations --- --- --- --- -33% -5% -1% -1%
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) 25% -211% 14% 14% -9% -7% 14% 11%
===== ===== ===== ===== ===== ===== ===== =====
<FN>
(1) Results for the year ended December 31, 1996 include a restructuring charge
of $69.4 million in the third quarter for the Company's exit from the modem
chipset business and the associated restructuring of its non-networking
operations. $4.7 million of this charge was recorded in cost of sales as an
inventory write down, and $64.7 million was recorded as a restructuring
cost in operating expenses. An in process research and development charge
of $7.8 million was recorded in the third quarter for the acquisition of
ethernet switching technology and other assets from Bit, Inc. Results of
operations include costs of continuing the development of ethernet
switching products and related activities from the date of the acquisition
on September 3, 1996.
(2) Results for the year ended December 31, 1995 include the loss from
discontinued operations related to Prometheus Products, Inc. of $22.5
million, the third quarter purchase price adjustment relating to the
finalization of the acquisition of PMC-Sierra, Inc. of $10.6 million and
the fourth quarter gain on sale of SiTel Sierra B.V. of $6.7 million.
(3) Net revenues, gross profits, research and development, and marketing,
general and administrative expenses have been restated to exclude amounts
relating to Prometheus Products, Inc. For 1995, amounts related to
Prometheus previously reported within net revenues were $19.0 million;
gross profit was $(0.1) million; and net profits were $(4.6) million. All
previously reported amounts have been included in "Loss from discontinued
operations".
(4) Share and per share information has been adjusted for the 2 for 1 stock
split effective October 5, 1995.
</FN>
</TABLE>
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Description of Forward-looking Statements. This portion of this Annual
Report contains forward-looking statements relating to the future activities of
the modem chipset business (which the Company exited during the third quarter of
fiscal 1996), modem-related revenues, gross margins, expenditures on research
and development, and marketing, general and administrative activities, and
sufficiency of capital resources. Actual results may differ from those projected
in the forward-looking statements for a number of reasons, including those
described in "Risk Factors."
General. Sierra Semiconductor designs, develops, markets and supports
high-performance system solutions for advanced communications markets. The
Company's products are used in broadband communications infrastructures, high
bandwidth networks and multimedia personal computers. In the third quarter of
1996 the Company announced its decision to exit from the personal computer modem
chipset business, and to restructure its non-networking operations, in order to
focus on the networking and infrastructure semiconductor businesses. Consistent
with this strategy, the Company acquired, in the third quarter, ethernet
switching assets, intellectual property and certain other assets from Bit, Inc.
In the fourth quarter of 1995, the Company discontinued operations of
Prometheus. The consolidated financial statements have been reclassified to
exclude the Prometheus results from continuing operations.
Restructuring
- -------------
On September 29, 1996, the Company recorded charges of $69,370,000 in
connection with the Company's decision to exit from the modem chipset business
and the associated restructuring of the Company's non-networking product
operations. The charges were recorded in cost of sales as an inventory write
down ($4,700,000) and as restructure costs in operating expenses ($64,670,000).
The elements of the total charge as of September 29, 1996 and December 31, 1996
are as follows:
<TABLE>
<CAPTION>
Restructuring Restructuring
Charge Reserve
September 29, Write-Down Cash December 31,
1996 of Assets Outlay 1996
(In Millions) ---- --------- -------- ----
<S> <C> <C> <C> <C>
Write down of inventories to net realizable value $23,000 $(23,000) $ --- $ ---
Employee termination benefits 6,985 --- (2,411) 4,574
Loss on supplier commitments and write off
of prepaid expenses 9,908 (905) (409) 8,594
Write down of excess fixed assets and assets
related to capacity commitments 16,580 (16,580) --- ---
Provision for price protection and product returns 5,047 (5,047) --- ---
Excess facility costs 3,411 --- (408) 3,003
Write down of goodwill related to Company's BV
subsidiary in Holland 2,459 (2,459) --- ---
Severance and closure costs related to Europe 1,980 --- (1,397) 583
------- ------ ------- -------
$69,370 $(47,991) $(4,625) $16,754
======== ======== ======== ========
</TABLE>
<PAGE>
The Company ceased manufacturing its modem chipset products in
September 1996 and expects to complete the shut down of the remaining
non-networking operations in San Jose by the middle of 1997. No sale was
anticipated in accounting for the restructuring. The Company will continue to
manufacture certain of its multimedia products in order to utilize components
either on-hand or under firm committed orders. As the non-networking operations
wind down, related work forces have been and will continue to be reduced.
Termination benefits for approximately 245 employees associated with the
Company's non-networking operations have been and will be paid as employees
reach their termination dates, between November 1996 and July 1997. As of
December 31, 1996, 118 employees employed as of the date of the restructuring in
the Company's non-networking operations had reached their termination dates and
have left the Company as planned in the restructuring. 127 employees employed as
of the date of the restructuring in the Company's non-networking operations will
reach their termination dates per the restructure plan during 1997.
As a result of its exit from the modem chipset business, the Company
identified incremental impairments in the carrying value of its non-networking
inventory and losses on supplier commitments arising directly from the decision
to stop manufacturing modem chipset inventory. Additionally, the Company
identified certain prepaid expenses and other commitments that, due to the exit
from the modem chipset and other non-networking operations, will provide no
future economic benefit to the Company.
In conjunction with the decision to exit the modem chipset business,
the Company is subject to incremental pricing pressure and potential returns of
modem chipset products. An estimate of the potential impact of price protection
and product returns has been included in the restructuring charge.
In connection with its decision to discontinue non-networking
operations, the Company evaluated the ongoing value of the fixed assets
associated with these operations. Based on this evaluation, the Company
identified approximately $2.1 million of non-networking property and equipment
that will continue to be utilized in the Company's networking operations. The
remaining non-networking property and equipment, with a carrying amount of
approximately $11.6 million, consists primarily of testers, engineering
workstations, and computer equipment. A small portion of these assets will be
utilized only during the wind down of the non-networking operations through the
middle of 1997. The majority of these assets will not be utilized and the
Company is attempting to dispose of such assets. As a result, in accordance with
Financial Accounting Standard No. 121, the Company determined that these assets
were impaired and wrote them down by approximately $9.7 million to their
estimated fair market value. Fair value was based on estimated net recoverable
salvage value of assets being held for disposal. Based upon net undiscounted
estimated cash flows to be generated by these assets, no impairment of assets
which will continue to be utilized was identified.
Prior to the Company's decision to exit from the modem chipset business
and the associated restructure of its non-networking operations, the Company
entered into noncancellable capital leases for equipment to be used by one of
the Company's outside foundries in exchange for guaranteed capacity and future
pricing considerations. Due to the Company's exit and restructure plan, the
Company estimates that it will not be able to fully utilize the contracted
capacity and pricing considerations. The Company's analysis of cash flows
expected from the reduced capacity utilization at this foundry, while incurring
the full contracted capital leases obligation, resulted in an impairment of
approximately $6.9 million of the Company's assets.
<PAGE>
The portion of the charge related to excess facility costs primarily
consists of amounts to be incurred by the Company under a seven year
noncancelable operating lease expiring in 2003. The Company plans to occupy a
portion of the building through June 1997. After June 1997, the Company expects
that the building will be vacant. The Company is actively trying to sublet the
building; however, it is expected that a sublessor may not be located for
approximately eighteen months. As a result, the charge consists of the unused
percentage of the lease obligations from September 1996 through June 1997 and
100% of the lease obligations for eighteen months thereafter, and associated
costs for operating and maintaining the facilities.
The Company's operations in Europe were closed as a result of the
decision to exit the modem chipset business. Costs related to the shutdown of
the European subsidiaries, including severance payments and excess facilities
costs, are included in the restructuring charge. Additionally, the restructuring
charge includes a write down of the remaining goodwill related to the Company's
Holland operation.
Cash expenditures associated with the restructuring accrued liabilities
were approximately $4.6 million in 1996. It is expected that approximately $5.7
million of cash expenditures related to the restructuring will occur during the
first half of 1997. Subsequent cash expenditures related primarily to leases
accrued in the restructuring will be approximately $11.1 million.
Reasons for Restructuring
- -------------------------
During 1995, the Company was experiencing increasing demand for its
modem chipset products, as shipment volumes were increasing and more customers
were requesting and ordering products for future deliveries. As a result, the
Company then increased the order rate and volume from its suppliers for
products. Also in 1995, the industry was experiencing a severe shortage of
foundry capacity to produce wafers for semiconductor devices. This caused
companies like Sierra to have to place order commitments with its foundry
suppliers with much longer lead times, and extending more than several months in
most cases.
In the first half of 1996, there was a combination of events which
changed the entire modem market environment. In a very short time period, the
demand for the modem speed technology changed from V.32 chips (14.4Kbps speed)
to V.34 chips (28.8Kbps), and the demand for slower speed modem products
declined quickly and dramatically. However, the longer lead times required by
the foundries for orders placed earlier in the year and in late 1995 resulted in
products being delivered and accumulating in the Company's inventories. As
foundry capacity, previously in limited supply, became more readily available,
customer preferences shifted to higher volume producers of V.34 and faster modem
products. This combination resulted in increased levels of the Company's
inventory for both lower speed and higher speed modem products, as the foundries
had more capacity to produce product and became aggressive in trying to build
and ship even more semiconductor products to Sierra and other modem chipset
companies.
<PAGE>
These factors combined to create excess inventory and a precipitous
decline in prices during the second and third quarters of 1996. The Company saw
this declining price and excessive inventory position as a major change in the
modem marketplace. Thus, in the third quarter of 1996, the Company made the
decision to exit the lower margin modem chipset market, and to invest future
resources in higher margin networking products.
Concurrent with the Company's decision to exit the modem chipset
business, the Company also decided to restructure its other non-networking
product operations in the graphics and custom areas, which no longer fit with
the Company's focus on networking products. The Company decided not to expend
funds for research and development on new products outside the networking area.
Impact of Restructuring
- -----------------------
The Company's decisions to exit from the modem chipset business and to
restructure its non-networking product operations are expected to result in a
decline of revenues derived from modem, graphic and custom integrated circuits.
In 1996, modem, graphic and custom integrated circuit revenues were $125.6
million, approximately 16% lower than revenues in 1995. In 1997, the Company
expects these revenues to decline significantly, although revenues in these
product areas may vary significantly from quarter to quarter as the Company
sells off its modem chipset inventory. Research and development, sales and
marketing and general and administrative expenses related to these
non-networking product operations in 1996 were $37.2 million, down from $40.7
million in 1995. The Company expects these expenses to decline significantly in
1997 due to reduced headcount and the elimination of new research and
development efforts in the non-networking business. Revenues from sales of modem
chipset products will continue to be reported until the Company disposes its
existing inventory, which the Company expects to occur during 1997.
Acquisition of Ethernet Switching Assets
- ----------------------------------------
Consistent with the Company's strategy to focus on the networking and
infrastructure semiconductor business, in the third quarter of 1996, a
subsidiary of the Company acquired the ethernet switching assets, intellectual
property and certain other assets from Bit, Incorporated, a privately held
company in Beaverton, Oregon. These assets were acquired in exchange for 804,407
shares of the Company's common stock and other consideration. The aggregate
value of this transaction was approximately $8,107,000, which includes
acquisition costs incurred by the Company. The acquisition was accounted for as
a purchase transaction, with a charge in the quarter of $7,783,000 for
in-process research and development. Approximately $324,000 of technology assets
were capitalized, and will be amortized over seven years.
Results of Operations
Net Revenues
- ------------
1996 Change 1995 Change 1994
---- ------ ---- ------ ----
Net revenues ($000,000)
Networking products $62.8 60% $39.2 390% $8.0
User interface - other $66.6 (28%) $92.8 10% $84.1
User interface - modem $59.0 4% $56.7 365% $12.7
----- ----- ----- ----- -----
Total net revenues $188.4 --- $188.7 80% $104.8
<PAGE>
Net revenues in 1996 remained approximately at the same level as 1995
revenues. Substantial growth in sales of networking products, and a small
increase in modem chipset product sales, were offset by declines in other user
interface product sales, which were primarily due to lower sales of graphic chip
products. The small increase in 1996 modem chipset sales increase over 1995
resulted from increased unit sales of both V.34 and V.32 modem products in the
first half of the year, while in the second half of the year the Company
experienced declining unit sales and substantially lower prices for modem
products. The change in net revenues in 1995 from 1994 was primarily
attributable to increased sales of networking and modem products. Sales of modem
products are expected to decline during the first two quarters of 1997 and to be
minimal in the second half of 1997. The Company anticipates a decline in average
selling prices for these discontinued products and cannot predict the level of
unit sales. As a result, revenues for 1997 are expected to be lower than
revenues in 1996.
<TABLE>
<CAPTION>
Gross Profit
- ------------
1996 Change 1995 Change 1994
---- ------ ---- ------ ----
Gross profit ($000,000)
<S> <C> <C> <C> <C> <C>
Networking products $46.4 58% $29.3 432% $5.5
Percentage of net networking revenues 74% 75% 69%
User interface products $47.0 (25%) $62.3 50% $41.5
Percentage of net user interface revenues 37% 42% 43%
User interface products excluding valuation
reserve for modem chipset inventory $51.7 (17%) $62.3 50% $41.5
Percentage of net user interface revenues 41% 42% 43%
Total gross profit $93.4 2% $91.6 95% $47.0
Percentage of net revenues 50% 49% 45%
Total gross profit excluding valuation
reserve for modem chipset inventory $98.1 7% $91.6 95% $47.0
Percentage of net revenues 52% 49% 45%
</TABLE>
Total gross profit increased from 1995 to 1996 as a result of increased
sales of higher gross margin networking products as a percentage of total net
revenues. Gross profit as a percentage of net revenues also increased due to the
increased proportion of sales of higher gross margin networking products. The
gross profit increase from 1994 to 1995 was primarily due to increased sales in
all product lines. Gross profit as a percentage of net revenues increased from
1994 to 1995 as a result of increased sales of higher margin networking
products. In the near term, as the Company continues to sell its existing
inventories of modem chipset products, the overall gross margin of the Company
may decline depending on the percentage of modem chipset product revenues
relative to total revenues. Overall gross margin may also be impacted
unfavorably due to anticipated erosion of modem pricing as the Company
liquidates its existing inventories. 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.
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses and Charges ($000,000)
- -----------------------------------------
1996 Change 1995 Change 1994
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Research and development $29.4 26% $23.4 49% $15.7
Percentage of net revenues 16% 12% 15%
In-process research & development $7.8 --- --- --- $12.7
Percentage of net revenues 4% --- 12%
Marketing, general & administrative $30.7 2% $30.1 27% $23.7
Percentage of net revenues 16% 16% 23%
Purchase price adjustment-compensation --- --- $10.6 --- ---
Percentage of net revenues 6% ---
Restructure costs $64.7 --- --- --- $(1.6)
Percentage of net revenues 34% --- (1%)
</TABLE>
Research and Development. Research and development expenses increased
in 1996 primarily due to greater research and development efforts for networking
products. As a percentage of net revenues, research and development expenses
increased as the rate of spending growth exceeded the rate of net revenues
growth. During 1995 research and development expenses increased from 1994
primarily due to increased investment in networking products. As a percentage of
net revenues, research and development expenses declined in 1995 from 1994 as
the rate of growth of sales exceeded the rate of growth of research and
development spending. In the near term, the Company expects research and
development spending to decline in absolute dollars, due to the reduction in
user interface research and development as associated headcount is reduced due
to the restructuring, offset partially by increases in research and development
spending on networking products.
In-Process Research and Development. In-process research and
development charges incurred in 1996 are a result of the acquisition of the
ethernet switching and other assets from Bit, Inc. The in-process research and
development charge in 1994 relates to the acquisition of PMC (see Note 2 to
Consolidated Financial Statements).
Marketing, General, and Administrative. In 1996, marketing, general,
and administrative expenses remained at the same levels as 1995 as increases in
these expenses in networking products primarily related to increased staffing
were offset by declines in these expenses and headcount of user interface groups
due to the restructuring. As a percentage of net revenues, total marketing,
general and administrative expenses remained at approximately the same level.
<PAGE>
The increase in marketing, general and administrative expenses in 1995 relative
to 1994 was primarily due to support of networking products. As a percentage of
net revenues, marketing, general and administrative expenses declined from 1994
to 1995, as the rate of increase in spending was less than the rate of revenue
growth. In the near term, the Company expects marketing, general and
administrative spending to decline in absolute dollars, due to reduced personnel
performing these functions for user interface products, although the Company
does not expect to increase spending in these areas to support networking
products.
PMC Purchase Price Adjustment. In completing the PMC acquisition in the
third quarter of 1995, the Company recorded a $10.6 million charge relating to
the compensation expense associated with the purchase price adjustment shares
reserved for issuance to the employees/shareholders of PMC. The $9.1 million
balance of the acquisition cost was allocated to goodwill. See Note 2 to
Consolidated Financial Statements.
Restructuring. 1996 restructure costs are part of the charge of $69.4
million recorded in connection with the Company's decision to exit from the
modem chipset business and the associated restructuring of the Company's
non-networking product operations. The 1994 restructure credit reflects the
reversal of the remainder of a restructure charge deemed no longer necessary
from the 1993 restructuring of the Company's operations in Holland and the U.S.
Interest Income (Expense), Net ($000,000)
1996 Change 1995 Change 1994
---- ------ ---- ------ ----
Interest income (expense), net $0.7 37% $0.5 227% $(0.4)
Percentage of net revenues 0.4% 0.3%
Interest Income. Interest income increased in 1996 and 1995 due to
higher cash balances available to invest and earn interest. Interest expense in
1996 increased from 1995 due to short term borrowing. Interest expense currently
relates primarily to the Company's financing arrangements for leases, and
financing of previously established foundry commitments. Interest expense in
1995 declined from 1994 as 1994 interest expense related primarily to interest
expense on notes issued in 1987 and repaid in 1994. The 1994 interest expense
was offset partially by interest earned on the Company's cash balances (see Note
1 of Notes to Consolidated Financial Statements).
Gain on sale of SiTel Sierra. During the fourth quarter of 1995, the
Company sold its interest in SiTel-Sierra, B.V. to National Semiconductor
Corporation for $7.0 million in cash. This transaction resulted in a pre-tax
gain of $6.7 million. The Company acquired its shares of SiTel-Sierra, B.V., a
joint venture with TriTech Microelectronics Pte. Ltd. of Singapore, in 1994 in
exchange for the contribution of a license to certain technology owned by the
Company and certain assets of Sierra Semiconductor B.V.
Provision for Income Taxes. The 1996 income tax provision reflects the
effect of a nondeductible $7.8 million charge for the purchase of in-process
research and development relating to the Bit, Inc. acquisition and taxes on
foreign operations. The U.S. taxes are reduced by the utilization of net
operating loss and tax credit carryforwards. The recorded modem chipset business
restructure charge of $69.4 million did not result in a tax benefit because of
the uncertainty of future U.S. income as required by Statement of Financial
Accounting Standards No. 109. The 1995 income tax provision reflects the effect
of a nondeductible $10.6 million charge for the PMC purchase price adjustment.
The 1994 income tax provision reflects the effect of a nondeductible $12.7
million charge for purchase of in-process research and development and taxes on
foreign operations.
<PAGE>
Discontinued Operations. During the fourth quarter of 1995, the Company
and its Board of Directors reached a decision to offer Prometheus Products, Inc.
for sale and, as a result, it has been reported as a discontinued operation in
the Company's consolidated financial statements. The Company recorded a $17.9
million discontinued operations charge to write down the assets and accrue
additional liabilities including a provision for future losses from operations
expected to be incurred during the sales process. The Company contracted with an
investment banking firm in the first quarter of 1996 to engage in efforts to
sell Prometheus. The effort to sell Prometheus has not resulted in a sale and
the Company has subsequently completed the closure of most operations of
Prometheus, except for the hardware and software technical support function
which provides product warranty support for the installed base of products
previously sold. All liabilities and operating results of Prometheus for 1996
have been recorded against the discontinued operations provision established in
the fourth quarter of 1995.
Liquidity and Capital Resources. The Company's cash and cash
equivalents and short term investments decreased from $45.9 million at December
31, 1995 to $42.1 million at December 31, 1996. During 1996 the Company made
payments of approximately $19.6 million to reduce debt and for capital lease
obligations (primarily related to foundry agreements for future production
capacity), $4.0 million for the purchase of fixed assets, and $3.2 million for
equity investments in other companies. These uses of cash were partially offset
by cash sources of approximately $19.6 million from operating activities and
$3.1 million from the issuance of common stock (principally under the Company's
stock option and purchase plans). The uses of cash for operating activities were
a net loss of $48.2 million, an increase in inventory purchased of $17.4
million, a reduction in accounts payable of $15.1 million, an increase in
deposits for wafer capacity of $9.0 million, $4.6 million net change in
restructure liabilities (third quarter 1996 restructure), and a $2.5 million
change in net liabilities of discontinued operations (Prometheus). The primary
offsetting sources of cash from operating activities were a non cash restructure
charge of $69.4 million (for the Company's exit from the modem chipset business
and the associated restructuring of its non-networking operations), a decrease
of $20.0 million in accounts receivable balances, $10.9 million of non cash
depreciation expense, a non cash in-process research and development charge of
$7.8 million (for the acquisition of technology and other assets from Bit,
Inc.), and the receipt of proceeds of $7.0 million in the first quarter of 1996
from the sale of SiTel-Sierra B.V. in the fourth quarter of 1995.
As of December 31, 1996, the Company had available a line of credit
with a bank under which the Company may borrow up to $10 million with interest
at the bank's prime rate (6.9% at December 31, 1996). At December 31, 1996,
there were no amounts outstanding under the line of credit. At December 31,
1995, a $2.0 million standby letter of credit was outstanding under the line of
credit. In the fourth quarter of 1996, as a result of the restructure charge,
the Company's line of credit agreement with the bank was renegotiated to allow
the Company to borrow up to $10 million under the line of credit, provided that
each borrowing is fully cash secured. 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. The agreement expires on July
1, 1997. As of December 31, 1996 and 1995, the Company was in compliance with
all of its covenants.
<PAGE>
The Company believes that existing sources of liquidity and anticipated
funds from operations will satisfy the Company's projected working capital and
capital expenditure requirements through the end of 1997. The Company's future
capital requirements will depend on many factors, including, among others, the
extent to which the Company pursues additional wafer fabrication capacity from
existing foundry suppliers or new suppliers, product development, and
acquisitions of complimentary businesses, products or technologies. From time to
time the Company may explore strategic investment opportunities which may
require funds in excess of currently available sources of liquidity.
Accordingly, the Company may choose to raise needed funds from debt and/or
equity financings.
ITEM 8. Financial Statements and Supplementary Data.
The chart entitled "Quarterly Data (Unaudited)" contained in Item 6
Part II hereof is hereby incorporated by reference into this Item 8 of Part II
of this Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
SIERRA SEMICONDUCTOR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements Included in Item 8:
Page
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................................................ 28
Consolidated Balance Sheet at December 31, 1996 and 1995..................................................... 29
Consolidated Statement of Operations for each of the three years in the period 30
ended December 31, 1996..................................................................................
Consolidated Statement of Shareholders' Equity for each of the three years in 31
the period ended December 31, 1996.......................................................................
Consolidated Statement of Cash Flows for each of the three years in the period 32
ended December 31, 1996..................................................................................
Notes to Consolidated Financial Statements................................................................... 34
Schedules for each of the three years in the period ended December 31, 1996
included in Item 14 (d):
II Valuation and Qualifying Accounts........................................................................ S-1
</TABLE>
Schedules not listed bove have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the financial statements or the notes thereto.
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Sierra Semiconductor Corporation
We have audited the accompanying consolidated balance sheets of Sierra
Semiconductor Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sierra
Semiconductor Corporation at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
San Jose, California ERNST & YOUNG LLP
January 22, 1997
<PAGE>
<TABLE>
<CAPTION>
Sierra Semiconductor Corporation
Consolidated Balance Sheet
(in thousands)
December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $35,038 $41,933
Short-term investments 7,024 4,004
Accounts receivable, net of allowance for doubtful accounts of $842 and
$1,081 in 1996 and 1995, respectively (including $3,662
and $8,827 due from related parties in 1996 and 1995, respectively, see Note 9) 13,907 39,320
Inventories 9,232 14,843
Prepaid expenses and other current assets 3,104 9,813
----- -----
Total current assets 68,305 109,913
Property and equipment, net 16,678 22,704
Goodwill and other intangible assets, net of accumulated
amortization of $2,305 ($1,499 in 1995) 10,188 13,856
Investments and other assets 7,623 5,147
Deposits for wafer fabrication capacity 27,120 33,240
------ ------
$129,914 $184,860
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $9,648 $22,866
Accrued liabilities 9,546 8,494
Accrued income taxes 4,050 7,737
Accrued restructure costs 16,754 ---
Short-term debt and current portion of obligations under capital leases and 6,269 33,979
long term debt
Net current liabilities of discontinued operations 1,600 4,096
----- -----
Total current liabilities 47,867 77,172
Deferred income taxes 2,741 2,179
Noncurrent obligations under capital leases and long-term debt 18,368 8,979
Commitments and contingencies
Special shares of PMC convertible into Sierra common stock
1,937 shares in 1996 (2,573 shares in 1995) 12,494 15,530
Shareholders' equity:
Preferred stock, no par value; 5,000 shares authorized, none outstanding --- ---
Convertible preferred stock, no par value; 500 shares authorized,
none outstanding --- ---
Common stock, no par value; 50,000 shares authorized; 28,647
issued and outstanding in 1996 (26,603 in 1995) 135,320 119,758
Accumulated deficit (86,876) (38,726)
------ ------
48,444 81,032
Less shareholders' notes receivable --- (32)
------ ------
Total shareholders' equity 48,444 81,000
------ ------
$129,914 $184,860
======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Sierra Semiconductor Corporation
Consolidated Statement of Operations
(in thousands, except for per share amounts)
Three Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Net revenues(1) $188,371 $188,724 $104,764
Costs and expenses:
Cost of revenues 94,948 97,110 57,804
Research and development 29,350 23,428 15,702
In process research and development 7,783 --- 12,748
Marketing, general and administrative 30,691 30,051 23,683
Purchase price adjustment - compensation --- 10,624 ---
Restructuring and other charges 64,670 --- (1,559)
------- ------- -------
Income (loss) from operations (39,071) 27,511 (3,614)
Interest income (expense), net 679 497 (390)
Gain on sale of SiTel Sierra --- 6,700 ---
Class action lawsuit settlement --- --- (2,400)
------- ------- -------
Income (loss) before provision for income taxes (38,392) 34,708 (6,404)
Provision for income taxes 9,758 10,732 1,512
------- ------- -------
Net income (loss) from continuing operations (48,150) 23,976 (7,916)
Loss from discontinued operations --- (4,591) (666)
Loss on disposal of discontinued operations (including provision of
$1,200 for operating losses during the phase-out period) --- (17,906) ---
------- ------- -------
Loss from discontinued operations --- (22,497) (666)
------- ------- -------
Net income (loss) $(48,150) $1,479 $(8,582)
======== ======== ========
Income (loss) from continuing operations per share $(1.62) $ 0.84 $(0.36)
Loss from discontinued operations per share $ --- $(0.79) $(0.03)
------- ------- -------
Net income (loss) per share $(1.62) $ 0.05 $(0.39)
======== ======== ========
Shares used in calculation of net income (loss) per share 29,719 28,620 22,030
======== ======== ========
(1) Including $25,520, $46,074 and $20,622 from related parties in 1996, 1995 and 1994, respectively. See Note 9.
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Sierra Semiconductor Corporation
Consolidated Statement of Shareholders' Equity
(in thousands)
Convertible Shareholders' Total
Preferred Stock Common Stock Accumulated Notes Shareholders'
Shares Amount Shares Amount Deficit Receivable Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 94 $ 1,856 19,731 $70,102 $(31,606) $ (199) $40,153
Conversion of convertible preferred
stock into common shares (83) (1,638) 171 1,638
Issuance of common shares under
stock benefit plans 1,011 3,004 3,004
Amortization of common stock grant 153 153
Accretion of redeemable convertible
preferred stock 16 (16)
Payment of shareholders' notes
receivable 137 137
Net loss (8,582) (8,582)
------ ------ ------ ------ ------ ------ ------
Balances at December 31, 1994 11 234 20,913 74,897 (40,204) (62) 34,865
Conversion of convertible preferred
stock into common shares (11) (235) 25 235
Issuance of common shares under
stock benefit plans 793 3,520 3,520
Accretion of redeemable convertible
preferred stock 1 (1)
Sale of common shares, net of
issuance costs of $1,484 1,150 19,216 19,216
Conversion of special shares into
common shares 3,722 19,906 19,906
Tax benefit of stock option
transactions 1,984 1,984
Payment of shareholders' notes
receivable 30 30
Net income 1,479 1,479
------ ------ ------ ------ ------ ------ ------
Balances at December 31, 1995 26,603 119,758 (38,726) (32) 81,000
Issuance of common shares under
stock benefit plans 604 3,072 3,072
Issuance of common stock to
capitalize PMC-Portland and
acquire assets of Bit 804 6,788 6,788
Adjustment to prior year common
stock issuance costs 38 38
Conversion of special shares into
common shares 636 3,036 3,036
Tax benefit of stock option
transactions 2,628 2,628
Payment of shareholders' notes
receivable 32 32
Net loss (48,150) (48,150)
------ ------ ------ ------ ------ ------ ------
Balances at December 31, 1996 $ 28,647 $135,320 $(86,876) $ --- $48,444
======= ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Sierra Semiconductor Corporation
Consolidated Statement of Cash Flows
Increase (decrease) in cash and cash equivalents
(in thousands)
Three Years Ended December 31,
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $(48,150) $1,479 $(8,582)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,922 8,888 6,493
Acquisition of in process technology and development from purchase of net 7,783 --- ---
assets of Bit
Compensation expense from purchase price adjustment of PMC-Sierra --- 10,624 ---
acquisition
Loss on discontinued operations of Prometheus Products, Inc. --- 17,906 ---
Acquisition of in process technology and development from purchase of
PMC-Sierra --- --- 12,748
Loss related to restructure reserve:
Accounts receivable 5,047 --- ---
Inventory 23,000 --- ---
Prepaid expenses 1,061 --- ---
Impairment of long-lived assets 16,425 --- ---
Impairment of goodwill of Holland operations 2,459 --- ---
Accruals for restructure related costs:
Severance and related costs 6,985 --- ---
Purchase commitments and other accruals 9,002 --- ---
Excess facilities costs 3,411 --- ---
Costs for closure of European subsidiaries 1,980 --- ---
Changes in assets and liabilities
Accounts receivable 20,023 (16,855) (12,511)
Inventories (17,389) (3,772) (677)
Prepaid expenses and other (711) (11,390) 6,757
Accounts payable and accrued expenses (15,109) 17,801 1,300
Accrued restructuring costs (4,624) --- ---
Net assets/liabilities associated with discontinued operations (2,496) (4,733) (9,077)
------- ------- -------
Net cash provided by (used in) operating activities 19,619 19,948 (3,549)
Cash flows from investing activities:
Proceeds from sales/maturities of short-term investments 15,984 3,188 10,910
Purchases of short-term investments (19,004) (3,984) ---
Investments in other companies (3,162) (1,430) (2,500)
Decrease in investments and other --- 150 ---
Purchase of PMC-Sierra, net of cash acquired --- --- 4,673
Purchase of Bit assets, net of cash acquired 71 --- ---
Additions to plant and equipment (4,000) (10,909) (6,565)
------- ------- -------
Net cash provided by (used in) investing activities (10,111) (12,985) 6,518
Cash flows from financing activities:
Proceeds from issuance of long-term debt 353 2,592 6,657
Proceeds from issuance of common stock 3,110 22,737 3,157
Proceeds from payments of notes receivable 32 30 137
Principal payments under capital lease obligations (2,310) (1,217) (1,383)
Repayment of notes payable and long-term debt (17,588) (1,794) (10,417)
------- ------- -------
Net cash provided by (used in) financing activities (16,403) 22,348 (1,849)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (6,895) 29,311 1,120
Cash and cash equivalents, beginning of the period 41,933 12,622 11,502
------- ------- -------
Cash and cash equivalents, end of the period $35,038 $41,933 $12,622
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Years Ended December 31,
1996 1995 1994
---- ---- ----
Supplemental disclosures of cash flow information:
<S> <C> <C> <C>
Cash paid for interest $ 1,278 $ 926 $ 1,764
Cash paid for income taxes $ 11,820 $ 1,851 $ 89
Supplemental disclosures of noncash investing and financing activities:
Conversion of convertible preferred stock into common stock --- $ 235 $ 1,638
Capital lease obligations incurred for purchase of property and equipment $ 16,145 $ 4,069 $ 827
Issuance of PMC special shares to be exchanged for common shares --- $18,935 $16,500
Conversion of PMC special shares into common stock $ 3,035 $19,906 ---
Short term debt obligations incurred for wafer fabrication capacity deposits --- $30,240 ---
Cancellation of short-term debt obligations incurred for wafer fabrication $(15,120) --- ---
capacity
During the years ended December 31, 1996, 1995, and 1994, the Company retired
assets with an original cost of $10,377, $2,851 and $4,855, respectively and
related accumulated depreciation of $9,858, $2,839 and $4,757, respectively.
See accompanying notes.
<PAGE>
<FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies
Basis of presentation. The accompanying consolidated financial
statements include the accounts of Sierra Semiconductor Corporation ("the
Company" or "Sierra") and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated from the
consolidated financial statements. The Company's fiscal year ends on the Sunday
nearest December 31. For ease of presentation, December 31 has been utilized as
the fiscal year end for all financial statement captions. Fiscal years 1996,
1995 and 1994 each consisted of 52 weeks.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. Actual results
may differ from those estimates.
Cash equivalents and short-term investments. Cash equivalents consist
of highly liquid debt instruments with original maturities at date of
acquisition of 90 days or less that have insignificant interest rate risk.
Short-term investments consist of money market instruments with original
maturities greater than 90 days, but less than one year. The Company maintains
its cash and cash equivalents in several financial instruments with various
banks and investment banking institutions and maintains short-term investments
in several financial instruments. The diversification of risk is consistent with
Company policy to preserve the principal and maintain liquidity.
Under Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (FAS 115) management classifies
investments as available-for-sale or held-to-maturity at the time of purchase
and reevaluates such designation as of each balance sheet date. Debt securities
are classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost with corresponding premiums or discounts amortized over
the life of the investment to interest income. Marketable equity and debt
securities not classified as held-to-maturity are classified as
available-for-sale and reported at fair value. Unrealized gains or losses on
available-for-sale securities have not been included in equity as such amounts
are immaterial. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Investments at December 31, 1996 mature through February 1997 and are classified as and consist
of the following (in thousands):
Amortized Gross Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Held-to-maturity investments
Banker's Acceptances $ 1,711 $ --- $ --- $ 1,711
Commercial paper $21,470 $ 2 $ --- $21,472
Total Investments $23,181 $ 2 $ --- $23,183
======= ====== ====== =======
Total included in cash and cash equivalents $16,157 $ 1 $ --- $16,158
Total included in short-term investment 7,024 1 --- 7,025
------- ------ ------ -----
Total Investments $23,181 $ 2 $ --- $23,183
======= ====== ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investments at December 31, 1995 matured through February 1996, are classified as and consist of the
following (in thousands):
Amortized Gross Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Held-to-maturity investments
Commercial Paper $ 2,987 $ 1 $ --- $ 2,988
Available-for-sale investments
Auction rate preferreds 3,012 --- --- 3,012
------- ------ ------ -----
Total Investments $5,999 $ 1 $ --- $6,000
======= ====== ====== =======
Total included in cash and cash equivalents $1,995 $ --- $ --- $1,995
Total included in short-term investment 4,004 1 --- 4,005
------- ------ ------ -----
Total Investments $5,999 $ 1 $ --- $6,000
======= ====== ====== =======
</TABLE>
Proceeds from sales and realized gains or losses on sales of
available-for-sale securities for all years presented were immaterial.
Inventories. Inventories are stated at the lower of cost (first-in,
first out) or market (estimated net realizable value). The components of
inventories are as follows (in thousands):
December 31,
1996 1995
---- ----
Work-in progress $3,335 $6,604
Finished goods 5,897 8,239
------ -----
$ 9,232 $14,843
======= =======
Property and equipment, net. Depreciation and amortization of property
and equipment are provided on the straight-line method over the estimated useful
lives of the assets, ranging from two to five years, or the applicable lease
term, whichever is shorter. $16,425 of assets were written down in connection
with the third quarter 1996 restructuring (see Note 12). The components of
property and equipment are as follows (in thousands):
December 31,
1996 1995
---- ----
Machinery and equipment $39,854 $45,059
Leasehold improvements 1,117 2,702
Furniture and fixtures 1,890 1,614
------- -----
Total cost 42,861 49,375
Accumulated depreciation (26,183) (26,671)
------- -------
$16,678 $22,704
======= =======
<PAGE>
Intangible Assets. Goodwill associated with acquisitions is being
amortized on a straight-line basis over ten years and is carried at a net book
value of $7.9 million and $11.3 million at December 31, 1996 and 1995,
respectively. The 1996 net book value excludes the goodwill for the Company's
B.V. operations, which was written off in the third quarter restructuring.
Purchased technology is being amortized on a straight-line basis over seven
years. Among other considerations, to assess impairment, the Company
periodically calculates undiscounted future cash flows to determine that they
exceed the unamortized balance of the related intangible asset.
Deposits for wafer fabrication capacity. In 1995, the Company entered
into wafer fabrication supply agreements with various foundries. In connection
with these agreements, the Company made deposits of $3 million and $24 million
in 1995 and 1996 respectively. In 1996, certain of these agreements were
renegotiated such that no more deposits are required under one agreement and
approximately $15 million of notes payable and related deposits were offset (see
Note 5). Approximately $12 million is to be refunded in the year 2000.
Accrued liabilities. The components of accrued liabilities are as
follows (in thousands):
December 31,
1996 1995
---- ----
Accrued compensation and benefits $ 3,846 $ 2,343
Accrued royalties 1,628 1,649
Other accrued liabilities 4,072 4,502
------- -------
$ 9,546 $ 8,494
======= =======
Foreign currency translation. For all foreign operations, the U.S.
dollar is the functional currency. Assets and liabilities are remeasured at the
year-end exchange rates. Statements of operations are remeasured at the average
exchange rates during the year. Gains and losses from foreign currency
remeasurement are included in interest income and other, net.
The Company enters into foreign currency forward exchange contracts
(forward contracts) to reduce the impact of currency fluctuations on monetary
asset and liability positions of its foreign subsidiaries. Gains and losses
associated with currency rate changes on forward contracts are recorded
currently in income and were immaterial for all periods presented. At December
31, 1996 and 1995, the Company had no outstanding forward contracts.
Concentration of credit risk. The Company believes that the
concentration of credit risk in its trade receivables with respect to the
high-technology industry is substantially mitigated by the Company's credit
evaluation process, relatively short collection terms, and the geographical
dispersion of sales. The Company generally does not require collateral. Bad debt
write-offs have been insignificant for all years presented.
Revenue recognition. Revenue is recognized at the time of shipment to
the customer. Reserves are provided currently for estimated product returns and
price protection that may occur under Company programs. Such reserves were not
material at December 31, 1995 and 1994. In conjunction with the third quarter
1996 restructure reserve, the Company had accrued approximately $5 million as a
provision for price protection and product returns. At December 31, 1996, this
reserve was approximately $2 million.
Interest income (expense), net. The components of interest income and
interest expense, net are as follows (in thousands):
Year Ended
December 31,
1996 1995 1994
---- ---- ----
Interest income $1,840 $1,244 $825
Interest expense (1,278) (892) (1,249)
Other 117 145 34
------ ------ ------
$679 $497 $(390)
====== ====== ======
<PAGE>
Net income (loss) per share. Net income (loss) per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Accretion attributed to convertible
preferred stock is deducted from net income available to common shareholders.
Potentially dilutive common equivalent shares consist of warrants and stock
options (using the treasury stock method). Fully diluted earnings per share have
not been presented because the amounts would not be significantly different.
Income Taxes. Deferred income taxes are provided for temporary
differences between financial statement and income tax reporting.
Stock Compensation. Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," (SFAS No. 123) permits, but does not
require companies to recognize compensation expense for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant or modification over the amount an
employee must pay to acquire the stock. Note 7 to the Consolidated Financial
Statements contains a summary of the pro forma effects to reported net income
and earnings per share for 1996 and 1995, if the Company had elected to
recognize compensation expense based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123. The effects of applying SFAS No. 123
for providing pro forma disclosures are not likely to be representative of the
effects on reported net income for future years.
NOTE 2. Acquisitions, Divestitures and Investments in Other Companies
Bit, Inc.
- ---------
During the third quarter of 1996, a subsidiary of the Company acquired
the ethernet switching assets, intellectual property, and certain other assets
of Bit, Inc. in exchange for shares of Sierra common stock and other
consideration. The aggregate value of this transaction was approximately $8.1
million, which includes acquisition costs incurred by the Company. These assets
of Bit, Inc., were acquired in exchange for 804,407 shares of Sierra common
stock with a value of approximately $6.8 million (based on the market value of
Sierra common stock issued subject to restrictions on transfer), approximately
$0.5 million of net liabilities assumed by the Company's subsidiary, the value
of options to purchase common stock of the Company, forgiveness of principal and
interest from loans provided by a subsidiary of the Company, and cash. The
acquisition resulted in a $7.8 million charge for the purchase of in-process
research and development. The remaining $0.3 million of technology assets have
been capitalized as long term assets which will be amortized over seven years.
Results of operations include the costs of continuing the development of
products and related activities acquired from Bit, Inc. after the closure of the
acquisition on September 3, 1996. The proforma effect of combining the Bit, Inc.
transaction with the Company's operations in 1995 and prior to the acquisition
in 1996 are not reported separately because they are not considered to be
material.
I.C. Works, Inc.
- ----------------
During the first quarter of 1996, the Company acquired $3 million of
common stock of I.C. Works, Inc., a foundry located in San Jose, California. In
addition, the Company is obligated to provide semiconductor manufacturing
equipment to I.C. Works, Inc., which the Company has provided under capital
leases (see Note 5), in consideration for guaranteed wafer capacity at
discounted prices.
<PAGE>
SiTel Sierra B.V.
- -----------------
During the fourth quarter of 1995, the Company sold its interest in
SiTel-Sierra B.V. to National Semiconductor Corporation. Proceeds from the sale
of this investment of $7 million in cash were received during the first quarter
of 1996. This transaction resulted in a pre-tax gain of $6.7 million.
Sierra Wireless, Inc.
- ---------------------
On July 7, 1993, the Company and MPR Teltech Ltd. (MPR) of British
Columbia, Canada announced an investment in a new company called Sierra Wireless
Inc. (Sierra Wireless). MPR contributed technology licenses in exchange for
Sierra Wireless's non-voting preferred stock. The Company invested approximately
$2.5 million of cash in exchange for shares of Sierra Wireless's non-voting
preferred stock. This initial investment was expensed in 1993 as Sierra Wireless
was still in its development stage. In 1996, 1995, and 1994, the Company
invested an additional approximately $0.2, $1.4, and $2.5 million, respectively,
in Sierra Wireless. These investments were capitalized and are being accounted
for as an equity investment on the cost basis, since Sierra Wireless is now an
operating company. Sierra Wireless has developed and is marketing portable
computer modems and modem sub-systems built to Cellular Digital Packet Data
(CDPD) performance specifications.
Prometheus Products, Inc.
- -------------------------
On October 2, 1994, the Company acquired Prometheus Products Inc.
(Prometheus), a distributor of software and hardware products for personal
computers headquartered in Tualatin, Oregon, in exchange for the elimination of
accounts receivable owed by Prometheus to the Company, a guaranteed cash payment
to the shareholders of Prometheus and future cash payments contingent upon
future sales and profits for Prometheus. The acquisition was accounted for as a
purchase. In December 1995, the Company decided to sell or dispose of Prometheus
(See Note 3).
PMC-Sierra
- ----------
On September 2, 1994, the Company acquired voting control of
PMC-Sierra, Inc. ("PMC") of Burnaby, British Columbia, Canada. PMC supplies
broadband transmission and networking chip set products for ATM, SONET/SDH,
T1/E1 and fast Ethernet applications. PMC was established in July 1992 by the
Company, which invested approximately $4.9 million of cash in exchange for PMC's
non-voting preferred stock representing approximately 61% of PMC's securities on
a fully diluted basis; MPR Teltech Ltd., a Canadian corporation which
contributed assets and technology licenses in exchange for non-voting preferred
stock; a venture capital investor, which purchased non-voting preferred stock
for cash; and PMC's employees, who purchased voting common stock.
The Company acquired voting control of PMC through a recapitalization
of PMC. In the recapitalization, the Company exchanged its PMC non-voting
preferred stock for PMC's voting Ordinary Shares, and PMC's other shareholders
exchanged their preferred stock and common stock for PMC Special Shares. Each
PMC A Special Share is currently redeemable at the holder's option for two
shares of the Company's Common Stock. The Company reserved 5,000,000 shares of
its Common Stock for issuance in connection with requests to redeem PMC Special
Shares then outstanding or issuable upon exercise.
The acquisition of voting control through PMC's recapitalization was
accounted for as a purchase of the interests of the other shareholders in PMC.
The total purchase price, based on the value of the 5,000,000 shares of the
Company's Common Stock reserved for issuance, was approximately $17.8 million.
The Company recorded a $12.7 million charge during the third quarter of 1994
related to the value of in-process research and development acquired in the
transaction. Additional purchased technology with a value of $3.2 million is
being amortized over seven years.
<PAGE>
Under the terms of the recapitalization agreement, in the third quarter
of 1995 the Company adjusted the 1994 purchase price paid to the other PMC
shareholders. Accordingly, the minority shareholders received additional
consideration through the right to acquire an additional 1,294,722 shares of
Common Stock in exchange for PMC B Special Shares. The issuance of these shares
is reflected in the Company's accompanying financial statements as a special
charge to income of $10.6 million relating to compensation expense in 1995 and
an increase in goodwill of $9.1 million.
The Special Shares of PMC will be classified outside of shareholders'
equity until such shares are exchanged for Sierra Common Stock.
Before the recapitalization, the Company held only non-voting preferred
stock in PMC, and accordingly PMC's assets, liabilities and operating results
were not included in those of the Company. From the date of the
recapitalization, PMC's balance sheet and operating results have been
consolidated in the Company's financial statements.
The pro-forma operating results for 1994 with the inclusion of PMC,
would have been net revenue of $118,131, net loss of $(6,798), and a net loss
per share of $(0.27).
In conjunction with the acquisition of PMC, liabilities were assumed as
follows:
Fair value of assets acquired $33,048
Consideration paid:
Value of shares issued $16,500
Acquisition costs 1,300 (17,800)
-----
In process technology expensed (12,748)
--------
Liabilities assumed $2,500
NOTE 3. Discontinued Operations
On December 28, 1995, the Company's Board of Directors approved a plan
to sell or discontinue the operations of Prometheus Products, Inc.
("Prometheus"). The Company purchased Prometheus in the third quarter of 1994,
and has operated it as a separate business unit. Accordingly, Prometheus has
been treated as a discontinued operation and the Company's results of continuing
operations have been reclassified to remove Prometheus' previously reported
results. Revenues of Prometheus were $19,018,000 and $3,798,000 in 1995 and
1994, respectively. The loss from discontinued operations for the year ended
December 31, 1995 is net of an income tax benefit of $742,000. The components of
net current liabilities (in 000's) of discontinued operations at December 31,
1995 and 1996 are detailed in the table below.
1996 1995
-------- --------
Cash $ 150
Accounts receivable 3,000
Inventory 1,000
Property and equipment - net 150
Accounts payable (2,387)
Accrued liabilities $ (753) (4,844)
Guaranteed royalties (847) (1,165)
------- -------
Net current liabilities of discontinued operations $(1,600) $(4,096)
======== ========
<PAGE>
The Company contracted with an investment banking firm in the first
quarter of 1996 to engage in efforts to sell Prometheus. The effort to sell
Prometheus has not resulted in a sale and the Company has subsequently completed
the closure of most operations of Prometheus, except for the hardware and
software technical support function which provides product warranty support for
the installed base of products previously sold. All liabilities and operating
results of Prometheus for 1996 have been recorded against the discontinued
operations provision established in the fourth quarter of 1995.
NOTE 4. Line of Credit
At December 31, 1996, the Company had available a line of credit with a
bank under which the Company may borrow up to $10 million with interest at the
bank's prime rate (6.9% at December 31, 1996). At December 31, 1996, there were
no amounts outstanding under the line of credit. At December 31, 1995, a $2.0
million standby letter of credit was outstanding under the line of credit. In
the fourth quarter of 1996, as a result of the restructure charge, the Company's
line of credit agreement with the bank was renegotiated to allow the Company to
borrow up to $10 million under the line of credit, provided that each borrowing
is fully cash secured. 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. The agreement expires on July 1, 1997. As
of December 31, 1996 and 1995, the Company was in compliance with all of its
covenants.
NOTE 5. Short-Term Debt and Obligations Under Capital Leases and Long Term Debt
The Company leases furniture and equipment under long-term capital
leases which have been accounted for as installment purchases. Accordingly,
capitalized costs of approximately $22,737,000 and $7,104,000, respectively, at
December 31, 1996 and 1995 and accumulated amortization of approximately
$4,710,000 and $2,242,000, respectively, are included in property and equipment.
Future minimum lease payments at December 31, 1996 under capital leases are as
follows (in thousands):
Year ended December 31 :
1997 $5,531
1998 5,443
1999 5,097
2000 4,281
2001 3,469
------
Total minimum lease payments 23,821
Less amount representing interest 4,474
-----
Present value of net minimum lease payments $19,347
=======
In 1996 the Company entered into two master capital leases, whereby the
Company is obligated to lease approximately $10 million of semiconductor
manufacturing equipment for one of its foundries. These leases have three year
terms, with two consecutive one year renewal options. The amounts in the table
above include commitments under these new leases. In conjunction with the
restructuring in 1996, the Company wrote off $6.9 million related to its
commitment to provide such equipment (see Note 11).
<PAGE>
Short-term debt and long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Unsecured non-interest bearing promissory notes, payable in two equal installments, on
March 31, 1996 and October 31, 1996 --- $30,240
Secured equipment loans, payable in 48 monthly installments commencing
on September 12, 1994, interest ranging from 7.71% to 9.23% 3,567 5,000
Various unsecured notes, payable in various installments with interest
rates ranging from 0% to 9% 1,004 724
Bank term debt, payable in 37 monthly installments commencing on
December 1, 1994, interest rate at prime + 1.75% (10.25% at
December 31, 1995 and 10% at December 31, 1996) 719 1,504
----- -----
5,290 37,468
Less current portion (2,279) (32,521)
------- -------
$3,011 $4,947
======= =======
</TABLE>
Maturities of long-term debt are as follows (in thousands):
Fiscal year ended
1997 $ 2,279
1998 1,405
1999 971
2000 106
2001 106
Thereafter 423
-------
$ 5,290
=======
Fair value of financial instruments. The estimated fair value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange.
The fair value of the unsecured promissory notes was approximately
$26,707,000 at December 31, 1995 versus a carrying value of $30,240,000. The
aggregate fair value of the Company's other long-term debt at December 31, 1996
and 1995 approximates its carrying value.
<PAGE>
NOTE 6. Commitments and Contingencies
Operating leases. The Company leases its facilities under operating
lease agreements which expire at various dates through April 2006. Total rent
expense for the years ended December 31, 1996, 1995, and 1994 was $2.1 million,
$2.3 million, and $2.5 million, respectively. Minimum rental commitments under
these leases are as follows:
(In thousands)
Year ended December 31:
1997 $ 2,148
1998 2,154
1999 2,052
2000 1,869
2001 1,887
Thereafter 6,451
-------
$16,561
=======
In June 1996, the Company entered into a 7-year lease for a facility
which it occupied in the fourth quarter of 1996. The table above includes all
commitments related to this lease (see further discussion regarding this lease
under excess facility costs in Note 11).
Supply agreements. The Company's supply agreement with Chartered
Semiconductor expires on November 17, 199, but certain provisions have been
superseded by a wafer capacity agreement which expires in December 2000 whereby
Chartered is obligated to supply the Company with a predetermined number of
wafers per quarter. TSMC is obligated to provide, and the Company is obligated
to purchase, certain quantities of wafers per year under an agreement with TSMC
which terminates on December 31, 2000.
Development and licensing agreement. In the 1996, the Company entered
into an agreement with an integrated circuit design and development firm, for
the design and development of certain semiconductor products. Under this
agreement, the Company is obligated to pay $0.25 million in license fees, and
$2.3 million of royalty payments. The license fees were paid and expensed by the
Company in 1996. The royalty payment obligation must be paid by the Company
within two years of the Company's acceptance and verification of the licensed
designs.
Contingencies. In the normal course of business, the Company receives
and makes inquiries with regard to possible patent infringement. Where deemed
advisable, the Company may seek or extend licenses or negotiate settlements.
Outcomes of such negotiations may not be determinable at any point in time;
however, management does not believe that such licenses or settlements will,
individually or in the aggregate, have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Risks and Uncertainties. Technological change - the markets for the
Company's products are characterized by evolving industry standards and rapid
technological change and product obsolescence. The carrying value of the
Company's products in inventory may be materially impaired in the future should
these changes occur more quickly than the Company anticipated. Wafer capacity
agreements - as discussed above, the Company has entered into various agreements
to secure future wafer capacity. Should the Company need more capacity or if
there is a decline in demand for the Company's products reducing the need for
this contracted capacity, estimates related to the carrying value of deposits or
prepayments or related to future commitments could materially change.
Restructure reserves - restructure reserves include management's' best estimate
of the liabilities and the estimated future costs associated with the exit from
the modem chipset business and the associated restructuring of the Company's
non-networking operations. The actual amounts which the Company will ultimately
incur could differ materially in the near term from the amounts assumed in
estimating the costs associated with the restructuring.
<PAGE>
NOTE 7. Shareholders' Equity
Convertible preferred stock The Company has authorized 5,000,000 shares
of undesignated preferred stock. The Company has also authorized 500,000 shares
of redeemable convertible preferred stock (the preferred stock). In February
1995, 11,488 shares of the preferred stock were converted and 24,766 shares of
Common Stock were issued.
Common Stock At December 31, 1996 and 1995, the Company had reserved
1,937,000 and 2,573,000 shares, respectively, of Common Stock to be issued to
holders of PMC special shares and options to purchase PMC special shares. The
holders of the special shares have the right to exchange one A special share for
two shares of Sierra Common Stock, and one B special share for 0.54612 share of
Sierra Common Stock. Upon exchange, amounts will be transferred from the PMC
special shares account to Sierra common stock on the consolidated balance sheet.
During 1996, the Company issued a warrant to purchase 25,000 shares of
common stock at $9.25 per share to an investment banking firm in settlement for
services previously expensed. The warrant expires in August 2000.
The Company has adopted a 1987 Incentive Stock Plan, a 1994 Incentive
Stock Plan and a 1996 Incentive Stock Plan (the "Plans"). Under the Plans
6,317,963 shares have been issued, 3,218,939 shares have been exercised and
1,528,549 shares remain available for future issuance to employees and
consultants. Options to purchase shares of the Company's common stock under the
Plan may be granted at not less than 85% of the fair value of the stock on the
date granted. The options generally expire after five to ten years and vest over
four years.
<PAGE>
<TABLE>
<CAPTION>
Changes during 1994, 1995, and 1996 in options outstanding for the
combined option plans were as follows:
Weighted Average
Options Available Exercise Price
For Issuance Shares Per Share
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 601,038 2,855,216 $4.02
Authorized 1,200,000
Granted (1,273,000) 1,273,000 $4.39
Exercised --- (891,098) $2.75
Expired --- ---
Canceled 722,814 (722,814) $4.84
------- ---------
Outstanding at December 31, 1994 1,250,852 2,154,304 $4.41
Authorized 1,600,000
Granted (1,094,800) 1,094,800 $14.16
Exercised --- (588,742) $4.56
Expired (809,038) --- $5.12
Canceled 305,211 (305,211) $6.21
------- ---------
Outstanding at December 31, 1995 1,252,225 2,715,151 $8.13
Authorized 1,250,000
Granted (1,403,574) 1,403,574 $14.11
Exercised --- (503,825) $4.74
Expired (85,980) --- $4.07
Canceled 515,878 (515,878) $12.73
------- ---------
Outstanding at December 31, 1996 1,528,549 3,099,022 $10.63
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes information concerning options
outstanding for the combined option plans at December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ---- ------ ----------- -------
<C> <C> <C> <C> <C> <C>
$ 0.00 - $ 0.00 20,000 9.75 $ 0.00 0 $ ---
$ 0.89 - $ 0.89 64,465 9.68 $ 0.89 42,437 $ 0.89
$ 3.50 - $ 4.75 812,885 6.91 $ 3.93 582,549 $ 3.93
$ 5.50 - $ 7.88 233,524 5.83 $ 5.72 226,585 $ 5.69
$ 8.63 - $ 12.88 854,755 9.04 $10.04 158,130 $ 8.88
$ 14.25 - $ 21.25 1,011,156 9.00 $17.07 220,329 $ 16.92
$ 22.25 - $ 26.06 102,237 8.83 $24.19 22,844 $ 25.13
- ----------------- --------- ---- ------ ---------- ------
$ 0.00 - $ 26.06 3,099,022 8.24 $10.63 1,252,874 $ 7.44
</TABLE>
For 1995, there were 1,037,181 options exercisable at the end of 1995,
with a weighted average exercise price of $5.4267. The expiration dates of the
remaining outstanding options range from November 30, 2001 to December 2, 2006.
As of December 31, 1996, the number of shares authorized and available
for grant is 1,528,549 shares, with a total of 4,627,571 shares authorized but
unissued.
Employee Stock Purchase Plan In 1991, the Company adopted an Employee
Stock Purchase Plan (ESPP) under Section 423 of the Internal Revenue Code and
reserved 1,060,000 shares of common stock for issuance under the Plan. Under
this Plan, qualified employees are entitled to purchase shares at 85% of the
lower of fair market value at the beginning or end of the related subscription
period. There were 79,863 shares issued under the Plan during 1996 and 164,126
shares issued under the Plan during 1995. As of December 31, 1996, the number of
shares available for issuance under the purchase plan was 250,203 shares of
common stock.
Stock-based compensation In accordance with the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," ("FASB 123") the Company applies
APB Opinion 25 and related interpretations in accounting for its stock-based
awards and, accordingly, does not generally recognize compensation expense.
Pro forma information regarding net income (loss) and net income (loss)
per share is required by FASB 123 for awards granted or modified after December
31, 1994 as if the Company had accounted for its stock-based awards to employees
under the fair value method of FASB 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
<PAGE>
Options ESPP
-------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
Expected life (years) 2.2 2.5 0.5 0.5
Expected volatility 0.8 0.6 0.8 0.6
Risk-free interest rate 5.7% 6.5% 5.3% 5.9%
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period (for
options) and the six-month purchase period (for stock purchases under the ESPP).
If the Company had elected to recognize compensation expense based on the fair
value of the options granted at grant date as prescribed by SFAS no. 123, net
income (loss) and net income (loss) per share would have been reduced to the pro
forma amounts indicated in the table below.
(in thousands except per share amounts):
1996 1995
- --------------------------------------------------------------------------------
Net income (loss) As reported $(48,150) $ 1,479
Pro forma $(54,006) $ 89
Net income (loss) per share As reported $ (1.62) $ 0.05
Pro forma $ (1.82) $ 0.00
Because FASB 123 is applicable only to awards granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1999. The weighted-average fair value of options granted during
1996 and 1995 were $6.94 and $5.99 per share, respectively.
The weighted-average fair value of employee stock purchase rights
exercised during 1996 was $3.78 per share. Options to purchase a total of
1,318,500 shares of common stock were granted during 1996 with exercise prices
equal to the market price of the stock on the grant date. The weighted-average
exercise price and weighted-average fair value of these options were $14.98 and
$6.69, respectively. Options to purchase a total of 85,074 shares of common
stock were granted during 1996 with exercise prices less than market value of
the stock on the grant date. The weighted-average exercise price and
weighted-average fair value of these options were $0.68 and $10.77,
respectively.
<PAGE>
NOTE 8. Income Taxes
The income tax provisions, calculated under Statement of Financial
Accounting Standards No. 109 (FAS 109) consist of the following:
Three Years Ended December 31,
(In thousands)
1996 1995 1994
---- ---- ----
Current:
Federal $2,109 $3,167 $ ---
State 42 315 100
Foreign 8,844 5,621 1,018
----- ----- -----
Total Current 10,995 9,103 1,118
Deferred:
Federal (1,799) --- ---
Foreign 562 887 394
----- ----- -----
Total Deferred (1,237) 887 394
Provision for income taxes 9,758 9,990 1,512
Benefit allocated to loss from
discontinued operations --- 742 ---
----- ----- -----
Provision attributable to continuing
operations $9,758 $10,732 $1,512
======= ======= =======
Actual 1996 and 1995 current tax liabilities have been decreased by
$2,628,000 and $1,984,000, respectively, due to employee stock option related
tax benefits which were credited to common stock.
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate (35% in 1996 and 1995, and 34% in 1994) follows:
(In thousands) 1996 1995 1994
---- ---- ----
Tax at U.S. Federal statutory rate $(14,522) $12,148 $(2,404)
Net operating losses (utilized) not utilized 11,257 (7,079) (611)
In-process R&D costs relating to BIT, Inc.
acquisition 2,724 --- ---
Nondeductible charges arising from
acquisition of PMC --- 3,710 4,334
Incremental taxes on foreign earnings 9,406 1,988 ---
Other 893 (35) 193
------ ------ -------
Provision for income taxes $9,758 $10,732 $1,512
======= ======= =======
Pretax income (loss) from foreign operations was $23,044,000 in 1996,
$14,298,000 in 1995 and $(6,700,000) in 1994.
As of December 31, 1996, the Company has federal foreign tax credits of
$1,200,000 that expire in 1999 and 2000, if not utilized. The Company has
$6,902,000 of federal net operating losses acquired from Bit, Inc. which will
expire in 2011. Utilization of these net operating losses is subject to
substantial limitation due to ownership change limitations provided by the
Internal Revenue Code of 1986. The Company has state research and investment
credit carryforwards of $2,025,000 that expire beginning in 2002.
<PAGE>
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 are as follows:
(In thousands)
1996 1995
---- ----
Deferred tax assets:
Operating loss carryforwards $2,416 $175
Credit carryforwards 2,436 4,115
Inventory valuation 4,638 4,637
Restructuring and other charges 27,662 2,954
------ -----
Total deferred tax assets 37,152 11,881
Valuation allowance (35,353) (8,929)
-------- -------
Total net deferred tax assets $1,799 $2,952
------- ------
Deferred tax liabilities:
Depreciation $(2,143) $(2,176)
Capitalized technology (598) (726)
Deferred income --- (2,229)
------- -------
Total deferred tax liabilities (2,741) (5,131)
-------- -------
Total net deferred taxes $(942) $(2,179)
====== ========
During 1996, the valuation allowance increased by approximately
$26,424,000. During 1995, the valuation allowance decreased by approximately
$5,800,000. During 1994, the valuation allowance increased by $93,000.
<PAGE>
NOTE 9. Related Parties
The Company sold $18,936,000, $46,074,000 and $20,622,000 of products
in 1996, 1995 and 1994, respectively, to Apple Computer with whom a director of
the Company was affiliated. Outstanding amounts receivable from Apple Computer
were $1,733,000 and $8,827,000 at December 31, 1996 and 1995, respectively.
During the second quarter of 1996, an officer of Cisco Systems, Inc. ("Cisco")
joined the Company's Board. In 1996, the Company sold $6,584,000 of products to
Cisco. Outstanding accounts receivable from Cisco were $1,929,000 at December
31, 1996.
NOTE 10. Segment Information
The Company operates in one industry segment, which is the development,
production and sale of high performance integrated circuit system solutions for
the communications markets and the global information network.
In 1996, 1995, and 1994 sales to Apple Computer represented 10%, 24%,
and 20% of net revenues, respectively.
Export sales consist of direct sales and sales by the Company's sales
subsidiaries. U.S. export revenue from shipments to Europe represented
$23,684,000, $23,877,000, and $22,364,000 in 1996, 1995, and 1994, respectively,
while U.S. export revenue from shipments to the Far East were $59,337,000,
$38,533,000, and $13,500,000 of net revenues, respectively, during these
periods.
Geographic financial information is as follows:
1996 1995 1994
---- ---- ----
Net sales to unaffiliated customers:
United States $125,493 $149,326 $96,484
Canada 62,878 39,398 8,280
------ ------ ------
Total net sales $188,371 $188,724 $104,764
========= ========= ========
Operating income (loss):
United States $(63,976) $10,382 $(6,319)
Canada 24,905 17,129 2,705
------ ------ ------
Total operating income/(loss) $(39,071) $27,511 $(3,614)
========= ========= ========
Identifiable assets:
United States $53,989 $129,747
Canada 57,510 37,612
Other 18,415 17,501
------ ------
Total assets $129,914 $184,860
========= =========
<PAGE>
NOTE 11. Restructuring
On September 29, 1996, the Company recorded charges of $69,370,000 in
connection with the Company's decision to exit from the modem chipset business
and the associated restructuring of the Company's non-networking product
operations. The charges were recorded in cost of sales as an inventory write
down ($4,700,000) and as restructure costs in operating expenses ($64,670,000).
The elements of the total charge as of September 29, 1996 and December 31, 1996
are as follows:
<TABLE>
<CAPTION>
Restructuring Restructuring
Charge Reserve
September 29, Write-Down Cash December 31,
1996 of Assets Outlay 1996
(In Millions) ---- --------- -------- ----
<S> <C> <C> <C> <C>
Write down of inventories to net realizable value $23,000 $(23,000) $ --- $ ---
Employee termination benefits 6,985 --- (2,411) 4,574
Loss on supplier commitments and write off
of prepaid expenses 9,908 (905) (409) 8,594
Write down of excess fixed assets and assets
related to capacity commitments 16,580 (16,580) --- ---
Provision for price protection and product returns 5,047 (5,047) --- ---
Excess facility costs 3,411 --- (408) 3,003
Write down of goodwill related to Company's BV
subsidiary in Holland 2,459 (2,459) --- ---
Severance and closure costs related to Europe 1,980 --- (1,397) 583
------- ------ ------- -------
$69,370 $(47,991) $(4,625) $16,754
======== ======== ======== ========
</TABLE>
The Company ceased manufacturing its modem chipset products in
September 1996 and expects to complete the shut down of the remaining
non-networking operations in San Jose by the middle of 1997. No sale was
anticipated in accounting for the restructuring. The Company will continue to
manufacture certain of its multimedia products in order to utilize components
either on-hand or under firm committed orders. As the non-networking operations
wind down, related work forces have been and will continue to be reduced.
Termination benefits for approximately 245 employees associated with the
Company's non-networking operations have been and will be paid as employees
reach their termination dates, between November 1996 and July 1997. As of
December 31, 1996, 118 employees employed as of the date of the restructuring in
the Company's non-networking operations had reached their termination dates and
have left the Company as planned in the restructuring. 127 employees employed as
of the date of the restructuring in the Company's non-networking operations will
reach their termination dates per the restructure plan during 1997.
As a result of its exit from the modem chipset business, the Company
identified incremental impairments in the carrying value of its non-networking
inventory and losses on supplier commitments arising directly from the decision
to stop manufacturing modem chipset inventory. Additionally, the Company
identified certain prepaid expenses and other commitments that, due to the exit
from the modem chipset and other non-networking operations, will provide no
future economic benefit to the Company.
In conjunction with the decision to exit the modem chipset business,
the Company is subject to incremental pricing pressure and potential returns of
modem chipset products. An estimate of the potential impact of price protection
and product returns has been included in the restructuring charge.
<PAGE>
In connection with its decision to discontinue non-networking
operations, the Company evaluated the ongoing value of the fixed assets
associated with these operations. Based on this evaluation, the Company
identified approximately $2.1 million of non-networking property and equipment
that will continue to be utilized in the Company's networking operations. The
remaining non-networking property and equipment, with a carrying amount of
approximately $11.6 million, consists primarily of testers, engineering
workstations, and computer equipment. A small portion of these assets will be
utilized only during the wind down of the non-networking operations through the
middle of 1997. The majority of these assets will not be utilized and the
Company is attempting to dispose of such assets. As a result, in accordance with
Financial Accounting Standard No. 121, the Company determined that these assets
were impaired and wrote them down by approximately $9.7 million to their
estimated fair value. Fair value was based on estimated net recoverable salvage
value of assets held for disposal. Based upon net undiscounted estimated cash
flows to be generated by these assets no impairment of assets which will
continue to be utilized was identified.
Prior to the Company's decision to exit from the modem chipset business
and the associated restructure of its non-networking operations, the Company
entered into noncancellable capital leases for equipment to be used by one of
the Company's outside foundries in exchange for guaranteed capacity and future
pricing considerations. Due to the Company's exit and restructure plan, the
Company estimates that it will not be able to fully utilize the contracted
capacity and pricing considerations. The Company's analysis of cash flows
expected from the reduced capacity utilization at this foundry while incurring
the full contracted capital leases obligation, resulted in an impairment of
approximately $6.9 million of the Company's assets.
The portion of the charge related to excess facility costs primarily
consists of amounts to be incurred by the Company under a seven year
noncancelable operating lease expiring in 2003. The Company plans to occupy a
portion of the building through June 1997. After June 1997, the Company expects
that the building will be vacant. The Company is actively trying to sublet the
building; however, it is expected that a sublessor may not be located for
approximately eighteen months. As a result, the charge consists of the unused
percentage of the lease obligations from September 1996 through June 1997 and
100% of the lease obligations for eighteen months thereafter, and associated
costs for operating and maintaining the facilities.
The Company's operations in Europe were closed as a result of the
decision to exit the modem chipset business. Costs related to the shutdown of
the European subsidiaries, including severance payments and excess facilities
costs, are included in the restructuring charge. Additionally, the restructuring
charge includes a write down of the remaining goodwill related to the Company's
Holland operation.
Cash expenditures associated with the restructuring plan, were
approximately $4.6 million in 1996. It is expected that approximately $5.7
million of cash expenditures related to the restructuring will occur during the
first half of 1997. Subsequent cash expenditures related primarily to leases
accrued in the restructuring will be approximately $11.1 million.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information concerning the Company's directors required by this
Item is incorporated by reference to the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders ("Proxy Statement"). The following sets forth
information regarding executive officers of the Company as of February 28, 1997.
<TABLE>
<CAPTION>
Name Age Position
- ------------------ --- --------------------------------------------------------------
<S> <C> <C>
James V. Diller 61 Chief Executive Officer and Chairman of the Board of Directors
Greg Aasen 42 Chief Operating Officer and Secretary of PMC-Sierra, Inc.
Robert L. Bailey 39 President and Chief Executive Officer of PMC-Sierra, Inc.
Glenn C. Jones 51 Senior Vice President, Finance and Chief Financial Officer
</TABLE>
Officers serve at the discretion of the Board of Directors. There are
no family relationships between any of the directors or officers of the Company.
Mr. Diller is a founder of the Company and has served as President,
Chief Executive Officer and a Director since its formation in December 1983. He
was Sierra's President from formation until July 1993. In July 1993, he was
named as the Chairman of the Company's Board of Directors. He also served as
Chief Financial Officer of the Company from its formation until July 1987 and as
Acting Chief Financial Officer of the Company from September 1993 to February
1994. Prior to founding the Company, he was employed by National Semiconductor
for 15 years, most recently as Vice President of MOS Memory and Custom MOS
Products from May 1981 to December 1983. Other positions held by Mr. Diller
while at National Semiconductor include Vice President of the Consumer Products
Division, Managing Director of Southeast Asian Manufacturing Operations, Group
Director of Linear Circuits and Managing Director of European Operations. Mr.
Diller is a director of Elantec Semiconductor, a linear semiconductor company.
Mr. Aasen is a founder of PMC-Sierra, Inc. and has served as its Chief
Operating Officer and Secretary since its formation in June 1992. He has served
as a director of PMC-Sierra, Inc. since August 1994. Prior to joining PMC-Sierra
Inc., Mr. Aasen was a General Manager of PMC, a division of MPR Teltech, Ltd.
Mr. Bailey has served as President, Chief Executive Officer and
Director of PMC-Sierra, Inc. since December 1993. Prior to joining PMC-Sierra,
Inc., Mr. Bailey was employed by AT&T-Microelectronics from August 1989 to
November 1993 where he served as Vice President of Integrated Microperipheral
Products. Mr. Bailey became a Sierra director in October 1996. He is also a
director of Teltone Corporation, a designer and manufacturer of telecom
products.
Mr. Jones joined the Company in February 1994 as Senior Vice President,
Finance and Chief Financial Officer. Prior to joining the Company, he was
employed by Sybase, Inc., a database software firm, as Vice President, Strategic
Ventures from September 1992 through February 1994. He was employed from March
1992 through September 1992 by Gain Technology, Inc., a multimedia software
development firm, as its Vice President of Operations and Chief Financial
Officer. Prior to March 1992, Mr. Jones was employed by Metaphor Computer, Inc.,
a computer systems manufacturer, for over eight years, where in his last
position, he served as Executive Vice President, General Manager and Chief
Financial Officer.
<PAGE>
ITEM 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements
The financial statements (including the notes thereto) listed in the
accompanying index to financial statements and financial statement schedules are
filed within this Annual Report on Form 10-K.
2. Financial Statement Schedules
The financial statement schedule listed on Page 28 in the accompanying
index to financial statements and financial statement schedule is filed within
this Annual Report on Form 10-K.
3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this Form
10-K Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
fourth fiscal quarter ended December 31, 1996.
<PAGE>
<TABLE>
<CAPTION>
(c) Exhibits
Exhibit Description Page
Number Number
------- -------------------------------------------------------------------- --------
<S> <C> <C>
2.1 Exchange Agreement dated September 2, (D)
1994 between Sierra and PMC.
2.2 Amended and Restated Shareholders (D)
Agreement dated September 2, 1994
among the Shareholders of PMC-Sierra, Inc.
2.3 Amendment to Exchange Agreement effective August 9, 1995 (G)
3.1 Restated Articles of Incorporation, as amended (H)
3.3 Bylaws, as amended (A)
4.1 Specimen of Common Stock Certificate (A)
4.3 Terms of PMC-Sierra, Inc. Special Shares (E)
4.4 Silicon Valley Bank Business Loan Agreement and Promissory Note, each dated
November 29, 1990 and Security Agreement dated February 22, 1990. (J)
4.4B Amendment dated December 29, 1996 to the Silicon Valley Bank Business Loan
Agreement and Promissory Note, dated November 29, 1990 and Security Agreement
dated February 22, 1990 --
10.1B 1987 Incentive Stock Plan, as amended (C)
10.2 1991 Employee Stock Purchase plan, as amended (A)
10.4 Form of Indemnification Agreement for directors and officers (A)
10.8 Warrants to Purchase Common Stock (A)
10.8B Warrant Purchase Agreement and Warrant to Purchase Shares of Common Stock
dated August 28, 1996 --
10.9D Technology License Agreement dated November 18, 1987, as amended
July 17, 1990 (A)
10.11 Net Building Space Lease dated November 1, 1996 (I)
10.14 Compass Design Automation, Inc. Software License Agreement dated
December 2, 1991* (B)
10.17 1994 Incentive Stock Plan (F)
10.18 Deposit Agreement with Chartered Semiconductor Pte., Ltd.* (K)
10.18B Amendment Agreement (No. 1) to Deposit Agreement with
Chartered Semiconductor Pte. Ltd.** --
10.19 Option Agreement among Sierra Semiconductor Corporation, PMC-Sierra, Inc.
and Taiwan Semiconductor Manufacturing Corporation** --
10.20 Net Building Lease (PMC-Sierra, Inc.) dated May 15, 1996
11.1 Calculation of earnings per share
22.1 Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney
</TABLE>
<PAGE>
* Confidential treatment has been granted as to a portion of this exhibit.
** Confidential treatment has been requested as to portions of this exhibit.
(A) Incorporated by reference from the same-numbered exhibit filed with
the Registrant's Registration Statement on Form S-1 (No. 33-39406).
(B) Incorporated by reference from the same-numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended December 29, 1991.
(C) Incorporated by reference from the same-numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended January 3, 1993.
(D) Incorporated by reference from the same-numbered
exhibit filed with the Registrant's Current Report on
Form 8-K, filed on September 16, 1994, as amended.
(E) Incorporated by reference from exhibit 4 of the Schedule 13-D filed on
November 2, 1994 by GTE Corporation.
(F) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-K Annual
report for the fiscal year ended January 2, 1994.
(G) Incorporated by reference from exhibit 2.1 filed with
Registrant's Current Report on Form 8-K, filed on
September 6, 1995, as amended on October 6, 1995.
(H) Incorporated by reference from exhibit 3.1 filed with the Registrant's
Form 10-Q for the quarter ended September 29, 1996.
(I) Incorporated by reference from the same numbered exhibit filed with
Registrant's Form 10-Q for the quarter ended June 30, 1996.
(J) Incorporated by reference from the same numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 (No. 33-39406).
(K) Incorporated by reference from the same numbered exhibit filed with the
Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIERRA SEMICONDUCTOR
CORPORATION
(Registrant)
Date: April 11, 1997 /s/ James V. Diller
----------------------------------------
James V. Diller, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James V. Diller and Glenn C. Jones,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ James V. Diller Chairman of the Board, April 11, 1997
- ----------------------- Chief Executive Officer and Director
James V. Diller (Principal Executive Officer)
/s/ Glenn C. Jones Senior Vice President, Finance and April 11, 1997
- ----------------------- Chief Financial Officer
Glenn C. Jones (Principal Financial Officer)
/s/ Michael L. Dionne April 11, 1997
- ----------------------- Director
Michael L. Dionne
/s/ Frank Marshall April 11, 1997
- ----------------------- Director
Frank Marshall
/s/ Robert Bailey April 11, 1997
- ----------------------- Director
Robert Bailey
/s/ Alexandre Balkanski April 11, 1997
- ----------------------- Director
Alexandre Balkanski
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Description Page
Number Number
-------- ----------------------------------------------------------------------- ------
<S> <C> <C>
4.4B Amendment dated December 29, 1996 to Silicon Valley Bank Business
Loan Agreement and Promissory Note and Security Agreement. 62
10.8 Warrant Purchase Agreement and Warrant to Purchase shares of Common Stock
dated August 28, 1996. 66
10.18 Amendment Agreement (No.1) to Deposit Agreement with Chartered Semiconductor
Pte. Ltd.** 82
10.19 Option Agreement among Sierra Semiconductor, PMC-Sierra, Inc. and Taiwan
Semiconductor Manufacturing Corporation as amended** 95
10.20 Net Building Lease (PMC-Sierra, Inc.) dated May 15, 1996 109
11.1 Calculation of Earnings Per Share 51
22.1 List of Subsidiaries 52
23.1 Consent of Ernst & Young LLP, Independent Auditors
** Confidential treatment has been requested as to portions of this exhibit.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1 SIERRA SEMICONDUCTOR CORPORATION
CALCULATION OF EARNINGS PER SHARE (1)
(in thousands, except per share amounts)
December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income (loss) from continuing operations $(48,150) $23,976 $(7,916)
Loss from discontinued operations --- (22,497) (666)
------- ------- -------
Net income (loss) $(48,150) 1,479 (8,582)
Adjustments to net income (loss):
Accretion of convertible, redeemable preferred stock --- (1) (16)
------- ------- -------
Adjusted net income (loss) $(48,150) $1,478 $(8,598)
========= ========= ========
Weighted average common shares outstanding 29,719 27,018 22,030
Common stock equivalents --- 1,602 ---
Shares used in calculation of net income (loss) per share 29,719 28,620 22,030
Income (loss) from continuing operations per share $(1.62) $ 0.84 $ (0.36)
Loss from discontinued operations per share $ --- $ (0.79) $ (0.03)
------- ------- -------
Net income (loss) per share $(1.62) $ 0.05 $ (0.39)
========= ========= ========
<FN>
(1) Share and per share information has been adjusted for a 2 for 1 stock split effective October 5, 1995
</FN>
</TABLE>
<PAGE>
Exhibit 22.1 SIERRA SEMICONDUCTOR CORPORATION
LIST OF SUBSIDIARIES
Subsidiaries of
Sierra Semiconductor Corporation
1. PMC-Sierra, Inc., organized under the laws of British Columbia,
Canada, doing business only under its official name.
2. Prometheus Products, Inc., organized under the laws of California,
doing business only under its official name.
3. Sierra Semiconductor B.V., organized under the laws of the
Netherlands, doing business only under its official name.
4. Chartered Sierra Semiconductor, organized under the laws of the
Republic of Singapore, doing business only under its official name.
5. Sierra Semiconductor Canada, Inc. organized under the laws of
British Columbia, Canada, doing business only under its official name.
6. Sierra Semiconductor, Ltd., organized under the laws of the United
Kingdom, doing business only under its official name.
7. Sierra Semiconductor GmbH, organized under the laws of Germany,
doing business only under its official name.
8. Sierra Semiconductor Srl, organized under the laws of Italy, doing
business only under its official name.
9. PMC-Sierra Portland, Inc., organized under the laws of Delaware,
doing business only under its official name.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-86930, 33-90393, 33-96620, 33-97490 and 333-15519), and in the
Registration Statements (Form S-8 Nos. 33-41027, 33-80988, 333-13387, 33-80992,
33-94790, 333-13359, and 333-13357) pertaining to the 1991 Employee Stock
Purchase Plan, 1994 Incentive Stock Plan, and PMC-Sierra, Inc. (Portland) 1996
Stock Option Plan of Sierra Semiconductor Corporation and in the related
Prospectuses, of our report dated January 22, 1997, with respect to the
consolidated financial statements and schedule of Sierra Semiconductor
Corporation included in this Annual Report (Form 10-K) for the year ended
December 31, 1996.
San Jose, California /s/ERNST & YOUNG LLP
April 10, 1997
<PAGE>
<TABLE>
<CAPTION>
S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1996, 1995 and 1994
(in thousands)
Additions Additions
Allowance for Balance at Charged to Charged
Doubtful Beginning Costs and to Other Balance at
Accounts of Year Expenses Accounts Write-offs End of Year
------------ --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1996 $1,081 $666 $ --- $905 $ 842
1995 $1,648 $ 49 $ --- $616 $1,081
1994 $ 734 $871 $148 (1) $105 $1,648
<FN>
(1) Represents amounts acquired in the acquisition of PMC charged to goodwill
and other intangible assets.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1993 Restructure
----------------
Additions Additions
Accrued Balance at Charged to Charged
Restructure Beginning Costs and to Other Balance at
Costs of Year Expenses Accounts Payments End of Year
------------ --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1996 $ 373 $ --- $ --- $ --- $ 373
1995 $1,150 $ --- $ --- $ 777 $ 373
1994 $6,903 $(1,559) (2) $ --- $4,194 $1,150
<FN>
(2) Represents reversal of restructuring and other charges.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 Restructure
----------------
Accruals
Additions Additions Reclassed
Accrued Balance at Charged to Charged to Other
Restructure Beginning Costs and to Other Restructure Balance at
Costs of Year Expenses Accounts Accounts Payments End of Year
------------ --------- --------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ --- $28,154 $ --- $(6,775) $4,625 $16,754
1995 $ --- $ --- $ --- $ --- $ --- $ ---
1994 $ --- $ --- $ --- $ --- $ --- $ ---
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000767920
<NAME> Sierra Semiconductor Corp.
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 35,038
<SECURITIES> 7,024
<RECEIVABLES> 13,907
<ALLOWANCES> 842
<INVENTORY> 9,232
<CURRENT-ASSETS> 68,305
<PP&E> 16,678
<DEPRECIATION> 0
<TOTAL-ASSETS> 129,914
<CURRENT-LIABILITIES> 47,867
<BONDS> 0
0
0
<COMMON> 135,320
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 129,914
<SALES> 188,371
<TOTAL-REVENUES> 188,371
<CGS> 94,948
<TOTAL-COSTS> 94,948
<OTHER-EXPENSES> 132,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (679)
<INCOME-PRETAX> (38,392)
<INCOME-TAX> 9,758
<INCOME-CONTINUING> (48,150)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,150)
<EPS-PRIMARY> (1.62)
<EPS-DILUTED> (1.62)
</TABLE>
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of January 17, 1997
and is effective as of December 29, 1996, by and between Sierra Semiconductor
Corporation ("Borrower") whose address is 2222 Qume Drive, San Jose, CA 95131,
and Silicon Valley Bank ("Lender") whose address is 3003 Tasman Drive, Santa
Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Lender, Borrower is indebted to Lender pursuant to, among
other documents, a Promissory Note, dated June 25, 1991, in the original
principal amount of Five Million and 00/100 Dollars ($5,000,000.00) as amended
from time to time (the "Note" and sometime referred to as the "Line"), and a
Promissory Note, dated May 18, 1994, in the original principal amount of Three
Million and 00/100 Dollars ($3,000,000.00) as amended from time to time (the
"Term Loan"). Hereinafter, the Note and the Term Loan shall be referred to
collectively as, the "Notes". Pursuant to a Loan Modification Agreement, dated
July 1, 1996, the principal amount of the Line was increased to Twelve Million
Five Hundred Thousand and 00/100 Dollars ($12,500,000.00). The Notes, together
with other promissory notes from Borrower to Lender, are governed by the terms
of a Business Loan Agreement, dated June 25, 1991, as such agreement may be
amended from time to time, between Borrower and Lender (the "Loan Agreement").
Defined terms used but not otherwise defined herein shall have the same meanings
as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness".
2. In connection with the repayment of the Indebtedness, Borrower has agreed not
to sell, transfer, assign, mortgage, pledge, lease, grant a security interest
in, or encumber any of Borrower's assets without Lender's prior written consent
(which consent shall not be unreasonably withheld) (the "Non-hypothecation
Agreement"). Concurrently herewith, Borrower shall execute an Assignment of
Deposit Account agreement in favor of Lender against Borrower's specific Silicon
Valley Bank Certificates of Deposit.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to the Note.
1. The principal amount of the Note is hereby decreased
to Ten Million and 00/100 Dollars($10,000,000.00).
2. The paragraph entitled "Payment" is hereby amended in
its entirety to read as follows:
From the date hereof until July 1, 1997 (the
"Maturity Date"), Borrower may request Advances
hereunder on a revolving basis. Prior to each
Advance, Borrower shall comply with the Conditions
Precedent to Each Advance (as described herein).
Following each Advance, Borrower shall pay regular
monthly payments of all accrued unpaid interest on
such Advance beginning February 1, 1997 and all
subsequent interest payments will be due on the same
day of each month thereafter through the earlier to
occur of (i) repayment of the Advance or (ii) the
Maturity Date. The outstanding principal balance of
all Advances plus all accrued interest not yet paid
will be due and payable on the Maturity Date.
Interest on this Note is computed on a 365/360 simple
interest basis; that is, by applying the ratio of the
annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance,
multiplied by the actual number of days the principal
balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place
as Lender may designate in writing. Unless otherwise
agreed or required by applicable law, payments will
be applied first to accrued unpaid interest, then to
principal, and any remaining amount to any unpaid
collection costs and late charges.
Whenever Borrower desires an Advance, Borrower will
notify Lender by facsimile transmission or telephone
no later than 3:00 p.m. Pacific time, on the business
day that the Advance is to be made. Each such
notification shall be promptly confirmed by a
Payment/Advance Form in substantially the form of
Exhibit A hereto. In addition to the foregoing,
Borrower shall comply with the Conditions Precedent
to Each Advance.
3. The following paragraph entitled "Conditions
Precedent to Each Advance" is hereby incorporated
to read as follows:
At any time from the date hereof through July 1,
1997, Borrower may request advances (including
issuing Standby Letters of Credit, Exchange Contracts
and any other extensions of credit for the benefit of
the Borrower) (each an "Advance" and collectively,
the "Advances") from Lender in an aggregate amount
not to exceed Ten Million and 00/100 Dollars
($10,000,000.00). To secure the Advances, Borrower
shall pledge to Lender cash to be held in a Silicon
Valley Bank Certificate of Deposit in an amount equal
to one hundred percent (100%) of each Advance, which
pledge shall remain in effect until Borrower's
obligations under the Note have been satisfied.
Borrower agrees to execute any and all documents
necessary to perfect Lender's security interest
therein.
4. The paragraph entitled "Variable Interest Rate" is
hereby amended in its entirety to read as follows:
VARIABLE INTEREST RATE. The interest rate to be
applied to each Advance under this Note shall be
based on the rate payable under each Certificate of
Deposit pledged to Lender to secure each Advance (the
"Index"). The Index is not necessarily the lowest
rate charged by Lender on its loans and is set by
Lender in its sole discretion. Lender will tell
Borrower the current Index rate of each Advance upon
Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The
interest rate change will not occur more often than
each time each Index is adjusted by Silicon Valley
Bank. The interest rate to be applied to the unpaid
principal balance of each Advance under this Note
will be at a rate of 3.000 percentage point over such
Index. NOTICE: Under no circumstances will the
interest rate on each Advance under this Note be more
than the maximum rate allowed by applicable law.
B. Modification(s) to Loan Agreement.
1. The paragraph entitled "Financial Covenants" is
hereby amended to read, in its entirety:
Borrower shall maintain, on a quarterly basis,
minimum cash equal to three (3) times the then
current outstanding principal balance of the Term
Loan.
2. The paragraph entitled "Borrowing Base Formula" is
hereby deleted in its entirety.
3. The paragraph entitled "Accounts Receivable and
Accounts Payable" is hereby deleted in its entirety.
4. The provision allowing Borrower to enter into
acquisitions in the section entitled "Negative
Covenants" is amended as follows:
Borrower may enter into acquisitions with other
companies provided the cash expended by such
acquisitions shall not exceed $1,000,000.00, in the
aggregate.
5. Borrower shall deliver to Lender, quarterly
Compliance Certificates prepared by Borrower within
thirty (30) days (rather than 45 days) after the end
of each quarter.
7. The paragraph entitled "Daylight Overdraft" is hereby
deleted in its entirety.
8. The paragraph entitled "Letters of Credit" is hereby
amended in its entirety to read as follows:
Subject to the terms and conditions of this
Agreement, Lender agrees to issue or cause to be
issued Letters of Credit for the account of Borrower
in an aggregate face amount not to exceed Ten Million
and 00/100 Dollars ($10,000,000.00) minus the then
outstanding principal balance of the Note, minus the
Foreign Exchange Reserve; provided that the face
amount of outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit) shall not
in any case exceed Ten Million and 00/100 Dollars
($10,000,000.00). provided that Borrower's Letter of
Credit reimbursement obligation shall be secured by
cash on terms defined herein and in the Assignment of
Deposit Account agreement of even date herewith. Each
such Letter of Credit shall have an expiry date no
later than one hundred eighty (180) days after the
maturity date of the Note. All such Letters of Credit
shall be, in form and substance, acceptable to Lender
in its sole discretion and shall be subject to the
terms and conditions of Lender's form of application
and Letter of Credit agreement.
Borrower shall indemnify, defend and hold Lender
harmless from any loss, cost, expense or liability,
including, without limitation, reasonable attorneys'
fees, arising out of or in connection with any
Letters of Credit.
Borrower may request that Lender issue a Letter of
Credit payable in a currency other than United States
Dollars. If a demand for payment is made under any
such Letter of Credit, Lender shall treat such demand
as an Advance to Borrower of the equivalent of the
amount thereof (plus cable charges) in United States
currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other
currency for cable transfer to the country of which
it is the currency.
Upon the issuance of any Letter of Credit payable in
a currency other than United States Dollars, Lender
shall create a reserve (the "Letter of Credit
Reserve") under the Note for Letters of Credit
against fluctuations in currency exchange rates, in
an amount equal to ten percent (10%) of the face
amount of such Letter of Credit. The amount of such
reserve may be amended by Bank from time to time to
account for fluctuations in the exchange rate. The
availability of funds under the Note shall be reduced
by the amount of such reserve for so long as such
Letter of Credit remains outstanding.
9. Notwithstanding the foregoing, the aggregate
outstanding under the Note, the Foreign Exchange
Reserve and the Letter of Credit Sublimit shall not
exceed Ten Million and 00/100 Dollars
($10,000,000.00).
C. Grant of Security Interest.
In consideration of, among other things, Lender entering into
this Loan Modification Agreement, Borrower hereby grants to
Lender a security interest in specific Silicon Valley Bank
Certificates of Deposit as referenced in the Assignment of
Deposit Account agreement executed concurrently herewith.
Borrower acknowledges that Lender has given full new value for
Borrower's pledge of the Certificates of Deposit, as described
herein, such new value being Lender's agreement to release its
interest in the Non-hypothecation Agreement between Borrower
and Lender.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount of Five
Thousand and 00/100 Dollars ($5,000.00) (the "Loan Fee") plus all out-of-pocket
expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any amounts
under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Lender is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Lender's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Lender to make any future modifications to
the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Lender and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Lender in writing. No maker, endorser,
or guarantor will be released by virtue of this Loan Modification Agreement. The
terms of this paragraph apply not only to this Loan Modification Agreement, but
also to all subsequent loan modification agreements.
<PAGE>
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is December
29, 1996 and is conditioned upon Borrower's payment of the Loan Fee and delivery
of, among other things, an executed Assignment of Deposit Account agreement.
This Loan Modification Agreement is executed as of the date first
written above.
Borrower: Lender:
SIERRA SEMICONDUCTOR CORPORATION SILICON VALLEY BANK
By:/s/ Glenn C. Jones By:
- -------------------------------- ---------------------------------
Name: Glenn C. Jones Name:
- -------------------------------- ---------------------------------
Title: Senior V.P. Finance - CFO Title:
- -------------------------------- ---------------------------------
HAMBRECHT & QUIST LLC
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415)576-3300
August 28, 1996
Confidential
- ------------
The Board of Directors
Sierra Semiconductor Corporation
2075 North Capitol Ave.
San Jose, CA 95132
Gentlemen:
Hambrecht & Quist LLC ("Hambrecht & Quist") has acted as financial advisor to
Sierra Semiconductor Corporation ("Sierra" or the "Company") in the analysis of
various strategic and financing alternatives. As compensation for these services
to the Company, Sierra agrees to pay to Hambrecht & Quist a warrant to acquire
25,000 shares of common stock of the Company. The warrant shall have an exercise
price equal to $9.25 per share (the closing price of the Company's common stock
as reported on NASDAQ National Market System on August 28, 1996) and shall be in
the form attached hereto as Exhibit A.
If the foregoing correctly sets forth the understanding between us, please so
indicate on the enclosed copies of this letter and return one original copy to
my attention.
Very truly yours,
HAMBRECHT & QUIST LLC
By /s/ James A. Davidson
James A. Davidson
Managing Director
Agreed to and accepted:
SIERRA SEMICONDUCTOR CORPORATION
By /s/ James V. Diller
- --------------------------------
James V. Diller
Title: CEO
SAN FRANCISCO * NEW YORK * BOSTON
MEMBERS NEW YORK STOCK EXCHANGE * AMERICAN STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
<PAGE>
EXHIBIT A
---------
WARRANT PURCHASE AGREEMENT
--------------------------
THIS WARRANT PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of the 28th day of August 1996 by and among SIERRA SEMICONDUCTOR
CORPORATION, a California corporation (the "Company") and HAMBRECHT & QUIST LLC,
a California limited liability corporation ("H&Q"). H&Q shall be referred to
herein as the "Investor." As used in this Agreement, the term "Shares" shall
mean the shares of Common Stock issuable from time to time upon exercise of the
Warrant, as defined in Section 1.1 below, or upon exercise of the rights to
convert the Warrant, as provided under Section 7 of the Warrant (the "Right to
Convert Warrant Into Stock").
The parties hereto agree as follows:
Article 1. Sale and Purchase of Warrant; Closing.
-------------------------------------
1.1 Sale and Purchase of Warrant. The Company agrees to sell to
----------------------------
the Investor and the Investor agrees to purchase from the Company for a purchase
price of $250.00 a warrant in the form attached hereto as Exhibit B to purchase
25,000 shares of the Company's Common Stock (the "Common Stock") at an initial
per share exercise price of $9.25. The Warrant will be exercisable at any time
on or before August 28, 2000. The warrant to be issued to the Investor hereunder
shall be refered to as the "Warrant." This warrant satisfies the Company's
obligation to issue a warrant under the August 28, 1996 engagement letter
between the Company and Investor.
1.2 Closing. The issuance of the Warrant shall take place on the
-------
date hereof, or on such other date as the parties shall mutually agree (the
"Closing"). At the Closing, the Company shall cause to be delivered to the
Investor the Warrant issued in the name of such Investor and Investor shall pay
the Company $250.00.
Article 2. Representations and Warranties of the Company. The
---------------------------------------------
Company hereby agrees and represents and warrants to the Investor as follows:
2.1 Corporate Status. The Company is a corporation duly organized,
----------------
validly existing, and in good standing under the laws of the State of California
and has all requisite legal and corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as now conducted
and as proposed to be conducted. The Company is duly licensed or qualified to
transact business as a foreign corporation in each jurisdiction in which the
Company is required by reason of its activities or ownership or lease of
property to be so qualified and where the failure to be so qualified would have
a material adverse effect on the business or operations of the Company.
2.2 Authorization. All corporate action on the part of the
-------------
Company, its officers, directors and shareholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, including the
authorization, issuance and delivery of the Warrant, the reservation of the
Shares issuable upon the exercise thereof, and the grant of registration rights
to the Investor, has been taken. The person signing this Agreement has full
power and authority to enter into this Agreement on behalf of the Company. When
executed and delivered, this Agreement will constitute a valid and binding
obligation of the Company.
<PAGE>
2.3 Corporate Power. The Company has all requisite legal and
---------------
corporate power and authority to enter into this Agreement and all requisite
legal and corporate power and authority to issue and deliver the Warrant and the
Shares and to carry out and perform its obligations under the terms and
conditions of this Agreement and the Warrant.
2.4 Validity of Warrant. The Warrant to be issued and delivered
-------------------
pursuant to this Agreement shall constitute a valid and binding obligation of
the Company. The Shares have been duly and validly reserved, and when issued
shall be duly authorized, validly issued, fully paid and nonassessable and free
of any liens or encumbrances except for restrictions on transfer provided for
under applicable federal and state securities laws. During the period within
which the purchase right represented by the Warrant may be exercised, the
Company shall at all times have authorized, and reserved for issuance upon
exercise of the Warrant or upon exercise of the Conversion Rights, a sufficient
number of shares of Common Stock to provide for the issuance of the Shares. The
issuance of such Common Stock will not be subject to any preemptive rights or
rights of first refusal.
Article 3. Representations and Warranties of the Investor. The
----------------------------------------------
Investor represents and warrants to the Company that:
3.1 Authorization. The person signing this Agreement has full
-------------
power and authority to enter into this Agreement on behalf of the Investor. When
executed and delivered, this Agreement will constitute the Investor's valid and
legally binding obligation.
3.2 Investment Representations.
--------------------------
(A) The Investor understands that the Warrant and the Shares
have not been registered under the Securities Act of 1933, as amended (the
"Act") and will be issued pursuant to an exemption from registration contained
in the Act based in part upon the representations of the Investor contained
herein.
(B) The Investor is acquiring the Warrant and the Shares
solely for its own account and not as a nominee for any other party and not with
a view toward the resale or distribution thereof.
(C) The Investor is a sophisticated investor experienced in
venture capital investing and able to fend for itself. The Investor is able to
bear the economic risk of the purchase of the Warrant and the Shares, including
a complete loss of such Investor's investment. The Investor has been afforded an
opportunity to ask such questions of the Company's officers, employees, agents,
accountants and representatives concerning the Company's business, operations,
financial condition, assets, liabilities and other relevant matters as it has
deemed necessary or desirable.
Article 4. Conditions of the Investor's Obligations at the
Closing. -----------------------------------------------------
------- The obligation of the Investor to purchase the Warrant is subject to
the fulfillment to its satisfaction, or its written waiver thereof, prior to or
at the Closing, of each of the following conditions:
4.1 Representations and Warranties. The representations and
-------------------------------
warranties of the Company contained in Article 2 hereof shall be true and
correct on and as of the Closing.
4.2 Corporate Action. All corporate action on the part of the
----------------
Company, its officers, directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby shall have been taken.
4.3 Delivery of Warrant. The Warrant shall have been delivered to
-------------------
the Investor.
<PAGE>
4.4 Governmental Consents. All permits, consents, approvals,
---------------------
orders and authorizations, if any, which the Company is required to obtain from,
and all registrations, qualifications, designations, declarations and filings
which the Company is required to make with any Federal or state governmental
authority of the United States in connection with the execution, delivery or
performance of this Agreement, the consummation of the transactions contemplated
hereby or the issuance and delivery of the Warrant to the Investor pursuant to
this Agreement, except post-sale filings which may be required under the Blue
Sky laws of any applicable states, shall have been duly obtained or made and
shall be effective on and as of the Closing.
4.5 Registration Rights. The Company shall provide the Investor
-------------------
such evidence as the Investor may require that all corporate action on the part
of the Company, its officers, directors and stockholders necessary for the grant
of registration rights pursuant to Article 6 hereof has been taken prior to the
Closing.
Article 5. Conditions of the Company's Obligations at the
Closing. -----------------------------------------------------
- ------- The obligation of the Company to issue the Warrant to the Investor
is subject to the fulfillment to its satisfaction, or its written waiver
thereof, prior to or at the Closing, of the condition that the representations
and warranties of the Investor contained in Article 3 hereof shall be true and
correct on and as of the Closing.
Article 6. Registration Rights.
-------------------
6.1 Company Registration.
--------------------
6.1.1 Notice of Registration. If at any time or from time to time
----------------------
after the Closing the Company shall determine to register under the Act any of
its securities for its own account (other than a registration relating solely to
employee stock option or purchase plans or relating solely to a Rule 145
transaction), the Company will:
(A) promptly give to Investor written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(B) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Shares specified in a written request or requests,
made within thirty (30) days after the date of such written notice from the
Company to Investor, except as set forth in Section 6.1.2.
6.1.2 Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise Investor as a part of the written notice given pursuant
to Section 6.1.1 (A). In such event the right of Investor to registration
pursuant to Section 6.1 shall be conditioned upon Investor's participation in
such underwriting and the inclusion of the Investor's Shares in the underwriting
to the extent provided herein. If Investor proposes to distribute its securities
through such underwriting it shall (together with the Company and other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section, if the managing underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
underwriter may limit the number of Shares to be included in the registration
and underwriting but in no event shall (i) the amount of Shares of Investor
included in the offering be reduced below twenty-five percent (25%) of the total
amount of securities included in such offering or (ii) notwithstanding (i)
above, any shares being sold by a shareholder exercising a demand registration
<PAGE>
right granted by the Company prior to the date of this Agreement be excluded
from such offering, and in such situation Investor's shares may be completely
excluded from registration. The Company shall advise Investor of any such
limitations, and the number of Shares that may be included in the registration.
If Investor disapproves of the terms of any such underwriting, it may elect to
withdraw therefrom by written notice to the Company and the underwriter. Any
Shares excluded or withdrawn from such underwriting shall not be included in
such registration.
6.1.3 Notwithstanding anything to the contrary in this Section 6.1, the
Company shall not be obligated to effect any registration of securities under
this Section 6.1 pursuant to a registration statement covering any of its
securities to be issued in connection with mergers, acquisitions, exchange
offers, dividend reinvestment plans or stock option or other employee benefit
plans.
6.2 Expenses of Registration.
------------------------
6.2.1 Subject to Section 6.2.2, all expenses incurred in connection
with any registration pursuant to Section 6.1, including, without limitation,
all registration, filing and qualification fees, printing expenses, fees and
disbursements of one counsel for all selling shareholders, including Investor,
expenses of complying with state securities or Blue Sky laws (including counsel
for the underwriters to the extent related to state securities laws),
accountants' fees and expenses incident to or required by any such registration,
expenses incident to the listing of securities on any exchange in which the
Shares are to be listed, and expenses of any special audits incidental to or
required by such registration shall be borne by the Company.
6.2.2 Notwithstanding anything to the contrary elsewhere in this
Section 6.2, all underwriters' discounts, commissions, or applicable stock
transfer and documentary stamp taxes (if any) relating to the sale of Shares
shall be borne by the seller of the Shares in all cases.
6.3 Registration Procedures. In the case of each registration
-----------------------
effected by the Company pursuant to Section 6.1, the Company will keep Investor
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense the Company will:
(A) keep such registration effective for a period of six
months or until Investor has completed the distribution described in the
registration statement relating thereto, whichever first occurs;
(B) furnish such number of prospectuses and other documents
incident thereto as Investor from time to time may reasonably request; and
(C) notify Investor, (1) when a prospectus or any prospectus
supplement or posteffective amendment has been filed, and, with respect to the
registration statement or any posteffective amendment, when the same has become
effective; (2) of any request by the Securities and Exchange Commission (the
"SEC") or any other federal or state governmental authority during the period of
effectiveness of the registration statement for amendments or supplements to the
registration statement or related prospectus or for additional information
relating to the registration statement, (3) of the issuance by the SEC or any
other federal or state governmental authority of any stop order suspending the
effectiveness of the registration statement or the initiation of any proceedings
for that purpose, (4) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Shares for sale in any jurisdiction or the initiation of any
proceeding for such purpose; or (5) of the happening of any event which makes
any statement made in the registration statement or related prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or which requires the making of any changes in the
registration statement or prospectus so that in the case of the registration
statement, it will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
<PAGE>
the statements therein not misleading, and that in the case of the prospectus,
it will not contain any untrue statement of a material fact or omit to state any
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
6.4 The Company may, upon the happening of any event (x) of the kind
described in clauses (2), (3), (4), or (5) of Section 6.3 (C) or (y) that, in
the judgment of the Company's Board of Directors, renders it advisable to
suspend use of the prospectus due to pending corporate developments, public
filings with the SEC or similar events, suspend use of the prospectus on written
notice to Investor, in which case Investor shall discontinue disposition of
Shares covered by the registration statement or prospectus until copies of a
supplemented or amended prospectus are distributed to Investor or until Investor
is advised in writing by the Company that the use of the applicable prospectus
may be resumed. The Company shall use its reasonable efforts to ensure that the
use of the prospectus may be resumed as soon as practicable. The Company shall
use every reasonable effort to obtain the withdrawal of any order suspending the
effectiveness of the registration statement, or the lifting of any suspension of
the qualification (or exemption from qualification) of any of the securities for
sale in any jurisdiction, at the earliest practicable moment. The Company shall
prepare as soon as practicable a supplement or post-effective amendment to the
registration statement or a supplement to the related prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Shares being sold thereunder,
such prospectus will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
6.5 Indemnification.
---------------
6.5.1 The Company will indemnify and hold harmless Investor, each of
its officers and directors, and each person controlling Investor, with respect
to which a registration has been effected pursuant to this Article 6 and each
underwriter, if any, and each person who controls any underwriter of the Shares
held by or issuable to the Investor, against all claims, losses, damages, costs,
expenses and liabilities whatsoever (or actions in respect thereof) arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, preliminary or final prospectus
contained therein or any amendment or supplement thereto, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
any violation by the Company of the Act or any state securities law or of any
rule or regulation promulgated under the Act or any state securities law
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, and will reimburse Investor,
each of its officers and directors, and each person controlling Investor, each
such underwriter and each person who controls any such underwriter, for any
legal and any other expenses as reasonably incurred in connection with
investigating or defending any such claim, loss, damage, cost, expense,
liability or action, provided that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, cost, expense, or
liability arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by an instrument duly executed
by Investor or any underwriter and stated to be specifically for use therein.
6.5.2 Investor will, if Shares held by or issuable to Investor are
included in the securities as to which such registration is being effected,
indemnify and hold harmless the Company, each of its directors and officers who
sign such registration statement, each underwriter, if any, of the Company's
securities covered by such registration statement, each person who controls the
Company within the meaning of the Act against all claims, losses, damages,
costs, expenses and liabilities whatsoever (or actions in respect thereof)
arising out of or based on any untrue statement of a material fact contained in
<PAGE>
any such registration statement, preliminary or final prospectus contained
therein or any amendment or supplement thereto, incident to any such
registration, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by Investor of the Act or of state
securities laws or any rule or regulation promulgated under the Act or any state
securities law applicable to Investor and relating to action or inaction
required of Investor in connection with any such registration and will reimburse
the Company, such directors, officers, persons or underwriters for any legal or
any other expenses as reasonably incurred in connection with investigating or
defending any such claim, loss, damage, cost, expense, liability or action, in
each case to the extent, but only to the extent, that such untrue statement or
omission is made in such registration statement, prospectus, in reliance upon
and in conformity with written information furnished to the Company by an
instrument duly executed by Investor and stated to be specifically for use
therein; provided, however, that the foregoing indemnity agreement is subject to
the condition that, insofar as it relates to any such untrue statement or
omission made in the preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the SEC at the time the registration statement
becomes effective or the amended prospectus filed with the SEC pursuant to rule
424(b) (be "Final Prospectus"), such indemnity agreement shall not inure to the
benefit of the Company, any underwriter or any holder of the Company's
securities included in the registration statement, if there is no underwriter,
if a copy of the Final Prospectus was not furnished to the person or entity
asserting the loss, liability, claim or damage at or prior to the time such
action is required by the Act.
6.5.3 Each party entitled to indemnification under this Section 6.5
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. If any such Indemnified Party shall have been advised by counsel
chosen by it that there may be one or more legal defenses available to such
Indemnified Party which are different from or additional to those available to
the Indemnifying Party, the Indemnifying Party shall not have the right to
assume the defense of such action on behalf of such Indemnified Party and will
promptly reimburse such Indemnified Party and any person controlling such
indemnified Party for the reasonable fees and expenses of any counsel retained
by the Indemnified Party, it being understood that the Indemnifying Party shall
not, in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for such Indemnified Party or controlling person,
which firm shall be designated in writing by the Indemnified Party to the
Indemnifying Party.
6.6 Contribution. If the indemnification provided for in Section
------------
6.5 is unavailable or insufficient to hold harmless an Indemnified Party
thereunder, then each Indemnifying Party thereunder shall contribute to the
account paid or payable by such Indemnified Party as a result of the losses,
claims, damages, costs, expenses, liabilities or actions referred to in Section
6.5.1 or 6.5.2, as the case may be in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and the
Indemnified Party on the other in connection with statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
<PAGE>
relates to information supplied by the Indemnifying Party or the Indemnified
Party and the Parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statements or omission. The
Parties hereto agree that it would not be just and equitable if contributions
pursuant to this Section 6.6 were to be determined by pro rata or per capita
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the first sentence of this Section
6.6. The amount paid by an Indemnified Party as a result of the losses, claims,
damages or liabilities referred to in the first sentence of this Section 6.6
shall be deemed to include any legal or other expenses reasonably incurred by
such Indemnified Party in connection with investigating or defending any action
or claim which is the subject of this Section 6.6. Promptly after receipt by an
Indemnified Party of notice of the commencement of any action against such party
in respect of which a claim for contribution may be made against an Indemnifying
Party under this Section 6.6, such Indemnified Party shall notify the
Indemnifying Party in writing of the commencement thereof if the notice
specified in Section 6.5.3 has not been given with respect to such action;
provided that the omission so to notify the Indemnifying Party shall not relieve
- --------
the Indemnifying Party from any liability which it may have to any Indemnified
Party otherwise under this Section 6.6, except to the extent that the
Indemnifying Party is actually prejudiced by such failure to give notice. No
Person guilty of fraudulent misrepresentation (within the meaning of Section 1
I(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
6.7 Information by Investor. Investor shall furnish to the Company
-----------------------
such information regarding Investor and the distribution proposed by Investor as
the Company may reasonably request in writing and as shall be required in
connection with any registration referred to in this Article 6.
6.8 Rule 144 Reporting. With a view to making available to
------------------
Investor the benefits of certain rules and regulations of SEC which may permit
the sale of Shares to the public without registration, the Company agrees to:
(A) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Act, at all times after ninety
(90) days after the effective date of the first registration filed by the
Company which involves a sale of securities of the Company to the general
public;
(B) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act; and
(C) furnish to Investor so long as it owns any Shares
forthwith upon request a written statement by the Company that it has complied
with the reporting requirements of said Rule 144 (at any time after ninety (90)
days after the effective date of said first registration statement filed by the
Company), and of the Act and the Securities Exchange Act of 1934, as amended (at
any time after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as may be reasonably requested in
availing Investor of any rule or regulation of the SEC permitting the selling of
any such securities without registration.
6.9 Termination of Registration Rights. All registration rights
----------------------------------
provided hereunder shall terminate upon the earlier to occur of (a) the tenth
anniversary of the Closing and (b) such time as Investor is able to sell all of
its Shares under Rule 144 during any two successive, three-month periods.
<PAGE>
6.10 Future Grants of Registration Rights. The Company agrees for
------------------------------------
the benefit of Investor that it will not grant registration rights with respect
to any of its securities upon terms more favorable to the holders of such
securities than those contained herein.
6.11 Lock-Up. If the Company registers its securities for its own
-------
account in an underwritten public offering and Investor does not sell in the
registered offering all of its shares issuable under the Warrant, then Investor
agrees not to sell, transfer, short sell against or otherwise divest itself of
economic risk with respect to the shares subject to this Warrant not sold in the
transaction for the same period of time as the directors and officers of the
Company agree to subject their shares of the Company's securities to similar
restrictions.
Article 7. Access to Information. The Investor shall have all
---------------------
rights to information and access to information as are granted stockholders
under the laws of the state of the Company's incorporation.
7.1 Notification. The Company shall notify Investor in writing
------------
sixty (60) days before the Warrant expires of the impending expiration.
7.2 Opinion of Counsel on Transfer. The Company shall cause its
------------------------------
counsel to deliver an opinion to the Company's transfer agent if required to
permit a sale of shares under Rule 144. Such opinion will be delivered only if
the proposed transfer complies with the requirement of Rule 144.
Article 8. Miscellaneous
-------------
8.1 Agreement Is Entire Contract. This Agreement, including the
----------------------------
Exhibits and Schedule 1 hereto, constitutes the entire contract between the
parties hereto with respect to the subject matter hereof.
8.2 Survival of Representations and Warranties.
------------------------------------------
The representations, warranties, covenants and agreements of the Company and the
Investor contained herein or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing.
8.3 Severability. If one or more provisions of this Agreement are
------------
held to be invalid, illegal or unenforceable under applicable law, portions of
such provisions, or such provisions in their entirety, to the extent necessary,
shall be severed from this Agreement, and the balance of this Agreement shall be
enforceable in accordance with its terms.
8.4 Counterparts. This Agreement may be executed in two
------------
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.
8.5 Governing Law. It is the intention of the parties hereto that
-------------
the internal laws of the State of California, as applied to contracts entered
into between California residents to be performed wholly within California,
shall govern the validity of this Agreement, the construction of its terms, and
the interpretation and enforcement of the rights and duties of the parties
hereto.
8.6 Binding Upon Successors and Assigns. This Agreement and the
-----------------------------------
rights and obligations of the parties hereunder shall be binding upon, and inure
to the benefit of, the permitted successors and assigns of the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
------------------
of the day and year first above written.
SIERRA SEMICONDUCTOR CORPORATION
By: /s/ James V. Diller
------------------------
Name: James V. Diller
(Print)
Title: CEO
HAMBRECHT & QUIST LLC
By: /s/ James A. Davidson
-------------------------
Name: James A. Davidson
(Print)
Title: Managing Director
<PAGE>
EXHIBIT B
---------
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR LAWS OR PURSUANT TO
RULE 144 OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK
Company: SIERRA SEMICONDUCTOR CORPORATION, a California corporation (the
"Company"), and any corporation that shall succeed to the obligations
of the Company under this Warrant.
Number of Shares: 25,000
Class of Stock: Common Stock
Initial Exercise Price: $9.25 per Share
Expiration Date: August 28, 2000
Date of Grant: August 28, 1996
THIS CERTIFIES THAT, for value received, Hambrecht & Quist LLC, is
entitled to purchase the above number (as adjusted pursuant to Section 5 hereof)
of fully paid and nonassessable shares of the above Class of Stock of the
Company at the Initial Exercise Price above (as adjusted pursuant to Section 5
hereof), subject to the provisions and upon the terms and conditions set forth
herein.
Article 1. Definitions.
-----------
As used herein, the following terms, unless the context
otherwise requires, shall have the following meanings:
(A) "Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations thereunder, as
shall be in effect at the time.
(B) "Common Stock" shall mean shares of the presently
authorized common stock of the Company and any stock into which such common
stock may hereafter be exchanged.
(C) "Holder" shall mean any person who shall at the time be
the holder of this Warrant.
(D) "Shares" shall mean the shares of the Class of Stock that
the Holder is entitled to purchase upon exercise of this Warrant, as adjusted
pursuant to Section 5 hereof.
(E) "Warrant Price" shall mean the Initial Exercise Price at
which this Warrant may be exercised, as adjusted pursuant to Section 5 hereof.
Article 2. Term.
----
The purchase right represented by this Warrant is exercisable,
in whole or in part, at any time on or before the Expiration Date.
<PAGE>
Article 3. Method of Exercise; Payment; Issuance of New Warrant.
----------------------------------------------------
Subject to Section 2 hereof, the purchase right represented by
this Warrant may be exercised by the Holder, in whole or in part, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
Appendix A duly executed) at the principal office of the Company and by the
payment to the Company, by check made payable to the Company drawn on a United
States bank and for United States funds of an amount equal to the then
applicable Warrant Price per share multiplied by the number of Shares then being
purchased. In the event of any exercise of the purchase right represented by
this Section 3, certificates for the Shares so purchased shall be delivered to
the Holder within thirty (30) days of receipt of such payment and, unless this
Warrant has been fully exercised or expired, a new Warrant representing the
portion of the Shares, if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder within such thirty (30)
day period.
Article 4. Exercise Price.
--------------
The Warrant Price at which this Warrant may be exercised shall
be the Initial Exercise Price, as adjusted from time to time pursuant to Section
5 hereof.
Article 5. Adjustment of Number and Kind of Shares and Adjustment of
----------------------------------------------------------
Warrant Price.
- --------------
5.1 Certain Definitions. As used in this Section 5 the following
-------------------
terms shall have the following respective meanings:
(A) Options:rights, options or warrants to subscribe for,
-------
purchase or otherwise acquire either shares of Common Stock or Convertible
Securities;
(B) Convertible Securities:any evidences of indebtedness,
----------------------
shares of stock or other securities directly or indirectly convertible into or
exchangeable for Common Stock.
5.2 Adjustments. The number and kind of securities purchasable
-----------
upon the exercise of this Warrant and the Warrant Price shall be subject to
adjustment from time to time upon the occurrence of certain events, as follows:
(A) Reclassification, Reorganization, Consolidation or
-----------------------------------------------------
Merger. In the case of any reclassification of the Common Stock, or any
- ------
reorganization, consolidation or merger of the Company with or into another
corporation (other than a merger or reorganization with respect to which the
Company is the surviving corporation and which does not result in any
reclassification of the Common Stock), the Company, or such successor
corporation, as the case may be, shall execute a new warrant, providing that the
Holder shall have the right to exercise such new warrant and upon such exercise
to receive, in lieu of each share of the Class of Stock theretofore issuable
upon exercise of this Warrant, the number and kind of securities receivable upon
such reclassification, reorganization, consolidation or merger by a holder of
shares of the same Class of Stock of the Company for each share of the Class of
Stock. The aggregate warrant price of the new warrant shall be the aggregate
Warrant Price in effect immediately prior to the reclassification,
reorganization, consolidation or merger. Such new warrant shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 5 including, without limitation,
adjustments to the Warrant Price and to the number of shares issuable upon
exercise of this Warrant. The provisions of this subsection (a) shall similarly
apply to successive reclassification, reorganizations, consolidations or
mergers.
<PAGE>
(B) Split, Subdivision or Combination of Shares.
-------------------------------------------
If the Company at any time while this Warrant remains outstanding and unexpired
shall split, subdivide or combine the Class of Stock for which this Warrant is
then exercisable, the Warrant Price shall be proportionately decreased in the
case of a split or subdivision or proportionately increased in the case of a
combination. Any adjustment under this subsection (b) shall become effective
when the split, subdivision or combination becomes effective.
(C) Stock Dividends. If the Company at any time while
---------------
this Warrant remains outstanding and unexpired shall pay a dividend with respect
to the Class of Stock for which this Warrant is then exercisable, payable in
shares of that Class of Stock, Options or Convertible Securities, the Warrant
Price shall be adjusted, from and after the date of determination of the
stockholders entitled to receive such dividend or distributions, to that price
determined by multiplying the Warrant Price in effect immediately prior to such
date of determination by a fraction (i) the numerator of which shall be the
total number of shares of that Class of Stock outstanding immediately prior to
such dividend or distribution, and (ii) the denominator of which shall be the
total number of shares of the same Class of Stock outstanding immediately after
such dividend or distribution (including shares of that Class of Stock issuable
upon exercise, conversion or exchange of any Options or Convertible Securities
issued as such dividend or distribution). If the Options or Convertible
Securities issued as such dividend or distribution by their terms provide, with
the passage of time or otherwise, for any decrease in the consideration payable
to the Company, or any increase in the number of shares issuable upon exercise,
conversion or exchange thereof (by change of rate or otherwise), the Warrant
Price shall, upon any such decrease or increase becoming effective, be reduced
to reflect such decrease or increase as if such decrease or increase became
effective immediately prior to the issuance of the Options or Convertible
Securities as the dividend or distribution. Any adjustment under this subsection
(c) shall become effective on the record date.
5.3 Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
Warrant Price pursuant to this Section 5, the number of Shares issuable upon
exercise of this Warrant shall be adjusted to the product obtained by
multiplying the number of Shares issuable immediately prior to such adjustment
in the Warrant Price by a fraction (i) the numerator of which shall be the
Warrant Price immediately prior to such adjustment, and (ii) the denominator of
which shall be the Warrant Price immediately after such adjustment.
5.4 Other Kinds of Dividends. If the Company at any time while
------------------------
this Warrant remains outstanding and unexpired shall pay a dividend with respect
to the Class of Stock for which this Warrant is then exercisable, payable in
property other than shares of that Class of Stock, Options or Convertible
Securities, then upon exercise of this Warrant the Holder shall receive, in
addition to shares of that Class of Stock, such additional property as the
Holder would have received if the Holder had exercised this Warrant pursuant to
Article 7 on the date immediately before the record date for determining
shareholders of the Company entitled to receive such a dividend. If the Company
is unable to hold such property for payment to the Holder upon exercise of this
Warrant, then an additional warrant shall be issued allowing for the acquisition
of such property independent of the exercise of this Warrant. Such additional
Warrant ("Additional Warrant") shall have the same terms and conditions of this
Warrant, except that the aggregate price shall equal the aggregate fair market
value determined in accordance with Section 7.4 of the property which would have
been distributed to the Holder if the Holder had held the Class of Stock on the
record date for determining the distribution. The Warrant Price of this Warrant
shall be adjusted, from and after the date of determination of the stockholders
entitled to receive such dividend, to that price determined by subtracting from
the aggregate Warrant Price in effect immediately prior to such date of
determination the aggregate Warrant Price of the Additional Warrant.
<PAGE>
Article 6. Notice of Adjustments.
---------------------
So long as this Warrant remains outstanding and unexpired,
whenever the Warrant Price shall be adjusted pursuant to Section 5 hereof, the
Company shall issue a certificate signed by its chief financial officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated and the
Warrant Price after giving effect to such adjustment, and shall cause a copy of
such certificate to be mailed (by first class mail, postage prepaid) to the
Holder.
Article 7. Right to Convert Warrant Into Stock.
-----------------------------------
7.1 Right to Convert. In addition to the rights granted under
----------------
Section 3 of this Warrant, the Holder shall have the right to require the
Company to convert this Warrant (the "Conversion Right") into shares of the
Class of Stock for which the Warrant is then exercisable, as provided in this
Section 7. Upon exercise of the Conversion Right, the Company shall deliver to
the Holder (without payment by the Holder of any Warrant Price) that number of
shares of stock equal to the quotient obtained by dividing (x) the value of this
Warrant at the time the Conversion Right is exercised (determined by subtracting
the aggregate Warrant Price immediately prior to the exercise of the Conversion
Right from the aggregate fair market value of the Shares issuable upon exercise
of this Warrant immediately prior to the exercise of the Conversion Right, as
determined pursuant to Section 7.4 below) by (y) the fair market value (as
determined pursuant to Section 7.4 below) of one share of that Class of Stock
immediately prior to the exercise of the Conversion Right.
7.2 Method of Exercise. So long as the Warrant remains outstanding
------------------
and unexpired, the Conversion Right may be exercised at any time by the Holder
by the surrender of this Warrant at the principal office of the Company together
with a written statement specifying that the Holder thereby intends to exercise
the Conversion Right. Certificates of the shares of stock issuable upon exercise
of the Conversion Right shall be delivered to the Holder within thirty (30) days
following the Company's receipt of this Warrant together with the aforesaid
written statement.
7.3 Notification Prior to Expiration. To the extent this Warrant
--------------------------------
is not previously exercised, the Company shall be obligated to notify Holder in
writing of impending expiration sixty (60) days prior to such expiration.
7.4 Valuation of Stock. For purposes of this Section 7, the fair
------------------
market value of one share of the Class of Stock issuable upon exercise of this
Warrant shall mean:
(A) The product of (i) the highest closing price or, if no
closing price is reported, the closing bid and asked prices of the Common Stock,
quoted in the Over-The-Counter Market Summary or the closing price quoted on any
exchange on which the Common Stock is listed, whichever is applicable, as
published in the Western Edition of The Wall Street Journal for the thirty (30)
trading days prior to the date of determination of fair market value, and (ii)
the number of shares of Common Stock into which each share of the Class of Stock
is then convertible, if applicable;
(B) If the Common Stock is not traded Over-The-Counter or on
an exchange, the fair market value of the Class of Stock per share shall be as
determined in good faith by the Company's Board of Directors; provided, however,
that if the Holder disputes in writing the fair market value determined by the
Board of Directors within thirty (30) days of being informed of such fair market
value, the fair market value shall be determined by an independent appraiser,
appointed in good faith by the Company's Board of Directors.
<PAGE>
Article 8. Compliance With Act; Transferability of Warrant;
-----------------------------------------------------
Disposition of Shares.
---------------------
8.1 Legends. This Warrant and the Shares issued upon exercise
-------
thereof shall be imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED."
8.2 Transferability and Non-negotiability of Warrant and Shares.
-----------------------------------------------------------
This Warrant and the Shares issued upon exercise thereof shall not be sold,
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, if reasonably
requested by the Company). Subject to the provisions of this Section 8.2, title
to this Warrant may be transferred in the same manner as a negotiable instrument
transferable by endorsement and delivery.
Article 9. Miscellaneous.
-------------
No fractional shares of the Shares shall be issued in
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Warrant
Price then in effect. The terms and provisions of this Warrant shall inure to
the benefit of, and be binding upon, the Company and the Holders hereof and
their respective successors and assigns. This Warrant shall be governed by and
construed under the laws of the State of California as applied to contracts
entered into between residents of the State of California to be wholly performed
in the State of California. The titles of the sections and subsections of this
Warrant are for convenience only and are not to be considered in construing this
Warrant. All pronouns used in the Warrant shall be deemed to include masculine,
feminine and neuter forms.
SIERRA SEMICONDUCTOR CORPORATION
By:
-------------------------------------
Title:
-------------------------------------
<PAGE>
APPENDIX A
NOTICE OF EXERCISE
------------------
TO:
----------------------
1. The undersigned hereby elects to purchase shares of
----------------
the Common Stock of SIERRA SEMICONDUCTOR CORPORATION, pursuant to terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full, together with all applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares
of the Common Stock in the name of the undersigned or in such other name as is
specified below:
3. The undersigned represents it is acquiring the shares of Common
Stock solely for its own account for investment and not as a nominee for any
other party and not with a view toward the resale or distribution thereof within
the meaning of the Securities Act of 1933, as amended.
------------------------------------
(Name)
------------------------------------
(Address)
------------------------------------
------------------------------------
------------------------------------
(Taxpayer Identification Number)
- -----------------------------------
(print name of Holder)
By:
---------------------------
Title:
---------------------------
Date:
---------------------------
DATED THIS 3RD DAY OF OCTOBER 1996
BETWEEN
(1) CHARTERED SEMICONDUCTOR MANUFACTURING LTD
(2) SIERRA SEMICONDUCTOR CORPORATION
AND
(3) PMC-SIERRA INC.
AMENDMENT AGREEMENT (NO. 1)
TO
DEPOSIT AGREEMENT DATED 15 AUGUST 1995
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
AMENDMENT AGREEMENT (NO. 1)
THIS AMENDMENT AGREEMENT (NO.1) is made the 3rd day of October 1996, by and
between:-
(1) CHARTERED SEMICONDUCTOR MANUFACTURING LTD (formerly known as Chartered
Semiconductor Manufacturing Pte Ltd), a company incorporated in
Singapore with its registered office at 60 Woodlands Industrial Park D,
Street 2, Singapore 738406 ("CSM");
(2) SIERRA SEMICONDUCTOR CORPORATION, a company incorporated in California
and having its place of business at 2075 North Capitol Avenue, San
Jose, CA 95132, United States of America ("Customer"); and
(3) PMC-SIERRA, INC., a company incorporated in Canada and having its place
of business at 105-8555 Baxter Place, Burnaby, B.C. Canada V5A 4V7
("PMC").
WHEREAS
(A) CSM and Customer had entered into a Deposit Agreement dated 15 August
1995 (the "Deposit Agreement") for the purpose of Customer depositing
certain funds with CSM and procuring CSM to make available to Customer
certain wafer manufacturing capacity.
(B) Customer desires such wafer manufacturing capacity from CSM to be made
available to PMC, a subsidiary of Customer, and Customer collectively
and Customer is willing to guarantee the obligations of PMC under this
Agreement.
(C) PMC is willing to enter into this Amendment Agreement and to be bound
by the terms and conditions set forth herein and in the Deposit
Agreement.
(D) CSM, Customer and PMC are entering into this Amendment Agreement to
vary the Deposit Agreement with effect from the date hereof.
<PAGE>
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the parties agree as follows:-
1. INTERPRETATION
All terms and references used in the Deposit Agreement and which are
defined or construed in the Deposit Agreement but are not defined or
construed in this Amendment Agreement shall have the same meaning and
construction in this Amendment Agreement.
2. ADDITIONAL PARTY
PMC hereby agrees to, and CSM and Customer are willing that PMC, become
a party to the Deposit Agreement and this Amendment Agreement and to be
bound by the terms and conditions set forth in the same. CSM will, in
accordance with the terms and conditions set forth in the Deposit
Agreement and this Amendment Agreement, make available wafer capacity
to Customer and PMC collectively.
3. AMENDMENT TO THE DEPOSIT AGREEMENT
The Parties agree that with effect from the date of this Amendment
Agreement, the Deposit Agreement shall be amended as follows:-
3.1 CLAUSE 1 (THE DEPOSIT)
----------------------
CLAUSES 1.1, 1.2 AND 1.3 shall be deleted in their entirety
and replaced with the following:-
"1.1 As at the date of this Amendment Agreement, Customer
has deposited with CSM the sum of US Dollars
[REDACTED] (the "Deposit").
1.2 Upon the expiry of the term of this Agreement or the
earlier termination thereof in accordance with Clause
6 or Clause 7.2, CSM will return to Customer the
Deposit, without interest and subject to any
deductions or refunds made by CSM pursuant to the
terms of this Agreement.
1.3 Customer shall have the option to increase the
Deposit to the sum of US Dollars [REDACTED] provided
that:-
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
(a) Customer shall give CSM at least six (6)
months' written notice of such intention to
increase the Deposit;
(b) CSM has the right to request Customer to
increase the Deposit by a date ("Expiry
Date") to be determined by CSM in its sole
discretion, provided that CSM shall give
Customer at least six (6) to twelve (12)
months notice. In the event Customer does
not increase the Deposit to [REDACTED] by
the determined Expiry Date, Customer's
option to increase the Deposit shall expire;
(c) in the event Customer increases the Deposit
to [REDACTED] before the Expiry Date,
CSM's Supply Commitment shall be calculated
based on the following formula:-
CSM Supply Commitment per month =
[REDACTED]
where D = the amount of Deposit then with
CSM and
(d) the terms and conditions of such increase
shall be mutually agreed between the
parties.
3.2 CLAUSE 2 (CSM SUPPLY COMMITMEN)
-------------------------------
The provisions of Clause 2 shall be amended as follows:-
CLAUSES 2.1, 2.2, 2.3 and 2.4 shall be deleted in their
entirety and replaced with the following:-
"2.1 In consideration of the payment of the Deposit by
Customer, Customer's maintenance of the Deposit with
CSM and Customer's guaranteeing of PMC's obligations
under the terms of this Agreement, CSM will make
available to Customer and PMC, wafer manufacturing
capacity for 8-inch wafers (based on 15 mask level
wafers) in each calendar quarter commencing from the
first calendar quarter of 1997 until the expiry or
the earlier termination of the term of this
Agreement, in such quantities as set out in Annex A
(the "CSM Supply Commitment"). For the purposes of
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission"
<PAGE>
clarity, the CSM Supply Commitment quantities as set
out in Annex A represent the aggregate of the wafer
manufacturing capacity available to Customer and PMC
in each quarter.
2.2 Unless otherwise expressly provided in this Agreement
the sale of wafers by CSM to Customer and PMC, the
capacity of which is made available to Customer and
PMC under this Agreement, shall be governed by the
terms and conditions of CSM's foundry agreement
("Foundry Agreement") to be entered into by CSM and
each of Customer and PMC.
2.3 CSM reserves the right to adjust the pricing of
wafers to be supplied by CSM from time to time
depending on prevailing market conditions, provided
however that CSM shall give Customer and PMC not less
than 3 months' prior written notice of such
adjustment. In any event, the price of wafers
supplied to Customer and/or PMC shall be no more than
[REDACTED] above CSM's pricing for similar products
and processes and similar quantities available to
CSM's equity investors."
3.3 CLAUSE 3 (CUSTOMER LOADING COMMITMENT)
--------------------------------------
The heading 3., and CLAUSES 3.1, 3.2 AND 3.3 shall be deleted
in their entirety and replaced with the followings
"3. CUSTOMER AND PMC LOADING COMMITMENT
3.1 Customer and PMC jointly and severally agree to place
purchase orders with CSM for such quantity of 8-inch
wafer equivalents (based on 15 mask level wafers) for
delivery during the calendar quarters set out in
Annex A (the "Customer and PMC Loading Commitment").
The aggregate quantity of wafers for which orders are
placed by Customer and PMC is hereinafter referred to
as the "Customer and PMC Actual Loading".
3.2 The Customer and PMC Actual Loading for each calendar
quarter during the term of the Agreement shall in
aggregate be equal to the Customer and PMC Loading
Commitment. In addition, the month to month variation
in the Customer and PMC Actual Loading shall not
exceed [REDACTED] without the prior written approval
of CSM.
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
3.3 Customer and/or PMC may elect to place purchase
orders for 6 inch wafers, on a two-for-one basis of
two 6-inch wafers for every one 8-inch wafer. In the
event of such election, the CSM Committed Capacity
quantities and the Customer and PMC Loading
Commitment quantities shall be adjusted accordingly.
By way of illustration, if in respect of 1Q97 (where
the CSM Committed Capacity and the Customer and PMC
Loading Commitment is [REDACTED] equivalents),
Customer or PMC elects to purchase (y) 6-inch wafers,
then:-
(i) the CSM Committed Capacity and the Customer
and PMC Loading Commitment for 1Q97 shall be
adjusted to be equal to [REDACTED]
(ii) for the purposes of Clauses 5.4 and 5.5
below, the Customer and PMC Loading
Commitment for 1Q97 shall be adjusted to be
equal to [REDACTED].
3.4 Customer and/ or PMC may elect which of CSM's Fab 1,
Fab 2 or Fab 3 such 6-inch or 8-inch wafers will be
manufactured in. Customer and PMC agree that such
election of Fabs, if any, must be notified to CSM six
(6) months in advance and be included in the rolling
6 month forecast to be given by Customer and/or PMC
in accordance with Clause 3.5 below.
3.5 With effect from the date of this Amendment
Agreement, Customer and PMC shall provide to CSM on a
monthly basis, each of their rolling 6-month forecast
of each of their monthly volume requirements for
wafers for each relevant product to be manufactured
hereunder and the Fab in which such wafers are to be
manufactured.
The first 3 months of each 6-month forecast shall be
backed by purchase orders for such first 3 months."
3.4 CLAUSE 4 (LIQUIDATED DAMAGES)
-----------------------------
The heading 4. and CLAUSES 4.1, 4.2, 4.3, 4.4 AND 4.5 shall be
deleted in their entirety and replaced with the following:-
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
"4. GUARANTEE
In consideration of CSM agreeing, at Customer's
request, to make available to PMC such wafer capacity
as set out in this Agreement, Customer hereby agrees
to guarantee the performance of PMC's obligations
under this Agreement."
3.5 CLAUSE 5 (SET OFF AND MAINTENANCE OF DEPOSIT)
---------------------------------------------
The provisions of Clause 5 shall be amended as follows:-
i) by deleting CLAUSES 5.1, 5.2 AND 5.3 in their
entirety and replacing them with the following:-
"5.1 CSM shall be entitled to deduct from and
set-off against the Deposit, any payment
falling due and remaining unpaid by Customer
and/or PMC under the Foundry Agreement.
5.2 At the end of each calendar quarter, CSM
shall issue a written notice to Customer
and/or PMC stating the amount of the overdue
payments and Customer and/or PMC shall pay
the relevant sum to CSM within 30 days of
the date of such notice, so as to maintain
the Deposit at [REDACTED] less such amounts
that may have been refunded by CSM to
Customer pursuant to Clause 5.4 or Clause
5.5 below.
5.3 CSM's right of deduction and set-off
pursuant to Clause 5.2 shall be in addition
to CSM's right to claim the aforesaid
overdue payments separately as a debt due
from Customer and/or PMC and shall not in
any way prejudice such right or any other
rights or remedies which CSM may have at law
or in equity."
ii) by inserting the following NEW CLAUSES 5.4 AND 5.5:-
"5.4 For the period [REDACTED], provided that the
Customer and PMC Actual Loading quantity for
each calendar year is equal to [REDACTED] or
more of the Customer and PMC Loading
Commitment for such calendar year (subject
to such adjustments as may be made in
accordance with Clause 3.3 above), CSM will
refund to
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
Customer the amount of [REDACTED] from
the Deposit within 30 days of [REDACTED] of
the year in which Customer has fulfilled the
condition stated in this Clause 5.4.
By way of illustration, if Customer and/or
PMC purchase an aggregate of [REDACTED] or
more of the quantities for [REDACTED] as
specified in Annex A (subject to such
adjustments as may be made in accordance
with Clause 3.3 above), then CSM will refund
[REDACTED] from the Deposit to Customer by
[REDACTED].
5.5 For the period [REDACTED] to [REDACTED],
provided that the Customer and PMC Actual
Loading quantity for each calendar year
[REDACTED] the Customer and PMC Loading
Commitment for such calendar year (subject
to such adjustments as may be made in
accordance with Clause 3.3 above) by more
than [REDACTED], then CSM will return to
Customer the amount of [REDACTED] from the
Deposit within 30 days of [REDACTED] of the
year in which Customer has fulfilled the
condition stated in this Clause 5.5.
By way of illustration, if Customer and/or
PMC purchase an aggregate of more than
[REDACTED] of the quantities for [REDACTED]
as specified in Annex A (subject to such
adjustments as may be made in accordance
with Clause 3.3 above), then CSM will refund
[REDACTED] from the Deposit to Customer by
[REDACTED]."
3.6 CLAUSE 6 (TERM AND TERMINATION)
-------------------------------
The provisions of Clause 6 shall be amended as follows:-
i) By deleting CLAUSE 6.1(A) in its entirety; and
ii) By renumbering CLAUSE 6.1(B), (C) AND (D) as Clause
6.1"(a)", "(b)" and "(c)" respectively.
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
3.7 CLAUSE 7 (FORCE MAJEURE)
------------------------
The provisions of Clause 7.1 shall be amended by inserting
after the word "Customer's" appearing in the second line, the
words "and PMC`s" and by inserting after the word 'CSM' in the
sixth line, the word "PMC".
3.8 CLAUSE 8 (WARRANTY AND INDEMNITY)
---------------------------------
The provisions of CLAUSES 8.1, 8.2, 8.3, 8.4, 8.5 AND 8.6
shall be deleted in their entirety and replaced with the
following :-
"8.1 Customer and PMC jointly and severally warrant that
each has the right to use and license the use of the
design and processes provided by Customer and/PMC and
each hereby grants to CSM the right to use the
aforesaid design and processes for the performance of
its obligations under this Agreement and the Foundry
Agreement.
8.2 Customer and PMC shall jointly and severally
indemnify, hold harmless and defend CSM against any
claims that Customer's and/or PMC's products or a
process or design licensed from or otherwise provided
by Customer and/or PMC and used by CSM for the
performance of its obligations under this Agreement
is an infringement of any letters patent or other
intellectual property rights, including, without
limitation, any infringement based on specifications
furnished by Customer and/or PMC or resulting from
the use of any equipment or process specified by
Customer and/or PMC.
8.3 CSM shall notify Customer and PMC of any claim of
infringement or of commencement of any suit, action,
or proceedings alleging infringement of any
intellectual property rights of any third party
forthwith after receiving notice thereof. Customer
and PMC shall have the right in their sole discretion
and at their expense to participate in the defence of
any such claim, suit, action or proceedings and in
any and all negotiations with respect thereto.
8.4 CSM shall indemnify, hold harmless and defend
Customer and/or PMC against any claims that the
wafers manufactured by CSM pursuant to this Agreement
using manufacturing processes provided by CSM for the
performance of its obligations under this Agreement
is an infringement of any letters patent or other
intellectual property rights of any third party.
<PAGE>
8.5 Customer and PMC shall notify CSM of any claim of
infringement or of commencement of any suit, action,
or proceedings alleging infringement of any
intellectual property rights of any third party
forthwith after receiving notice thereof. CSM shall
have the right in its sole discretion and at its
expense to participate in the defence of any such
claim, suit, action or proceedings and in any and all
negotiations with respect thereto.
8.6 Customer and PMC hereby agree that in the event that
CSM is required to make any payments, including
without limitation, licence fees or royalty payments,
to any third party in respect of any of CSM's
manufacturing processes used by CSM in the
performance of its obligations under this Agreement,
CSM shall be entitled to adjust the pricing of the
wafers supplied to Customer and PMC accordingly. Such
adjustment shall be effective upon CSM giving to
Customer or PMC not less than 3 months' prior written
notice thereof."
3.9 CLAUSE 10 (NOTICES)
-------------------
CLAUSE 10.1 shall be amended as follows:-
(i) by deleting the address and facsimile number for CSM
in its entirety and replacing it with the following:-
"CSM
---
60 Woodlands Industrial Park D, Street 2
Singapore 738406
Facsimile no : (65) 3622908
Attn: Mr Tan Bock Seng
President"
<PAGE>
(ii) by inserting after the address and facsimile number
for Customer, the following:-
"PMC
---
105-8555 Baxter Place,
Burnaby, B.C.
Canada V5A 4V7
Facsimile no: (604) 4156207
Attn: Mr Greg Aasen
Chief Operating Officer"
3.10 ANNEX A (PAYMENT SCHEDULE)
--------------------------
ANNEX A shall be deleted in its entirety.
3.11 ANNEX B (CSM-SUPPLY COMMITMENT/CUSTOMER LOADING COMMITMENT)
----------------------------------------------------------
ANNEX B shall be deleted in its entirety and replaced by the
ANNEX A (CSM SUPPLY COMMITMENT / CUSTOMER AND PMC LOADING
COMMITMENT) attached.
4. SAVING AND INCORPORATION
4.1 Save as expressly amended by this Amendment Agreement, the terms and
conditions of the Deposit Agreement shall continue to be in full force
and effect in all other respects.
4.2 The Deposit Agreement and this Amendment Agreement shall be construed
as one document and this Amendment Agreement shall be deemed to be part
of the Deposit Agreement. Where the context so permits, references in
the Deposit Agreement and in this Amendment Agreement to "the Deposit
Agreement" or "this Agreement" shall be read and construed as
references to the Deposit Agreement as amended and supplemented by this
Amendment Agreement.
5. GOVERNING LAW
This Amendment Agreement shall be governed by and construed in
accordance with the laws of Singapore. The parties hereby irrevocably
submit to the nonexclusive jurisdiction of the courts of Singapore.
<PAGE>
IN WITNESS WHEREOF the Parties have hereunto entered into this Agreement the
date first above written.
Signed by /s/ Tom Gurnee )
)
)
CHARTERED SEMICONDUCTOR )
MANUFACTURING LTD )
in the presence of:- )/s/ signature unreadable
/s/ Angela Hon
Name: Angela Hon
Signed by /s/ James V. Diller )
)
)
SIERRA SEMICONDUCTOR )
CORPORATION )
in the presence of:- )/s/ Gary Kennedy
/s/ James V. Diller
Name:
Signed by /s/ James V. Diller )
)
)
PMC-SIERRA INC. )
in the presence of:- )/s/ Gary Kennedy
/s/ James V. Diller
Name:
<PAGE>
ANNEX A
CSM SUPPLY COMMITMENT
---------------------
CUSTOMER AND PMC LOADING COMMITMENT
-----------------------------------
Number of 8-inch silicon wafer equivalents (based on 15 mask level)*
1Q97 2Q97 3Q97 4Q97 1Q98 2Q98 3Q98 4Q98 through 4Q2000
[REDACTED]
*subject to such adjustments as may be made in accordance with Clause 3.3
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
OPTION AGREEMENT
BETWEEN
PMC-SIERRA, INC.
AND
SIERRA SEMICONDUCTOR CORPORATION
AND
TAIWAN SEMICONDUCTOR MANUFACTURING CO., LTD.
NOVEMBER 6, 1996
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
TABLE OF CONTENTS
1. TERMINATION OF THE OPTION AGREEMENTS 3
2. DEFINITIONS 4
3. VOLUME COMMITMENT 5
4. WAFER PRICE 5
5. OTHER PURCHASE TERMS AND CONDITIONS 6
6. FAILURE TO PURCHASE THE CUSTOMERS COMMITTED CAPACITY;
FIRST RIGHT OF REFUSAL 6
7. TERM AND TERMINATION 8
8. BOARD APPROVAL 8
9. LIMITATION OF LIABILITY 8
10. NOTICE 9
11. ENTIRE AGREEMENT 9
12. GOVERNING LAW 10
13. ARBITRATION 10
14. ASSIGNMENT 10
15. CONFIDENTIALITY 10
16. FORCE MAJEURE 11
17. OBLIGATION OF FUTURE PURCHASE 11
EXHIBIT A 12
EXHIBIT B 13
EXHIBIT C 14
<PAGE>
OPTION AGREEMENT
----------------
THIS AGREEMENT is made and becomes effective as of November 6,1996 (the
"Effective Date") by Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"), a
company organized under the laws of the Republic of China with its registered
address at No. 12 1, Park Ave. 3, Science-Based Industrial Park, Hsinchu,
Taiwan, and 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, British Columbia, Canada V5A 4V7 (collectively referred to as
"Customers").
RECITALS
WHEREAS, TSMC currently supplies Customers with wafers and Customer
wishes to increase the volume of wafers to be purchased from TSMC;
WHEREAS, in order to increase its output, TSMC must accelerate
[REDACTED] and advance [REDACTED];
WHEREAS, as a condition to TSMC's acceleration of these facilities,
TSMC has asked Customers to make capacity commitments and certain advance
payment under two option agreements;
WHEREAS, the parties intend to terminate the two option agreements and
enter into a new option agreement for the purposes set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties agree as follows:
1. TERMINATION OF THE OPTION AGREEMENTS
Sierra and TSMC agree to terminate the Option Agreement between Sierra and TSMC
dated November 6, 1995 upon the Effective date hereof. PMC-Sierra and TSMC agree
to terminate the Option Agreements between PMC-Sierra and TSMC dated November 6,
1995 upon the Effective Date hereof. Any rights and obligations accrued prior to
the termination of these two agreements, excluding the option fees due
thereunder, shall remain effective.
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
2. DEFINITIONS
(a) "Base Capacity" used in this Agreement shall mean the capacity
that TSMC agrees to provide, and Customers agree to purchase,
in addition to the Option Capacity, pursuant to this
Agreement.
(b) "Customers Committed Capacity" used this Agreement shall mean
the total capacity that Customers agree to purchase from TSMC
pursuant to this Agreement, and is set forth in Exhibit B.
(c) "Option Capacity" used in this Agreement shall mean the firm
capacity commitment made by Customers pursuant to this
Agreement, for which Capacity Customer agrees to pay TSMC
liquidated damages at [REDACTED] per Wafer Equivalent for any
unused capacity pursuant to Subsection 6(a).
(d) "Option Fee" used in this Agreement shall mean the deposit, US
[REDACTED] in total, that Customers have placed with TSMC
upon the execution hereof for liquidated damages upon
Customer's failure to purchase the Option Capacity.
(e) "TSMC Committed Capacity" used in this Agreement shall mean
the total capacity that TSMC agrees to provide to Customers
pursuant to this Agreement, and is set forth in Exhibit B.
(f) "Wafer Equivalent" used in this Agreement shall mean the
number of wafers based on the [REDACTED]. For details of the
equivalency factor, please refer to Exhibit A. Any and all
capacity commitments referred to in this Agreement shall be
measured in Wafer Equivalent.
(g) "Customers" mean either Sierra or PMC-Sierra, or both Sierra
and PMC-Sierra together, as the case may be, when both of them
are principally liable for the performance of the duties or
obligations hereunder as one party; in which case, Sierra and
PMC-Sierra are jointly and severally liable of the obligations
of Customers hereunder. However, Sierra and PMC-Sierra may
individually exercise its rights hereunder when the term
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
"Sierra" and "PMC-Sierra" is used; which shall be construed, neither
joint, nor joint and several, but several. In order to determine the role and
responsibility of each Sierra and PMC-Sierra as a party "Sierra and PMC-Sierra"
hereunder and further clarify and define their respective rights, duties and
obligations hereunder, Sierra and PMC-Sierra shall immediately after the
execution of this Agreement, enter into an agreement between them.
3. VOLUME COMMITMENT
(a) Customers agree to purchase from TSMC the Customers Committed
Capacity, and subject to the payment of the Option Fee by
Customers under Section 5 below, TSMC agrees to provide to
Customer the TSMC Committed Capacity, as set forth in Exhibit
B. In any calendar year, the orders placed by Customers shall
first apply fulfill the [REDACTED] portion of the Customers
Committed Capacity, and then the [REDACTED] portion thereof.
(b) Each month, Customers agree to provide to TSMC a six-month
rolling forecast of the number of wafers that Customers will
purchase, with the volume for the first [REDACTED] weeks being
frozen (i.e., Customers must purchase all of the quantity
forecast for the delivery in the first [REDACTED] weeks of the
forecast). The forecast must be based on wafers out or
deliveries expected to be made by TSMC.
(c) TSMC will use its reasonable effort to cause its fabs to be
capable of producing wafers of more advanced specifications,
as set forth in the TSMC Technology Road Map attached as
Exhibit C.
4. WAFER PRICE
(a) The wafer prices for the Option Capacity shall [REDACTED].
In the event the wafer prices for the Customers Committed
Capacity do not comply with the preceding sentence, TSMC will
make proper price changes for the unfilled orders, upon
Customers' notice in writing.
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
(b) The parties shall negotiate in good faith each year the wafer
prices for the Option Capacity for the following year, and if
no agreement may be reached by the parties before October each
year, the parties agree to submit the dispute to the binding
arbitration pursuant to Section 13 below, and under such
circumstances, neither party shall have the right to terminate
this Agreement under Section 7 below.
5. OTHER PURCHASE TERMS AND CONDITIONS
(a) Within ninety (90) days upon execution hereof, the parties
agree to use their best efforts to negotiate and enter into a
Wafer Production Agreement for the purchase of wafers
hereunder.
(b) Upon the execution hereof, TSMC will return to Customers the
two promissory notes already made to TSMC.
6. FAILURE TO PURCHASE THE CUSTOMERS COMMITTED CAPACITY; FIRST RIGHT OF
REFUSAL
(a) Customers shall notify TSMC of Customers' annual total wafer
requirement from outside sources for the subsequent year by
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 requirements with a
thirty (3 0) days written notice to Customers.
Customers have the right to Carry forward any portion of the
Customers Committed Capacity in the years [REDACTED] through
[REDACTED] to the year [REDACTED] with a [REDACTED] written
notice, provided that the Customers' annual orders to TSMC
represents at least[REDACTED] of the Customers [REDACTED]
wafer requirement from outside sources. In no event can any
Customers Committed Capacity be carried forward beyond the
year of [REDACTED]. If in the year [REDACTED] Customers are
not able to use the Customers Committed Capacity that may have
been carried forward into the year [REDACTED] during the years
[REDACTED] though [REDACTED] or if Customers fail to carry any
portion of the Customers Committed Capacity to the year
[REDACTED] herein, Customers shall promptly notify TSMC of
such in writing and first offer TSMC such capacity for sales
to any third parties. TSMC may, at its option, accept such
offer, in whole or in part, within [REDACTED] days following
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
Customers' notification, and if TSMC so accepts, the
corresponding Option Fee will be returned without interest. In
the event that TSMC decides not to accept such offer,
Customers may assign this Agreement (including the right to
purchase the Customers Committed Capacity for the remaining
term of this Agreement) to any third parties acceptable to
TSMC, within [REDACTED] upon TSMC's written notice that it
will not accept such offer, and if Customers fail to do so,
TSMC shall have the right to withhold the corresponding Option
Fee at [REDACTED] as liquidated damages from the Option Fee,
and TSMC is entitled to sell or use any such unused capacity
thereafter.
In the event Customers' annual orders to TSMC represents lower
than [REDACTED] of the Customers [REDACTED] wafer requirement
from outside sources, [REDACTED] of the Customers Committed
Capacity for that particular year can be carried forward to
the year [REDACTED]. If in such calendar year, for any reason,
Customers are not able to use or purchase all or a portion of
the Customers Committed Capacity, Customers shall promptly
notify TSMC of such in writing and first offer TSMC such
capacity for sales to any third parties. TSMC may, at its
option, accept such offer, in whole or in part, within
[REDACTED] following Customers' notification, and if TSMC so
accepts, the corresponding Option Fee at [REDACTED] will be
returned without interest. In the event that TSMC decides not
to accept such offer, Customers may assign this Agreement
(including the right to purchase the Customers Committed
Capacity for the remaining term of this Agreement) to any
third parties acceptable to TSMC, within [REDACTED] upon
TSMC's written notice that it will not accept such offer, and
if Customers fails to do so, TSMC shall have the right to
withhold the corresponding Option Fee at[REDACTED] as
liquidated damages from the Option Fee, and TSMC is entitled
to sell or use any such unused capacity thereafter.
(b) If any portion of this Agreement or the whole Agreement is
assigned to any third parties acceptable to TSMC pursuant to
this Subsection 6(a) above, such third parties shall abide by
the terms and conditions of this Agreement and TSMC will
return to Customers the Option Fee corresponding to
[REDACTED].
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
7. TERM AND TERMINATION
(a) The term of this Agreement shall commence from the Effective
Date, and continue until [REDACTED], or the date of total
consumption of the Option Fee, whichever is earlier. In the
event that any of the Customers Committed Capacity is carried
forward to the year of [REDACTED] pursuant to Subsection 6(a),
this Agreement shall be extended to [REDACTED].
(b) TERMINATION FOR OTHER BREACH OR FOR BANKRUPTCY Either party
may terminate this Agreement if, the other party breaches any
material provisions of this Agreement (other than the breach
of Section 5 above), and does not cure or remedy such breach
within ninety (90) days of receiving written notice of such
breach, or (ii) becomes the subject of a voluntary or
involuntary petition in bankruptcy or any proceeding relating
to insolvency, receivership or liquidation, if such petition
or proceeding is not dismissed with prejudice within sixty
(60) days after filing.
(c) EFFECT OF TERMINATION
The parties shall remain liable to the other party for any
outstanding and matured rights and obligations at the time of
termination.
8. BOARD APPROVAL
Customers shall obtain the approval by their Boards of
Directors of this Agreement, and submit to TSMC, at the time
of executing this Agreement, an authentic copy of it's board
resolution authorizing the representative designated below to
execute this Agreement.
9. LIMITATION OF LIABILITY
In no event shall any party be liable for any indirect,
special, incidental or consequential damages (including loss
of profits and loss of use) resulting from, arising out of or
in connection with either party's performance or failure to
perform under this Agreement, or resulting from, arising out
of or in connection with either party's producing, supplying,
and/or sale of the wafers, whether due to a breach of
contract, breach of warranty, tort, negligence, or otherwise.
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
10. NOTICE
All notices required or permitted to be sent by either party
to the other party under this Agreement shall be sent by
registered mail postage prepaid, or by personal delivery, or
by fax. Any notice given by fax shall be followed by a
confirmation copy within ten (10) days. Unless changed by
written notice given by either party to the other, the
addresses and fax numbers of the respective parties shall be
as follows:
To TSMC:
TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY, LTD.
No. 121, Park Avenue 3
Science-Based Industrial Park
Hsinchu, Taiwan
Republic of China FAX: 886-35-781545
To Customers:
PMC-SIERRA INC.
105-8555 Baxter Place
Burnaby, B.C. Canada V5A 4V7 FAX: 604-415-6207
Sierra Semiconductor Corporation
2222 Qume Drive
San Jose, CA 95131 FAX: 408-894-0219
11. ENTIRE AGREEMENT
This Agreement, including Exhibits A-C, constitutes the entire
agreement between the parties with respect to the subject
matter hereof, and supersedes and replaces all prior or
contemporaneous understandings, agreements, dealings and
negotiations, oral or written, regarding the subject matter
hereof. No modification, alteration or amendment of this
Agreement shall be effective unless in writing and signed by
all parties. No waiver of any breach or failure by either
party to enforce any provision of this Agreement shall be
deemed a waiver of any other or subsequent breach, or a waiver
of future enforcement of that or any other provision.
<PAGE>
12. GOVERNING LAW
This Agreement will be governed by and interpreted in
accordance with the laws of the Republic of China.
13. ARBITRATION
Each party will make best efforts to resolve amicably any
disputes or claims under this Agreement among the parties. In
the event that a resolution is not reached among the parties
within thirty (30) days after written notice by any party of
the dispute or claim, the dispute or claim shall be finally
settled by binding arbitration in Taipei under The Rules of
Arbitration of the International Chamber of Commerce by three
(3) arbitrators appointed in accordance with such rules. The
arbitration proceeding shall be conducted in English. Judgment
on the award rendered by the arbitrator may be entered in any
court having jurisdiction thereof.
14. ASSIGNMENT
This Agreement shall be binding on and inure to the benefit of each
party and its successors, and except that Customers may assign this
Agreement under Section 6 above, neither party shall assign any of its
rights hereunder nor delegate its obligations hereunder, to any third
party, without the prior written consent of the other.
15. CONFIDENTIALITY
The parties shall keep in strict confidence the existence and contents
of this Agreement, and take best precaution possible to prevent any
unauthorized disclosure or use thereof. Both parties agree that no
disclosure of this Agreement or any matter relating hereto may be made
without the disclosing party first providing the proposed disclosure to
the other party two weeks in advance for consent and reasonable
changes. In the event disclosure is required by laws or governmental
regulations, the disclosing party shall provide the opportunity to
protest, participate in preparing disclosure or make reasonable changes
hereto.
<PAGE>
16. FORCE MAJEURE
Neither party shall be responsible for delays or failure in performance
resulting from acts beyond the reasonable control of such party. Such
acts shall include but not limited to acts of God, war, riot, labor
stoppages, governmental actions, fires, floods, and earthquakes.
17. OBLIGATION OF FUTURE PURCHASE
Customers agree to contract TSMC to manufacture [REDACTED] of its total
wafers requirement above and beyond any contractual commitments in place as of
the [REDACTED], including the Customers Committed Capacity requirement of this
Agreement. Upon completion of the capacity obligations of this Agreement, be it
[REDACTED], or [REDACTED] in the case that some of the Customers Committed
Capacity is carried forward from the years [REDACTED], and into the year of
[REDACTED], Customers commit to contract TSMC to manufacture no less than
[REDACTED] of its total wafer requirement. In the year prior to the expiration
hereof, the parties agree to negotiate in good faith to enter into a new
agreement under which Customers agree to contract TSMC to provide a minimum of
[REDACTED] of Customers' total wafer requirements, provided that TSMC is able to
continue to offer competitive technology, pricing, quality and delivery.
IN WITNESS WHEREOF, the parties, have executed this Agreement as of the
date first stated above.
TAIWAN SEMICONDUCTOR PMC-SIERRA CORPORATION
MANUFACTURING CO., LTD.
BY:/s/ Donald Brooks BY: /s/ James V. Diller
--------------------------- -----------------------
Donald Brooks James V. Diller
President C.E.O.
SIERRA SEMICONDUCTOR
CORPORATION
BY: /s/ James V. Diller
-------------------------
James V. Diller
C.E.O.
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
EXHIBIT A
EQUIVALENCY FACTOR TABLE
[REDACTED]
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
EXHIBIT B
CUSTOMERS'/TSMC
COMMITTED CAPACITY
[REDACTED]
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
<PAGE>
EXHIBIT C
TSMC CMOS TECHNOLOGY ROADMAP
[CHART OMITTED]
"The Confidential Portion has been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission".
LEASE AGREEMENT
PRODUCTION COURT
LAKE CITY
TENANT : PMC - SIERRA, INC.
LEASE COMMENCEMENT: May 15, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
<S> <C>
ARTICLE 1
DEFINITIONS................................................ 1
1.1 Additional Rent........................................................................................ 1
---------------
1.2 Additional Services.................................................................................... 2
-------------------
1.3 Base Rent.............................................................................................. 2
---------
1.4 Building............................................................................................... 2
--------
1.5 Capital Tax............................................................................................ 2
-----------
1.6 Common Areas........................................................................................... 2
------------
1.7 Cost of Additional Services............................................................................ 2
---------------------------
1.8 Commencement Date...................................................................................... 3
-----------------
1.9 Insured Damage......................................................................................... 3
--------------
1.10 Land................................................................................................... 3
----
1.11 Landlord's Architect................................................................................... 3
--------------------
1.12 Lease.................................................................................................. 3
-----
1.13 Leasehold Improvements................................................................................. 3
----------------------
1.14 Normal Business Hours.................................................................................. 3
---------------------
1.15 Operating Costs........................................................................................ 3
---------------
1.16 Permitted Use.......................................................................................... 4
-------------
1.17 Premises............................................................................................... 4
--------
1.18 Prime Rate............................................................................................. 5
----------
1.19 Property............................................................................................... 5
--------
1.20 Proportionate Share.................................................................................... 5
-------------------
1.21 Rent................................................................................................... 5
----
1.22 Rentable Area.......................................................................................... 5
-------------
1.23 Sales Tax.............................................................................................. 5
---------
1.24 Structural Repairs or Replacements..................................................................... 5
----------------------------------
1.25 Taxes.................................................................................................. 5
-----
<PAGE>
1.26 Term................................................................................................... 6
----
ARTICLE 2
PREMISES AND INTENT............................................ 6
2.1 Premises............................................................................................... 6
--------
2.2 Intent................................................................................................. 6
------
2.3 Parking................................................................................................ 6
-------
ARTICLE 3
TERM.................................................... 6
3.1 Term................................................................................................... 6
----
ARTICLE 4
RENT.................................................... 7
4.1 Base Rent.............................................................................................. 7
---------
4.2 Additional Rent........................................................................................ 7
---------------
4.3 Estimate of Additional Rent............................................................................ 8
---------------------------
4.4 Adjustment for Additional Rent......................................................................... 8
------------------------------
4.5 Building Not Fully Occupied............................................................................ 8
---------------------------
4.6 Direct Assessment...................................................................................... 8
-----------------
4.7 Landlord Tax Obligation................................................................................ 8
-----------------------
4.8 Amounts Past Due....................................................................................... 9
----------------
4.9 Value-Added Tax........................................................................................ 9
---------------
4.10 Waiver of Offset....................................................................................... 9
----------------
4.11 Receipts, etc.......................................................................................... 9
--------------
4.12 Allocation of Taxes.................................................................................... 9
-------------------
ARTICLE 5
TENANT'S COVENANTS............................................. 10
5.1 Occupancy.............................................................................................. 10
---------
5.2 Rent................................................................................................... 10
----
5.3 Permitted Use.......................................................................................... 10
-------------
5.4 Waste and Nuisance..................................................................................... 10
------------------
5.5 Floor Loads............................................................................................ 10
-----------
5.6 Insurance Risks........................................................................................ 11
---------------
<PAGE>
5.7 Noxious Fumes and Odours............................................................................... 11
------------------------
5.8 Condition.............................................................................................. 11
---------
5.9 By-Laws................................................................................................ 11
-------
5.10 Rules and Regulations.................................................................................. 12
---------------------
5.11 Surrender, Overholding................................................................................. 12
----------------------
5.12 Exterior Signage....................................................................................... 12
----------------
5.13 Inspection and Access.................................................................................. 12
---------------------
5.14 Exhibiting Premises.................................................................................... 13
-------------------
5.15 Name of Building....................................................................................... 13
----------------
5.16 Acceptance of Premises................................................................................. 13
----------------------
5.17 No Auction............................................................................................. 13
----------
5.18 Yard and Parking Obstruction........................................................................... 13
----------------------------
ARTICLE 6
LANDLORD'S COVENANTS............................................ 13
6.1 Quiet Enjoyment........................................................................................ 13
---------------
ARTICLE 7
UTILITIES................................................. 14
7.1 Utilities.............................................................................................. 14
---------
7.2 Use of Water........................................................................................... 14
------------
7.3 Energy Conservation.................................................................................... 14
-------------------
ARTICLE 8
REPAIR, DAMAGE AND DESTRUCTION....................................... 14
8.1 Landlord's Repairs..................................................................................... 15
------------------
8.2 Tenant's Repairs....................................................................................... 15
----------------
8.3 Abatement and Termination.............................................................................. 15
-------------------------
ARTICLE 9
LICENSES, ASSIGNMENTS AND SUBLETTINGS................................... 17
9.1 Licenses............................................................................................... 17
--------
9.2 Assignments and Sublettings............................................................................ 17
---------------------------
ARTICLE 10
FIXTURES AND IMPROVEMENTS......................................... 19
10.1 Installation of Fixtures & Improvements................................................................ 19
---------------------------------------
<PAGE>
10.2 Liens and Encumbrances on Fixtures & Improvements...................................................... 19
-------------------------------------------------
10.3 Tenant's Goods......................................................................................... 20
--------------
10.4 Removal of Fixtures and Improvements................................................................... 20
------------------------------------
ARTICLE 11
INSURANCE, LIABILITY AND INDEMNITY..................................... 20
11.1 Landlord's Insurance................................................................................... 20
--------------------
11.2 Tenant's Insurance..................................................................................... 21
------------------
11.3 Limitation of Landlord's Liability..................................................................... 22
----------------------------------
11.4 Indemnity.............................................................................................. 22
---------
ARTICLE 12
SUBORDINATION, ATTORNMENT, REGISTRATION AND CERTIFICATES.......................... 23
12.1 Subordination and Attornment........................................................................... 23
----------------------------
12.2 Registration........................................................................................... 23
------------
12.3 Certificates........................................................................................... 23
------------
12.4 Non-Disturbance Agreement.............................................................................. 24
-------------------------
ARTICLE 13
REMEDIES OF LANDLORD ON TENANT'S DEFAULT.................................. 24
13.1 Remedying by Landlord, Non-Payment and Interest........................................................ 24
-----------------------------------------------
13.2 Remedies Cumulative.................................................................................... 24
-------------------
13.3 Right of Re-entry on Termination....................................................................... 24
--------------------------------
13.4 Re-entry and Termination............................................................................... 25
------------------------
13.5 Rights on Re-entry..................................................................................... 25
------------------
13.6 Distress............................................................................................... 25
--------
13.7 Payment of Rent, Etc., on Termination.................................................................. 25
-------------------------------------
ARTICLE 14
CANCELLATION OF INSURANCE AND EVENTS TERMINATING LEASE........................... 26
14.1 Cancellation of Insurance.............................................................................. 26
-------------------------
14.2 Default................................................................................................ 26
-------
ARTICLE 15
MISCELLANEOUS............................................... 27
15.1 Notices................................................................................................ 27
-------
<PAGE>
15.2 Entire Agreement....................................................................................... 28
----------------
15.3 Area Determination..................................................................................... 28
------------------
15.4 Successors and Assigns, Interpretation................................................................. 28
--------------------------------------
15.5 Force Majeure.......................................................................................... 28
-------------
15.6 Waiver................................................................................................. 28
------
15.7 Governing Law, Covenants, Severability................................................................. 29
--------------------------------------
15.8 Headings, Captions..................................................................................... 29
------------------
15.9 Time for Payment....................................................................................... 29
----------------
15.10 Time of Essence........................................................................................ 29
---------------
15.11 Special Provisions......................................................................................29
------------------
(a) Option to Renew........................................................................................ 29
---------------
(b) Options to Lease Contiguous Space...................................................................... 29
---------------------------------
(c) Right to First Refusal to Lease........................................................................ 30
-------------------------------
(d) Right of First Opportunity to Lease Space.............................................................. 31
-----------------------------------------
(e) Option to Expand....................................................................................... 31
----------------
(f) Relocation of Other Tenants to Accommodate Tenant...................................................... 31
-------------------------------------------------
(g) Interpretation......................................................................................... 32
--------------
</TABLE>
<PAGE>
LEASE AGREEMENT made as of the fifteenth day of May, 1996
BETWEEN:
PILOT PACIFIC DEVELOPMENTS INC., B.C. Incorporation No. 398327, on
behalf of KAB PROPERTIES INC., B.C. Incorporation No. 397623, both
being bodies corporate carrying on business at 505 Burrard Street, 930
One Bentall Centre, in the City of Vancouver, in the Province of
British Columbia
(hereinafter collectively called the "Landlord");
AND:
PMC - SIERRA, INC., Federal Incorporation No. 282445-1, a body
corporate carrying on business at 8501 Commerce Court, in the City of
Burnaby, in the Province of British Columbia
(hereinafter called the "Tenant").
WHEREAS KAB Properties Inc. ("KAB") is the registered owner of that certain
parcel of land situated in the City of Burnaby, in the Province of British
Columbia and more particularly described in Schedule "B" hereof (hereinafter
called the "Land"); and
WHEREAS Pilot Pacific Developments Inc. ("Pilot") represents KAB and is entering
into this Lease on behalf of KAB as the duly authorized agent thereof; and
WHEREAS the Landlord has constructed or intends to construct an office building
containing lab, high technology and flex space upon the Land (hereinafter called
the "Building") shown as "Phase II Building" on the site plan attached hereto as
Schedule "A1"; and
WHEREAS the Tenant has agreed to lease space in the Building which will comprise
the area more particularly hereinafter set forth for the term and at the rental
and subject to the terms, covenants, conditions and agreements hereinafter
contained;
WITNESSETH THAT:
<PAGE>
1
DEFINITIONS
1.0 In this Lease the following expressions shall have the following
meanings:
1.1 Additional Rent
---------------
"Additional Rent" means the payments of Operating Costs and Taxes and any other
payments which the Tenant is required to make to the Landlord pursuant to this
Lease.
1.2 Additional Services
-------------------
"Additional Services" means the services and supervision supplied by the
Landlord from time to time to the Tenant and which are approved in writing by
the Tenant and are additional to the normal operation and maintenance of the
Property and other services which the Landlord has agreed to supply pursuant to
the provisions of this Lease and to like provisions of other leases of the
Building.
1.3 Base Rent
---------
"Base Rent" means the fixed annual rent calculated and payable pursuant to
Article 4.1.
1.4 Building
--------
"Building" has the meaning set out on page 1 of the Lease but if the Building is
expanded or becomes part of a bigger building by being connected to the 8525
Building, then except as otherwise specifically provided herein, "Building"
shall mean the bigger building.
1.5 Capital Tax
-----------
"Capital Tax" means an imputed amount presently or hereafter imposed from time
to time upon KAB and payable by KAB (or by Pilot acting on behalf of KAB or by
any other corporation acting on behalf of KAB) and which is levied or assessed
against KAB on account of its ownership of or capital employed in the Land and
Building. Capital Tax shall be imputed as if the amount of such tax were that
amount due if the Land and Building were the only real property of KAB and
Capital Tax includes the amount of any capital or place of business tax levied
by the provincial government or other applicable taxing authority against the
Landlord with respect to the Land and Building whether or not known as Capital
Tax or by any other name.
1.6 Common Areas
------------
"Common Areas" means all areas of the Building or Property, as may be designated
by the Landlord from time to time, including without limitation, corridors,
electrical rooms, washrooms, staircases, retaining walls, roofs, all exterior
areas, facilities, improvements, equipment and installations of the Building and
on the Property, pedestrian sidewalks, landscaped and planted areas, general
signs, entrances and exits, roads and other means of access to and serving the
Building and Property, loading docks and areas, delivery passages, truckways,
parking areas, all general signs and all other facilities available for the use
and/or benefit of all tenants, their officers, employees, agents, customers,
invitees and licensees.
<PAGE>
1.7 Cost of Additional Services
---------------------------
"Cost of Additional Services" means in the case of Additional Services provided
by the Landlord a reasonable charge made therefor by the Landlord which shall
not exceed the cost of obtaining such services from independent contractors, and
in the case of Additional Services provided by independent contractors, the
Landlord's total cost of providing Additional Services to the Tenant including
the cost of all labour (including salaries, wages and fringe benefits) and
materials and other direct expenses incurred, the cost of supervision and other
indirect expenses capable of being allocated thereto (such allocation to be made
upon a reasonable basis) and all other out-of-pocket expenses made in connection
therewith including amounts paid to independent contractors, plus in either
case, an amount equal to fifteen (15%) percent thereof. A report of the
Landlord's independent chartered accountant as to the amount of any Cost of
Additional Services shall be conclusive, should a dispute arise. The
determination of the Cost of Additional Services shall exclude any goods and
services taxes, sales taxes, value added taxes or any other taxes payable or
paid by the Landlord in respect of Additional Services except to the extent that
the Landlord does not receive, or is not entitled to receive, a credit or
reimbursement for those taxes pursuant to the applicable tax legislation.
1.8 Commencement Date
-----------------
"Commencement Date" means the first day of the Lease Term as set out in Article
3.1.
1.9 Insured Damage
--------------
"Insured Damage" means the part of any damage occurring to the Premises for
which the Landlord is responsible of which the cost of repair is actually
recoverable by the Landlord under a policy of insurance in respect of fire and
other perils from time to time effected by the Landlord.
1.10 Land
----
"Land" means those lands described as "LOT 2" in Schedule "B" and, if
consolidated with those lands at any time, the lands contiguous to those lands
^on which the 8525 Building is located, which are described as "LOT 1" in
Schedule "B".
1.11 Landlord's Architect
--------------------
<PAGE>
"Landlord's Architect" means the architect, or engineer or quantity surveyor
selected by the Landlord from time to time for the purposes of making
determinations hereunder.
1.12 Lease
-----
"Lease", "hereof", "herein", "hereunder" and similar expressions mean or refer
to this Lease and includes all other Schedules attached hereto, and any
amendments thereof made from time to time by the parties in writing.
1.13 Leasehold Improvements
----------------------
"Leasehold Improvements" means all fixtures, improvements, installations,
alterations and additions from time to time made, erected or installed by or on
behalf of the Tenant or any previous tenant of the Premises with the exception
of trade fixtures or furniture and equipment not of the nature of fixtures, and
includes all wall-to-wall carpeting (whether or not supplied by the Landlord),
and all window coverings.
1.14 Normal Business Hours
---------------------
"Normal Business Hours" means the hours from 7:30 a.m. to 6:00 p.m., Monday to
Friday, inclusive, of each week, statutory holidays excepted.
1.14 Operating Costs
---------------
"Operating Costs" means the total of all expenses, costs and outlays of every
nature incurred in the complete maintenance, repair, operation, insuring and
management of the Property and the carrying out of the Landlord's obligations
under this Lease and similar tenant leases, all calculated in accordance with
generally accepted accounting principles but not including costs incurred for
the original construction of the Building. Without limiting the generality of
the foregoing, Operating Costs includes all expenses, costs and outlays relating
to the following: Common Areas; all utilities not separately metered to tenants;
security; all insurance required to be carried by the Landlord pursuant hereto
and all other insurance relating to the Property as placed by the Landlord from
time to time in the Landlord's discretion, acting reasonably; repairs and
replacements to the Building and its components including, without limitation,
repairs pursuant to Article 8.1, but excluding Structural Repairs or
Replacements and costs exceeding $1000.00 in any one invoice relating to each
roof replacement, roof repair or roof maintenance expense; accounting and
auditing; all amounts paid to third parties relating to work performed in
relation to the Property; should the Landlord elect to manage the Property
itself a fee for management and administration of the Property calculated at
four (4%) percent of the Base Rent payable by all tenants in the Building;
supplies and materials used in relation to operating and maintaining the
Property; uniforms; provision of a building superintendent and associated
personnel including a reasonable rental value for office space used by those
persons and related expenses; all outdoor maintenance including landscaping and
snow removal; operation and maintenance of parking area (including reasonable
depreciation and materials for resurfacing the parking area); preventative
maintenance and inspection; cost of consulting engineering fees; costs of all
service contracts, legal and consulting services; taxes (other than income
taxes), including:
Capital tax, any goods and services taxes, sales taxes, excise taxes,
value added taxes or any other taxes payable or paid by the Landlord in
respect of Operating Costs to the extent that the Landlord does not
receive, or is not entitled to receive a credit or reimbursement for
those taxes pursuant to the applicable tax legislation;
Cost of each "major expenditure" (as hereinafter defined) as amortized
over the period of the Landlord's reasonable estimate of the economic
life of the item acquired, but not to exceed fifteen (15) years, using
equal monthly installments of principal and interest at the prime
commercial loan rate charged at the time of the expenditure to
borrowers having the highest credit rating from time to time by the
main branch, in British Columbia of the Landlord's principal bank at
the time, per annum compounded semiannually, where "major expenditure"
shall mean any single expenditure incurred during or subsequent to the
fiscal period in which the lease commences, for replacement of
machinery, equipment, building elements, repairs, systems or facilities
in connection with the Property or the Building, which expenditure is
more than ten percent (10%) of the total Operating Costs for the
previous fiscal period, or for modifications or additions to the
Property if one of the principal purposes of such modification or
addition was to reduce energy consumption or Operating Costs or was
required by government regulation; and
<PAGE>
Depreciation of: (1) the costs and expenses including repair and
replacement, of all maintenance and cleaning equipment and master
utility meters, and (2) the costs and expenses incurred for repairing
or replacing all other fixtures, equipment and facilities serving or
comprising the Building which by their nature, require periodic or
substantial repair or replacement unless they are charged fully in the
year in which they are incurred, in accordance with sound accounting
principles.
For greater certainty, the determination of Operating Costs shall exclude any
goods and services taxes, sales taxes, value added taxes or any other taxes
payable by the Landlord in respect of Operating Costs except to the extent that
Landlord does not receive, or is not entitled to receive, a credit or
reimbursement for those taxes pursuant to the applicable tax legislation.
To the extent that any component of Operating Costs should be allocated, in the
reasonable opinion of the Landlord, to the Building or to other buildings on the
Land or to a tenant or one group of tenants the Landlord may, but shall not be
obligated to allocate the cost component of Operating Costs to those buildings
or tenants alone.
Any report of the Landlord's auditor or other licensed public accountant
appointed by the Landlord for the purpose, shall be conclusive as to the amount
of Operating Costs for any period to which such report relates.
1.16 Permitted Use
-------------
"Permitted Use" means the use specified in Article 5.3.
1.17 Premises
--------
"Premises" means those portions of the Building shown outlined in heavy black
outline on the floor plans attached as Schedule "A2" hereto. The exterior face
of the Building and any space in the Premises used for stairways or passageways
to other premises, stacks, shafts, pipes, conduits, ducts or other building
facilities, the heating, electrical, plumbing, air conditioning and other
systems in the Building and the use thereof, as well as access thereto through
the Premises for the purpose of use, operation, maintenance, replacement and
repair, are expressly excluded from the Premises and reserved to the Landlord.
<PAGE>
1.18 Prime Rate
----------
"Prime Rate" means that rate of interest announced from time to time by the main
branch in the Province of British Columbia of the Landlord's principle bank at
the time, as a reference rate then in effect for determining interest rates on
Canadian Dollar denominated commercial loans made in Canada.
1.19 Property
--------
"Property" means the Land and Building referred to herein (including the land
contiguous to the Land, on which the 8525 Building is located^described as "LOT
1" on Schedule "B", if consolidated with the Land at any time) and all other
buildings and improvements on the Land as are from time to time existing
thereon.
1.20 Proportionate Share
-------------------
When used herein, "Proportionate Share" means the ratio (during each calendar
year) which the Rentable Area of the Premises bears to the total Rentable Area
in the Building if the Building is fully occupied and if it is not fully
occupied "Proportionate Share" means the ratio (during each calendar year) the
Rentable Area of the Premises bears to 95% of the total Rentable Area in the
Building.
1.21 Rent
----
"Rent" means the Base Rent and the Additional Rent.
1.22 Rentable Area
-------------
"Rentable Area" as used herein shall refer to all floor area measured from the
exterior face of the predominant building line in the case of exterior walls and
to the centre of partitions that separate the Premises from adjoining premises
or Common Areas and includes, without limitation, all stairways, passageways,
mechanical rooms and washrooms, and other facilities exclusively or primarily
serving the Premises. There shall be no deductions for vestibules or other
recessed areas inside the said predominant building line, or for columns, ducts,
projections or other structural elements necessary to the Building. The
"Rentable Area" in the Building does not include Common Areas.
<PAGE>
1.23 Sales Tax
---------
"Sales Tax" shall have the meaning set out in Article 4.9.
1.24 Structural Repairs or Replacements
----------------------------------
"Structural Repairs or Replacements" means any repairs, replacements, changes or
alterations required to be made to the foundations, concrete or steel columns,
bearing walls, roof joists and decking (excluding membrane) and floor decks or
slabs of the Premises.
1.25 Taxes
-----
"Taxes" means all taxes, rates, duties, levies and assessments whatsoever,
whether municipal, provincial, federal or otherwise, levied, imposed or assessed
against the Building, the Land and any Leasehold Improvements or any of them, or
upon the Landlord in respect thereof or from time to time levied, imposed or
assessed in lieu thereof, including those levied, imposed or assessed for
education, schools and local improvements, and including all costs and expenses
(including legal and other professional fees and interest and penalties on
deferred payments) incurred by the Landlord in good faith in contesting,
resisting or appealing any taxes, rates, duties, levies or assessments, but
excluding taxes and license fees in respect of any business carried on by
tenants and occupants of the Building (including the Landlord), income or
profits taxes upon the income of the Landlord to the extent such taxes are not
levied in lieu of taxes, rates, duties, levies and assessments against the
Building, the Land or Leasehold Improvements or upon the Landlord in respect
thereof and Sales Tax imposed or levied against the Tenant in respect of the
Rent or Cost of Additional Services payable by the Tenant to the Landlord or the
provision of rental space by the Landlord to the Tenant, and shall also include
any and all taxes which may in the future be levied in lieu of Taxes as
hereinbefore defined. 1.26 Term
"Term" means the term of the Lease set forth in Article 3.1 and any extension
thereof and any period of permitted overholding.
2
PREMISES AND INTENT
2.1 Premises
--------
In consideration of the rents, covenants, agreements and conditions hereinafter
reserved and contained on the part of the Tenant to be respectively paid, kept,
observed and performed, the Landlord hereby demises and leases unto the Tenant
the Premises as generally shown outlined in heavy black outline on the floor
plans attached hereto as Schedule "A2". The Rentable Area of the Premises is
fifty seven thousand eight hundred thirty seven (57,837) square feet according
to the final determination by the Landlord's Architect. The certificate of
measurement prepared by the Landlord's Architect shall be final and binding upon
the parties hereto as to such Rentable Area.
2.2 Intent
------
The Tenant acknowledges and agrees that this Lease shall be a completely net
lease for the Landlord except as expressly herein set out and the Landlord shall
not be responsible during the Term hereof for any costs, charges, expenses and
outlays of any nature whatsoever arising from or relating to the Premises, or
the contents thereof and without limiting the generality of the foregoing, the
Tenant shall be liable for the payment of all charges, impositions and expenses
of every nature and kind relating to the Premises and the contents thereof and
its Proportionate Share of Operating Costs and Taxes as defined herein.
<PAGE>
2.3 Parking
-------
The Tenant will be entitled to 1 reserved parking stall for every 260 square
feet of the Rentable Area at any one time at such locations as may be mutually
agreed from time to time by the Landlord and the Tenant provided that it is
hereby agreed and understood by the Tenant that in no way shall the Landlord be
responsible for monitoring the use of or the policing of such parking.
3
TERM
3.1 Term
----
The Term of this Lease shall be ten (10) years and shall commence on the 15th
day of May, 1996 (the "Commencement Date") to be fully completed and ended on
the 14th day of May, 2006. In the event the Premises should not be ready for
occupancy by Commencement Date for any reason Landlord shall not be liable or
responsible for any claims, damages or liabilities in connection therewith or by
reason thereof, subject to the terms contained in the Agreement to Lease
accepted June 20, 1995 between the Landlord and the Tenant (the "Agreement to
Lease"). Should the Term of this Lease commence on a date other than the
Commencement Date the Landlord and the Tenant will, at the request of the other,
execute a declaration specifying a revised commencement date of the Term of this
Lease and in such event, rental under this Lease shall not commence until the
said revised commencement date which shall be deemed to be the Commencement
Date, and the stated Term in this Lease shall thereupon commence and the
expiration date shall be extended so as to give effect to the full stated Term.
4
RENT
4.1 Base Rent
---------
The Tenant shall pay to the Landlord a base annual rent (herein called "Base
Rent") throughout the Term as follows:
(a) $13.75 per square foot of Rentable Area per year, completely net to the
Landlord as set out in Article 2.2 of this Lease, during and throughout
the first five years of the Term, yielding and paying to the Landlord
$795,258.75 per annum, payable as follows:
(i) $36,342.47, representing 17/31 of $66,271.56, in advance on
May 15, 1996;
(ii) 59 equal consecutive monthly installments of $66,271.56 each
in advance on the first day of each month commencing on June
1, 1996 and ending on April 1, 2001; and
(iii) $29,929.09, representing 14/31 of $66,271.56, in advance o
May 1, 2001; and
(b) $15.00 per square foot of Rentable Area per year, completely net to the
Landlord as set out in Article 2.2 of this Lease, during and throughout
the last five years of the Term, yielding and paying to the Landlord
$867,555 per annum, payable as follows:
(i) $39,646.33, representing 17/31 of $72,296.25, in advance on
May 15, 2001;
(ii) 59 equal consecutive monthly installments of $72,296.25 each
inadvance on the first day of each month commencing on June 1,
2001 and ending on April 1, 2006; and
(iii) $32,649.92, representing 14/31 of $72,296.25, in advance on
May 1, 2006.
<PAGE>
The Tenant agrees to pay such Base Rent, together with any adjustment of rent
provided for herein then in effect, to the Landlord at the Landlord's address as
provided herein (or such other address as may be designated by the Landlord from
time to time) monthly in advance without demand. If the Term of this Lease as
heretofore established commences on other than the first day of a month or
terminates on other than the last day of a month, then the installment or
installments so prorated, together with prorated installments of all other sums
due hereunder at the time and in the manner provided for payment of Base Rent,
shall be paid in advance without demand.
4.2 Additional Rent
---------------
From and after Commencement Date, the Tenant shall pay as Additional Rent its
Proportionate Share of Operating Costs and of Taxes, and all other sums to be
paid by the Tenant hereunder including, without limitation, the Cost of
Additional Services, if any, and the Landlord shall have the same remedies for
default for the payment of Additional Rent as are available to the Landlord in
the case of default in the payment of Base Rent.
4.3 Estimate of Additional Rent
---------------------------
Prior to the Commencement Date, and thereafter prior to the commencement of each
calendar year of the Tenant's occupancy the Landlord shall provide an estimate
of Operating Costs and of Taxes for the portion of the calendar year in which
Commencement Date occurs and thereafter for each calendar year. The Tenant shall
pay as Additional Rent its Proportionate Share of such estimate in equal monthly
installments (or prorated installments under Article 4.1 hereof) at the time and
in the manner provided for payment of Base Rent.
4.4 Adjustment for Additional Rent
------------------------------
Within one hundred and fifty (150) days, or as soon thereafter as possible after
the conclusion of each calendar year of the Term hereof, the Landlord shall
furnish to the Tenant a statement of the Landlord's actual Operating Costs and
Taxes for the said calendar year or portion thereof as the case may be. A lump
sum payment will be made from the Landlord to the Tenant or from the Tenant to
the Landlord, equal to the Proportionate Share of an amount by which the actual
Operating Costs and Taxes is less than the estimated Operating Costs and Taxes
or equal to the Proportionate Share of an amount by which the actual Operating
Costs and Taxes exceeds the estimated Operating Costs and Taxes respectively.
4.5 Building Not Fully Occupied
---------------------------
Notwithstanding anything herein otherwise expressed or implied it is agreed that
in the event the Building is not 90% occupied during any year of the Term
hereof, an adjustment shall be made in computing the Operating Costs and Taxes
for such year so that the Operating Costs and Taxes shall be computed for such
year as though the Building has been 90% occupied during such year.
4.6 Direct Assessment
-----------------
The Tenant covenants to pay promptly:
(a) when billed, all taxes, rates duties or charges levied imposed or
assessed on its personal property, its use or occupation of the
Premises, the business carried on therein, all fixtures, equipment,
machinery of the Tenant therein or from time to time levied, imposed or
assessed in the future in lieu thereof; and Taxes levied, imposed or
assessed on all Leasehold Improvements in the Premises; and
(b) in the event of a direct assessment of Taxes in respect of the
Premises, the amount of such direct assessment, when billed (and to
provide a copy of such assessment notice to the Landlord with evidence
of such payment), plus its Proportionate Share of all Taxes on areas of
the Property not demised specifically to tenants.
<PAGE>
4.7 Landlord Tax Obligation
-----------------------
The Landlord covenants with the Tenant, subject to the provisions of Articles
4.2 and 4.6, to pay the Taxes promptly when due. The Landlord shall have the
right to appeal any taxes assessed or levied against the Property or the
Premises but shall not be obligated to so do. The cost incurred by the Landlord
to contest the Taxes shall be included in Operating Costs.
4.8 Amounts Past Due
----------------
If the Tenant fails to pay, when the same is due and payable, any Base Rent, any
Additional Rent or any other amounts payable by the Tenant under this Lease,
such unpaid amounts shall bear interest from the due date thereof to the date of
payment at a rate per annum which is six (6%) percentage points above the Prime
Rate.
4.9 Value-Added Tax
---------------
Notwithstanding anything herein contained to the contrary, the Landlord and the
Tenant acknowledge that the Rent and the Cost of Additional Services and any
other amounts payable by the Tenant to the Landlord are exclusive of any goods
and services taxes, sales taxes, excise taxes, value added taxes or any other
taxes imposed in respect of the Rent and Cost of Additional Services payable by
the Tenant to the Landlord for the provision of rental space and Additional
Services by the Landlord to the Tenant under this Lease ("Sales Tax"). The
Tenant shall pay to the Landlord an amount equal to any Sales Tax imposed on the
Tenant which the Landlord is obligated to collect from the Tenant or which is
assessed upon the Landlord with respect to the Rent and Cost of Additional
Services payable by the Tenant to the Landlord pursuant to this Lease in respect
of the rental of space and provision of Additional Services under this Lease
against, it being the intention of the Landlord and the Tenant that the Tenant
shall bear full responsibility for payment of Sales Tax in respect of the rental
of space and the provision of Additional Services by the Landlord to the Tenant
hereunder. The amount of Sales Tax so payable by the Tenant shall be calculated
by the Landlord in accordance with the applicable legislation and shall be paid
to the Landlord at the same time as the amounts against which that Sales Tax is
being applied are payable to the Landlord under the terms of this Lease or upon
demand at such other time or times as the Landlord from time to time determines.
Despite any other provision of this Lease, the amounts payable by the Tenant
under this paragraph shall be deemed not to be rent, but the Landlord shall have
all of the same remedies for and recovery of such amounts as it has for recovery
of Base Rent under this Lease.
4.10 Waiver of Offset
----------------
The Tenant hereby waives and renounces any and all existing and future claims,
offsets and compensation against any Rent and agrees to pay such Rent regardless
of any claim, offset or compensation which may be asserted by the Tenant or on
its behalf.
4.11 Receipts, etc.
--------------
Whenever requested by the Landlord the Tenant will deliver to it receipts for
payments of all taxes, rates, duties, levies and assessments payable by the
Tenant pursuant to Article 4.6(a) hereof and furnish such other information in
connection therewith as the Landlord may reasonably require.
4.12 Allocation of Taxes
-------------------
If a separate allocation of Taxes is not issued by the relevant taxing authority
with respect to the Building on the Land or to any Leasehold Improvements, the
Landlord or the Tenant may from time to time apply to the taxing authority for a
determination of the portion of Taxes attributable to the Building or Leasehold
Improvements, which determination shall be conclusive for the purposes of this
Article. In the event that no such determination may be obtained from the taxing
authority, the Landlord shall establish the portion of Taxes attributable to the
Building or Leasehold Improvements using the then current established principles
of assessment used by the taxing authority, or such other method which is fair,
reasonable and equitable as determined by the Landlord.
<PAGE>
5
TENANT'S COVENANTS
The Tenant covenants and agrees with and represents as follows to the Landlord
and acknowledges that the Landlord is relying on such covenants, agreements,
representations and warranties in connection with the leasing of the Premises to
the Tenant:
5.1 Occupancy
---------
From the commencement of, and throughout, the Term to continuously occupy the
Premises and to carry on therein the business comprising the Permitted Use
subject to the terms hereof.
5.2 Rent
----
To pay the Rent hereby reserved, and all other sums payable hereunder to the
Landlord, promptly on the days and at the times and in the manner specified
herein, without demand, deduction or set-off.
5.3 Permitted Use
-------------
To use the Premises only for the purpose of offices, research and development,
manufacture and distribution of computer components and related products and not
to use or permit to be used the Premises or any part thereof for any other
purpose or business whatsoever without the prior written consent of the
Landlord. The Tenant will utilize the Premises for the Permitted Use in an up to
date first class and reputable manner in the best interests of the Building as a
whole. The Tenant acknowledges the Landlord will not have any liability or
responsibility to the Tenant for the breach, non-observance or other violation
of any other tenant in the Building of any obligations or provisions in this
Lease.
5.4 Waste and Nuisance
------------------
Not to commit or permit any waste, including waste as it is defined in the Waste
Management Act, S.B.C. 1979 C.41., as amended from time to time, to be brought
upon, kept, or used in or about the Premises by the Tenant, its agents,
employees, contractors or invitees, without the prior written consent of the
Landlord, not to commit or permit any damage to the Premises, including the
Leasehold Improvements and trade fixtures therein, not to commit or permit any
nuisance therein or any use or manner of use causing annoyance to other tenants
and occupants of the Building or the Land and not to use or permit to be used
any part of the Premises for any trade or business which is, in the opinion of
the Landlord, dangerous, noxious or offensive; not cause or suffer or permit any
waste, oil or grease or any harmful, objectionable, dangerous, poisonous or
explosive matter or substance to be discharged into the Premises or the
Property; and not to place any objects on or otherwise howsoever obstruct the
heating or air conditioning vents within the Premises.
If the presence of any waste on the Premises results in any contamination of the
Premises or Property, subject to the Landlord's prior approval, the Tenant shall
promptly take all actions at its sole expense as are necessary to return the
Premises and Property to the condition existing prior to the introduction of any
such waste to the Premises.
5.5 Floor Loads
-----------
Not to place a load upon any portion of any floor of the Premises which exceeds
the floor load which the area of such floor being loaded was designed to carry
having regard to the loading of adjacent areas and that which is allowed by
code. The Landlord reserves the right to prescribe the weight and position of
all safes and heavy installation which the Tenant wishes to place in the
Premises, so as to distribute properly the weight thereof and the Tenant shall
pay for all costs incurred by the Landlord and the Landlord's Architect in
making such assessment. The Tenant shall repair any damage done in the Premises
or the Building by reason of any excessive weight placed in the Premises or
excessive vibration caused in the Premises.
<PAGE>
5.6 Insurance Risks
---------------
Not to do, omit to do or permit to be done upon the Premises anything which
would or might cause the Landlord's cost of insurance (whether fire, liability
or other) to be increased (and, without waiving the foregoing prohibition the
Landlord may demand, and the Tenant shall pay to the Landlord upon demand, the
amount of any such increase of cost caused by anything so done or omitted or
permitted to be done or omitted) or which would or might cause any policy of
insurance to be subject to cancellation or refusal of placement or renewal.
5.7 Noxious Fumes and Odours
------------------------
To use the Premises so that noxious or objectionable fumes, vapours and odours
will not occur beyond the extent to which they are discharged or eliminated by
means of the flues and other devices provided in the Building by the Landlord
and shall prevent any such noxious or objectionable fumes, vapours and odours
from entering into the air conditioning or being discharged into other vents or
flues of the Building or annoying any of the tenants in the Building. Any
discharge of fumes, vapours and odours shall be permitted only during such
period or periods, to such extent, in such conditions and in such manner as
directed by the Landlord from time to time.
5.8 Condition
---------
Not to permit, in the opinion of the Landlord, the Premises to become untidy,
unsightly, offensive or hazardous or permit unreasonable quantities of waste or
refuse to accumulate therein. The Tenant shall store all such garbage, refuse or
other objectionable material (including commercial garbage containers) within
the Premises and dispose of such garbage on a regular basis.
5.9 By-Laws
-------
The Tenant shall comply with all laws relating to its use of the Premises, its
activities, its business and its operation at the Premises. The Tenant has
received no notice, requisition, requirement or order relating thereto and the
Tenant does not know or have reasonable grounds to know of any acts, matters or
things which may give rise to any notice, requisition, requirement or order
being issued in respect of any of the Tenant's activities or its proposed
activities, businesses or operations.
The Tenant shall comply at its own expense with all requirements and laws
including, without limitation, municipal, provincial, federal, sanitary, fire,
building and safety statutes, laws, bylaws, regulations, ordinances, orders and
requirements pertaining to the operation and use of the Premises and the conduct
of business therein (including, without limitation, obtaining all necessary
permits, licences and approvals), the condition of the Leasehold Improvements,
trade fixtures, furniture and equipment installed by the Tenant therein and the
making by the Tenant of any repairs, changes or improvements therein or any
other matter pertaining to the Premises or the Tenant and all laws, ordinances,
regulations or requirements pertaining to solid or other wastes, chemicals, oil
and gas, toxic, corrosive or hazardous materials, air, water (surface or ground
water) or noise pollution and the storage, handling, use or disposal of any such
material, as well as all rules and regulations of the Canadian Board of Fire
Underwriters, or any successor body and with the requirements of all insurance
companies having policies of any kind whatsoever in effect covering the Building
which are communicated to the Tenant.
<PAGE>
5.10 Rules and Regulations
---------------------
To observe, and to cause its employees, invitees and all others over whom the
Tenant can reasonably be expected to exercise control to observe the Rules and
Regulations attached as Schedule "C" hereto, and such further and other
reasonable Rules and Regulations and amendments and changes therein as may
hereafter be made by the Landlord of which notice in writing shall be given to
the Tenant and all such Rules and Regulations shall be deemed to be incorporated
into and form part of this Lease. For the enforcement of such Rules and
Regulations, the Landlord shall have available to it all remedies in this Lease
provided for a breach thereof and all legal remedies whether or not provided for
in this Lease, both at law and in equity. The Landlord shall not be responsible
or liable to the Tenant for the non-observance or violation by any other tenant
of any such Rules and Regulations or the non-enforcement as against other
tenants of such Rules and Regulations or any loss or damage arising out of the
same.
5.11 Surrender, Overholding
----------------------
That upon the expiration or other termination of the Term of this Lease, the
Tenant shall quit and surrender the Premises in vacant and clean possession and
in good order, repair, decoration, and condition (subject to the exceptions to
the Tenant's repair obligations contained in Article 8.2(a) hereof) and shall
remove all its property therefrom, except as otherwise provided in this Lease.
The Tenant's obligation to observe or perform this covenant shall survive the
expiration or other termination of the Term of this Lease. If the Tenant shall
continue to occupy the Premises after the expiration of this Lease without
further written agreement and without objection by the Landlord, the Tenant
shall be a month-to-month tenant at double the Base Rent provided for herein
(plus Additional Rent) and (except as to length of tenancy) on and subject to
the provisions and conditions herein set out.
5.12 Exterior Signage
----------------
The Landlord grants to the Tenant the right to utilize, during the Term, that
portion of the fascia of the Building which the Landlord has allocated for the
Tenant's signage and the Building directory, for the installation of
identification signs of the Tenant, such installation to be at the expense of
the Landlord and the design and lettering of such signs and the manner and
timing of the installation thereof shall comply with the Landlord's signage
policy for the Building and shall be subject to approval of the City of Burnaby
and the Landlord's prior approval which shall not be unreasonably withheld. On
the expiration or sooner termination of the Term, such sign or signs shall be
removed by the Tenant at its sole cost, risk and expense and any damage caused
by such removal shall forthwith be repaired by the Tenant. Except as aforesaid,
the Tenant shall not paint, display, inscribe, place or affix any other sign,
symbol, notice or lettering of any kind anywhere outside the Premises (whether
on the outside or inside of the Building) or within the Premises so as to be
visible from the outside of the Premises.
<PAGE>
5.13 Inspection and Access
---------------------
Subject to the Landlord giving the Tenant reasonable written notice of its
intention to perform any of the aftermentioned work to permit the Landlord at
any time and from time to time to enter and to have its authorized agents,
employees and contractors enter the Premises for the purpose of (i) inspection,
maintenance, making repairs, alterations or improvements to the Premises,
adjoining premises or the Building, or to have access to or make changes in
utilities and services (including underfloor and overhead ducts, air
conditioning, heating, plumbing, electrical and telephone facilities and access
panels, all of which the Tenant agrees not to obstruct) and (ii) to determine
the electric light and power consumption by the Tenant in the Premises and the
Tenant shall provide free and unhampered access for such purposes, and shall not
be entitled to compensation for any inconvenience, nuisance and discomfort or
loss caused thereby, but the Landlord in exercising its rights hereunder shall
proceed to the extent reasonably possible so as to minimize interference with
the Tenant's use and enjoyment of the Premises. The Landlord shall give the
Tenant not less that 14 days prior written notice in the event that any of the
aforesaid maintenance or repairs will interfere with the Tenant's manufacturing
process.
5.14 Exhibiting Premises
-------------------
To allow the Landlord or its agents acting reasonably, upon 2 business days
prior written notice, to enter and exhibit the Premises to prospective tenants
or purchasers of the Property or the Premises during Normal Business Hours
during the Term hereof, and place upon the Premises a notice of reasonable
dimensions and reasonably placed stating that the Property or the Premises are
for sale or for let, which notice the Tenant shall not remove or obscure or
permit to be removed or obscured.
5.15 Name of Building
----------------
Not to refer to the Building by any name other than that designated from time to
time by the Landlord, nor to use such name for any purpose other than that of
the business address of the Tenant.
5.16 Acceptance of Premises
----------------------
The Tenant will have the opportunity to examine the Premises within the 180 day
period provided for in clause 8 of the Agreement to Lease and shall notify the
landlord within this time period of any defects or omissions which are not in
accordance with the Agreement to Lease, after which time the Premises shall be
deemed to be in good order and satisfactory condition and that all alterations,
remodelling, decorating and installation of equipment and fixtures required to
be done by the Landlord have been satisfactorily completed save only for such
list in writing prepared by the Tenant during the 180 day period provided for in
the Agreement to Lease. Any dispute as to any aspects of the Landlord's Work or
completion or adequacy of the Building, the Premises or any part thereof shall
be determined by the Landlord's Architect.
<PAGE>
5.17 No Auction
----------
The Tenant shall not at any time during the Term of this Lease, permit any sale
by auction to be held within the Premises or upon the Property or any part
thereof.
5.18 Yard and Parking Obstruction
----------------------------
The Tenant shall not place, nor suffer or permit its customers, invitees,
licensees, agents or servants to place any materials in the yard or yards of the
Property or the driveways, parking or Common Areas thereof and shall cause no
obstruction to vehicles operating on the said driveways, parking or Common
Areas.
6
LANDLORD'S COVENANTS
The Landlord covenants with the Tenant as follows:
6.1 Quiet Enjoyment
---------------
That the Tenant paying the Rent hereby reserved at the times and in the manner
aforesaid and observing and performing each and every of the covenants,
conditions, restrictions and stipulations by the Tenant to be observed or
performed shall and may peaceably and quietly possess and enjoy the Premises for
the Term hereby granted without any interruption from the Landlord or any other
person lawfully claiming by, through, or under it.
7
UTILITIES
The Landlord and Tenant further covenant and agree as follows:
7.1 Utilities
---------
The Tenant shall pay for the cost of all utilities provided for its exclusive
use in the Premises, including without restricting the generality of the
foregoing gas, water, electricity, telephone and communication service charges
and/or rates relating to services and/or utilities provided for the exclusive
use of the Tenant in respect of the Tenant's occupation of the Premises and
operation of its business carried on therein or therefrom, including laboratory
work and any special systems servicing its own computers or any other machinery.
7.2 Use of Water
------------
The Tenant shall install at the Tenant's expense a domestic meter for
measurement or checking of the Tenant's water consumption and the Tenant shall
pay to the Landlord (or, as required by law, directly to the supplier of the
water) as and when due from time to time any and all water charges for such
water consumption.
7.3 Energy Conservation
-------------------
The Tenant covenants with the Landlord (subject to the Tenant's permitted use of
the Premises):
(a) that the Tenant will cooperate with the Landlord in the conservation
of all forms of energy in the Building, including without limitation
the Premises;
(b) that the Tenant will comply with all laws, by-laws, regulations and
orders relating to the conservation of energy and affecting the
Premises or the Building;
<PAGE>
(c) that the Tenant will at its own cost and expense comply with all
reasonable requests and demands of the Landlord made with a view to
such energy conservation provided that such requests are made in
accordance with good management practice and would be made by a prudent
owner of like property of like age; and
(d) that any and all costs and expenses paid or incurred by the Landlord in
complying with such laws, by-laws, regulations and orders, so far as
the same shall apply to or reasonably be apportioned to the Building by
the Landlord, shall be included in the Landlord's Operating Costs.
The Landlord shall not be liable to the Tenant in any way for any loss, costs,
damages or expenses whether direct or consequential paid, suffered or incurred
by the Tenant as a result of any reduction in the services provided by the
Landlord to the Tenant or to the Building as a result of the Landlord's
compliance with such laws, by-laws, regulations or orders.
8
REPAIR, DAMAGE AND DESTRUCTION
The Landlord and Tenant further covenant and agree as follows:
8.1 Landlord's Repairs
------------------
The Landlord covenants with the Tenant subject to Article 8.3(b) and Article
11.3 hereof and except for reasonable wear and tear and damage not covered by
insurance normally maintained by prudent landlords, to keep in a good and
substantial state of repair the exterior walls, roof, foundations, and bearing
structure of the Building.
8.2 Tenant's Repairs
----------------
The Tenant covenants with the Landlord:
(a) subject to Article 8.3 (b), at its own cost and expense to keep in a
good and substantial state of repair and decoration to at least the
standard existing at the beginning of the Term, the Premises including
all Leasehold Improvements, all facilities exclusively or primarily
serving the Premises, and all trade fixtures therein and all glass
therein, and without limiting the generality of the foregoing, the
Tenant shall:
(i) maintain in good operating condition to the satisfaction of
the Landlord the water, sewer and gas and all other mechanical
systems serving the Tenant's Premises. The Tenant shall
maintain service contracts for the inspection and maintenance
of the heating, ventilating and air conditioning units
(whether located on the roof or within the Premises) and file
copies of such contracts with the Landlord;
(ii) repair or replace to the satisfaction of the Landlord, the
glass, locks and doors (including overhead doors) in or upon
the Premises which become damaged or broken; and
(iii) replace and maintain (at its expense as is necessary from time
to time) all light fixtures, bulbs, tubes, ballasts, starters
and fuses.
(b) that upon 2 days prior notice to the Tenant (except for cases of
emergency), the Landlord may from time to time enter and view the state
of repair, and that the Tenant will repair according to notice in
writing;
(c) that if any part of the Building including without limitation the
structure or the structural elements of the Building, or the systems
for the provision of utilities or services fall into disrepair, or
become damaged or destroyed through the negligence or misuse of the
Tenant or of its employees, invitees or others over whom the Tenant can
reasonably be expected to exercise control, the expense of repairs or
replacements thereto necessitated thereby, other than to the extent the
same is recovered under a policy of insurance required to be carried by
the Landlord hereunder, shall be paid by the Tenant at the Landlord's
actual cost plus fifteen (15%) percent thereof; and
<PAGE>
(d) that the Tenant will notify the Landlord immediately upon the Tenant
becoming aware of any defect in the Premises or of any other condition
which may cause damage to the Premises or the Building.
8.3 Abatement and Termination
-------------------------
It is agreed between the Landlord and the Tenant that:
(a) (i) In the event of partial destruction (as hereinafter
defined) of the Premises by fire, the elements or other cause
or casualty, then in such event, if the destruction is such,
in the opinion of the Landlord's Architect, that the Premises
cannot be used for the Tenant's business until repaired, the
Base Rent and Additional Rent shall abate as hereinafter
provided until the repair has been made.
If the destruction is such that, in the opinion of the
Landlord's Architect, the Premises may be partially used for
the Tenant's business while the repairs are being made, then
the Base Rent and Additional Rent shall abate in the
proportion that the part of the Premises rendered unusable
bears to the whole of the Premises, PROVIDED ALWAYS that if
the part rendered unusable exceeds one-half (1/2) of the
Rentable Area of the Premises there shall be a total abatement
of Base Rent and Additional Rent until the repairs have been
made unless the Tenant, with the permission of the Landlord,
in fact uses the undamaged part in which case the Tenant shall
pay proportionate Base Rent and Additional Rent for the part
so used (being in the same proportion to the Base Rent and
Additional Rent, as the area in square feet of the part of the
Premises being used bears to the Rentable Area of the
Premises). "Partial destruction" shall mean any damage to the
Premises less than total destruction (as hereinafter defined),
but which renders all or any part of the Premises temporarily
unfit for use by the Tenant for the Tenant's business. A
certificate of the Landlord's Architect as to whether the
whole or a part of the Premises is rendered unusable, and
certifying the extent of the part rendered unusable, shall be
binding and conclusive upon both Landlord and Tenant for the
purposes hereof. If the partial destruction is repaired within
fifteen (15) days after the date of destruction there shall be
no abatement of Rent.
(i) In the event of partial destruction (as hereinbefore defined
the Landlord shall, to the extent of proceeds of insurance it
receives, repair and restore the Premises according to the
nature of the damage with all reasonable diligence, except for
improvements installed by or on behalf of the Tenant which the
Tenant shall repair and restore, in both cases, to
substantially the condition the Premises and those
improvements were in immediately before such destruction
occurred, but to the extent that any part of the Premises is
not reasonably capable of use by reason of damage which the
Tenant is obligated to repair hereunder, any abatement of Rent
to which the Tenant is otherwise entitled hereunder shall not
extend later than the time by which, in the reasonable opinion
of the Landlord, repairs by the Tenant ought to have been
completed with reasonable diligence. To the extent the
Landlord receives proceeds of insurance respecting damage the
Tenant is to repair, the Landlord will turn over those
proceeds upon the Tenant completing such repair.
Notwithstanding anything herein otherwise contained, there
shall be no abatement of Rent if the damage is caused by
willful act or neglect of the Tenant.
(b) (i) In the event of the total destruction (as hereinafter defined)
of the Premises by fire, the elements or other cause or
casualty, then in such event the Landlord may at its option,
to be exercised within sixty (60) days of the date of such
total destruction, terminate this Lease effective from the
<PAGE>
date when such destruction occurs. Upon the Landlord
exercising such option the Tenant shall immediately surrender
the Premises and all its interest therein to the Landlord and
the Tenant shall pay Base Rent and Additional Rent to the time
of such destruction and the Landlord may re-enter and
repossess the Premises discharged of this Lease. Upon such
termination the Tenant shall remain liable to the Landlord for
all sums accrued due to the Landlord pursuant to the terms
hereof to the date of such destruction. If the Landlord does
not exercise its option of termination the provisions of
repair and restoration set forth in Article 8.3 (a) (ii) shall
apply. "Total destruction" shall mean such damage to the
Premises that renders same unfit for use by the Tenant for the
Tenant's business and which cannot reasonably be repaired
within six (6) months of the date of the destruction to the
state wherein the Tenant could use substantially all of the
Premises for its business. A certificate of the Landlord's
Architect certifying that "total destruction" has occurred
shall be binding and conclusive upon both Landlord and Tenant
for the purposes hereof.
(i) Notwithstanding the foregoing provisions concerning total
or partial destruction of the Premises, in the event of total
or partial destruction of the Building of which the Premises
form a part (and whether or not the Premises are destroyed) to
such a material extent or of such a nature that in the opinion
of the Landlord the damage to the Building cannot be repaired
within one hundred and eighty (180) days from the date of
destruction or the Building must be or should be totally or
partially demolished, whether to be reconstructed in whole or
in part or not, then the Landlord may, at its option (to be
exercised within sixty (60) days from the date of total or
partial destruction) give notice to the Tenant that this Lease
is terminated with effect from the date stated in the notice.
If the Tenant is able effectively to use the Premises after
the destruction, such date of termination shall be not less
than thirty (30) days from the date of the notice. If the
Tenant is unable effectively to use the Premises after the
destruction, the date given in the notice shall be the date of
termination. Upon such termination, the Tenant shall
immediately surrender the Premises and all its interest
therein to the Landlord and the Base Rent and Additional Rent
shall abate and be apportioned to the date of termination and
the Tenant shall remain liable to the Landlord for all sums
accrued due pursuant to the terms hereof to the date of
termination. The Landlord's Architect shall determine whether
the Premises can or cannot be effectively used by the Tenant
and his certificate thereon shall be binding and conclusive
upon both Landlord and Tenant for the purposes hereof.
(ii) In none of the cases aforesaid shall the Tenant have any claim
upon the Landlord for any damages sustained by it. No damages,
compensation or claim whatsoever shall be payable by the
Landlord for inconvenience, loss of business or annoyance or
other loss or damage whatsoever arising from the occurrence of
any such damage or destruction of the Premises or of the
Building and/or the repair or restoration thereof.
9
LICENSES, ASSIGNMENTS AND SUBLETTINGS
The Landlord and Tenant further covenant and agree as follows:
9.1 Licenses
--------
The Tenant shall not suffer or permit any part of the Premises to be used or
occupied by any persons other than the Tenant, its affiliates, any assignees or
subtenants permitted under Article 9.2 and the employees of the Tenant and any
such permitted assignee or subtenant, or suffer or permit any part of the
Premises to be used or occupied by any licensee or concessionaire, or suffer or
permit any persons to be upon the Premises other than the Tenant, its
affiliates, such permitted assignees or subtenants and their respective
employees, customers and others having lawful business with them.
<PAGE>
9.2 Assignments and Sublettings
---------------------------
(a) The Tenant shall not assign or mortgage this Lease or sublet the whole
or any part of the Premises unless it shall have first requested and
obtained the consent in writing of the Landlord thereto. Any request
for such consent shall be in writing and shall be accompanied by a true
copy of any offer to take an assignment or sublease which the Tenant
may have received as well as a copy of the proposed assignment or
sublease or mortgage and the Tenant shall furnish to the Landlord all
information available to the Tenant or requested by the Landlord as to
the business and financial responsibility and standing of the proposed
assignee or subtenant.
(b) If the Landlord consents to the Tenant's request for consent to assign,
mortgage or sublet, which consent may not be unreasonably withheld, or
if a consent to assign, mortgage or sublet is obtained by order of a
Court of competent jurisdiction, the Tenant shall assign, mortgage or
sublet, as the case may be, only upon the terms submitted to the
Landlord as aforesaid and not otherwise, PROVIDED THAT no such
assignment, mortgaging or subletting shall:
(i) in any manner or extent release or relieve the Tenant from the
performance or observance of any of its covenants or
obligations hereunder;
(ii) in the case of an assignment or subletting, be made other than
to responsible persons, firms, partnerships or bodies
corporate who undertake by agreement in writing with the
Landlord to perform and observe the obligations of the Tenant
hereunder;
(iii) be made unless the Tenant is not in default of any of its
obligations under this Lease;
(iv) in the case of an assignment or subletting, be made to any
person, firm, partnership or body corporate who intends to or
does use the Premises for any business or use which is
prohibited hereunder or which the Landlord is obliged to
restrict by reason of any other lease or contract relating to
the Building, or any use, purpose or business (other than the
Permitted Use) to which the Landlord in its entire discretion
may object; and
PROVIDED THAT no such mortgage shall:
i) be made unless the mortgagee covenants to pay to the Landlord
all sums payable by the Tenant hereunder (including all
arrears) during any period the mortgagee actually or
constructively occupies the Premises and to otherwise perform
and observe the obligations of the Tenant hereunder during any
such period; and
ii) unless the mortgagee covenants that any assignment or sublease
it may wish to make shall be subject to all the same terms
affecting an assignment or subletting made by the Tenant.
(c) The Landlord's consent to any assignment or sublease shall not be or
operate as a consent to any further assignment or sublease; and the
Landlord's prior consent in writing shall be required for each and
every assignment or sublease.
(d) Notwithstanding any prior provisions of this Article 9.2 to the
contrary, after the Landlord receives request for consent to an
assignment or subletting and the required information related thereto
in writing, it shall have the option, to be exercised by written notice
within thirty (30) days after the receipt of such request and
information, to terminate this Lease and the term hereof on not less
than thirty (30) days and not more than ninety (90) days notice to the
Tenant. If the Tenant elects, to be exercised by written notice to the
Landlord within fifteen (15) days after receipt by the Landlord of such
notice of termination, to withdraw the request for consent to the
proposed assignment or subletting, in which case the Tenant shall not
proceed with such assignment or subletting, the notice or termination
shall be null and void and this Lease shall continue in full force and
effect in accordance with its terms.
<PAGE>
(e) If the Tenant is a corporation, other than a corporation the shares of
which are listed on any recognized stock exchange, effective control of
the corporation shall not be changed directly or indirectly by a sale,
encumbrance or other disposition of shares or otherwise howsoever
without the Tenant first obtaining the written consent of the Landlord;
provided that the Landlord's consent shall not be required for any sale
or other disposition of shares by present shareholders to and between
themselves or in the event of any transmission of shares on death or by
operation of law and provided further that the Landlord's consent shall
not be unreasonably withheld where control of the Tenant is to pass to
a subsidiary or parent of the Tenant.
(f) Whether or not the Landlord consents to any request of the Tenant for
an assignment, subletting or mortgage, the reasonable costs incurred by
the Landlord in considering and processing the request for consent and
in completing any of the documentation involved in implementing such
assignment, subletting or mortgage shall be for the Tenant's account
and payable forthwith on demand by the Tenant to the Landlord.
(g) The Landlord may sell, transfer, lease, mortgage, encumber or otherwise
deal with the Property or any portion thereof or any interest of the
Landlord therein, in every case without the consent of the Tenant, and
without restriction, and to the extent that any purchaser, transferee
or lessee from the Landlord has become bound by and covenanted to
perform the covenants and obligations of the Landlord under this Lease,
the Landlord shall without further written agreement be freed and
relieved of liability upon such covenants and obligations.
10
FIXTURES AND IMPROVEMENTS
The Landlord and Tenant further covenant and agree as follows:
10.1 Installation of Fixtures & Improvements
---------------------------------------
(a) Following the initial tenant improvements as set out in the Agreement
to Lease (the "Initial Tenant Improvements"), the Tenant will not make,
erect, install or alter any Leasehold Improvements or trade fixtures in
the Premises without having requested and obtained the Landlord's prior
written approval, which the Landlord shall not unreasonably withhold.
(b) In making, erecting, installing or altering any Leasehold Improvements
or trade fixtures after the Initial Tenant Improvements, the Tenant
will not alter or interfere with any installations which have been made
by the Landlord without the prior written approval of the Landlord, and
in no event shall alter or interfere with or affect the structural
elements or the strength or outside appearance of the Building, or the
mechanical, electrical, plumbing and climate control systems if any or
the window coverings installed on exterior windows.
(c) The Tenant's request for any approval hereunder shall be in writing and
accompanied by an adequate description of the contemplated work and,
where appropriate, working drawings and specifications therefor. Any
out-of-pocket expense incurred by the Landlord in connection with any
such request for approval shall be deemed incurred by way of an
Additional Service. All work to be performed in the Premises shall be
performed by competent contractors and subcontractors of whom the
Landlord shall have approved (such approval not to be unreasonably
withheld, but provided that the Landlord may require that the
Landlord's contractors and subcontractors be engaged for any mechanical
or electrical work). At the option of the Landlord, all such work shall
be subject to inspection by and the reasonable supervision of the
Landlord, as an Additional Service, and shall be performed in
accordance with any reasonable conditions or regulations imposed by the
Landlord (including without limitation the examination by the
Landlord's Architect or other experts of the detailed drawings and
specification as an Additional Service and contractor's liability
insurance in reasonable amounts) and completed in a good workmanlike
manner in accordance with the description of the work approved by the
Landlord.
<PAGE>
10.2 Liens and Encumbrances on Fixtures & Improvements
-------------------------------------------------
In connection with the making, erection, installation or alteration of Leasehold
Improvements and trade fixtures and all other work or installations made by or
for the Tenant in the Premises, the Tenant shall comply with all the provisions
of the applicable provincial legislation in respect of builders' lien and
worker's compensation and other statutes from time to time applicable thereto
(including any provision requiring or enabling the retention of portions of any
sums payable by way of holdbacks) and except as to any such holdback shall
promptly pay all accounts relating thereto. If and whenever any builders' or
other lien for work, labour, services or materials supplied to or for the Tenant
or for the cost of which the Tenant may be in any way liable or claims therefor
shall arise or be filed or any such mortgage, conditional sale agreement, lease
or other encumbrance shall attach, the Tenant shall within four (4) days after
receipt of notice thereof procure the discharge thereof, including any
certificate of lis pendens registered in respect of any lien, by payment or
giving security or in such other manner as may be required or permitted by law,
and failing which the Landlord may in addition to all other remedies hereunder
avail itself of its remedy under Article 13.1 and may make any payments required
to procure the discharge of any such liens or encumbrances, and shall be
reimbursed by the Tenant as provided in Article 13.1, and its right to
reimbursement shall not be affected or impaired if the Tenant shall then or
subsequently establish or claim that any lien or encumbrance so discharged was
without merit or excessive or subject to any abatement, set-off or defence.
10.3 Tenant's Goods
--------------
The Tenant covenants that it will not sell, dispose of or remove any of the
trade fixtures, goods or chattels of the Tenant from or out of the Premises
during the Term without the consent of the Landlord, unless the Tenant is
substituting new trade fixtures, goods or chattels of equal value or is bona
fide disposing of individual items which have become excess for the Tenant's
purposes in the normal course of its business. The Tenant further covenants that
it will at all times have and retain full legal and beneficial ownership of its
trade fixtures, goods and chattels and will not permit them to be or become
subject to any lien, mortgage, charge, encumbrance or title retention agreements
except such as are bona fide incurred for the purpose of financing the purchase
of such trade fixtures, goods or chattels.
10.4 Removal of Fixtures and Improvements
------------------------------------
All Leasehold Improvements in or upon the Premises installed or affixed by the
Tenant shall immediately upon termination of this Lease be and become the
Landlord's property without compensation therefor to the Tenant. Except to the
extent herein or otherwise expressly agreed by the Landlord in writing, no
Leasehold Improvements, trade fixtures, furniture or equipment shall be removed
by the Tenant from the Premises either during or at the expiration or sooner
termination of the Term, except that (a) the Tenant, if not in default
hereunder, may at the end of the Term remove its trade fixtures, furniture and
equipment; and (b) the Tenant shall at the end of the Term remove such of its
trade fixtures, furniture, equipment and Leasehold Improvements installed by it
as the Landlord shall require to be removed. The Tenant shall, in the case of
every removal either during or at the end of the Term, make good any damage
caused to the Premises and/or the Building by the installation and removal.
Included in the definition of trade fixtures shall be hepa filters which may be
removed by the Tenant at the end of the Term provided that the Tenant makes good
any damages caused to the Premises and/or the Building.
<PAGE>
11
INSURANCE, LIABILITY AND INDEMNITY
11.1 Landlord's Insurance
--------------------
The Landlord shall throughout the Term provide and keep in force or cause to be
provided and kept in force:
(a) fire insurance (including standard extended coverage endorsement perils
and leakage from fire protective devices) or alternatively at
Landlord's option, all risk insurance in respect of the Building and
its fixed improvements including all rentable premises including the
Premises but excluding tenant's fixtures and (except to the extent that
the Landlord elects to insure them) Leasehold Improvements installed or
constructed by tenants including the Tenant and in sufficient amounts
to repair and restore the Building and the Premises if required
pursuant to Article 8.3 hereof;
(b) at the Landlord's option, loss of rental income insurance relating to
rental abatement contemplated in Article 8.3;
(c) if any boilers or pressure vessels are operated in the Building other
than in any rentable premises therein, boiler and pressure vessel
insurance with respect thereto;
(d) comprehensive general business liability insurance with respect to
the operation of the Building for personal and bodily injury or death
and damage to property of others; and
(e) insurance against any other occurrences and in such amounts as the
Landlord may deem prudent.
Insurance effected by the Landlord under this clause shall be with insurers duly
licensed to transact insurance in British Columbia and shall be in amounts which
the Landlord shall from time to time determine as being reasonable and
sufficient, shall be subject to such reasonable deductibles and exclusions as
the Landlord may determine and shall otherwise be upon such terms and conditions
as the Landlord shall from time to time determine as being reasonable and
sufficient.
11.2 Tenant's Insurance
------------------
The Tenant shall, at its own cost, throughout the Term provide and keep in
force:
(a) fire insurance (including standard extended coverage endorsement
perils, leakage from fire protective devices and water damage
generally) in respect of the Tenant's fixtures, furniture, equipment,
inventory and stock-in-trade, the Tenant's Leasehold Improvements to
the extent that the Landlord has not elected to insure them pursuant to
Article 11.1, and such other property in or forming part of the
Premises (not being property which the Landlord is bound to insure
pursuant to Article 11.1) as the Landlord may from time to time
require;
(b) plate and other glass insurance;
(c) if any boiler or pressure vessel is operated in the Premises, boiler
and pressure vessel insurance with respect thereto;
(d) comprehensive general business liability insurance with respect to the
business carried on in or from the Premises and the use and occupancy
thereof for personal and bodily injury or death and damage to property
of others; and
(e) Tenant's legal liability insurance and such other forms of insurance
including business interruption insurance as the Landlord may
reasonably require.
<PAGE>
Insurance effected by the Tenant under this clause shall be with insurers duly
licensed to transact insurance in British Columbia, shall be in amounts which
the Landlord shall from time to time determine as being reasonable and
sufficient (and, without limiting the generality of the foregoing, in the case
of insurance under paragraphs (a), (b) and (c) shall be on a full replacement
cost basis subject only to such deductibles and exclusions as the Landlord may
approve and in the case of insurance under paragraph (d) shall have original
limits not less than $2,000,000 in respect of any one accident or occurrence),
shall permit the release of the Landlord from certain liability as set out in
Article 11.3, shall include the Landlord as an additional named insured, and
shall otherwise be upon such terms and conditions as the Landlord shall from
time to time require as being reasonable and sufficient. At the request of the
Landlord the Tenant shall file with the Landlord such copies of current policies
or certificates or other proofs as may be required to establish the Tenant's
insurance coverage in effect from time to time and the payment of premiums
thereon, and if the Tenant fails to insure or pay premiums or to file
satisfactory proof thereof as so required, the Landlord may without notice to
the Tenant effect such insurance and recover any premiums paid therefor from the
Tenant on demand. All such policies of insurance shall contain an undertaking by
the insurance company to notify the Landlord in writing thirty (30) days prior
to any material change in any such policies. To the extent applicable, the
Tenant agrees to use the proceeds of insurance to restore the Premises to the
condition existing immediately prior to any loss or damage.
11.3 Limitation of Landlord's Liability
----------------------------------
The Landlord shall not be liable or in any way responsible to the Tenant in
respect of any loss, injury or damage suffered by the Tenant or its employees,
invitees or licensees, or others unless resulting from the negligence of the
Landlord but in no event shall the Landlord be liable for loss, injury or
damage:
(a) to any property of the Tenant or others from theft, damage or any
other cause;
(b) caused to any persons or property by fire, explosion, falling plaster,
escaping steam or gas, electricity, water, rain or snow, or leaks from
any part of the Building or from any pipes, appliances or plumbing work
therein, or by dampness;
(c) caused by other tenants or occupants or persons or the public in or
about the Premises or other rentable premises or elsewhere in the
Building, or caused by operations in the conduct of any private or
public work;
(d) of the nature of indirect or consequential loss, injury or damage of
any nature whatsoever including without limitation matters affected by
interruptions in the supply of water, electricity, heating, air
conditioning and other utilities; or
(e) required to be insured by the Tenant under the provisions of Article
11.2.
11.4 Indemnity
---------
Notwithstanding any other provision of this Lease to the contrary the Tenant
shall be liable to the Landlord for and does hereby hold harmless and indemnify
the Landlord, its officers, employees and agents and the successors and
permitted assigns of the Landlord from and against all losses, costs,
liabilities, claims, damages, expenses, demands, suits, actions or other
proceedings, judgements, penalties and fines (including, without limiting the
generality of the foregoing, direct losses, costs, damages and expenses suffered
by the Landlord which arise during or after the Term of this Lease and are in
any manner based upon, arise out of or are connected with:
(a) any breach, violation, or non-performance of any covenant, condition or
agreement in this Lease set forth and contained on the part of the
Tenant to be fulfilled, kept, observed or performed;
(b) any damage to property, including property of the Landlord, occasioned
by any negligence of the Tenant or its employees, agents, contractors,
invitees, concessionaires, or licensees in or about the Building;
<PAGE>
(c) any injury to person or persons, including death at any time resulting
therefrom, occasioned by any negligence of the Tenant or its employees,
agents, contractors, invitees, concessionaires, or licensees in or
about the Building;
(d) any contract, lien, privilege, charge or encumbrance of the Premises
arising from or occasioned by the act, default, omission or negligence
of the Tenant and those for whom the Tenant is responsible;
(e) the presence of any waste, as that term is defined in the Waste
Management Act, S.B.C. 1979 c.41, as amended from time to time, toxic
or hazardous substances in, on or under the Premises or any other
contamination including that resulting from waste, an unhealthful,
hazardous or dangerous condition caused by, contributed to or
aggravated by the Tenant's violation of any laws, ordinances,
regulations or requirements pertaining to solid or other wastes,
chemicals, oil and gas, toxic, corrosive or hazardous materials, air,
water (surface or ground water) or noise pollution and the storage,
handling, use or disposal of such matter (unless the waste, toxic or
hazardous substances or any other contaminants are present solely as a
result of the negligence or willful misconduct of the Landlord),
including, without limitation, costs incurred in connection with any
investigation of site conditions or any clean-up, remedial, removal or
restoration work required by any federal, provincial or municipal
government agency;
such covenant of the Tenant to survive the expiration or sooner termination of
the Term, notwithstanding anything herein to the contrary. The Tenant hereby
further expressly agrees that any statutory limitation period on actions to
enforce these obligations shall not be deemed to commence until the Landlord
discovers any such circumstances as may give rise to their enforcement and the
Tenant hereby knowingly and voluntarily waives the benefits of any shorter
limitation period.
12
SUBORDINATION, ATTORNMENT, REGISTRATION AND CERTIFICATES
The Tenant agrees with the Landlord that:
12.1 Subordination and Attornment
----------------------------
This Lease shall, at the option of the Landlord or the mortgagee under any
mortgage or the trustee under any trust deed or trust indenture, now or
hereafter existing, (such mortgagee or trustee being in this Article 12.1 called
the "Holder" and such mortgage or trust deed or trust indenture being called the
"Security") affecting the Lands or Building, exercisable at any time and from
time to time by the Landlord or such Holder, be either subject and subordinate
to such Security and accordingly not binding upon such Holder or, alternatively,
prior to such Security and binding upon such Holder. On request at any time and
from time to time, the Tenant shall either postpone and subordinate this Lease
with the intent and effect that this Lease and all rights of the Tenant shall be
subject to the rights of such Holder as fully as if the Security, regardless of
when made, had been made prior to the making of this Lease or, alternatively, to
attorn to such Holder and become bound to it as its tenant of the Premises for
the then unexpired residue of the Term and upon the terms and conditions
contained in this Lease, in each case as the Landlord or such Holder may
require, without limiting the foregoing (and notwithstanding that any of
previous attornment or subordination in favour of such Holder shall have been
given) the Tenant shall execute promptly the appropriate instrument of
postponement and subordination or alternatively the right instrument of
attornment, as the case may be, in order to give effect to the foregoing.
<PAGE>
12.2 Registration
------------
The Tenant may register this Lease, without financial provisions, with the Land
Title Office. All costs of registration, including survey drawing costs and
registration costs, shall be borne by the Tenant and the Landlord will provide
the Lease in registerable form if requested by the Tenant.
The Landlord hereby agrees that the registered ownership on title to the
Building and to the adjacent building owned by the Landlord located at 8525
Baxter Place, Burnaby, B.C. (the "8525 Building") shall both remain in the name
of the Landlord, or that upon transfer of registered ownership on title to the
8525 Building, that the new owner will assume the obligations of the Landlord to
the Tenant under this Lease with respect to the 8525 Building.
12.3 Certificates
------------
The Tenant shall within ten (10) days of receipt of notice in writing from
Landlord execute and deliver to the Landlord and if required by the Landlord, to
any mortgagee (including any trustee under a trust deed or trust indenture)
designated by the Landlord a confirmation in writing as to the status of this
Lease, including as to whether it is in full force and effect, is modified or
unmodified, confirming the rental payable hereunder and the state of the
accounts between the Landlord and Tenant, the existence or non-existence of
defaults, the Rentable Area of the Premises, and any other matters pertaining to
this Lease as to which the Landlord shall request confirmation. Such certificate
to be substantially in the form attached hereto as Schedule "D".
12.4 Non-Disturbance Agreement
-------------------------
The Landlord shall obtain from any existing or future holder of a
mortgage, charge or hypothec, a non-disturbance agreement in favour of the
Tenant whereby the Tenant's possession of the Premises will not be interfered
with by any such holder, provided that the Tenant is not in default of its
obligations under this Lease.
13
REMEDIES OF LANDLORD ON TENANT'S DEFAULT
The Landlord and Tenant further covenant and agree as follows:
13.1 Remedying by Landlord, Non-Payment and Interest
-----------------------------------------------
In addition to all rights and remedies of the Landlord available to it in the
event of any default hereunder by the Tenant either by any other provision of
this Lease or by statute or common law, the Landlord:
(a) shall have the right (but shall not be obligated to) at all times to
remedy or attempt to remedy any default of the Tenant, and in so doing
may make any payments due that are verified to be due by the Tenant to
third parties (the payment of which is required by this Lease) and may
enter upon the Premises to do work or other things therein, and in such
event all expenses of the Landlord in remedying or attempting to remedy
such default shall be payable by the Tenant to the Landlord forthwith
upon demand, together with a fee for supervision for carrying out the
Tenant's obligations in an amount equal to fifteen (15%) percent of the
cost of repairs or other work carried out by or under the supervision
of the Landlord which amount shall be in addition to the incurred costs
of such work together with interest at a rate of six (6%) percent per
annum above the Prime Rate from time to time on the aggregate of the
foregoing from the date funds were expended by the Landlord until
actual payment thereof by the Tenant;
(b) may recover as Additional Rent all sums paid or expenses incurred
hereunder by the Landlord, which ought to have been paid or incurred by
the Tenant, or for which the Landlord hereunder is entitled to
reimbursement from the Tenant, and any interest owing to the Landlord
hereunder by any and all remedies available to it for the recovery of
Base Rent in arrears;
<PAGE>
(c) if the Tenant shall fail to pay any Rent or other amount from time to
time payable by it to the Landlord hereunder promptly when due, shall
be entitled to interest thereon at a rate of six (6%) percent per annum
above the Prime Rate from time to time from, (except where interest
commences to accrue earlier pursuant to Article 13.1 (a)), the date
upon which the same was due until actual payment thereof.
13.2 Remedies Cumulative
-------------------
The Landlord may from time to time resort to any or all of the rights and
remedies available to it in the event of any default hereunder by the Tenant,
either by any provision of this Lease or by statute or the general law, all of
which rights and remedies are intended to be cumulative and not alternative, and
the express provisions hereunder as to certain rights and remedies are not to be
interpreted as excluding any other or additional rights and remedies available
to the Landlord by statute or the general law.
13.3 Right of Re-entry on Termination
--------------------------------
If this Lease shall have become terminated pursuant to any provision hereof, or
if the Landlord shall have become entitled to terminate this Lease and shall
have given notice terminating it pursuant to any provision hereof, then and in
every such case it shall be lawful for the Landlord thereafter to enter into and
upon the Premises or any part thereof in the name of the whole and the same to
have again, repossess and enjoy as of its former estate.
13.4 Re-entry and Termination
------------------------
If and whenever the Landlord becomes entitled to or does re-enter the Premises
under any provision of this Lease, the Landlord, in addition to all other rights
and remedies, shall have the right to terminate this Lease forthwith by leaving
upon the Premises notice in writing of such termination, and in such event the
Tenant shall forthwith vacate and surrender the Premises.
13.5 Rights on Re-entry
------------------
Whenever the Landlord becomes entitled to re-enter upon the Premises under any
provision of this Lease, the Landlord, in addition to all other rights it may
have, shall have the right to enter the Premises, as agent of the Tenant, either
by force or otherwise without being liable for any loss or damage occasioned
thereby and to relet them and to receive the rent therefor and as the agent of
the Tenant to take possession of any furniture or other property thereon and to
sell the same at public or private sale without notice and to apply the proceeds
thereof and any rent derived from reletting the Premises, after deducting its
costs of conducting such sale and its cost of reletting, upon account of the
Rent due and to become due under this Lease and the Tenant shall be liable to
the Landlord for the deficiency, if any.
13.6 Distress
--------
The Tenant waives and renounces the benefit of any present or future law taking
away or limiting the Landlord's right of distress on the property of the Tenant
and, notwithstanding any such law, the Landlord may seize and sell the Tenant's
goods and chattels, excepting for records and reports of a confidential nature,
whether within the Premises or removed therefrom and apply the proceeds of such
sale upon Rent and all other amounts outstanding including the cost of the
seizure and sale in the same manner as might have been done if such law had not
been passed. The Tenant further agrees that if it leaves the Premises leaving
any Rent or other amounts provided to be paid under this Lease unpaid, the
Landlord, in addition to any remedy otherwise provided at law or in equity, may
seize the goods and chattels of the Tenant at any place to which the Tenant or
any other person may have removed them from the Premises in the same manner as
if such goods and chattels had remained upon the Premises. For the purposes of
making any such distress the Landlord, by itself, its agents and bailiffs may
break open any door or window and enter upon the Premises at any time after Rent
or other monies shall accrue due.
<PAGE>
13.7 Payment of Rent, Etc., on Termination
-------------------------------------
If the Landlord shall re-enter and this Lease shall be terminated as provided
for herein, then the Tenant shall pay to the Landlord on demand:
(a) Rent up to the time of re-entry or termination, whichever shall be the
later, plus accelerated Rent as herein provided;
(b) all other amounts payable hereunder until such time;
(c) such expenses as the Landlord may incur or have incurred in connection
with re-entering or terminating and reletting, or collecting sums due
or payable by the Tenant or realizing upon assets seized including
brokerage, legal fees and disbursements (on a solicitor-client basis),
and the expense of keeping the Premises in good order, repairing the
same and preparing them for reletting; and
(d) as liquidated damages for the loss of Rent and other income of the
Landlord expected to be derived from the Lease during the period which
would have constituted the unexpired portion of the Term had it not
been terminated, the amount, if any, by which the rental value of the
Premises for such period established by reference to the terms and
provisions of this Lease exceeds the rental value of the Premises for
such period established by reference to the terms and provisions upon
which the Landlord relets them, if such reletting is accomplished
within a reasonable time after termination of this Lease, and otherwise
with reference to all market and other relevant circumstances. Rental
value is to be computed in each case by reducing to present worth at an
interest rate equal to the then current Prime Rate all Rent and other
amounts to become payable for such period and where the ascertainment
of amounts to become payable requires it, the Landlord may make
estimates and assumptions of fact which shall govern unless shown to be
unreasonable or erroneous.
14
CANCELLATION OF INSURANCE AND EVENTS TERMINATING LEASE
The Landlord and Tenant further covenant and agree as follows:
14.1 Cancellation of Insurance
-------------------------
If any policy of insurance upon the Building from time to time effected by the
Landlord shall be cancelled or be about to be cancelled by the insurer or an
insurer shall refuse or decline to place or renew insurance by reason of the use
or occupation of the Premises by the Tenant or any assignee, subtenant or
licensee of the Tenant or anyone permitted by the Tenant to be upon the Premises
and the Tenant after receipt of notice in writing from the Landlord shall have
failed to take such immediate steps in respect of such use or occupation as
shall enable the Landlord to reinstate, renew, replace or avoid cancellation of
(as the case may be) , such policy of insurance, without limitation to any other
right or remedy of the Landlord under this Lease, the Landlord may at its
option, at any time and without notice enter upon the Premises and remove the
said use or condition in which event the Tenant shall forthwith on demand pay to
the Landlord the cost to the Landlord related to such removal together with a
supervisory fee of fifteen (15%) percent of such cost and with interest on the
aggregate of the foregoing from the date funds were expended by the Landlord
until actual payment thereof.
<PAGE>
14.2 Default
-------
If and whenever:
(a) the Rent hereby reserved, or any part thereof, be not paid when due, or
there is non-payment of any other sum which the Tenant is obligated to
pay under any provisions hereof, and in either case such default shall
continue for ten (10) days after notice by the Landlord requiring the
Tenant to rectify the same; or
(b) the Term or any goods, chattels, equipment or other personal property
of the Tenant shall at any time be taken or be exigible in execution or
attachment, or the Tenant shall attempt or threaten to move its goods,
chattels or equipment out of the Premises (other than in the ordinary
course of its business or as permitted hereunder) or shall, for a
period of ten (10) consecutive days (without the prior written consent
of the Landlord) fail to conduct business from the Premises; or
(c) the Premises shall be vacated or abandoned or remain unoccupied for
fifteen (15) days or more while capable of being occupied; or
(d) the Tenant shall become insolvent or commit an act of bankruptcy or
become bankrupt or take the benefit of any Act that may be in force for
bankrupt or insolvent debtors or, if the Tenant is a corporation,
become involved in a winding up proceeding or other proceeding for the
termination of its corporate existence or if a receiver shall be
appointed for the business, property, affairs or revenues of the Tenant
or if any governmental authority should take possession of the business
or property of the Tenant or the Tenant shall make a general assignment
for the benefit of creditors; or
(e) without the written consent of the Landlord, the Premises shall be used
by any persons other than the Tenant or its permitted assigns or
sub-tenants or for any purpose other than that for which they were
leased, or shall be occupied by any person whose occupancy is
prohibited by this Lease; or
(f) the Tenant shall assign or sublet or purport to assign or sublet any
portion or all of the Term or the Premises without the written consent
of the Landlord or control of the Tenant, if a corporation, is changed
without the prior written consent of the Landlord, in either case as
required pursuant to Article 9; or
(g) the Tenant shall fail to remedy any condition giving rise to
cancellation, threatened cancellation, reduction or threatened
reduction of any insurance policy on the Property or any part thereof
within twenty four (24) hours after notice thereof by the Landlord; or
(h) the Tenant shall breach or fail to observe or perform any other of the
covenants, agreements, provisions, stipulations and conditions herein
to be observed, performed and kept by the Tenant and shall persist in
such failure for ten (10) days after notice by the Landlord requiring
that the Tenant remedy, correct, desist or comply (or in the case of
any such breach which reasonably would require more than ten (10) days
to rectify, unless the Tenant shall commence rectification within the
said ten (10) day period and thereafter promptly and diligently and
continuously proceed with the rectification of the breach); then and in
any of such cases, at the option of the Landlord, the full amount of
the current month's and the next three (3) months' monthly Rent shall
immediately become due and payable and the Landlord may without notice
or any form of legal process forthwith re-enter upon and take
possession of the Premises or any part thereof in the name of the whole
and remove and sell the Tenant's goods, chattels and equipment
therefrom any rule of law or equity to the contrary notwithstanding;
and the Landlord may seize and sell such goods, chattels and equipment
of the Tenant as are in the Premises or at any place to which the
Tenant or any other person may have removed them in the same manner as
if they had remained and been distrained upon the Premises; and such
sale may be effected in the discretion of the Landlord either by public
auction or by private treaty, and either in bulk or by individual item,
or partly by one means and partly by another, all as the Landlord in
its entire discretion may decide.
<PAGE>
15
MISCELLANEOUS
The Landlord and Tenant further covenant and agree as follows:
15.1 Notices
-------
All notices, demands, requests, consents, approvals and other instruments
required or permitted to be given pursuant to the terms of this Lease shall be
in writing and shall be deemed to have been properly given if personally served
or sent by registered mail (postage prepaid with return receipt requested) or
sent by telecopier to the Landlord or the Tenant at the addresses hereinbefore
set forth or in the case of the Tenant at the Premises in lieu of the address
hereinbefore set forth.
Provided, however, that such address may be changed upon five (5) business days
written notice thereof, similarly given, to the other party.
The date of receipt of any such notice, demand, request, consent, approval or
other instrument shall be deemed to be as follows:
(a) in the case of personal service, the date of service;
(b) in the case of registered mail, the fifth (5th) business day following
the date of delivery to the Post Office, provided, however, that in the
event of an interruption of normal mail service receipt shall be deemed
to be the fifth (5th) business day following the date on which normal
mail service is restored;
(c) in the case of telecopy, the business day next following the day o
sending.
Any notices required or permitted to be given by the Landlord pursuant to the
terms of this Lease may be served by the Landlord, its lawyer or its managing
agent.
15.2 Entire Agreement
----------------
The Tenant acknowledges that there are no covenants, representations,
warranties, agreements or conditions expressed or implied relating to this Lease
or the Premises save as expressly set out in this Lease and the Agreement to
Lease accepted on June 20, 1995 between the Landlord and the Tenant. In the
event of any conflict between the terms of this Lease and the terms of the
Agreement to Lease the terms of this Lease shall prevail. This Lease may not be
modified except by an agreement in writing executed by the Landlord and the
Tenant.
15.3 Area Determination
------------------
In the event that any calculation or determination by the Landlord of the
Rentable Area of any premises (including the Premises) of the Building is
disputed or called into question, it shall be calculated or determined by the
Landlord's Architect, whose certification shall be conclusive, the cost of such
remeasurement to be paid by and borne by the party so disputing or calling into
question the previous calculation or determination. The Landlord may at any time
convert all measurements relating to this Lease to metric measurements and the
Lease shall be appropriately modified.
<PAGE>
15.4 Successors and Assigns, Interpretation
--------------------------------------
This Lease and everything herein contained shall enure to the benefit of and be
binding upon the successors and assigns of the Landlord and the heirs,
executors, administrators, successors and permitted assigns of the Tenant.
References to the Tenant shall be read with such changes in gender as may be
appropriate, depending on whether the Tenant is a male or female person or a
firm or corporation, and if the Tenant is more than one person or entity, the
covenants of the Tenant shall be deemed-joint and several.
15.5 Force Majeure
-------------
Notwithstanding anything herein contained to the contrary, if the Landlord or
the Tenant is, in good faith, delayed or prevented from doing anything required
by this Lease or the Agreement to Lease because of a strike, labour trouble,
inclement weather, inability to get materials or services, power failure,
restrictive governmental laws, or regulations, riots, insurrection, sabotage,
rebellion, war, act of God, or any other similar reason that is not the fault of
the party delayed, including any delay caused as a result of responsiveness, or
lack thereof on behalf of the other party, its consultants, agents and
representatives, the doing of the thing is excused for a period of time that is
appropriate given the nature, circumstances, and length of the delay, and the
party delayed shall do what was delayed or prevented within the appropriate
period after the delay.
15.6 Waiver
------
Failure of the Landlord to insist upon strict performance of any of the
covenants or conditions of this Lease or to exercise any right or option herein
contained shall not be construed as a waiver or relinquishment of any such
covenant, condition, right or option, but the same shall remain in full force
and effect. The Tenant undertakes and agrees, for itself and for any person
claiming to be a subtenant or assignee, that the acceptance by the Landlord of
any rent from any person other than the Tenant shall not be construed as a
recognition of any rights not herein expressly granted, or as a waiver of any of
the Landlord's rights, or as an admission that such person is, or as a consent
that such person shall be deemed to be, a subtenant or assignee of this Lease,
irrespective of whether the Landlord or said person claims that such person is a
subtenant or assignee of this Lease. The Landlord may accept rent from any
person occupying the Premises at any time without in any way waiving any right
under this Lease.
15.7 Governing Law, Covenants, Severability
--------------------------------------
This Lease shall be governed by and construed in accordance with the laws of the
Province of British Columbia in which the Building is situate. The Landlord and
the Tenant agree that all of the provisions of this Lease are to be construed as
covenants and agreements as though the words importing such covenants and
agreements were used in each separate section hereof. Should any provision or
provisions of this Lease be illegal or not enforceable, it or they shall be
considered separate and severable from the Lease and its remaining provisions
shall remain in force and be binding upon the parties hereto as though the said
provision or provisions had never been included.
<PAGE>
15.8 Headings, Captions
------------------
The headings and captions appearing in this Lease have been inserted for
convenience of reference only and in no way define, limit or enlarge the scope
or meaning of this Lease or of any provisions hereof.
15.9 Time for Payment
----------------
Unless otherwise expressly provided in this Lease, all amounts (other than Rent)
required to be paid by the Tenant to the Landlord pursuant to this Lease shall
be payable on demand at the place designated by the Landlord for payment of Rent
and if not so paid within ten (10) days of such demand be treated as Rent in
arrears.
15.10 Time of Essence
---------------
Time shall be of the essence of this Lease.
15.11 Special Provisions
------------------
Option to Renew - The Landlord will grant to the Tenant two options to renew for
- ---------------
a further 5 years each provided that the Tenant is not then in default of any of
its financial covenants herein contained on the part of the Tenant to be
performed. Such options to renew may be exercised by the written request of the
Tenant delivered or mailed to the Landlord not earlier than nine (9) months and
not later than six (6) months before the expiration of the Term or renewal term
as the case may be. All terms and conditions as in this Lease shall be the same,
except for any improvements work, this renewal option, and the Basic Rent. The
Landlord and the Tenant shall make all reasonable efforts to reach agreement as
to the annual rent for such five (5) year periods not more than three (3) months
prior to the commencement of such five (5) year periods and not less than two
(2) months prior to the commencement of such five (5) year periods and failing
such agreement such annual rent shall be fixed under the provisions of the
Commercial Arbitration Act, Statutes of British Columbia, and shall be the fair
market rent for the Premises, having regard to the rent then currently being for
premises of a like kind, of a like age and condition, and in comparable
locations in the Municipality of Burnaby. Such annual rent shall in any event be
not less than the Base Rent fixed in respect of the previous period for which
Base Rent has been fixed under this Lease.
Options to Lease Contiguous Space - The Landlord hereby grants to the Tenant the
following options to lease space in the Building contiguous to the Premises (or
contiguous to any space in the Building leased by the Tenant in the future):
Optioned Area Exercise Date Occupancy Date
-------------------------------------------------
1) 15,000^13,750 sq. ft. October^November 1, 1996
2) 15,000 sq. ft. March 1, 1997 December 31, 1997
3) 15,000 sq. ft. March 1, 1999 December 31, 1999
4) 20,000 sq. ft. March 1, 2001 December 31, 2001
Option No.'s 2, 3 and 4 outlined above may be exercised by the written request
of the Tenant delivered or mailed to the Landlord on or before the Exercise
Dates as set out in this section above.
The parties acknowledge that the Tenant exercised Option No. 1 above prior to
the signing of this Lease. In connection with the Tenant's exercise of Option
No. 1 above, the Landlord shall pay to the Tenant a leasehold improvement
allowance of $25.00 per sq. ft. of the optioned area as set out in this section
above. With respect to Option No. 1, the Tenant will have access to the optioned
premises, for a period of sixty (60) days prior to the Tenant taking possession
and beginning to pay Base Rent and Additional Rent on the November 1, 1996
occupancy date, for the purpose of installing fixtures and furnishings. During
such period prior to the occupancy date, the Tenant will not be liable for any
Base Rent or Additional Rent, except that subject to the Landlord paying the
leasehold improvement allowance the Tenant will be responsible for all costs to
complete the tenant improvements, including without limitation provision of
services such as power, heat, water, 24-hour security, sanitary facilities,
garbage disposal containers, the use of a designated elevator and supervision
and co-ordination by the Landlord and/or its consultants during execution of
work ("Tenant Improvement Costs").
<PAGE>
If the Tenant exercises Option No.'s 2, 3 or 4 above, the Tenant shall take the
optioned premises on an "as is" basis, provided that the respective optioned
premises are in a condition or level reasonably consistent with the quality of
finishing in the Premises. If the respective optioned premises are not in a
condition or level reasonably consistent with the quality of finishing in the
Premises, and the Landlord has not improved the respective optioned premises to
such a condition or level by the respective occupancy date, then the Landlord
shall pay to the Tenant an amount (the "Improvement Amount") equal to the cost
to improve the respective optioned premises to the level of the then current
value of the improvements to the Premises (excluding lab and technical areas),
normal wear and tear excepted, such cost to improve per square foot to be
multiplied by a fraction, the numerator of which is the remaining number of
months in the Term and the denominator of which is 120.
If the Tenant exercises Options No.'s 2, 3 or 4 above, the Landlord shall also
recarpet and paint the respective optioned premises prior to the Tenant taking
possession. With respect to Options No.'s 2, 3 and 4, the Tenant will have
access to the optioned premises, for a period of thirty (30) days prior to the
Tenant taking possession and beginning to pay Base Rent and Additional Rent on
the respective occupancy date, for the purpose of installing fixtures and
furnishings. During such period prior to the occupancy date, the Tenant will not
be liable for any Base Rent or Additional Rent, except that subject to the
Landlord paying the Improvement Amount the Tenant will be responsible for all
Tenant Improvement Costs.
The Landlord and the Tenant will make all reasonable effort to ensure that their
respective consultants and contractors cooperate with each other during any time
of mutual occupation of the optioned premises.
The basic rent, additional rent and all terms and conditions of a new lease
relating to the respective optioned premises shall be consistent with this Lease
and the term of the lease on the respective optioned premises shall expire on
the same date as the Term in this Lease.
(c) Right to First Refusal to Lease - If the Landlord receives a bona fide
third party offer (the "Offer") to lease space in the Building, it shall only
accept such Offer subject to this Right of First Refusal and if the rent and
terms of the Offer are not more favourable to the third party than those offered
to the Tenant in the Right of First Opportunity as set out in paragraph (d) of
this section below.
If the Landlord receives an Offer, it shall deliver a true copy of the Offer to
the Tenant. If the Tenant is not then in default of any of its financial
covenants herein contained on the part of the Tenant to be performed, and if the
Tenant has not declined, in the preceding 120 day period, to lease such space
under its Right of First Opportunity set out in paragraph (d) hereof, then the
Landlord shall grant to the Tenant a right of first refusal to lease (the
"RFR"), during the Term or any renewal thereof, the space set out in the Offer,
on the terms and conditions of the Offer. The Tenant shall have fifteen (15)
days from such delivery within which to give written notice to the Landlord
whether it intends to exercise its RFR. The RFR may only be exercised within
such time, by the Tenant delivering notice in writing of acceptance to the
Landlord whereupon a binding agreement to lease such premises shall exist
between the Landlord and Tenant on the terms and conditions contained in the
Offer. If the Tenant elects not to so exercise the RFR, then the premises may
thereafter be leased by the Landlord to the tenant identified in the Offer and
subject to the terms and conditions therein, but not otherwise, and failing
leasing as aforesaid, the provisions of this section shall apply again.
The Tenant shall not have the right to assign this right of first refusal to
lease except in conjunction with a permitted assignment of all rights under this
Lease.
<PAGE>
(d) Right of First Opportunity to Lease Space - If the Tenant is not then
in default of any of its financial covenants herein contained on the part of the
Tenant to be performed, then the Landlord shall grant to the Tenant a Right of
First Opportunity to lease any space in the Building as it becomes available for
lease. The Landlord agrees to deliver to the Tenant notice in writing (the
"Landlord's Notice") identifying the available space and the date on which it
will be available. The Tenant shall have thirty (30) days from the date of
delivery of the Landlord's Notice to provide written notice to the Landlord that
it is exercising its Right of First Opportunity to lease the space.
The term of the lease of the space shall commence on the date specified in the
Landlord's Notice, but no earlier than 90 days after the date of the Landlord's
Notice and shall expire on the expiry of the Term of this Lease or any permitted
renewal thereof. The basic rent payable on the space shall be the current fair
market rental as agreed between the Landlord and the Tenant or failing such
agreement as determined by arbitration pursuant to the terms of the Commercial
Arbitration Act of the Province of British Columbia. ----------
- ---------------
The Landlord shall, at the Tenant's request, paint and recarpet the respective
space. The Tenant shall not have the right to assign this Right of First
Opportunity to lease, except in conjunction with a permitted assignment of all
rights under the Lease.
(e) Option to Expand - At any time after the first anniversary of the Term,
and if the Tenant is not then in default of any of its financial covenants
herein contained on the part of the Tenant to be performed, then the Tenant
shall have the option to lease any space in the Building adjoining the Tenant's
existing space of a minimum of 6,800 sq. ft. in the Building, by providing
written notice to the Landlord.
The lease term on this additional space shall commence on the first day of the
eleventh month after the date of the Tenant's notification and shall terminate
on the expiry of the Term of the Lease or any permitted renewal thereof. The
basic rent payable on the additional space shall equal the current fair market
rent; however, no less than the rate per square foot payable on the Premises. If
the adjoining space is occupied by another tenant at the time that the Tenant
exercises this option to lease, this option shall apply to all, but not part of,
the prior tenant's existing space. Upon the Tenant taking possession of the
adjoining space it shall reimburse the Landlord for the actual verifiable
relocation cost of the previous tenant up to a maximum of $10.00 per sq. ft.
of the space vacated by the previous tenant.
(f) Relocation of Other Tenants to Accommodate Tenant - The Landlord shall
provide in leases of space in the Building to any tenant other than the Tenant,
that such tenants shall relocate elsewhere in the Building or to the 8525
Building, as defined in section 12.2 herein, in order to accommodate the
Tenant's expansion options contained in paragraphs (b) and (e) hereof. If the
Landlord does not obtain such a relocation provision in such third party leases
and the Tenant wishes to exercise its expansion options as set out in paragraphs
(b) and (e) hereof, then the Landlord will lease to the Tenant comparable space
in the 8525 Building or the Building at a rental equivalent to 65 % of the then
current market rental for such space.
This Relocation Provision will become null and void upon the Tenant occupying a
total of 115,000 sq. ft. in the Building.
(g) Interpretation - As used in this Article 15.11, the term "Building"
refers only to the Building shown as "Phase II Building" on Schedule "A1", and
not to any bigger building of which the Building may become a part.
<PAGE>
IN WITNESS WHEREOF the Landlord and Tenant have executed this Lease the day and
year first above written on page 1 hereof.
THE CORPORATE SEAL of PILOT PACIFIC DEVELOPMENTS INC., )
was hereto affixed in the presence of: )
)
)
_____________________________ ) c/s
)
)
- ----------------------------- )
)
THE CORPORATE SEAL of PMC- SIERRA, INC. was hereto )
affixed in the presence of: )
)
- ---------------------------- )
Authorized Signatory ) c/s
- ---------------------------- )
Authorized Signatory )
)
<PAGE>
SCHEDULE "A1"
ATTACH SITE PLAN
<PAGE>
SCHEDULE "A2"
ATTACH FLOOR PLANS
<PAGE>
SCHEDULE "B"
THE LAND
^LOT 2
P.I.D. # 017-485-631
LOT 2 DISTRICT LOT 56
GROUP 1, NEW WESTMINSTER
DISTRICT PLAN LMP1598
LOT 1
P.I.D. # 017-485-622
LOT 1 DISTRICT LOT 56
GROUP 1, NEW WESTMINSTER
DISTRICT PLAN LMP1598
<PAGE>
SCHEDULE "C"
RULES AND REGULATIONS
16 The Landlord shall have the right to control and operate the public
portions of the Building and the public facilities, as well as facilities
furnished for the common use of the tenants, in such manner as it deems best for
the benefit of the tenants generally. No tenant shall invite to the Premises, or
permit the visit of, persons in such numbers or under such conditions as to
interfere with the use and enjoyment of the facilities of the Building by other
tenants.
17 The sidewalks, driveways and entrances shall not be encumbered or
obstructed by tenants or tenants' agents, servants, employees, licensees or
invitees, or be used by them for any purpose other than for ingress to and
egress from the Premises. Landlord reserves the right to restrict and regulate
the use of the aforementioned public areas of the Building by tenants and
tenants' agents, employees, servants, licensees and invitees and by persons
making deliveries to tenants. All loading and unloading of merchandise,
supplies, materials, garbage, refuse or other chattels shall be made only
through or by means of such doorway as the Landlord shall designate in writing
from time to time.
18 Unless specifically provided for in the Lease or in the Agreement to
Lease or in any agreement made between the Landlord and the Tenant:
.1 No awnings or other projections shall be attached to the
outside walls of the Building. No curtains, blinds, shades or screens
shall be attached to, or hung in, or used in connection with, any
window or door of the Premises, without the prior written consent of
Landlord. Such curtains, blinds, shades, screens and other fixtures
must be of a quality, type, design and colour, and attached in the
manner approved by Landlord.
.2 No sign, advertisement, notice or other lettering shall be
exhibited, inscribed, painted or affixed by any tenant on any window or
part of the outside or inside of the Premises or the Building without
the prior written consent of Landlord. In the event of the violation of
the foregoing by any tenant, Landlord may remove same without any
liability, and may charge the expense incurred by such removal to such
tenant.
.3 No showcases or other articles shall be put in front of or
affixed to any part of the exterior of the Building.
19 The toilets, urinals, sinks and other water apparatus shall not be used
for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags, coffee grinds, ashes or other substances shall be
thrown therein. Any damage resulting by misuse shall be borne by the tenants by
whom or by whose agents, servants, employees, customers or invitees the same was
caused. Tenants shall not let the water run unless it is in actual use, and
shall not deface or damage any part of the Building. The Tenant shall repair to
the satisfaction of the Landlord any holes or damage in or to the Building
resulting from the Tenant driving nails, spikes, hooks, or screws into the walls
or woodwork of the Building, and the Tenant shall remove such nails, spikes
hooks, or screws on or by the end of the Term.
20 No vehicles or animals or birds of any kind shall be brought into or
kept in the Building or the Premises.
21 No space in the Building shall be used for lodging, sleeping, or any
immoral or illegal purposes.
22 Tenants shall not make or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of this or neighbouring buildings
or premises or those having business with them whether by the use of any musical
instrument, radio, television, talking machine, unmusical noise, whistling,
singing or in any other way. Tenants shall not throw anything out of the doors,
windows, or skylights, if any, of the Building.
23 No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by tenants, nor shall any changes whatsoever be made to
existing locks or the mechanics thereof except by the Landlord, at its option.
Tenants shall not permit any duplicate keys to be made, but additional keys as
reasonably required shall be supplied by the Landlord when requested by a tenant
in writing and such keys shall be paid for by the tenant, and upon termination
of tenant's lease, the tenant shall surrender to the Landlord all keys of the
Premises and other part or parts of the Building.
<PAGE>
24 The tenants and their agents, servants, contractors, invitees or
employees, shall not bring in or take out, position, construct, install or move
any safe or other heavy equipment without first obtaining the consent in writing
of the Landlord. In giving such consent, the Landlord shall have the right in
its sole discretion, to prescribe the weight permitted and the position thereof,
and the use and design of plans, skids or platforms to distribute the weight
thereof. All damage done to the Building by moving or using any such heavy
equipment or other office equipment or furniture shall be repaired at the
expense of the Tenant.
25 Tenants shall not occupy or permit any portion of the Premises to be
occupied for the possession, storage, manufacture, or sale of narcotics or
drugs, except as incidental to tenant's main business.
26 All entrance doors in the Premises shall be left locked and all
windows shall be left closed by tenants when the Premises are not in use.
27 Neither tenants nor their servants, employees, agents, visitors, or
licensees shall at any time bring or keep upon the Premises any inflammable,
combustible or explosive fluid, chemical or substance, nor do nor permit to be
done anything in conflict with any insurance policy which may or might be in
force upon the Building or any part thereof or with the laws relating to fires,
or with the regulations of the Fire Department or the Health Department, or with
any of the rules, regulations or ordinances of the city in which the Premises
are located, or of any other duly constituted authority.
28 Tenants shall not, without first obtaining Landlord's prior written
approval, conduct any restaurant, luncheonette, or cafeteria for the sale or
service of food or beverages to others, or cause or permit any odours of cooking
or other process or any unusual or objectionable odours to emanate from the
Premises.
29 Lists of automobile licence numbers of people working in the Building
and the names of people who normally work off-hours may be required by Landlord,
who may also require tenants' employees to display a card or sticker as a
prerequisite to admission to any parking facility.
30 The Landlord reserves the right to promulgate, rescind, alter or waive
any rules or regulations at any time prescribed for the Building when is
necessary, desirable or proper for its best interest and in the opinion of the
Landlord, for the best interest of the tenants.
31 The tenants shall promptly notify the Landlord of all requests by any
taxing authority for information relating to the Premises (including fixtures,
improvements, or machinery and equipment therein) or the tenant's occupation or
use thereof and any such information to be given by the tenant to such taxing
authority shall be forwarded by the tenant to the Landlord for delivery to such
taxing authority.
32 If any apparatus used or installed by a tenant requires a permit as a
condition for its installation, the tenant must file a copy of such permit with
Landlord.
33 Tenants shall be responsible for the cleaning of any window coverings
installed in their Premises.
34 Tenants shall not burn any trash or garbage in or about the Premises o
anywhere within the confines of the Land.
<PAGE>
SCHEDULE "D"
ESTOPPEL CERTIFICATE
THE UNDERSIGNED, the Tenant in the Lease between Pilot Pacific Developments
Inc., as agent for KAB Properties Inc. and the undersigned, dated the day of
1995, certifies:
<PAGE>
35 THAT the Tenant's obligation to pay rent pursuant to Article 4 of the
Lease commenced on the day of 1st day of , 1996.
36 THAT the Lease has not been altered or amended since the time of
execution and is in full force and effect in accordance with its original terms.
37 THAT the Rentable Area of the Premises measured as provided in
Article 2.1 of the Lease, actually comprises an area of square feet. The Base
Rent reserved pursuant to Article 4.1 of the said Lease, adjusted having
reference to the aforesaid measurement is:
38 THAT the Tenant is in possession of the Premises.
39 THAT the Lease is an absolutely net Lease to the Landlord and that the
Tenant is paying (and has paid) effective to the day of , 19 , Base Rent (as
adjusted) and all other charges, including, without limitation, the Additional
Rent referred to in Article 4.2, pursuant to the said Lease, and commenced
paying the same on the date that the Tenant's obligation to pay rent commenced,
as aforesaid.
40 THAT the amount of prepaid rent or security deposit held by the
Landlord is $
41 THAT the Premises have been completed in accordance with any
obligations of the Landlord and the Premises are entirely satisfactory and
suitable for the use thereof as contemplated by the Tenant.
42 THAT neither the Landlord nor the Tenant is in default in respect o
the Lease.
43 THAT the Tenant has no claims, charges, defences, right to set-off,
lien, abatement or counterclaim against the Landlord in respect of Rent or
otherwise.
DATED at the City of , in the Province of
------------------ -------------------
this day of , 19 .
---------------------- ----
TENANT
Per:_________________________________ c/s
Authorized Signing Officer
