----------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10 - Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended June 27, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the Transition Period From ____ to ____
Commission File Number 0-19084
PMC-Sierra, Inc.
(Exact name of registrant as specified in its charter)
A Delaware Corporation - I.R.S. NO. 94-2925073
105-8555 BAXTER PLACE
BURNABY, BRITISH COLUMBIA, V5A 4V7
CANADA
Telephone (604) 415-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes ___X____ No _______
Common shares outstanding at June 27, 1999 - 63,421,124
------------------------------------------------------
<PAGE>
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated statements of operations -
- Consolidated balance sheets -
- Consolidated statements of cash flows -
- Notes to consolidated financial statements -
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -
Item 3. Quantitative and Qualitative Disclosures About
Market Risk -
PART II - OTHER INFORMATION
Item 4. Submission of Matters to A Vote by Stockholders -
Item 5. Description of Capital Stock -
Item 6. Exhibits and Reports on Form 8 - K -
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
Jun 27, Jun 28, Jun 27, Jun 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues $ 59,287 $ 39,975 $ 109,426 $ 74,270
Cost of revenues 13,088 9,968 24,062 18,103
------------ ------------ ------------ ------------
Gross profit 46,199 30,007 85,364 56,167
Other costs and expenses:
Research and development 12,817 7,820 24,375 13,836
Marketing, general and administrative 9,440 7,249 18,591 13,296
Amortization of goodwill 313 186 626 261
Acquisition of in process research and development - 39,176 - 39,176
------------ ------------ ------------ ------------
Income (loss) from operations 23,629 (24,424) 41,772 (10,402)
Interest and other income, net 1,085 750 2,141 1,574
Gain on sale of investments 26,800 - 26,800 -
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 51,514 (23,674) 70,713 (8,828)
Provision for income taxes 12,272 5,639 18,998 10,836
------------ ------------ ------------ ------------
Net income (loss) $ 39,242 $ (29,313) $ 51,715 $ (19,664)
============ ============ ============ ============
Basic net income (loss) per share $ 0.59 $ (0.46) $ 0.79 $ (0.31)
============ ============ ============ ============
Diluted net income (loss) per share $ 0.54 $ (0.46) $ 0.72 $ (0.31)
============ ============ ============ ============
Shares used to calculate:
Basic net income (loss) per share 66,010 63,658 65,811 63,354
Diluted net income (loss) per share 72,283 63,658 71,737 63,354
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
Jun 27, Dec 27,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 140,080 $ 33,943
Short-term investments 9,773 50,893
Accounts receivable, net 24,027 26,227
Inventories 5,314 3,617
Prepaid expenses and other current assets 4,447 3,840
Short-term deposits for wafer fabrication capacity - 4,000
------------ ------------
Total current assets 183,641 122,520
Property and equipment, net 33,671 31,595
Goodwill and other intangible assets, net 17,863 19,629
Investments and other assets 3,290 4,434
Deposits for wafer fabrication capacity 19,120 19,120
------------ ------------
$ 257,585 $ 197,298
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 10,861 $ 8,964
Accrued liabilities 16,425 14,618
Deferred income 18,517 12,517
Accrued income taxes 14,844 13,897
Current portion of obligations under capital leases and long-term debt 2,001 4,909
------------ ------------
Total current liabilities 62,648 54,905
Deferred income taxes 2,785 2,851
Noncurrent obligations under capital leases and long-term debt 1,002 5,223
Special shares convertible into PMC common stock 7,458 8,387
Stockholders' equity:
Common stock, par value $0.001 64 62
Additional paid in capital 187,409 181,366
Accumulated deficit (3,781) (55,496)
------------ ------------
Total stockholders' equity 183,692 125,932
------------ ------------
$ 257,585 $ 197,298
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
-------------------------
Jun 27, Jun 28,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 51,715 $ (19,664)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of plant and equipment 7,874 4,585
Amortization of intangibles 1,759 934
Gain on sale of investments (26,800) -
Acquisition of in process research and development - 39,176
Changes in operating assets and liabilities
Accounts receivable 2,200 (4,492)
Inventories (1,697) (2,458)
Prepaid expenses and other (380) (1,754)
Accounts payable and accrued expenses 4,585 4,153
Deferred income 6,000 4,772
Net liabilities associated with discontinued operations - (52)
------------ ------------
Net cash provided by operating activities 45,256 25,200
------------ ------------
Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments 50,893 43,442
Purchases of short-term investments (9,773) (2,108)
Proceeds from refund of wafer fabrication deposits 4,000 4,000
Purchase of investments (630) -
Proceeds from sale of investments 28,628 -
Purchase of intangible assets (411) -
Payment for purchase of Integrated Telecom Technology, Inc.,
net of cash acquired - (27,165)
Purchase of other in process research and development - (1,419)
Purchases of plant and equipment (9,950) (9,636)
------------ ------------
Net cash provided by investing activities 62,757 7,114
------------ ------------
Cash flows from financing activities:
Repayment of notes payable and long-term debt (653) (116)
Principal payments under capital lease obligations (6,476) (2,461)
Proceeds from issuance of common stock 5,253 3,229
------------ ------------
Net cash provided by (used in) financing activities (1,876) 652
------------ ------------
Net increase in cash and cash equivalents 106,137 32,966
Cash and cash equivalents, beginning of the period 33,943 27,906
------------ ------------
Cash and cash equivalents, end of the period $ 140,080 $ 60,872
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PMC-SIERRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Summary of Significant Accounting Policies
Basis of presentation. The accompanying financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules or
regulations. The interim financial statements are unaudited, but reflect all
adjustments which are, in the opinion of management, necessary to present a fair
statement of results for the interim periods presented. These financial
statements should be read in conjunction with the financial statements and the
notes thereto in the Company's Annual Report on Form 10-K for the year ended
December 27, 1998. The results of operations for the interim period are not
necessarily indicative of results to be expected in future periods.
Inventories. Inventories are stated at the lower of cost (first-in, first out)
or market (estimated net realizable value). All figures are in thousands.
Jun 27, Dec 27,
1999 1998
Work-in-progress $ 2,973 $ 1,761
Finished goods 2,341 1,856
-------------- --------------
$ 5,314 $ 3,617
============== ==============
Recently issued accounting standards. In June 1998, the FASB issued Statement of
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Company expects to adopt the new Statement effective January 1,
2000. The Statement will require the recognition of all derivatives on the
Company's consolidated balance sheet at fair value. The Company anticipates that
the adoption of this Statement will not have a significant impact on its results
of operations or financial position.
NOTE 2. Segment Information
The Company has two operating segments: networking and non-networking products.
The networking segment consists of internetworking semiconductor devices and
related technical service and support to equipment manufacturers for use in
their communications and networking equipment. The non-networking segment
includes custom user interface products. The Company is supporting the
non-networking products for existing customers, but has decided not to develop
any further products of this type.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on revenues and gross margins from operations of the two segments.
Three Months Ended Six Months Ended
------------------------ ----------------------
Jun 27, Jun 28, Jun 27, Jun 28,
1999 1998 1999 1998
Networking
Net revenues $ 54,482 $ 32,608 $ 101,627 $ 60,462
Gross profit 43,973 26,272 81,726 49,573
Non- Networking
Net revenues 4,805 7,367 7,799 13,808
Gross profit 2,226 3,735 3,638 6,594
Total gross profit 46,199 30,007 85,364 56,167
All the figures in this note are in thousands.
NOTE 3. Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
Jun 27, Jun 28, Jun 27, Jun 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 39,242 $ (29,313) $ 51,715 $ (19,664)
=========== =========== =========== ===========
Denominator:
Basic weighted average common shares outstanding (1) 66,010 63,658 65,811 63,354
----------- ----------- ----------- -----------
Effect of dilutive securities:
Stock options 6,228 - 5,882 -
Stock warrants 45 - 44 -
----------- ----------- ----------- -----------
Shares used in calculation of net income per share 72,283 63,658 71,737 63,354
=========== =========== =========== ===========
Basic net income (loss) per share $ 0.59 $ (0.46) $ 0.79 $ (0.31)
Diluted net income (loss) per share $ 0.54 $ (0.46) $ 0.72 $ (0.31)
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic net
income per share.
</TABLE>
NOTE 4. Sale of Investments
During the quarter ended June 27, 1999, the Company recognized a pre-tax gain of
$12.3 million related to the disposition of its investment in IC Works, Inc.
("ICW"). ICW was purchased by Cypress Semiconductor, Inc. ("Cypress"), a
publicly held company. As part of the purchase agreement between ICW and
Cypress, the Company's preferred shares in ICW, with a nominal book value, were
exchanged for 923,600 common shares of Cypress which, at the time, had a fair
market value of approximately $8.6 million. The Company then sold 831,240 of the
Cypress common shares resulting in a total pre-tax gain of $ 12.3 million. The
remaining 92,360 Cypress common shares are subject to certain escrow
restrictions, are not available for sale in 1999 and are carried at the nominal
book value of the Company's original investment in ICW.
During the quarter ended June 27, 1999, a Company's investee, Sierra Wireless
Inc. ("Sierra Wireless"), completed an initial public offering ("IPO") in
Canada. As part of this IPO, the Company's investment in non-voting preferred
shares of Sierra Wireless were exchanged for 5.1 million common shares of Sierra
Wireless, of which 1.7 million shares were sold as part of the offering for a
pre-tax gain of approximately $14.5 million.
<PAGE>
Immediately subsequent to the IPO, the Company held 3.4 million common shares of
Sierra Wireless, representing approximately 24% of Sierra Wireless' securities.
Accordingly, commencing in the third quarter of 1999, the Company will begin
accounting for its investment in Sierra Wireless under the equity method of
accounting. The common shares of Sierra Wireless held by the Company are subject
to certain resale restrictions and are not available for sale during 1999.
NOTE 5. Stock Split
On April 30, 1999, the Company effected a two-for-one stock split in the form of
a stock dividend. Accordingly, all references to share and per-share data for
all periods presented have been adjusted to reflect this event.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investors should read the following discussion in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I - Item 1
of this Quarterly Report, and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations in the Company's 1998 Annual Report on Form 10K. Our
discussions about PMC-Sierra include our subsidiary PMC-Sierra Ltd., a Canadian
corporation, and our other subsidiaries.
Some statements in this report constitute "forward looking statements" within
the meaning of the federal securities laws, including those statements relating
to:
o revenues;
o gross margins;
o gross profit;
o expenditures on research and development, and selling and administration;
o capital resources sufficiency;
o market trends; and
o Year 2000 preparedness issues.
Our results may differ materially from those expressed or implied by the
forward-looking statements for a number of reasons, including those described
below in "Factors You Should Consider Before Investing in PMC-Sierra." We may
not, nor are we obliged to, release revisions to forward-looking statements to
reflect subsequent events.
<PAGE>
Results of Operations
Second Quarters of 1999 and 1998
Net Revenues ($000,000)
- -----------------------
Second Quarter
---------------------------
1999 1998 Change
Networking products $ 54.5 $ 32.6 67%
Non-networking products 4.8 7.4 (35)%
------------ -----------
Total net revenues $ 59.3 $ 40.0 48%
============ ===========
Net revenues increased by 48% in the second quarter of 1999 compared to the same
quarter in 1998. Our networking revenue increased 67% in the same periods, which
more than offset the 35% decline in non-networking revenues.
Networking revenues increased as a result of additional demand for our
customers' broadband equipment, an increase in our customers' purchases of our
standard merchant market chips over custom-made chips, and our introduction and
sale of chips addressing additional network functions.
Non-networking revenue continued to decline consistent with our decision to exit
all non-networking product lines while supporting existing customers.
Non-networking product revenues did increase compared to the first quarter but
that was as a result of shipments to existing customers for existing
applications and does not represent a sustainable long-term increase in
non-networking product revenues.
Gross Profit ($000,000)
- -----------------------
Second Quarter
-------------------------
1999 1998 Change
Networking $ 44.0 $ 26.3 67%
Non-networking 2.2 3.7 (41)%
------------ -----------
Total gross profit $ 46.2 $ 30.0 54%
============ ===========
Percentage of net revenues 78% 75%
Total gross profit grew 54% from $30.0 million in the second quarter of 1998 to
$46.2 million in the same quarter of 1999. Consistent with our results in past
quarters, the increase in sales of higher gross margin networking semiconductors
more than offset the decline in gross profit due to the reduction in
non-networking revenue.
Gross profit as a percentage of net revenue increased in the second quarter of
1999 over the comparable period in 1998 as our relatively high gross margin
networking products comprised a higher percentage of total revenue.
<PAGE>
Our networking gross profit as a percentage of net revenue is high relative to
the overall semiconductor industry because our products are complex and are sold
in relatively low volumes. We believe our gross profit as a percentage of
revenue will decline as our products mature and if our customers purchase in
greater volume. We expect networking gross margins to decline if reductions in
production costs do not offset decreases in the average selling price of
existing networking products.
Non-networking gross profit as a percent of non-networking revenue declined in
the second quarter of 1999 compared to the same period in 1998. Further
reductions may occur in the future.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
Second quarter
---------------------------
1999 1998 Change
Research and development $ 12.8 $ 7.8 64%
Percentage of net revenues 22% 20%
Marketing, general & administrative $ 9.4 $ 7.2 30%
Percentage of net revenues 16% 18%
Amortization of goodwill $ 0.3 $ 0.2 68%
Acquisition of in process
research and development $ - $ 39.2
Research and Development ("R&D") expenses of $12.8 million in the second quarter
of 1999 increased 64% over last year's second quarter. We incur R&D expenditures
in an effort to attain technological leadership from a multi-year perspective.
This has caused R&D spending to fluctuate from quarter to quarter. We expect
such fluctuations, particularly when measured as a percentage of net revenues,
to occur in the future, primarily due to the timing of expenditures and changes
in the level of net revenues.
Marketing, general and administrative expenses incurred in the second quarter of
1999 increased in dollars but decreased as a percentage of net revenue compared
to the second quarter of 1998. In the short term, many of the marketing, general
and administrative expenses are fixed, causing a decline as a percentage of net
revenues in periods of rapidly rising revenues and an increase as a percentage
of net revenue when revenue growth is slower or declining.
Goodwill amortization increased to $313,000 in the second quarter of 1999
compared to $186,000 in last year's second quarter. The increase relates
primarily to our 1998 acquisition of Integrated Telecom Technology, Inc.
In the second quarter of 1998 we recorded a $39.2 million charge for the
acquisition of in process research and development primarily related to the
Integrated Telecom Technology, Inc. acquisition. We did not record comparable
charges in 1999.
<PAGE>
Interest and other income, net
- ------------------------------
Net interest and other income increased to $1.1 million in the second quarter of
1999 from $0.8 million in last year's second quarter primarily due to higher
cash balances available to invest and earn interest and reduced interest expense
due to a lower level of capital leases.
Gain on sale of investments
- ---------------------------
During the quarter ended June 27, 1999, we realized a pre-tax gain of
approximately $12.3 million as a result of the disposition of our investment in
IC Works, Inc. ("ICW"). ICW was purchased by Cypress Semiconductor, Inc.
("Cypress"). As part of this purchase, we received Cypress common shares in
exchange for our investment in preferred shares of ICW. We subsequently sold
831,240 Cypress common shares. See Note 4 of the Consolidated Financial
Statements.
We also realized a pre-tax gain of approximately $14.5 million in the second
quarter of 1999 related to our investment in Sierra Wireless Inc. ("Sierra
Wireless"). During the quarter, Sierra Wireless completed an initial public
offering in Canada. As part of this initial public offering, we exchanged our
investment in non-voting preferred shares of Sierra Wireless for 5.1 million
common shares, of which 1.7 million were sold as part of the offering for a
pre-tax gain of $14.5 million. See Note 4 of the Consolidated Financial
Statements.
Provision for income taxes
- --------------------------
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations. Approximately $20.7 million of the gain on sale of
investments recorded in the second quarter of 1999 relates to investments held
in the United States. This gain was largely offset by our United States net
operating loss carryforward. The second quarter 1998 write-off of acquired in
process research and development as well as the goodwill amortization in both
years are not deductible for tax purposes.
First Six Months of 1999 and 1998
Net Revenues ($000,000)
- -----------------------
First six months
-------------------------
1999 1998 Change
Networking products $ 101.6 $ 60.5 68%
Non-networking 7.8 13.8 (43)%
------------ -----------
Total net revenues $ 109.4 $ 74.3 47%
============ ===========
Net revenues of $109.4 million in the first half of 1999 increased 47% over the
comparable period in 1998. A 68% increase in our networking semiconductor
revenue more than offset a 43% decline in non-networking products.
<PAGE>
Gross Profit ($000,000)
- -----------------------
First six months
-------------------------
1999 1998 Change
Networking $ 81.7 $ 49.6 65%
Non-networking 3.7 6.6 (44)%
------------ -----------
Total gross profit $ 85.4 $ 56.2 52%
============ ===========
Percentage of net revenues 78% 76%
Total gross profit increased 52% from $56.2 million in the first half of 1998 to
$85.4 million in this year's first half. Gross profit increased more rapidly
than the increase in net revenues due to increased sales of our networking
products as compared to sales of our non-networking products. Our networking
products are generally sold for higher gross margins than non-networking
products. Margins on our networking and non-networking products declined from
82.0% and 47.8% in the first half of 1998 to 80.4% and 46.6% respectively in the
first half of 1999. We expect our gross margins to decline further.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
First six months
---------------------------
1999 1998 Change
Research and development $ 24.4 $ 13.8 76%
Percentage of net revenues 22% 19%
Marketing, general & administrative $ 18.6 $ 13.3 40%
Percentage of net revenues 17% 18%
Amortization of Goodwill $ 0.6 $ 0.3 139%
Acquisition of in process
research and development $ - $ 39.2
R&D expenses increased in both dollars and as a percent of net revenues in the
first half of 1999 compared to last year's first half. We made a strategic
decision mid-year in 1998 to increase our targeted spending on R&D to address
additional market opportunities for our products.
Marketing, general and administrative expenses increased in dollars but declined
as a percentage of net revenues in the first half of 1999 compared to the first
half of 1998. In the short term, many of the marketing, general and
administrative expenses are fixed, causing them to decline as a percentage of
net revenues in periods of rapidly rising revenues and to increase as a
percentage of net revenue when revenue growth is slower or declining.
Goodwill amortization increased to $626,000 in the first half of 1999 from
$261,000 in the comparable period in 1998. The increase is related primarily to
our 1998 acquisition of Integrated Telecom Technology, Inc.
<PAGE>
Interest and other income, Net
- ------------------------------
Net interest and other income increased from $1.6 million in the first half of
1998 to $2.1 million in the first half of 1999 due to the same factors that
increased net interest income for the three months ended June 27, 1999.
Liquidity and Capital Resources
Cash, cash equivalents and short term investments increased from $84.8 million
at the end of 1998 to $149.9 million at June 27, 1999.
During the first six months of 1999, operating activities provided $45.3 million
in cash and included $7.9 million of depreciation and $1.8 million amortization
of intangibles. Our year to date investing activities provided $62.8 million and
includes $41.1 million of net sales of short term investments, $28.6 million in
proceeds from the sale of equity investments, and $10 million spent on plant and
equipment purchases. Our financing activities used $1.9 million, as debt and
lease repayments of $7.1 million exceeded the $5.2 million in proceeds from sale
of common stock through our stock option and purchase plans.
Our principal source of liquidity at June 27, 1999 was our cash, cash equivalent
and short term investment of $149.9 million. We also have an unused line of
credit with a bank that allows us to borrow up to $15 million provided, along
with other restrictions, that we do not pay cash dividends or make any material
divestments without the bank's written consent.
We believe that existing sources of liquidity and anticipated funds from
operations will satisfy our projected working capital and capital expenditure
requirements through the end of 1999. We expect to spend approximately $22
million on new capital additions over the balance of 1999.
Our future capital requirements will depend on many factors. These include the
rate at which we develop products or acquire businesses, products or
technologies. If we do not own or generate sufficient resources to fund our
operations, we may be forced to raise additional funds through public or private
debt or equity financing. If we issue additional equity, we will reduce the
percentage of ownership of our current stockholders. In addition, additional
issued equity may have a senior interest to the stock of our current
stockholders. If sufficient funds are not available, we may be required to
delay, limit or eliminate some or all of our activities.
<PAGE>
FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA
- ---------------------------------------------------------------
Our company is subject to a number of risks - some are normal to the fabless
networking semiconductor industry, some are the same or similar to those
disclosed in previous SEC filings, and some may be present in the future. You
should carefully consider all of these risks and the other information in this
report before investing. The fact that certain risks are endemic to the industry
does not lessen the significance of the risk.
As a result of these risks, our business, financial condition or operating
results could be materially adversely affected. This could cause the trading
price of our common stock to decline, and you may lose part or all of your
investment.
OUR OPERATING RESULTS FLUCTUATE
- -------------------------------
Our operating results have fluctuated in the past and may fluctuate in the
future for any of the following reasons:
o our product introduction timing;
o our customers' inventory levels fluctuate;
o demand for our and our customers' products changes;
o our suppliers' product and capacity availability changes;
o our product manufacturing yields change;
o market acceptance or rejection of one or more of our products;
o our average selling prices change;
o our customers are acquired or divested;
o a networking industry downturn occurs;
o we are unable to acquire wafer or other manufacturing capacity;
o our competitors produce new products or technologies;
o our product and process development expenditures change; and
o our competitors change prices.
WE ANTICIPATE LOWER MARGINS ON MATURE AND HIGH VOLUME PRODUCTS
- --------------------------------------------------------------
Our gross and operating margins may change in the future as a result of any of
the following:
o changes in average selling prices;
o changes in production and wafer and other supply costs; and
o changes in our product mix.
We expect the average selling prices of our products to decline as they mature.
Historically, competition in the semiconductor industry has driven down the
average selling prices ("ASPs") of products. If we price our products too high,
our customers may use a competitor's product or an in-house solution. Thus, our
ASPs will generally fall with the industry norms. To maintain profit margins, we
must reduce our costs sufficiently to offset declines in ASPs, or successfully
sell proportionately more new products with higher ASPs. Yield or other
production problems, or shortages of supply may preclude us from lowering or
maintaining current operating costs. Also, competitive, market and other
pressures may not allow us to increase our sales of our higher ASP products.
<PAGE>
In addition, we are entering into the ethernet market of the networking
industry. Average volumes that are higher and gross margins that are lower than
the market in which we currently participate characterize this market. To
maintain our current operating margins, we will have to sell higher volumes of
these chips than in our traditional markets. If we sell these chips in low
volumes, our operating margins may be adversely affected.
WE NEED TO SUCCESSFULLY DEVELOP AND INTRODUCE OUR NEW PRODUCTS
- --------------------------------------------------------------
The success of our new products depends on a number of factors, including:
o our definition of new products to meet customer requirements;
o our completion of product development and introduction of new products to
market in a timely manner;
o our ability to judge product demand;
o competitive pricing and performance levels; and
o suitable fabrication yields by our independent foundries.
Many of these factors are outside our control. We may not be able to effectively
accomplish those factors that are in our control.
Some of our products adhere to specifications developed by industry groups. For
example, in the second half of 1998, we introduced two packet-over-Sonet devices
based on specifications developed by an industry group. These specifications may
not reach sufficient acceptance by the market to allow our products commercial
success.
We recently introduced a number of new ethernet switch products which function
at gigabit and fast ethernet speeds. These products may not be sufficiently
accepted by the market to achieve commercial success.
In May 1998, we acquired in-process research and development and developed
technology related to ATM segmentation and reassembly as well as ATM switching.
It is possible that these products may not achieve volumes sufficient to assure
their commercial success.
WE OPERATE IN AN INDUSTRY SUBJECT TO RAPID TECHNOLOGICAL CHANGE
- ---------------------------------------------------------------
We sell products to a market whose characteristics include rapidly evolving
industry standards, product obsolescence, and new manufacturing and design
technologies. Our complex semiconductors require extensive design and testing
before prototypes can be manufactured. They often need to be redesigned because
manufacturing yields on prototypes are unacceptable or customers redefine their
products to meet changing industry standards. Many of the standards and
protocols for our products are based on high speed networking technologies that
have not been widely adopted or ratified by one of the standard setting bodies
in our customers' industry. Our customers often delay or alter their design
demands during this standard-setting process. In response, we must redesign our
products to suit these changing demands. Redesign usually delays the production
of our products. Our products may become obsolete due to these rapidly evolving
industry standards and customer preferences.
<PAGE>
WE DEPEND ON THE ATM TELECOMMUNICATIONS AND NETWORKING MARKET
- -------------------------------------------------------------
We focus a significant part of our business and research expenditures in the
Asynchronous Transfer Mode ("ATM") telecommunications and networking market. As
a result of our 1996 restructuring, revenues from non-networking products have
declined significantly over the last several years, making our results depend
primarily on ATM and related products. The percentage of net revenues to total
company sales derived from sales of ATM, T1/E1, DS3/E3 and SONET/SDH based
products amounted to 86% in 1998 compared to 67% in 1997.
The ATM market is in an early stage of deployment. If the industry adopts
industry standards that compete with ATM, our ATM products could be made
unmarketable or obsolete. The market for ATM equipment has not developed as
rapidly as industry observers had originally predicted, while alternative
networking technologies such as "packet-over-SONET" and "gigabit ethernet" have
developed to meet networking requirements.
WE FACE FIERCE COMPETITION
- --------------------------
The markets for our products are intensely competitive and subject to rapid
technological change and price erosion. We may not be able to compete
successfully against current or future competitors.
We believe that our ability to compete successfully in these markets depends on:
o our product performance, quality and pricing;
o our, our competitors' and our customers' timing and success of new product
introductions;
o our ability to innovate;
o our ability to deliver working products on schedule;
o market acceptance of standards for which we have produced products;
o our ability to obtain adequate manufacturing capacity;
o our subcontractors' production efficiency;
o the rate at which our customers incorporate our products into their
designs; and
o our and our competitors' assertion of intellectual property rights.
We typically face competition at the design stage, where customers evaluate
alternative design approaches that require integrated circuits. Our competitors
have increasingly frequent opportunities to supplant our products in next
generation systems because of shortened product life and design-in cycles in
many of our customers' products.
<PAGE>
Our competitors are major domestic and international semiconductor companies,
many of which have substantially greater financial and other resources than us.
Emerging companies also provide significant competition in our segment of the
semiconductor market. Our competitors include Advanced Micro Circuits
Corporation, Broadcom, Conexant Systems, Cypress Semiconductor, Dallas
Semiconductor, Galileo Technology, Integrated Device Technology, Intel, Level
One Communications, Lucent Technologies, Motorola, MMC Networks, Siemens, Texas
Instruments, Transwitch and Vitesse Semiconductor. Over the next few years, we
expect additional competitors, some of which also may have greater financial and
other resources, to enter the market with new products. In addition, we are
aware of a number of venture-backed companies that each focus on a specific
portion of our broad range of products. These companies collectively could
represent future competition for many design wins, and subsequent product sales.
WE MUST HAVE ACCESS TO THE KEY SUPPLIERS ON WHICH WE RELY
- ---------------------------------------------------------
We do not own or operate a wafer fabrication facility. Two outside foundries
supply all our semiconductor device requirements. Our foundry suppliers also
produce products for themselves and other companies. We may not have access to
adequate capacity or certain process technologies. We have less control over
delivery schedules, manufacturing yields and costs than competitors with their
own fabrication facilities. If the foundries we use are unable or unwilling to
manufacture our products in required volumes, we may have to identify and
qualify acceptable additional or alternative foundries. This qualification
process could take six months or longer. We may not find enough capacity quickly
enough, if ever, to satisfy our production requirements.
Sub-assemblers in Asia assemble all of our semiconductor products. Raw material
shortages, political and social instability, assembly house service disruptions,
currency fluctuations, or other circumstances in the region could force us to
seek additional or alternative sources of supply or assembly. This could lead to
supply constraints or product delivery delays which, in turn, may result in the
loss of customers. We have less control over delivery schedules, assembly
processes, quality assurances and costs than competitors that do not outsource
these tasks.
A limited number of suppliers provide the computer aided design ("CAD") software
we use to design our products. Factors affecting the price, availability or
technical capability of these products could affect our ability to access
appropriate CAD tools for the development of highly complex products. In
particular, the CAD software industry has been the subject of extensive
intellectual property rights litigation, the results of which could materially
change the pricing and nature of the software we use. We also have less control
over whether our software suppliers will be able to breach technical barriers in
time to fulfill our needs.
OUR CUSTOMER BASE IS CONCENTRATED
- ---------------------------------
We depend on a limited number of customers for a major portion of our revenues.
Through direct, distributor and subcontractor purchases, Lucent Technologies
(including Ascend Communications) and Cisco Systems each accounted for more than
10% of our fiscal 1998 revenues. We do not have long-term volume purchase
commitments from any of our major customers. Our customers often shift buying
patterns as they manage inventory levels, decide to use competing products, or
change their orders for other reasons. If one or more customers were to delay,
reduce or cancel orders, our overall order levels may fluctuate greatly.
<PAGE>
OUR GLOBAL BUSINESS APPROACH SUBJECTS US TO ADDITIONAL RISKS
- ------------------------------------------------------------
We are subject to a number of risks of conducting business outside of the United
States.
Historically, international sales accounted for the following percentages of our
net revenues: 32% in 1998, 30% in 1997 and 46% in 1996. We expect international
sales will continue to represent a significant portion of our and our customers'
net revenues for the foreseeable future.
We are subject to these risks to a greater extent than most companies because,
in addition to selling our products in a number of countries, a significant
portion of our research and development and manufacturing are conducted outside
of the United States. The majority of our development, test, marketing and
administrative functions occur in Canada and substantially all of our products
are manufactured and assembled by independent third parties in Asia.
Our international sales, research and development and manufacturing may subject
us to the following risks:
o changes to, or impositions of, legislative or regulatory requirements and
policy changes affecting the networking market;
o delays resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas, exchange rates and other trade barriers and
restrictions;
o foreign currency rate fluctuations because our development, test,
marketing and administrative costs are denominated in Canadian dollars,
and our selling costs are denominated in a variety of currencies;
o greater difficulty in accounts receivable collection;
o longer payment cycles;
o taxes;
o political, social and economic instability;
o hostilities and changes in diplomatic and trade relationships; and
o the burdens of complying with a variety of foreign laws and communications
standards.
WE DEPEND ON KEY PERSONNEL
- --------------------------
We must retain and hire key technical personnel to be successful. This is
particularly true with respect to those employees who are highly skilled at the
design and test functions used to develop high speed networking products and
related software. The competition for such employees is intense and we do not
have employment agreements in place with these key personnel. We issue common
stock options that are subject to vesting as employee incentives. These options,
however, are effective as retention incentives only if they have economic value.
OUR PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY THAT WE MAY NOT BE ABLE TO PROTECT
- -----------------------------------------------------------------------------
To compete effectively, we must protect our proprietary information. We rely on
a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We hold several patents and have a number of
pending patent applications.
<PAGE>
We might not succeed in attaining patents from any of our pending applications.
Even if we are awarded patents, they may not provide any meaningful protection
or commercial advantage to us, as they may not be of sufficient scope or
strength, or may not be issued in all countries where our products can be sold.
In addition, our competitors may be able to design around our patents.
We develop, manufacture and sell our products in Asian and other countries that
may not protect our products or intellectual property rights to the same extent
as the laws of the United States. This makes piracy of our technology and
products more likely. Steps we take to protect our proprietary information may
not be adequate to prevent theft of our technology. We may not be able to
prevent our competitors from independently developing technologies that are
similar to or better than ours.
WE MAY BE LEFT WITH UNSALEABLE INVENTORY
- ----------------------------------------
We attempt to forecast and maintain a level of inventory in anticipation of
demand for our products. Anticipating demand is difficult because our customers
face volatile pricing and demand for their end-user networking equipment. If our
customers were to delay, cancel or otherwise change future ordering patterns, we
could be left with unwanted inventory.
OUR PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY THAT MAY INFRINGE ON THE INTELLECTUAL
- --------------------------------------------------------------------------------
PROPERTY RIGHTS OF THIRD PARTIES
- --------------------------------
Vigorous protection and pursuit of intellectual property rights or positions
characterize the semiconductor industry. This often results in expensive and
lengthy litigation. We, as well as our customers or suppliers, may be accused of
infringing on patents or other intellectual property rights owned by third
parties. This has happened in the past. An adverse result in any litigation
could force us to pay substantial damages, stop manufacturing, using and selling
the infringing products, spend significant resources to develop non-infringing
technology, discontinue using certain processes or obtain licenses to the
infringing technology. In addition, we may not be able to develop non-infringing
technology, nor might we be able to find appropriate licenses on reasonable
terms.
Patent disputes in the semiconductor industry are often settled through
cross-licensing arrangements. Because we currently do not have a substantial
portfolio of patents, we may not be able to settle an alleged patent
infringement claim through a cross-licensing arrangement. We are therefore more
exposed to third party claims than some of our competitors and customers.
In the past, our customers have been required to obtain licenses from and pay
royalties to third parties for the sale of systems incorporating our
semiconductor devices. Until December of 1997, we indemnified our customers up
to the dollar amount of their purchases of our products found to be infringing
on technology owned by third parties. Customers may also make claims against us
with respect to infringement.
Furthermore, we may initiate claims or litigation against third parties for
infringing our proprietary rights or to establish the validity of our
proprietary rights. This could consume significant resources and divert the
efforts of our technical and management personnel, regardless of the
litigation's outcome.
WE MAY BE INVOLVED IN ACQUISITIONS
- ----------------------------------
We may acquire products, technologies or businesses from third parties.
Management may be diverted from our operations while they identify and negotiate
these acquisitions and integrate an acquired entity into our operations. Also,
we may be forced to develop expertise outside our existing businesses, and
replace key personnel who leave due to an acquisition. An acquisition could
absorb substantial cash resources, require us to incur or assume debt
obligations, or issue additional equity. If we issue more equity, we may dilute
our common stock with securities that have a senior interest.
Acquired entities also may have unknown liabilities, and the combined entity may
not achieve the results that were anticipated at the time of the acquisition.
Proposed changes to accounting standards will eliminate in-process R&D
write-offs. As a result, an acquisition that is accounted for as a purchase
could involve the amortization of intangibles and goodwill over a number of
years. The purchase method of accounting was used to record our acquisition of a
networking business in 1994, certain assets of Bipolar Integrated Technology in
September 1996, and the acquisition of Integrated Telecom Technology in May
1998.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE
- --------------------------------------------
We must continue to make significant investments in research and development,
capital equipment and facilities for our operations. Our future capital
requirements will depend on many factors, including product development, working
capital investments, and acquisitions of businesses, products or technologies.
We may need to raise additional funds through public or private debt or equity
financing to fund our operations. If we raise funds by issuing equity
securities, the percentage ownership of current stockholders will be reduced and
the new equity securities may have priority rights to your investment. We may
not obtain sufficient financing on terms we or you will find favorable. We may
delay, limit or eliminate some or all of our proposed operations if adequate
funds are not available.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
- --------------------------------------------------------
In the past, our common stock price has fluctuated substantially. The reasons
this may continue include the following:
o our or our competitors' new product announcements;
o quarterly fluctuations in the financial results of our company and other
companies in the semiconductor, networking or computer industries;
o conditions in the networking or semiconductor industry; and
o investor sentiment toward technology stocks.
<PAGE>
In addition, increases in our stock price and expansion of our price-to-earnings
multiple may have made our stock attractive to momentum investors who often
shift funds into and out of stocks rapidly, exacerbating price fluctuations in
either direction.
YEAR 2000 COMPUTER SYSTEMS ISSUES
- ---------------------------------
The approach of the year 2000 presents significant issues for many financial,
information, and operational systems. Many systems in use today may not be able
to interpret dates after December 31, 1999 appropriately, because such systems
allow only two digits to indicate the year in a date. As a result, such systems
are unable to distinguish January 1, 2000, from January 1, 1900, which could
have adverse consequences on the operations of the entity.
Our State of Readiness
We have designated specific individuals to identify and resolve year 2000 issues
associated with our internal information technology (IT) systems, our internal
non-IT systems, and material third party relationships. We have completed the
identification of and are implementing our plans to address our year 2000
issues.
We use commercially available standard software for our critical operating and
design functions. Our primary software vendors have provided program updates
that are intended to rectify the year 2000 issues related to their software. We
upgraded all primary software by the second quarter of 1998. In addition, we are
currently implementing an enterprise-wide software system for operational
reasons. This system is scheduled to be fully implemented in the remainder of
1999 and is year 2000 compliant.
We have secondary design and operating software that is not year 2000 compliant.
We have identified and intend to install or develop patches or workaround
solutions for this software during 1999.
We use other technology, such as semiconductor testers, which are not year 2000
compliant. These systems do not interface with our critical operating
applications. We have identified these systems and expect to conclude modifying
or replacing them in 1999.
The total cost of the software upgrade for our primary operating and financial
applications, the cost to purchase and install our other non-critical software,
and the cost for the modification and replacement of our other technology is
expected to be immaterial.
As of June 27, 1999, our year 2000 procedures are proceeding as planned. Costs
of these procedures to date plus expected costs to completion are expected to be
immaterial.
Our Year 2000 Risk
Our greatest year 2000 exposure comes from our product manufacturing, packaging
and delivery suppliers. Our worst case scenario would be if one or more critical
suppliers fail to become year 2000 compliant and fail to develop acceptable
workaround solutions. The majority of our product manufacturing, packaging and
delivery is outsourced to two wafer fabrication companies, three assembly
companies and one shipping company, respectively. These suppliers are generally
much larger than our company and we have little influence on their year 2000
preparedness schedules. While we have received written communication from our
critical suppliers that they have developed an action plan to address their year
2000 issues, we cannot be certain that these plans will be implemented or be
effective.
<PAGE>
If our suppliers are unable to manufacture our products as a result of year 2000
issues, we may be forced to find and qualify other year 2000 compliant
suppliers. This qualification process could take six months or longer. We may
not find sufficient capacity quickly enough to satisfy our production
requirements, as we would expect that the many other companies with
manufacturing models similar to ours would be vying for production capacity.
We are also exposed to customers who may not be year 2000 compliant. If one or
more of our customers' operations is interrupted due to year 2000 issue
non-compliance, our revenues from these customers could be materially impacted.
Our Contingency Plans
While we do not have a formal contingency plan, we are monitoring our critical
suppliers to ensure they complete their year 2000 plans as scheduled. We would
implement a formal contingency plan should any of our critical suppliers
indicate that there would be any delays resulting from their own year 2000
plans. Such a plan could entail contacting and qualifying other potentially year
2000 compliant suppliers and stocking additional inventory to cover short term
operating needs. We can not ensure that this contingency plan would be effective
or completed in a timely manner.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The following discussion regarding our risk management activities contains
"forward-looking statements" that involve risks and uncertainties. Actual
results may differ materially from those projected in the forward-looking
statements.
We are exposed to foreign currency fluctuations through our operations in Canada
and elsewhere. In our effort to hedge this risk, we typically forecast our
operational currency needs, purchase such currency on the open market at the
beginning of an operational period, and classify these funds as a hedge against
operations. We usually limit the operational period to less than 3 months to
avoid undue exposure of our asset position to further foreign currency
fluctuation. While we expect to utilize this method of hedging our foreign
currency risk in the future, we may change our hedging methodology and utilize
foreign exchange contracts which are currently available under our operating
line of credit agreement.
Occasionally, we may not be able to correctly forecast our operational needs. If
our forecasts are overstated or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses. At the
end of the second quarter of 1999, we did not have significant foreign currency
denominated net asset or net liability positions, and we had no outstanding
foreign exchange contracts.
We maintain investment portfolio holdings of various issuers, types, and
maturity dates with various banks and investment banking institutions. We
sometimes hold investments beyond 120 days, and the market value of these
investments on any day during the investment term may vary as a result of market
interest rate fluctuations. We do not hedge this exposure because short-term
fluctuations in interest rates would not likely have a material impact on
interest earnings. We classify our investments as available-for-sale or
held-to-maturity at the time of purchase and re-evaluate this designation as of
each balance sheet date. We had approximately $9.8 million in outstanding short
term investments at the end of the second quarter of 1999. In the future, we
expect to hold the short-term investments we buy through to maturity.
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE BY STOCKHOLDERS
The Annual Meeting of Stockholders of PMC-Sierra, Inc. was held on May 19, 1999
for the purposes of electing directors of the Company, approving two amendments
to the Company's Certificate of Incorporation, and to ratify the appointment of
Deloitte & Touche LLP as the Company's independent auditors for the 1999 fiscal
year.
All nominees for directors were elected, all other matters were approved. The
voting on each matter is set forth below:
Election of the Directors of the Company.
Nominee: For Withheld
Robert L. Bailey 29,638,250 72,276
Alexandre Balkanski 29,640,750 69,776
Colin Beaumont 29,640,050 70,476
James V. Diller 29,638,835 71,691
Frank L. Marshall 29,639,851 70,675
Proposal to approve an amendment to the Company's Certificate of Incorporation
to enable Stockholders to call a Special Stockholders Meeting and eliminate the
ability of the Stockholders to act other than at a meeting of all Stockholders.
For Against Abstain Broker non-vote
23,846,464 1,484,210 52,820 4,327,032
Proposal to approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock by 100,000,000
shares to a total of 200,000,000 shares.
For Against Abstain Broker non-vote
28,806,082 860,181 44,263 n/a
<PAGE>
Proposal to ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the 1999 fiscal year.
For Against Abstain Broker non-vote
29,646,001 16,228 48,297 n/a
Item 5. DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000,000 shares of
Common Stock, par value $0.001, and 5,000,000 shares of
Preferred Stock, par value $0.001.
The following summary of certain provisions of the Common Stock and Preferred
Stock does not purport to be complete though the Company believes it contains
all the material provisions, and is subject to, and qualified in its entirety
by, the provisions of the Company's Certificate of Incorporation and by the
provisions of applicable law.
Common Stock
- ------------
The Company's Common Stock is registered under Section 12(g) of the Exchange
Act. Subject to preferences that may be applicable to any outstanding Preferred
Stock which may be issued in the future, the holders of Common Stock are
entitled to receive ratably such non-cumulative dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
available to the Common Stock. The holders of Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders, except that
stockholders may, in accordance with Section 214 of the Delaware General
Corporation Law, cumulate their votes in the election of directors. In the event
of liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to liquidation preferences, if any, of Preferred Stock
which may be issued in the future. All outstanding shares of Common Stock are
fully paid and non-assessable.
Preferred Stock
- ---------------
Pursuant to the Company's Certificate of Incorporation, the Board of Directors
of the Company has the authority to issue up to 5,000,000 shares of Preferred
Stock in one or more series, to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock, and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders. Such issued Preferred Stock could adversely effect the voting
power and other rights of the holders of Common Stock. The issuance of Preferred
Stock may also have the effect of delaying, deferring or preventing a change in
control of the Company. At present, there are no outstanding shares of Preferred
Stock.
<PAGE>
Rights of Holders of Special Shares of PMC-Sierra, Ltd.
- -------------------------------------------------------
The Special Shares of PMC-Sierra, Ltd. are redeemable for Common Stock of the
Company. Special Shares do not have voting rights in the Company, but in all
other respects they represent the economic and functional equivalent of the
Common Stock of the Company for which they can be redeemed. Under applicable
law, each class of Special Shares will have class voting rights in certain
circumstances with respect to transactions that affect the rights of the class
and for certain extraordinary corporate transactions. Two kinds of Special
Shares are outstanding: A Special Shares and B Special Shares.
Delaware Law
- ------------
Section 203 of the Delaware General Corporation Law, from which the Company has
not opted out in its Certificate of Incorporation, restricts certain "business
combinations" with "interested stockholders" for three years following the date
that a person or entity becomes an interested stockholder, unless the Company's
Board of Directors approves the business combination and/or certain other
requirements are met.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
o 3.1D Certificate of Amendment to Certificate of
Incorporation of PMC-Sierra, Inc. filed on July 14,
1999.
o 10.23 Revolving Operating Line of Credit Agreement between
PMC-Sierra, Inc. and CIBC Inc. dated 11th day of
June 1999.
o 10.24 Revolving Operating Line of Credit Agreement between
PMC-Sierra, Ltd. and CIBC dated 11th day of June
1999.
o 11.1 Calculation of earnings per share
o 27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC-SIERRA, INC.
(Registrant)
Date: July 28, 1999 /S/ JOHN W. SULLIVAN
------------- ------------------------------------
John W. Sullivan
Vice President, Finance
(duly authorized officer)
Chief Financial Officer
(principal accounting officer)
CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF
PMC-SIERRA, INC.
A Delaware corporation
PMC-Sierra, Inc., a corporation organized under the laws of the State of
Delaware (the "Corporation,,), hereby certifies that:
The name of the Corporation is PMC-Sierra, Inc. The Corporation was originally
incorporated with the Secretary of State of Delaware on May 2, 1997.
The first paragraph of Article IV of the Certificate of Incorporation of the
Corporation shall be amended to read as follows:
"This Corporation is authorized to issue two classes of stock to be designated,
respectively, "Common Stock" and "Preferred Stock." The Corporation is
authorized to issue a total of 205,000,000 shares. 200,000,000 shares shall be
Common Stock, par value $0.001, and 5,000,000 shares shall be Preferred Stock,
par value $0.001."
Article XII of the Certificate of Incorporation of the Corporation shall be
amended to read as follows:
"The stockholders of the Corporation shall not act by written consent, except
solely to call a special meeting of the stockholders in accordance with the
following procedures:
Upon request by written consent of holders of a majority of the
outstanding shares, containing the information described below, sent by
registered mail to the president or chief executive officer, the board
of directors shall determine a place and time for such meeting and a
record date for the determination of stockholders entitled to vote at
such meeting. Such time shall not be more than 75 days after
determination of the validity of such request. The board of directors
shall have no more than 10 days after receipt of such request to
determine its validity. Following such receipt and determinations, the
secretary shall give notice to the stockholders entitled to vote at
such meeting that a meeting will be held at the place and time so
determined.
The request by written consent shall state each action the requesting
stockholders propose to take at such meeting. The board of directors
may include other proposals to be considered at such meeting.
The requesting stockholders shall provide to the Corporation
information regarding any material interest in the proposal held by the
requesting stockholders and any other information that would be
required to be disclosed in filings with the Securities and Exchange
Commission in connection with the solicitation of proxies.
This Certificate of Amendment of the Corporation's Amended Certificate of
Incorporation has been duly adopted by the Corporation's board of directors in
accordance with Section 242 of the General Corporation Law of the State of
Delaware.
This Certificate of Amendment of the Corporation's Amended Certificate of
Incorporation has been duly approved by the holders of a majority of outstanding
stock of the Corporation entitled to vote thereon in accordance with Section 242
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to
Certificate of Incorporation to be signed by John Sullivan, Vice President of
Finance and Chief Financial Officer, on this 12th day of July, 1999.
PMC-SIERRA, INC.
By: /S/ JOHN W. SULLIVAN
-----------------------------
John Sullivan
Vice President of Finance and
Chief Financial Officer
CIBC INC.
425 Lexington Avenue
New York, NY 10017
Tel: 212-856-4000
CIBC Oppenheimer
June 11, 1999
PMC - Sierra, Inc.
105 - 8555 Baxter Place
Burnaby, B.C.
V5A 4V7
Attention: Mr. John Sullivan
Dear Sirs:
We, CIBC Inc., are pleased to establish the following credit for you,
our customer.
Committed Operating Line
Credit Limit: U.S. $15,000,000, less the U.S. equivalent of the
principal amount at the time of the liabilities of
PMC-Sierra Ltd., a Canadian corporation, ("PMC
Ltd.") in connection with its operating line
facility pursuant to the credit agreement issued
by Canadian Imperial Bank of Commerce ("CIBC") on
or about the date hereof, as amended and replaced
from time to time, (the "CIBC Credit Agreement").
Availability: May be availed by you by way of U.S. alternate
base rate loans, and/or LIBOR Loans and/or
financial standby letters of credit. Availments by
way of U.S. alternate base rate loans and/or LIBOR
Loans will be limited to minimum draws of
$1,000,000.
<PAGE>
Description and Rate: A revolving committed credit, for general business
purposes, having the following parts:
(1) U.S. alternate base rate loans. The Interest
Rate is as follows: U.S. Alternate Base Rate plus
0% per year.
(2) U.S. dollar LIBOR loans. The Interest Rate
is as follows: LIBO Rate plus 1.0% per year.
(3) Financial standby letters of credit. The
fees are equal to 1% of the principal amount of
the L/C, plus out of pocket expenses.
Letters of Credit: L/Cs may not have terms to expiry of more than 12
months or beyond the committed term of this
Credit. Our standard L/C documentation is also
required. If we issue an L/C, the available Credit
Limit will be reduced by 100% of the face amount
of the L/C. If there is a drawing under any L/C,
you will forthwith upon demand pay us the
amount(s) drawn under the L/C. If you do not pay
us the amount demanded interest will accrue on the
amount drawn under the L/C at the Default Interest
Rate until the amount drawn under the L/C is paid
in full, unless you have made other arrangements
with us.
Repayment/Termination: Repayments of U.S. alternate base rate loans
and/or LIBOR Loans must be in minimum amounts of
$1,000,000 or, if less, the then outstanding
amount thereof.
This Credit will expire two years after the date
of this Agreement, except CIBC Inc. may from time
to time renew its commitment by an additional
year; provided that this Credit must be repaid in
full immediately upon, and further availments will
cease to be available upon, the earlier of the
expiry of the committed term of this Credit, the
occurrence of an Event of Default, or there having
occurred (in our reasonable opinion) a change in
effective control of your company or PMC Ltd. with
respect to the power to elect the majority of the
Board of Directors of your company or PMC Ltd.
("Change of Control").
<PAGE>
Standby Fee: A standby fee of 25 basis points per year, payable
monthly in arrears, will apply to the unused
portion of this Credit.
Security
Security: The following security is required:
Hypothecation: A pledge from you, hypothecating 65% of the issued
and outstanding voting shares in the capital of
PMC Ltd. and 65% of the issued and outstanding
shares in the capital of PMC - Sierra
International, Inc.
Covenants
Financial Covenants: You will ensure that the following financial
covenants/requirements, tested at the end of each
of your fiscal quarters, are satisfied on the
basis of your consolidated financial statements:
<PAGE>
Quick Ratio: The Quick Ratio (cash or equivalents
plus accounts receivable plus the unused portion
of this Credit, divided by current liabilities)
must not be less than 0.8:1.
Debt to Effective Equity Ratio: The Debt to
Effective Equity Ratio (using the following
definitions) must not exceed 2:1.
Debt is defined as all debts and liabilities
(whether absolute or contingent, and including all
lease obligations which would be required to be
disclosed on your consolidated financial
statements) excluding deferred income taxes and
excluding debt subordinated and postponed to CIBC
Inc. and CIBC (provided that all the terms of
which are satisfactory to such lenders).
Effective Equity is defined as the aggregate of:
(a) amounts paid up on issued and outstanding
shares of all classes;
(b) retained earnings;
(c) contributed surplus;
<PAGE>
(d) debt subordinated and postponed to CIBC Inc.
and CIBC (provided that all the terms of which are
satisfactory to such lenders) to the prior
repayment and satisfaction of all debts and
liabilities pursuant to this Agreement, the CIBC
Credit Agreement and your guarantee thereunder;
plus
Special Shares of PMC Ltd convertible into your
common stock;
minus all intangibles including, but not limited
to goodwill, copyrights, patents, trademarks,
licences, research and development costs, and
deferred development costs; provided that for the
purposes of this ratio, equity investments in
non-affiliated companies will not be treated as
intangibles so long as the combined total of all
such investments does not exceed $20,000,000 (or
any higher amount agreed to in this regard by us
in writing).
Profitability: An operating loss must not be
incurred in two consecutive fiscal quarters.
Capital Expenditures (excluding acquisitions):
Total capital expenditures, excluding acquisitions
permitted below under "Restriction on
Acquisitions", must not exceed $40,000,000 in
fiscal 1999 and $60,000,000 in fiscal 2000 without
our prior written consent (which consent will not
be unreasonably withheld).
Other Covenants:
Restriction on Acquisitions: Neither you nor any
of your subsidiaries will make any material
acquisitions` without our prior written consent,
except, provided no Event of Default exists nor
will result from the proposed acquisition during
the fiscal quarter immediately succeeding the
fiscal quarter within which the acquisition was
made (calculated on the basis of your financial
statements on a consolidated basis submitted for
your fiscal quarter immediately preceding the date
of the acquisition), and provided there has not
been a Change of Control of your company or PMC
Ltd:
(a) you, or any of your subsidiaries, may make an
acquisition without our prior written consent if
the purchase price in respect of the proposed
acquisition does not exceed the Applicable Limit
referred to below; and
<PAGE>
(b) if the purchase price in respect of the
proposed acquisition exceeds the Applicable Limit
referred to below, you, or any of your
subsidiaries, may nevertheless make the proposed
acquisition if you first provide pro forma
financial statements to us which take into account
the effect of the proposed acquisition and all
debt incurred or assumed in connection therewith,
and which demonstrate compliance with all
financial covenants/requirements set forth herein,
both before and after the proposed acquisition.
For the purposes hereof, the "Applicable Limit"
means $80,000,000 unless your Debt to Effective
Equity Ratio on a consolidated basis (exclusive of
the acquisition) exceeds 1:1, in which case the
"Applicable Limit" means $40,000,000.
Restriction on Divestments: Neither you nor any of
your subsidiaries will make any material business
divestment, other than for cash, without our prior
written consent. The cash proceeds from the
material divestment will be used in the first
instance to retire any outstanding
borrowings/indebtedness under the credit
facilities established hereunder which, however,
may be readvanced or incurred subject to your
continued compliance with all of the terms and
conditions of the credit facilities provided for
hereunder.
Restriction on Cash Dividends: You will not issue
any cash dividends without our prior written
consent.
Negative Pledge: Neither you nor any of your
subsidiaries will create or allow any Lien on any
of your/their present or future assets, nor will
you/they assign any right to any income, without
our prior written consent, except you/they are
permitted to enter into lease commitments or
Purchase Money Liens on normal commercial terms,
in the ordinary course of business up to
$10,000,000 in each fiscal year, provided no Event
of Default exists nor will the proposed
transaction give rise to an Event of Default, and
provided there has not been a Change of Control of
your company or PMC Ltd.
<PAGE>
Reporting Requirements: (1) Within 30 days of each quarter end, you will
provide us with a consolidated aged list of trade
accounts receivable, as of that quarter-end.
(2) Within 60 days of the end of each of the
first, second and third quarters, you will provide
us with a copy of your Form 10-Q, as of each
quarter-end.
(3) Within 120 days of each fiscal year-end, you
will provide us with a copy of your Form 10-K as
of that year-end, which is to include a copy of
your audited consolidated year-end financial
statements.
Other Provisions
Indemnity re Reserves, If the introduction or implementation of or any
Capital Adequacy, Etc. change in or in the interpretation of, or any
change in its application to us of, any law or any
regulation or guideline issued by any central bank
or other governmental authority (whether or not
having the force of law), including without
limitation any reserve or special deposit
requirement or any tax (other than tax on our
general income) or any capital requirement, has
(due to our compliance) the effect, directly or
indirectly, of (i) increasing the cost to us of
performing our obligations hereunder or under any
L/C; (ii) reducing any amount received or
receivable by us hereunder or our effective return
hereunder or on our capital; or (iii) causing us
to make any payment or to forgo any return based
on any amount received or receivable by us
hereunder or in respect of any L/C; then upon
demand from time to time you will pay such amount
as shall compensate us for any such cost,
reduction, payment or forgone return. You will
further indemnify us for all out-of-pocket costs,
losses and expenses incurred by us in connection
with any L/C and agree that we will have no
liability to you for any reason in respect of any
availment other than on account of our gross
negligence or wilful misconduct. Any certificate
of CIBC Inc. in respect of the foregoing will be
conclusive and binding upon you, except for
manifest error, provided that we shall determine
the amounts owing to us in good faith using any
reasonable averaging and attribution methods.
<PAGE>
Obligations re L/Cs if You will pay to us on demand all of our contingent
Credit Terminated: liability in respect of (i) any L/C outstanding
upon any termination of this Credit and (ii) any
L/C which is the subject matter of any order,
judgment, injunction or other such determination
restricting payment by us under and in accordance
with such L/C or extending our liability under
such L/C beyond the expiration date stated therein
(an "Order"). We agree that we will, with respect
to each such L/C, upon the later of:
(a) the earlier of: (i) the date on which either
the original counterpart of such L/C is returned
to us for cancellation or we are released by the
beneficiary from any further obligations in
respect of such L/C; and, (ii) the expiry of such
L/C; and
(b) the date on which any final order, judgment or
other such determination has been rendered or
issued either terminating the applicable Order, or
permanently enjoining us from paying under such
L/C;
pay to you an amount equal to any excess of the
amount received by us hereunder in respect of our
contingent liability under such L/C (the "Received
Amount") over the total of amounts applied to
reimburse us for amounts paid by us under such L/C
(CIBC Inc. having the right to so appropriate such
funds), together with an additional amount
computed by applying to the amount of such excess
from time to time a per annum rate equal to 3% per
year less than the U.S. Alternate Base Rate. Such
additional amount shall be calculated daily on the
basis of a calendar year for the actual number of
days elapsed from and including the date of
payment to us of the Received Amount to (but not
including) the date of return to you of the
excess.
Default Interest Rate: Currently 21% per year.
Next Scheduled Review Date: May 31, 2000. Such that CIBC Inc. may renew its
commitment by an additional one year on mutually
agreeable terms.
<PAGE>
Termination of Agreement This Agreement may be terminated by you at any
by Borrower: time upon written notice to CIBC Inc. and upon
payment and satisfaction of all of your debts and
liabilities, absolute and contingent, to CIBC Inc.
and CIBC.
Standard Credit Terms: The attached Schedule - Standard Credit Terms
(including the revisions indicated thereon in
bold-faced or struck-out text) forms part of this
Agreement.
Expenses and Costs: All reasonable out of pocket expenses incurred by
us (excluding any syndication or participation
expenses) will be for your account.
Amendment: This Agreement may only be amended by a document
executed by the party against whom enforcement of
the amendment is sought.
Assignment: You may not assign this Agreement. We may assign
or grant participation in our rights and
obligations hereunder, with each such assignee or
participant being entitled to rely on all
indemnities contained herein.
Governing Law: This Agreement will be construed in accordance
with the laws of the State of New York.
Set-Off: Upon the occurrence of an Event of Default and so
long as the Event of Default exists, we may at any
time and from time to time, without notice to you
(any such notice being expressly waived), set-off
and apply any and all deposits (general or
special) and any other indebtedness at any time
held by or owing by us to you or for your credit
or your account, against and on account of any or
all of your debts and liabilities to us hereunder,
whether or not then due, whether absolute or
contingent, and irrespective of the currency(ies)
in question.
Entire Agreement: In accordance with the scheduled review date set
out in the Credit Agreement dated October 21, 1998
issued by CIBC Inc. to you the "Previous Credit
Agreement", this Agreement extends the Previous
Credit Agreement and restates the terms thereof as
set out above. There are no understandings,
inducements, representations, warranties,
collateral agreements or conditions affecting or
supported by this Agreement other than as
expressed in this Agreement.
<PAGE>
Accounting Terms and GAAP: All accounting terms not otherwise defined have
the meanings assigned to them in accordance with
GAAP. In this Agreement, "GAAP" means generally
accepted accounting principles from time to time
applicable in the United States of America and
approved by the Financial Accounting Standards
Board or any successor thereto, as applied on a
basis consistent with the financial statements of
the preceding fiscal period, except as disclosed
therein or where the inconsistency is immaterial.
Successors: In this Agreement, any reference to a corporate
entity includes and is also a reference to any
corporate entity that is a successor to such
entity, whether immediate or derivative.
Currency: Unless otherwise indicated all dollar amounts
referred to in this Agreement are in lawful money
of the United States of America.
Waivers of Jury Trial: CIBC Inc. and PMC - Sierra, Inc. hereby
irrevocably and unconditionally waive trial by
jury in any legal action or proceeding relating to
this Agreement or any other loan document and for
any counterclaim therein.
Please indicate your acceptance of these terms by returning a signed copy of
this Agreement. If we do not receive a signed copy by June 24, 1999, then this
offer will expire.
Upon acceptance, this Agreement extends the Previous Credit Agreements and
restates the terms thereof, as set out above. Outstanding amounts (and security)
under the Previous Credit Agreement will be covered by this Agreement.
Yours truly,
CIBC Inc.
by: /S/ Howard A.Palmer
-------------------
Howard A. Palmer
Authorized Signatory
Phone no.: (212) 856-3504
Fax no.: (212) 856-3761
<PAGE>
Acknowledgement: The undersigned certifies that all information
provided to CIBC Inc. is true, and acknowledges
receipt of a copy of, and accepts the terms of,
this Agreement (including the attached Schedule -
Standard Credit Terms).
Accepted this 24th day of June, 1999.
PMC - Sierra, Inc.
By: /S/ John W. Sullivan
--------------------
Name: John W. Sullivan
--------------------
Title: VP Finance
--------------------
<PAGE>
6326-95/06 Schedule - Standard Credit
ARTICLE 1 - GENERAL
1.1 Interest Rate. You will pay interest on each Credit at nominal rates per
year equal to:
(a) for amounts above the Credit Limit of a Credit or a part of a Credit or
for amounts that are not paid when due, the Default Interest Rate, and
(b) for any other amounts, the rate specified in this Agreement.
1.2 Variable interest. Each variable interest rate provided for under this
Agreement will change automatically, without notice, whenever the Prime Rate or
the U.S. Alternate Base Rate, as the case may be, changes.
1.3 Payment of interest. Interest is calculated on the daily balance of the
Credit at the end of each day. Interest is due once a month, unless the
Agreement states otherwise and you will pay the interest when it is due. Unless
you have made other arrangements with us regarding the payment of interest, we
will be charging interest on overdue interest (which is known as compounding).
Unpaid interest continues to compound whether or not we have demanded payment
from you or started a legal action, or get judgment, against you.
1.4 Default Interest. To determine whether Default Interest is to be charged,
the following rules apply:
(a) Default Interest will be charged on the amount that exceeds the Credit
Limit of any particular Credit.
(b) If there are several parts of a Credit, Default Interest will be charged
if the Credit Limit of a particular part is exceeded. For example, if Credit A's
limit is $250,000, and the limit of one part is $100,000 and the limit of that
part is exceeded by $25,000, Default Interest will be charged on that $25,000
excess, even if the total amount outstanding under Credit A is less than
$250,000.
1.5 Fees. You will pay CIBC Inc.'s fees for each Credit as outlined in the
Letter. You will also reimburse us for all reasonable fees (including legal
fees) and out-of-pocket expenses incurred in registering any security, and in
enforcing our rights under this Agreement or any security. We will automatically
debit your Operating Account for fee amounts owing.
1.6 Our rights re demand Credits. At CIBC Inc., we believe that the
banker-customer relationship is based on mutual trust and respect. It is
important for us to know all the relevant information (whether good or bad)
about your business. CIBC Inc. is itself a business. Managing risks and
monitoring our customers' ability to repay is critical to us. We can only
continue to lend when we feel that we are likely to be repaid. As a result, if
you do something that jeopardizes that relationship, or if we no longer feel
that you are likely to repay all amounts borrowed, we may have to act. We may
decide to act, for example, because of something you have done, information we
receive about your business, or changes to the economy that affect your
business. Some of the actions that we may decide to take include requiring you
to give us more financial information, negotiating a change in the interest rate
or fees, or asking you to get further accounting assistance, put more cash into
the business, provide more security, or produce a satisfactory business plan. It
is important to us that your business succeeds. We may, however, at our
discretion, demand immediate repayment of any outstanding amounts under any
demand Credit. We may also, at any time and for any cause, cancel the unused
portion of any demand Credit. Under normal circumstances, however, we will give
you 30 days' notice of any of these actions.
1.7 Payments. If any payment is due on a day other than a Business Day, then
the payment is due on the next Business Day.
1.8 Applying money received. If you have not made payments as required by this
Agreement, or if you have failed to satisfy any term of this Agreement (or any
other agreement you have that relates to this Agreement), or at any time before
default but after we have given you appropriate notice, we may decide how to
apply any money that we receive. This means that we may choose which Credit to
apply the money against, or what mix of principal, interest, fees and overdue
amounts within any Credit will be paid.
1.9 Information requirements. We may from time to time reasonably require you
to provide further information about your business. We may require information
from you to be in a form acceptable to us. We will use your information only in
connection with the credits and will keep it confidential unless required to be
disclosed by law or court order.
1.10 Insurance. You will keep all your business assets and property insured (to
the full insurable value) against loss or damage by fire and all other risks
usual for property such as yours (plus for any other risks we may reasonably
require). If we ask, you will give us either the policies themselves or adequate
evidence of their existence. If your insurance coverage for any reason stops, we
may (but do not have to) insure the property. We will automatically debit your
Operating Account for these amounts. Finally, you will notify us immediately of
any loss or damage to the property.
<PAGE>
1.11 Environmental. You will carry on your business, and maintain your assets
and property, in accordance with all applicable environmental laws and
regulations. If (a) there is any release, deposit, discharge or disposal of
pollutants of any sort (collectively, a "Discharge") in connection with either
your business or your property, and we pay any fines or for any clean-up, or (b)
we suffer any loss or damage as a result of any Discharge, you will reimburse
CIBC Inc., its directors, officers, employees and agents for any and all losses,
damages, fines, costs and other amounts (including amounts spent preparing any
necessary environmental assessment or other reports, or defending any lawsuits)
that result. If we ask, you will defend any lawsuits, investigations or
prosecutions brought against CIBC Inc. or any of its directors, officers,
employees and agents in connection with any Discharge. Your obligation to us
under this section continues even after all Credits have been repaid and this
Agreement has terminated.
1.12 Consent to release information. We may from time to time give any credit
information about you to, or receive such information from, (a) any financial
institution, credit reporting agency, rating agency or credit bureau, (b) any
person, firm or corporation with whom you may have or propose to have financial
dealings, and (c) any person, firm or corporation in connection with any
dealings you have or propose to have with us. You agree that we may use that
information to establish and maintain your relationship with us and to offer any
services as permitted by law, including services and products offered by our
subsidiaries when it is considered that this may be suitable to you.
1.13 Our pricing policy: Fees, interest rates and other charges for your
banking arrangements are dependent upon each other. If you decide to cancel any
of these arrangements, you will have to pay us any increased or added fees,
interest rates and charges we determine and notify you of. These increased or
added amounts are effective from the date of the changes that you make.
1.14 Proof of debt. This Agreement provides the proof, between CIBC Inc. and
you, of the credit made available to you. There may be times when the type of
Credit you have requires you to sign additional documents. Throughout the time
that we provide you credit under this Agreement, our loan accounting records
will provide complete proof of all terms and conditions of your credit (such as
principal loan balances, interest calculations, and payment dates).
1.15 Renewals of this Agreement. This Agreement will remain in effect for your
Credits for as long as they remain unchanged. We have shown a Next Scheduled
Review Date in the Letter. If there are no changes to the Credits this Agreement
will continue to apply, and you will not need to sign anything further. If there
are any changes, we will provide you with either an amending agreement, or a new
replacement Letter, for you to sign.
1.16 Confidentiality: The terms of this Agreement are confidential between you
and CIBC Inc.. You therefore agree not to disclose the contents of this
Agreement to anyone except your professional advisors or (as required by law)
any regulatory or governmental body, including, without limitation, the United
States Securities and Exchange Commission.
1.17 Pre-conditions. You may use the Credits granted to you under this
Agreement only if:
(a) we have received properly signed copies of all documentation that we may
reasonably require and which we have provided to you in connection with the
operation of your accounts and your ability to borrow and give security;
(b) all the required security has been received and registered to our
satisfaction;
(c) any special provisions or conditions set forth in the Letter have been
complied with; and
(d) if applicable, you have given us the required number of days notice for a
drawing under a Credit.
1.18 Notices. We may give you any notice in person or by telephone, or by
letter that is sent either by fax or by mail.
1.19 Use of the Operating Line. You will use your Operating Line only for your
business operating cash needs. You are responsible for all debits from the
Operating Account that you have either initiated (such as cheques, loan
payments, pre-authorized debits, etc.) or authorized us to make. Payments are
made by making deposits to the Operating Account. You may not at any time exceed
the Credit Limit. We may, without notice to you, return any debit from the
Operating Account that, if paid, would result in the Credit Limit being
exceeded, unless you have made prior arrangements with us. If we pay any of
these debits, you must repay us immediately the amount by which the Credit Limit
is exceeded.
1.20 Foreign Currency Conversion. If this Agreement includes foreign currency
Credits, then currency changes may affect whether either the Credit Limit of any
Credit or the Overall Credit Limit has been exceeded.
(a) See section 1.4 for the general rules on how Default Interest is
calculated.
(b) To determine the Overall Credit Limit, all foreign currency amounts are
converted to U.S. dollars, even if the Credit Limits of any particular Credits
are quoted directly in a foreign currency (such as Canadian dollars). No matter
how the Credit Limit of a particular Credit is quoted, therefore, currency
fluctuations can affect whether the Overall Credit Limit has been exceeded. For
example, if Credits X and Y have Credit Limits of US$100,000 and CDN$50,000,
respectively, with an Overall Credit Limit of US$135,000, if Credit X is at
US$90,000 and Credit Y is at CDN$45,000, Default Interest will be charged only
if, after converting the Cdn. dollar amount, the Overall Credit Limit is
exceeded.
(c) Whether the Credit Limit of a particular Credit has been exceeded will
depend on how the Credit Limit is quoted, as described below.
(d) If the Credit Limit is quoted as, for example, the Canadian dollar
equivalent of a U.S. dollar amount, daily exchange rate fluctuations may affect
whether that Credit Limit has been exceeded. If, on the other hand, the Credit
Limit is quoted in a foreign currency (for example, directly in Cdn. dollars),
whether that Credit Limit has been exceeded is determined by reference only to
the closing balance of that Credit in that currency.
<PAGE>
(e) For example, assume an outstanding balance of a Credit on a particular day
of CDN$200,000. If the Credit Limit is stated as "the Cdn. dollar equivalent of
US$140,000", then whether the Credit Limit of that Credit has been exceeded will
depend on the value of the U.S. dollar on that day. If the conversion
calculations determine that the outstanding balance is under the Credit Limit, a
drop in the value of the U.S. dollar the next day (without any change in the
balance) may have the effect of putting that Credit over its Credit Limit. If,
on the other hand, the Credit Limit is stated as "CDN$200,000", the Credit Limit
is not exceeded, and a drop in the value of the dollar the next day will not
change that (although the Overall Credit Limit may be affected).
(f) Conversion calculations are done on the closing daily balance of the
Credit. The conversion factor used is the mid-point between the buying and
selling rate offered by CIBC Inc. (or if such rates can not be determined, the
mid-point between such rates offered by CIBC) for that currency on the
conversion date.
1.21 Instalment Loans. The following terms apply to each Instalment Loan.
(a) Non-revolving loans. Unless otherwise stated in the Letter, any Instalment
Loan is non-revolving. This means that any principal payment made permanently
reduces the available Loan Amount. Any payment we receive is applied first to
overdue interest, then to current interest owing, then to overdue principal,
then to any fees and charges owing, and finally to current principal.
(b) Floating Rate Instalment Loans. Floating Rate Instalment Loans may have
either (i) blended payments or (ii) payments of fixed principal amounts, plus
interest, as described below.
(i) Blended payments. If you have a Floating Rate Loan that has blended
payments, the amount of your monthly payment is fixed for the term of the
loan, but the interest rate varies with changes in the Prime or U.S.
Alternate Base Rate (as the case may be). If the Prime or U.S. Alternate
Base Rate during any month is lower than what the rate was at the outset,
you may end up paying off the loan before the scheduled end date. If,
however, the Prime or U.S. Alternate Base Rate is higher than what it was
at the outset, the amount of principal that is paid off is reduced. As a
result, you may end up still owing principal at the end of the term
because of these changes in the Prime or U.S. Alternate Base Rate.
(ii) Payments of principal plus interest. If you have a Floating Rate Loan
that has regular principal payments, plus interest, the principal payment
amount of your Loan is due on each payment date specified in the Letter.
The interest payment is also due on the same date, but it is debited from
your Operating Account one or two banking days later. Although the
principal payment amount is fixed, your interest payment will usually be
different each month, for at least one and possibly more reasons, namely:
the reducing principal balance of your loan, the number of days in the
month, and changes to the Prime Rate or U.S. Alternate Base Rate (as the
case may be).
(c) Prepayment. Unless otherwise agreed, the following terms apply to
prepayment of any Instalment Loan:
(i) Floating Rate Instalment Loans. You may prepay all or part of a
Floating Rate Instalment Loan (whether it is a Demand or a Committed Loan)
at any time without notice or penalty.
(ii) Fixed Rate Instalment Loans. You may prepay all or part of a Fixed
Rate Instalment Loan, on the following condition. You must pay us, on the
prepayment date, a prepayment fee equal to the interest rate differential
for the remainder of the term of the Loan, in accordance with the standard
formula used by CIBC Inc. in these situations.
(d) Demand of Fixed Rate Demand Instalment Loans. If you have a Fixed Rate
Demand Instalment Loan and we make demand for payment, you will owe us (i) all
outstanding principal, (ii) interest, (iii) any other amount due under this
Agreement, and (iv) a prepayment fee. The prepayment fee is equal to the
interest rate differential for the remainder of the term of the loan, in
accordance with the standard formula used by CIBC Inc. in these situations.
1.22 Notice of Default. You will promptly notify us of the occurrence of any
event that is an Event of Default (or any that would be an Event of Default if
the only thing required is either notice being given or time elapsing, or both).
ARTICLE 1 - LIBO RATE PROVISIONS
1.1 Definitions. In this Agreement, the following terms have the following
meanings:
"LIBO Rate" for any LIBOR Period means a rate of interest per year equal to the
rate at which we are prepared to offer, as at 11:00 a.m. (London, England time)
on the second LIBOR Business Day before the start of that LIBOR Period, deposits
to leading banks in London, England interbank eurocurrency market in an amount
of U.S. dollars similar to the amount of the applicable LIBOR Loan and for a
deposit period comparable to that LIBOR Period; except that, if we do not
receive proper or timely notice as required below but we permit your request,
then the LIBOR Rate for such LIBOR Period means the rate of interest per year as
determined by us (in our absolute discretion) and offered to you and immediately
accepted by you.
<PAGE>
"LIBOR Business Day" means a Business Day on which U.S. dollar transactions can
be carried out between leading banks in the interbank eurocurrency market in
London, England and between CIBC Inc. and other leading banks in New York City.
"LIBOR Loan" means a Fixed Rate Loan in U.S. dollars in whole multiples of
US$1,000,000 on which interest is calculated by reference to a LIBO Rate.
"LIBOR Period" means the period selected by you in accordance with this
Agreement for computing interest from time to time on a LIBOR Loan.
1.2 Availability. LIBOR Loans are available only in whole multiples of
US$1,000,000 each, for terms of one to six months.
1.3 Required Notice.
(a) You may draw down or roll over a LIBOR Loan, or convert another type of
Credit under this Agreement to a LIBOR Loan, or repay a LIBOR Loan, but only as
provided in this Article. Any such action must be done on a LIBOR Business Day.
Also, you must give notice (in the form we require) to the CIBC Inc.
Branch/Centre before 10:00 a.m. (local time where the CIBC Inc. Branch/Centre is
located). The notice must be given on the third LIBOR Business Day before the
requested date of drawdown, rollover, conversion or repayment.
You may roll over or convert an existing LIBOR Loan only on the expiry of its
LIBOR Period.
(b) If we do not receive proper or timely notice as required by the preceding
paragraph, we may (but we are not obliged to) decide what you are permitted to
do for that LIBOR Loan. We may, on the other hand, simply roll over an existing
LIBOR Loan at the end of its LIBOR Period for a new LIBOR Loan with a new LIBOR
Period determined by us.
1.4 Maturity Limitation. The expiry date of a LIBOR Period for any LIBOR Loan
may not (a) be after a scheduled or required maturity or termination date for
that Credit or (b) conflict, in our opinion, with any scheduled or mandatory
repayment for that Credit.
1.5 Repayments. You may only repay all (but not part) of a LIBOR Loan, and
only on the last day of the LIBOR Period for that LIBOR Loan.
1.6 Interest Calculation and Payment. Interest at a LIBO Rate will be
calculated on the daily balance of each LIBOR Loan for the actual number of days
elapsed, on the basis of a 360 day year. You will pay interest on each LIBOR
Loan in arrears at the end of each LIBOR Period. If a LIBOR Period is greater
than three months, you will pay interest at the end of each three month period
during that LIBOR Period, except that overdue interest will be payable
immediately on demand. Overdue amounts in respect of a LIBOR Loan (including any
overdue interest) may at our option be either converted to another type of loan
(if available) under any Credit or considered to be a LIBOR Loan for one or more
LIBOR Periods as we may determine.
1.7 Interest Act. Each nominal rate of interest referenced to a LIBO Rate,
expressed as an annual rate for purposes of the Interest Act (Canada), is that
rate multiplied by the actual number of days in the calendar year in which the
rate is to be ascertained, and divided by 360.
1.8 Lack of LIBO Rate. At any time before the start of any LIBOR Period, we
might determine that (a) by reason of circumstances affecting the London,
England interbank eurocurrency market generally, adequate and fair means do not
exist for determining the LIBO Rate applicable for that LIBOR Period, or (b)
deposits in U.S. dollars are not in the ordinary course of business available to
CIBC Inc. in that market for deposit periods comparable to that LIBOR Period in
a total amount similar to that LIBOR Loan bearing interest at a rate no greater
than the LIBO Rate applicable to that LIBOR Loan. If we do, then from and after
that date, you may not roll over any existing LIBOR Loan at the end of its LIBOR
Period, or obtain any new LIBOR Loan. Our determination of any events under this
paragraph will be conclusive.
1.9 Illegality. If at any time we determine in good faith that any legal
requirement or any official directive or request (whether or not having the
force of law) by a central bank or other governmental authority will make it
unlawful or impossible for us to make, maintain or fund any LIBOR Loan, we will
notify you accordingly. Upon receiving such a notice, you will either (a) on the
last day of the LIBOR Period of any LIBOR Loan, if we can continue to maintain
that loan, or (b) immediately, if we cannot legally maintain that loan,
(1) pay us in full the then outstanding principal amount of each such LIBOR
Loan, together with all accrued interest, or
(2) convert that loan into another type of loan allowed under this Agreement.
For clarification, upon a payment or conversion of a LIBOR Loan made under this
section in the middle of its LIBOR Period, you will immediately on demand
compensate us as provided elsewhere in this Agreement. Our determination of any
matters under this paragraph will be conclusive.
<PAGE>
ARTICLE 2 - DEFINITIONS
1.1 Definitions. In this Agreement, the following terms have the following
meanings:
"Alternate Base Rate Loan" means a U.S. dollar loan on which interest is
calculated by reference to the U.S. Alternate Base Rate.
"Business Day" means any day (other than a Saturday or a Sunday) that the CIBC
Inc. Branch/Centre is open for business.
"CIBC Inc. Branch/Centre" means the CIBC Inc. branch or banking centre noted on
the first page of this Agreement, as changed from time to time by agreement
between the parties.
"Committed Loan" means a Loan (including an operating line) that is repayable in
full only upon the earlier of the expiry of the committed term of the Loan, the
occurrence of an Event of Default, or there having occurred (in our reasonable
opinion) a Change of Control of (as defined in the Letter) of your company or
PMC Ltd. Such a Loan may be either at a fixed or a floating rate of interest.
"Credit" means any credit referred to in the Letter, and if there are two or
more parts to a Credit, "Credit" includes reference to each part.
"Credit Limit" of any Credit means the amount specified in the Letter as its
Credit Limit, and if there are two or more parts to a Credit, "Credit Limit"
includes reference to each such part.
"Default Interest Rate", unless otherwise defined in the Letter, means the
Standard Overdraft Rate.
"Demand Instalment Loan" means an Instalment Loan that is payable upon demand.
Such a Loan may be either at a fixed or a floating rate of interest.
"Event of Default" means, in connection with any Committed Loan (even if that
Loan has not yet been drawn), the occurrence of any of the following events (or
the occurrence of any other event of default described in this Agreement, in any
of the security documents or in any other agreement or document you have signed
with us):
(1) You do not pay, when due, any amount that you are required to pay us under
this Agreement or otherwise and such failure is not remedied within 5 days after
notice, or you do not perform any of your other obligations to us under this
Agreement or otherwise and any such failure (if curable) is not remedied within
10 days after notice.
(2) Any part of the security terminates or is no longer in effect, without our
prior written consent.
(3) You cease to carry on your business in the normal course, or it reasonably
appears to us that that may happen.
(4) A representation that you have made (or deemed to have made in any
certificate or document delivered to CIBC hereunder) in this Agreement or in any
security agreement is incorrect or misleading in any material respect.
(5) (i) An actual or potential default or event of default occurs in
connection with any debt owed by you or by PMC Ltd (including any actual or
potential default or event of default under the CIBC Credit Agreement), with the
result that the payment of the debt has become, or is capable of becoming,
accelerated, or (ii) you do not make a payment when due in connection with any
such debt after the expiration of any applicable grace period. (This subsection
(5), however, applies only to amounts that we reasonably consider to be
material.)
(6) We believe, in good faith and upon commercially reasonable grounds, that
all or a material part of your property is or is about to be placed in jeopardy.
(7) The holder of a Lien or a receiver or similar official takes possession of
all or a material part of your property; or a distress, execution or other
similar process is levied against any such property.
(8) You (i) become insolvent; (ii) are unable generally to pay your debts as
they become due; (iii) make a proposal in bankruptcy, or file a notice of
intention to make such a proposal; (iv) make an assignment in bankruptcy; (v)
bring a court action to have yourself declared insolvent or bankrupt; or someone
else brings an action for such a declaration; or (vi) you default in payment or
breach any other material obligation to any of your other creditors.
(9) If you are a corporation, (i) you are dissolved; (ii) your shareholders or
members pass a resolution for your winding-up or liquidation; (iii) someone goes
to court seeking your winding-up or liquidation, or the appointment of an
administrator, conservator, receiver, trustee, custodian or other similar
official for you or for all or substantially all your assets; or (iv) you seek
protection under any statute offering relief against the company's creditors.
"Fixed Rate Instalment Loan" means an Instalment Loan that is also a Fixed Rate
Loan.
<PAGE>
"Fixed Rate Loan" means any loan drawn down, converted or extended under a
Credit at an interest rate which was fixed for a term, instead of referenced to
a variable rate such as the Prime Rate or U.S. Alternate Base Rate, at the time
of such drawdown, conversion or extension. For purposes of certainty, a Fixed
Rate Loan includes a LIBOR Loan.
"Floating Rate Instalment Loan" means an Instalment Loan that is either a Prime
Rate Loan or an Alternate Base Rate Loan.
"Instalment Loan" means a loan that is repayable either in fixed instalments of
principal, plus interest, or in blended instalments of both principal and
interest. A Demand Instalment Loan is repayable on demand. A Committed
Instalment Loan is repayable only upon the occurrence of an Event of Default.
"Letter" or "Agreement" means the letter agreement between you and CIBC Inc. to
which this Schedule and any other Schedules are
attached and includes the schedule(s).
"Letter of Credit" or "L/C" means a documentary or stand-by letter of credit, a
letter of guarantee, or a similar instrument in form and substance satisfactory
to us.
"Lien" includes a mortgage, charge, lien, security interest or encumbrance of
any sort on an asset, and includes conditional sales contracts, title retention
agreements, capital trusts and capital leases.
"Normal Course Lien" means a Lien that (a) arises by operation of law or in the
ordinary course of business as a result of owning any such asset (but does not
include a Lien given to another creditor to secure debts owed to that creditor)
and (b), taken together with all other Normal Course Liens, does not materially
affect the value of the asset or its use in the business.
"Operating Account" means the account that you normally use for the day-to-day
cash needs of your business, and may be either or both of a U.S. dollar and a
Canadian dollar account.
"Prime Rate" means the variable reference rate of interest per year declared by
CIBC from time to time to be its prime rate for Canadian dollar loans made by
CIBC in Canada.
"Prime Rate Loan" means a Canadian dollar loan on which interest is calculated
by reference to Prime Rate.
"Purchase Money Lien" means a Lien incurred in the ordinary course of business
only to secure all or part of the purchase price of an asset, or to secure debt
used only to finance all or part of the purchase of the asset.
"Standard Overdraft Rate" means the variable reference interest rate per year
declared by CIBC Inc. from time to time to be its standard overdraft rate on
overdrafts in U.S. or Canadian dollar accounts maintained with CIBC Inc. in the
United States of America.
"U.S. Alternate Base Rate" means the variable reference interest rate per year
as declared by CIBC Inc. from time to time to be its base rate for U.S. dollar
commercial demand loans made by CIBC Inc. in the United States of America, and
means on any day a fluctuating rate of interest per year equal to the highest
of:
(a) the rate of interest most recently established by CIBC Inc. as its
base rate for U.S. dollar commercial demand loans made by CIBC Inc.
in the United States; and
(b) the "Federal Funds Rate" plus 0.5%, where the Federal Funds Rate
means, for any particular day, the variable rate of interest per
year, calculated on the basis of a year of 360 days, equal to the
weighted average of rates on overnight federal funds transactions
with members of the Federal Reserve System arranged by Federal Funds
brokers as released on the next succeeding business day by the
Federal Reserve Bank of New York;
Neither the U.S. Alternate Base Rate nor any component thereof is necessarily
intended to be the lowest rate of interest determined by CIBC Inc. in connection
with extensions of credit.
Commerce Place Commercial
Banking
400 Burrard St., 7th Floor
Vancouver, B.C.
V6C 3A6
CIBC
June 11, 1999
PMC - Sierra Ltd.
105 - 8555 Baxter Place
Burnaby, B.C.
V5A 4V7
Attention: Mr. John Sullivan
Dear Sirs:
We, Canadian Imperial Bank of Commerce ("CIBC"), are pleased to
establish the following credits for you, our customer.
Credit A: Committed Operating Line
Credit Limit: U.S. $15,000,000, less the amount at the time of
the liabilities of PMC - Sierra, Inc., a Delaware
corporation, (the "Guarantor") in connection with
its operating line facility pursuant to CIBC
Inc.'s credit agreement dated on or about the date
hereof, as amended and replaced from time to time,
(the "CIBC Inc. Credit Agreement").
Availability: May be availed by you by way of current account
overdraft in Canadian and/or U.S. Dollars, and/or
Bankers' Acceptances in Canadian Dollars, and/or
L/C Acceptances, and/or Canadian or U.S. Dollar or
Foreign Currency L/Cs, and/or LIBOR Loans and/or
financial or non-financial standby letters of
credit.
Description and Rate: A revolving committed credit, for general business
purposes, having the following parts:
<PAGE>
(1) U.S. dollar overdrafts and L/C
Acceptances. The Interest Rate is as follows: U.S.
Base Rate plus 0% per year.
(2) U.S. dollar LIBOR loans. The Interest
Rate is as follows: LIBOR Rate plus 1.0% per year.
(3) Canadian Dollar overdrafts and L\C
Acceptances. The Interest Rate is as follows:
Prime Rate plus 0% per year.
(4) Canadian Dollar B/As. The stamping fee
is 123 basis points per year.
(5) Canadian and/or U.S. Dollar or Foreign
Currency L/Cs. The fees are our standard L/C fees,
minimum $150, plus out of pocket expenses.
Letters of Credit: L/Cs may not have terms to expiry of more than 12
months or beyond the committed term of this
Credit. Our standard L/C documentation is also
required. If we issue an L/C, the available Credit
Limit will be reduced by 100% of the face amount
of the L/C. If there is a drawing under any L/C,
we will pay it by drawing on your Operating
Account, unless you have made other arrangements
with us.
Repayment/Termination: This Credit will expire two years after the date
of this Agreement, except CIBC may from time to
time renew its commitment by an additional year;
provided that this Credit must be repaid in full
immediately upon, and further availments will
cease to be available upon, the earlier of the
expiry of the committed term of this Credit, the
occurrence of an Event of Default, or there having
occurred (in our reasonable opinion) a change in
effective control of your company or the Guarantor
with respect to the power to elect the majority of
the Board of Directors of your company or the
Guarantor ("Change of Control").
Credit B: Foreign Exchange Contracts
Credit Limit: U.S. $4,000,000.
<PAGE>
Description: You may enter into one or more spot, forward or
other foreign exchange rate transactions with us
and/or Wood Gundy Inc. Your ability to make use of
this Credit will depend upon your outstanding
obligations under such transactions, as determined
by us. This facility is a demand credit, provided
that even if no demand is made this facility must
be repaid in full when Credit A is required to be
repaid in full.
Credit C: Cheque Credit
Credit Limit: U.S. $1,500,000.
Description: You may negotiate cheques at our Burnaby and
Vancouver Branches that we identify for you in a
total face amount each day up to the Credit Limit
of this Credit. This facility is a demand credit,
provided that even if no demand is made this
facility must be repaid in full when Credit A is
required to be repaid in full.
Security
Security: The following security is required:
Guarantee: Guarantee from the Guarantor in an amount that is
limited to U.S.$25,000,000 plus interest, which
guarantee will include a "gross-up" clause.
Covenants
Financial Covenants: You will ensure that the following financial
covenants/requirements, tested at the end of each
of the Guarantor's fiscal quarters, are satisfied
on the basis of the consolidated financial
statements for the Guarantor:
Quick Ratio: The Quick Ratio (cash or equivalents
plus accounts receivable plus the unused portion
of Credit A, divided by current liabilities) must
not be less than 0.8:1.
Debt to Effective Equity Ratio: The Debt to
Effective Equity Ratio (using the following
definitions) must not exceed 2:1.
Debt is defined as all debts and liabilities
(whether absolute or contingent, and including all
lease obligations which would be required to be
disclosed on the Guarantor's consolidated
financial statements) excluding deferred income
taxes and excluding debt subordinated and
postponed to CIBC and CIBC Inc. (provided that all
of the terms of which are satisfactory to such
lenders).
Effective Equity is defined as the aggregate
of:
(a) amounts paid up on issued and outstanding
shares of all classes;
(b) retained earnings;
(c) contributed surplus;
(d) debt subordinated and postponed to CIBC
and CIBC Inc. (in a manner and on terms
satisfactory to such lenders) to the prior
repayment and satisfaction of all debts and
liabilities pursuant to this Agreement, the CIBC
Inc. Credit Agreement and the guarantee hereunder;
plus
(e) Special Shares of your company
convertible into the Guarantor's common stock;
minus all intangibles including, but not limited
to goodwill, copyrights, patents, trademarks,
licences, research and development costs, and
deferred development costs; provided that for the
purposes of this ratio, equity investments in
non-affiliated companies will not be treated as
intangibles so long as the combined total of all
such investments does not exceed U.S.$20,000,000
(or any higher amount agreed to in this regard by
us in writing).
Profitability: An operating loss must not be
incurred in two consecutive fiscal quarters.
Capital Expenditures (excluding acquisitions):
Total capital expenditures, excluding acquisitions
permitted below under "Restriction on
Acquisitions", must not exceed U.S. $40,000,000 in
fiscal 1999 and U.S. $60,000,000 in fiscal 2000
without our prior written consent (which consent
will not be unreasonably withheld).
<PAGE>
Other Covenants: Restriction on Acquisitions: Neither the Guarantor
nor any of its subsidiaries (including you) will
make any material acquisitions without our prior
written consent, except, provided no Event of
Default exists nor will result from the proposed
acquisition during the fiscal quarter immediately
succeeding the fiscal quarter within which the
acquisition was made (calculated on the basis of
the financial statements of the Guarantor on a
consolidated basis submitted for the fiscal
quarter of the Guarantor immediately preceding the
date of the acquisition), and provided there has
not been (in our reasonable opinion) a Change of
Control of your company or the Guarantor:
(a) the Guarantor, or any of its subsidiaries, may
make an acquisition without our prior written
consent if the purchase price in respect of the
proposed acquisition does not exceed the
Applicable Limit referred to below; and
(b) if the purchase price in respect of the
proposed acquisition exceeds the Applicable Limit
referred to below, the Guarantor, or any of its
subsidiaries, may nevertheless make the proposed
acquisition if you first provide proforma
financial statements to us which take into account
the effect of the proposed acquisition and all
debt incurred or assumed in connection therewith,
and which demonstrate compliance with all
financial covenants/requirements set forth herein,
both before and after the proposed acquisition.
For the purposes hereof, the "Applicable Limit"
means U.S.$80,000,000 unless the Debt to Effective
Equity Ratio of the Guarantor on a consolidated
basis (exclusive of the acquisition) exceeds 1:1,
in which case the "Applicable Limit" means
U.S.$40,000,000.
Restriction on Divestments: Neither the Guarantor
nor any of its subsidiaries (including you) will
make any material business divestment, other than
for cash, without our prior written consent. The
cash proceeds from the material divestment will be
used in the first instance to retire any
outstanding borrowings/indebtedness under the
credit facilities established hereunder which,
however, may be readvanced or incurred subject to
your continued compliance with all of the terms
and conditions of the credit facilities provided
for hereunder.
<PAGE>
Negative Pledge: Neither the Guarantor nor any of
its subsidiaries (including you) will create or
allow any Lien on any of their/your present or
future assets, nor will they/you assign any right
to any income, without our prior written consent,
except you/they are permitted to enter into lease
commitments or Purchase Money Liens on normal
commercial terms in the ordinary course of
business up to U.S.$10,000,000 in each fiscal
year, provided no Event of Default exists nor will
the proposed transaction give rise to an Event of
Default, and provided there has not been (in our
reasonable opinion) a Change of Control of your
company or the Guarantor.
Reporting Requirements: (1) Within 30 days of each quarter-end, you will
provide us with the Guarantor's consolidated aged
list of trade accounts receivable as of that
quarter-end.
(2) Within 60 days of the end of each of the
first, second and third quarters, you will provide
us with a copy of the Guarantor's Form 10-Q, as of
each quarter-end.
(3) Within 120 days of each fiscal year-end, you
will provide us with a copy of the Guarantor's
Form 10-K as of that year-end, which is to include
a copy of the Guarantor's audited consolidated
year-end financial statements.
Other Provisions
Indemnity re Reserves, If the introduction or implementation of or any
Capital Adequacy, Etc. change in or in the interpretation of, or any
change in its application to us of, any law or any
regulation or guideline issued by any central bank
or other governmental authority (whether or not
having the force of law), including without
limitation any reserve or special deposit
requirement or any tax (other than tax on our
general income) or any capital requirement, has
(due to our compliance) the effect, directly or
indirectly, of (i) increasing the cost to us of
performing our obligations hereunder or under any
B/A or L/C; (ii) reducing any amount received or
receivable by us hereunder or our effective return
hereunder or on our capital; or (iii) causing us
to make any payment or to forgo any return based
on any amount received or receivable by us
hereunder or in respect of any B/A or L/C; then
upon demand from time to time you will pay such
amount as shall compensate us for any such cost,
reduction, payment or forgone return. You will
further indemnify us for all out-of-pocket costs,
losses and expenses incurred by us in connection
with any B/A or L/C and agree that we will have no
liability to you for any reason in respect of any
availment other than on account of our gross
negligence or wilful misconduct. Any certificate
of CIBC in respect of the foregoing will be
conclusive and binding upon you, except for
manifest error, provided that we shall determine
the amounts owing to us in good faith using any
reasonable averaging and attribution methods.
Obligations re L/Cs if You will pay to us on demand all of our contingent
Credit A Terminated: liability in respect of (i) any L/C outstanding
upon any termination of Credit A and (ii) any L/C
which is the subject matter of any order,
judgment, injunction or other such determination
restricting payment by us under and in accordance
with such L/C or extending our liability under
such L/C beyond the expiration date stated therein
(an "Order"). We agree that we will, with respect
to each such L/C, upon the later of:
(a) the earlier of: (i) the date on which either
the original counterpart of such L/C is returned
to us for cancellation or we are released by the
beneficiary from any further obligations in
respect of such L/C; and, (ii) the expiry of such
L/C; and
(b) the date on which any final order, judgment or
other such determination has been rendered or
issued either terminating the applicable Order, or
permanently enjoining us from paying under such
L/C;
<PAGE>
pay to you an amount equal to any excess of the
amount received by us hereunder in respect of our
contingent liability under such L/C (the "Received
Amount") over the total of amounts applied to
reimburse us for amounts paid by us under such L/C
(CIBC having the right to so appropriate such
funds), together with an additional amount
computed by applying to the amount of such excess
from time to time a per annum rate equal to 3% per
year less than the Prime Rate. Such additional
amount shall be calculated daily on the basis of a
calendar year for the actual number of days
elapsed from and including the date of payment to
us of the Received Amount to (but not including)
the date of return to you of the excess.
Default Interest Rate: Currently 21% per year.
Next Scheduled Review Date: May 31, 2000. Such that CIBC may renew its
commitment by an additional one year on mutually
agreeable terms.
Termination of Agreement This Agreement may be terminated by you at any
by Borrower: time upon written notice to CIBC and upon payment
and satisfaction of all of your debts and
liabilities, absolute and contingent, to CIBC.
Standard Credit Terms: The attached Schedule - Standard Credit Terms
(including the revisions indicated thereon in
bold-faced or struck-out text) forms part of this
Agreement.
Expenses and Costs: All reasonable out of pocket expenses incurred by
us (excluding any syndication or participation
expenses) will be for your account.
Amendment: This Agreement may only be amended by a document
executed by the party against whom enforcement of
the amendment is sought.
Assignment: You may not assign this Agreement. We may assign
or grant participation in our rights and
obligations hereunder, with each such assignee or
participant being entitled to rely on all
indemnities contained herein.
Governing Law: This Agreement will be construed in accordance
with the laws of the Province of British Columbia
and the laws of Canada applicable therein.
<PAGE>
Set-Off: Upon the occurrence of an Event of Default and so
long as the Event of Default exists, we may at any
time and from time to time, without notice to you
(any such notice being expressly waived), set-off
and apply any and all deposits (general or
special) and any other indebtedness at any time
held by or owing by us to you or for your credit
or your account, against and on account of any or
all of your debts and liabilities to us hereunder,
whether or not then due, whether absolute or
contingent, and irrespective of the currency(ies)
in question.
Entire Agreement: In accordance with the scheduled review date set
out in the Credit Agreement dated October 21, 1999
issued by CIBC to you the "Previous Credit
Agreement", this Agreement extends the Previous
Credit Agreement and restates the terms thereof as
set out above. There are no understandings,
inducements, representations, warranties,
collateral agreements or conditions affecting or
supported by this Agreement other than as
expressed in this Agreement.
Accounting Terms and GAAP: All accounting terms not otherwise defined have
the meanings assigned to them in accordance with
GAAP. In this Agreement, "GAAP" means generally
accepted accounting principles from time to time
applicable in the United States of America and
approved by the Financial Accounting Standards
Board or any successor thereto, as applied on a
basis consistent with the financial statements of
the preceding fiscal period, except as disclosed
therein or where the inconsistency is immaterial.
Successors: In this Agreement, any reference to a corporate
entity includes and is also a reference to any
corporate entity that is a successor to such
entity, whether immediate or derivative.
Please indicate your acceptance of these terms by returning a signed copy of
this Agreement. If we do not receive a signed copy by June 24, 1999, then this
offer will expire.
Upon acceptance, this Agreement extends the Previous Credit Agreements and
restates the terms thereof, as set out above. Outstanding amounts (and security)
under the Previous Credit Agreement will be covered by this Agreement.
Yours truly,
Canadian Imperial Bank of Commerce
by: /S/ Tom Smith
-------------
Tom Smith
Relationship Manager
Knowledge Based Business
Phone no.: (604) 665-1610
Fax no.: (604) 665-1144
Acknowledgement: The undersigned certifies that all information
provided to CIBC is true, and acknowledges receipt
of a copy of, and accepts the terms of, this
Agreement (including the attached Schedule -
Standard Credit Terms).
Accepted this 24th day of June, 1999.
PMC - Sierra Ltd.
By: /S/ John W. Sullivan
--------------------
Name: John W. Sullivan
--------------------
Title: VP Finance
--------------------
<PAGE>
6326-95/06 Schedule - Standard Credit
WP51CRED)
ARTICLE 1 - GENERAL
1.1 Interest Rate. You will pay interest on each Credit at nominal rates per
year equal to:
(a) for amounts above the Credit Limit of a Credit or a part of a Credit or
for amounts that are not paid when due, the Default Interest Rate, and
(b) for any other amounts, the rate specified in this Agreement.
1.2 Variable interest. Each variable interest rate provided for under this
Agreement will change automatically, without notice, whenever the Prime Rate or
the U.S. Base Rate, as the case may be, changes.
1.3 Payment of interest. Interest is calculated on the daily balance of the
Credit at the end of each day. Interest is due once a month, unless the
Agreement states otherwise. Unless you have made other arrangements with us, we
will automatically debit your Operating Account for interest amounts owing. If
your Operating Account is in overdraft and you do not deposit to the account an
amount equal to the monthly interest payment, the effect is that we will be
charging interest on overdue interest (which is known as compounding). Unpaid
interest continues to compound whether or not we have demanded payment from you
or started a legal action, or get judgment, against you.
1.4 Default Interest. To determine whether Default Interest is to be charged,
the following rules apply:
(a) Default Interest will be charged on the amount that exceeds the Credit
Limit of any particular Credit.
(b) If there are several parts of a Credit, Default Interest will be charged
if the Credit Limit of a particular part is exceeded. For example, if Credit A's
limit is $250,000, and the limit of one part is $100,000 and the limit of that
part is exceeded by $25,000, Default Interest will be charged on that $25,000
excess, even if the total amount outstanding under Credit A is less than
$250,000.
1.5 Fees. You will pay CIBC's fees for each Credit as outlined in the Letter.
You will also reimburse us for all reasonable fees (including legal fees) and
out-of-pocket expenses incurred in registering any security, and in enforcing
our rights under this Agreement or any security. We will automatically debit
your Operating Account for fee amounts owing.
1.6 Our rights re demand Credits. At CIBC, we believe that the banker-customer
relationship is based on mutual trust and respect. It is important for us to
know all the relevant information (whether good or bad) about your business.
CIBC is itself a business. Managing risks and monitoring our customers' ability
to repay is critical to us. We can only continue to lend when we feel that we
are likely to be repaid. As a result, if you do something that jeopardizes that
relationship, or if we no longer feel that you are likely to repay all amounts
borrowed, we may have to act. We may decide to act, for example, because of
something you have done, information we receive about your business, or changes
to the economy that affect your business. Some of the actions that we may decide
to take include requiring you to give us more financial information, negotiating
a change in the interest rate or fees, or asking you to get further accounting
assistance, put more cash into the business, provide more security, or produce a
satisfactory business plan. It is important to us that your business succeeds.
We may, however, at our discretion, demand immediate repayment of any
outstanding amounts under any demand Credit. We may also, at any time and for
any cause, cancel the unused portion of any demand Credit. Under normal
circumstances, however, we will give you 30 days' notice of any of these
actions.
1.7 Payments. If any payment is due on a day other than a Business Day, then
the payment is due on the next Business Day.
1.8 Applying money received. If you have not made payments as required by this
Agreement, or if you have failed to satisfy any term of this Agreement (or any
other agreement you have that relates to this Agreement), or at any time before
default but after we have given you appropriate notice, we may decide how to
apply any money that we receive. This means that we may choose which Credit to
apply the money against, or what mix of principal, interest, fees and overdue
amounts within any Credit will be paid.
1.9 Information requirements. We may from time to time reasonably require you
to provide further information about your business. We may require information
from you to be in a form acceptable to us. We will use your information only in
connection with the credits and will keep it confidential unless required to be
disclosed by law or court order.
1.10 Insurance. You will keep all your business assets and property insured (to
the full insurable value) against loss or damage by fire and all other risks
usual for property such as yours (plus for any other risks we may reasonably
require). If we ask, you will give us either the policies themselves or adequate
evidence of their existence. If your insurance coverage for any reason stops, we
may (but do not have to) insure the property. We will automatically debit your
Operating Account for these amounts. Finally, you will notify us immediately of
any loss or damage to the property.
<PAGE>
1.11 Environmental. You will carry on your business, and maintain your assets
and property, in accordance with all applicable environmental laws and
regulations. If (a) there is any release, deposit, discharge or disposal of
pollutants of any sort (collectively, a "Discharge") in connection with either
your business or your property, and we pay any fines or for any clean-up, or (b)
we suffer any loss or damage as a result of any Discharge, you will reimburse
CIBC, its directors, officers, employees and agents for any and all losses,
damages, fines, costs and other amounts (including amounts spent preparing any
necessary environmental assessment or other reports, or defending any lawsuits)
that result. If we ask, you will defend any lawsuits, investigations or
prosecutions brought against CIBC or any of its directors, officers, employees
and agents in connection with any Discharge. Your obligation to us under this
section continues even after all Credits have been repaid and this Agreement has
terminated.
1.12 Consent to release information. We may from time to time give any credit
information about you to, or receive such information from, (a) any financial
institution, credit reporting agency, rating agency or credit bureau, (b) any
person, firm or corporation with whom you may have or propose to have financial
dealings, and (c) any person, firm or corporation in connection with any
dealings you have or propose to have with us. You agree that we may use that
information to establish and maintain your relationship with us and to offer any
services as permitted by law, including services and products offered by our
subsidiaries when it is considered that this may be suitable to you.
1.13 Our pricing policy: Fees, interest rates and other charges for your
banking arrangements are dependent upon each other. If you decide to cancel any
of these arrangements, you will have to pay us any increased or added fees,
interest rates and charges we determine and notify you of. These increased or
added amounts are effective from the date of the changes that you make.
1.14 Proof of debt. This Agreement provides the proof, between CIBC and you, of
the credit made available to you. There may be times when the type of Credit you
have requires you to sign additional documents. Throughout the time that we
provide you credit under this Agreement, our loan accounting records will
provide complete proof of all terms and conditions of your credit (such as
principal loan balances, interest calculations, and payment dates).
1.15 Renewals of this Agreement. This Agreement will remain in effect for your
Credits for as long as they remain unchanged. We have shown a Next Scheduled
Review Date in the Letter. If there are no changes to the Credits this Agreement
will continue to apply, and you will not need to sign anything further. If there
are any changes, we will provide you with either an amending agreement, or a new
replacement Letter, for you to sign.
1.16 Confidentiality: The terms of this Agreement are confidential between you
and CIBC. You therefore agree not to disclose the contents of this Agreement to
anyone except your professional advisors or (as required by law) to any
regulatory or governmental body.
1.17 Pre-conditions. You may use the Credits granted to you under this
Agreement only if:
(a) we have received properly signed copies of all documentation that we may
reasonably require and which we have provided to you in connection with the
operation of your accounts and your ability to borrow;
(b) all the required security has been received and registered to our
satisfaction;
(c) any special provisions or conditions set forth in the Letter have been
complied with; and
(d) if applicable, you have given us the required number of days notice for a
drawing under a Credit.
1.18 Notices. We may give you any notice in person or by telephone, or by
letter that is sent either by fax or by mail.
1.19 Use of the Operating Line. You will use your Operating Line only for your
business operating cash needs. You are responsible for all debits from the
Operating Account that you have either initiated (such as cheques, loan
payments, pre-authorized debits, etc.) or authorized us to make. Payments are
made by making deposits to the Operating Account. You may not at any time exceed
the Credit Limit. We may, without notice to you, return any debit from the
Operating Account that, if paid, would result in the Credit Limit being
exceeded, unless you have made prior arrangements with us. If we pay any of
these debits, you must repay us immediately the amount by which the Credit Limit
is exceeded.
1.20 Foreign Currency Conversion. If this Agreement includes foreign currency
Credits, then currency changes may affect whether either the Credit Limit of any
Credit or the Overall Credit Limit has been exceeded.
(a) See section 1.4 for the general rules on how Default Interest is
calculated.
(b) To determine the Overall Credit Limit, all foreign currency amounts are
converted to Canadian dollars, even if the Credit Limits of any particular
Credits are quoted directly in a foreign currency (such as U.S. dollars). No
matter how the Credit Limit of a particular Credit is quoted, therefore,
currency fluctuations can affect whether the Overall Credit Limit has been
exceeded. For example, if Credits X and Y have Credit Limits of C$100,000 and
US$50,000, respectively, with an Overall Credit Limit of C$175,000, if Credit X
is at C$90,000 and Credit Y is at US$45,000, Default Interest will be charged
only if, after converting the US dollar amount, the Overall Credit Limit is
exceeded.
(c) Whether the Credit Limit of a particular Credit has been exceeded will
depend on how the Credit Limit is quoted, as described below.
<PAGE>
(d) If the Credit Limit is quoted as, for example, the U.S. dollar equivalent
of a Canadian dollar amount, daily exchange rate fluctuations may affect whether
that Credit Limit has been exceeded. If, on the other hand, the Credit Limit is
quoted in a foreign currency (for example, directly in US dollars), whether that
Credit Limit has been exceeded is determined by reference only to the closing
balance of that Credit in that currency.
(e) For example, assume an outstanding balance of a Credit on a particular day
of US$200,000. If the Credit Limit is stated as "the US dollar equivalent of
C$275,000", then whether the Credit Limit of that Credit has been exceeded will
depend on the value of the Canadian dollar on that day. If the conversion
calculations determine that the outstanding balance is under the Credit Limit, a
drop in the value of the Canadian dollar the next day (without any change in the
balance) may have the effect of putting that Credit over its Credit Limit. If,
on the other hand, the Credit Limit is stated as "US$200,000", the Credit Limit
is not exceeded, and a drop in the value of the dollar the next day will not
change that (although the Overall Credit Limit may be affected).
(f) Conversion calculations are done on the closing daily balance of the
Credit. The conversion factor used is the mid-point between the buying and
selling rate offered by CIBC for that currency on the conversion date.
1.21 Instalment Loans. The following terms apply to each Instalment Loan.
(a) Non-revolving loans. Unless otherwise stated in the Letter, any Instalment
Loan is non-revolving. This means that any principal payment made permanently
reduces the available Loan Amount. Any payment we receive is applied first to
overdue interest, then to current interest owing, then to overdue principal,
then to any fees and charges owing, and finally to current principal.
(b) Floating Rate Instalment Loans. Floating Rate Instalment Loans may have
either (i) blended payments or (ii) payments of fixed principal amounts, plus
interest, as described below.
(i) Blended payments. If you have a Floating Rate Loan that has blended
payments, the amount of your monthly payment is fixed for the term of the
loan, but the interest rate varies with changes in the Prime or U.S. Base
Rate (as the case may be). If the Prime or U.S. Base Rate during any month
is lower than what the rate was at the outset, you may end up paying off
the loan before the scheduled end date. If, however, the Prime or U.S.
Base Rate is higher than what it was at the outset, the amount of
principal that is paid off is reduced. As a result, you may end up still
owing principal at the end of the term because of these changes in the
Prime or U.S. Base Rate.
(ii) Payments of principal plus interest. If you have a Floating Rate Loan
that has regular principal payments, plus interest, the principal payment
amount of your Loan is due on each payment date specified in the Letter.
The interest payment is also due on the same date, but it is debited from
your Operating Account one or two banking days later. Although the
principal payment amount is fixed, your interest payment will usually be
different each month, for at least one and possibly more reasons, namely:
the reducing principal balance of your loan, the number of days in the
month, and changes to the Prime Rate or U.S. Base Rate (as the case may
be).
(c) Prepayment. Unless otherwise agreed, the following terms apply to
prepayment of any Instalment Loan:
(i) Floating Rate Instalment Loans. You may prepay all or part of a
Floating Rate Instalment Loan (whether it is a Demand or a Committed Loan)
at any time without notice or penalty.
(ii) Fixed Rate Instalment Loans. You may prepay all or part of a Fixed
Rate Instalment Loan, on the following condition. You must pay us, on the
prepayment date, a prepayment fee equal to the interest rate differential
for the remainder of the term of the Loan, in accordance with the standard
formula used by CIBC in these situations.
(d) Demand of Fixed Rate Demand Instalment Loans. If you have a Fixed Rate
Demand Instalment Loan and we make demand for payment, you will owe us (i) all
outstanding principal, (ii) interest, (iii) any other amount due under this
Agreement, and (iv) a prepayment fee. The prepayment fee is equal to the
interest rate differential for the remainder of the term of the loan, in
accordance with the standard formula used by CIBC in these situations.
1.22 Notice of Default. You will promptly notify us of the occurrence of any
event that is an Event of Default (or any that would be an Event of Default if
the only thing required is either notice being given or time elapsing, or both).
ARTICLE 1 - BANKERS' ACCEPTANCES
1.1 Definitions. In this Article, the following terms have the following
meanings:
"Bankers' Acceptance" or "B/A" means a Canadian dollar Draft that we have
accepted under this Agreement.
"Commerce Acceptance Rate" means the variable reference rate that we declare
from time to time as our stamping or acceptance fee for Drafts accepted by us.
"Draft" means, at any time, a blank bill of exchange within the meaning of the
Bills of Exchange Act drawn by the Customer on us (in satisfactory form), but
before we have accepted it.
1.2 Availability. B/As are available only with terms to maturity of between 30
and 180 days.
<PAGE>
1.3 Minimum issue amount. You will present Drafts for acceptance in a minimum
amount of $1 million. We can change this minimum amount at any time by 30 days'
prior written notice.
1.4 Required Notice. You may either obtain a new advance by issuing a B/A
stamped by CIBC (including a rollover of an existing B/A) or you may convert an
amount outstanding under another Credit to issuance of a B/A on the following
terms. You must give us notice (in the form we require, including, when
applicable, the date of acceptance, the amount and the maturity date). Notice
must be given by 10:00 a.m. (local time where the CIBC Branch/Centre is located)
on the Business Day prior to the requested date of issuance. You must also give
us any other notice required by the Letter.
1.5 Special Conditions.
(a) Draft Conditions. You will deliver to us the Drafts that you want us to
issue. Each Draft must (i) be in a whole multiple of C$100,000, (ii) be dated
the date of delivery (which will be the same date as the requested date you
notified us); (iii) mature on a Business Day; and (iv) be presented to the CIBC
Branch/Centre for acceptance by 12:00 noon on the date of delivery (unless you
have made prior arrangements in writing with us).
(b) Maturity Limitation. The maturity date of a Draft submitted to us for
acceptance may not (i) be after a scheduled or mandatory final maturity or
termination date for that Credit or (ii) conflict, in our opinion, with any
scheduled or mandatory repayment for that Credit.
(c) Conversion-To-Loan Limitation. You may only convert a B/A into a loan
otherwise allowed under this Agreement if the total of "A" plus "B" is less than
Prime Rate existing on that maturity date, where:
"A" is the annual discount rate quoted at 9:30 a.m. (Toronto time) by the
Toronto office of Wood Gundy Inc. as the discount rate at which it would
purchase a bankers' acceptance issued by CIBC having a term to maturity of
30 days, and
"B" is the annual stamping or acceptance rate applicable to a Draft
accepted by us under this Agreement, as determined on the maturity date of
that B/A.
In making these calculations, each of "A" and "B" is expressed as a percentage.
1.6 Stamping Fee. When we accept a Draft under this Agreement, you will pay us
a stamping fee, on the date of acceptance, in the amount as set out in the
Letter. The stamping fee will be calculated on the face amount of that Draft for
the number of days to maturity based on a 365 day year.
1.7 Reimbursement. B/As are negotiable instruments that are purchased in
financial markets at a discount. Market forces determine what the discount
amount for B/As is at any particular time. At maturity, the holder of a B/A
redeems it from CIBC. We then pay the holder the face amount. You will,
therefore, reimburse us at the maturity date for the face amount of all B/As
that we have accepted for you, unless you convert those amounts to another
Credit (assuming all proper notice has been given). If you do not reimburse us
or convert those amounts to another Credit, we may convert them to any type of
loan (if available) under any Credit.
1.8 Signatures and Safekeeping. All Drafts must either be signed by a properly
authorized signing officer or bear a mechanically reproduced facsimile signature
of that officer (subject to any prior written arrangements with us). Each Draft
and B/A bearing a facsimile signature of that officer will be as binding on you
as if it had been manually signed by that officer. This applies even for
individuals who may no longer be authorized or otherwise be an officer at any
time. You will compensate us for any loss or expense relating to any Draft or
B/A that we deal with under this Agreement. We need only exercise the same
degree of care in safekeeping executed Drafts delivered to us for future
acceptance as if they were CIBC's property and we were keeping them at the place
at which they are to be held.
1.9 Credit Cancellation. If your B/A Credit is terminated for any reason, we
may require you to pay us immediately on demand the appropriate reimbursement
amount for each B/A then outstanding. We will calculate the reimbursement amount
in accordance with standard practice in the banking industry in Canada. After
making this payment, (a) you will have no further liability for that B/A, and
(b) we will (i) become the sole party liable under the B/A, and (ii) compensate
you if you have to pay anyone else under that B/A.
1.10 Waiver. You will not claim any days of grace for the payment of a B/A. You
waive any defence to payment which might otherwise exist if for any reason a B/A
is held by us in our own right at its maturity.
1.11 Obligations Absolute. Your obligations for Drafts and B/As are
unconditional and irrevocable. You will perform your obligations strictly in
accordance with the provisions of this Agreement including, among other things,
(a) any lack of validity or enforceability of a Draft accepted by us as a B/A,
and (b) the existence of a claim, set-off, defence or other right which you may
have against the holder of a B/A, CIBC or another person.
<PAGE>
ARTICLE 2 - LIBO RATE PROVISIONS
2.1 Definitions. In this Agreement, the following terms have the following
meanings:
"LIBO Rate" for any LIBOR Period means a rate of interest per year equal to the
rate at which we are prepared to offer, as at 11:00 a.m. (London, England time)
on the second LIBOR Business Day before the start of that LIBOR Period, deposits
to leading banks in London, England interbank eurocurrency market in an amount
of U.S. dollars similar to the amount of the applicable LIBOR Loan and for a
deposit period comparable to that LIBOR Period; except that, if we do not
receive proper or timely notice as required below but we permit your request,
then the LIBOR Rate for such LIBOR Period means the rate of interest per year as
determined by us (in our absolute discretion) and offered to you and immediately
accepted by you.
"LIBOR Business Day" means a Business Day on which U.S. dollar transactions can
be carried out between leading banks in the interbank eurocurrency market in
London, England and between CIBC and other leading banks in New York City.
"LIBOR Loan" means a Fixed Rate Loan in U.S. dollars in whole multiples of
US$1,000,000 on which interest is calculated by reference to a LIBO Rate.
"LIBOR Period" means the period selected by you in accordance with this
Agreement for computing interest from time to time on a LIBOR Loan.
2.2 Availability. LIBOR Loans are available only in whole multiples of
US$1,000,000 each, for terms of one to six months.
2.3 Required Notice.
(a) You may draw down or roll over a LIBOR Loan, or convert another type of
Credit under this Agreement to a LIBOR Loan, or repay a LIBOR Loan, but only as
provided in this Article. Any such action must be done on a LIBOR Business Day.
Also, you must give notice (in the form we require) to the CIBC Branch/Centre
before 10:00 a.m. (local time where the CIBC Branch/Centre is located). The
notice must be given on the third LIBOR Business Day before the requested date
of drawdown, rollover, conversion or repayment. You may roll over or convert an
existing LIBOR Loan only on the expiry of its LIBOR Period.
(b) If we do not receive proper or timely notice as required by the preceding
paragraph, we may (but we are not obliged to) decide what you are permitted to
do for that LIBOR Loan. We may, on the other hand, simply roll over an existing
LIBOR Loan at the end of its LIBOR Period for a new LIBOR Loan with a new LIBOR
Period determined by us.
2.4 Maturity Limitation. The expiry date of a LIBOR Period for any LIBOR Loan
may not (a) be after a scheduled or required maturity or termination date for
that Credit or (b) conflict, in our opinion, with any scheduled or mandatory
repayment for that Credit.
2.5 Repayments. You may only repay all (but not part) of a LIBOR Loan, and
only on the last day of the LIBOR Period for that LIBOR Loan.
2.6 Interest Calculation and Payment. Interest at a LIBO Rate will be
calculated on the daily balance of each LIBOR Loan for the actual number of days
elapsed, on the basis of a 360 day year. You will pay interest on each LIBOR
Loan in arrears at the end of each LIBOR Period. If a LIBOR Period is greater
than three months, you will pay interest at the end of each three month period
during that LIBOR Period, except that overdue interest will be payable
immediately on demand. Overdue amounts in respect of a LIBOR Loan (including any
overdue interest) may at our option be either converted to another type of loan
(if available) under any Credit or considered to be a LIBOR Loan for one or more
LIBOR Periods as we may determine.
2.7 Interest Act. Each nominal rate of interest referenced to a LIBO Rate,
expressed as an annual rate for purposes of the Interest Act (Canada), is that
rate multiplied by the actual number of days in the calendar year in which the
rate is to be ascertained, and divided by 360.
2.8 Lack of LIBO Rate. At any time before the start of any LIBOR Period, we
might determine that (a) by reason of circumstances affecting the London,
England interbank eurocurrency market generally, adequate and fair means do not
exist for determining the LIBO Rate applicable for that LIBOR Period, or (b)
deposits in U.S. dollars are not in the ordinary course of business available to
CIBC in that market for deposit periods comparable to that LIBOR Period in a
total amount similar to that LIBOR Loan bearing interest at a rate no greater
than the LIBO Rate applicable to that LIBOR Loan. If we do, then from and after
that date, you may not roll over any existing LIBOR Loan at the end of its LIBOR
Period, or obtain any new LIBOR Loan. Our determination of any events under this
paragraph will be conclusive.
2.9 Illegality. If at any time we determine in good faith that any legal
requirement or any official directive or request (whether or not having the
force of law) by a central bank or other governmental authority will make it
unlawful or impossible for us to make, maintain or fund any LIBOR Loan, we will
notify you accordingly. Upon receiving such a notice, you will either (a) on the
last day of the LIBOR Period of any LIBOR Loan, if we can continue to maintain
that loan, or (b) immediately, if we cannot legally maintain that loan,
(1) pay us in full the then outstanding principal amount of each such LIBOR
Loan, together with all accrued interest, or
<PAGE>
(2) convert that loan into another type of loan allowed under this Agreement.
For clarification, upon a payment or conversion of a LIBOR Loan made under this
section in the middle of its LIBOR Period, you will immediately on demand
compensate us as provided elsewhere in this Agreement. Our determination of any
matters under this paragraph will be conclusive.
ARTICLE 3 - DEFINITIONS
3.1 Definitions. In this Agreement, the following terms have the following
meanings:
"Base Rate Loan" means a U.S. dollar loan on which interest is calculated by
reference to the U.S. Base Rate.
"Business Day" means any day (other than a Saturday or a Sunday) that the CIBC
Branch/Centre is open for business.
"CIBC Branch/Centre" means the CIBC branch or banking centre noted on the first
page of this Agreement, as changed from time to time by agreement between the
parties.
"Committed Loan" means a Loan (including an operating line)that is repayable in
full only upon the earlier of the expiry of the committed term of the Loan, the
occurrence of an Event of Default, or there having occurred (in our reasonable
opinion) a Change of Control (as defined in the Letter) of your company or the
Guarantor. Such a Loan may be either at a fixed or a floating rate of interest.
"Credit" means any credit referred to in the Letter, and if there are two or
more parts to a Credit, "Credit" includes reference to each part.
"Credit Limit" of any Credit means the amount specified in the Letter as its
Credit Limit, and if there are two or more parts to a Credit, "Credit Limit"
includes reference to each such part.
"Default Interest Rate", unless otherwise defined in the Letter, means the
Standard Overdraft Rate.
"Demand Instalment Loan" means an Instalment Loan that is payable upon demand.
Such a Loan may be either at a fixed or a floating rate of interest.
"Event of Default" means, in connection with any Committed Loan (even if that
Loan has not yet been drawn), the occurrence of any of the following events (or
the occurrence of any other event of default described in this Agreement, in any
of the security documents or in any other agreement or document you have signed
with us):
(1) You do not pay, when due, any amount that you are required to pay us under
this Agreement or otherwise and such failure is not remedied within 5 days after
notice, or you do not perform any of your other obligations to us under this
Agreement or otherwise and such failure (if curable) is not remedied within 10
days after notice.
(2) Any part of the security terminates or is no longer in effect, without our
prior written consent.
(3) You cease to carry on your business in the normal course, or it reasonably
appears to us that that may happen.
(4) A representation that you have made (or deemed to have made in any
certificate or document delivered to CIBC hereunder) in this Agreement or in any
security agreement is incorrect or misleading in any material respect.
(5) (i) An actual or potential default or event of default occurs in
connection with any debt owed by you or by the Guarantor (including any actual
or potential default or event of default under the CIBC Inc. Credit Agreement),
with the result that the payment of the debt has become, or is capable of
becoming, accelerated, or (ii) you do not make a payment when due in connection
with any such debt after the expiry of any applicable grace period. (This
subsection (5), however, applies only to amounts that we reasonably consider to
be material.)
(6) We believe, in good faith and upon commercially reasonable grounds, that
all or a material part of your property is or is about to be placed in jeopardy.
(7) The holder of a Lien or a receiver or similar official takes possession of
all or a material part of your property; or a distress, execution or other
similar process is levied against any such property.
(8) You (i) become insolvent; (ii) are unable generally to pay your debts as
they become due; (iii) make a proposal in bankruptcy, or file a notice of
intention to make such a proposal; (iv) make an assignment in bankruptcy; (v)
bring a court action to have yourself declared insolvent or bankrupt; or someone
else brings an action for such a declaration; or (vi) you default in payment or
breach any other material obligation to any of your other creditors.
<PAGE>
(9) If you are a corporation, (i) you are dissolved; (ii) your shareholders or
members pass a resolution for your winding-up or liquidation; (iii) someone goes
to court seeking your winding-up or liquidation, or the appointment of an
administrator, conservator, receiver, trustee, custodian or other similar
official for you or for all or substantially all your assets; or (iv) you seek
protection under any statute offering relief against the company's creditors.
"Fixed Rate Instalment Loan" means an Instalment Loan that is also a Fixed Rate
Loan.
"Fixed Rate Loan" means any loan drawn down, converted or extended under a
Credit at an interest rate which was fixed for a term, instead of referenced to
a variable rate such as the Prime Rate or U.S. Base Rate, at the time of such
drawdown, conversion or extension. For purposes of certainty, a Fixed Rate Loan
includes a LIBOR Loan.
"Floating Rate Instalment Loan" means either an Instalment Loan that is either a
Prime Rate Loan or a Base Rate Loan.
"Instalment Loan" means a loan that is repayable either in fixed instalments of
principal, plus interest, or in blended instalments of both principal and
interest. A Demand Instalment Loan is repayable on demand. A Committed
Instalment Loan is repayable only upon the occurrence of an Event of Default.
"Letter" or "Agreement" means the letter agreement between you and CIBC to which
this Schedule and any other Schedules are attached and includes the schedule(s).
"Letter of Credit" or "L/C" means a documentary or stand-by letter of credit, a
letter of guarantee, or a similar instrument in form and substance satisfactory
to us.
"L/C Acceptance" means a draft (as defined under the Bills of Exchange Act
(Canada)) payable to the beneficiary of a documentary L/C which the L/C
applicant or beneficiary, as the case may be, has presented to us for acceptance
under the terms of the L/C.
"Lien" includes a mortgage, charge, lien, security interest or encumbrance of
any sort on an asset, and includes conditional sales contracts, title retention
agreements, capital trusts and capital leases.
"Normal Course Lien" means a Lien that (a) arises by operation of law or in the
ordinary course of business as a result of owning any such asset (but does not
include a Lien given to another creditor to secure debts owed to that creditor)
and (b), taken together with all other Normal Course Liens, does not materially
affect the value of the asset or its use in the business.
"Operating Account" means the account that you normally use for the day-to-day
cash needs of your business, and may be either or both of a Canadian dollar and
a U.S. dollar account.
"Prime Rate" means the variable reference rate of interest per year declared by
CIBC from time to time to be its prime rate for Canadian dollar loans made by
CIBC in Canada.
"Prime Rate Loan" means a Canadian dollar loan on which interest is calculated
by reference to Prime Rate.
"Purchase Money Lien" means a Lien incurred in the ordinary course of business
only to secure all or part of the purchase price of an asset, or to secure debt
used only to finance all or part of the purchase of the asset.
"Standard Overdraft Rate" means the variable reference interest rate per year
declared by CIBC from time to time to be its standard overdraft rate on
overdrafts in Canadian or U.S. dollar accounts maintained with CIBC in Canada.
"U.S. Base Rate" means the variable reference interest rate per year as declared
by CIBC from time to time to be its base rate for U.S. dollar loans made by CIBC
in Canada.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FILED FOR THE QUARTER ENDED JUNE 27, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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0
0
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