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 March 26, 2000
[ ] 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 April 30, 2000 -- 145,891,414
------------------------------------------------
<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 6. Exhibits and Reports on Form 8 - K -
<PAGE>
<TABLE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
<CAPTION>
Three Months Ended
------------------------------
Mar 26, Mar 28,
2000 1999
<S> <C> <C>
Net revenues $ 102,807 $ 50,399
Cost of revenues 20,601 10,974
-------------- --------------
Gross profit 82,206 39,425
Other costs and expenses:
Research and development 24,805 13,914
Marketing, general and administrative 14,725 9,634
Amortization of deferred stock compensation:
Research and development 3,062 458
Marketing, general and administrative 259 53
Amortization of goodwill 307 313
Costs of merger 7,902 -
-------------- --------------
Income from operations 31,146 15,053
Interest and other income, net 3,646 1,090
Gain on sale of investments 4,117 -
-------------- --------------
Income before provision for income taxes 38,909 16,143
Provision for income taxes 15,916 6,728
-------------- --------------
Net income $ 22,993 $ 9,415
============== ==============
Net income per common share - basic $ 0.16 $ 0.07
============== ==============
Net income per common share - diluted $ 0.14 $ 0.06
============== ==============
Shares used in per share calculation - basic 146,733 138,666
Shares used in per share calculation - diluted 166,593 149,825
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Mar 26, Dec 26,
2000 1999
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 223,193 $ 85,945
Short-term investments - 106,636
Accounts receivable, net 46,108 36,170
Inventories, net 9,621 7,208
Deferred income taxes 9,270 9,270
Prepaid expenses and other current assets 8,025 7,270
Short-term deposits for wafer fabrication capacity 637 4,637
-------------- --------------
Total current assets 296,854 257,136
Property and equipment, net 56,075 48,032
Goodwill and other intangible assets, net 14,359 15,280
Investments and other assets 12,489 11,827
Deposits for wafer fabrication capacity 14,483 14,483
-------------- --------------
$ 394,260 $ 346,758
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,120 $ 11,570
Accrued liabilities 25,593 16,113
Deferred income 42,574 34,486
Accrued income taxes 13,618 26,190
Current portion of obligations under capital leases and long-term debt 1,956 2,255
-------------- --------------
Total current liabilities 105,861 90,614
Deferred income taxes 9,091 9,091
Noncurrent obligations under capital leases and long-term debt 720 3,136
Special shares convertible into 4,069 (1999 - 4,242) common stock 6,748 6,998
Stockholders' equity
Common stock and additional paid in capital, par value $0.001;
200,000 shares authorized (200,000 shares in 1999)
143,568 shares issued and outstanding (141,317 in 1999) 241,331 219,761
Deferred stock compensation (14,172) (4,530)
Retained earnings 44,681 21,688
-------------- --------------
Total stockholders' equity 271,840 236,919
-------------- --------------
$ 394,260 $ 346,758
============== ==============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
-----------------------------
Mar 26, Mar 28,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,993 $ 9,415
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of plant and equipment 5,886 4,145
Amortization of intangibles 921 871
Amortization of deferred stock compensation 3,321 511
Equity in income of investee (725) -
Gain on sale of investments (4,117) -
Changes in operating assets and liabilities
Accounts receivable (9,938) 1,800
Inventories (2,413) (1,391)
Prepaid expenses and other (742) (124)
Accounts payable and accrued expenses 20,030 4,632
Income taxes payable (12,572) (4,945)
Deferred income 8,088 1,863
-------------- -------------
Net cash provided by operating activities 30,732 16,777
-------------- -------------
Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments 106,636 50,893
Purchases of plant and equipment (13,929) (5,880)
Proceeds from sale of investments 4,167 -
Proceeds from refund of wafer fabrication deposits 4,000 4,000
-------------- -------------
Net cash provided by investing activities 100,874 49,013
-------------- -------------
Cash flows from financing activities:
Proceeds from notes payable - 136
Repayment of notes payable and long-term debt (2,222) (93)
Principal payments under capital lease obligations (493) (1,147)
Proceeds from issuance of common stock 8,357 3,195
-------------- -------------
Net cash provided by financing activities 5,642 2,091
-------------- -------------
Net increase in cash and cash equivalents 137,248 67,881
Cash and cash equivalents, beginning of the period 85,945 45,691
-------------- -------------
Cash and cash equivalents, end of the period $ 223,193 $ 113,572
============== =============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
NOTE 1. Summary of Significant Accounting Policies
Description of business. PMC-Sierra, Inc (the "Company" or "PMC" ) provides
customers with internetworking semiconductor system solutions for high speed
transmission and networking systems.
Basis of presentation. All historical financial information has been restated to
reflect the acquisitions of Toucan Technology Limited ("Toucan") and AANetcom,
Inc. ("AANetcom") in the first quarter of fiscal 2000 which were accounted for
as poolings of interests.
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 26, 1999. 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).
(in thousands) Mar 26, Dec 26,
2000 1999
(unaudited)
Work-in-progress $ 3,834 $ 4,031
Finished goods 5,787 3,177
-------------- ---------------
$ 9,621 $ 7,208
============== ===============
Recently issued accounting standards. In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Statement will require the recognition of all
derivatives on the Company's consolidated balance sheet at fair value. The
Financial Accounting Standards Board has subsequently delayed implementation of
the standard for the financial years beginning after June 15, 2000. The Company
expects to adopt the new Statement effective January 1, 2001. The impact on the
Company's financial statements is not expected to be material.
<PAGE>
NOTE 2. Business Combinations.
In January 2000, the Company acquired Toucan, a privately held integrated
circuit design company, located in Galway and Dublin, Ireland. Toucan offers
expertise in telecommunications semiconductor design. At December 26, 1999, the
Company owned seven per cent of Toucan and purchased the remaining for
approximately 300,000 shares of PMC common stock and options to purchase PMC
common stock.
In March 2000, the Company acquired AANetcom, Inc. ("AANetcom"), a privately
held fabless semiconductor company with offices in Allentown, Pennsylvania and
San Jose, California. AANetcom's technology is designed for use in gigabit or
terabit switches and routers, telecommunication access equipment, and optical
networking switches in applications ranging from the enterprise to the core of
the Internet. The Company issued approximately 4.8 million shares of PMC common
stock in exchange for all outstanding stock and options of AANetcom.
These transactions were accounted for as a pooling of interests and all
historical financial information contained herein has been restated to include
combined results of operations, financial position and cash flows of Toucan and
AANetcom.
During the quarter ended March 26, 2000, PMC recorded merger-related transaction
costs of $7.9 million related to the acquisition of Toucan and AANetcom. These
charges, which consist primarily of investment banking and other professional
fees, have been included under costs of merger in the Consolidated Statements of
Operations.
Acquisitions Completed After March 26, 2000
In April 2000, the Company completed the purchase of Extreme Packet Devices,
Inc. ("Extreme"), a privately held fabless semiconductor company located in
Canada. Extreme specializes in developing semiconductors for high speed IP and
ATM traffic management at 10 Gigabits per second rates. The purchase agreement
provides for the Company to issue approximately 2.0 million shares of PMC common
stock and options to purchase PMC common stock in exchange for all outstanding
stock and options of Extreme. This transaction will be accounted for as a
pooling of interests.
NOTE 3. Sale of Investment
During the quarter ended March 26, 2000, the Company realized a pre-tax gain of
$4.1 million related to the disposition of 92,360 common shares of Cypress
Semiconductor, Inc., a publicly held company. These shares were previously
subject to escrow restrictions and were not available for sale until the first
quarter of fiscal 2000.
<PAGE>
NOTE 4. 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
------------------------------
(in thousands) Mar 26, Mar 28,
2000 1999
Net revenues
Networking $ 97,753 $ 47,405
Non-Networking 5,054 2,994
------------------------------
Total $ 102,807 $ 50,399
==============================
Gross profit
Networking $ 79,958 $ 38,013
Non-Networking 2,248 1,412
------------------------------
Total $ 82,206 $ 39,425
==============================
NOTE 5. Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share:
Three Months Ended
------------------------------
(in thousands,
except for per share amounts) Mar 26, Mar 28,
2000 1999
Numerator:
Net income $ 22,993 $ 9,415
==============================
Denominator:
Basic weighted average
common shares outstanding (1) 146,733 138,666
------------------------------
Effect of dilutive securities:
Stock options 19,692 11,072
Stock warrants 168 87
------------------------------
Shares used in calculation
of diluted net income per share 166,593 149,825
==============================
Net income per common share - basic $ 0.16 $ 0.07
Net income per common share - diluted $ 0.14 $ 0.06
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of
basic net income per share.
<PAGE>
NOTE 6. Stock Split
In February 2000, 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
Some statements in this report constitute "forward looking statements" within
the meaning of the federal securities laws, including those statements relating
to:
- - revenues;
- - gross margins;
- - gross profit;
- - research and development expenses;
- - marketing, general and administrative expenditures; and
- - capital resources sufficiency.
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 That 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.
In February 2000, we 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.
Acquisitions
- ------------
In January and March 2000, we announced the acquisitions of Toucan Technology
Ltd. ("Toucan"), AANetcom Inc. ("AANetcom") and Extreme Packet Devices, Inc.
("Extreme") in exchange for approximately 7.1 million shares of common stock and
options to purchase common stock. The acquisitions of Toucan and AANetcom were
completed in the first quarter of 2000, while the acquisition of Extreme was
completed in April 2000.
We are accounting for all of these transactions as pooling-of-interests. We have
restated all prior period consolidated financial statements presented to include
combined results of operations, financial position and cash flows of Toucan and
AANetcom. Extreme will be reflected in the second quarter of fiscal 2000.
<PAGE>
Results of Operations
First Quarters of 2000 and 1999
Net Revenues ($000,000)
- -----------------------
First Quarter
-------------------------------
2000 1999 Change
Networking products $97.8 $47.4 106%
Non-networking products 5.0 3.0 67%
------------- ------------
Total net revenues $102.8 $50.4 104%
============= ============
Net revenues increased by 104% in the first quarter of 2000 compared to the same
quarter in 1999. Our networking revenue increased 106% in the same periods and
our non-networking revenues grew 67%.
Networking revenue growth was driven by growth in our customers' networking
equipment business, our customers' continued transition from internally
developed application specific semiconductors to our standard semiconductors,
and our introduction and sale of chips addressing additional network functions.
Non-networking revenues grew as a result of our customers' ordering patterns. We
expect our non-networking revenues to fluctuate in the future as they have in
the past. In the long run, we expect non-networking revenues to reduce to zero
as we have not developed any new products of this type since 1996.
Gross Profit ($000,000)
- -----------------------
First Quarter
-------------------------------
2000 1999 Change
Networking $80.0 $38.0 111%
Non-networking 2.2 1.4 57%
----------- ----------
Total gross profit $82.2 $39.4 109%
=========== ==========
Percentage of net revenues 80% 78%
Total gross profit grew 109% from $39.4 million in the first quarter of 1999 to
$82.2 million in the same quarter of 2000. Total gross profit grew as a result
of higher sales volumes of both networking and non-networking products.
Total gross profit as a percentage of net revenue increased in the first quarter
of 2000 as our networking revenues comprised a greater portion of our total
revenues. Our networking gross profit as a percentage of net revenue is high
relative to the overall gross margins in the semiconductor industry because our
products are complex and are sold in relatively low volumes. We believe that,
should the market for our networking products grow and our customers purchase in
greater volume, our gross profit as a percentage of revenue will decline.
Non-networking gross profit as a percentage of non-networking revenue declined
in the first quarter of 2000 compared to the same period in 1999 as a result of
price changes on these older products.
<PAGE>
<TABLE>
<CAPTION>
Other Costs and Expenses ($000,000)
- -----------------------------------
First Quarter
-----------------------------
2000 1999 Change
<S> <C> <C> <C>
Research and development $ 24.8 $ 13.9 78%
Percentage of net revenues 24% 28%
Marketing, general and administrative $ 14.7 $ 9.6 53%
Percentage of net revenues 14% 19%
Amortization of deferred stock compensation:
Research and development $ 3.1 $ 0.4
Marketing, general and administrative 0.2 0.1
Amortization of goodwill $ 0.3 $ 0.3
Costs of merger $ 7.9 -
</TABLE>
Our research and development ("R&D") expenses of $24.8 million in the first
quarter of 2000 increased 78% over the first quarter of 1999. Our R&D expenses
increased in absolute dollars but decreased as a percentage of net revenues. R&D
expenditures increased in the first quarter of 2000 predominantly because we
hired more R&D employees.
We incur R&D expenditures in order 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. We expect R&D expenses
to continue to increase in future periods.
We increased marketing, general and administrative expenses by 53% in the first
quarter of 2000 compared to the first quarter of 1999. Marketing, general and
administrative expenses decreased as a percentage of net revenue compared to the
first quarter of 1999 because many marketing, general and administrative
expenses are fixed in the short term. Therefore, in periods of rising revenues,
these expenses decline as a percentage of revenues.
We recorded a $3.3 million charge for amortization of deferred stock
compensation in the first quarter of 2000 compared to a $0.5 million charge in
the prior year's first quarter. Deferred compensation charges increased as a
result of the AANetcom acquisition. AANetcom had, in the past, issued shares at
prices lower than the deemed fair value of the stock. We are amortizing these
amounts using the accelerated method over the vesting period.
We incurred $0.3 million in non-cash goodwill charges in the first quarters of
2000 and 1999 in connection with goodwill recorded as a result of prior
acquisitions. We may acquire products, technologies or companies in the future
for which the purchase method of accounting may be used. This could result in
significant goodwill amortization charges in future periods which could
materially impact our operating results.
<PAGE>
During the first quarter of 2000, we recorded $7.9 million in merger costs
related to the acquisition of Toucan and AANetcom. These charges consist
primarily of investment banking and other professional fees. We expect to incur
significant merger costs related to future acquisitions.
Interest and other income, net
- ------------------------------
Net interest and other income increased to $3.6 million in the first quarter of
2000 from $1.1 million in last year's first quarter due to higher cash balances
available to earn interest. In addition, we included $0.7 million from our
equity interest in another company in the first quarter of 2000.
Gain on sale of investment
- --------------------------
During the first quarter of 2000, we realized a pre-tax gain of approximately
$4.1 million as a result of our disposition of our remaining investment in
Cypress Semiconductor ("Cypress"). Cypress purchased our interest in IC Works,
Inc. ("ICW") in the second quarter of 1999. 92,360 Cypress shares were released
from escrow in the first quarter of 2000 and were subsequently sold.
Provision for income taxes
- --------------------------
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations.
Recently issued accounting standards
- ------------------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on our consolidated balance sheet at
fair value. The Financial Accounting Standards Board has subsequently delayed
implementation of the standard for the financial years beginning after June 15,
2000. We expect to adopt the new Statement effective January 1, 2001. We expect
the impact of this accounting standard will be immaterial to our financial
statements.
Liquidity and Capital Resources
Cash and cash equivalents and short term investments increased from $192.6
million at the end of 1999 to $223.2 million at March 26, 2000.
During the first quarter of 2000, operating activities provided $30.7 million in
cash. Net income of $23.0 million includes non-cash charges of $5.9 million for
depreciation, $0.9 million of intangible amortization, $3.4 million of deferred
stock compensation and a non-cash gain of $4.1 million from the sale of an
investment.
Our year to date investing activities included the maturity of short-term
investments, the bulk of which were reinvested as cash and cash equivalents.
They also included an investment of $13.9 million in plant and equipment, $4.2
million of proceeds from the sale of an investment and a wafer fabrication
deposit refund of $4.0 million.
<PAGE>
Our year to date financing activities provided $5.6 million. We used $2.7
million for debt and lease repayments and received $8.3 million of proceeds from
issuing common stock.
Our principal source of liquidity at March 26, 2000 was our cash and cash
equivalents of $223.2 million. We also have a line of credit with a bank that
allows us to borrow up to $13 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, capital expenditure and
wafer deposit requirements through the end of 2000. We expect to spend
approximately $51 million on new capital additions and to provide $8.6 million
in wafer deposits over the balance of 2000.
FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA
- ---------------------------------------------------------------
Our company is subject to a number of risks - some are normal to the fabless
networking semiconductor industry, some are the same or similar to those
disclosed in previous SEC filings, and some may be present in the future. You
should carefully consider all of these risks and the other information in this
report before investing in PMC. The fact that certain risks are endemic to the
industry does not lessen the significance of the risk.
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.
If one or more of our customers changes their ordering pattern or if we lose one
or more of our customers, our revenues could decline
We depend on a limited number of customers for a major portion of our revenues.
Through direct, distributor and subcontractor purchases, Lucent Technologies and
Cisco Systems each accounted for more than 10% of our fiscal 1999 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, are acquired or divested, market different
products, change production schedules 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, particularly when viewed on a quarterly
basis.
<PAGE>
If our customers use our competitors' products instead of ours, suffer a decline
in demand for their products or are acquired or sold, our revenues may decline
Our expenses are relatively fixed so that fluctuation in our revenues may cause
our operating results to fluctuate as well. Demand for our products and, as a
result our revenues, may decline for the following reasons outside our control.
As our customers increase the frequency by which they design next
generation systems and select the chips for those new systems, our
competitors have an increased opportunity to convince our customers to
switch to their products, which may cause our revenues to decline
The markets for our products are intensely competitive and subject to rapid
technological advancement in design tools, wafer manufacturing techniques,
process tools and alternate networking technologies. We must identify and
capture future market opportunities to offset the rapid price erosion that
characterizes our industry. We may not be able to develop new products at
competitive pricing and performance levels. Even if we are able to do so, we may
not complete a new product and introduce it to market in a timely manner. Our
customers may substitute use of our products in their next generation equipment
with those of current or future competitors.
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.
Major domestic and international semiconductor companies, such as Intel, IBM,
and Lucent Technologies, are concentrating an increasing amount of their
substantially greater financial and other resources on the markets in which we
participate. This represents a serious competitive threat to PMC. Emerging
companies also provide significant competition in our segment of the
semiconductor market.
Our competitors include Applied Micro Circuits Corporation, Broadcom, Conexant
Systems, Cypress Semiconductor, Dallas Semiconductor, Galileo Technology,
Integrated Device Technology, IBM, Infineon, Intel, Lucent Technologies,
Motorola, MMC Networks, 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 venture-backed companies that focus on
specific portions of our broad range of products. Competition is particularly
strong in the market for optical networking and optical telecommunication chips,
in part due to the market's growth rate, which attracts larger competitors, and
in part due to the number of smaller companies focused on this area. These
companies, individually or collectively, could represent future competition for
many design wins, and subsequent product sales.
We must often redesign our products to meet rapidly evolving industry
standards and customer specifications, which may delay an increase in
our revenues
<PAGE>
We sell products to a market whose characteristics include rapidly evolving
industry standards, product obsolescence, and new manufacturing and design
technologies. Many of the standards and protocols for our products are based on
high speed networking technologies that have not been widely adopted or ratified
by one of the standard setting bodies in our customers' industry. Our customers
often delay or alter their design demands during this standard-setting process.
In response, we must redesign our products to suit these changing demands.
Redesign usually delays the production of our products. Our products may become
obsolete during these delays.
If demand for our customers' products changes, including due to a
downturn in the networking industry, our revenues could decline
Our customers routinely build inventories of our products in anticipation of end
demand for their products. Many of our customers have numerous product lines,
numerous component requirements for each product, and sizeable and very complex
supplier structures. This makes forecasting their production requirements
difficult and can lead to an inventory surplus of certain of their suppliers'
components.
In the past, some of our customers have built PMC component inventories that
exceeded their production requirements. Those customers materially reduced their
orders and impacted our operating results. This may happen again.
In addition, while all of our sales are denominated in US dollars, our
customers' products are sold worldwide. Any major fluctuations in currency
exchange rates could materially affect our customers' end demand, and force them
to reduce orders, which could cause our revenues to decline.
Since we develop products many years before their volume production, if
we inaccurately anticipate our customers' needs, our revenues may not
increase
Our products generally take between 18 and 24 months from initial
conceptualization to development of a viable prototype, and another 6 to 18
months to be designed into our customers' equipment and into production. They
often need to be redesigned because manufacturing yields on prototypes are
unacceptable or customers redefine their products to meet changing industry
standards. As a result, we develop products many years before volume production
and may inaccurately anticipate our customers' needs.
There have been times when we either designed products that had more features
than were demanded when they were introduced to the market or conceptualized
products that were not sufficiently feature-rich to meet the needs of our
customers or compete effectively against our competitors. This may happen again.
If the recent trend of consolidation in the networking industry
continues, our customers may be acquired or sold, which could cause
those customers to cancel product lines or development projects and our
revenues to decline
The networking equipment industry has experienced significant merger activity
and partnership programs. Through mergers or partnerships, our customers could
seek to remove redundancies in their product lines or development initiatives.
This could lead to the cancellation of a product line into which PMC products
are designed or a development project on which PMC is participating. In the
cases of a product line cancellation, PMC revenues could be materially impacted.
In the case of a development project cancellation, we may be forced to cancel
development of one or more products, which could mean opportunities for future
revenues from this development initiative could be lost.
<PAGE>
If there is not sufficient market acceptance of the recently developed
specifications and protocols on which our new products are based, we
may not be able to sustain or increase our revenues
We recently introduced a number of ethernet switch products which function at
gigabit and fast ethernet speeds. Gigabit ethernet involves the transmission of
data over ethernet protocol networks at speeds of up to one billion bits per
second. Fast ethernet transmits data over these networks at speeds of up to 100
megabits per second. While gigabit and fast ethernet are well established, it is
not clear whether products meeting these protocols will be competitive with
products meeting alternative protocols, or whether our products will be
sufficiently attractive to achieve commercial success.
Some of our other recently introduced products adhere to specifications
developed by industry groups for transmissions of data signals, or packets, over
high-speed fiber optics transmission standards. These transmission standards are
called synchronous optical network, or SONET, in North America, and synchronous
data hierarchy, or SDH in Europe. The specifications, commonly called
packet-over-SONET/SDH, may be rejected for other technologies, such as mapping
IP directly onto fiber. In addition, we can not be sure whether our products
will compete effectively with packet-over-SONET/SDH offerings of other
companies.
A substantial portion of our business also relies on industry acceptance of
asynchronous transfer mode, or ATM, products. ATM is a networking protocol.
While ATM has been an industry standard for a number of years, the overall ATM
market has not developed as rapidly as some observers had predicted it would. As
a result, competing communications technologies, including gigabit and fast
ethernet and packet-over-SONET/SDH, may inhibit the future growth of ATM and our
sales of ATM products.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance
We recently acquired or have announced acquisitions of six companies, five of
which have design wins for their products. The design wins have not yet
generated significant revenue. These or any follow on products may not achieve
commercial success. These acquisitions may not generate future revenues or
earnings.
Acquiring products, technologies or businesses from third parties is an integral
part of our business strategy. Management may be diverted from our operations
while they identify and negotiate these acquisitions and integrate an acquired
entity into our operations. Also, we may be forced to develop expertise outside
our existing businesses, and replace key personnel who leave due to an
acquisition. We have not previously attempted to integrate several acquisitions
simultaneously and may not succeed in this effort.
A future acquisition could adversely affect operating results. In particular, if
we were to acquire a company or assets and record the acquisition as a purchase,
we may capitalize a significant goodwill asset. This asset would be amortized
over its expected period of benefit. The resulting amortization expense could
seriously impact operating results for many years.
An acquisition could absorb substantial cash resources, require us to incur or
assume debt obligations, or issue additional equity. If we issue more equity, we
may dilute our common stock with securities that have an equal or a senior
interest.
<PAGE>
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.
We anticipate lower margins on mature and high volume products, which could
adversely affect our profitability
We expect the average selling prices of our products to decline as they mature.
Historically, competition in the semiconductor industry has driven down the
average selling prices of products. If we price our products too high, our
customers may use a competitor's product or an in-house solution. To maintain
profit margins, we must reduce our costs sufficiently to offset declines in
average selling prices, or successfully sell proportionately more new products
with higher average selling prices. Yield or other production problems, or
shortages of supply may preclude us from lowering or maintaining current
operating costs.
We may not be able to meet customer demand for our products if we do not
accurately predict demand or if we fail to secure adequate wafer fabrication or
assembly capacity
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.
Recently, our suppliers, particularly silicon wafer suppliers, have experienced
an increase in the demand for their products or services. If our silicon wafer
or other suppliers are unable or unwilling to increase productive capacity in
line with the growth in demand, we may suffer longer production lead times.
Longer production lead times require that we forecast the demand for our
products further into the future. Thus, a greater proportion of our
manufacturing orders will be based on forecasts, rather than actual customers
orders. This increases the likelihood of forecasting errors. These forecasting
errors could lead to excess inventory in certain products and insufficient
inventory in others, which could adversely affect our operating results.
In addition, if our suppliers are unable or unwilling to increase productive
capacity in line with demand, we may suffer supply shortages or be allocated
supply. A shortage in supply could adversely impact our ability to satisfy
customer demand, which could adversely affect our customer relationships along
with our current and future operating results.
We rely on a limited source of wafer fabrication, the loss of which
could delay and limit our product shipments
We do not own or operate a wafer fabrication facility. Two outside foundries
supply most of our semiconductor device requirements. Our foundry suppliers also
produce products for themselves and other companies. In addition, we may not
have access to adequate capacity or certain process technologies. We have less
control over delivery schedules, manufacturing yields and costs than competitors
with their own fabrication facilities. If the foundries we use are unable or
unwilling to manufacture our products in required volumes, we may have to
identify and qualify acceptable additional or alternative foundries. This
qualification process could take six months or longer. We may not find
sufficient capacity quickly enough, if ever, to satisfy our production
requirements.
Some companies which supply our customers are similarly dependent on a limited
number of suppliers to produce their products. These other companies' products
may be designed into the same networking equipment into which we are designed.
Our order levels could be reduced materially if these companies are unable to
access sufficient production capacity to produce in volumes demanded by our
customers because our customers may be forced to slow down or halt production on
the equipment into which we are designed.
<PAGE>
We depend on third parties in Asia for assembly of our semiconductor
products which could delay and limit our product shipments
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.
We depend on a limited number of design software suppliers, the loss of which
could impede our product development
A limited number of suppliers provide the computer aided design, or CAD,
software we use to design our products. Factors affecting the price,
availability or technical capability of these products could affect our ability
to access appropriate CAD tools for the development of highly complex products.
In particular, the CAD software industry has been the subject of extensive
intellectual property rights litigation, the results of which could materially
change the pricing and nature of the software we use. We also have limited
control over whether our software suppliers will be able to overcome technical
barriers in time to fulfill our needs.
We are subject to the risks of conducting business outside the United States to
a greater extent than companies which operate their businesses mostly in the
United States, which may impair our sales, development or manufacturing of our
products
We are subject to the risks of conducting business outside the United States to
a greater extent than most companies because, in addition to selling our
products in a number of countries, a significant portion of our research and
development and manufacturing are conducted outside of the United States. This
subjects us to the following risks.
We may lose our ability to design or produce products, could face
additional unforeseen costs or could lose access to key customers if
any of the nations in which we conduct business impose trade barriers
or new communications standards
We may have difficulty obtaining export licenses for certain technology produced
for us outside the United States. If a foreign country imposes new taxes,
tariffs, quotas, and other trade barriers and restrictions or the United States
and a foreign country develop hostilities or change diplomatic and trade
relationships, we may not be able to continue manufacturing or sub-assembly of
our products in that country and may have fewer sales in that country. We may
also have fewer sales in a country that imposes new communications standards or
technologies. This could inhibit our ability to meet our customers' demand for
our products and lower our revenues.
<PAGE>
If foreign exchange rates fluctuate significantly, our profitability
may decline
We are exposed to foreign currency rate fluctuations because a significant part
of our development, test, marketing and administrative costs are denominated in
Canadian dollars, and our selling costs are denominated in a variety of
currencies around the world. In addition, a number of the countries in which we
have sales offices have a history of imposing exchange rate controls. This could
make it difficult to withdraw the foreign currency denominated assets we hold in
these countries.
We may have difficulty collecting receivables from customers based in
foreign countries, which could adversely affect our earnings
We sell our products to customers around the world. Payment cycle norms in these
countries may not be consistent with our standard payment terms. Thus, we may
have greater difficulty collecting receivables on time from customers in these
countries. This could impact our financial performance, particularly on our
balance sheet.
In addition, we may be faced with greater difficulty in collecting outstanding
balances due to the shear distances between our collection facilities and our
customers, and we may be unable to enforce receivable collection in foreign
nations due to their business legal systems. If one or more of our foreign
customers do not pay their outstanding receivable, we may be forced to write-off
the account. This could have a material impact on our earnings.
The loss of personnel could preclude us from designing new products
To succeed, we must retain and hire technical personnel highly skilled at the
design and test functions used to develop high speed networking products and
related software. The competition for such employees is intense. We, along with
our peers, customers and other companies in the communications industry, are
facing intense competition for those employees from our peers and an increasing
number of startup companies which are emerging with potentially lucrative
employee ownership arrangements.
We do not have employment agreements in place with our 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.
If we cannot protect our proprietary technology, we may not be able to prevent
competitors from copying our technology and selling similar products, which
would harm our revenues
To compete effectively, we must protect our proprietary information. We rely on
a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We hold several patents and have a number of
pending patent applications.
We might not succeed in attaining patents from any of our pending applications.
Even if we are awarded patents, they may not provide any meaningful protection
or commercial advantage to us, as they may not be of sufficient scope or
strength, or may not be issued in all countries where our products can be sold.
In addition, our competitors may be able to design around our patents.
<PAGE>
We develop, manufacture and sell our products in Asian and other countries that
may not protect our products or intellectual property rights to the same extent
as the laws of the United States. This makes piracy of our technology and
products more likely. Steps we take to protect our proprietary information may
not be adequate to prevent theft of our technology. We may not be able to
prevent our competitors from independently developing technologies that are
similar to or better than ours.
Our products employ technology that may infringe on the proprietary rights of
third parties, which may expose us to litigation and prevent us from selling our
products
Vigorous protection and pursuit of intellectual property rights or positions
characterize the semiconductor industry. This often results in expensive and
lengthy litigation. We, as well as our customers or suppliers, may be accused of
infringing on patents or other intellectual property rights owned by third
parties. This has happened in the past. An adverse result in any litigation
could force us to pay substantial damages, stop manufacturing, using and selling
the infringing products, spend significant resources to develop non-infringing
technology, discontinue using certain processes or obtain licenses to the
infringing technology. In addition, we may not be able to develop non-infringing
technology, nor might we be able to find appropriate licenses on reasonable
terms.
Patent disputes in the semiconductor industry are often settled through
cross-licensing arrangements. Because we currently do not have a substantial
portfolio of patents compared to our larger competitors, we may not be able to
settle an alleged patent infringement claim through a cross-licensing
arrangement. We are therefore more exposed to third party claims than some of
our larger competitors and customers.
In the past, our customers have been required to obtain licenses from and pay
royalties to third parties for the sale of systems incorporating our
semiconductor devices. 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.
Securities we issue to fund our operations could dilute your ownership
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
<PAGE>
In the past, our common stock price has fluctuated significantly. This could
continue as our or our competitors announce new products, our and our peers or
customers' results fluctuate, conditions in the networking or semiconductor
industry change or investors change their sentiment toward technology stocks.
In addition, increases in our stock price and expansion of our price-to-earnings
multiple may have made our stock attractive to momentum or day-trading investors
who often shift funds into and out of stocks rapidly, exacerbating price
fluctuations in either direction particularly when viewed on a quarterly basis.
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 that 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 first quarter of 2000, 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 no outstanding short-term investments at the end
of the first quarter of 2000. In the future, we expect to hold the short-term
investments we buy through to maturity.
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
10.35 Deposit agreement between Chartered Semiconductor
Manufacturing Ltd. and PMC-Sierra, Inc. dated January
31, 2000.(1)
11.1 Calculation of earnings per share (2)
27 Financial Data Schedule
(b) Reports on Form 8-K -
- A Current Report on Form 8-K was filed on March 20,
2000 to disclose the completion of the Company's
purchases of Toucan Technology Ltd. and AANetcom,
Inc. and to disclose that the Company had signed a
definitive agreement to purchase Extreme Packet
Devices Inc.
- A Current Report on Form 8-K was filed on April 12,
2000 to disclose the completion of the Company's
acquisition of Extreme Packet Devices Inc.
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: May 10, 2000 /S/ John W.Sullivan
----------- ------------------------------------------------
John W. Sullivan
Vice President, Finance (duly authorized officer)
Chief Financial Officer (principal accounting
officer)
- -----------------
1 Confidential treatment has been requested as to a portion of this
exhibit.
2 Refer to Note 5 of the financial statements included in Item I of Part
I of this Quarterly Report.
Deposit agreement between Chartered Semiconductor
Manufacturing Ltd. and PMC-Sierra, Inc. dated January 31, 2000.
Effective Date : 31st January 2000
Between
CHARTERED SEMICONDUCTOR MANUFACTURING LTD
And
PMC-SIERRA, INC.
----------------------------------
DEPOSIT AGREEMENT
----------------------------------
<PAGE>
DEPOSIT AGREEMENT
THIS AGREEMENT is made effective the 31st day of January, 2000 ("Effective
Date") by and between :-
(1) CHARTERED SEMICONDUCTOR MANUFACTURING LTD, a company incorporated in
Singapore with its registered office at 60 Woodlands Industrial Park D,
Street 2, Singapore 738406 (hereinafter referred to as "CHARTERED");
and
(2) PMC-SIERRA, INC., a company incorporated in California and having its
place of business at 105-8555 Baxter Place, Burnaby, British Columbia,
Canada, V5A 4VY (hereinafter referred to as "Customer"),
WHEREAS :
(A) CHARTERED is engaged primarily in the business of the manufacturing,
marketing and selling of semiconductors, with its 5 wafer fabrication
facilities situated in Singapore.
(B) Customer desires to deposit certain funds with CHARTERED to enable
CHARTERED to procure increased wafer fabrication capacity and to make
available to Customer certain wafer manufacturing capacity, on the
terms and conditions of this Agreement.
IT IS HEREBY AGREED as follows :
1. THE DEPOSIT
1.1 In consideration of the on-going business relationship with the
Customer, CHARTERED is agreeing to make available to the Customer up to
__% of the Customer Loading Commitment (as hereinafter defined),
without a deposit, in accordance with the provisions of Clause 2.1
below.
1.2 For the excess capacity over __% of the Customer Loading Commitment,
the Customer will deposit with CHARTERED the total sum of US$____ (the
"Deposit") on such dates and in such amounts as specified in Annex A
(as may be revised in accordance with Clause 3.6 below).
1.3 The Deposit shall be paid by telegraphic transfer to an account
designated by CHARTERED and such Deposit shall be maintained by
Customer to the amount for each year as set out in Annex A A (as may be
revised in accordance with Clause 3.6 below) during the term of this
Agreement.
1.4 Upon the expiry of this Agreement or the earlier termination thereof in
accordance with Clause 6 or Clause 7.2, CHARTERED will return to
Customer any Deposit remaining with CHARTERED in accordance with the
provisions of Clause 4.6 below.
<PAGE>
2. CHARTERED SUPPLY COMMITMENT
2.1 CHARTERED agrees to make available capacity of up to __% of Customer's
Loading Commitment (as hereinafter defined) for 6-inch and 8-inch
wafers in each calendar quarter as set out in Annex C (as may be
revised in accordance with Clause 3.2 below) with no deposit required
("CHARTERED Supply Commitment"). However, any additional capacity above
the CHARTERED Supply Commitment will require a deposit of US$___ per
wafer for additional capacity guarantee per quarter in accordance with
Clause 2.2 below.
2.2 In consideration of the payment of the Deposit by Customer and
Customer's maintenance of the full deposit amount for each year with
CHARTERED, CHARTERED will make available to Customer, wafer
manufacturing capacity for 6-inch and 8-inch wafers in each calendar
quarter commencing from the January 01, 2000 until the expiry or
earlier termination of this Agreement, in such quantities as set out in
Annex D (as may be revised in accordance with Clause 3.6 below) (the
"CHARTERED Additional Supply Commitment").
2.3 The Parties agree that the technology mix of the CHARTERED Supply
Commitment and the CHARTERED Additional Supply Commitment will be as
follows :-
Technology
2.4 Unless otherwise expressly provided in this Agreement, the sale of
wafers by CHARTERED to Customer, the capacity of which is made
available to Customer under this Agreement, shall be governed by the
terms and conditions of CHARTERED's manufacturing agreement to be
entered into by CHARTERED and Customer (the "Manufacturing Agreement").
2.5 The Deposit amount for the CHARTERED Additional Supply Commitment for
each calendar year is calculated based on the following formulae :-
US$__ x the CHARTERED Additional Supply Commitment for that
year set out in Annex D (as may be revised in
accordance with Clause 3.6 below)
2.6 CHARTERED reserves the right to adjust the selling price of wafers to
be supplied by CHARTERED from time to time depending on prevailing
market conditions, provided however that CHARTERED shall give Customer
not less than __ months' prior written notice of such adjustment.
3. CUSTOMER LOADING COMMITMENT
3.1 Customer agrees to place purchase orders with CHARTERED for such
quantity of 6-inch and 8-inch wafers for delivery during the calendar
quarters set out in Annex B (as may be revised in accordance with
Clause 3.2 below) (the "Customer Loading Commitment"). The quantity of
wafers for which orders are placed by Customer is hereinafter referred
to as the "Customer Actual Loading."
<PAGE>
3.2 Every calendar quarter, Customer agrees to provide to CHARTERED a
rolling __-month loading forecast and thereafter, CHARTERED and
Customer shall negotiate and mutually agree in writing on the forecast
("Forecast"). In the event the Parties agree on a Forecast which
differs from the quantities for the relevant period set out in the
Customer Loading Commitment in Annex B, then :-
(a) such Forecast shall supersede the quantities set out in Annex B and
shall be the Customer Loading Commitment for the period stated therein;
and
(b) the quantities set out in Annex C shall be revised to be __% of the
quantities in such Forecast which shall be the CHARTERED Supply
Commitment for the period stated therein.
In the event the Parties are unable to agree on the Forecast, then the
quantities set out in the Customer Loading Commitment in Annex B for
the relevant period shall apply and be the Customer Loading Commitment.
3.3 Customer shall place purchase orders with CHARTERED as follows :-
(1) for __% of the quantity for the __ quarter of each Forecast;
(2) for plus or minus __ of the quantity for the __ quarter of each
Forecast;
(3) for plus or minus __% of the quantities for the __ quarters of each
Forecast; and
(4) no purchase orders as the __ quarters of each Forecast are not
binding commitments to purchase.
3.4 The Customer Actual Loading for each calendar quarter during the term
of the Agreement shall be equal to the Customer Loading Commitment. In
addition, the month to month variation in the Customer Actual Loading
shall not exceed __% without the prior written consent of CHARTERED in
the form of the agreed Forecast.
3.5 As a separate requirement from the quarterly Forecast as set out in
Clause 3.1, by June 1st of each calendar year during the term of this
Agreement, Customer shall review its loading forecast for the following
calendar year and Customer may, with CHARTERED's written consent,
increase or reduce the quantities set out in the CHARTERED Additional
Supply Commitment in Annex D.
3.6 In the event the Parties mutually agree on any increase or reduction in
the CHARTERED Additional Supply Commitment for any calendar year, the
Deposit amount for such year shall be calculated in accordance with
Clause 2.5 above.
<PAGE>
4. DEPOSIT RETENTION AND REFUND
4.1 The quantity of wafers for which orders are placed by Customer that is
in excess of __% of the Customer Loading Commitment is hereinafter
referred to as the "Customer Actual Additional Loading".
4.2 In the event that the Customer Actual Additional Loading for any
calendar year is less than the CHARTERED Additional Supply Commitment
(as may be revised in accordance with Clause 3.6 above) for that year,
CHARTERED shall be entitled to retain a deposit retention amount
("Deposit Retention Amount") from the Deposit paid for that calendar
year calculated as follows :-
ADP x (CASC - CAAL)
Where :-
ADP = CHARTERED's Average Deposit Price of US$__ per wafer
CASC = the CHARTERED Additional Supply Commitment (as may be
revised in accordance with Clause 3.6 above) for that
calendar year
CAAL = Customer Actual Additional Loading for that calendar
year
4.3 CHARTERED shall refund Customer the Deposit paid to secure additional
capacity for each calendar year less any Deposit Retention Amount for
that year that may have been retained by CHARTERED pursuant to Clause
4.2 above (the "Refund"), provided always that the Deposit paid to
secure capacity for a calendar year shall be refunded only in the year
following such calendar year in accordance with Clause 4.4 below.
4.4 The Refund for each calendar year shall be made by CHARTERED to
Customer within sixty (60) days after the calendar year-end.
4.5 All Refunds of the Deposit shall cease upon either (a) the depletion of
the Deposit with CHARTERED; or (b) the expiry or earlier termination of
this Agreement, whichever occurs earlier.
4.6 Upon the expiry of this Agreement or the earlier termination thereof in
accordance with Clause 6 or Clause 7.2 below, :-
(a) CHARTERED shall return to Customer, without any interest, any
Deposit remaining with CHARTERED at the time of such expiry or
termination, subject to any deductions, refunds and/or set-off
made pursuant to Clause 5.1 of this Agreement; or
(b) Customer may at their option, subject to CHARTERED's agreement,
roll over any remaining amount of the Deposit to secure wafer
capacity in the calendar year following such expiry or
termination, and the terms and conditions of such wafer capacity
shall be mutually agreed by the Parties in writing.
<PAGE>
5. DEDUCTION AND SET OFF
5.1 CHARTERED shall be entitled to deduct and/or set-off against the
Deposit any payment falling due and remaining unpaid by Customer under
the Manufacturing Agreement.
5.2 CHARTERED's right of deduction and set-off pursuant to Clause 5.1 shall
be in addition to CHARTERED's right to claim the aforesaid overdue
payments separately as a debt due from Customer and shall not in any
way prejudice such right or any other rights or remedies which
CHARTERED may have at law or in equity.
6. TERM AND TERMINATION
6.1 Unless renewed in accordance with Clause 14 below, this Agreement shall
expire on 31 December 2003 and may be terminated earlier in the
following manner :-
(a) At the option of CHARTERED, in the event that Customer does not
deposit with CHARTERED any portion of the Deposit in accordance
with the terms of this Agreement;
(b) At the option of CHARTERED, in the event that the Customer Actual
Loading is in aggregate less than __% of the Customer Loading
Commitment for __ calendar months;
(c) At the option of Customer, in the event that CHARTERED fails to
deliver to Customer in aggregate at least __% of the Customer
Actual Loading for __ calendar months;
(d) At the option of either Party, in any of the following events:-
(i) the inability of the Party to pay in the normal course
of business; or
(ii) the other Party ceasing or threatening to cease wholly
or substantially to carry on its business, otherwise
than for the purpose of a reconstruction or amalgamation
without insolvency; or
(iii) any encumbrancer taking possession of or a receiver,
manager, trustee or judicial manager being appointed
over the whole or any substantial part of the
undertaking, property or assets of the other Party; or
(iv) the making of an order by a court of competent
jurisdiction or the passing of a resolution for the
winding-up of the other Party or any company controlling
the other Party, otherwise than for the purpose of a
reconstruction or amalgamation without insolvency.
<PAGE>
6.2 Termination of this Agreement pursuant to Clause 6.1 shall take effect
immediately upon the issue of a written notice to that effect by the
Party terminating the Agreement to the other. The termination of this
Agreement howsoever caused shall be without prejudice to any
obligations or rights of either Party which have accrued prior to such
termination and shall not affect any provision of this Agreement which
is expressly or by implication provided to come into effect on or to
continue in effect such termination.
7. FORCE MAJEURE
7.1 CHARTERED's obligation to provide the CHARTERED Supply Commitment and
the CHARTERED Additional Supply Commitment and Customer's obligation to
place purchase orders in accordance with the terms of this Agreement
shall be suspended upon the occurrence of a force majeure event such as
act of God, flood, earthquake, fire, explosion act of government, war,
civil commotion, insurrection, embargo, riots, lockouts, labour
disputes affecting CHARTERED or Customer as the case may be, for such
period as such force majeure event, the affected Party shall notify the
other Party in writing of the same and shall by subsequent written
notice after the cessation of such force majeure event inform the other
Party of the date on which that Party's obligation under this Agreement
shall be reinstated.
7.2 Notwithstanding anything in this Clause 7, upon the occurrence of a
force majeure event affecting either Party, and such force majeure
event continues for a period exceeding 6 consecutive months without a
prospect of a cure of such event, the other Party shall have the
option, in its sole discretion, to terminate this Agreement. Such
termination shall take effect immediately upon the written notice to
that effect from the other Party to the Party affected by the force
majeure event.
8. CONFIDENTIALITY
8.1 All Confidential Information shall be kept confidential by the
recipient unless or until the recipient Party can reasonably
demonstrate that any such Confidential Information is, or part of it
is, in the public domain through no fault of its own, whereupon to the
extent that it is in the public domain or is required to be disclosed
by law this obligation shall cease. For the purposes of this Agreement,
"Confidential Information" shall mean all communications between the
Parties, and all information and other materials supplied to or
received by either of them from the other (a) prior to or on the date
of this Agreement whether or not marked confidential; (b) after the
date of this Agreement which is marked confidential with an appropriate
legend, marking, stamp or other obvious written identification by the
disclosing Party, and (c) all information concerning the business
transactions and the financial arrangements of the Parties with any
person with whom any of them is in a confidential relationship with
regard to the matter in question coming to the knowledge of the
recipient.
<PAGE>
8.2 The Parties and shall take all reasonable steps to minimize the risk of
disclosure of Confidential Information, by ensuring that only they
themselves and such of their employees and directors whose duties will
require them to possess any of such information shall have access
thereto, and will be instructed to treat the same as confidential.
8.3 The obligation contained in this Clause shall endure, even after the
termination of this Agreement, for a period of 5 years from the date of
receipt of the Confidential Information except and until such
Confidential enters the public domain as set out above.
9. NOTICES
9.1 Addresses
All notices, demands or other communications required or permitted to
be given or made under or in connection with this Agreement shall be in
writing and shall be sufficiently given or made (a) if delivered by
hand or commercial courier or (b) sent by pre-paid registered post or
(c) sent by legible facsimile transmission (provided that the receipt
of such facsimile transmission is confirmed and a copy thereof is sent
immediately thereafter by pre-paid registered post) addressed to the
intended recipient at its address or facsimile number set out below. A
Party may from time to time notify the others of its change of address
or facsimile number in accordance with this Clause.
CHARTERED
60 Woodlands Industrial Park D
Street 2
Singapore 738406
Attn: The Legal Department
Customer
105-8555 Baxter Place
Burnaby, B.C.
Canada, V5A4V7
Attn: Mr. Bob Bailey
President
9.2 Deemed Delivery
Any such notice, demand or communication shall be deemed to have been
duly served (a) if delivered by hand or commercial courier, or sent by
pre-paid registered post, at the time of delivery; or (b) if made by
successfully transmitted facsimile transmission, at the time of
dispatch (provided that the receipt of such facsimile transmission is
confirmed and that immediately after such dispatch, a copy thereof is
sent by prepaid registered post.
<PAGE>
10. WAIVER AND REMEDIES
10.1 No delay or neglect on the part of either Party in enforcing against
the other Party any term or condition of this Agreement or in
exercising any right or remedy under this Agreement shall either be or
be deemed to be a waiver or in any way prejudice any right or remedy of
that Party under this Agreement.
10.2 No remedy conferred by any of the provisions of this Agreement is
intended to be exclusive of any other remedy which is otherwise
available at law, in equity, by statute or otherwise and each and every
other remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law, in
equity, by statute or otherwise. The election of any one or more of
such remedies by either of the Parties hereto shall not constitute a
waiver by such Party of the right to pursue any other available remedy.
11. SEVERANCE
If any provision or part of this Agreement is rendered void, illegal or
unenforceable in any respect under any enactment or rule of law, the
validity, legality and enforceability of the remaining provisions shall
not in any way be affected or impaired thereby.
12. ENTIRE AGREEMENT
This Agreement and the Manufacturing agreement constitute the entire
agreement between CHARTERED and Customer with respect to the subject
matter hereof and shall supersede all previous agreements and
undertakings between Parties.
13. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of Singapore. The Parties hereby irrevocably submit to the
non-exclusive jurisdiction of the courts of Singapore.
14. RENEWAL OPTION
One year before the expiration of this agreement, Customer will have
the option to renew this agreement for a period of up to four years,
with the terms of the renewal to be negotiated by the parties.
<PAGE>
IN WITNESS WHEREOF the Parties have hereunto entered into this Agreement
effective the date first above written.
Signed by Robert Baxter, )
Senior Vice President, Business Operations )
CHARTERED SEMICONDUCTOR )
MANUFACTURING LTD )
in the presence of:- ) ______________________________
- --------------------------------
Signature and name of witness
Signed by Bob Bailey, )
President )
PMC-SIERRA, INC. )
in the presence of:- ) ______________________________
- -------------------------------
Signature and name of witness
<PAGE>
ANNEX A
Deposit Amount and Payment Schedule
- --------------- ------------------------------ --------------------------------
Deposit Amount To secure additional capacity Payable on
in calendar year
- --------------- ----------------------------- --------------------------------
US$__ 2000 Date of signing of this Agreement
---------------------------------
- --------------- ---------------------------- ----------------------------------
US$__ 2001 Date of signing of this Agreement
- --------------- --------------------------- ----------------------------------
US$__ 2002 2 January 2001
- --------------- --------------------------- -----------------------------------
US$__ 2003 2 January 2002
- --------------- --------------------------- -----------------------------------
Total = US$__
- --------------- --------------------------- ------------------------------------
PMC-SIERRA, INC.
<PAGE>
ANNEX B
CUSTOMER LOADING COMMITMENT
Number of 8-inch and 6-inch silicon wafers
1Q00 2Q00 3Q00 4Q00 Yr. 2000
- ---------------- ------------- -------------- ------------- -------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
-------------------------------------------------------------------------------
1Q01 1Q01 3Q01 4Q01 Yr. 2001
- ---------------- ------------- -------------- ------------ -------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
- --------------------------------------------------------------------------------
1Q02 2Q02 3Q02 4Q02 Yr. 2002
- ---------------- ------------- ------------- ------------- -------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
- --------------------------------------------------------------------------------
1Q03 2Q03 3Q03 4Q03 Yr. 2003
---------------- ------------ ------------- ------------ -------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
- --------------------------------------------------------------------------------
<PAGE>
ANNEX C
CHARTERED SUPPLY COMMITMENT
Number of 8-inch and 6-inch silicon wafers
1Q00 2Q00 3Q00 4Q00 Yr. 2000
--------------- -------------- --------------- -------------- --------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
-----------------------------------------------------------------------------
1Q01 1Q01 3Q01 4Q01 Yr. 2001
-------------- -------------- --------------- -------------- --------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
----------------------------------------------------------------------------
1Q02 2Q02 3Q02 4Q02 Yr. 2002
-------------- -------------- --------------- -------------- --------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
---------------------------------------------------------------------------
1Q03 2Q03 3Q03 4Q03 Yr. 2003
---------------- -------------- --------------- -------------- --------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
--------------------------------------------------------------------------
<PAGE>
ANNEX D
CHARTERED ADDITIONAL SUPPLY COMMITMENT
Number of 8-inch and 6-inch silicon wafers
1Q00 2Q00 3Q00 4Q00 Yr. 2000
- ---------------- -------------- --------------- -------------- --------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
- ---------------- -------------- --------------- -------------- --------------
1Q01 1Q01 3Q01 4Q01 Yr. 2001
- ---------------- -------------- --------------- -------------- --------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
- ---------------- -------------- --------------- -------------- --------------
1Q02 2Q02 3Q02 4Q02 Yr. 2002
- ---------------- -------------- --------------- -------------- --------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
1Q03 2Q03 3Q03 4Q03 Yr. 2003
- ---------------- -------------- --------------- -------------- --------------
8" 8" 8" 8" Total 8"
-- -- -- -- --
6" 6" 6" 6" Total 6"
-- -- -- -- --
- ---------------- -------------- --------------- -------------- --------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FILED FOR THE QUARTER ENDED MARCH 26, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Dec-27-1999
<PERIOD-END> Mar-26-2000
<CASH> 223,193
<SECURITIES> 0
<RECEIVABLES> 46,108
<ALLOWANCES> 0
<INVENTORY> 9,621
<CURRENT-ASSETS> 296,854
<PP&E> 101,044
<DEPRECIATION> (44,969)
<TOTAL-ASSETS> 394,260
<CURRENT-LIABILITIES> 105,861
<BONDS> 0
0
0
<COMMON> 241,331
<OTHER-SE> 30,509
<TOTAL-LIABILITY-AND-EQUITY> 394,260
<SALES> 102,807
<TOTAL-REVENUES> 102,807
<CGS> 20,601
<TOTAL-COSTS> 20,601
<OTHER-EXPENSES> 51,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 38,909
<INCOME-TAX> 15,916
<INCOME-CONTINUING> 22,993
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,993
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.14
</TABLE>
