-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PK95GhQZcMQ5O164DheG1+FEApF9QnGy543tSrtRch+OEfepabvr6rq0uabifssG i44RFn8DJbpnPFHbTZQD9A== 0000767920-03-000010.txt : 20031110 0000767920-03-000010.hdr.sgml : 20031110 20031107193313 ACCESSION NUMBER: 0000767920-03-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030928 FILED AS OF DATE: 20031110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PMC SIERRA INC CENTRAL INDEX KEY: 0000767920 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942925073 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19084 FILM NUMBER: 03986585 BUSINESS ADDRESS: STREET 1: 3975 FREEDOM CIRCLE STREET 2: MISSION TOWER ONE CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 408-369-1176 MAIL ADDRESS: STREET 1: ATTENTION: TREASURER STREET 2: 3975 FREEDOM CIRCLE CITY: SANTA CLARA STATE: CA ZIP: 95054 FORMER COMPANY: FORMER CONFORMED NAME: SIERRA SEMICONDUCTOR CORP DATE OF NAME CHANGE: 19950419 10-Q 1 file10q32003.txt PMC-SIERRA INC. FORM 10Q Q3 2003 ------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10 - Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 28, 2003 [ ] 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 3975 Freedom Circle Santa Clara, CA 95054 (408) 239-8000 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 _______ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ___X____ No _______ Common shares outstanding at October 31, 2003 - 172,767,594 ------------------------------------------------ INDEX PART I - FINANCIAL INFORMATION Item 1. Financial Statements Page - Condensed consolidated statements of operations 3 - Condensed consolidated balance sheets 4 - Condensed consolidated statements of cash flows 5 - Notes to the condensed consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 39 Item 4. Controls and Procedures 40 PART II - OTHER INFORMATION Item 5. Other Information 41 Item 6. Exhibits and Reports on Form 8 - K 42 Signatures 42 2 Part I - FINANCIAL INFORMATION Item 1 - Financial Statements PMC-Sierra, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except for per share amounts) (unaudited)
Three Months Ended Nine Months Ended -------------------------------- ------------------------------- Sep 28, Sep 29, Sep 28, Sep 29, 2003 2002 2003 2002 Net revenues Networking $ 63,100 $ 59,358 $ 178,096 $ 160,095 Non-networking - 226 768 5,442 -------------- -------------- --------------- --------------- Total 63,100 59,584 178,864 165,537 Cost of revenues 21,868 23,229 65,054 64,546 -------------- -------------- --------------- --------------- Gross profit 41,232 36,355 113,810 100,991 Other costs and expenses: Research and development 27,759 33,977 90,880 104,649 Marketing, general and administrative 12,031 16,030 36,798 49,592 Amortization of deferred stock compensation: Research and development - 453 317 2,138 Marketing, general and administrative 313 23 421 150 Restructuring costs (1,093) - 12,811 - -------------- -------------- --------------- --------------- Income (loss) from operations 2,222 (14,128) (27,417) (55,538) Interest and other income (expense), net (267) 1,374 175 4,134 Gain on extinguishment of debt 1,700 - 1,700 - Net gain (loss) on investments (162) 71 2,331 3,135 -------------- -------------- --------------- --------------- Income (loss) before provision for income taxes 3,493 (12,683) (23,211) (48,269) Provision for (recovery of) income taxes 329 (3,438) (5,695) (13,753) -------------- -------------- --------------- --------------- Net income (loss) $ 3,164 $ (9,245) $ (17,516) $ (34,516) ============== ============== =============== =============== Net income (loss) per common share - basic $ 0.02 $ (0.05) $ (0.10) $ (0.20) Net income (loss) per common share - diluted $ 0.02 $ (0.05) $ (0.10) $ (0.20) Shares used in per share calculation - basic 174,118 170,525 172,603 169,945 Shares used in per share calculation - diluted 186,137 170,525 172,603 169,945 See notes to the consolidated financial statements.
3 PMC-Sierra, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value)
Sep 28, Dec 29, 2003 2002 (unaudited) ASSETS: Current assets: Cash and cash equivalents $ 204,048 $ 70,504 Short-term investments 144,550 340,826 Restricted cash 2,544 5,329 Accounts receivable, net of allowance for doubtful accounts of $2,848 (2002 - $2,781) 18,449 16,621 Inventories 19,690 26,420 Deferred tax assets 1,131 1,083 Prepaid expenses and other current assets 12,691 15,499 -------------- -------------- Total current assets 403,103 476,282 Investment in bonds and notes 54,073 148,894 Other investments and assets 8,010 21,978 Property and equipment, net 25,124 51,189 Property held for sale 14,203 - Goodwill and other intangible assets, net 7,907 8,381 Deposits for wafer fabrication capacity 6,779 21,992 -------------- -------------- $ 519,199 $ 728,716 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable $ 22,188 $ 24,697 Accrued liabilities 44,255 53,530 Income taxes payable 38,578 21,553 Accrued restructuring costs 15,274 129,499 Deferred income 15,704 17,982 -------------- -------------- Total current liabilities 135,999 247,261 Convertible subordinated notes 175,000 275,000 Deferred tax liabilities 74 2,764 PMC special shares convertible into 2,961 (2002 - 3,196) shares of common stock 4,636 5,052 Stockholders' equity Common stock and additional paid in capital, par value $.001: 900,000 shares authorized; 172,190 shares issued and outstanding (2002 - 167,400) 857,263 834,265 Deferred stock compensation (212) (1,158) Accumulated other comprehensive income 2,362 3,939 Accumulated deficit (655,923) (638,407) -------------- -------------- Total stockholders' equity 203,490 198,639 -------------- -------------- $ 519,199 $ 728,716 ============== ==============
See notes to the consolidated financial statements. 4 PMC-Sierra, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended --------------------------------- Sep 28, Sep 29, 2003 2002 Cash flows from operating activities: Net loss $ (17,516) $ (34,516) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property and equipment 21,252 30,941 Amortization of other intangibles 474 854 Amortization of deferred stock compensation 738 2,288 Amortization of debt issuance costs 1,164 1,173 Impairment of other investments 3,500 - Noncash restructuring costs 1,490 - Gain on extinguishment of debt (1,700) - Gain on sale of investments and other assets (5,818) (3,126) Changes in operating assets and liabilities: Accounts receivable (1,828) (952) Inventories 6,730 6,116 Prepaid expenses and other current assets 3,216 671 Accounts payable and accrued liabilities (11,784) (2,033) Income taxes payable 17,025 12,454 Accrued restructuring costs (114,200) (24,386) Deferred income (2,278) (5,361) --------------- ---------------- Net cash used in operating activities (99,535) (15,877) --------------- ---------------- Cash flows from investing activities: Change in restricted cash 2,785 - Purchases of short-term held-to-maturity investments (16,538) (94,512) Purchases of short term available-for-sale investments (54,701) (24,375) Proceeds from sales and maturities of short-term held-to-maturity investments 120,459 92,023 Proceeds from sales and maturities of short-term available for sale investments 149,098 15,578 Purchases of long-term held-to-maturity investments in bonds and notes (95,874) (141,863) Proceeds from sales and maturities of long-term held-to-maturity investments in bonds and notes 189,973 93,249 Purchases of investments and other assets (1,300) (8,734) Proceeds from sale of investments and other assets 8,402 5,125 Proceeds from refund of wafer fabrication deposits 15,213 - Purchases of property and equipment (10,547) (2,946) --------------- ---------------- Net cash provided by (used in) investing activities 306,970 (66,455) --------------- ---------------- Cash flows from financing activities: Repayment of capital leases and long-term debt - (377) Repurchase of convertible subordinated notes (96,680) - Proceeds from issuance of common stock 22,789 9,867 --------------- ---------------- Net cash provided by (used in) financing activities (73,891) 9,490 --------------- ---------------- Net increase (decrease) in cash and cash equivalents 133,544 (72,842) Cash and cash equivalents, beginning of the period 70,504 152,120 --------------- ---------------- Cash and cash equivalents, end of the period $ 204,048 $ 79,278 =============== ================ Supplemental disclosures of cash flow information: Cash paid for interest $ 10,568 $ 10,759 Cash refund of income taxes 23,228 - Cash paid for income taxes 407 384 See notes to the consolidated financial statements.
5 PMC-Sierra, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1. Summary of Significant Accounting Policies Description of business. PMC-Sierra, Inc (the "Company" or "PMC") designs, develops, markets and supports high-speed broadband communications and storage semiconductors and MIPS-based processors for service provider, enterprise, storage, and wireless networking equipment. The Company offers worldwide technical and sales support through a network of offices in North America, Europe and Asia. Basis of presentation. The accompanying Condensed Consolidated 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 that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial statements and related notes thereto in the Company's Annual Report on Form 10-K for the year ended December 29, 2002. The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods. Estimates. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, sales returns, warranty costs, income taxes, restructuring costs and contingencies. Actual results could differ from these estimates. Inventories. Inventories are stated at the lower of cost (first-in, first out) or market (estimated net realizable value). Inventories (net of reserves of $26.4 million and $30.1 million at September 28, 2003 and December 29, 2002, respectively) were as follows: Sep 28, Dec 29, (in thousands) 2003 2002 - ----------------------------------------------------------------------------- Work-in-progress $ 6,910 $ 11,409 Finished goods 12,780 15,011 - ----------------------------------------------------------------------------- $ 19,690 $ 26,420 ======================================== Product warranties. The Company provides a one-year limited warranty on most of its standard products and accrues for the cost of this warranty at the time of shipment. The Company estimates its warranty costs based on historical failure rates and related repair or replacement costs. The change in the Company's accrued warranty obligations from December 31, 2002 to September 28, 2003 is as follows: 6 Nine months ended (in thousands) Sep 28, 2003 - -------------------------------------------------------------------------------- Beginning balance, December 30, 2002 $ 2,399 Accrual for new warranties issued 848 Reduction for payments (in cash or in kind) (224) Adjustments related to changes in estimate of warranty accrual (267) - -------------------------------------------------------------------------------- Ending balance, September 28, 2003 $ 2,756 ============= Other Indemnifications. From time to time, on a limited basis, we indemnify customers, as well as our suppliers, contractors, lessors, and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and use of our products, the use of their goods and services, the use of facilities, the state of assets that we sell and other matters covered by such contracts, usually up to a specified maximum amount. Derivatives and Hedging Activities. PMC's net income (loss) and cash flows may be negatively impacted by fluctuating foreign exchange rates. The Company periodically hedges foreign currency forecasted transactions related to certain operating expenses. All derivatives are recorded in the balance sheet at fair value. For a derivative designated as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net income (loss). For a derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in net income (loss) when the hedged item affects net income (loss). Ineffective portions of changes in the fair value of cash flow hedges are recognized in net income (loss). If the derivative used in an economic hedging relationship is not designated in an accounting hedging relationship or if it becomes ineffective, changes in the fair value of the derivative are recognized in net income (loss). Stock based compensation. The Company accounts for stock-based compensation in accordance with the intrinsic value method prescribed by APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". Under APB 25, compensation is measured as the amount by which the market price of the underlying stock exceeds the exercise price of the option on the date of grant; this compensation is amortized over the vesting period. Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS 123, " Accounting for Stock-Based Compensation" for awards granted or modified after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated using both the single and multiple option approach, recognizing forfeitures as they occur, assuming no expected dividends and using the following weighted average assumptions: 7 Three Months Ended --------------------------------------------------- Options ESPP ------------------------ ----------------------- Sep 28, Sep 29, Sep 28, Sep 29, 2003 2002 2003 2002 - -------------------------------------------------------------------------------- Expected life (years) 2.8 1.7 1.1 0.5 Expected volatility 101% 101% 105% 123% Risk-free interest rate 2.1% 2.4% 1.4% 2.1% Nine Months Ended --------------------------------------------------- Options ESPP ------------------------ ----------------------- Sep 28, Sep 29, Sep 28, Sep 29, 2003 2002 2003 2002 - -------------------------------------------------------------------------------- Expected life (years) 2.8 2.0 1.0 0.6 Expected volatility 101% 101% 107% 122% Risk-free interest rate 1.9% 2.5% 1.5% 2.4% The weighted-average estimated fair values of employee stock options granted for the three months ending September 28, 2003 and September 29, 2002 were $6.63 and $2.90 per share, respectively. The weighted-average estimated fair values of employee stock options granted for the nine months ending September 28, 2003 and September 29, 2002 were $4.33 and $4.46 per share, respectively. If the Company had accounted for stock-based compensation in accordance with the fair value method as prescribed by SFAS 123, net loss and net loss per share would have been:
Three Months Ended Nine Months Ended ----------------------------- -------------------------------- Sep 28, Sep 29, Sep 28, Sep 29, (in thousands, except per share amounts) 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------- -------------------------------- Net income (loss), as reported $ 3,164 $ (9,245) $ (17,516) $ (34,516) Adjustments: Additional stock-based employee compensation expense under fair value based method for all awards (12,511) (11,954) (48,275) (70,347) -------------- ------------- -------------- --------------- Net loss, adjusted $ (9,347) $ (21,199) $ (65,791) $ (104,863) ============== ============= ============== =============== Basic and diluted net income (loss) per share, as reported $ 0.02 $ (0.05) $ (0.10) $ (0.20) ============== ============= ============== =============== Basic and diluted net income (loss) per share, adjusted $ (0.05) $ (0.12) $ (0.38) $ (0.62) ============== ============= ============== ===============
Recently issued accounting standards. In May 2003, the Financial Accounting Standards Board (FASB) issued Statement No. 150 (SFAS No. 150), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities". SFAS No. 150 requires certain financial instruments that were accounted for as equity under previous guidance to now be accounted for as a liability. SFAS No. 150 applies to mandatorily redeemable stock and certain financial instruments that require or may require settlement by transferring cash or other assets. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has not issued any financial instruments that fall under the scope of SFAS No. 150. The Company adopted SFAS No. 150 in the third quarter of 2003. The adoption of this Statement has had no material impact on PMC's results of operations and financial position. 8 In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," was issued. In general, this statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The Company adopted SFAS No. 149 on July 1, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company's consolidated financial position or disclosures. In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.13, and Technical Corrections" was issued, rescinding SFAS 4, which required gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. The Company adopted SFAS 145 as of the beginning of fiscal 2003. Compliance with this standard resulted in the classification of the $1.7 million gain on extinguishment of debt in income from continuing operations in the consolidated statement of operations. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003 however, earlier adoption is permitted. PMC adopted FIN 46 in the third quarter of 2003. Adoption of this standard did not have a material effect on the Company's results of operations, financial condition or disclosures. NOTE 2. Derivatives Instruments and Hedging Activities PMC generates revenues in U.S. dollars but incurs certain operating expenses in various foreign currencies, primarily the Canadian dollar. To minimize the short-term impact of foreign currency fluctuations, the Company uses currency forward contracts. Currency forward contracts that are used to hedge exposures to variability in forecasted foreign currency cash flows are designated as cash flow hedges. The maturities of these instruments are less than twelve months. For these derivatives, the gain or loss from the effective portion of the hedge is initially reported as a component of other comprehensive income in stockholders' equity and subsequently reclassified to earnings in the same period in which the hedged transaction affects earnings. The gain or loss from the ineffective portion of the hedge is recognized in interest and other expense immediately. 9 Currency forward contracts that are used to offset the currency risk of non-U.S.-dollar denominated firm commitments are designated as fair value hedges. Changes in the fair value of underlying firm commitments are generally offset by changes in fair value of the related derivative designated as a hedge, with the resulting net gain or loss, if any, recorded in interest and other expense. At September 28, 2003, the Company had two currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these two contracts was $26.9 million and the contracts had a fair value of $0.8 million as of September 28, 2003. No portion of the hedging instrument's gain was excluded from the assessment of effectiveness and the ineffective portions of hedges had an insignificant impact on earnings. NOTE 3. Restructuring and Other Costs In response to the severe economic downturn in the semiconductor industry in 2001, PMC implemented two restructuring plans aimed at focusing development efforts on key projects and reducing operating costs. By the first quarter of 2003, the Company was still operating in a challenging economic climate, making it necessary to again streamline operations and announce a further restructuring. PMC's assessment of market demand for its products and the development efforts necessary to meet this demand were key factors in its decisions to implement these restructuring plans. Because end markets for the Company's products had contracted to such a great degree, certain projects were curtailed in an effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer resources were required to support the reduced level of development and sales activities during this period. PMC has completed substantially all of the activities contemplated in the original restructuring plans, but has not yet disposed of all its surplus leased facilities as of September 28, 2003. Restructuring - March 26, 2001 PMC had completed the restructuring activities contemplated in its March 2001 restructuring plan by June 2002. However, the Company still has ongoing rental commitments for office space abandoned under this plan. Due to the continued downturn in real estate markets, the Company expects these costs to be higher than anticipated in the original plan. As a result, PMC recorded an additional provision for abandoned office facilities of $3.1 million in the third quarter of 2003. Payments made in connection with these leases in the three months ended September 28, 2003 were $0.2 million. Restructuring Additional Liability at (in thousands) Charges Cash Payments September 28, 2003 - -------------------------------------------------------------------------------- Excess facility costs $ 3,082 $ (213) $ 2,869 ================================================================================ Restructuring - October 18, 2001 PMC implemented a restructuring plan in the fourth quarter of 2001 to reduce its operating cost structure. This restructuring plan included the termination of 341 employees, the consolidation of excess facilities, and the curtailment of certain research and development projects. As a result, the Company recorded a restructuring charge of $175.3 million in the fourth quarter of 2001. 10 Activity in the restructuring reserve during the nine-month period ended September 28, 2003 was as follows:
Restructuring Restructuring Liability at Cash Liability at (in thousands) December 31, 2002 Payments Reversals September 28, 2003 - -------------------------------------------------------------------------------------------------------- Facility lease and contract settlement costs $ 129,499 $ (116,287) $ (4,500) $ 8,712 ===========================================================================
On July 7, 2003, PMC terminated its remaining rental commitment for Mission Towers Two, located in Santa Clara, CA, by purchasing the facility for $133 million and then immediately reselling it for $33 million. PMC incurred fees of approximately $1 million on these transactions. Upon completion of the sale of Mission Towers Two, PMC reversed $4.5 million of excess restructure provision. The remainder of cash payments made in 2003 and the remaining accrual at September 28, 2003 related to other facilities abandoned in the October 2001 restructuring. Restructuring - January 16, 2003 As a result of the prolonged economic downturn in the semiconductor industry, the Company implemented another corporate restructuring aimed at further reducing operating expenses in the first quarter of 2003. The restructuring included the termination of approximately 175 employees and the closure of design centers in Maryland, Ireland and India. To date, PMC has recorded a restructuring charge of $14.2 million in accordance with SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities". These charges related to workforce reduction, lease and contract settlement costs and the write-down of certain property, equipment and software assets whose value was impaired as a result of this restructuring plan. Activity in this restructuring reserve during the nine-month period ended September 28, 2003 was as follows:
Restructuring Total Charge Additional Non-cash Cash Liability at (in thousands) January 16, 2003 Charges Charges Payments September 28, 2003 - ----------------------------------------------------------------------------------------------------------------------------- Workforce reduction $ 6,384 $ 812 - $ (5,845) $ 1,351 Excess facility and contract settlement costs 260 4,184 - (3,150) 1,294 Obligations related to closure of development sites - 1,099 - (51) 1,048 Asset write-downs - 1,491 (1,491) - - - ---------------------------------------------------------------------------------------------------------------------------- Total $ 6,644 $ 7,586 $ (1,491) $ (9,046) $ 3,693 =====================================================================================
The Company recorded $0.3 million of restructuring charges under this plan in the third fiscal quarter. To date, the Company has made cash payments of $9.0 million under this plan. NOTE 4. Debt Investments 11 The following tables summarize the Company's investments in debt securities: Sep 28, Dec 29, (in thousands) 2003 2002 - ----------------------------------------------------------------------------- Held to maturity: US Government Agency notes $ - $ 92,039 Corporate bonds and notes - 303,169 -------------------------------- - 395,208 Available-for-sale: US Government Treasury and Agency notes 61,078 94,512 Corporate bonds and notes 137,545 - - ----------------------------------------------------------------------------- $ 198,623 $ 489,720 ================================ Reported as: Short-term investments $ 144,550 $ 340,826 Investments in bonds and notes 54,073 148,894 - ----------------------------------------------------------------------------- $ 198,623 $ 489,720 ================================ During the third fiscal quarter, PMC sold $29.9 million of its long-term held-to-maturity debt investments and recorded a loss on sale of $0.2 million. The proceeds of this sale were used to fund the partial repurchase of PMC's convertible subordinated notes during the quarter. As a result of this sale, the Company reclassified its remaining portfolio of held-to-maturity debt investments as available-for-sale and recorded an unrealized gain of $1.6 million in other comprehensive income. NOTE 5. Convertible Subordinated Notes In August 2001, we issued $275 million of convertible subordinated notes maturing on August 15, 2006. These notes bear interest at 3.75% payable semi-annually and are convertible into an aggregate of approximately 6.5 million shares of PMC's common stock at any time prior to maturity at a conversion price of approximately $42.43 per share. We may redeem the notes at any time after August 19, 2004. In addition, a holder may require us to repurchase the notes if a change of control, as defined in the indenture, occurs. These notes also become payable upon events of bankruptcy, insolvency or reorganization, or if we fail to pay amounts due on the notes or any other indebtedness of at least $40 million, or we fail to perform various procedural covenants detailed in the indenture. Under the terms of the indenture relating to our convertible subordinated notes, we may not merge into another entity, permit another entity to merge into us, sell substantially all of our assets to another entity, or purchase substantially all of the assets of another entity, unless the entity formed by the merger, sale or purchase is a company, partnership or trust formed in the United States, and the surviving entity assumes our obligations under the indenture, including the payment of principal and interest on the notes and, no event of default has occurred and is continuing. During the third fiscal quarter of 2003, the Company repurchased $100 million principal amount of these notes for $96.7 million and wrote off $1.6 million of related unamortized debt issue costs, resulting in a net gain of $1.7 million. 12 NOTE 6. Segment Information The Company has two operating segments: networking and non-networking products. The networking segment consists of semiconductor devices and related technical service and support to equipment manufacturers for use in service provider, enterprise, and storage area networking equipment. The non-networking segment consists of a single custom user interface product. 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 contained in the Company's Annual Report on Form 10-K. The Company evaluates performance based on net revenues and gross profits from operations of the two segments. Three Months Ended Nine Months Ended ----------------------------- ----------------------------- Sep 28, Sep 29, Sep 28, Sep 29, (in thousands) 2003 2002 2003 2002 - ------------------------------------------------- ----------------------------- Net revenues Networking $ 63,100 $ 59,358 $ 178,096 $ 160,095 Non-networking - 226 768 5,442 - ------------------------------------------------- -------------- -------------- Total $ 63,100 $ 59,584 $ 178,864 $ 165,537 ============================= ============== ============== Gross profit Networking $ 41,232 $ 36,259 $ 113,481 $ 98,662 Non-networking - 96 329 2,329 - ------------------------------------------------- -------------- -------------- Total $ 41,232 $ 36,355 $ 113,810 $ 100,991 ============================= ============== ============== NOTE 7. Comprehensive Income (Loss) The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended Nine Months Ended ---------------------------- ------------------------------ Sep 28, Sep 29, Sep 28, Sep 29, (in thousands) 2003 2002 2003 2002 - ------------------------------------------------------------------- ------------------------------ Net income (loss) $ 3,164 $ (9,245) $ (17,516) $ (34,516) Other comprehensive income (loss): Change in net unrealized gains (losses) on investments 1,584 (1,954) (2,287) (24,398) Change in fair value of derivatives 710 - 710 - - ------------------------------------------------------------------- ------------------------------ Total $ 5,458 $ (11,199) $ (19,093) $ (58,914) ============================ ============= ==============
NOTE 8. Net Income (Loss) Per Share The following table sets forth the computation of basic and diluted net income loss per share: 13
Three Months Ended Nine Months Ended ----------------------------------- ----------------------------------- Sep 28, Sep 29, Sep 28, Sep 29, (in thousands, except per share amounts) 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------- ----------------------------------- Numerator: Net income (loss) $ 3,164 $ (9,245) $ (17,516) $ (34,516) =================================== ================ ================ Denominator: Basic weighted average common shares outstanding (1) 174,118 170,525 172,603 169,945 Effect of dilutive securities: Stock options 12,019 - - - ---------------- ----------------- ---------------- ---------------- Diluted weighted average common shares outstanding (1) 186,137 170,525 172,603 169,945 =================================== ================ ================ Basic net income (loss) per share $ 0.02 $ (0.05) $ (0.10) $ (0.20) =================================== ================ ================ Diluted net income (loss) per share $ 0.02 $ (0.05) $ (0.10) $ (0.20) =================================== ================ ================
The Company had 2.6 million common stock equivalents outstanding at September 29, 2002 that were not included in diluted net loss per share because they would be antidilutive. (1) PMC-Sierra, Ltd. special shares are included in the calculation of basic weighted average common shares outstanding. NOTE 9. Voluntary Stock Option Exchange Offer In August 2002, the Company offered to eligible stock option holders an opportunity to voluntarily exchange certain stock options outstanding under the Company's equity-based incentive plans. Under the program, participants were able to tender for cancellation stock options granted within a specified period with exercise prices at or above $8.00 per share, in exchange for new options to be granted at least six months and one day after the cancellation of the tendered options. Pursuant to the terms and conditions set forth in the Company's offer, each eligible participant received new options to purchase an equivalent number of PMC shares for each tendered option with an exercise price of less than $60.00. For each tendered option with an exercise price of $60.00 or more, each eligible participant received a new option to purchase a number of PMC shares equal to one share for each four unexercised shares subject to the tendered option. On September 26, 2002, the Company cancelled options to purchase approximately 19.3 million shares of common stock with a weighted average exercise price of $35.98. In exchange for these stock options and pursuant to the terms and conditions set forth in the Company's offer, the Company granted options to purchase approximately 16.6 million shares of common stock on March 31, 2003 with an exercise price of $5.95, which was the closing price of the Company's stock on the grant date. NOTE 10. Subsequent Event Subsequent to September 28, 2003, the Company sold a property it held in Burnaby, Canada, for total proceeds of approximately $15.3 million. The proceeds consist of $ 12.7 million cash and a $ 2.6 million vendor take-back mortgage. The mortgage is non-interest bearing and is due on September 30, 2008. The Company recognized a nominal net gain on sale of this property. At September 28, 2003, this property was classified as property held for sale in accordance with SFAS 144. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates", "believes", "plans", "expects", "future", "intends", "may", "will", "should", "estimates", "predicts", "potential", "continue", "becoming", "transitioning" and similar expressions to identify such forward-looking statements. These forward-looking statements apply only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks we face as described under "Factors That You Should Consider Before Investing in PMC-Sierra" and elsewhere in this Quarterly Report. Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Such forward-looking statements include statements as to, among others, our business outlook, revenues, capital resources sufficiency, capital expenditures, restructuring activities, and expenses. Results of Operations Third Quarters of 2003 and 2002 Net Revenues ($000,000) Third Quarter -------------------------- 2003 2002 Change Networking products $ 63.1 $ 59.4 6% Non-networking products - 0.2 ( 100%) -------------------------- Total net revenues $ 63.1 $ 59.6 6% ========================== Net revenues for the third quarter of 2003 were $63.1 million compared to $59.6 for the third quarter of 2003. Networking revenues increased $3.7 million, 6% over the third quarter of 2002 due to increased unit demand, primarily in storage and enterprise equipment markets. Non-networking revenues declined to zero in the third quarter of 2003 from $0.2 million in the same period a year ago. Our non-networking product is a single medical chip near end of life and we have not developed any new products of this type. 15 Gross Profit ($000,000) Third Quarter -------------------------- 2003 2002 Change Networking products $ 41.2 $ 36.3 14% Non-networking products 0.1 ( 100%) -------------------------- Total gross profit $ 41.2 $ 36.4 13% ========================== Percentage of net revenues 65% 61% Total gross profit increased $4.8 million, or 13%, in the third quarter of 2003 compared to the same quarter a year ago. Networking gross profit for the third quarter of 2003 increased by $4.9 million from the third quarter of 2002 primarily due to increased unit sales and a reduction in product material costs. Networking gross profit as a percentage of networking revenues increased 4 percentage points, from 61% in the third quarter of 2002 to 65% in the third quarter of 2003. This increase resulted from the following factors: * product material costs decreased, improving gross profit by 7 percentage points; * fixed manufacturing costs were allocated over a higher volume of shipments, improving gross profit by approximately 2 percentage points; * a greater portion of our sales were from higher volume but lower margin applications, reducing networking gross profit by approximately 3 percentage points; and * the average selling price of our high volume products decreased, reducing gross profit by 2 percentage points. Operating Expenses and Charges ($000,000) Third Quarter -------------------------- 2003 2002 Change Research and development $ 27.8 $ 34.0 ( 18%) Percentage of net revenues 44% 57% Marketing, general and administrative $ 12.0 $ 16.0 ( 25%) Percentage of net revenues 19% 27% Amortization of deferred stock compensation: Research and development $ - $ 0.5 Marketing, general and administrative 0.3 - -------------------------- $ 0.3 $ 0.5 -------------------------- Percentage of net revenues 0% 1% Restructuring costs $ (1.1) $ - 100% 16 Research and Development and Marketing, General and Administrative Expenses: Our research and development, or R&D, expenses were $6.2 million, or 18%, lower in the third quarter of 2003 compared to the same quarter a year ago due to the restructuring program implemented in the first quarter of 2003 and ongoing cost reduction initiatives. Headcount reductions resulting from the first quarter restructuring program and attrition have decreased our R&D personnel and related costs by $1.9 million. Of the $4.3 million decrease in other R&D expenses since the third quarter of 2002, $2.1 million related to reduced depreciation expense as more property and equipment became fully depreciated and was not replaced. Additionally, costs incurred for product development materials were $1.4 million lower in the third quarter of 2003 than the same period a year ago. This fluctuation in costs is due, in part, to the timing of purchases of prototype wafers and masks used in the development of new products. Our marketing, general and administrative, or MG&A, expenses decreased by $4.0 million, or 25%, in the third quarter of 2003 compared to the same quarter a year ago. Reductions in headcount due to our first quarter restructuring program resulted in a decrease of personnel-related costs of $1.2 million. The $2.8 million decrease in Other MG&A expenses was primarily attributable to reduced sales commissions and legal expenses. Amortization of Deferred Stock Compensation The non-cash charge for amortization of deferred stock compensation in the third quarter of 2003 was $0.3 million compared to $0.5 million in the third quarter of 2002. Restructuring In response to the severe economic downturn in the semiconductor industry in 2001, we implemented two restructuring plans aimed at focusing development efforts on key projects and reducing operating costs. By the first quarter of 2003, we were still operating in a challenging economic climate, making it necessary for us to again streamline operations and announce a further restructuring. Our assessment of market demand for our products and the development efforts necessary to meet this demand were key factors in our decisions to implement these restructuring plans. Because end markets for our products had contracted to such a great degree, certain projects were curtailed in an effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer resources were required to support the reduced level of development and sales activities during this period. We have completed substantially all of the activities contemplated in the original restructuring plans, but have not yet disposed of all our surplus leased facilities as of September 28, 2003. During the third quarter of 2003, we recorded an additional $3.1 million for costs relating to facilities abandoned in our March 2001 restructuring plan. The continued downturn in real estate markets has resulted in higher expected costs than anticipated in the original plan. Payments made in connection with these leases in the third quarter were $0.2 million. We expect to make cash payments of $0.3 million related to these facilities in the fourth quarter of 2003. Efforts to exit these sites are ongoing, however, the payments related to these facilities could extend to 2010. 17 On July 7, 2003, we terminated our remaining rental commitment for Mission Towers Two, located in Santa Clara, CA, by purchasing the facility for $133 million and then immediately reselling it for $33 million. We incurred fees of approximately $1 million on these transactions. Upon completion of the sale of Mission Towers Two, we reversed $4.5 million of excess restructure provision. We have completed the restructuring activities contemplated in the October 2001 plan, but have not yet disposed of all of its surplus leased facilities as of September 28, 2003. The remainder of cash payments made in 2003 related to other facilities abandoned in the October 2001 restructuring. We expect to make cash payments of $0.6 million related to this restructuring in the fourth quarter of 2003. We continue our efforts to exit the remaining sites, however, payments relating to these facilities could extend to 2009. In the first quarter of fiscal 2003, we implemented a corporate restructuring to further reduce operating expenses. The restructuring plan included the termination of approximately 175 employees and the closure of four product development centers in Maryland, Ireland and India. We recorded a charge of $0.3 million in the third quarter of 2003. We have substantially completed activities contemplated in this plan and do not expect to record further related restructuring charges. We made cash payments of $1.0 million in the third quarter of 2003 and expect to make cash payments of approximately $0.6 million in the fourth quarter. We continue our efforts to exit the remaining sites, however, payments relating to these facilities could extend to 2006. As a result of this restructuring, we expect to save approximately $21 million of annual operating costs. Interest and other income (expense), net Net interest and other expense was $0.3 million in the third quarter of 2003 compared to income of $1.4 million in the third quarter of 2002. We incurred net interest expense in the current quarter due to declining cash balances as well as declining reinvestment yields on our maturing longer term investments. Gain on extinguishment of debt In the third quarter of 2003, we repurchased $100 million face value of our convertible subordinated notes for $96.7 million and wrote off $1.6 million of related unamortized debt issue costs, resulting in a net gain of $1.7 million. Gain (loss) on investments In the third quarter of 2003, we sold debt investments totaling $29.9 million resulting in a loss of $0.2 million. The proceeds were used to fund a portion of the repurchase of our convertible debt. These investments were previously classified as held-to-maturity. As a result of these sales all debt investments were reclassified as available for sale at the end of the third quarter. In the same period a year ago, we recorded a $0.1 million gain on the sale of a portion our investment in Sierra Wireless, Inc., a public company. 18 Provision for income taxes We recorded a provision for income taxes of $0.3 million in the third quarter of 2003 relating to income generated in Canada. First Nine Months of 2003 and 2002 Net Revenues ($000,000) First Nine Months --------------------------- 2003 2002 Change Networking products $ 178.1 $ 160.1 11% Non-networking products 0.8 5.4 ( 86%) --------------------------- Total net revenues $ 178.9 $ 165.5 8% =========================== Net revenues increased by 8% in the first nine months of 2003 compared to the same period a year ago. Networking revenues increased 11% over the same period a year ago due to increased unit demand. The increased unit demand resulted from improved demand, particularly in Asia, for telecommunications equipment that incorporates our networking equipment and a decrease in component supply chain inventories. Non-networking revenues declined 86% in the first nine months of 2003 compared to the first nine months of 2002. Our non-networking product is a single medical chip near end of life and we have not developed any new products of this type. Gross Profit($000,000) First Nine Months --------------------------- 2003 2002 Change Networking products $ 113.5 $ 98.7 15% Non-networking products 0.3 2.3 ( 86%) ---------------------------- Total gross profit $ 113.8 $ 101.0 13% ============================ Percentage of net revenues 64% 61% Total gross profit increased $12.8 million, or 13%, in the first nine months of 2003 compared to the same period a year ago. Networking gross profit for the first nine months of 2003 increased by $14.8 million from the first nine months of 2002. Networking gross profit as a percentage of networking revenues increased to 64% from 62% a year ago. This increase resulted from the following factors: * product material costs decreased, improving gross profit by 7 percentage points; * fixed manufacturing costs were allocated over a higher volume of shipments, improving gross profit by approximately 2 percentage points; 19 * a greater portion of our sales from higher volume but lower margin applications, reducing networking gross profit by approximately 4 percentage points; and * the average selling price of our high volume products decreased, reducing gross profit by 3 percentage points. Non-networking gross profit for the first nine months of 2003 decreased by $2.3 million from the first nine months of 2002 due to a reduction in sales volume. Operating Expenses and Charges ($000,000) First Nine Months ----------------------- 2003 2002 Change Research and development $ 90.9 $ 104.6 ( 13%) Percentage of net revenues 51% 63% Marketing, general and administrative $ 36.8 $ 49.6 ( 26%) Percentage of net revenues 21% 30% Amortization of deferred stock compensation: Research and development $ 0.3 $ 2.1 Marketing, general and administrative 0.4 0.2 ----------------------- Total $ 0.7 $ 2.3 ( 67%) ----------------------- Percentage of net revenues 0% 1% Restructuring costs $ 12.8 $ - 100% Research and Development and Marketing, General and Administrative Expenses: Our research and development, or R&D, expenses decreased by $13.7 million, or 13%, in the first nine months of 2003 compared to the same period a year ago due to the restructuring and cost reduction programs implemented in 2001 and January 2003. As a result of these restructuring and cost reduction initiatives, we reduced our R&D personnel and related costs by $4.4 million. Other R&D expenses decreased by $9.3 million, which was attributable to a $5.5 million decrease in depreciation due to property and equipment becoming fully depreciated and not replaced and to a $2.8 million decrease in product development tools and equipment as part of our cost reduction initiatives. Our marketing, general and administrative, or MG&A, expenses decreased by $12.8 million, or 26%, in the first nine months of 2003 compared to the same period a year ago. Of this decrease, $1.5 million was attributable to lower sales commissions due to reduced use of external sales representatives and a reduction in our internal sales force. The remainder was attributable to the restructuring and cost reduction programs implemented in 2003 and 2001, which reduced our MG&A personnel and related costs by $5.4 million and other MG&A expenses by $5.9 million compared to the first nine months of 2003. Included in the $5.9 million reduction in other MG&A expenses were a $3.1 million decrease in corporate communication and professional fees, $0.7 million decrease in depreciation due to property and equipment becoming fully depreciated and not being replaced, and $0.6 million reduction in facilities costs as a result of our restructuring activities. 20 Amortization of Deferred Stock Compensation We recorded a non-cash charge of $0.7 million for amortization of deferred stock compensation in the first nine months of 2003 compared to a $2.3 million charge in the same period a year ago. The decline is due to amortizing a continually declining balance of deferred stock compensation, without entering transactions that would have required us to record offsetting additions. Restructuring In response to the severe economic downturn in the semiconductor industry in 2001, we implemented two restructuring plans aimed at focusing development efforts on key projects and reducing operating costs. By the first quarter of 2003, we were still operating in a challenging economic climate, making it necessary for us to again streamline operations and announce a further restructuring. Our assessment of market demand for our products and the development efforts necessary to meet this demand were key factors in our decisions to implement these restructuring plans. Because end markets for our products had contracted to such a great degree, certain projects were curtailed in an effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer resources were required to support the reduced level of development and sales activities during this period. We have completed substantially all of the activities contemplated in the original restructuring plans, but have not yet disposed of all its surplus leased facilities as of September 28, 2003. During the third quarter of 2003, we recorded an additional $3.1 million for costs relating to facilities abandoned in our March 2001 restructuring plan. The continued downturn in real estate markets have resulted in higher expected costs than anticipated in the original plan. Payments made in connection with these leases in the nine months ended September 28, 2003 were $1.3 million. Efforts to exit these sites are ongoing, however, the payments related to these facilities could extend to 2010. During the first nine months of 2003, we paid out $116.4 million in connection with our October 2001 restructuring activities. We paid net cash of $102 million to terminate our rental commitment for Mission Towers Two, located in Santa Clara, CA by purchasing and then immediately reselling the facility. Upon settlement of the sale of Mission Towers Two, we reversed $4.5 million of related excess restructure provision. We have completed the restructuring activities contemplated in the October 2001 plan, but have not yet disposed of all of its surplus leased facilities as of September 28, 2003. The remainder of cash payments made in 2003 related to other facilities abandoned in the October 2001 restructuring. While we continue our efforts to exit the remaining sites, payments relating to these facilities could extend to 2009. In the first quarter of fiscal 2003, we implemented a corporate restructuring to further reduce operating expenses. The restructuring plan included the termination of approximately 175 employees and the closure of four product development centers in Maryland, Ireland and India. To date, we have recorded charges of $14.2 million in conjunction with this plan, including $7.2 million for workforce reduction, $4.4 million for lease exit and contract settlement costs, $1.5 million for asset write downs and $1.1 million to settle obligations in connection with the closure of development sites. The restructuring activities contemplated in this plan are substantially complete and we do not expect to have further material charges with respect to this restructuring. While we continue our efforts to exit the remaining sites, payments relating to these facilities could extend to 2006. We made cash payments of $9.0 million in the first nine months of 2003 in connection with this restructuring. As a result of this restructuring, we expect to save approximately $21 million of annual operating costs. 21 Interest and other income, net Net interest and other income was $0.2 million in the first nine months of 2003 compared to $4.1 million in the same period a year ago. The decrease in interest income resulted from declining cash and investment balances and declining reinvestment yields on our maturing longer term investments. Gain on extinguishment of debt During the first nine months of 2003, we recorded a gain of $1.7 million from the repurchase of $100 million face value of our convertible subordinated notes for $96.7 million and wrote off $1.6 million of related unamortized debt issue costs. Net gain on investments We had a net gain of $2.3 million from investments in the first nine months of 2003 compared to $3.1 million 2002. In 2003, we sold our remaining investment in Sierra Wireless Inc., a public company, resulting in a gain of $6.0 million that was partially offset by a $3.5 million charge for the impairment of a portion of our investments in non-public companies. We also sold long-term debt investments that resulted in a loss of $0.2 million. In the first nine months of 2002, we realized a $3.1 million gain on the sale of a portion of our investment in Sierra Wireless Inc. and another public company. Provision for income taxes We recorded a tax recovery of $5.7 million in the first nine months of 2003 relating to losses and tax credits generated in Canada, which will result in a recovery of taxes paid in prior periods. We have provided a valuation allowance on other deferred tax assets generated in the quarter because of uncertainty regarding their realization. Critical Accounting Estimates General Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect our reported assets, liabilities, revenue and expenses, and related disclosure of our contingent assets and liabilities. Our significant accounting policies are outlined in Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the period ended December 29, 2002, which also provides commentary on our most critical accounting estimates. The following estimates were of note during the first nine months of 2003. 22 Restructuring charges - Facilities In calculating the cost to dispose of our excess facilities, we had to estimate for each location the amount to be paid in lease termination payments, the future lease and operating costs to be paid until the lease is terminated, and the amount, if any, of sublease revenues. This required us to estimate the timing and costs of each lease to be terminated, the amount of operating costs for the affected facilities, and the timing and rate at which we might be able to sublease or complete negotiations of a lease termination agreement for each site. To form our estimates for these costs we performed an assessment of the affected facilities and considered the current market conditions for each site. During 2001, we recorded total charges of $155 million for the restructuring of excess facilities as part of restructuring plans. After elimination of the lease obligation related to Mission Towers Two during the third quarter, we performed a review of our assumptions relating to the remaining lease commitments using current market trends for the timing and rates to sublet or cancel the lease for each of the remaining facilities. Based on this analysis we determined that an additional charge of $3.1 million was required for facilities related to the March 26, 2001 restructuring due to further deterioration in facilities leasing markets, with the total estimate representing 66% of the estimated total future operating costs and lease obligations for the effected sites. For the facilities related to the October 18, 2001 restructuring we determined that we could lower the estimate to meet lease termination costs by $4.5 million and made an adjustment of that amount. The total remaining estimate represents 92% of the estimated total future operating costs and lease obligations for the effected sites. In the first quarter of 2003, we announced a further restructuring of our operations, which resulted in the closing of an additional four product development sites. Our current estimate of costs for the closing of all four sites represents just over 58% of the estimated total future operating costs and lease obligations for the effected sites. We believe our estimates of the obligations for the closing of sites remain sufficient to cover anticipated settlement costs. However, our assumptions on either the lease termination payments, operating costs until terminated, or the amounts and timing of offsetting sublease revenues may turn out to be incorrect and our actual cost may be materially different from our estimates. If our actual costs exceed our estimates, we would incur additional expenses in future periods. Business Outlook Forecasting our revenue outlook in the current economic climate remains difficult. Many of our customers delay ordering of our products until the last possible moment, and are still limiting their orders to the minimum required to produce equipment to meet specific customer demand. Our quarterly revenues may continue to vary considerably as our customers adjust to fluctuating demand for products in their markets. 23 We anticipate that our fourth quarter 2003 revenues will increase by 8% to 11% compared with the third quarter of 2003 resulting estimated revenues of $68 million to $70 million. Our estimate regarding fourth quarter revenues is based on orders already shipped at the date of this report, order backlog scheduled for shipment during the remainder of the quarter, and an estimate of new orders we expect to receive and ship before the end of the quarter (turns orders). We have estimated turns orders for the fourth quarter to be consistent with previous quarters of fiscal 2003. As our customers still do not place orders for delivery beyond our lead times, we are unable to estimate revenues beyond the fourth quarter of 2003. We expect aggregate spending on research and development (R&D) and marketing, general and administrative (MG&A) expenses to remain at the same level in the fourth quarter as the third quarter of 2003, as we have now implemented the restructuring program announced on January 16, 2003. We anticipate recording only non-material amounts related to the January 2003 restructuring in the fourth quarter. We expect our interest costs to exceed the interest income on our cash balances by $0.2 million as the yields we earn on our cash, short-term investments and long-term investments in bonds and notes continue to decline, while the interest rate associated with our convertible subordinated debt, the largest component of interest expense, is fixed. Liquidity & Capital Resources Our principal source of liquidity at September 28, 2003 was $405.2 million in cash and investments, which included $351.1 million in cash and cash equivalents, short-term investments and restricted cash and $54.1 million of long-term investments in bonds and notes, which mature within the next 12 to 27 months. In the first nine months of 2003, we used $99.5 million of cash for operating activities. Changes in working capital accounts included: o a $114.2 million reduction in accrued restructuring costs, primarily due to the settlement of a long-term lease obligation at a Santa Clara, CA. office facility; o an $11.8 million decrease in accounts payable and accrued liabilities, principally due to the settlement of $5.3 million of personnel related costs such as the employee stock purchase plan, accrued payroll and accrued vacation costs during third quarter of 2003, the payment of $3.1 million of accrued interest on our convertible subordinated notes in August 2003, and reduced operating expenses which has decreased our trade accounts payable balance; 24 o a $6.7 million reduction in inventories, as we continued our efforts to reduce our networking product inventories; and o a $2.3 million decrease in deferred income, as PMC product shipments by our major distributor exceeded PMC product shipments to our major distributor. In the first nine months of 2003 cash flows from our investment activities included: o the purchase of $167.1 million of long- and short-term debt investments; o cash proceeds of $459.5 million from the sale or maturities of short- and long-term debt investments; o cash proceeds of $8.4 million from the sale of the remainder of our investment in Sierra Wireless Inc., a public company; o cash proceeds of $15.2 million in wafer fabrication deposit refunds; o an investment of $10.5 million for the purchases of property and equipment; and In the first nine months of 2003 cash flows from our financing activities included: o cash proceeds of $22.8 million from the issuance of common stock under our equity-based compensation plans and o $96.7 million used to repurchase $100 million face value of our convertible subordinated notes. As of September 28, 2003, we had cash commitments made up of the following:
(in thousands) - --------------------------------------------------------------------------------------------------------------------------------- After Contractual Obligations Total 2003 2004 2005 2006 2007 2007 Operating Lease Obligations: Minimum Rental Payments $ 62,783 $ 2,944 $ 11,075 $ 9,475 $ 7,941 $ 7,536 $ 23,812 Estimated Operating Cost Payments 25,328 1,091 4,103 3,881 3,211 2,905 10,137 Long Term Debt: Principal Repayment 175,000 - - - 175,000 - - Interest Payments 19,689 - 6,563 6,563 6,563 - - Purchase Obligations 11,636 3,035 6,192 2,409 - - - ----------------------------------------------------------------------------------- 294,436 $ 7,070 $ 27,933 $ 22,328 $ 192,715 $ 10,441 $ 33,949 ====================================================================== Venture Investment Commitments (see below) 21,119 ----------- Total Contractual Cash Obligations $ 315,555 ===========
Subsequent to the end of the third quarter of 2003, we extended the lease agreement for our facility in Burnaby, Canada. This will increase the total commitments in the above table by $1.4 million, $2.2 million and $4.8 million for the years 2006, 2007 and 2008 respectively. In addition we sold a property held in Burnaby, Canada, for total proceeds of approximately $15.3 million. The proceeds consist of $ 12.7 million cash and a $ 2.6 million vendor take-back mortgage. The mortgage is non-interest bearing and is due on September 30, 2008. In 1999 and 2000 we established passive investments, like many of our peers, in four professionally managed venture funds as an opportunity to be kept abreast of technological and market developments in the rapidly evolving market in which we participate. From time to time these funds request additional capital. We have committed to invest an additional $21.1 million into these funds, which may be requested by the fund managers at any time over the next seven years. We have a line of credit with a bank that allows us to borrow up to $5.3 million provided we maintain eligible investments with the bank equal to the amount drawn on the line of credit. At September 28, 2003 we had committed $2.5 million under letters of credit as security for office leases. We are committed to semi-annual interest payments of approximately $3.3 million to holders of our convertible notes. These interest payments are due on February 15 and August 15 of each year, with the last payment of interest and $175 million in principal being due on August 15, 2006. 25 We believe that existing sources of liquidity will satisfy our projected restructuring, operating, working capital, venture investing, debt interest, capital expenditure and wafer deposit requirements through the end of 2003 and 2004. While we believe our current sources of liquidity will satisfy our long-term needs for capital, we operate in an industry that is subject to the rapid technological and economic changes. In addition, we contemplate mergers and acquisitions of other companies or assets as part of our business strategy. Consequently in the future we may determine that our sources of liquidity are insufficient and we may proceed with financing or other activities, which may dilute your investment or impact our liquidity and operating results. Recently issued accounting standards In May 2003, the Financial Accounting Standards Board (FASB) issued Statement No. 150 (SFAS No. 150), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities". SFAS No. 150 requires certain financial instruments that were accounted for as equity under previous guidance to now be accounted for as liability. SFAS No. 150 applies to mandatorily redeemable stock and certain financial instruments that require or may require settlement by transferring cash or other assets. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We have not issued any financial instruments that fall under the scope of SFAS No. 150. We adopted SFAS No. 150 in the third quarter of 2003. The adoption of this Statement has not had a material impact on our results of operations and financial position. In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," was issued. In general, this statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. We adopted SFAS No. 149 on July 1, 2003. The adoption of SFAS No.149 did not have material impact on our consolidated financial position or disclosures. In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.13, and Technical Corrections" was issued, rescinding SFAS 4, which required gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. We adopted SFAS 145 as of the beginning of fiscal 2003. Compliance with this standard resulted in the classification of the $1.7 million gain on extinguishment of debt in income from continuing operations in our consolidated statement of operations. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003 however, earlier adoption is permitted. We adopted FIN 46 in the third quarter of 2003. Adoption of this standard did not have a material effect on our results of operations, financial condition or disclosures. 26 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 securities to decline, and you may lose part or all of your investment. We are subject to rapid changes in demand for our products due to customer inventory levels, production schedules, fluctuations in demand for networking equipment and our customer concentration. As a result of these factors, we have very limited revenue visibility and the rate by which revenues are booked and shipped within the same reporting period is typically volatile. In addition, our net bookings can vary sharply up and down within a quarter. Our revenues may decline as our customers face unpredictable and volatile demand for their products. While some of our customers have reported that demand for some of their products has improved, demand may fluctuate from current levels depending on their customers' specific needs. Several of our customers' clients carefully manage their cash usage and expense levels, purchasing equipment which may generate a financial return on a shorter time horizon. The equipment to which our customers' clients shift may not incorporate, or may incorporate fewer, of our products. In response to the actual declines in networking equipment demand, many of our customers and their contract manufacturers have undertaken initiatives to significantly reduce expenditures and excess component inventories. Many platforms in which our products are designed have been cancelled as our customers cancel or restructure product development initiatives or as venture-financed startup companies fail. Our revenues may be materially and adversely impacted in future quarters if these conditions continue or worsen. Our customers' actions have reduced our visibility of future revenue streams. As most of our costs are fixed in the short term, a further reduction in demand for our products may cause a decline in our gross and net margins. While we believe that our customers and their contract manufacturers are consuming a portion of their inventory of PMC products, we believe that our revenues will continue to be affected by: variability in flat aggregate end market demand trends for our customers' products which include our components as well as seasonal variability in customer order patterns. We cannot accurately predict when demand for our products will strengthen or how quickly our customers will consume their inventories of our products. 27 We may fail to meet our demand forecasts if our customers cancel or delay the purchase of our products. Many of our customers have numerous product lines, numerous component requirements for each product, sizeable and complex supplier structures, and often engage contract manufacturers for additional manufacturing capacity. This makes forecasting their production requirements difficult and can lead to an inventory surplus of certain of their components. Our customers often shift buying patterns as they manage inventory levels, decide to use competing products, are acquired or divested, market different products, or change production schedules. Customers frequently request shipment of our products at less than our normal lead times. We may be unable to deliver products to customers when they require them if we incorrectly estimate future demand, and this may lead to higher fluctuations in shipments of our products. In addition, we believe that uncertainty in our customers' end markets and our customers' increased focus on cash management has caused our customers to delay product orders and reduce delivery lead-time expectations. This may increase the proportion of our revenues in future periods that will be from orders placed and fulfilled within the same period. This will decrease our ability to accurately forecast and may lead to greater fluctuations in operating results. We rely on a few customers for a major portion of our sales, any one of which could materially impact our revenues should they change their ordering pattern. We depend on a limited number of customers for a major portion of our revenues. Through direct, distributor and subcontractor purchases, Cisco Systems and Hewlett Packard each accounted for more than 10% of our third quarter 2003 revenues. We do not have long-term volume purchase commitments from any of our major customers. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities. The loss of a key customer, or a reduction in our sales to any key customer or our inability to attract new significant customers could materially and adversely affect our business, financial condition or results of operations. We anticipate lower margins on 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. 28 OEMs are becoming more price conscious than in the past as a result of the industry downturn, and as semiconductors sourced from third party suppliers comprise a greater portion of the total materials cost in OEM equipment. We have also experienced more aggressive price competition from competitors that wish to enter into the market segments in which we participate. These circumstances may make some of our products less competitive and we may be forced to decrease our prices significantly to win a design. We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition. In addition, our networking products range widely in terms of the margins they generate. A change in product sales mix could impact our operating results materially. Design wins do not translate into near-term revenues and the timing of revenues from newly designed products is often uncertain. We have announced a number of new products and design wins for existing and new products. While some industry analysts may use design wins as a metric for future revenues, many design wins do not generate revenues, as customer projects are cancelled or are not adopted by their end customers. In the event a design win generates revenue, the amount of revenue will vary greatly from one design win to another. Most revenue-generating design wins take greater than two years to generate meaningful revenue. Our restructurings have curtailed our resources and may have insufficiently addressed market conditions. On January 16th, 2003, we implemented plans to restructure our operations through a workforce reduction of approximately 175 employees and the shutdown of four of our product development sites. We recorded a charge of $14.2 million in the first nine months of 2003. While we expect to record only immaterial further costs in the fourth quarter of 2003, actual costs may exceed our estimates. We reduced the work force and consolidated or closed excess facilities in an effort to bring our expenses into line with our reduced revenue expectations. However, if revenues decline we may again incur net losses. Restructuring plans require significant management resources to execute and we may fail to achieve our targeted goals and our expected annualized savings. We may have incorrectly anticipated the demand for our products, we may be forced to restructure further or may incur further operating charges due to poor business conditions and some of our product development initiatives may be delayed due to the reduction in our development resources. Our revenues may decline if we do not maintain a competitive portfolio of products. 29 We are experiencing significantly greater competition from many different market participants as the market in which we participate matures. In addition, we are expanding into markets, such as the enterprise storage semiconductors and generic microprocessor markets, which have established incumbents with substantial financial and technological resources. We expect fiercer competition than that which we have traditionally faced as some of these incumbents derive a majority of their earnings from these markets. All of our competitors pose the following threats to us: As our customers design next generation systems and select the chips for those new systems, our competitors have an opportunity to convince our customers to use their products, which may cause our revenues to decline. We typically face competition at the design stage, where customers evaluate alternative design approaches requiring integrated circuits. Our competitors may have more opportunities to supplant our products in next generation systems because of the shortening product life and design-in cycles in many of our customers' products. In addition, as a result of the industry downturn, and as semiconductors sourced from third party suppliers comprise a greater portion of the total materials cost in OEM equipment, OEMs are becoming more price conscious than in the past. We have also experienced increased price aggressiveness from some competitors that wish to enter into the market segments in which we participate. These circumstances may make some of our products price-uncompetitive or force us to match low prices. We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition. We are facing additional competition from companies who have excess capacity and who are able to offer our OEM customers similar products to ours. Excess capacity, in tandem with the significant decrease in demand for OEM equipment, has created downward pricing pressure on our products. 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 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. Increasing competition in our industry will make it more difficult to achieve design wins. We face significant competition from three major fronts. First, we compete against established peer-group semiconductor companies that focus on the semiconductor markets that we target. These companies include Agere Systems, Applied Micro Circuits Corporation, Broadcom, Conexant Systems, Exar Corporation, Marvell Technology Group, Multilink Technology Corporation, Silicon Image, Transwitch and Vitesse Semiconductor. These companies are well financed, have significant communications semiconductor technology assets, have established sales channels, and are dependent on the market in which we participate for the bulk of their revenues. Other competitors include major domestic and international semiconductor companies, such as Agilent, Altera, Cypress Semiconductor, Intel, IBM, Infineon, Integrated Device Technology, Maxim Integrated Products, Motorola, Nortel Networks, Texas Instruments, and Xilinx. These companies are concentrating an increasing amount of their substantial financial and other resources on the markets in which we participate. This represents a serious competitive threat to us. 30 Emerging venture-backed companies also provide significant competition in our segment of the semiconductor market. These companies tend to focus on specific portions of our broad range of products and in the aggregate, represent a significant threat to our product lines. In addition, these companies could introduce disruptive technologies that may make our technologies and products obsolete. Over the next few years, we expect additional competitors, some of which may also have greater financial and other resources, to enter the market with new products. 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 evolving industry standards and customer specifications, which may prevent or delay future revenues. We sell products to a market whose characteristics include evolving industry standards, product obsolescence, and new manufacturing and design technologies. Many of the standards and protocols for our products are based on technologies that have not been widely adopted or ratified by one or more 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. Since many of the products we develop do not reach full production sales volumes for a number of years, we may incorrectly anticipate market demand and develop products that achieve little or no market acceptance. 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. Our products often must be redesigned because manufacturing yields on prototypes are unacceptable or customers redefine their products to meet changing industry standards or customer specifications. As a result, we develop products many years before volume production and may inaccurately anticipate our customers' needs. Our strategy includes broadening our business into the Enterprise, Storage and Consumer markets. We may not be successful in achieving significant sales in these new markets. The Enterprise, Storage and Consumer markets are already serviced by incumbent suppliers who have established relationships with customers. We may be unsuccessful in displacing these suppliers, or having our products designed into products for different market needs. In order to compete against incumbents, we may need to lower our prices to win new business, which could lower our gross margin. We may incur increased research, development and sales costs to address these new markets. If foreign exchange rates fluctuate significantly, our profitability may decline. 31 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. The US dollar has and may continue to devalue compared to the Canadian dollar. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we enter into foreign currency forward contracts. The contracts reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. In addition, this foreign currency risk management policy may not be effective in addressing long-term fluctuations since our contracts do not extend beyond a 12-month maturity. In addition, while all of our sales are denominated in US dollars, our customers' products are sold worldwide. Any further decline in the world networking markets could seriously depress our customers' order levels for our products. This effect could be exacerbated if fluctuations in currency exchange rates decrease the demand for our customers' products. We are subject to the risks of conducting business outside the United States to a greater extent than companies that 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 is conducted outside the United States. The geographic diversity of our business operations could hinder our ability to coordinate design and sales activities. If we are unable to develop systems and communication processes to support our geographic diversity, we may suffer product development delays or strained customer relationships. 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. We are exposed to the credit risk of some of our customers and we may have difficulty collecting receivables from customers based in foreign countries. Many of our customers employ contract manufacturers to produce their products and manage their inventories. Many of these contract manufacturers represent greater credit risk than our networking equipment customers, who generally do not guarantee our credit receivables related to their contract manufacturers. 32 In addition, international debt rating agencies have significantly downgraded the bond ratings on a number of our larger customers, which had traditionally been considered financially stable. Should these companies enter into bankruptcy proceedings or breach their debt covenants, our significant accounts receivables with these companies could be jeopardized. The complexity of our products could result in unforeseen delays or expenses and in undetected defects or bugs, which could adversely affect the market acceptance of new products and damage our reputation with current or prospective customers. Although we, and our customers and our suppliers rigorously test our products, our highly complex products regularly contain defects or bugs. We have in the past experienced, and may in the future experience, these defects and bugs. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to buy our products. This could materially and adversely affect our ability to retain existing customers or attract new customers. In addition, these defects or bugs could interrupt or delay sales to our customers. We may have to invest significant capital and other resources to alleviate problems with our products. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. Moreover, we would likely lose, or experience a delay in, market acceptance of the affected product or products, and we could lose credibility with our current and prospective customers. We may be unsuccessful in transitioning the design of our new products to new manufacturing processes. Many of our new products are designed to take advantage of new manufacturing processes offering smaller manufacturing geometries as they become available, as the smaller geometry products can provide a product with improved features such as lower power requirements, more functionality and lower cost. We believe that the transition of our products to smaller geometries is critical for us to remain competitive. We could experience difficulties in migrating to future geometries or manufacturing processes, which would result in the delay of the production of our products. Our products may become obsolete during these delays, or allow competitors' parts to be chosen by customers during the design process. Our business strategy contemplates acquisition of other companies or technologies, which could adversely affect our operating performance. Acquiring products, technologies or businesses from third parties is 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. 33 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. 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. The timing of revenues from newly designed products is often uncertain. In the past, we have had to redesign products that we acquired when buying other businesses, resulting in increased expenses and delayed revenues. This may occur in the future as we commercialize the new products resulting from acquisitions. We are passive investors in funds that in turn invest in early-stage private technology companies to gain access to emerging technologies. These companies possess unproven technologies and our investments may or may not yield positive returns. We currently have commitments to invest $21.1 million in such funds. In addition to consuming significant amounts of cash, these investments are risky because the technologies that these companies are developing may not reach commercialization. We may record an impairment charge to our operating results should we determine that these funds have incurred a non-temporary decline in value. 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 needed to develop high-speed networking products and related software. We do not have employment agreements in place with many of our key personnel. As employee incentives, we issue common stock options that generally have exercise prices at the market value at the time of grant and that are subject to vesting. The stock options we grant to employees are effective as retention incentives only if they have economic value. Our recent restructurings have significantly reduced the number of our technical employees. We may experience customer dissatisfaction as a result of delayed or cancelled product development initiatives. 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. We currently do not have the ability to accurately predict what products our customers will need in the future. Anticipating demand is difficult because our customers face volatile pricing and demand for their end-user networking equipment, our customers are focusing more on cash preservation and tighter inventory management, and because we supply a large number of products to a variety of customers and contract manufacturers who have many equipment programs for which they purchase our products. Our customers are frequently requesting shipment of our products earlier than our normal lead times. If we do not accurately predict what mix of products our customers may order, we may not be able to meet our customers' demand in a timely manner or we may be left with unwanted inventory. 34 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 limited sources of wafer fabrication, the loss of which could delay and limit our product shipments. We do not own or operate a wafer fabrication facility. Three outside foundries in Asia supply greater than 90% 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 that 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 our products 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 our products are designed. We depend on third parties in Asia for assembly of our semiconductor products that 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 that, in turn, may result in the loss of revenues. We have less control over delivery schedules, assembly processes, quality assurances and costs than competitors that do not outsource these tasks. Severe acute respiratory syndrome, or SARS, may disrupt our wafer fabrication or assembly manufacturers located in Asia which could adversely impact our ability to ship orders, reducing our revenues in that quarter 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. 35 From time to time, we become defendants in legal proceedings about which we are unable to assess our exposure and which could become significant liabilities upon judgment. We become defendants in legal proceedings from time to time. Companies in our industry have been subject to claims related to patent infringement and product liability, as well as contract and personal claims. We may not be able to accurately assess the risk related to these suits, and we may be unable to accurately assess our level of exposure. These proceedings may result in material charges to our operating results in the future if our exposure is material and if our ability to assess our exposure becomes clearer. 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. 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. Although we have neither received any material claims relating to the infringement of patents or other intellectual property rights owned by third parties nor are we aware of any such potential claims, we, and our customers or suppliers, may be accused of infringing on patents or other intellectual property rights owned by third parties in the future. 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. 36 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. 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 have significantly increased our debt level as a result of the sale of convertible subordinated notes. We currently owe $175 million in convertible subordinated notes. Our debt could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. On August 15, 2006, we are obliged to repay the full remaining principal amount of the notes that have not been converted into our common stock. Securities we issue to fund our operations could dilute your ownership. We may decide 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 that are favorable to you or us. 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 significantly. In particular, our stock price declined significantly in the context of announcements made by us and other semiconductor suppliers of reduced revenue expectations and of a general slowdown in the markets we serve. Given these general economic conditions and the reduced demand for our products that we have experienced, we expect that our stock price will continue to be volatile. In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis. 37 Securities class action litigation has often been instituted against a company following periods of volatility and decline in the market price of their securities. If instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of our management's attention and resources and have a material adverse effect on our business, financial condition and operating results. We could be required to pay substantial damages, including punitive damages, if we were to lose such a lawsuit. Provisions in our charter documents and Delaware law and our adoption of a stockholder rights plan may delay or prevent acquisition of us, which could decrease the value of our common stock. Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Although we believe these provisions of our certificate of incorporation and bylaws and Delaware law and our stockholder rights plan will provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders. We adopted a stockholder rights plan in 2001, pursuant to which we declared a dividend of one share purchase right for each outstanding share of common stock. If certain events occur, including if an investor tenders for or acquires more than 15% of our outstanding common stock, stockholders (other than the acquirer) may exercise their rights and receive $650 worth of our common stock in exchange for $325 per right, or we may, at our option, issue one share of common stock in exchange for each right, or we may redeem the rights for $0.001 per right. 38 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. Cash Equivalents, Short-term Investments and Investments in Bonds and Notes: We regularly maintain a short and long term investment portfolio of various types of government and corporate bonds and notes. Our investments are made in accordance with an investment policy approved by our Board of Directors. Maturities of these instruments are less than 30 months with the majority being within one year. To minimize credit risk, we diversify our investments and select minimum ratings of P-1 or A by Moody's, or A-1 or A by Standard and Poor's, or equivalent. We classify these securities as available-for-sale and they are held at fair market value. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate and credit rating risk. Fixed rate securities may have their fair market value adversely impacted because of a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. In addition, the value of all types of securities may be impaired if bond rating agencies decrease the credit ratings of the entities which issue those securities. Due in part to these factors, our future investment income may fall short of expectations because of changes in interest rates, or we may suffer losses in principal if we were to sell securities that have declined in market value because of changes in interest rates or a decrease in credit ratings. We do not use derivative financial instruments to reduce or eliminate our exposure to changes in interest rates or credit ratings. Based on a sensitivity analysis performed on the financial instruments held at September 28, 2003, the impact to the fair value of our investment portfolio by an immediate hypothetical parallel shift in the yield curve of plus or minus 50, 100 or 150 basis points would result in a decline or increase in portfolio value of approximately $0.8 million, $1.4 million and $2.1 million respectively. Other Investments: Our other investments also include numerous strategic investments in privately held companies or venture funds that are carried on our balance sheet at cost, net of write-downs for non-temporary declines in market value. We expect to make additional investments like these in the future. These investments are inherently risky, as they typically are comprised of investments in companies and partnerships that are still in the start-up or development stages. The market for the technologies or products that they have under development is typically in the early stages, and may never materialize. We could lose our entire investment in these companies and partnerships or may incur an additional expense if we determine that the value of these assets have been impaired. 39 Foreign Currency Our sales and corresponding receivables are made primarily in United States dollars. We generate a significant portion of our revenues from sales to customers located outside the United States including Canada, Europe, the Middle East and Asia. We are subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. Through our operations in Canada and elsewhere outside the United States, we incur research and development, customer support costs and administrative expenses in Canadian and other foreign currencies. We are exposed, in the normal course of business, to foreign currency risks on these expenditures. In our effort to manage such risks, we have adopted a foreign currency risk management policy intended to reduce the effects of potential short-term fluctuations on our operating results stemming from our exposure to these risks. As part of this risk management, we enter into foreign exchange forward contracts on behalf of our foreign subsidiaries. These forward contracts offset the impact of U.S. dollar currency fluctuations on forecasted cash flows or firm commitments. We limit the forward contracts operational period to 12 months or less and we do not enter into foreign exchange forward contracts for trading purposes. Because we do not engage in foreign exchange risk management techniques beyond these periods, our cost structure is subject to long-term changes in foreign exchange rates. At September 28, 2003, the Company had two currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these two contracts was $26.9 million and the contract had a fair value of $0.8 million as of September 28, 2003. A 10% shift in foreign exchange rates would not have materially impacted our other income because our foreign currency net asset position was immaterial. Item 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures Our chief executive officer and our chief financial officer evaluated our "disclosure controls and procedures" (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934 (the "Exchange Act") as of of the end of the period covered by this quarterly report. They concluded that as of the evaluation date, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Changes in internal controls There was no change in our internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 40 Part II - OTHER INFORMATION Item 5. Other Information Stock Option Plans Our equity-based compensation program is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. We currently grant stock options from two plans: 1994 Incentive Stock Plan and 2001 Stock Option Plan. The majority of options granted under these plans generally vest over four years and have a maximum term of ten years. The following table summarizes the activity under all of our stock option plans for the first nine months of 2003:
Number of Weighted Average Shares Available Options Exercise Price (in thousands, except per share amounts) for Options Outstanding Per Share - ---------------------------------------------------------------------------------------------------- Balance at December 31, 2002 30,857 11,145 $ 9.51 Additional shares reserved (1) 18,372 - - Granted (2) (17,594) 17,594 $ 6.02 Exercised - (2,921) $ 5.21 Cancelled and available for regrant 1,614 (1,614) $ 12.07 - ---------------------------------------------------------------------------------------------------- Balance at September 28, 2003 33,248 24,204 $ 7.38 =========================================================
(1) On January 1, 2003, 8.4 million shares were automatically authorized for issuance under the "evergreen" provisions in the 1994 Incentive Stock Plan. On June 9, 2003, 10 million additional shares were authorized for issuance under the company's 2001 Stock Option Plan. (2) On September 26, 2002, we cancelled options to purchase approximately 19.3 million shares of common stock with a weighted average exercise price of $35.98. In exchange for these stock options and pursuant to the terms and conditions set forth in our Voluntary Stock Option Exchange Offer, we granted options to purchase approximately 16.6 million shares of common stock on March 31, 2003 with an exercise price of $5.95, which was the closing price of our stock on the grant date. In the first 9 months of 2003, we also granted options to purchase approximately 1 million shares primarily to new employees. 41 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - o 11.1 Calculation of income (loss) per share (1) o 10.1 Sixth Amendment to Building Lease Agreement between PMC-Sierra, Ltd. and Production Court Property Holdings Inc. o 10.2 Agreement for Purchase and Sale of Real Property between WHTS Freedom Circle Partners II, L.L.C. and PMC-Sierra, Inc. o 10.3 Agreement for Purchase and Sale of Real Property between PMC-Sierra, Inc. and WB Mission Towers, L.L.C. o 31.1 Certification of Chief Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002 o 31.2 Certification of Chief Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002 o 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) o 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) (b) Reports on Form 8-K - - On October 16, 2003, we furnished a Current Report on Form 8-K to announce our third quarter results. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PMC-SIERRA, INC. (Registrant) Date: November 7, 2003 /s/ Alan F. Krock ---------------- --------------------------------- Alan F. Krock Vice President, Finance Chief Financial Officer and Principal Accounting Officer - -------- (1) Refer to Note 8 of the financial statements included in Item I of Part I of this Quarterly Report. 42 EX-10 3 exhibit10_1.txt EXHIBIT 10.1 - SIXTH AMENDMENT SIXTH AMENDMENT OF LEASE THIS SIXTH AMENDMENT is dated October 1, 2003 BETWEEN: PRODUCTION COURT PROPERTY HOLDINGS INC., a body corporate carrying on business at Vancouver, British Columbia, (the "Landlord") - AND - PMC-SIERRA, LTD., a body corporate carrying on business at 8555 Baxter Place, Burnaby, British Columbia, V5A 4N3 (the "Tenant") WHEREAS the Landlord and Tenant are parties to a certain Lease Agreement dated as of May 15, 1996 and amended by Amendments of Lease dated as of January 1, 1997, November 1, 1999, August 11, 2000, April 17, 2001 and May 8, 2001 and supplemented by a Satellite Dish Agreement dated January 22, 2001 (collectively, the "Lease"), pursuant to which the Tenant is leasing and occupying certain premises in the Landlord's buildings at 8555 Baxter Place ("8555 Baxter"), 2700 Production Way ("2700 Production") and 8525 Baxter Place ("8525 Baxter"), all in Burnaby, British Columbia (collectively, "Production Court"); IN CONSIDERATION OF the covenants and agreements in this Sixth Amendment and for other good and valuable consideration the receipt and sufficiency whereof each of the parties hereby acknowledges, the Landlord and the Tenant hereby agree each with the other as follows: 1. 8555 BAXTER PLACE (a) The Tenant is now in possession of all of the rentable premises in 8555 Baxter, leasing all of said premises until May 14, 2006, subject to earlier termination by the Landlord pursuant to the Lease. (b) Subsection (a) of Article 15.11 of the Lease provided the Tenant with certain options to renew the rentable premises in 8555 Baxter. (c) This Sixth Amendment is deemed to exhaust those options to renew. Therefore, there are no further rights to be exercised under Article 15.11 of the Lease. (d) The Tenant agrees to adjust its Base Rent effective October 1, 2003 in exchange for an extension of the Term. The following chart summarizes the Rentable Area, current Base Rent rate per square foot of Rentable Area commencing October 1, 2003, the increase thereof commencing October 1, 2008, current monthly Base Rent commencing October 1, 2003, the increase thereof commencing October 1, 2008 and the expiration date applicable to the Tenant's occupancy in 8555 Baxter:
--------------------- --------------------------- ----------------------------- -------------------------- Base Rent per Square Foot Rentable Area of Rentable Area Monthly Base Rent Expiration Date --------------------- --------------------------- ----------------------------- -------------------------- 134,161 01/10/03-30/09/08 01/10/03-30/09/08 $15.17 169,601.85 --------------------- --------------------------- ----------------------------- -------------------------- 01/10/08-30/09/13 01/10/08-30/09/08 September 30, 2013 $16.00 178,881.33 --------------------- --------------------------- ----------------------------- --------------------------
(e) The Landlord shall provide a one time only inducement to the Tenant of $4,200,000 (the "Inducement"). The Inducement shall be paid on October 1, 2003 subject to the following conditions having been satisfied: (1) the Tenant being in good standing under the Lease; and (2) the Tenant continuing to be in occupancy of the Leased Premises. (f) At any time after March 31, 2007, the Tenant may give the Landlord written notice that it elects (without cause) to terminate the Lease effective the eighteenth (18th) month following the date of such notice conditional upon payment 30 days prior to the effective date of the termination of a termination fee equal to the unamortized portion of the Inducement provided for in Section 1(f), utilizing an 8% discount rate based on an 88 month term commencing June 1, 2006, with no interest accruing to the Inducement for the period from October 1, 2003 to June 1, 2006. (g) The Tenant shall not be responsible for paying any fees or commissions in respect of the extension of the Lease pursuant to this Section 1. 2. 8525 BAXTER PLACE The Landlord and Tenant acknowledge and agree that: (a) The Tenant shall have the right to terminate the Lease as it relates to Suite #103A at 8525 Baxter effective at any time upon 3 months written notice to the Landlord. 3. 2700 PRODUCTION WAY The Landlord and Tenant acknowledge and agree that: (a) The Tenant shall surrender Suites #500 and #600 at 2700 Production effective September 30, 2003 and the Tenant shall be released of all obligation to pay Rent with respect thereto from October 1, 2003 to the date that the lease of such Premises would otherwise have expired on December 31, 2003. 4. GENERAL (a) Except as otherwise provided herein, each capitalized term used in this Sixth Amendment, not defined in this Sixth Amendment, and defined in the Lease, has the meaning herein ascribed to it in the Lease. (b) Except as modified hereby, the Lease remains unchanged, and as modified hereby the Lease continues in full force and effect, time still being of the essence. The Landlord and the Tenant hereby confirm and ratify the Lease as modified hereby. (c) This Sixth Amendment contains the entire agreement between the parties in connection with the extension of the Lease as it relates to 8555 Baxter, the Tenant's right to terminate the lease as it relates to 8525 Baxter, the Tenant's surrender the Lease as it relates to 2700 Production and the Tenant's right to enter a new lease with respect to 3100 Production Way in Burnaby, B.C. (which last mentioned right the parties have mutually agreed not to set forth in a binding agreement), and this Sixth Amendment replaces that certain letter of intent entered into between the Tenant through its agent and the Landlord dated August 1, 2003. (d) This Sixth Amendment may be signed in counterparts and delivered by fax. (e) This Sixth Amendment will enure to the benefit of and be binding upon the Landlord and the Tenant and their respective successors and permitted assigns. IN WITNESS WHEREOF the Landlord and the Tenant have executed this Sixth Amendment effective as of the date and year first above written. PRODUCTION COURT PROPERTY HOLDINGS INC. PMC-SIERRA, LTD. ____________________________________ _________________________________ Authorized Signatory Authorized Signatory ____________________________________ _________________________________ Authorized Signatory Authorized Signatory EX-10 4 exhibit10_2.txt EXHIBIT 10.2 - AGREEMENT PURCHASE & SALE AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY BY AND BETWEEN WHTS FREEDOM CIRCLE PARTNERS II, L.L.C., a Delaware limited liability company, AS SELLER AND PMC-SIERRA, INC., a Delaware corporation, AS BUYER DATED JULY 2, 2003 PROPERTY LOCATED AT: 3985 FREEDOM CIRCLE SANTA CLARA, CALIFORNIA AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY THIS AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY (the "Agreement") is dated as of the 2nd day of July, 2003 (the "Contract Date"), by and between WHTS FREEDOM CIRCLE PARTNERS II, L.L.C., a Delaware limited liability company ("Seller"), and PMC-SIERRA, INC., a Delaware corporation ("Buyer"). RECITALS WHEREAS, Seller desires to cause the sale, assignment and transfer of its interests in and to the Property (as hereinafter defined) to Buyer and Buyer desires to purchase such interests from Seller upon the terms of this Agreement. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer hereby agree as follows: 1. Definitions. Unless the context otherwise specifies or requires, for the purposes of this Agreement all words and phrases having their initial letters capitalized herein shall have the meanings set forth below: "Adjacent Property" shall mean the real property owned by WHTS Freedom Circle Partners, L.L.C., a Delaware limited liability company, commonly known as 3975 Freedom Circle, Santa Clara, California, and more particularly described in Exhibit R to this Agreement. "Buyer Party" shall mean one unaffiliated third party designated by Buyer prior to the Scheduled Closing Date. "Closing Certificate" will be the WHTS Closing Certificate to be delivered to Buyer on the Closing Date in the form of Exhibit O. "Closing Date" shall mean the date of recordation of the Deed. "Closing Documents" shall mean the Closing Certificate, the Parking Easement Agreement, the Reliance Letter, and the Development Indemnity Agreement and, if applicable, the WHTS Modification Indemnity. "Contingency Period" shall mean the period commencing on the Contract Date and terminating at 5:00 p.m. Pacific Time on July 2, 2003. "Contract Date" shall mean May 12, 2003. "Development Indemnity Agreement" shall mean a Development Indemnity Agreement in the form set forth in attached Exhibit S, to be executed and recorded in the office of the Santa Clara County Clerk Recorder, on or prior to the Closing Date, by Seller and WHTS Freedom Circle Partners, L.L.C. a Delaware limited liability company (as the owner of the Adjacent Property). "Environmental Insurance Policy" shall mean an insurance policy acceptable to Buyer insuring against loss and liability as a consequence of the presence of legionella bacteria in the Property after the Closing Date in such form and from such insurer and with such coverages, deductibles, and exclusions as Buyer shall approve during the Contingency Period and insuring Buyer and such other parties as Buyer shall designate during the Contingency Period as additional insureds. "Environmental Laws" shall mean any and all federal, state and local laws, statutes, rules, regulations, requirements under permits issued with respect thereto, and other requirements of any federal, state or local governmental agency, court, board, bureau or other authority having jurisdiction with respect to or relating to the environment, to any Hazardous Substance or to any activity involving Hazardous Substances, and shall include, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601, et seq., the Federal Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.) and all amendments thereto in effect as of the Closing Date. "Hazardous Substances" shall mean and include any chemical, compound, material, mixture, waste or substance that is defined or listed in, or otherwise classified pursuant to, any Environmental Laws as a "hazardous substance," "hazardous material," "hazardous waste," "extremely hazardous waste," "infectious waste," "toxic substance," "toxic pollutant" or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, or toxicity including any petroleum, natural gas, natural gas liquids, liquified natural gas, or synthetic gas usable for fuel (or mixture of natural gas and such synthetic gas) and including legionella bacteria. "Hazardous Substances" shall include, without limitation, any hazardous or toxic substance, material or waste or any chemical, compound or mixture which is (i) asbestos, (ii) designated as a "hazardous substance" pursuant to Section 1317 of the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), (iii) defined as a "hazardous waste" pursuant to Section 6903 of the Federal Resource Conservation and Recovery Act, (42 U.S.C. Section 6901 et seq., (iv) defined as "hazardous substances" pursuant to Section 9601 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq.), or (v) listed in the United States Department of Transportation Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR part 302); or in any and all amendments thereto in effect as of the Closing Date; or such chemicals, compounds, mixtures, substances, materials or wastes otherwise regulated under any applicable local, state or federal Environmental Laws. "Hillmann" shall mean Hillmann Environmental Company, Inc., now known as Hillmann Environmental Group. "Improvements" shall mean all improvements and fixtures now or hereafter located on the Land including, without limitation, the twelve (12) story building (the "Building") constructed on the Land, together with all appurtenances thereto and all apparatus, equipment and appliances located on the Land and owned by Seller and used in connection with the operation and occupancy thereof such as systems or facilities for heating, ventilation, air conditioning, climate control, utility services, parking services, garbage disposal, irrigation and/or recreation, and all landscaping. "Intangible Property" shall mean Seller's rights, title and interests in: (a) any and all transferable or assignable permits, building plans and specifications, certificates of occupancy, operating permits, sign permits, development rights and approvals, certificates, licenses, warranties and guarantees, trade names, service marks, engineering, soils, pest control and other reports relating to the Property, tenant lists, advertising materials, and telephone exchange numbers identified with the Property; and (b) all other transferable intangible property, miscellaneous rights, benefits or privileges of any kind or character with respect to the Property. "Land" shall mean the real property commonly known as 3985 Freedom Circle, Santa Clara, California, and more particularly described in Exhibit A to this Agreement, and all rights and interests appurtenant thereto, including but not limited to rights under the Parking Easement Agreement and all other easements, riparian or other water rights, rights of way and other interests appurtenant thereto, and all right, title and interest of Seller in and to any land lying in the bed of any street, road, highway or avenue, open or proposed, in front of, adjacent to or adjoining such real property and in all strips and gores. "Laws and Restrictions" shall mean all applicable federal, state, local and other laws, statutes, regulations, codes, orders, ordinances and rules including, without limitation, those relating to fire, safety, land use, subdivision, health, labor, environmental protection, seismic design, conservation, parking, handicapped access, zoning and building, and all restrictive covenants (if any), other title encumbrances and other obligations affecting the Property, all Environmental Laws, all applicable provisions of the Fair Housing Act of 1968 and the Americans With Disabilities Act of 1990, and all amendments thereto. "Material Exception" is defined in Section 4(c)(viii). "PMC Lease" shall mean that certain lease dated July 20, 2000 between Seller, as landlord and PMC-Sierra, Inc., as tenant (the "Tenant"), as amended by First Amendment to Lease dated November 6, 2000. "Parking Easement Agreement" shall mean that certain Easement Agreement dated July 6, 2000, and recorded on September 22, 2000 as Document No. 15400202 in the office of the Santa Clara County Clerk Recorder, as amended by First Amendment dated October 31, 2000, recorded as Document No. 15445030 on November 2, 2000, by and between Seller and WHTS Freedom Circle Partners, L.L.C., as the same shall be amended and restated (and recorded in the office of the Santa Clara County Clerk Recorder) on the Closing Date as set forth in attached Exhibit J. "Permitted Exceptions" shall mean the exceptions to title identified as items 1 through 16, inclusive, on Schedule B Part 2 of the Title Commitment attached hereto as Exhibit I. "Personal Property" shall mean all personal property now or hereafter owned by Seller, which is used in connection with the Land, the Improvements and/or the Intangible Property or the ownership or operation thereof including, without limitation, all furniture, fixtures, machinery, appliances and equipment located on the Property, other than personal property owned by tenants of the Property. A list of the Personal Property is attached hereto as Exhibit C. "Property" shall mean collectively the Land, the Improvements, the Personal Property, and the Intangible Property and all of Seller's interest, as landlord, in and to the PMC Lease. "Reliance Letter" shall mean the letters in the form of Exhibit Q attached hereto and duly signed by Hillmann. "Scheduled Closing Date" shall mean July 7, 2003. "Title Commitment" shall mean that title commitment issued by the Title Company for an ALTA Extended Coverage Owner's Policy of Title Insurance (Form B, Rev. 10/17/70), and including a commitment for the following endorsements: CLTA endorsements numbered 100 (modified) 100.6, 103.4, 103.7, 116, 116.1, 116.4, 116.7 and 123.2, a "Fairway" endorsement, and a "separate tax parcel" endorsement, which is attached hereto as Exhibit I. "Title Company" shall mean First American Guaranty Company whose address for this transaction is as follows: First American Guaranty Company 1737 North First Street, Suite 100 San Jose, California 95112 Attn: Mike Hickey Fax No. (408) 451-7836 "Title Policy" is defined in Section 4(c)(i). "WHTS Modification Indemnity" shall mean a WHTS Modification Indemnity in the form set forth in attached Exhibit T as described in Sections 4(c)(viii) and (ix). 2. Purchase And Sale. Seller agrees to sell the Property to Buyer, and Buyer agrees to purchase the Property from Seller, on all of the terms, covenants and conditions set forth in this Agreement. 3. Purchase Price. The total purchase price for the Property (the "Purchase Price") shall be the sum of $133,000,000 which, subject to all prorations and adjustments provided in this Agreement, shall be paid by Buyer to Seller through escrow on the Closing Date as follows: 3.1 Deposit. Prior to the expiration of the Contingency Period, provided Buyer does not elect to terminate this Agreement in accordance with Section 4 below, Buyer shall deposit with the Title Company the amount of $2,000,000 (the "Deposit"), which sum the Title Company shall deposit in a federally insured interest-bearing "money market" account at a financial institution reasonably acceptable to Seller and Buyer with the interest from such account to be credited to Buyer. 3.2 Cash Payment. The balance of Purchase Price shall be paid to Seller by wire transfer in immediately available federal funds on the Closing Date. 4. Review And Inspection; "As-Is" Purchase; Conditions To Agreement. (a) Review And Inspection. During the Contingency Period, Buyer and, if applicable, any Buyer Party designated by Buyer prior to the close of escrow, shall have the right to conduct, at its sole cost and expense, such investigations, studies, surveys, analyses and tests on and of the Property as it shall, in its sole discretion, determine are necessary or desirable, including, without limitation, soil tests, environmental audits and studies, and make such evaluations as Buyer may, in its sole and absolute discretion, determine are necessary or desirable under the circumstances, provided that (i) Buyer and any such Buyer Party shall only have the right to conduct soils and groundwater tests and borings regarding the environmental condition of the Property with the Seller's prior written consent, which shall not be unreasonably withheld or delayed, (ii) Buyer shall maintain, or in the case Buyer Party is the entering party, cause Buyer Party to maintain, a Three Million Dollar ($3,000,000) combined, single limit, comprehensive general commercial liability insurance policy with respect to the Property, issued by a licensed insurance company naming Seller and Seller's property manager as additional insureds; and (iii) Buyer shall defend, indemnify, protect and hold Seller and the Property and Seller's affiliates, members, subsidiaries, officers, directors and agents harmless from and against any loss, cost, damage, or expense (including without limitation, reasonable attorneys' fees) incurred by Seller as a result of property damage, personal injury, or mechanics' liens, to the extent arising out of Buyer's or Buyer Party's inspections of the Property and Improvements. Without limiting the generality of the foregoing, Buyer agrees to pay Seller, or cause a Buyer Party to pay Seller, upon demand, the cost of repairing and restoring any damage or disturbance which Buyer, Buyer Party or their respective agents or contractors cause to the Property. Notwithstanding the foregoing, Buyer Party shall have no liability for the discovery of any matters in, on, at, or relating to the Property. The indemnity contained in this Section 4(a) shall survive the close of escrow or termination of this Agreement. In order to perform the foregoing investigations, during the Contingency Period, Buyer, Buyer Party (if applicable), their respective potential lenders, and the agents, contractors, and employees for said parties, shall have reasonable access to the Property, all for the purposes of inspecting the same and conducting tests, inspections, and analyses thereon and making evaluations thereof, all at the Buyer's, or Buyer Party's (if applicable), expense. In particular, Buyer and Buyer Party shall be permitted to conduct the borings, drillings, soils tests and groundwater tests described on Exhibit N attached hereto. Buyer and Buyer Party shall not be permitted to conduct any other borings, drillings, soils tests, or groundwater tests on the Property in connection with the preparation of an environmental audit or in connection with any other inspection of the Property without the prior written reasonable consent of Seller. Buyer or Buyer Party, as the case may be, shall schedule and coordinate all inspections, including, without limitation, any environmental tests, with Seller and shall give Seller at least one (1) business day's prior notice of such test. Seller shall be entitled to have a representative present at all times during each such inspection. Seller has made available to Buyer the documents, plans, studies (environmental or otherwise) and reports listed on Exhibit M attached hereto. Except as expressly provided to the contrary in the Seller Certificate or this Agreement, Seller makes no representation or warranty relating to the validity of such information and Buyer (or Buyer Party as the case may be) is responsible to verify such information at its discretion. In conducting the inspection of the Property, Buyer shall at all times comply with all laws and regulations of all applicable governmental authorities, and Buyer shall not contact or have any discussions with any of Seller's employees, agents or representatives, or with any contractors providing services to the Property unless in each case Buyer obtains the prior consent of Seller, which consent shall not be unreasonably withheld, it being agreed that all such contacts or discussions shall, pending any such approval, be directed to Carl Shannon ((415) 536-1850). (b) Termination During Contingency Period. Buyer may, at any time during the Contingency Period, for any reason or no reason, (i) terminate this Agreement by delivering to Seller its written notice of termination prior to the expiration of the Contingency Period, or (ii) waive its right to terminate this Agreement by, prior to the expiration of the Contingency Period, (a) waiving its termination right in writing and delivering such waiver to Seller, and (b) timely delivering the Additional Deposit to the Title Company. In the event Buyer (1) fails to provide a written waiver of its right to terminate in accordance with the foregoing no later than 5 p.m. Pacific Time on the last day of the Contingency Period, or (2) fails to deposit the Additional Deposit with the Title Company no later than 5 p.m. Pacific Time on the last day of the Contingency Period, then this Agreement shall automatically terminate. In the event of any automatic termination or other termination by Buyer pursuant to this Section 4(b), (x) the Initial Deposit and all other funds deposited in escrow by Buyer and all interest accrued on such funds (less Buyer's share of any escrow and title cancellation fees) shall be returned immediately to Buyer, (y) all documents deposited in escrow by Buyer or Seller shall be returned to the depositing party, and (z) Buyer shall promptly deliver to Seller, at no cost to Seller, and without representation or warranty, the originals or copies of all tests, reports and inspections of the Property, which do not restrict such delivery to a third party, made and conducted by Buyer, Buyer Party or for Buyer's benefit or for Buyer Party's benefit which are in the possession or control of Buyer and promptly return to Seller copies of all materials delivered by Seller to Buyer and shall destroy all copies and abstracts thereof, and except for this Section 4(b) and the provisions of this Agreement that expressly survive the termination of this Agreement, this Agreement shall be null and void and of no further force and effect, and neither Seller nor Buyer shall have any further rights or obligations hereunder. (c) Conditions Precedent. Buyer's obligation to purchase the Property shall be conditioned expressly upon the fulfillment of each of the following conditions precedent on or before the Closing Date: (i) The issuance by the Title Company, or the irrevocable binding commitment of the Title Company to issue, on the Closing Date, conditioned only upon payment of the Title Company's regularly-scheduled premium, the title policy ("Title Policy") described in the Title Commitment, including the endorsements described in the Title Commitment, insuring fee simple absolute title to the Property, free and clear of all liens and encumbrances except for the Permitted Exceptions. (ii) Subject to Section 8 of this Agreement, there shall have been no material adverse change in the condition of the Property or any portion thereof. (iii) There are no contracts, other than the PMC Lease, the Permitted Exceptions, and any other agreements approved in writing by Buyer, which will affect the Property or be binding upon Buyer on or after the Closing Date. (iv) From and after the Contract Date, Seller has not failed in any material respect to perform the items described in clauses (i) through (vi) of Section 5.3(a) below. (v) From and after the Contract Date, Seller has not removed or permitted the removal of any Personal Property or any fixtures from the Property except to the extent such items were replaced with Personal Property or fixtures of equal or greater value. (vi) The execution, acknowledgement, and delivery by Seller and the owner of the Adjacent Property of an Amended and Restated Parking Easement Agreement in the form attached hereto as Exhibit J, the recordation thereof in the office of the Santa Clara County Clerk Recorder and the recorded subordination thereto by the holder of any deed of trust or other foreclosable document or instrument currently encumbering the Adjacent Property, all on or prior to the Closing Date. (vii) The execution and delivery by Hillmann to Buyer and Buyer Party (if applicable) of the Reliance Letter. (viii) The execution and delivery to Buyer of the Closing Certificate. Notwithstanding the foregoing, if Seller includes any matter on Schedule 2 to the Closing Certificate and all matters on Schedule 2 to the Closing Certificate, when taken together, constitute a "Material Exception" (as hereinafter defined), Buyer shall have the right to terminate this Agreement. Upon any such termination, the Deposit will be returned by the Title Company to Buyer (and Seller shall so instruct the Title Company) and, subject to the provision for reimbursement of expenses under certain circumstances set forth in this Section 4(c)(viii), this Agreement shall terminate and be of no further force or effect, except for those provisions that expressly survive the termination hereof. If this Agreement is not so terminated by Buyer, then Seller and Buyer shall consummate this transaction in accordance with this Agreement. If Seller includes any matter on Schedule 2 to the Closing Certificate, but all of the matters on Schedule 2 to the Closing Certificate do not in the aggregate constitute a Material Exception, then (1) Buyer shall have no right to terminate this Agreement pursuant to this Section 4(c)(viii), (2) the additional condition precedent described in Section 4(c)(ix) shall apply, and (3) subject to the terms and conditions of this Agreement, Seller and Buyer shall consummate this transaction without any abatement in the Purchase Price as a result of that matter (so long as the condition precedent described in Section 4(c)(ix) is satisfied). Furthermore, if Buyer terminates this Agreement pursuant to this Section 4(c)(viii) and a matter set forth on Schedule 2 to the Closing Certificate, which alone or together with other matters thereon, gave rise to the termination right, makes the representations and warranties made by Seller in Section 5.1 false as of the Contract Date, then Seller, upon Buyer's written request, shall pay to Buyer an amount equal to all of the Buyer Party's out-of-pocket costs incurred in connection with or related to the Property, including without limited to legal expenses, non-refundable loan fees, and studies, inspections and investigations of the Property during the Contingency Period, but in no event to exceed $250,000. For the purposes of this Section 4(c)(viii), the matters set forth on Schedule 2 to the Closing Certificate shall be deemed a "Material Exception," if, but only if, all of the matters included on Schedule 2 to the Closing Certificate, when taken together, would reasonably be expected to result in additional cost, expense, liability and/or damage to Buyer (after factoring in all cost of litigating, resolving, and/or defending the matter, any reduction in the fair market value of the Property, any contingent liability, and the cost of any delay in the lease-up of the Property) in excess of Five Hundred Thousand Dollars ($500,000). The provisions of this Section 4(c)(viii) shall survive the close of escrow or the termination of this Agreement. In addition, the provisions of this Section 4(c)(viii) shall be subject to Section 8 of this Agreement and shall not apply to any events covered thereunder. (ix) If, but only if, required pursuant to Section 4(c)(viii) above, the delivery to Buyer of the WHTS Modification Indemnity. The WHTS Modification Indemnity shall be subject to the limitations set forth in the Closing Certificate. (x) The execution, acknowledgement, and delivery by Seller and the owner of the Adjacent Property of the Development Indemnity Agreement and the recordation of the Development Indemnity Agreement in the office of the Santa Clara County Clerk Recorder, all on or prior to the Closing Date. (xi) The issuance of the Environmental Insurance Policy. Buyer shall use, or shall cause Buyer Party to use, good faith efforts to obtain the Insurance Policy. At any time or times on or before the Scheduled Closing Date, Buyer may waive any of the foregoing conditions by written notice to Seller. Other than Buyer's close of escrow pursuant to this Agreement, which shall waive all such unfulfilled conditions, no waiver shall be effective unless made in writing specific as to the conditions or matters so waived. (d) AS IS Purchase. Buyer acknowledges that Buyer will have had the opportunity to conduct prior to the Closing Date, such studies and investigations of the Property as Buyer desires, and that Buyer will have had the right to observe to its satisfaction, and will have observed to its satisfaction, the physical characteristics and condition of the Property. Except as expressly set forth in the Closing Documents, Buyer acknowledges and agrees that the Property is to be purchased and accepted by Buyer in its condition as of the Closing Date, "AS IS", without any implied or express warranty or representation by Seller or anyone acting or purporting to act on Seller's behalf ("Seller's Agents"), and with all patent and latent defects. No representations or warranties, express or implied regarding the Property or matters affecting the Property have been or will be made with respect to the Property or the subject matter of this Agreement, by Seller or Seller's Agents, or by any other person or entity, except as expressly set forth in this Agreement or the Closing Documents. Without limiting the foregoing, Buyer acknowledges that no representation is or will be made concerning the physical condition, environmental, economic, or legal condition of the Property, title to or the boundaries of the Property, topography, climate, air, water rights, utilities, leases, water, present and future zoning, physical condition, soil condition, pest control matters, engineering characteristics, traffic patterns, purposes to which the Property may be suited, value, potential for development, contamination, drainage, access to public roads, proposed routes of roads or extensions thereof, and compliance with building, health, safety laws, Environmental Laws, land use laws and regulations to which the Property may be subject or any other matter in any way affecting the Property, or the use or ownership thereof (herein collectively the "Property Matters") by Seller, Seller's Agents, or by any other person or entity, except as expressly set forth in this Agreement or the Closing Documents. Buyer acknowledges that, although Seller has disclosed or made available documents and reports concerning the Property, other than those specifically set forth in this Agreement and the Closing Documents, (i) that Seller cannot and does not make any warranty or representation whatsoever concerning the completeness or the accuracy of information contained in such documents and reports and (ii) that Buyer is not relying upon any such representations and warranties made by Seller, Seller's Agents, or any other person or entity. Buyer further acknowledges that it has not received from Seller or anyone acting or claiming to act on Seller's behalf, any accounting, tax, legal, architectural, engineering, property management, environmental or other advice with respect to this transaction and is relying solely upon the advice of its own accounting, tax, legal, architectural, engineering, property management, environmental and other advisors. THEREFORE, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR THE CLOSING DOCUMENTS, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, DIRECTLY OR INDIRECTLY, TO BUYER, AND SELLER IS TRANSFERRING TO BUYER, AND BUYER IS PURCHASING THE PROPERTY FROM SELLER, IN ITS "AS IS' CONDITION ON THE CLOSING DATE, AND BUYER IS ASSUMING ON THE CLOSING DATE THE RISK THAT ADVERSE PHYSICAL, ENVIRONMENTAL, ECONOMIC OR LEGAL CONDITIONS MAY NOT HAVE BEEN REVEALED BY ITS INVESTIGATION. Notwithstanding the foregoing, but subject to any Release executed as of the Closing Date in the form attached hereto as Exhibit U, nothing contained in, nor any of the statements made or actions taken by either party in connection with, this Agreement shall be deemed to have in any manner waived, released, modified or discharged Buyer and Seller of their respective rights and obligations under the PMC Lease or under applicable statutory or common law with respect to the Property, the Property Matters or the undertakings and rights of the parties as set forth in the PMC Lease. This Section 4(d) shall survive the close of escrow. Buyer hereby specifically acknowledges that Buyer has carefully reviewed this subsection and discussed its import with legal counsel and that provisions of this subsection are a material part of this Agreement. 5. Representations, Warranties, Covenants And Agreements. 5.1 Representations And Warranties Of Seller. Seller hereby makes the following representations and warranties to and for the benefit of Buyer, each of which representations and warranties (i) is material and being relied upon by Buyer, (ii) is made as an inducement to Buyer to enter into this Agreement and consummate the transaction contemplated hereby, (iii) is true in all respects as of the date of this Agreement, and (iv) shall survive the close of escrow but such survival shall be limited as set forth in this Section 5.1. (a) Seller is a Delaware limited liability company and has the full power, authority and legal right to enter into and perform this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of the Seller. (b) Seller has no actual knowledge of any pending or threatened actions or proceedings before any court or administrative agency which could reasonably be expected to materially and adversely affect the ability of Seller to perform Seller's obligations under the Purchase Agreement. (c) To the best of Seller's actual knowledge, there are no pending or threatened condemnation or similar proceeding affecting the Property or any portion thereof. (d) To the best of Seller's actual knowledge, other than claims made by PMC under the PMC Lease, there are no third party claims, legal actions, suits, or other legal or administrative proceedings, pending or threatened against the Property. (e) To the best of Seller's actual knowledge, there is no unrecorded or undisclosed legal or equitable interest in the Property owned or claimed by any party other than Seller or Buyer. (f) Seller has not received any written notices from any governmental agencies of any condition, or defects with respect to any violations of building codes and/or zoning ordinances, Environmental Laws or other governmental laws, regulations or orders with respect to the Property that remain uncured. Seller shall promptly notify Buyer of any violations or conditions of which Seller becomes aware. (g) To the best of Seller's actual knowledge, except for the PMC Lease (as defined in the Purchase Agreement), there are no leases or adverse or other parties in possession of the Property or any part thereof. (h) Seller has made available or shall make available to Buyer on or prior to June 16, 2003 all reports and documents in Seller's possession or control with respect to the physical, environmental and legal condition of the Property, and Seller is not aware that any other reports or documents regarding such matters, and generated or dated after Seller's initial acquisition of title to the Property, exist. (i) Except for the PMC Lease, the Permitted Exceptions, that certain Master License Agreement dated May 4, 2001 by and between TishmanSpeyer Properties and Ad Walls, LLC, that certain Information Services Agreement dated August 2000 between WHTS and Elevator News Network (the "Elevator News Agreement"), and other agreements or obligations referred to or contemplated by this Agreement, there are no leases, contracts, employment agreements, service contracts, utility contracts, construction contracts, maintenance agreements, leasing and brokerage agreements or any other contracts, agreements and obligations, whether or not in writing, which relate to Seller's ownership, operation, management, maintenance and use or occupancy of the Property which will be binding on the Property, Buyer or any Buyer Party after the Closing Date. On or prior to the Closing Date, WHTS shall terminate the Elevator News Agreement. (j) Seller is not a "foreign person" as defined in Internal Revenue Code Section 1445 and any related regulations. At the closing, Buyer will have no duty to collect withholding Taxes for Seller pursuant to the Foreign Investment in U.S. Real Property Tax Act of 1980, as amended. (k) Seller has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its creditors; (iii) suffered the appointment of a receiver to take possession of all or substantially all of its assets; or (iv) suffered the attachment or other judicial seizure of all or substantially all of its assets. (l) Seller hereby represents that that certain License Agreement dated August 17, 1999, by and between the City of Santa Clara and WHTS Freedom Circle Partners, L.L.C., is the document which is referred to as an "agreement to landscape and maintain" on page 9 of the Project Conditions to Development Plan, and on page 14, Special Provision No. 11, of the Property Development Agreement between TishmanSpeyer and City Public Works; and to the best of Seller's actual knowledge, there is no other agreement with the City of Santa Clara with respect to the Property regarding maintenance and landscaping of City-owned property. Any and all uses of the phrase, "to the best of Seller's actual knowledge" or other references to Seller's knowledge or Seller's awareness in this Agreement shall be limited to the actual, present, conscious knowledge of Carl Shannon and Yolanda Faile (the "Seller Knowledge Individuals") which either of them has, or should have had after reasonable investigation and inquiry, as to a fact as of the date hereof. Seller hereby represents and warrants that the Seller Knowledge Individuals are the persons affiliated with Seller most likely to have knowledge of the matters which are the subject of the representations. Subject to the first sentence of this paragraph with respect to reasonable investigation and inquiry, neither the actual, present, conscious knowledge of any other individual or entity, nor the constructive knowledge of the Seller Knowledge Individuals or of any other individual or entity, shall be imputed to the Seller Knowledge Individuals. The representations, warranties, covenants and agreements of Seller contained in this Section 5.1 shall survive the Closing for one (1) year following the Closing Date (the "Limitation Period") except that the Limitation Period with respect to the representations and warranties of Seller contained in clauses (b), (d), (f) and (h) of this Section 5.1 shall be two (2) years. Each such representation and warranty shall automatically be null and void and of no further force and effect following the expiration of the applicable Limitation Period unless, prior to such expiration, Buyer shall have provided Seller with a written notice alleging that Seller shall be in breach of such representation or warranty and specifying in reasonable detail the nature of such breach. Any legal proceeding against Seller for such breach must be commenced, if at all, within ninety (90) days after the expiration of the applicable Limitation Period. Notwithstanding anything to the contrary set forth in this Agreement, Seller's liability for breach of any covenant, obligation, representation, agreement or warranty of Seller contained in this Agreement and in any document executed by Seller pursuant to this Agreement, including any instruments delivered at Closing, shall, subject to the limitations of survival set forth in this Section 5.1 be limited to claims in excess of One Hundred Thousand Dollars ($100,000) in the aggregate (but once the aggregate exceeds $100,000, Seller shall be liable to the full extent of such claims), and Seller's aggregate liability for any and all claims arising out of any such covenants, obligations, representations, agreements and warranties shall not exceed Five Million Dollars ($5,000,000). 5.2 Representations And Warranties Of Buyer. Buyer hereby makes the following representations and warranties to and for the benefit of Seller, each of which representations and warranties (i) is material and being relied upon by Seller, (ii) is made as an inducement to Seller to enter into this Agreement and consummate the transaction contemplated hereby, (iii) is true in all respects as of the date of this Agreement, (iv) shall be true in all material respects on the Closing Date, and (v) shall survive the close of escrow: (a) Buyer is a Delaware corporation and it has the full power, authority and legal right to enter into and perform this Agreement. The execution, delivery and performance of this have been duly authorized by all necessary action on the part of Buyer. (b) Buyer has not (i) made a general assignment for the benefit of creditors; (ii) filed any voluntary petition in bankruptcy or suffered the filing of any voluntary petition by its creditors; (iii) suffered the appointment of a receiver to take possession of all or substantially all of its assets; or (iv) suffered the attachment or other judicial seizure of all or substantially all of its assets. (c) Until the Closing Date, Buyer shall continue to pay, under protest and without waiver or derogation of any of its rights or defenses to the PMC Lease, all rents and other sums specified as payable by the lessee under the PMC Lease and to perform, under protest and without waiver or derogation of any of its rights or defenses to the Lease, all of obligations of the lessee otherwise specified in the PMC Lease. Payment of such sums and performance of such obligations by Buyer shall not waive but shall be subject to all rights of reimbursement and all claims and defenses under the PMC Lease to which the Tenant is or may be entitled. The representations and warranties of Buyer contained in this Section 5.2 shall survive the Closing for two (2) years following the Closing Date. Notwithstanding anything to the contrary set forth in this Agreement, Buyer's liability for breach of any covenant, representation or warranty of Buyer contained in the Agreement, shall be limited to claims in excess of One Hundred Thousand Dollars ($100,000) in the aggregate, and Buyer's aggregate liability for any and all claims arising out of any such covenants, representations and warranties shall not exceed Five Million Dollars ($5,000,000). 5.3 Agreements. Each of Buyer and Seller hereby specifically agrees as follows: (a) From the date of this Agreement to the Closing Date, Seller shall (i) manage, maintain, operate, and service the Property, to the same standard as existed at the Contract Date so as to keep the Property and every portion thereof in the same working order and repair as existed on the Contract Date, (ii) not remove or permit the removal of any Personal Property or any fixtures from the Property unless such items are replaced immediately with Personal Property or fixtures of equal or greater value, (iii) comply, in all material respects, with all Laws and Restrictions with respect to the Property, (iv) not modify, terminate, cancel, extend, or amend any lease, contracts or arrangements which will affect the Property or be binding upon the Buyer on or after the Closing Date, without the consent of Buyer, which consent shall not be unreasonably withheld, conditioned or delayed, (v) not enter into any leases or other agreements with respect to the occupancy, maintenance or improvement of the Property that continue after the Closing Date without Buyer's prior written approval (which Buyer may withhold in its sole discretion), and (vi) maintain in full force and effect all of the insurance policies and coverages currently in effect with respect to the Property. From the date of this Agreement to the earlier of the Scheduled Closing Date or the termination of this Agreement, Seller shall not lease or otherwise transfer the PMC Lease, the Property, or any portion thereof or interest therein (except to a party which has assumed the obligations of Seller under this Agreement). (b) Seller shall promptly after the Contract Date turn on (and shut down daily for approximately 12 hours at night to simulate night time conditions but not flush more than once per week) all water systems at the Property, including without limitation hot water, HVAC, heating, and air conditioning systems, to permit the testing described in Exhibit N hereto. (c) Seller shall promptly notify Buyer in writing of any event or circumstance known to Seller which materially adversely affects Seller's ability to perform its obligations under this Agreement in a timely manner or the likelihood of timely satisfaction of the conditions precedent set forth above. (d) Seller shall promptly notify Buyer in writing if Seller becomes aware of any fact or occurrence that would render any of its representations or warranties under Section 5.1 above untrue, or would render it unable to deliver the Closing Certificate on the Closing Date. (e) Seller shall use good faith efforts to obtain from the holder of any deed of trust or other foreclosable document or instrument currently encumbering the Adjacent Property the subordination set forth in Section 4(c)(vi). Seller shall reasonably cooperate with Buyer in Buyer's efforts to obtain the Insurance Policy. (f) Seller shall pay at the close of escrow fifty percent (50%) of the cost of the one-time premium for the Environmental Insurance Policy (the "Insurance Premium") up to a maximum of One Hundred Fifty Thousand Dollars ($150,000) (i.e., up to an Insurance Premium of $300,000) and Buyer shall pay at the close of escrow the cost of the Insurance Premium in excess of said amount. (g) Prior to the Closing, Seller shall have the right, to the extent permitted under and in accordance with the terms of the PMC Lease, to apply any security deposits held under the PMC Lease in respect of defaults by Tenant under the PMC Lease. At the Closing, Seller shall deliver to Buyer the letter of credit held by Seller as security under the Lease and not applied to defaults as above provided. 6. TITLE, ESCROW AND CLOSING. 6.1 Conditions Of Title. (a) On the Scheduled Closing Date, Seller shall convey title to the Property to Buyer free and clear of all liens and encumbrances except the Permitted Exceptions, the PMC Lease, the Parking Easement Agreement and the Development Indemnity Agreement. (b) Seller shall deliver to Escrow Holder a deed in the form attached hereto as Exhibit E (the "Deed") conveying title to the Property to Buyer. The Title Company shall issue, or shall be irrevocably bound and committed to issue, on the Closing date, conditioned only upon payment of the Title Company's regularly-scheduled premium, the Title Policy. 6.2 Closing Date. Subject to the conditions precedent herein set forth, through an escrow established with the Title Company, Buyer and Seller shall consummate this transaction on the Scheduled Closing Date or such other date upon which Buyer and Seller may mutually agree. 6.3 Deposits And Deliveries By Seller. Subject to the terms and provisions of this Agreement, unless this Agreement is terminated by Buyer in accordance with the terms hereof, Seller shall deposit or cause to be deposited into escrow with the Title Company for delivery to Buyer or such person as Buyer shall designate, or deliver directly to Buyer outside of escrow, on or before the Scheduled Closing Date, the following documents duly executed and acknowledged as required: (a) The Deed. (b) A Bill of Sale and Assignment of Intangible Property in the form attached hereto as Exhibit F transferring the Personal Property and Intangible Property to Buyer (the "Bill of Sale"). (c) An Assignment and Assumption of Lease in the form attached as Exhibit G (the "Assignment and Assumption of Lease"). (d) An Affidavit of Non-Foreign Status in form attached hereto as Exhibit H (the "Non-Foreign Affidavit) and a California Form 593-W (the "California Affidavit"). (e) A Closing Certificate in the form of attached Exhibit O. (f) The Amended and Restated Parking Easement Agreement in the form attached hereto as Exhibit J or as otherwise approved in writing by Buyer. (g) Seller's written escrow instructions to close escrow in accordance with the terms of this Agreement. (h) The Development Indemnity Agreement in the form attached hereto as Exhibit S. (i) A Release in the form of the attached Exhibit U (the "Release"). (j) The WHTS Modification Indemnity (if the additional condition precedent described in Section 4(c)(ix) shall apply in accordance with Section 4(c)(viii)) in the form of Exhibit T. (k) Evidence reasonably acceptable to Buyer's counsel that the documents delivered to Buyer by Seller at closing have been duly authorized by Seller, and duly executed on behalf of Seller. (l) The letter of credit, and any proceeds thereof, held by Seller as security under the PMC Lease and not applied to defaults in accordance with the PMC Lease. (m) Wire transfer of immediately available funds in the amount of Seller's obligation pursuant to Section 5.3(f). (n) Such other documents, resolutions, consents and affidavits required to effect the valid consummation of the transaction evidenced by this Agreement. 6.4 Deposits And Deliveries By Buyer. Subject to the conditions precedent herein set forth, Buyer shall deposit or cause to be deposited into escrow with the Title Company for delivery to Seller or such person as Seller shall designate, or deliver directly to Seller outside of escrow, on or before the Scheduled Closing Date, each of the following documents duly executed and acknowledged as required and funds: (a) Wire transfer of immediately available funds, which, together with the Deposit, shall equal the Purchase Price (the "Purchase Funds"). (b) Cash, wire transfer, cashier's check, or other immediately available funds covering Buyer's share of closing costs and prorations. (c) The Assignment and Assumption of Contracts and Intangible Property. (d) A closing certificate confirming the accuracy and completeness, in all material respects, as of the Closing Date of each representation and warranty made herein by Buyer. (e) A Release in the form of the attached Exhibit U (the "Release"). (f) Buyer's written escrow instructions to close escrow in accordance with the terms of this Agreement. (g) Evidence reasonably acceptable to Seller's counsel that the documents delivered to Seller by Buyer at closing have been duly authorized by Buyer, and duly executed on behalf of Buyer. (h) Such other documents, resolutions, consents and affidavits required to effect the valid consummation of the transaction evidenced by this Agreement. 6.5 Closing. Upon satisfaction of the conditions to the Closing, the parties shall instruct the Title Company to close escrow by concurrently: (a) Recording and arranging for delivery to Buyer of the duly executed original Deed. (b) Issuing to Buyer the Title Policy. (c) Recording the originals of, and arranging for delivery to each of Buyer and Seller of one certified copy of the duly executed and recorded, Parking Easement Agreement and Development Indemnity Agreement and the subordinations and recognitions thereto required by Sections 4(c)(vi) and (x). (d) Delivering or arranging for delivery to Buyer of an original, duly executed Assignment of the PMC Lease, Bill of Sale, the Non-Foreign Affidavit, the California Affidavit, the Closing Certificate, WHTS Modification Indemnity (if applicable), the Reliance Letter, and the Release. (e) Delivering to Seller (or as directed by Seller) the Purchase Price as adjusted pursuant to the terms of this Agreement. (f) Taking of all actions, and delivering to Buyer and Seller of copies of all other documents and things deposited and/or delivered through escrow as directed by the parties pursuant to their mutually consistent escrow instruction. 6.6 Prorations. The costs and expenses of the Property shall be prorated as follows: (a) Upon delivery of the Release, (i) any and all rents (including, without limitation, operating expense escalation payments, and real estate tax escalation payments payable under the PMC Lease) ("Rents") and amounts payable by Tenant, shall be prorated between Seller and Buyer as of July 31, 2003 (i.e., Buyer shall not be entitled to the return of any July Rents paid by Tenant); (ii) if any Rents due for periods prior to July 31, 2003 have not been paid by Tenant, Seller shall receive a credit to the Purchase Price for such Rents; and (iii) Buyer shall receive a credit towards the Purchase Price for any overpayments or prepaid Rents. Any proration of rent or other sums shall be on the basis of the actual number of days of the month which shall have elapsed and a 365 day year. (b) All items subject to proration pertaining to the period prior to the Closing Date shall be credited to Seller, and all such prorations pertaining to the period on or following the Closing Date shall be credited to Buyer. Seller, Buyer and Title Company shall cooperate to produce prior to the Closing Date a schedule of prorations to be made as of the Closing Date as complete and accurate as reasonably possible. All prorations which can be liquidated accurately or reasonably estimated as of the Closing Date shall be made in escrow on the Closing Date. All other prorations, and adjustments to initial estimated prorations, shall be made by Buyer and Seller with due diligence and cooperation within 30 days following the Closing Date, or such later time as may be required to obtain necessary information for proration, by cash payment to the party yielding a net credit from such prorations from the other party. Such cash payment shall be made within ten (10) business days of demand for payment by the party entitled to receive such payment. (c) The provisions of this Section 6.6 shall survive the close of escrow. 6.7 Closing Costs. Seller shall pay (i) the cost of the County of Santa Clara transfer tax, (ii) the basic CLTA portion (with no endorsements) of the title insurance premiums for the title insurance described in the Title Commitment, (iii) one-half of all escrow fees, and (iv) Seller's legal fees and costs incurred in connection with the contemplated transaction. Buyer shall pay (i) the balance of the title insurance premium (including costs for endorsements), (ii) recording fees, (iii) one-half of all escrow fees, (iv) Buyer's legal fees and costs incurred in connection with the contemplated transaction, and (v) all costs and expenses incurred in connection with any financing obtained by Buyer, including without limitation, loan fees, mortgage recording taxes, financing costs and lender's legal fees. Any applicable city transfer tax shall be shared equally by Buyer and Seller. All other closing costs shall be borne by Seller and/or Buyer in the manner which is customary in the county where the Land is located. Notwithstanding the foregoing, if close of escrow fails to occur as a consequence of the default by a party, then such party shall pay all escrow fees and cancellation fees owing to the Title Company. 6.8 Possession. Right to possession of the Property shall transfer to Buyer on the Closing Date subject to the PMC Lease. 6.9 Filing Of Reports. Title Company shall be solely responsible for the timely filing of any reports or returns required pursuant to the provisions of Section 6045(e) of the Internal Revenue Code of 1986 (and any similar reports or returns required under any state or local laws) in connection with the closing of the transaction contemplated in this Agreement. 6.10 Cooperation. Without further consideration, each of Seller and Buyer shall execute, acknowledge and deliver to the other party on or after the Closing Date any and all other instruments or documents, and do and perform any other acts which may be required or which the other party may reasonably request in order to fully assign, transfer and/or convey to Buyer, and vest in Buyer, the Property, and each and every part and component thereof. 7. Liquidated Damages. BUYER AND SELLER HEREBY ACKNOWLEDGE AND AGREE THAT, IN THE EVENT THE TRANSACTION PROVIDED FOR IN THIS AGREEMENT FAILS DUE TO A DEFAULT BY BUYER OF AN OBLIGATION TO PURCHASE THE PROPERTY AFTER (i) ALL OF THE CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE THE PROPERTY SHALL HAVE BEEN SATISFIED, OR WAIVED IN WRITING BY BUYER, AND (ii) THE SELLER SHALL HAVE PERFORMED, TENDERED, OR OFFERED TO TENDER, PERFORMANCE OF ALL OF ITS OBLIGATIONS, SELLER'S DAMAGES WOULD BE DIFFICULT OR IMPOSSIBLE TO DETERMINE AND THE AMOUNT OF THE DEPOSIT IS THE PARTIES' BEST AND MOST ACCURATE ESTIMATE OF THE DAMAGES SELLER WOULD SUFFER. ACCORDINGLY, THE PARTIES AGREE THAT, IN SUCH EVENT THE DEPOSIT SHALL BE PAID BY TITLE COMPANY TO SELLER AS LIQUIDATED DAMAGES UNDER THE FOREGOING CONDITIONS, AND THAT SUCH PAYMENT IS REASONABLE UNDER THE CIRCUMSTANCES EXISTING AS OF THE DATE OF THIS AGREEMENT. BUYER AND SELLER AGREE THAT THE SELLER'S RIGHT TO RETAIN THE DEPOSIT SHALL BE THE SOLE AND EXCLUSIVE REMEDY OF SELLER IN THE EVENT OF SUCH A BREACH OF THIS AGREEMENT BY BUYER FOLLOWING SATISFACTION OF SUCH CONDITIONS. ----------------------------- ---------------------------- BUYER SELLER 8. Damage And Destruction; Condemnation. Seller shall notify Buyer immediately of the occurrence of any damage to or destruction of the Property, or the institution or maintenance of any condemnation or similar proceedings with respect to the Property prior to the Closing Date of which Seller is aware. In the event of any damage to or destruction of the Property prior to the Closing Date for which the cost to repair in the aggregate exceeds $500,000, or in the event any condemnation or similar proceedings are instituted or maintained prior to the Closing Date, Buyer at its option either (i) may terminate this Agreement by written notice to Seller prior to the Scheduled Closing Date, or (ii) may consummate the purchase evidenced by this Agreement. With respect to any damage to or destruction of the Property prior to the Closing Date for which the cost to repair does not in the aggregate exceed $500,000, Buyer shall have no right to terminate this Agreement pursuant to the preceding sentence, this Agreement shall continue in accordance with its terms and the Purchase Price shall be reduced by the Restoration Funds (as defined below). As used herein, "Restoration Funds" shall mean an amount equal to the actual costs and expenses directly and indirectly related to the restoration of the Property, including the costs of permits less the actual proceeds of insurance assigned to Buyer at the Closing, but not exceeding the estimated cost of the restoration as reasonably determined and agreed upon by Buyer and Seller based on bids for a guaranteed maximum price contract for the restoration, which may include appropriate contingencies for cost overruns reasonably agreed upon by Buyer and Seller. If Buyer and Seller do not reasonably agree on the amount of the Restoration Funds and reasonable contingencies in connection therewith prior to the Closing Date, then Buyer shall have the right to terminate this Agreement as described above on or before the Closing Date. If this Agreement is not terminated by Buyer pursuant to this Section 8, then (i) Buyer shall accept possession of the Property in such damaged condition and/or subject to such condemnation or other proceeding on the Closing Date, (ii) as of the Closing Date, Seller shall assign to Buyer all insurance proceeds or condemnation proceeds received or to be received by Seller as a result of such damage or taking, and (iii), if applicable, the Purchase Price shall be reduced by the amount of the Restoration Funds. If this Agreement is so terminated by Buyer, then Buyer shall be entitled to an immediate return of the Deposit. 9. Commissions. Each party to this Agreement warrants to the other that, except to the extent payable solely by the warranting party, no person or entity can properly claim a right to a real estate commission, real estate finder's fee, real estate acquisition fee or other real estate brokerage-type compensation (collectively, "Real Estate Compensation") based upon the acts of that party with respect to the transaction contemplated by this Agreement, and each party hereby agrees to indemnify, defend and protect the other against and to hold the other harmless from any loss, cost or expense (including but not limited to attorneys' fees and returned commissions) resulting from any claim for Real Estate Compensation by any person or entity based upon such acts. 10. General Provisions. 10.1 Notices. Any notice required or permitted to be given under this Agreement shall be in writing and (i) personally delivered, (ii) sent by United States mail, registered or certified mail, postage prepaid, return receipt requested, (iii) sent by Federal Express or similar nationally recognized overnight courier service, or (iv) transmitted by facsimile with a hard copy sent within one (1) business day by any of the foregoing means, and in all cases addressed as follows, and such notice shall be deemed to have been given upon the date of actual receipt or delivery (or refusal to accept delivery) at the address specified below (or such other addresses as may be specified by notice in the foregoing manner) as indicated on the return receipt or air bill: TO SELLER: Tishman Speyer Properties, L.P. 525 Market Street, Suite 3720 San Francisco, California 94105 Attention: Carl Shannon Fax: (415) 536-4139 with a copy to: Tishman Speyer Properties 520 Madison Avenue New York, New York 10022 Attention: General Counsel Fax: (212) 935-8239 and Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 Attention: Jeffrey A. Lenobel, Esq. Fax: (212) 593-5955 and Whitehall Street Real Estate Limited Partnership IX 85 Broad Street New York, New York 10004 Attention: Patricia Geery Fax: (212) 357-5505 With a copy to: Mr. Todd Williams Goldman, Sachs & Co. 100 Crescent Court, Suite 1000 Dallas, TX 75201 Fax: (214) 855-6305 Stone Street Real Estate Fund 1998, L.P. 85 Broad Street New York, New York 10004 Fax: (212) 357-5505 Bridge Street Real Estate Fund 1998, L.P. 85 Broad Street New York, New York 10004 Fax: (212) 357-5505 Stone Street WHTS Corp. 85 Broad Street New York, New York 10004 Fax: (212) 357-5505 TO BUYER: PMC-Sierra, Inc. 8555 Baxter Place Burnaby, British Columbia V5A 4V7 Canada Attn: Manager, Corporate Real Estate and Facilities Fax: (604) 415-6161 with a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attention: Norman Cruz, Esq. Fax: (650) 493-6811 10.2 Entire Agreement; No Modifications. This Agreement, together with the schedules and exhibits attached hereto, incorporates all agreements, warranties, representations and understandings between the parties to the Agreement with respect to the subject matter hereof and constitutes the entire agreement of Seller and Buyer with respect to the purchase and sale of the Property. Any prior or contemporaneous correspondence, memoranda, understandings, offers, negotiations and agreements, oral or written, are merged herein and replaced in total by this Agreement and the exhibits hereto and shall be of no further force or effect. This Agreement may not be modified or amended except in a writing signed by Seller and Buyer. 10.3 Time. Time is of the essence in the performance of the parties' respective obligations set forth in this Agreement. 10.4 Attorneys' Fees. In the event any action or proceeding at law or in equity between Buyer and Seller (including an action or proceeding between Buyer and the trustee or debtor in possession while Seller is a debtor in a proceeding under the Bankruptcy Code (Title 11 of the United States Code) or any successor statute to such Code) to enforce or interpret any provision of this Agreement or to protect or establish any right or remedy of either Buyer or Seller hereunder, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses including, without limitation, reasonable attorneys' and paralegals' fees and expenses, incurred by such prevailing party, in such action or proceeding and in any appeal in connection therewith, whether or not such action, proceeding or appeal is prosecuted to judgment or other final determination, together with all costs of enforcement and/or collection of any judgment or other relief. 10.5 Specific Performance. The parties understand and agree that the Property is unique and for that reason, among others, Buyer will be irreparably damaged in the event that this Agreement is not specifically enforced. Accordingly, in the event of any breach or default in or of this Agreement or any of the warranties, terms or provisions hereof by Seller, Buyer, in addition to a claim for damages for such breach or default (subject, however, to the limitations set forth in Section 5.1), and in addition and without prejudice to any right or remedy available at law or in equity, shall have the right (i) to seek to obtain specific performance of Seller's obligations hereunder, provided that any action for specific performance shall be commenced within sixty (60) days after such default. If Buyer elects to seek specific performance of this Agreement, then as a condition precedent to any suit for specific performance, Buyer shall on or before the Closing Date, time being of the essence, fully perform all of its obligations hereunder which are capable of being performed (other than the payment of the Purchase Price, which shall be paid as and when required by the court in the suit for specific performance). 10.6 Successors And Assigns. Except as permitted by this Section 10.6, this Agreement may not be assigned by Seller or Buyer without the prior written consent of the other party which may be granted or withheld by the other party in its sole discretion. Subject to the foregoing provision, this Agreement shall inure to the benefit of and be binding upon the parties to this Agreement and their respective successors and assigns. Buyer shall have the right to assign its rights and obligations under this Agreement to an affiliate of Buyer, provided that the assignee assumes for Seller's benefit all of Buyer's obligations hereunder. For the purposes of this Section 10.6, "affiliate of Buyer" shall mean an entity controlling, controlled by or under common control with Buyer. "Control" shall mean the possession, directly or indirectly, of the power to direct the management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise. 10.7 Counterparts. This Agreement may be executed in one or more counterparts and each such counterpart shall be deemed to be an original; all counterparts so executed shall constitute one instrument and shall be binding on all of the parties to this Agreement notwithstanding that all of the parties are not signatories to the same counterpart. 10.8 Construction. This Agreement shall be governed by and construed under the laws of the State of California. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Agreement or any schedules or exhibits to it or any document executed and delivered by either party in connection with this Agreement. All captions in this Agreement are for reference only and shall not be used in the interpretation of this Agreement or any related document. If any provision of this Agreement shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Agreement and all such other provisions shall remain in full force and effect. 10.9 Confidentiality. Seller shall keep all information obtained from or about Buyer or the transaction contemplated by this Agreement strictly confidential and will not disclose any such information to any other person or entity without first obtaining the prior written consent of Buyer. Notwithstanding anything to the contrary contained in this Agreement, Buyer and Buyer's Agents and Seller and Seller's Agents may disclose the tax treatment (i.e., the purported or claimed Federal income tax treatment) or the tax structure (i.e., any fact that may be relevant to understanding such treatment) of the transaction contemplated by this Agreement, and all materials of any kind (including opinions or other tax analyses) provided by Seller to Buyer relating to such tax treatment and tax structure. Furthermore, each of Buyer and Seller acknowledges and agrees that it has not made or provided a statement to the other party with respect to the tax consequences for the other party of the transactions contemplated by the Purchase Agreement. 10.10 Exculpation. Buyer agrees that it does not have and will not have any claims or causes of action against any disclosed or undisclosed officer, director, employee, trustee, shareholder, partner, member, principal, parent, subsidiary or other affiliate of Seller, including, without limitation, Tishman Speyer Properties, L.P. and Goldman, Sachs & Co., or any officer, director, employee, trustee, shareholder, member, partner or principal of any such parent, subsidiary or other affiliate (collectively, "Seller's Affiliates"), arising out of with this Agreement or the transactions contemplated hereby. Buyer agrees to look solely to Seller and its assets for the satisfaction of any liability or obligation arising under this Agreement or the transactions contemplated hereby, or for the performance of any of the covenants, warranties or other agreements contained herein, and further agrees not to sue or otherwise seek to enforce any personal obligation against any of Seller's Affiliates with respect to any matters arising out of this Agreement or the transactions contemplated hereby. The provisions of this Section 10.10, however, shall not apply to Tishman Speyer/Travelers Real Estate Venture, L.P. and Whitehall Street Real Estate Limited Partnership IX (collectively, the "Members") to the extent of the amount any of the Members has received from the proceeds of the transactions which is the subject of this Agreement, if the remaining funds available to Seller to satisfy the obligations of the Seller pursuant to this Agreement or the transactions contemplated hereby are not at least equal to Five Million Dollars ($5,000,000) or such lower amount of liability or potential liability as the Seller may have under such agreements. The provisions of this Section 10.10 shall survive the termination of this Agreement and the Closing. This Section 10.10 will not apply to the parties to the Parking Easement or the Development Indemnity Agreement to the extent such claim or cause of action relates solely to the Parking Easement Agreement or the Development Indemnity Agreement, as applicable. IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of the date and year first written above: SELLER: WHTS FREEDOM CIRCLE PARTNERS II, L.L.C., a Delaware limited liability company By: Tishman Speyer/Travelers Real Estate Venture, L.P., a Delaware limited Partnership By: ____________________________________ Name: Title: and By: Whitehall Street Real Estate Limited Partnership IX, a Delaware limited liability partnership By: Whitehall Advisors, L.L.C. IX, a Delaware limited liability company, its general partner By: Whitehall Street IX/X, Inc., a Delaware corporation, its managing member By:_______________________ Name: Title: BUYER: PMC-SIERRA, INC., a Delaware corporation By: _____________________________________ Name: Title: EX-10 5 exhibit10_3.txt EXHIBIT 10.3 - AGREEMENT PURCHASE & SALE AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY BY AND BETWEEN PMC-SIERRA, INC., A DELAWARE CORPORATION AS SELLER AND WB MISSION TOWERS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, AS BUYER JUNE 29, 2003 PROPERTY LOCATED AT: 3985 FREEDOM CIRCLE SANTA CLARA, CALIFORNIA AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY THIS AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY (the "Agreement") is dated as of the 29th day of June, 2003 by and between PMC-SIERRA, INC., a Delaware corporation ("Seller" or "PMC"), and MISSION TOWERS, LLC, a Delaware limited liability company ("Buyer" or "Westbrook"). RECITALS A. PMC, as tenant, and WHTS Freedom Circle Partners II, LLC ("WHTS"), as landlord, are parties to that certain Lease dated as of July 20, 2000 (as amended, the "WHTS Lease"), pursuant to which PMC leases the Property (as hereinafter defined) from WHTS. B. In addition, PMC, as buyer, and WHTS, as seller, have entered into that certain Agreement for Purchase and Sale dated as of the date hereof (the "WHTS Agreement"), pursuant to which PMC or an affiliate of PMC has the right to acquire the fee interest in the Property from WHTS, a true and correct copy of which has been delivered to Buyer. C. Seller desires to sell the Property to Buyer, and Buyer desires to purchase the Property from Seller, upon and subject to the terms and conditions of this Agreement AGREEMENT NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer hereby agree as follows: 1. Definitions. Unless the context otherwise specifies or requires, for the purposes of this Agreement all words and phrases having their initial letters capitalized herein shall have the meanings set forth below: "Adjacent Property" shall mean the real property owned by WHTS Freedom Circle Partners, L.L.C., a Delaware limited liability company, commonly known as 3975 Freedom Circle, Santa Clara, California, and more particularly described in Exhibit R to this Agreement. "Closing Certificates" shall mean the Seller Closing Certificate to be delivered to Buyer on the Closing Date in the form of Exhibit O, including therewith the WHTS Closing Certificate, which is to be delivered to Seller for the benefit of Seller and Buyer upon the closing of the Seller's acquisition of the Property from WHTS, in the form of Attachment A to Exhibit O (or such other form as Buyer will accept in its discretion). "Closing Date" shall mean the date of recordation of the Deed. "Closing Documents" shall mean the Closing Certificates, the Parking Easement Agreement, the Reliance Letter, and the Development Indemnity Agreement and, if applicable, the WHTS Modification Indemnity. "Contingency Period" shall mean the period commencing on the Contract Date and terminating at 11:00 a.m. Pacific Time on July 2, 2003. "Contract Date" shall mean June 11, 2003. "Development Indemnity Agreement" shall mean a Development Indemnity Agreement in the form set forth in attached Exhibit S, to be executed and recorded in the office of the Santa Clara County Clerk Recorder, on or prior to the Closing Date, by WHTS and WHTS Freedom Circle Partners, L.L.C. a Delaware limited liability company (as the owner of the Adjacent Property). "Environmental Insurance Policy" shall mean an insurance policy insuring against loss and liability as a consequence of the presence of legionella bacteria in the Property after the Closing Date in such form and from such insurer and with such coverages, deductibles, and exclusions as Buyer shall approve during the Contingency Period and insuring Buyer and naming Seller and such other parties as Buyer shall designate during the Contingency Period as additional insureds. "Environmental Laws" shall mean any and all federal, state and local laws, statutes, rules, regulations, requirements under permits issued with respect thereto, and other requirements of any federal, state or local governmental agency, court, board, bureau or other authority having jurisdiction with respect to or relating to the environment, to any Hazardous Substance or to any activity involving Hazardous Substances, and shall include, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601, et seq., the Federal Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.) and all amendments thereto in effect as of the Closing Date. "Hazardous Substances" shall mean and include any chemical, compound, material, mixture, waste or substance that is defined or listed in, or otherwise classified pursuant to, any Environmental Laws as a "hazardous substance," "hazardous material," "hazardous waste," "extremely hazardous waste," "infectious waste," "toxic substance," "toxic pollutant" or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, or toxicity including any petroleum, natural gas, natural gas liquids, liquified natural gas, or synthetic gas usable for fuel (or mixture of natural gas and such synthetic gas) and including legionella bacteria. "Hazardous Substances" shall include, without limitation, any hazardous or toxic substance, material or waste or any chemical, compound or mixture which is (i) asbestos, (ii) designated as a "hazardous substance" pursuant to Section 1317 of the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), (iii) defined as a "hazardous waste" pursuant to Section 6903 of the Federal Resource Conservation and Recovery Act, (42 U.S.C. Section 6901 et seq., (iv) defined as "hazardous substances" pursuant to Section 9601 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq.), or (v) listed in the United States Department of Transportation Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR part 302); or in any and all amendments thereto in effect as of the Closing Date; or such chemicals, compounds, mixtures, substances, materials or wastes otherwise regulated under any applicable local, state or federal Environmental Laws. "Hillmann" shall mean Hillmann Environmental Company, Inc., now known as Hillmann Environmental Group. "Improvements" shall mean all improvements and fixtures now or hereafter located on the Land including, without limitation, the twelve (12) story building (the "Building") constructed on the Land, together with all appurtenances thereto and all apparatus, equipment and appliances located on the Land and owned by Seller and used in connection with the operation and occupancy thereof such as systems or facilities for heating, ventilation, air conditioning, climate control, utility services, parking services, garbage disposal, irrigation and/or recreation, and all landscaping. "Intangible Property" shall mean Seller's rights, title and interests in: (a) any and all transferable or assignable permits, building plans and specifications, certificates of occupancy, operating permits, sign permits, development rights and approvals, certificates, licenses, warranties and guarantees, trade names, service marks, engineering, soils, pest control and other reports relating to the Property, tenant lists, advertising materials, and telephone exchange numbers identified with the Property; and (b) all other transferable intangible property, miscellaneous rights, benefits or privileges of any kind or character with respect to the Property. "Land" shall mean the real property commonly known as 3985 Freedom Circle, Santa Clara, California, and more particularly described in Exhibit A to this Agreement, and all rights and interests appurtenant thereto, including but not limited to rights under the Parking Easement Agreement and all other easements, riparian or other water rights, rights of way and other interests appurtenant thereto, and all right, title and interest of Seller in and to any land lying in the bed of any street, road, highway or avenue, open or proposed, in front of, adjacent to or adjoining such real property and in all strips and gores. "Laws and Restrictions" shall mean all applicable federal, state, local and other laws, statutes, regulations, codes, orders, ordinances and rules including, without limitation, those relating to fire, safety, land use, subdivision, health, labor, environmental protection, seismic design, conservation, parking, handicapped access, zoning and building, and all restrictive covenants (if any), other title encumbrances and other obligations affecting the Property, all Environmental Laws, all applicable provisions of the Fair Housing Act of 1968 and the Americans With Disabilities Act of 1990, and all amendments thereto. "Material Exception" is defined in Section 4(c)(ix). "Parking Easement Agreement" shall mean that certain Easement Agreement dated July 6, 2000, and recorded on September 22, 2000 as Document No. 15400202 in the office of the Santa Clara County Clerk Recorder, as amended by First Amendment dated October 31, 2000, recorded as Document No. 15445030 on November 2, 2000, by and between Seller and WHTS Freedom Circle Partners, L.L.C., as the same shall be amended and restated (and recorded in the office of the Santa Clara County Clerk Recorder) on the Closing Date as set forth in attached Exhibit J. "Permitted Exceptions" shall mean the exceptions to title identified as items 1 through 14, inclusive, on Schedule B, Part 2 of the Title Commitment attached hereto as Exhibit I. "Personal Property" shall mean all personal property now or hereafter owned by WHTS and conveyed to Seller, or otherwise owned by Seller, which is used in connection with the Land, the Improvements and/or the Intangible Property or the ownership or operation thereof including, without limitation, all furniture, fixtures, machinery, appliances and equipment located on the Property, other than personal property owned by tenants of the Property. A list of the Personal Property is attached hereto as Exhibit C. "Property" shall mean collectively the Land, the Improvements, the Personal Property, and the Intangible Property. "Reliance Letter" shall mean a letter in the form of Exhibit Q attached hereto addressed to Buyer and duly signed by Hillmann. "Scheduled Closing Date" shall mean July 7, 2003. "Title Commitment" shall mean that title commitment issued by the Title Company for an ALTA Extended Coverage Owner's Policy of Title Insurance in the amount of the Purchase Price (Form B, Rev. 10/17/70), and including a commitment for the following endorsements: CLTA endorsements numbered 100 (modified) 100.6, 103.4, 103.7, 116, 116.1, 116.4, 116.7 and 123.2, a "Fairway" endorsement, and a "separate tax parcel" endorsement, which is attached hereto as Exhibit I. "Title Company" shall mean First American Guaranty Company whose address for this transaction is as follows: First American Guaranty Company 1737 North First Street, Suite 100 San Jose, California 95112 Attn: Mike Hickey Fax No. (408) 451-7836 "Title Policy" is defined in Section 4(c)(i). "WHTS Modification Indemnity" shall mean a WHTS Modification Indemnity in the form set forth in attached Exhibit T as described in Sections 4(c)(ix) and (x). 2. Purchase And Sale. Seller agrees to sell the Property to Buyer, and Buyer agrees to purchase the Property from Seller, subject to and on all of the terms, covenants and conditions set forth in this Agreement. Within one (1) business day following the Contract Date, Seller shall designate Buyer as the "Buyer Party" under the WHTS Agreement. 3. Purchase Price. The total purchase price for the Property (the "Purchase Price") shall be the sum of $32,750,000 which, subject to all prorations and adjustments provided in this Agreement, shall be paid by Buyer to Seller through escrow on the Closing Date as follows: 3.1 Deposit. Prior to the expiration of the Contingency Period, provided Buyer does not elect to terminate this Agreement in accordance with Section 4 below, Buyer shall deposit with the Title Company the amount of $3,000,000 (the "Deposit"), which sum the Title Company shall deposit in a federally insured interest-bearing "money market" account at a financial institution reasonably acceptable to Buyer with the interest from such account to be credited to Buyer. 3.2 Cash Payment. The balance of Purchase Price shall be paid by Buyer to Seller or, if Seller so directs, to WHTS, by wire transfer in immediately available federal funds on the Closing Date. 4. Review And Inspection; "As-Is" Purchase; Conditions To Agreement. (a) Review And Inspection. During the Contingency Period, Buyer, as the "Buyer Party" under the WHTS Agreement, shall have the right to conduct, at its sole cost and expense, such investigations, studies, surveys, analyses and tests on and of the Property as it shall, in its sole discretion, determine are necessary or desirable, including, without limitation, soil tests, environmental audits and studies, and make such evaluations as Buyer may, in its sole and absolute discretion, determine are necessary or desirable under the circumstances, provided that (i) the Buyer's right to enter upon and undertake samples, tests, and borings are subject to and shall comply with the WHTS Agreement, including as appropriate the obtaining of consent of WHTS and the maintenance of insurance, in accordance with such agreement, (ii) Buyer, as the "Buyer Party" under the WHTS Agreement shall only have the right to conduct soils and groundwater tests and borings regarding the environmental condition of the Property with Seller's prior written consent, which shall not be unreasonably withheld or delayed, (iii) Buyer shall maintain a Three Million Dollar ($3,000,000) combined, single limit, comprehensive general commercial liability insurance policy with respect to the Property, issued by a licensed insurance company naming Seller, WHTS and WHTS' property manager as additional insureds and its consultants and subcontractors engaging any investigation of the Property shall carry at least a One Million Five Hundred Thousand Dollar ($1,500,000) combined, single limit, comprehensive general commercial liability insurance policy while on or about the Property; and (iv) Buyer shall defend, indemnify, protect and hold WHTS, the Property, Seller and Seller's affiliates, members, subsidiaries, officers, directors and agents harmless from and against any loss, cost, damage, or expense (including without limitation, reasonable attorneys' fees) incurred by Seller as a result of property damage, personal injury, or mechanics' liens, to the extent arising out of Buyer's inspections of the Property or Improvements. Without limiting the generality of the foregoing, Buyer agrees to pay WHTS and/or Seller, upon demand, the cost of repairing and restoring any damage or disturbance which Buyer or its agents or contractors cause to the Property. Notwithstanding the foregoing, Buyer shall have no liability for the discovery of any matters in, on, at, or relating to the Property. The indemnity contained in this Section 4(a) shall survive the close of escrow or termination of this Agreement. In order to perform the foregoing investigations, during the Contingency Period, Buyer, its potential lenders, and the agents, contractors, and employees for said parties shall have reasonable access to the Property, all for the purposes of inspecting the same and conducting tests, inspections, and analyses thereon and making evaluations thereof, all at Buyer's expense. Buyer shall not be permitted to conduct any borings, drillings, soils tests, or groundwater tests on the Property in connection with the preparation of an environmental audit or in connection with any other inspection of the Property without the prior written reasonable consent of Seller and WHTS. Buyer shall schedule and coordinate all inspections, including, without limitation, any environmental tests, with Seller and WHTS and shall give Seller and WHTS at least one (1) business day's prior notice of such test and the ability, if Seller or WHTS may so desire, to take split samples (at no additional expense to Buyer). Seller and WHTS shall be entitled to have a representative present at all times during each such inspection. Seller has made available to Buyer the documents, plans, studies (environmental or otherwise) and reports listed on Exhibit M attached hereto to the extent the same are in Seller's possession or control. Except as specifically set forth in Section 5.1 of this Agreement or the Seller Closing Certificate, Seller makes no representation or warranty relating to the validity of such information and Buyer is responsible to verify such information at its discretion. Nothing contained in this Section 4(a) shall (i) limit the representations, warranties or indemnities made by WHTS under the WHTS Closing Certificate or the other Closing Documents or Buyer's rights and remedies against WHTS thereunder or (ii) limit the representations or warranties made by Seller under the Seller Closing Certificate and/or Section 5.1 of this Agreement. In conducting the inspection of the Property, Buyer shall at all times comply with all laws and regulations of all applicable governmental authorities, and Buyer shall not contact or have any discussions with any of WHTS' employees, agents or representatives, or with any contractors providing services to the Property unless in each case Buyer obtains the prior consent of WHTS, it being agreed that all such contacts or discussions shall, pending any such approval, be directed to Carl Shannon at (415) 536-1850. (b) Termination During Contingency Period. Buyer may, at any time during the Contingency Period, for any reason or no reason, (i) terminate this Agreement by delivering to Seller its written notice of termination prior to the expiration of the Contingency Period, or (ii) waive its right to terminate this Agreement by, prior to the expiration of the Contingency Period, (a) waiving its termination right in writing and delivering such waiver to Seller, (b) timely delivering the Additional Deposit to the Title Company, and (c) delivering to Seller either (x) a pro forma of the Environmental Insurance Policy or (y) its written waiver of the condition precedent set forth in Section 4(c)(xii). In the event Buyer (1) fails to provide a written waiver of its right to terminate in accordance with the foregoing no later than 5 p.m. Pacific time on the last day of the Contingency Period, (2) fails to deposit the Additional Deposit with the Title Company no later than 5 p.m. Pacific time on the last day of the Contingency Period, or (3) fails to either deliver the pro forma of the Environmental Insurance Policy to Seller or deliver its election in writing to waive the condition precedent set forth in Section 4(c)(xii), by 5 p.m. Pacific time on the last day of the Contingency Period, then this Agreement shall automatically terminate. In the event of any automatic termination or other termination by Buyer pursuant to this Section 4(b), (x) the Initial Deposit and all other funds deposited in escrow by Buyer and all interest accrued on such funds (less Buyer's share of any escrow and title cancellation fees) shall be returned immediately to Buyer, (y) all documents deposited in escrow by Buyer or Seller shall be returned to the depositing party, and (z) Buyer shall promptly deliver to Seller, at no cost to Seller, and without representation or warranty, the originals or copies of all tests, reports and inspections of the Property, which do not restrict such delivery to a third party, made and conducted by Buyer or for Buyer's benefit which are in the possession or control of Buyer and promptly return to Seller copies of all materials delivered by Seller or WHTS to Buyer and shall destroy all copies and abstracts thereof, and except for this Section and the provisions of this Agreement that expressly survive the termination of this Agreement, this Agreement shall be null and void and of no further force and effect, and neither Seller nor Buyer shall have any further rights or obligations hereunder. (c) Conditions Precedent. Seller's obligation to sell the Property to Buyer shall be conditioned upon (A) the acquisition of the Property by PMC or its affiliate on the terms set forth in the WHTS Agreement (or such other terms reasonably acceptable to Seller), and (B) the issuance of (or irrevocable commitment of the applicable insurer to issue concurrently with the close of escrow) the Environmental Insurance Policy. In addition, Buyer's obligation to purchase the Property shall be conditioned expressly upon the fulfillment of each of the following conditions precedent on or before the Closing Date: (i) The issuance by the Title Company, or the irrevocable binding commitment of the Title Company to issue, to Buyer, on the Closing Date, conditioned only upon payment of the Title Company's regularly-scheduled premium, the title policy ("Title Policy") described in the Title Commitment, including the endorsements described in the Title Commitment, insuring Buyer that fee simple absolute title to the Property is vested, free and clear of all liens and encumbrances except for the Permitted Exceptions. (ii) Subject to Section 8 of this Agreement, there shall have been no material adverse change in the condition of the Property, or any portion thereof. (iii) There are no contracts, other than the Permitted Exceptions, that certain Master License Agreement dated May 4, 2001 by an between TishmanSpeyer Properties and Ad Walls, LLC, and any other agreements approved in writing by Buyer, which will affect the Property or be binding upon Buyer on or after the Closing Date. (iv) From and after the Contract Date, WHTS has not failed in any material respect to perform the items described in clauses (i) through (vi) of Section 5.3(a) below. (v) From and after the Contract Date, WHTS has not removed or permitted the removal of any Personal Property or any fixtures from the Property except to the extent such items were replaced with Personal Property or fixtures of equal or greater value. (vi) The acquisition of fee title to the Property by PMC or its affiliate, and the termination of the WHTS Lease. (vii) The execution, acknowledgement, and delivery by WHTS and the owner of the Adjacent Property of an Amended and Restated Parking Easement Agreement in the form attached hereto as Exhibit J to escrow, the recordation thereof in the office of the Santa Clara County Clerk Recorder and the recorded subordination thereto by the holder of any deed of trust or other foreclosable document or instrument currently encumbering the Adjacent Property, all on or prior to the Closing Date. (viii) The execution and delivery by Hillmann to escrow for delivery to Buyer at the close of escrow of the Reliance Letter, provided, however, that if the Reliance Letter is not then in fact delivered to Buyer at the close of escrow, this condition shall be deemed to have failed. Seller cannot and does not make any warranty or representation whatsoever concerning the completeness or the accuracy of any matters contained in the Reliance Letter. (ix) The execution by the parties thereto and delivery to escrow for the delivery to Buyer at the close of escrow of the Closing Certificates; provided however, that if the Closing Certificates are not then in fact delivered to Buyer at the close of escrow this condition shall be deemed to have failed. Notwithstanding the foregoing, if WHTS includes any matter on Schedule 2 to the WHTS Closing Certificate and all matters on Schedule 2 to the WHTS Closing Certificate, when taken together, constitute a "Material Exception" (as hereinafter defined), Buyer shall have the right to terminate this Agreement. Upon any such termination, upon Buyer's demand, the Deposit will be returned by the Title Company to Buyer (and Seller shall so instruct the Title Company) and, subject to the provision for reimbursement of expenses under certain circumstances set forth in this Section 4(c)(ix), this Agreement shall terminate and be of no further force or effect, except for those provisions that expressly survive the termination hereof. If this Agreement is not so terminated by Buyer, then Seller and Buyer shall consummate this transaction in accordance with this Agreement. If WHTS includes any matter on Schedule 2 to the WHTS Closing Certificate, but all of the matters on Schedule 2 to the WHTS Closing Certificate do not in the aggregate constitute a Material Exception (as hereinafter defined), then (1) Buyer shall have no right to terminate this Agreement pursuant to this Section 4(c)(ix), and (2) the additional condition precedent described in Section 4(c)(x) shall apply and (3) subject to the terms and conditions of this Agreement, Seller and Buyer shall consummate this transaction without any abatement in the Purchase Price as a result of that matter (so long as the condition precedent described in Section 4(c)(x) is satisfied). Furthermore, if Buyer terminates this Agreement pursuant to this Section 4(c)(ix) and a matter set forth on Schedule 2 to the WHTS Closing Certificate, which alone or together with other matters thereon, gave rise to the termination right, makes the representations and warranties made by WHTS in Section 5.1 of the WHTS Agreement false when made (a copy of which Section 5.1 is attached hereto as Exhibit B, and which shall not be modified by Seller), then Seller, upon Buyer's written request, shall pay to Buyer an amount equal to all of Buyer's out-of-pocket costs incurred by Buyer in connection with this transaction, including but not limited to its legal expenses relating to this transaction, non-refundable loan fees, and its studies, inspections and investigations of the Property during the Contingency Period, but in no event to exceed $250,000 provided, however, that Seller's obligation to make this payment shall be limited to the amount collected by Seller (and Seller shall exercise its reasonable and diligent efforts to so collect) (or which could reasonably have been collected by Seller, assuming all reasonable diligence in attempted collection) pursuant to Section 4(c)(viii) of the WHTS Agreement (a copy of which Section 4(c)(viii) is attached hereto as Exhibit D and which shall not be modified by Seller). For the purposes of this Section 4(c)(ix), the matters set forth on Schedule 2 to the WHTS Closing Certificate shall be deemed a "Material Exception," if, but only if, all of the matters included on Schedule 2 to the WHTS Closing Certificate, when taken together, would reasonably be expected to result in additional cost, expense, liability and/or damage to Buyer (after factoring in all cost of litigating, resolving, and/or defending the matter, any reduction in the fair market value of the Property, any contingent liability, and the cost of any delay in the lease-up of the Property) in excess of Five Hundred Thousand Dollars ($500,000). The provisions of this Section 4(c)(ix) shall survive the close of escrow and the termination of this Agreement. In addition, the provisions of this Section 4(c)(ix) shall be subject to Section 8 of this Agreement and shall not apply to any events covered thereunder. (x) If, but only if, required pursuant to Section 4(c)(ix) above, the delivery to escrow for delivery to Buyer at the close of escrow of the WHTS Modification Indemnity; provided however, that if the WHTS Modification Indemnity is not then in fact delivered to Buyer at the close of escrow this condition shall be deemed to have failed. The WHTS Modification Indemnity shall be subject to the limitations set forth in the WHTS Closing Certificate. (xi) The execution, acknowledgement, and delivery to escrow by WHTS and the owner of the Adjacent Property of the Development Indemnity Agreement and the recordation of the Development Indemnity Agreement in the office of the Santa Clara County Clerk Recorder, all on or prior to the Closing Date. (xii) The issuance of the Environmental Insurance Policy. Buyer shall use good faith efforts to obtain the Environmental Insurance Policy, and Seller shall reasonably cooperate with Buyer in connection with the obtaining of the Environmental Insurance Policy. (xiii) The performance by Seller of its obligations under Section 6.3 of this Agreement. At any time or times on or before the Scheduled Closing Date, Buyer may waive any of the foregoing conditions by written notice to Seller. Other than Buyer's close of escrow pursuant to this Agreement which shall waive all such unfulfilled conditions, no waiver shall be effective unless made in writing specific as to the conditions or matters so waived. In the event that any of the conditions precedent to Buyer's obligation to purchase the Property in this Section 4(c) are not satisfied or otherwise waived by Buyer on or before July 8, 2003 (other than a failure of a condition precedent caused by a breach of Buyer's obligations under this Agreement), then Buyer shall have the right to terminate this Agreement by delivering to Seller written notice of such termination in which event the Deposit shall be returned immediately to Buyer. If Buyer terminates this Agreement pursuant to the preceding sentence and the failure of such condition precedent was caused by the breach by WHTS of the WHTS Agreement or a breach by Seller under this Agreement, then Seller, upon Buyer's written request, shall pay to Buyer an amount equal to all of Buyer's out-of-pocket costs incurred by Buyer in connection with this transaction, including but not limited to its legal expenses relating to this transaction and its studies, inspections and investigations of the Property (but excluding loan fees), but in no event to exceed $175,000. Seller's obligation under the preceding sentence shall not be subject to the $100,000 floor set forth in the last paragraph of Section 5.1. (d) AS IS Purchase. Buyer acknowledges that Buyer will have had the opportunity to conduct prior to the Closing Date, such studies and investigations of the Property as Buyer desires, and that Buyer will have had the right to observe to its satisfaction, and will have observed to its satisfaction, the physical characteristics and condition of the Property. Nothing contained in this Section 4(d) shall (i) limit the representations, warranties or indemnities made by WHTS under the WHTS Closing Certificate or the other Closing Documents or Buyer's rights and remedies against WHTS thereunder or (ii) limit the representations or warranties made by Seller under the Seller Closing Certificate and/or Section 5.1 of this Agreement. Except as expressly set forth in the Closing Documents or this Agreement, Buyer acknowledges and agrees that the Property is to be purchased and accepted by Buyer in its condition as of the Closing Date, "AS IS", without any implied or express warranty or representation by Seller or anyone acting or purporting to act on Seller's behalf ("Seller's Agents"), and with all patent and latent defects. No representations or warranties, express or implied regarding the Property or matters affecting the Property have been or will be made with respect to the Property or the subject matter of this Agreement (i) by Seller or Seller's Agents, except as expressly set forth in the Seller Closing Certificate and/or Section 5.1 of this Agreement, or (ii) by any other person or entity (including without limitation WHTS, or anyone acting or claiming to act on WHTS' behalf (other than Seller and Seller's Agents)), except as expressly set forth in the Closing Documents. Without limiting the foregoing, Buyer acknowledges that no representation is or will be made concerning the physical condition, environmental, economic, or legal condition of the Property, title to or the boundaries of the Property, topography, climate, air, water rights, utilities, leases, water, present and future zoning, physical condition, soil condition, pest control matters, engineering characteristics, traffic patterns, purposes to which the Property may be suited, value, potential for development, contamination, drainage, access to public roads, proposed routes of roads or extensions thereof, and compliance with building, health, safety laws, Environmental Laws, land use laws and regulations to which the Property may be subject or any other matter in any way affecting the Property, or the use or ownership thereof (herein collectively the "Property Matters") (i) by Seller or Seller's Agents, except as expressly set forth in the Seller Closing Certificate and/or Section 5.1 of this Agreement, or (ii) by any other person or entity (including, without limitation, WHTS or anyone acting or claiming to act on WHTS' behalf (other than Seller and Seller's Agents)), except as expressly set forth in the Closing Documents. Buyer acknowledges that, although Seller has disclosed, made available, or caused WHTS to make available documents and reports concerning the Property, that Seller cannot and does not make any warranty or representation whatsoever concerning the completeness or the accuracy of information contained in such documents and reports and that Buyer is not relying upon any such representations and warranties, other than (i) with respect to Seller and Seller's Agents, those expressly set forth in the Seller Closing Certificate and/or Section 5.1 of this Agreement, and (ii) with respect to any other person or entity (including, without limitation, WHTS and those acting or purporting to act on behalf of WHTS (other than Seller and Seller's Agents)), those expressly set forth in the Closing Documents. Buyer further acknowledges that it has not received from Seller, WHTS or anyone acting or claiming to act on their behalf, any accounting, tax, legal, architectural, engineering, property management, environmental or other advice with respect to this transaction and is relying solely upon the advice of its own accounting, tax, legal, architectural, engineering, property management, environmental and other advisors. Furthermore, the representations and warranties of Seller and Seller's Agents set forth in this Agreement or otherwise made in any form (other than in the Seller's Closing Certificate) are merged into the deed at the closing. THEREFORE, EXCEPT AS EXPRESSLY SET FORTH IN SECTION 5.1 OF THIS AGREEMENT AND THE SELLER CLOSING CERTIFICATE, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, DIRECTLY OR INDIRECTLY TO BUYER, AND SELLER IS TRANSFERRING THE PROPERTY TO BUYER, AND BUYER IS PURCHASING THE PROPERTY FROM SELLER, WITHOUT RECOURSE TO SELLER, IN ITS "AS IS" CONDITION ON THE CLOSING DATE, AND BUYER, FOR THE EXPRESS BENEFIT OF SELLER, IS ASSUMING ON THE CLOSING DATE THE RISK THAT ADVERSE PHYSICAL, ENVIRONMENTAL, ECONOMIC OR LEGAL CONDITIONS MAY NOT HAVE BEEN REVEALED BY ITS INVESTIGATION; PROVIDED, HOWEVER, THAT NOTHING IN THIS SUBPARAGRAPH SHALL BE DEEMED TO BE A WAIVER BY BUYER OF ANY CLAIMS BUYER MAY HAVE AGAINST WHTS OR ANY PARTY (OTHER THAN SELLER AND SELLER'S AGENTS) PURSUANT TO THE WHTS CLOSING CERTIFICATE AND THE OTHER CLOSING DOCUMENTS. The acknowledgments contained in this Section constitute a conclusive admission that (a) Buyer is a sophisticated, knowledgeable investor in commercial property, and (b) without waiving any claims Buyer may have against WHTS or any party (other than Seller and Seller's Agents) pursuant to the WHTS Closing Certificate and the other Closing Documents, Buyer is relying upon its own judgment as to any matter germane to the Property, or its purchase or contemplated use thereof, and not on the judgment of Seller or any Seller Agent, and (c) except as expressly set forth in the Seller Closing Certificate, any statement by Seller or any Seller Agent with respect to any Property Matter, whether oral, written, constructive express or implied, is immaterial to Buyer. Except with respect to any claims against Seller arising out of any breach of covenants, representations or warranties set forth in the Seller Closing Certificate, effective as of the Closing Date, Buyer, for itself and its agents, affiliates, successors and assigns ("Buyer Parties"), hereby releases and forever discharges Seller, its affiliates, successors and assigns, and their respective officers, directors, shareholders, employees and agents, from any and all rights, claims and demands at law or in equity, whether known or unknown at the time of this Agreement, which Buyer has or may have in the future, arising out of the Property or the Property Matters, including, without limitation, any claims for indemnification or contribution arising under the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601 et seq.) or any similar federal, state or local statute, rule or ordinance relating to liability of property owners for environmental matters, or arising due to the presence of LPB (as defined in Section 5.2(c)) at the Property. In giving the foregoing releases, Buyer expressly waives the provisions of California Civil Code Section 1542 as it applies to the foregoing mutual release, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." This Section 4(d) shall survive the close of escrow. Buyer hereby specifically acknowledges that Buyer has carefully reviewed this subsection and discussed its import with legal counsel and that provisions of this subsection are a material part of this Agreement. 5. Representations, Warranties, Covenants And Agreements. 5.1 Representations And Warranties Of Seller. Seller hereby makes the following representations and warranties to and for the benefit of Buyer, each of which representations and warranties (i) is material and being relied upon by Buyer, (ii) is made as an inducement to Buyer to enter into this Agreement and consummate the transaction contemplated hereby, (iii) is true in all respects as of the date of this Agreement, (iv) shall be true in all material respects on the Closing Date, and (v) shall survive the close of escrow, but such survival shall be limited as set forth in this Section 5.1. (a) Seller is a Delaware corporation and has the full power, authority and legal right to enter into and perform this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of the Seller. (b) Seller has no actual knowledge of any pending or threatened actions or proceedings before any court or administrative agency which would reasonably be expected to materially adversely affect the ability of Seller to perform Seller's obligations under this Agreement. (c) Seller is not a "foreign person" as defined in Internal Revenue Code Section 1445 and any related regulations. At the closing, Buyer will have no duty to collect withholding Taxes for Seller pursuant to the Foreign Investment in U.S. Real Property Tax Act of 1980, as amended. (d) Seller has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its creditors; (iii) suffered the appointment of a receiver to take possession of all or substantially all of its assets; or (iv) suffered the attachment or other judicial seizure of all or substantially all of its assets. (e) Seller has made available to Buyer all reports and documents made available to Seller by WHTS pursuant to the WHTS Agreement including, without limitation, those listed on Exhibit M attached hereto to the extent such documents are in Seller's possession or control, and PMC does not have reason to believe that WHTS has failed to make available to Seller any reports or documents in WHTS' control relating to the physical, environmental, economic or legal condition of the Property; provided, however, that Seller cannot and does not make any warranty or representation whatsoever concerning the completeness or the accuracy of information contained in such documents and reports. (f) There are no documents or reports in Seller's possession or under Seller's control, that contain information that would lead a reasonably prudent buyer to conclude that the physical, environmental, economic or legal condition of the Property is materially and adversely inconsistent with that represented in the documents and reports made available to Buyer prior to June 16, 2003. The representations and warranties of Seller contained in this Section 5.1 shall survive the Closing for one (1) year following the Closing Date (the "Limitation Period") except that the Limitation Period with respect to the representations and warranties of Seller contained in clauses (b) and (e) of this Section 5.1 shall be two (2) years. Each such representation and warranty shall automatically be null and void and of no further force and effect following the expiration of the applicable Limitation Period unless, prior to such expiration, Buyer shall have provided Seller with a written notice alleging that Seller shall be in breach of such representation or warranty and specifying in reasonable detail the nature of such breach. Any legal proceeding against Seller for such breach must be commenced, if at all, within ninety (90) days after the expiration of the applicable Limitation Period. Notwithstanding anything to the contrary set forth in this Agreement, Seller's liability for breach of any covenant, representation or warranty of Seller contained in this Agreement and in any document executed by Seller pursuant to this Agreement, including any instruments delivered at Closing, shall, subject to the limitations of survival set forth in this Section 5.1 be limited to claims in excess of One Hundred Thousand Dollars ($100,000) in the aggregate (but once the aggregate exceeds $100,000, Seller shall be liable to the full extent of such claims), and Seller's aggregate liability for any and all claims arising out of any such covenants, representations and warranties shall not exceed Five Million Dollars ($5,000,000). 5.2 Representations And Warranties Of Buyer. Buyer hereby makes the following representations and warranties to and for the benefit of Seller, each of which representations and warranties (i) is material and being relied upon by Seller, (ii) is made as an inducement to Seller to enter into this Agreement and consummate the transaction contemplated hereby, (iii) is true in all respects as of the date of this Agreement, (iv) shall be true in all material respects on the Closing Date, and (v) shall survive the close of escrow: (a) Buyer is a Delaware limited liability company and it has the full power, authority and legal right to enter into and perform this Agreement. The execution, delivery and performance of this have been duly authorized by all necessary action on the part of Buyer. (b) Buyer has not (i) made a general assignment for the benefit of creditors; (ii) filed any voluntary petition in bankruptcy or suffered the filing of any voluntary petition by its creditors; (iii) suffered the appointment of a receiver to take possession of all or substantially all of its assets; or (iv) suffered the attachment or other judicial seizure of all or substantially all of its assets. (c) Buyer expressly acknowledges that it is aware that legionella pneumophila bacterium ("LPB") has been present at the Property, and, except as expressly provided in the Closing Certificates, Buyer shall make and rely solely on its own independent investigation and WHTS' representations and warranties under the WHTS Closing Certificate with respect thereto. Buyer's liability for breach of any covenant, representation or warranty of Buyer contained in the Agreement, shall be limited to claims in excess of One Hundred Thousand Dollars ($100,000) in the aggregate, and Buyer's aggregate liability for any and all claims arising out of any such covenants, representations and warranties shall not exceed Five Million Dollars ($5,000,000). 5.3 Agreements. Each of Buyer and Seller hereby specifically agrees as follows: (a) From the date of this Agreement to the Closing Date, Seller shall use reasonable efforts to enforce WHTS' obligations under the WHTS Agreement to (i) manage, maintain, operate, and service the Property, to the same standard as existed at the Contract Date so as to keep the Property and every portion thereof in the same working order and repair as existed on the Contract Date, (ii) not remove or permit the removal of any Personal Property or any fixtures from the Property unless such items are replaced immediately with Personal Property or fixtures of equal or greater value, (iii) comply, in all material respects, with all Laws and Restrictions with respect to the Property, (iv) not modify, terminate, cancel, extend, or amend any lease, contracts or arrangements which will affect the Property or be binding upon the Buyer on or after the Closing Date without the consent of Buyer, which consent shall not be unreasonably withheld, conditioned or delayed, (v) not enter into any leases or other agreements with respect to the occupancy, maintenance or improvement of the Property that continue after the Closing Date without Buyer's prior written approval (which Buyer may withhold in its sole discretion), and (vi) maintain in full force and effect all of the insurance policies and coverages currently in effect with respect to the Property. From the date of this Agreement to the earlier of the Scheduled Closing Date or the termination of this Agreement, Seller shall not lease, sublease, assign or otherwise transfer the WHTS Lease, the Property, or any portion thereof or interest therein (except to a party which has assumed the obligations of Seller under this Agreement). (b) Immediately upon its acquisition of the Property, Seller shall terminate the WHTS Lease, by merger or otherwise, if Seller acquires title to the Property. (c) Provided (i) all of the conditions precedent in Section 4(c) of this Agreement and Section 4(c) of the WHTS Agreement are satisfied on or before the Closing Date, (ii) this Agreement is not terminated pursuant to Section 4(b) of this Agreement or otherwise in accordance with the terms of this Agreement or applicable law, (iii) WHTS fully tenders its performance of all of its obligations under the WHTS Agreement to sell the Property to Seller in accordance with the WHTS Agreement and (iii) Buyer fully tenders its performance of all of its obligations under this Agreement to purchase the Property from Seller in accordance with this Agreement, then Seller shall purchase the Property from WHTS as permitted by and in accordance with the WHTS Agreement; provided, however, that a failure in the foregoing shall not excuse performance by Seller hereunder to the extent such failure is caused by Seller's breach of this Agreement or the WHTS Agreement or by the acts or omissions of Seller made for the purpose of causing such failure. Seller shall use reasonable efforts to not cause the failure of any of the foregoing. (d) Seller shall promptly notify Buyer in writing of any event or circumstance known to Seller which materially adversely affects Seller's ability to perform its obligations under this Agreement in a timely manner or the likelihood of timely satisfaction of the conditions precedent set forth above. (e) Seller shall promptly notify Buyer in writing if Seller becomes aware of any fact or occurrence that would render any of its representations or warranties under Section 5.1 above untrue, or would render it unable to deliver the Closing Certificates on the Closing Date. (f) Seller shall pay at the close of escrow the cost of the one-time premium for the Environmental Insurance Policy (the "Insurance Premium") up to a maximum of Two Hundred Thousand ($200,000) and Buyer shall pay at the close of escrow the cost of the Insurance Premium in excess of said amount. (g) Seller shall promptly forward to Buyer any notice delivered prior to the Closing Date by WHTS to Seller with respect to the Property pursuant to the WHTS Agreement. (h) On the Closing Date, Seller shall deliver possession of the Property to Buyer free and clear of any leases, occupancy agreements, occupants or other parties in possession. 6. TITLE, ESCROW AND CLOSING. 6.1 Conditions Of Title. On the Closing Date, Seller shall deliver to Escrow Holder a deed in the form attached hereto as Exhibit E (the "Deed"). 6.2 Closing Date. Subject to the conditions precedent herein set forth, through an escrow established with the Title Company, Buyer and Seller shall consummate this transaction on the Scheduled Closing Date or such other date upon which Buyer and Seller may mutually agree. 6.3 Deposits And Deliveries By Seller. Subject to the conditions precedent herein set forth and the terms and conditions of this Agreement, Seller shall deposit or cause to be deposited into escrow with the Title Company for delivery to Buyer or such person as Buyer shall designate, or deliver directly to Buyer outside of escrow, on or before the Scheduled Closing Date, the following documents duly executed and acknowledged as required: (a) The Deed. (b) A Bill of Sale and Assignment of Intangible Property in the form attached hereto as Exhibit F transferring the Personal Property and Intangible Property to Buyer (the "Bill of Sale"). (c) An Affidavit of Non-Foreign Status in form attached hereto as Exhibit H (the "Non-Foreign Affidavit) and a California Form 597-W (the "California Affidavit"). (d) A Closing Certificate in the form of attached Exhibit O. (e) Seller's written escrow instructions to close escrow in accordance with the terms of this Agreement. (f) Evidence reasonably acceptable to Buyer's counsel that the documents delivered to Buyer by Seller at closing have been duly authorized by Seller and duly executed on behalf of Seller. (g) Wire transfer of immediately available funds in the amount of Seller's obligation pursuant to Section 5.3(f) or a credit towards the Purchase Price in such amount. (h) Such other documents, resolutions, consents and affidavits required to effect the valid consummation of the transaction evidenced by this Agreement. 6.4 Deposits And Deliveries By Buyer. Subject to the conditions precedent herein set forth, Buyer shall deposit or cause to be deposited into escrow with the Title Company for delivery to Seller or such person as Seller shall designate, or deliver directly to Seller outside of escrow, on or before the Scheduled Closing Date, each of the following documents duly executed and acknowledged as required and funds: (a) Wire transfer of immediately available funds, which, together with the Deposit, shall equal the Purchase Price (the "Purchase Funds"). (b) Cash, wire transfer, cashier's check, or other immediately available funds covering Buyer's share of closing costs and prorations. (c) Intentionally Deleted. (d) A closing certificate confirming the accuracy and completeness, in all material respects, as of the Closing Date of each representation and warranty made herein by Buyer. (e) Buyer's written escrow instructions to close escrow in accordance with the terms of this Agreement. (f) Evidence reasonably acceptable to Seller's counsel that the documents delivered to Seller by Buyer at closing have been duly authorized by Buyer and duly executed on behalf of Buyer. (g) Intentionally Deleted. (h) Such other documents, resolutions, consents and affidavits required to effect the valid consummation of the transaction evidenced by this Agreement. 6.5 Closing. Upon satisfaction of the conditions to the Closing, the parties shall instruct the Title Company to close escrow by concurrently: (a) Recording and arranging for delivery to Buyer of the duly executed original Deed, showing all recording information. (b) Issuing to Buyer the Title Policy. (c) Recording the originals of, and arranging for delivery to Buyer of one certified copy of the duly executed and recorded, Parking Easement Agreement and Development Indemnity Agreement and the subordinations and recognitions thereto required by Sections 4(c)(vii) and (xi). (d) Delivering or arranging for delivery to Buyer of an original, duly executed Bill of Sale, the Non-Foreign Affidavit, the California Affidavit, Seller's Closing Certificate, WHTS Closing Certificate, WHTS Modification Indemnity (if applicable) and the Reliance Letter. (e) Delivering to Seller (or as directed by Seller) the Purchase Price, after deducting Seller's share of closing costs and prorations. (f) Taking of all actions, and delivering to Buyer and Seller of copies of all other documents and things deposited and/or delivered through escrow as directed by the parties pursuant to their mutually consistent escrow instruction. 6.6 Prorations. The costs and expenses of the Property shall be prorated as follows: (a) Maintenance expenses and taxes, insurance, utilities, management, service and operating expenses shall be prorated between Seller and Buyer as of the Closing Date. Expenses shall be prorated on the basis of the actual number of days in a month. (b) All items subject to proration pertaining to the period prior to the Closing Date shall be credited to Seller, and all such prorations pertaining to the period on or following the Closing Date shall be credited to Buyer. Seller, Buyer and Title Company shall cooperate to produce prior to the Closing Date a schedule of prorations to be made as of the Closing Date as complete and accurate as reasonably possible. All prorations which can be liquidated accurately or reasonably estimated as of the Closing Date shall be made in escrow on the Closing Date. All other prorations, and adjustments to initial estimated prorations, shall be made by Buyer and Seller with due diligence and cooperation within 30 days following the Closing Date, or such later time as may be required to obtain necessary information for proration, by cash payment to the party yielding a net credit from such prorations from the other party. Such cash payment shall be made within ten (10) business days of demand for payment by the party entitled to receive such payment. (c) The provisions of this Section 6.6 shall survive the close of escrow. 6.7 Closing Costs. Seller shall pay (i) the cost of the County of Santa Clara transfer tax, (ii) the basic CLTA portion (with no endorsements) of the title insurance premiums for the title insurance described in the Title Commitment, (iii) one-half of all escrow fees and (iv) Seller's legal fees and costs incurred in connection with the contemplated transaction. Buyer shall pay (i) the balance of the title insurance premium (including costs for endorsements), (ii) recording fees, (iii) one-half of all escrow fees, (iv) Buyer's legal fees and costs incurred in connection with the contemplated transaction and (v) all costs and expenses incurred in connection with any financing obtained by Buyer, including without limitation, loan fees, mortgage recording taxes, financing costs and lender's legal fees (if applicable). Any applicable city transfer tax shall be shared equally by Buyer and Seller. All other closing costs shall be borne by Seller and/or Buyer in the manner which is customary in the county where the Land is located. Notwithstanding the foregoing, if close of escrow fails to occur as a consequence of the default by a party, then such party shall pay all escrow fees and cancellation fees owing to the Title Company. 6.8 Possession. Right to possession of the Property shall transfer to Buyer on the Closing Date. 6.9 Filing Of Reports. Title Company shall be solely responsible for the timely filing of any reports or returns required pursuant to the provisions of Section 6045(e) of the Internal Revenue Code of 1986 (and any similar reports or returns required under any state or local laws) in connection with the closing of the transaction contemplated in this Agreement. 6.10 Cooperation. Without further consideration, each of Seller and Buyer shall execute, acknowledge and deliver to the other party on or after the Closing Date any and all other instruments or documents, and do and perform any other acts which may be required or which the other party may reasonably request in order to fully assign, transfer and/or convey to Buyer, and vest in Buyer, the Property, and each and every part and component thereof. 7. Liquidated Damages. IN THE EVENT THAT BUYER FAILS TO PURCHASE THE PROPERTY AFTER (I) ALL OF THE CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE THE PROPERTY SHALL HAVE BEEN SATISFIED, OR WAIVED IN WRITING BY BUYER AND (II) THE SELLER SHALL HAVE PERFORMED, TENDERED (OR OFFERED TO TENDER) PERFORMANCE OF ITS OBLIGATIONS, THEN THE DEPOSIT SHALL BE PAID BY TITLE COMPANY TO SELLER AS LIQUIDATED DAMAGES. BUYER AND SELLER HEREBY ACKNOWLEDGE AND AGREE THAT SELLER'S DAMAGES WOULD BE DIFFICULT OR IMPOSSIBLE TO DETERMINE AND THE AMOUNT OF THE DEPOSIT IS THE PARTIES' BEST AND MOST ACCURATE ESTIMATE OF THE DAMAGES SELLER WOULD SUFFER IN THE EVENT THE TRANSACTION PROVIDED FOR IN THIS AGREEMENT FAILS TO CLOSE UNDER THE FOREGOING CONDITIONS, AND IS REASONABLE UNDER THE CIRCUMSTANCES EXISTING AS OF THE DATE OF THIS AGREEMENT. BUYER AND SELLER AGREE THAT THE SELLER'S RIGHT TO RETAIN THE DEPOSIT SHALL BE THE SOLE AND EXCLUSIVE REMEDY OF SELLER IN THE EVENT OF SUCH A BREACH OF THIS AGREEMENT BY BUYER. - ----------------------------- ---------------------------- BUYER SELLER 8. Damage And Destruction; Condemnation. Seller shall notify Buyer immediately of the occurrence of any damage to or destruction of the Property, or the institution or maintenance of any condemnation or similar proceedings with respect to the Property prior to the Closing Date of which Seller is aware. In the event of any damage to or destruction of the Property prior to the Closing Date for which the cost to repair in the aggregate exceeds $500,000, or in the event any condemnation or similar proceedings are instituted or maintained prior to the Closing Date, Buyer at its option either (i) may terminate this Agreement by written notice to Seller prior to the Closing Date, or (ii) may consummate the purchase evidenced by this Agreement. With respect to any damage to or destruction of the Property prior to the Closing Date for which the cost to repair does not in the aggregate exceed $500,000 , Buyer shall have no right to terminate this Agreement pursuant to the preceding sentence, this Agreement shall continue in accordance with its terms and the Purchase Price shall be reduced by the Restoration Funds (as defined below). As used herein, "Restoration Funds" shall mean an amount equal to the actual costs and expenses directly and indirectly related to the restoration of the Property, including the costs of permits less the actual proceeds of insurance assigned to Buyer at the Closing, but not exceeding the estimated cost of the restoration as reasonably determined and agreed upon by Buyer, Seller and WHTS based on bids for a guaranteed maximum price contract for the restoration, which may include appropriate contingencies for cost overruns reasonably agreed upon by Buyer, Seller and WHTS. If Buyer, Seller and WHTS do not reasonably agree on the amount of the Restoration Funds and reasonable contingencies in connection therewith prior to the Closing Date, then Buyer shall have the right to terminate this Agreement as described above prior to the Closing Date. If this Agreement is not terminated by Buyer pursuant to this Section 8, then (i) Buyer shall accept possession of the Property in such damaged condition and/or subject to such condemnation or other proceeding on the Closing Date, (ii) as of the Closing Date, Seller shall assign to Buyer all insurance proceeds or condemnation proceeds received or to be received by Seller as a result of such damage or taking, and (iii), if applicable, the Purchase Price shall be reduced by the amount of the Restoration Funds. If this Agreement is so terminated by Buyer, then Buyer shall be entitled to an immediate return of the Deposit. 9. Commissions. (a) Each party to this Agreement warrants to the other that except for the fees set forth in Section 9(b) due to Colliers International and Cornish & Carey (the "Approved Broker"), no person or entity can properly claim a right to a real estate commission, real estate finder's fee, real estate acquisition fee or other real estate brokerage-type compensation (collectively, "Real Estate Compensation") based upon the acts of that party with respect to the transaction contemplated by this Agreement, and each party hereby agrees to indemnify, defend and protect the other against and to hold the other harmless from any loss, cost or expense (including but not limited to attorneys' fees and returned commissions) resulting from any claim for Real Estate Compensation by any person or entity based upon such acts. (b) Seller shall be responsible for paying the Approved Broker, at and conditioned upon close of escrow, a sum equal to one percent (1%) of the Purchase Price pursuant to a separate agreement between Seller and the Approved Broker. Buyer shall be responsible for paying the Approved Broker, at and conditioned upon close of escrow, an additional sum equal to one percent (1%) of the Purchase Price. 10. General Provisions. 10.1 Notices. Any notice required or permitted to be given under this Agreement shall be in writing and (i) personally delivered, (ii) sent by United States mail, registered or certified mail, postage prepaid, return receipt requested, (iii) sent by Federal Express or similar nationally recognized overnight courier service, or (iv) transmitted by facsimile with a hard copy sent within one (1) business day by any of the foregoing means, and in all cases addressed as follows, and such notice shall be deemed to have been given upon the date of actual receipt or delivery (or refusal to accept delivery) at the address specified below (or such other addresses as may be specified by notice in the foregoing manner) as indicated on the return receipt or air bill: TO SELLER: PMC-Sierra, Inc. 8555 Baxter Place Burnaby, British Columbia V5A 4V7 Canada Attn: Manager, Corporate Real Estate and Facilities Fax No. 604/415-6161 Phone No. 604/415-6651 with a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attention: Norman Cruz Fax No. (650) 493-6811 Phone No. (650) 320-4926 TO BUYER: Westbrook Partners, L.L.C 100 California Street, Suite 750 San Francisco, CA 94111 Attn: Aric M. Shalev Fax No. (415) 438-7921 Phone No. (415) 438-7920 with a copy to: Westbrook Partners, L.L.C. 13155 Noel Road/LB 54 Suite 2400 Dallas, Texas 75240 Attn: Patrick K. Fox, Esq. Facsimile (972) 934-8333 and Gibson, Dunn & Crutcher LLP 333 S. Grand Avenue Suite 4900 Los Angeles, CA 90071 Attn: Jesse Sharf, Esq. Facsimile: (213) 229-6638 TO WHTS: Tishman Speyer Properties, L.P. 525 Market Street, Suite 3720 San Francisco, California 94105 Attention: Carl Shannon Fax: (415) 536-4139 with a copy to: Tishman Speyer Properties 520 Madison Avenue New York, New York 10022 Attention: General Counsel Fax: (212) 935-8239 and Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 Attention: Jeffrey A. Lenobel, Esq. Fax: (212) 593-5955 and Whitehall Street Real Estate Limited Partnership IX 85 Broad Street New York, New York 10004 Attention: Patricia Geery Fax: (212) 357-5505 With a copy to: Mr. Todd Williams Goldman, Sachs & Co. 100 Crescent Court, Suite 1000 Dallas, TX 75201 Fax: (214) 855-6305 Stone Street Real Estate Fund 1998, L.P. 85 Broad Street New York, New York 10004 Fax: (212) 357-5505 Bridge Street Real Estate Fund 1998, L.P. 85 Broad Street New York, New York 10004 Fax: (212) 357-5505 Stone Street WHTS Corp. 85 Broad Street New York, New York 10004 Fax: (212) 357-5505 10.2 Entire Agreement; No Modifications. This Agreement, together with the schedules and exhibits attached hereto, incorporates all agreements, warranties, representations and understandings between the parties to the Agreement with respect to the subject matter hereof and constitutes the entire agreement of Seller and Buyer with respect to the purchase and sale of the Property. Any prior or contemporaneous correspondence, memoranda, understandings, offers, negotiations and agreements, oral or written, are merged herein and replaced in total by this Agreement and the exhibits hereto and shall be of no further force or effect. This Agreement may not be modified or amended except in a writing signed by Seller and Buyer. 10.3 Time. Time is of the essence in the performance of the parties' respective obligations set forth in this Agreement. 10.4 Attorneys' Fees. In the event any action or proceeding at law or in equity between Buyer and Seller (including an action or proceeding between Buyer and the trustee or debtor in possession while Seller is a debtor in a proceeding under the Bankruptcy Code (Title 11 of the United States Code) or any successor statute to such Code) to enforce or interpret any provision of this Agreement or to protect or establish any right or remedy of either Buyer or Seller hereunder, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses including, without limitation, reasonable attorneys' and paralegals' fees and expenses, incurred by such prevailing party, in such action or proceeding and in any appeal in connection therewith, whether or not such action, proceeding or appeal is prosecuted to judgment or other final determination, together with all costs of enforcement and/or collection of any judgment or other relief. 10.5 Specific Performance. The parties understand and agree that the Property is unique and for that reason, among others, Buyer will be irreparably damaged in the event that this Agreement is not specifically enforced. Accordingly, in the event that Seller defaults in its obligation to sell the Property to Buyer after (i) Seller has acquired the fee title to the Property from WHTS, (ii) all other conditions to the Seller's obligation to sell the Property set forth in Section 4(c) shall have been satisfied, and (ii) the Buyer shall have performed, tendered (or offered to tender) performance of its obligations under this Agreement, Buyer shall have, in addition to a claim for damages for such breach or default (subject, however, to the limitations set forth in Section 5.1), and in addition and without prejudice to any right or remedy available at law or in equity, the right to demand and have specific performance of this Agreement. In all other circumstances, Buyer hereby waives the right to specific performance of this Agreement. 10.6 Successors And Assigns. Except as permitted by this Section, this Agreement may not be assigned by Seller or Buyer without the prior written consent of the other party which may be granted or withheld by the other party in its sole discretion. Subject to the foregoing provision, this Agreement shall inure to the benefit of and be binding upon the parties to this Agreement and their respective successors and assigns. Seller shall have the right to assign its rights and obligations under this Agreement to an affiliate of Seller by delivery of notice of the identity of the assignee affiliate at least 15 days prior to the Scheduled Closing Date, provided that the assignee assumes for Buyer's benefit all of Seller's obligations hereunder and, notwithstanding such assignment, Seller shall not be released from its obligations under the Agreement or the Seller Closing Certificate; and Buyer shall have the right to assign its rights and obligations under this Agreement to an affiliate of Buyer, provided that the assignee assumes for Seller's and WHTS' benefit all of Buyer's obligations hereunder and, notwithstanding such assignment, Buyer shall not be released from any obligations it may have under the Agreement or the Closing Documents. For the purposes of this Section, "affiliate of Buyer" shall mean an entity controlling, controlled by or under common control with Buyer. "Control" shall mean the possession, directly or indirectly, of the power to direct the management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise. 10.7 Counterparts. This Agreement may be executed in one or more counterparts and each such counterpart shall be deemed to be an original; all counterparts so executed shall constitute one instrument and shall be binding on all of the parties to this Agreement notwithstanding that all of the parties are not signatories to the same counterpart. 10.8 Construction. This Agreement shall be governed by and construed under the laws of the State of California. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Agreement or any schedules or exhibits to it or any document executed and delivered by either party in connection with this Agreement. All captions in this Agreement are for reference only and shall not be used in the interpretation of this Agreement or any related document. If any provision of this Agreement shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Agreement and all such other provisions shall remain in full force and effect. 10.9 Confidentiality. Seller shall keep all information obtained from or about Buyer or the transaction contemplated by this Agreement strictly confidential and will not disclose any such information to any other person or entity without first obtaining the prior written consent of Buyer. Notwithstanding anything to the contrary contained in this Agreement, Buyer and Buyer's Agents and Seller and Seller's Agents may disclose the tax treatment (i.e., the purported or claimed Federal income tax treatment) or the tax structure (i.e., any fact that may be relevant to understanding such treatment) of the transaction contemplated by this Agreement, and all materials of any kind (including opinions or other tax analyses) provided by Seller to Buyer relating to such tax treatment and tax structure. 10.10 No Third Party Beneficiaries. There are no third party beneficiaries of this Agreement and no person or entity, other than Buyer and Seller, shall be benefited by or have the right to enforce this Agreement. 10.11 Exculpation. Buyer agrees that it does not have and will not have any claims or causes of action against any disclosed or undisclosed officer, director, employee, trustee, shareholder, partner, member, principal, parent, subsidiary or other affiliate of Seller (herein "Seller's Affiliates") or against any disclosed or undisclosed officer, director, employee, trustee, shareholder, partner, member, principal, parent, subsidiary or other affiliate of WHTS, including, without limitation, Tishman Speyer Properties, L.P. and Goldman, Sachs & Co., or any officer, director, employee, trustee, shareholder, member, partner or principal of any such parent, subsidiary or other affiliate (collectively, "WHTS' Affiliates"), arising out of with this Agreement, the Closing Certificates, or the transactions contemplated hereby. Buyer agrees to look solely to Seller and its assets and to WHTS and its assets for the satisfaction of any liability or obligation arising under this Agreement, the Closing Documents, or the transactions contemplated hereby, or for the performance of any of the covenants, warranties or other agreements contained herein or in the Closing Documents, and further agrees not to sue or otherwise seek to enforce any personal obligation against any of Seller's Affiliates or WHTS' Affiliates with respect to any matters arising out of this Agreement, the Closing Documents, or the transactions contemplated hereby. The provisions of this Section 10.11, however, shall not apply to Seller's Affiliates to the extent of the amount a Seller's Affiliate has received after the date of this Agreement, if the remaining funds available to Seller to satisfy the obligations of Seller to Buyer pursuant to this Agreement and the Closing Documents are not at least equal to Five Million Dollars ($5,000,000) or such lower amount of liability or potential liability as Seller may have under such agreements. In addition, the provisions of this Section 10.11 shall not apply to Tishman Speyer/Travelers Real Estate Venture, L.P. and Whitehall Street Real Estate Limited Partnership IX (collectively, the "Members") to the extent of the amount any of the Members has received from the proceeds of the transactions which is the subject of the WHTS Agreement, if the remaining funds available to WHTS to satisfy the obligations of WHTS to Buyer pursuant to this Agreement, the Closing Documents and the WHTS Agreement are not at least equal to Five Million Dollars ($5,000,000) or such lower amount of liability or potential liability as WHTS may have under such agreements. The provisions of this Section 10.11 shall survive the termination of this Agreement and the Closing Date. This Section 10.11 will not apply to the parties to the Parking Easement or the Development Indemnity Agreement to the extent such claim or cause of action relates solely to the Parking Easement Agreement or the Development Indemnity Agreement, as applicable. IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of the date and year first written above: SELLER: BUYER: PMC-Sierra, Inc., WB MISSION TOWERS, LLC, a Delaware corporation a Delaware limited liability company By:____________________________ By:____________________________ Name:__________________________ Name:__________________________ Title:_________________________ Title:_________________________ EX-31 6 exhibit31_1.txt EXHIBIT 31.1 - 302 CERTIFICATION - CEO Exhibit 31.1 CERTIFICATION I, Robert L. Bailey, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PMC-Sierra, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2003 /s/ Robert L. Bailey ---------------------- --------------------------------------- Robert L. Bailey President and Chief Executive Officer EX-31 7 exhibit31_2.txt EXHIBIT 31.2 - 302 CERTIFICATION - CFO Exhibit 31.2 CERTIFICATION I, Alan F. Krock, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PMC-Sierra, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2003 /s/ Alan F. Krock ------------------- -------------------------------------- Alan F. Krock Vice President, Finance Chief Financial Officer and Principal Accounting Officer EX-32 8 exhibit32_1.txt EXHIBIT 32.1 - 906 CERTIFICATION - CEO Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert L. Bailey hereby certify, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of PMC-Sierra, Inc. ("PMC"), that, to my knowledge, the Quarterly Report of PMC on Form 10-Q for the period ended September 28, 2003, fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of PMC. Date: November 7, 2003 By: /s/ Robert L. Bailey ------------------ ------------------------------------- Robert L. Bailey President and Chief Executive Officer EX-32 9 exhibit32_2.txt EXHIBIT 32.2 - 906 CERTIFICATION - CFO Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Alan F. Krock hereby certify, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of PMC-Sierra, Inc. ("PMC"), that, to my knowledge, the Quarterly Report of PMC on Form 10-Q for the period ended September 28, 2003, fully complies with the requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of PMC. Date: November 7, 2003 By: /s/ Alan F. Krock ------------------ ----------------------------- Alan F. Krock Vice President, Finance Chief Financial Officer and Principal Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----