24
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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 29, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d)of the Securities
Exchange Act of 1934.
Commission File Number 0-19084
SIERRA SEMICONDUCTOR
CORPORATION
(Exact name of registrant as specified in its charter)
A California Corporation - I.R.S. NO. 94-2925073
2222 QUME DRIVE
SAN JOSE, CALIFORNIA 95131
(Current Address)
2075 NORTH CAPITOL AVENUE
SAN JOSE, CA 95132
(Former Address)
Telephone (408) 434-9300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
------- -------
Common shares outstanding at September 29, 1996 - 28,469,994
- --------------------------------------------------------------------------------
<PAGE>
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated condensed balance sheets 3
- Consolidated condensed statements of income 4
- Consolidated condensed statements of cash flows 5
- Notes to consolidated condensed financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K 23
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SIERRA SEMICONDUCTOR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 29, December 31,
1996 1995
-------------- --------------
ASSETS:
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 20,101 $ 41,933
Short-term investments 6,969 4,004
Accounts receivable, net 24,440 39,320
Inventories 12,571 14,843
Prepaid expenses and other current assets 2,462 9,813
--------- ---------
Total current assets 66,543 109,913
Property and equipment, at cost 47,922 49,375
Accumulated depreciation and amortization (33,454) (26,671)
--------- ---------
14,468 22,704
Goodwill and other intangible assets, net 10,551 13,856
Investments and other assets 7,833 5,147
Deposits for wafer fabrication capacity 27,120 33,240
--------- ---------
$ 126,515 $ 184,860
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 15,117 $ 22,866
Accrued liabilities 8,859 8,494
Accrued income tax 6,147 7,737
Accrued restructure costs 30,563 --
Short-term debt and current portion of obligations under
capital leases and long-term debt 4,809 33,979
Net liabilities of discontinued operations 2,389 4,096
--------- ---------
Total current liabilities 67,884 77,172
Deferred income taxes 2,083 2,179
Noncurrent obligations under capital leases and long-term debt 10,962 8,979
Special shares of PMC convertible into Sierra common stock 12,753 15,530
Shareholders' equity:
Common stock, no par value 131,930 119,758
Accumulated deficit (99,096) (38,726)
--------- ---------
32,834 81,032
Less shareholders' notes receivable (1) (32)
--------- ---------
Total shareholders' equity 32,833 81,000
--------- ---------
$ 126,515 $ 184,860
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
SIERRA SEMICONDUCTOR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 34,726 $ 50,700 $ 152,144 $ 129,840
Cost of sales 21,318 25,793 80,782 66,007
--------- --------- --------- ---------
Gross profit 13,408 24,907 71,362 63,833
Other costs and expenses:
Research and development 6,790 5,969 23,081 16,523
Acquisition of in process research and development 7,783 -- 7,783 --
Marketing, general and administrative 7,314 7,170 24,821 21,449
Purchase price adjustment - compensation -- 10,624 -- 10,624
Restructure costs 67,770 -- 67,770 --
--------- --------- --------- ---------
Income (loss) from operations (76,249) 1,144 (52,093) 15,237
Interest income (expense), net 33 19 529 145
--------- --------- --------- ---------
Income (loss) before provision for income taxes (76,216) 1,163 (51,564) 15,382
Provision for income taxes 178 2,384 8,806 5,727
--------- --------- --------- ---------
Income (loss) from continuing operations (76,394) (1,221) (60,370) 9,655
Loss from discontinued operations -- (2,249) -- (3,086)
--------- --------- --------- ---------
Net income (loss) $ (76,394) $ (3,470) $ (60,370) $ 6,569
========= ========= ========= =========
Income (loss) from continuing operations per share $ (2.57) $ (0.05) $ (2.05) $ 0.34
Loss from discontinued operations per share $ -- $ (0.08) $ -- $ (0.11)
--------- --------- --------- ---------
Net income (loss) per share $ (2.57) $ (0.13) $ (2.05) $ 0.23
========= ========= ========= =========
Shares used in calculation of net income (loss) per share 29,782 27,230 29,456 28,107
========= ========= ========= =========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
SIERRA SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 29, October 1,
1996 1995
---------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $(60,370) $ 6,569
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,675 6,239
Compensation expense from purchase price adjustment
of PMC-Sierra acquisition -- 10,624
Acquisition of in process technology and development
from purchase of net assets of BIT 7,783 --
Fixed asset loss related to restructure reserve 9,689 --
Changes in assets and liabilities
Accounts receivable 14,537 (13,906)
Inventories 2,272 19
Prepaid expenses and other 1,227 (3,876)
Accounts payable and accrued expenses (10,053) 9,879
Accrued restructuring costs 30,563 --
Net assets/liabilities associated with discontinued operations (1,707) (2,547)
-------- --------
Net cash provided by operating activities 2,616 13,001
Cash flows from investing activities:
Proceeds from maturities of short-term investments 15,984 2,190
Purchases of short-term investments (18,949) --
Investments in other companies (3,000) (920)
Decrease in investments and other -- 150
Purchase of BIT assets, net of cash acquired 71 --
Additions to plant and equipment (3,334) (7,473)
-------- --------
Net cash (used in) investing activities (9,228) (6,053)
Cash flows from financing activities:
Proceeds from issuance of notes payable and long-term debt 353 687
Proceeds from issuance of common stock 2,607 2,713
Proceeds from payments of notes receivable 31 29
Principal payments under capital lease obligations (1,379) (886)
Repayment of notes payable and long-term debt (16,832) (1,282)
-------- --------
Net cash provided by (used in) financing activities (15,220) 1,261
-------- --------
Net increase (decrease) in cash and cash equivalents (21,832) 8,209
Cash and cash equivalents, beginning of the period 41,933 12,622
-------- --------
Cash and cash equivalents, end of the period $ 20,101 $ 20,831
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
SIERRA SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules or regulations. The
interim financial statements are unaudited, but reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement of
results for the interim periods presented.
These financial statements should be read in conjunction with the financial
statements and the notes thereto in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
The results of operations for the three and nine months ended September 29,
1996 are not necessarily indicative of results to be expected in future periods.
2. In the third quarter of 1996, the Company recorded a charge of $72,470,000
in connection with the Company's decision to exit from the modem chipset
business and the associated restructuring of the Company's non-networking
product operations. $4,700,000 of this charge is included in cost of sales as an
inventory write down, and $67,770,000 is included as a restructure cost in
operating expenses. $23,000,000 of the total charge is for an adjustment in the
valuation of inventory to net realizable value. $10,085,400 is severance and
related costs for the employees in North America. $9,907,938 of the charge is
the accrual for certain purchase orders, write-off of prepaid expenses and
accrual for other commitments of the Company. $9,650,000 of the charge is a
write down in excess fixed assets. $6,930,056 of the charge is for a write down
in the value that the Company will derive from an investment in a foundry
source. $5,047,209 of this charge is a write-off of accounts receivable due
primarily to price discounts. $3,411,000 of the charge is for excess facilities
costs in North America. $2,458,810 of the charge is the write-off of goodwill of
the Company's B.V. subsidiary in Holland, which will be liquidated, and an
additional $1,980,000 for the costs of severance, facilities, and other costs
associated with the closure of the Company's European subsidiaries.The remainder
relates to the accrual for a reduced value expected to be derived from an
existing capacity commitment, the estimate for excess facility costs, and the
accrual for price protection due to changes in the Company's pricing of modem
products.
3. During the third quarter of 1996, a subsidiary of the Company acquired the
ethernet switching assets, intellectual property, and certain other assets of
Bit, Inc. in exchange for shares of Sierra common stock and other considerations
with an aggregate value of approximately $8,107,000. The acquisition resulted in
a $7,783,000 charge for the purchase of in-process research and development. The
remaining $324,000 of technology assets have been capitalized as a long term
asset which will be amortized over seven years. Results of operations include
the costs of continuing the development of products and related activities
acquired from Bit, Inc. from the closure of the acquisition on September 3,
1996. The proforma effect of combining the Bit transaction with the Company's
operations the first nine months of fiscal 1995 and 1996 are not reported
separately because they are considered to be not material
4. The components of inventories are as follows (in thousands):
September 29, Dec 31,
1996 1995
---- ----
Work-in-progress $ 4,318 $ 6,604
Finished goods 8,253 8,239
----- -----
$12,571 $14,843
======= =======
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Third Quarters of 1996 and 1995
Overview
- --------
In the third quarter of fiscal 1996, the Company announced its decision to exit
from the modem chipset business, and to focus on its existing networking and
infrastructure semiconductor businesses. As a result of this decision, the modem
chipset product line has been put up for sale, and the Company recorded a
restructuring charge of $72,470,000, which includes costs of restructuring the
Company's non-networking product operations.
Consistent with the Company's strategy to focus on the networking and
infrastructure semiconductor businesses, a subsidiary of the Company acquired in
the third quarter of 1996 the ethernet switching assets, intellectual property
and certain other assets from Bit, Incorporated, a privately held company in
Beaverton, Oregon. These assets were acquired in exchange for the Company's
common shares and other consideration with an aggregate value of approximately
$8,107,000. The acquisition was accounted for as a purchase transaction, with a
charge in the quarter of $7,783,000 for in-process research and development.
Approximately $324,000 of technology assets were capitalized, and will be
amortized over seven years.
Net Revenues
Third Third
Quarter Quarter
1996 Change 1995
---- ------ ----
Net revenues ($000,000)
Networking products $16.0 55% $10.3
User interface - other $12.7 (48%) $24.5
User interface - modem $6.0 (62%) $15.9
------ ----- -----
Total net revenues $34.7 (32%) $50.7
The Company's decrease in total net revenues was due to a decline in sales of
user interface products, primarily modem chipset products and graphics chips.
Partially offsetting these reductions was growth in revenues of networking
products by the Company's PMC-Sierra, Inc. subsidiary ("PMC").
<PAGE>
Gross Profit
Third Third
Quarter Quarter
1996 Change 1995
---- ------ ----
Gross profit ($000,000)
Networking products $11.7 50% $7.8
Percentage of net revenues 73% 76%
User interface products $1.7 (90%) $17.1
Percentage of net revenues 9% 42%
User interface products excluding
valuation reserve for modem inventory $6.4 (63%) $17.1
Percentage of net revenues 34% 42%
Total gross profit $13.4 (46%) $24.9
Percentage of net revenues 39% 49%
Total gross profit excluding valuation
reserve for modem inventory $18.1 (27%) $24.9
Percentage of net revenues 52% 49%
Gross profit decreased as a result of lower revenue during this period, and a
$4.7 million charge to cost of sales for an inventory write down associated with
the Company's decision to exit from the modem chipset business. Gross profit as
a percentage of net revenues declined primarily due to this inventory write-down
charge. Excluding this charge, gross profit as a percentage of net revenues
increased as the mix of higher gross margin networking products increased as a
percentage of total net revenues. In the near term, as the Company sells its
existing modem products, which have lower gross margins than networking
products, the overall gross margin of the Company may decline depending on the
percentage of modem product revenues relative to total revenues. In the longer
term, the Company may experience declining gross profits as a percentage of net
revenues if decreases in average selling prices of existing networking products
are not offset by reductions in production costs, or by an increase in the share
of total revenue of networking products with higher gross profit.
<PAGE>
Operating Expenses and Charges ($000,000)
Third Third
Quarter Quarter
1996 Change 1995
---- ------ ----
Research and development $6.8 13% $6.0
Percentage of net revenues 20% 12%
In-process research & development $7.8 ---
Percentage of net revenues 22% ---
Marketing, general & administrative $7.3 1% $7.2
Percentage of net revenues 21% 14%
Purchase price adjustment-compensation --- --- $10.6
Percentage of net revenues --- --- 21%
Restructure costs $67.8 --- ---
Percentage of net revenues 195% --- ---
Research and Development expenses increased primarily due to increases in
research and development personnel in networking products. As a percentage of
net revenues, research and development expenses increased as a result of growth
in expenses and a decline in sales. In the near term, the Company expects
research and development spending to decline in absolute dollars, due to the
reduction in user interface research and development, offset partially by
increases in research and development spending for networking products.
In-process research and development charges incurred in the third fiscal quarter
of 1996 related to the acquisition of the ethernet switching and other assets
from Bit, Inc.
Marketing, general and administrative expenses remained at approximately the
same level. As a percentage of revenues, these expenses increased due to the
reduced net revenues. In the near term, the Company expects marketing, general
and administrative spending to decline in absolute dollars, due to the reduction
in user interface marketing, general and administrative expenses, offset
partially by increases in marketing, general and administrative spending for
networking products.
The purchase price adjustment-compensation in the third quarter of 1995 was due
to the completion of the acquisition of PMC, and related to the purchase price
adjustment shares reserved for issuance to the employee/shareholders of PMC.
Restructure costs are part of the Company recorded charge of $72,470,000 in
connection with the Company's decision to exit from the modem chipset business
and the associated restructuring of the Company's non-networking product
operations. $4,700,000 of this is included in cost of sales as an inventory
write down, and $67,770,000 is included as restructure costs in operating
expenses. $23,000,000 of the total charge is for an adjustment in the valuation
of inventory to net realizable value. $10,085,400 is severance and related costs
for the employees in North America. $9,907,938 of the charge is the accrual for
certain purchase orders, write-off of prepaid expenses and accrual for other
commitments of the Company. $9,650,000 of the charge is a write down in excess
fixed assets. $2,458,810 of the charge is the write-off of goodwill of the
Company's B.V. subsidiary in Holland, which will be liquidated, and an
additional $1,980,000 for the costs of severance, facilities, and other costs
associated with the closure of the Company's European subsidiaries. The
remainder relates to the accrual for a reduced value expected to be derived from
an existing capacity commitment, the estimate for excess facility costs, and the
accrual for price protection due to changes in the Company's pricing of modem
products.
Interest Income (Expense), Net ($000,000)
- -----------------------------------------
Third Third
Quarter Quarter
1996 Change 1995
---- ------ ----
Interest income (expense) $0.03 74% $0.02
Percentage of net revenues 0.1% 0.03%
Interest income increased due to higher cash balances available to invest and
earn interest. Interest expense increased slightly. Interest expense currently
relates primarily to the Company's financing arrangements for working capital
financing, leases, and financing of previously established foundry commitments.
The provision for income taxes consists primarily of taxes on foreign
operations. U.S. taxes are reduced by the utilization of the current portion of
net operating losses associated with the restructure charge, which substantially
offsets the provision for taxes on foreign operations in the third fiscal
quarter of 1996. The Company's estimated tax rate for 1996 will be a component
of foreign taxes on income, and U.S. taxes on income offset by the utilization
of the allowable restructure charges during the year. The net estimated result
is not expected to be higher than the rate provided in the first and second
quarter of 1996. The actual results will be dependent upon the revenue and
profits of the various legal entities and product lines.
First Nine Months of 1996 and 1995
Net Revenues
First First
Nine Months Nine Months
1996 Change 1995
---- ------ ----
Net revenues ($000,000)
Networking products $49.8 88% $26.5
User interface - other $50.6 (31%) $73.6
User interface - modem $51.7 74% $29.7
----- --- -----
Total net revenues $152.1 17% $129.8
The increase in total net revenues was attributable to growth in revenues of
networking and User Interface-modem products during the first two quarters of
1996. The increase in revenues of these products was partially offset by a
decline in revenues of User Interface-other products, which was primarily due to
lower sales of graphics chip products and to a decline in modem product sales in
the third quarter of 1996.
Gross Profit
First First
Nine Months Nine Months
1996 Change 1995
---- ------ ----
Gross profit ($000,000)
Networking products $36.8 86% $19.8
Percentage of net revenues 74% 75%
User interface products $34.6 (21%) $44.0
Percentage of net revenues 34% 43%
User interface products excluding
valuation reserve for modem inventory $39.3 (11%) $44.0
Percentage of net revenues 38% 43%
Total gross profit $71.4 12% $63.8
Percentage of net revenues 47% 49%
Total gross profit excluding valuation
reserve for modem inventory $76.1 19% $63.8
Percentage of net revenues 50% 49%
Gross profit increased as a result of increased net revenues during this period.
Gross profit as a percentage of net revenues declined due to the $4.7 million
charge for inventory valuation write down. Gross profit as a percentage of net
revenues excluding this inventory valuation charge increased slightly as the mix
of higher gross margin networking products increased as a percentage of total
net revenues to offset the margin declines in the user interface products. In
the near term, as the Company sells its existing modem products, which have
lower gross margins than networking products, the overall gross margin of the
Company may decline depending on the percentage of modem product revenues
relative to total revenues. In the longer term, the Company may experience
declining gross profits as a percentage of net revenues if decreases in average
selling prices of existing networking products are not offset by reductions in
production costs, or by an increase in the share of total revenue of networking
products with higher gross profit.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
First First
Nine Months Nine Months
1996 Change 1995
---- ------ ----
Research and development $23.1 40% $16.5
Percentage of net revenues 15.1% 12.7%
In-process research & development $7.8 --- ---
Percentage of net revenues 5.1%
Marketing, general & administrative $24.8 16% $21.4
Percentage of net revenues 16.3% 16.5%
Purchase price adjustment-compensation --- $10.6
Percentage of net revenues 8.2%
Restructure costs $67.8 ---
Percentage of net revenues 44.6% ---
Research and development expenses increased primarily due to increases in
research and development personnel in networking products as well as other
product groups. As a percentage of net revenues, research and development
expenses increased as the rate of growth of spending exceeded the rate of net
revenues growth. In the near term, the Company expects research and development
spending to decline in absolute dollars, due to the reduction in user interface
research and development, offset partially by increases in research and
development spending on networking products.
In-process research and development charges were incurred in the third fiscal
quarter of 1996, as a result of the acquisition of the ethernet switching and
other assets from Bit, Inc.
Marketing, general, and administrative expenses grew due to increases in
marketing, sales, and administrative personnel in networking products as well as
other product groups.As a percentage of net revenues, these expenses remained at
approximately the same level, as the rate of growth in these expenses was
approximately the same as the rate of revenue growth. In the near term, the
Company expects marketing, general and administrative spending to decline in
absolute dollars, due to the reduction in user interface marketing, general and
administrative expenses, offset partially by increases in marketing, general and
administrative spending for networking products.
The purchase price adjustment-compensation in the third quarter of 1995 was due
to the completion of the acquisition of PMC, and related to the purchase price
adjustment shares reserved for issuance to the employee/shareholders of PMC.
Restructure costs are part of the Company recorded charge of $72,470,000 in
connection with the Company's decision to exit from the modem chipset business
and the associated restructuring of the Company's non-networking product
operations. $4,700,000 of this is included in cost of sales as an inventory
write down, and $67,770,000 is included as restructure costs in operating
expenses. $23,000,000 of the total charge is for an adjustment in the valuation
of inventory to net realizable value. $10,085,400 is severance and related costs
for the employees in North America. $9,907,938 of the charge is the accrual for
certain purchase orders, write-off of prepaid expenses and accrual for other
commitments of the Company. $9,650,000 of the charge is a write down in excess
fixed assets. $2,458,810 of the charge is the write-off of goodwill of the
Company's B.V. subsidiary in Holland, which will be liquidated, and an
additional $1,980,000 for the costs of severance, facilities, and other costs
associated with the closure of the Company's European subsidiaries. The
remainder relates to the accrual for a reduced value expected to be derived from
an existing capacity commitment, the estimate for excess facility costs, and the
accrual for price protection due to changes in the Company's pricing of modem
products.
Interest Income (Expense), Net ($000,000)
- -----------------------------------------
First First
Nine Months Nine Months
1996 Change 1995
---- ------ ----
Interest income (expense) $0.5 253% $0.15
Percentage of net revenues 0.3% 0.1%
Interest income increased due to higher cash balances available to invest and
earn interest. Interest expense increased slightly. Interest expense currently
relates primarily to the Company's financing arrangements for working capital
financing, leases, and financing of previously established foundry commitments.
The provision for income taxes consists primarily of taxes on foreign
operations. U.S. taxes are reduced by the utilization of the current portion of
net operating losses associated with the restructure charge, which substantially
offsets the provision for taxes on foreign operations in the third fiscal
quarter of 1996. The Company's estimated tax rate for 1996 will be a component
of foreign taxes on income, and U.S. taxes on income offset by the utilization
of the allowable restructure charges during the year. The net estimated result
is not expected to be higher than the rate provided in the first and second
quarter of 1996. The actual results will be dependent upon the revenue and
profits of the various legal entities and product lines.
Risk Factors
THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE
SUBJECT TO A NUMBER OF RISKS, SOME OF WHICH ARE DESCRIBED BELOW. THE COMPANY AND
PMC-SIERRA, INC. EACH FACE SIMILAR FACTORS WHICH MAY AFFECT THEIR RESPECTIVE
PERFORMANCE, AND ACCORDINGLY CERTAIN RISK FACTORS BELOW WHICH REFER TO THE
COMPANY AND ITS OPERATIONS SHOULD ALSO BE VIEWED AS RISK FACTORS REFERRING
SEPARATELY TO PMC-SIERRA, INC. AND ITS OPERATIONS.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements and information in this Report constitute "forward-looking
statements" within the meaning of the federal securities laws. Such
forward-looking statements involve risks and uncertainties which may cause the
actual results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. The forward-looking statements
include projections of gross margin, future expenditures on research and
development an on marketing, general and administrative activities, and
projected tax rates. Actual results could differ from those projected in any
forward-looking statements for the reasons detailed below.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results may vary due to a number of
factors, including, among others, the timing of new product introductions,
decreased demand or average selling prices for products, market acceptance of
products, demand for products of the Company's customers, the introduction of
products or technologies by the Company's competitors, competitive pressure on
product pricing, the Company's and its customers' inventory levels of the
Company's products (particularly discontinued modem products), product
availability from outside foundries, variations in manufacturing yields for the
company's products, expenditures for new product and process development, the
acquisition of wafer fabrication and other manufacturing capacity, and the
acquisition of businesses, products or technologies. At various times in the
past, the Company's foundry and other suppliers have experienced lower than
anticipated yields that have adversely affected production and, consequently,
the Company's operating results. There can be no assurance that the Company's
existing or future foundry and other suppliers will not experience
irregularities which could have a material adverse effect on the Company's
operating results. The Company from time to time may order in advance of
anticipated customer demand from its suppliers in response to anticipated long
lead times to obtain inventory and materials, which might result in excess
inventory levels if expected orders fail to materialize or other factors render
the Company's product or its customer's products less marketable. The Company
has limited ability to forecast its unit volumes of discontinued modem chipset
sales or the prices at which these sales will occur, particularly in light of
recent announcements by competitors of modems operating at speeds of up to 56
kbps. The Company's visibility on sales of networking chipsets is limited due to
customer uncertainty regarding future demand for end-user networking products
and price competition in the market for ATM chipsets. Any delay or cancellation
of existing orders, or any decline in projected future orders, by the Company's
customers could have a material adverse effect on the Company's operating
results. Margins will vary depending on product mix as described above. The
Company's operating results also are affected by the state and direction of the
electronics industry and the economy in the United States and other markets the
Company serves. The Company's operating results could also be adversely affected
if restructuring reserves are insufficient for the costs of liquidating
inventory, retaining employees and discontinuing operations. The occurrence of
any of the foregoing or other factors could have a material adverse effect on
the Company's operating results. Due to these factors, past results may not be
indicative of future results.
TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by evolving industry
standards and rapid technological change and product obsolescence. Technological
change may be particularly pronounced in the developing markets for
communications semiconductor devices used in high-speed networks. The Company's
future success will be highly dependent upon the timely completion and
introduction of new products at competitive price and performance levels. The
success of new products depends on a number of factors, including proper
definition of such products, successful and timely completion of product
development and introduction to market, correct judgment with respect to product
demand, market acceptance of the Company's and its customers' products,
fabrication yields by the Company's independent foundries and the continued
ability of the Company to offer innovative new products at competitive prices.
Many of these factors are outside the control of the Company. There can be no
assurance that the Company will be able to identify new product opportunities
successfully, develop and bring to market new products, achieve design wins or
be able to respond effectively to new technological changes or product
announcements by others. A failure in any of these areas would materially and
adversely affect the Company's operating results.
The Company's current strategy is focused on high-speed networking interface
chips. Products for telecommunications and data communications applications are
based on industry standards that are continually evolving. Future transitions in
customer preferences could quickly obsolete Sierra products. The Company is
developing products for the Asynchronous Transfer Mode ("ATM")
telecommunications and networking market, which is in an early stage of
development. The emergence and adoption of new industry standards that compete
with ATM or maintenance by the industry of existing standards in lieu of new
standards could render the Company's ATM products unmarketable or obsolete. The
market for ATM equipment has not developed as rapidly as industry observers has
predicted, and alternative networking technologies such as "fast Ethernet" have
developed to meet consumer requirements. A substantial portion of the Company's
development efforts are focused on ATM and related products. A material portion
of the Company's revenues and a substantial portion of the Company's profits are
derived from sales of ATM, T1/E1, DS3/E3 and SONET/SDH based products. There can
be no assurance that a significant market for the Company's products will emerge
or, if it does emerge, that the Company will be able to develop and market these
or other networking products in a timely and commercially viable manner. The
adoption or maintenance by the industry of high speed transmission standards
other than those which the Company currently addresses, or the inability of the
Company to develop and market its networking-related products, would have a
material adverse effect on the Company's operating results.
Many of the Company's products under development are complex semiconductor
devices that require extensive design and testing before prototypes can be
manufactured. The integration of a number of functions in a single chip or in a
chipset requires the use of advanced semiconductor manufacturing techniques.
This can result in chip redesigns if the initial design does not permit
acceptable manufacturing yields. The Company's telecommunications products are
designed for customers who in many instances have not yet fully defined their
hardware products. Design delays or redesigns by these customers could in turn
delay completion or require redesign of the semiconductor devices needed for the
final hardware product. In this regard, many of the relevant standards and
protocols for products based on high speed networking technologies have not been
widely adopted or ratified by the relevant standard-setting bodies. Redesigns or
design delays often are required for both the hardware manufacturer's products
and the Company's chipsets as industry and customer standards, protocols or
design specifications are determined. Any resulting delay in the production of
the Company's products could have a material adverse effect on the Company's
operating results.
The Company acquired in-process research and development relating to ethernet
switching technology from Bit, Incorporated. The Company will be required to
expend significant resources completing products based on this technology. The
Company cannot assure that these products will be completed in a timely manner
or at all, or that if completed these products will be commercially adopted.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change and by price erosion. The industry consists of major
domestic and international semiconductor companies, many of which have
substantially greater financial and other resources than the Company. Emerging
companies also provide significant competition in this segment of the
semiconductor market. The Company believes that its ability to compete
successfully in this market depends on a number of factors, including, among
others, the price, quality and performance of the Company's and its competitors'
products, the timing and success of new product introductions by the Company,
its customers and its competitors, the emergence of new standards, the
development of technical innovations, the ability to obtain adequate
manufacturing capacity and sources of raw materials, the efficiency of
production, the rate at which the Company's customers design the Company's
products into their products, the number and nature of the Company's competitors
in a given market, the assertion of the Company's and its competitors'
intellectual property rights and general market and economic conditions.
The Company produces semiconductor devices for advanced telecommunications and
networking applications. The Company's competitors in this market include, among
others, Texas Instruments, Level One, Lucent Technologies, Dallas Semiconductor
and Transwitch. The number of competitors in this market and the technology
platforms on which their products will compete may change in the future. To date
there have been several competing technologies in the telecommunications and
networking markets and a standard has not yet emerged. The Company's success
will depend on the successful development of a market for its customers'
products. It is likely that over the next few years additional competitors will
enter the market with new products. These new competitors may have substantially
greater financial and other resources than the Company. Competition among
manufacturers of semiconductors like the Company's products typically occurs at
the design stage, where the customer evaluates alternative design approaches
that require integrated circuits. Because of shortened product life cycles and
even shorter design-in cycles, the Company's competitors have increasingly
frequent opportunities to achieve design wins in next generation systems. Any
success by the Company's competitors supplanting the Company's products would
have a material adverse effect on the Company's operating results.
ACCESS TO WAFER FABRICATION AND OTHER MANUFACTURING CAPACITY
The Company does not own or operate a wafer fabrication facility, and all of its
semiconductor device requirements are supplied by outside foundries.
Substantially all of the Company's semiconductor products are currently
manufactured by third party foundry suppliers. The Company's foundry suppliers
fabricate products for other companies and produce products of their own design.
The Company's reliance on independent foundries involves a number of risks,
including the absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
delivery schedules, manufacturing yields and costs. In the event that these
foundries are unable or unwilling to continue to manufacture the Company's
products in required volumes, the Company will have to identify and qualify
acceptable additional or alternative foundries. This qualification process could
take six months or longer. No assurance can be given that any such source would
become available to the Company or that any such source would be in a position
to satisfy the Company's production requirements in a timely basis, if at all.
Any significant interruption in the supply of semiconductors to the Company
would result in the allocation of products to customers, which in turn could
have a material adverse effect on the Company's operating results.
All of the Company's semiconductor products are assembled by sub-assemblers in
Asia. Shortages of raw materials or disruptions in the provision of services by
the Company's assembly houses or other circumstances that would require the
Company to seek additional or alternative sources of supply or assembly could
lead to supply constraints or delays in the delivery of the Company's products.
Such constraints or delays may result in the loss of customers or other adverse
effects on the Company's operating results. The Company's reliance on
independent assembly houses involves a number of other risks, including reduced
control over delivery schedules, quality assurances and costs and the possible
discontinuance of such contractors' assembly processes. Any supply or other
problems resulting from such risks would have a material adverse effect on the
Company's operating results.
CUSTOMER CONCENTRATION
The Company has no long-term volume purchase commitments from any of its major
customers. In 1993, 1994, and 1995 Apple Computer, Inc. represented more than
10% of the revenues of the Company. For the first nine months of 1996, a modem
board assembler represented approximately 10% of the revenues of the Company.
The reduction, delay or cancellation of orders from one or more significant
customers could materially and adversely affect the Company's operating results.
Due to the relatively short product life cycles in the telecommunications and
data communications markets, the Company's operating results would be materially
and adversely affected if one or more of its significant customers were to
select devices manufactured by one of the Company's competitors for inclusion in
future product generations. There can be no assurance that the Company's current
customers will continue to place orders with the Company, that orders by
existing customers will continue at the levels of previous periods or that the
Company will be able to obtain orders from new customers. Loss of one or more of
the Company's current customers or a disruption in the Company's sales and
distribution channels could materially and adversely affect the Company's
operating results.
INTERNATIONAL OPERATIONS
During fiscal years 1993, 1994 and 1995 and the first nine months of fiscal
1996, international sales accounted for approximately 32%, 38%, 39% and 56% of
the Company's net revenues, respectively. The Company expects that international
sales will continue to represent a significant portion of its net revenues for
the foreseeable future. PMC's operations, which are primarily in Canada, are
expected to represent a larger percentage of the Company's overall operations.
In addition, substantially all of the Company's products are manufactured,
assembled and tested by independent third parties in Asia. Due to its reliance
on international sales and foreign third-party manufacturing, assembly and
testing operations, the Company is subject to the risks of conducting business
outside of the United States. These risks include unexpected changes in, or
impositions of, legislative or regulatory requirements and policy changes
affecting the telecommunications and data communications markets, delays
resulting from difficulty in obtaining export licenses for certain technology,
tariffs quotas, exchange rates and other trade barriers and restrictions, longer
payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws and other factors beyond the Company's control. The Company is also subject
to general geopolitical risks in connection with its international operations,
such as political, social and economic instability, potential hostilities and
changes in diplomatic and trade relationships. Sales in Europe are generally
denominated in local currencies, while sales in the rest of the world are
generally denominated in U.S. dollars. As a result, the Company is subject to
the risks of currency fluctuations. There can be no assurance that one or more
of the foregoing factors will not have a material adverse effect on the
Company's operating results.
FUTURE CAPITAL NEEDS
The Company must continue to make significant investments in research and
development as well as capital equipment and expansion of facilities for
networking products. The Company's future capital requirements will depend on
many factors, including, among others, product development, the Company's
ability to sell existing modem chipset inventories, investments in working
capital, and acquisitions or complementary businesses, products or technologies.
To the extent that existing resources and future earnings are insufficient to
fund the Company's operations, the Company may need to raise additional funds
through public or private debt or equity financings. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
current shareholders will be reduced and such equity securities may have rights,
preferences or privileges senior to those of the holders of the Company's Common
Stock. No assurance can be given that additional financing will be available or
that, if available, it can be obtained on terms favorable to the Company and its
shareholders. If adequate funds are not available, the Company may be required
to delay, limit or eliminate some or all of its proposed operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
services of its key technical personnel, particularly those highly skilled at
the design and test functions involved in the development of high speed
networking products and related software. The competition for such employees is
intense. As a result of the Company's decision to exit the modem business,
certain key administrative and engineering personnel may terminate their
employment by the Company. The Company cannot assure that the retention
incentives which the Company has put in place will be sufficient to retain these
individuals. The loss of the services of one or more of these key personnel, and
any difficulties the Company may experience in hiring qualified replacements,
would materially and adversely affect the Company's operating results.
PATENTS AND PROPRIETARY RIGHTS
The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company relies on a combination of patents,
trademarks, copyrights, trade secret laws, confidentiality procedures and
licensing arrangements to protect its intellectual property rights. There can be
no assurance that patents will issue from any of the Company's pending
applications or that any claims allowed will be of sufficient scope or strength,
or be issued in all countries where the Company's products can be sold, to
provide meaningful protection or any commercial advantage to the Company. In
addition, competitors of the Company may be able to design around the Company's
patents. The laws of certain foreign countries in which the Company's products
are or may be developed, manufactured or sold, including various countries in
which the Company's products are or may be developed, manufactured or sold,
including various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. There can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. The Company or its customers or
foundries have in the past, and may from time to time in the future, be notified
of claims that the Company may be infringing patents or other intellectual
property rights owned by third parties. If its is necessary or desirable, the
Company may seek licenses under patents or intellectual property rights. There
can be no assurance that licenses will be available or that the terms of any
offered license will be acceptable to the Company. The failure to obtain a
license from a third party for technology used by the Company could cause the
Company to incur substantial liabilities and to suspend the manufacture of
products or the use by the Companys' foundry suppliers requiring the technology.
In the past, the Company's customers have been required to obtain licenses from
and pay royalties to third parties for the sale of systems incorporating the
Company's semiconductor devices. If this occurs in the future, the customers'
businesses may be materially and adversely affected, which in turn would have a
material adverse effect on the Company's operating results. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products, spend significant
resources to develop non-infringing technology, discontinue the use of certain
processes or obtain licenses to the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Patent disputes in the semiconductor industry have
often been settled through cross-licensing arrangements. Because the Company
currently does not have a substantial portfolio of patents, the Company may not
be able to settle an alleged patent infringement claim through a cross-licensing
arrangement. Any successful third party claim against the Company or its
customers for patent or intellectual property infringement, would have a
material adverse effect on the Company's operating results.
ACQUISITIONS
The Company's strategy may involve, in part, acquisitions of products,
technologies or businesses from third parties. Identifying and negotiating these
acquisitions may divert substantial management time away from the Company's
operations. An acquisition could absorb substantial cash resources, could
require the Company to incur or assume debt obligations, or could involve the
issuance of additional equity securities of the Company. The issuance of
additional equity securities could dilute, and could represent an interest
senior to the rights of, then outstanding common stock. An acquisition which is
accounted for as a purchase, like the acquisition of PMC in 1994 and the
acquisition of certain assets of Bit in September 1996, could involve
significant one-time non-cash write-offs, and could involve the amortization of
goodwill over a number of years, which would adversely affect earnings in those
years. Any acquisition will require attention from the Company's management to
integrate the acquired entity into the Company's operations, may require the
Company to develop expertise outside its existing businesses and may result in
departures of management of the acquired entity. An acquired entity may have
unknown liabilities, and its business may not achieve the results anticipated at
the time of the acquisition.
VOLATILITY OF STOCK PRICE
Factors such as announcements of the introduction of new products by the Company
or its competitors, quarterly fluctuations in the Company's financial results or
the financial results of other semiconductor companies or of companies in the
personal computer industry, general conditions in the semiconductor industry and
conditions in the financial markets have in the past caused the price of the
Common Stock to fluctuate substantially, and may do so in the future. In
addition, the stock market has recently experienced price and volume
fluctuations, which have particularly affected the market prices for many high
technology companies and which have often been unrelated to the operating
performance of the specific companies.
Liquidity and Capital Resources
The Company's cash and cash equivalents and short term investments decreased
from $45.9 million on December 31, 1995 to $27.1 million on September 29, 1996.
The decrease was primarily attributable to $18.1 million of payments made during
this period to reduce debt and capital lease obligations (principally related to
foundry agreements for future production capacity). Other uses of cash were $3.3
million for the purchase of fixed assets, and a $3.0 million equity investment
in a another company. Sources of cash were $2.6 million of proceeds from
issuance of common stock (principally under the Company's stock option and
purchase plans), and $2.6 million of net cash provided by operating activities.
The primary sources of cash, included in the net cash provided by operating
activities, are a $14.5 million decrease in accounts receivable, proceeds of
$7.0 million from the sale of Sitel-Sierra in the fourth quarter of 1995 and a
decrease in net inventories of $2.3 million. These were primarily offset by uses
of cash including a $10.1 million decrease in accounts payable, a $9.0 million
increase in deposits for wafer capacity (related to commitments made in 1995),
and a $1.7 million change in net liabilities of discontinued operations
(Prometheus).
As of September 29, 1996, the Company's principal sources of liquidity included
cash and cash equivalents and short term investments of $27.1 million, and
approximately $10 million available under its bank line of credit. The current
line of credit agreement expires on July 1, 1997. The Company believes that
existing sources of liquidity and anticipated funds from operations will satisfy
the Company's projected working capital expenditure requirements through fiscal
1996.
The Company's future capital requirements will depend on many factors,
including, among others, product development and acquisitions of complementary
businesses, products or technologies. To the extent that existing resources and
the funds generated by future earnings are insufficient to fund the Company's
operations, the Company may need to raise additional funds through public or
private debt or equity financings. If additional funds are raised through the
issuance of equity securities, the percentage ownership of current shareholders
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. No
assurance can be given that additional financing will be available or that, if
available, it can be obtained on terms favorable to the Company and its
shareholders. If adequate funds are not available, the Company may be required
to delay, limit or eliminate some or all of its proposed operations.
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
o 11.1 - (calculation of earnings per share)
(b) A current report on Form 8-K was filed on August 30, 1996 to
disclose the Company's decision to exit from the modem
chipset business
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
SIERRA SEMICONDUCTOR CORPORATION
CALCULATION OF EARNINGS PER SHARE
(In thousands, except for per share amounts)
Three Months Ended
September 29,
---------------------------------------------
1996 1995
<S> <C> <C>
Income (loss) from continuing operations $ (76,394) $ (1,221)
Loss from discontinued operations - (2,249)
------------------ ------------------
Net income (loss) $ (76,394) $ (3,470)
================== ==================
Weighted average common shares outstanding 29,782 27,230
Common stock options - -
------------------ ------------------
Shares used in calculation of net income (loss) per share 29,782 27,230
================== ==================
Income (loss) from continuing operations per share $ (2.57) $ (0.05)
Loss from discontinued operations per share $ - $ (0.08)
------------------ ------------------
Net income (loss) per share $ (2.57) $ (0.13)
================== ==================
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIERRA SEMICONDUCTOR CORPORATION
(Registrant)
Date: November 5, 1996 /s/ James V. Diller
---------------- ---------------------
James V. Diller
Chairman and Chief Executive Officer
Date: November 5, 1996 /s/ Glenn C. Jones
---------------- ---------------------
Glenn C. Jones
Senior Vice President, Finance
Chief Financial Officer (Principal Accounting
Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000767920
<NAME> SIERRA SEMICONDUCTOR CORP.
<MULTIPLIER> 1000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JUL-1-1996
<PERIOD-END> SEP-29-1996
<CASH> 20,101
<SECURITIES> 6,969
<RECEIVABLES> 24,440
<ALLOWANCES> 0
<INVENTORY> 12,571
<CURRENT-ASSETS> 66,543
<PP&E> 47,922
<DEPRECIATION> (33,454)
<TOTAL-ASSETS> 126,515
<CURRENT-LIABILITIES> 67,884
<BONDS> 0
0
0
<COMMON> 131,930
<OTHER-SE> (99,096)
<TOTAL-LIABILITY-AND-EQUITY> 126,515
<SALES> 34,726
<TOTAL-REVENUES> 34,726
<CGS> 21,318
<TOTAL-COSTS> 21,318
<OTHER-EXPENSES> 89,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> (76,216)
<INCOME-TAX> 178
<INCOME-CONTINUING> (76,394)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (76,394)
<EPS-PRIMARY> (2.57)
<EPS-DILUTED> (2.57)
</TABLE>
