----------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10 - Q/A-1
[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>
EXPLANATORY NOTE
This amendment to the quarterly report on Form 10-Q for the quarter ended
September 29, 1996 is being filed for the purpose of revising the Consolidated
Condensed Financial Statements, the Notes to Consolidated Condensed Financial
Statements, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Exhibit 11.1.
<PAGE>
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated condensed balance sheets 4
- Consolidated condensed statements of operations 5
- Consolidated condensed statements of cash flows 6
- Notes to consolidated condensed financial statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K 28
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SIERRA SEMICONDUCTOR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
(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 12,953 14,843
Prepaid expenses and other current assets 2,462 9,813
--------- ---------
Total current assets 66,925 109,913
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
--------- ---------
$ 126,897 $ 184,860
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 15,117 $ 22,866
Accrued liabilities 9,241 8,494
Accrued income tax 6,147 7,737
Accrued restructure costs 27,463 --
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 65,166 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 (95,996) (38,726)
--------- ---------
35,934 81,032
Less shareholders' notes receivable (1) (32)
--------- ---------
Total shareholders' equity 35,933 81,000
--------- ---------
$ 126,897 $ 184,860
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
SIERRA SEMICONDUCTOR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except for per share amounts)
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 20,936 25,793 80,400 66,007
--------- --------- --------- ---------
Gross profit 13,790 24,907 71,744 63,833
Other costs and expenses:
Research and development 7,080 5,969 23,371 16,523
Acquisition of in process research and development 7,783 -- 7,783 --
Marketing, general and administrative 7,406 7,170 24,913 21,449
Purchase price adjustment - compensation -- 10,624 -- 10,624
Restructure costs (includes impairment of
goodwill and long-lived assets) 64,670 -- 64,670 --
--------- --------- --------- ---------
Income (loss) from operations (73,149) 1,144 (48,993) 15,237
Interest income (expense), net 33 19 529 145
--------- --------- --------- ---------
Income (loss) before provision for income taxes (73,116) 1,163 (48,464) 15,382
Provision for income taxes 178 2,384 8,806 5,727
--------- --------- --------- ---------
Income (loss) from continuing operations (73,294) (1,221) (57,270) 9,655
Loss from discontinued operations -- (2,249) -- (3,086)
--------- --------- --------- ---------
Net income (loss) $ (73,294) $ (3,470) $ (57,270) $ 6,569
========= ========= ========= =========
Income (loss) from continuing operations per share $ (2.46) $ (0.05) $ (1.94) $ 0.34
Loss from discontinued operations per share $ -- $ (0.08) $ -- $ (0.11)
--------- --------- --------- ---------
Net income (loss) per share $ (2.46) $ (0.13) $ (1.94) $ 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
(unaudited)
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) $(57,270) $ 6,569
Adjustments to reconcile net income (loss) to net cash
provided by 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 --
Loss related to restructure reserve:
Accounts receivable 5,047 --
Inventory 23,000 --
Prepaid expenses 1,061 --
Impairment of long-lived assets 9,650 --
Impairment of goodwill of Holland operations 2,459 --
Accruals for restructure related costs:
Severance and related costs 6,985 --
Purchase commitments and other accruals 8,847 --
Reduced value of foundry commitment 6,930 --
Excess facilities costs 3,411 --
Costs for closure of European subsidiaries 1,980 --
Changes in assets and liabilities
Accounts receivable 9,490 (13,906)
Inventories (21,110) 19
Prepaid expenses and other (2,254) (3,876)
Accounts payable and accrued expenses (9,671) 9,879
Accrued restructuring costs (690) --
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 charges of $69,370,000 in
connection with the Company's decision to exit from the modem chipset business
and the associated restructuring of the Company's non-networking product
operations. The charges were recorded in cost of sales as an inventory write
down ($4,700,000) and as restructure costs in operating expenses ($64,670,000).
The elements of the total charge as of September 29, 1996 are as follows:
Write down of inventories to net realizable value $23,000,000
Employee termination benefits (North America) 6,985,300
Losses on supplier commitments and write off
of prepaid expenses 9,907,900
Write down of excess fixed assets to fair value 9,650,000
Write down of capacity assets to fair value 6,930,000
Provision for price protection and product returns 5,047,000
Excess facility costs 3,411,000
Write down of goodwill related to Company's BV
subsidiary in Holland 2,458,800
Severance and closure costs related to European
operations 1,980,000
-----------
$69,370,000
The Company's intention is to cease manufacturing its modem chipset products
immediately and to complete the shut down of the remaining non-networking
operations in San Jose by the middle of 1997. The Company is actively attempting
to sell its modem chipset business; however, no sale is anticipated in
accounting for the restructuring. The Company plans to continue manufacturing
certain of its multimedia products in order to utilize components either on-hand
or under firm committed orders. As the non-networking operations wind down,
related work forces will be reduced. Termination benefits for approximately 245
employees associated with the Company's non-networking operations will be paid
as employees reach their termination dates, between November 1996 and July 1997.
<PAGE>
As a result of its exit from the modem chipset business, the Company identified
incremental impairments in the carrying value of its non-networking inventory
and losses on supplier commitments arising directly from the decision to stop
manufacturing of modem chipset inventory. Additionally, the Company identified
certain prepaid expenses and other commitments that, due to the exit from the
modem chipset and other non-networking operations, will provide no future
economic benefit to the Company.
In conjunction with the decision to exit the modem chipset business, the Company
is subject to incremental pricing pressure and potential returns of modem
chipset products. An estimate of the potential impact of price protection and
product returns has been included in the restructuring charge.
In connection with its decision to discontinue non-networking operations, the
Company evaluated the ongoing value of the fixed assets associated with these
operations. Based on this evaluation, the Company identified approximately $2.1
million of non-networking property and equipment that will continue to be
utilized in the Company's networking operations. The remaining non-networking
property and equipment, with a carrying amount of approximately $11.6 million,
consists primarily of testers, engineering workstations, and computer equipment.
A small portion of these assets will be utilized only during the wind down of
the non-networking operations through the middle of 1997. The majority of these
assets will not be utilized and the Company is attempting to dispose of such
assets. As a result, in accordance with Financial Accounting Standard No. 121,
the Company determined that these assets were impaired and wrote them down by
approximately $9.7 million to their estimated fair market value. Fair value was
based on estimated net recoverable salvage value of assets being disposed of and
took into account no impairment of assets being utilized based upon net
undiscounted estimated cash flows to be generated by these assets.
Prior to the Company's decision to exit from the modem chipset business and the
associated restructure of its non-networking operations, the Company entered
into noncancellable capital leases for equipment to be used by one of the
Company's outside foundries in exchange for guaranteed capacity and future
pricing considerations. Due to the Company's exit and restructure plan, the
Company estimates that it will not be able to fully utilize the contracted
capacity and pricing considerations. The Company's analysis of cash flows
expected from the reduced capacity utilization at this foundry, while incurring
the full contracted capital lease obligations, resulted in an impairment of
approximately $6.9 million of the related equipment.
The portion of the charge related to excess facility costs primarily consists of
amounts to be incurred by the Company under a seven year noncancellable
operating lease expiring in 2003. The Company plans to occupy a portion of the
building through June 1997. After June 1997, the Company expects that the
building will be vacant. The Company is actively trying to sublet the building;
however, it is expected that a sublessor may not be located for approximately
eighteen months. As a result, the charge consists of the unused percentage of
the lease obligations from September 1996 through June 1997 and 100% of the
lease obligations for eighteen months thereafter, and associated costs for
operating and maintaining the facilities.
<PAGE>
The Company's operations in Europe were closed as a result of the decision to
exit the modem chipset business. Costs related to the shutdown of the European
subsidiaries, including severance payments and excess facilities costs, are
included in the restructuring charge. Additionally, the restructuring charge
includes a write down of the remaining goodwill related to the Company's Holland
operation.
Cash expenditures associated with the restructuring plan, were approximately
$0.7 million in the third quarter of 1996. It is expected that approximately
$4.2 million and $6.2 million of cash expenditures related to the restructuring
will occur during the fourth quarter of 1996 and the first half of 1997,
respectively. Subsequent cash expenditures related primarily to leases accrued
in the restructuring will be approximately $12.1 million.
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 consideration.
The aggregate value of this transaction was approximately $8.1 million, which
includes acquisition costs incurred by the Company. These assets of Bit, Inc.
were acquired in exchange for 804,407 shares of Sierra common stock with a value
of approximately $6.6 million (based on the market value of Sierra common stock
issued subject to restrictions on transfer), approximately $0.5 million of net
liabilities assumed by the Company's subsidiary, the value of options to
purchase common stock of the Company, forgiveness of principal and interest from
loans provided by the Company's subsidiary, and cash. The acquisition resulted
in a $7.8 million charge for the purchase of in-process research and
development. The remaining $0.3 million of technology assets have been
capitalized as long term assets which will be amortized over seven years.
Results of operations include the costs of continuing the development of
products and related activities acquired from Bit, Inc. from the closure of the
acquisition on September 3, 1996. The proforma effect of combining the Bit, Inc.
transaction with the Company's operations in 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, December 31,
1996 1995
---- ----
(unaudited)
Work-in-progress $ 4,318 $ 6,604
Finished goods 8,635 8,239
----- -----
$12,953 $14,843
======= =======
5. The Company contracted with an investment banking firm in the first quarter
of 1996 to engage in efforts to sell Prometheus Products, Inc ("Prometheus").
The effort to sell Prometheus has not resulted in a sale and the Company has
subsequently completed the closure of most operations of Prometheus, except for
the hardware and software technical support function which provides product
warranty support for the installed base of products previously sold. All
liabilities and operating results of Prometheus for the first three quarters of
1996 have been recorded against the discontinued operations provision
established in the fourth quarter of 1995.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview
Restructuring Charge
- --------------------
In the third quarter of 1996, the Company recorded charges of $69,370,000 in
connection with the Company's decision to exit from the modem chipset business
and the associated restructuring of the Company's non-networking product
operations. The charges were recorded in cost of sales as an inventory write
down ($4,700,000) and as restructure costs in operating expenses ($64,670,000).
The elements of the total charge as of September 29, 1996 are as follows:
Write down of inventories to net realizable value $23,000,000
Employee termination benefits (North America) 6,985,300
Losses on supplier commitments and write off
of prepaid expenses 9,907,900
Write down of excess fixed assets to fair value 9,650,000
Write down of capacity assets to fair value 6,930,000
Provision for price protection and product returns 5,047,000
Excess facility costs 3,411,000
Write down of goodwill related to Company's BV
subsidiary in Holland 2,458,800
Severance and closure costs related to European
operations 1,980,000
-----------
$69,370,000
The Company's intention is to cease manufacturing its modem chipset products
immediately and to complete the shut down of the remaining non-networking
operations in San Jose by the middle of 1997. The Company is actively attempting
to sell its modem chipset business; however, no sale is anticipated in
accounting for the restructuring. The Company plans to continue manufacturing
certain of its multimedia products in order to utilize components either on-hand
or under firm committed orders. As the non-networking operations wind down,
related work forces will be reduced. Termination benefits for approximately 245
employees associated with the Company's non-networking operations will be paid
as employees reach their termination dates, between November 1996 and July 1997.
As a result of its exit from the modem chipset business, the Company identified
incremental impairments in the carrying value of its non-networking inventory
and losses on supplier commitments arising directly from the decision to stop
manufacturing of modem chipset inventory. Additionally, the Company identified
certain prepaid expenses and other commitments that, due to the exit from the
modem chipset and other non-networking operations, will provide no future
economic benefit to the Company.
In conjunction with the decision to exit the modem chipset business, the Company
is subject to incremental pricing pressure and potential returns of modem
chipset products. An estimate of the potential impact of price protection and
product returns has been included in the restructuring charge.
<PAGE>
In connection with its decision to discontinue non-networking operations, the
Company evaluated the ongoing value of the fixed assets associated with these
operations. Based on this evaluation, the Company identified approximately $2.1
million of non-networking property and equipment that will continue to be
utilized in the Company's networking operations. The remaining non-networking
property and equipment, with a carrying amount of approximately $11.6 million,
consists primarily of testers, engineering workstations, and computer equipment.
A small portion of these assets will be utilized only during the wind down of
the non-networking operations through the middle of 1997. The majority of these
assets will not be utilized and the Company is attempting to dispose of such
assets. As a result, in accordance with Financial Accounting Standard No. 121,
the Company determined that these assets were impaired and wrote them down by
approximately $9.7 million to their estimated fair market value. Fair value was
based on estimated net recoverable salvage value of assets being disposed of and
took into account no impairment of assets being utilized based upon net
undiscounted estimated cash flows to be generated by these assets.
Prior to the Company's decision to exit from the modem chipset business and the
associated restructure of its non-networking operations, the Company entered
into noncancellable capital leases for equipment to be used by one of the
Company's outside foundries in exchange for guaranteed capacity and future
pricing considerations. Due to the Company's exit and restructure plan, the
Company estimates that it will not be able to fully utilize the contracted
capacity and pricing considerations. The Company's analysis of cash flows
expected from the reduced capacity utilization at this foundry, while incurring
the full contracted capital lease obligations, resulted in an impairment of
approximately $6.9 million of the related equipment.
The portion of the charge related to excess facility costs primarily consists of
amounts to be incurred by the Company under a seven year noncancellable
operating lease expiring in 2003. The Company plans to occupy a portion of the
building, through June 1997. After June 1997, the Company expects that the
building will be vacant. The Company is actively trying to sublet the building;
however, it is expected that a sublessor may not be located for approximately
eighteen months. As a result, the charge consists of the unused percentage of
the lease obligations from September 1996 through June 1997 and 100% of the
lease obligations for eighteen months thereafter, and associated costs for
operating and maintaining the facilities.
The Company's operations in Europe were closed as a result of the decision to
exit the modem chipset business. Costs related to the shutdown of the European
subsidiaries, including severance payments and excess facilities costs, are
included in the restructuring charge. Additionally, the restructuring charge
includes a write down of the remaining goodwill related to the Company's Holland
operation.
Cash expenditures associated with the restructuring plan, were approximately
$0.7 million in the third quarter of 1996. It is expected that approximately
$4.2 million and $6.2 million of cash expenditures related to the restructuring
will occur during the fourth quarter of 1996 and the first half of 1997,
respectively. Subsequent cash expenditures related primarily to operating and
capital leases accrued in the restructuring will be approximately $12.1 million.
<PAGE>
Reasons for Restructuring
- -------------------------
During 1995, the Company was experiencing increasing demand for its modem
chipset products, as shipment volumes were increasing and more customers were
requesting and ordering products for future deliveries. As a result, the Company
then increased the order rate and volume from its suppliers for products. Also
in 1995, the industry was experiencing a severe shortage of foundry capacity to
produce the wafers for the semiconductor devices. This caused companies like
Sierra to be required to place order commitments with its foundry suppliers with
much longer lead times, and extending more than several months in most cases.
In the first half of 1996, there was a combination of events which changed the
entire modem market environment. In a very short time period, the demand for the
modem speed technology changed from V.32 chips (14.4Kbps speed) to V.34 chips
(28.8Kbps), and the demand for slower speed modem products declined quickly and
dramatically. However, the longer lead times required by the foundries for
orders placed earlier in the year resulted in products being delivered and
accumulating in the Company's inventories. As foundry capacity, previously in
limited supply, became more readily available, customer preferences shifted to
higher volume producers of V.34 and higher speed modem products. This
combination resulted in increased levels of inventory for both lower speed and
higher speed modem products, while the foundries had more capacity to produce
product and became aggressive in trying to build and ship even more
semiconductor products to modem chipset companies like Sierra.
These factors combined to create excess inventory and a precipitous decline in
prices during the second and third quarters of 1996. The Company saw this
declining price and excessive inventory position as a major change in the modem
marketplace. Thus, in the third quarter of 1996, the Company decided to exit the
lower margin modem chipset market, and to invest future resources in higher
margin networking products.
Concurrent with the Company's decision to exit the modem chipset business, the
Company also decided to restructure its other non-networking product operations
in the graphics and custom areas, which would no longer fit with the Company's
focus on networking products. The Company decided not to expend funds for
research and development on new products outside the networking area.
Impact of Restructuring
- -----------------------
The decisions to exit from the modem chipset business and to restructure the
non-networking product operations are expected to result in a decline of
revenues derived from modem, graphic and custom integrated circuit sales. For
the first nine months of 1996, modem, graphic and custom integrated circuit
revenues were $102.3 million, approximately 1% lower than the comparable nine
month period in 1995. For 1997, the Company expects these revenues to decline
significantly, although revenues in these product areas may vary significantly
from quarter to quarter as the Company sells off its modem chipset inventory.
Research and development, sales and marketing and general and administrative
expenses related to these non-networking product operations for the first nine
months of 1996 were $96.2 million, up from $88.4 million in the comparable
period in 1995. The Company expects these expenses to decline significantly in
1997 due to reduced headcount and the absence of new research and development
efforts in the non-networking business. Revenues from sales of modem chipset
products will continue to be reported until the Company disposes its existing
inventory, which the Company expects to occur during 1997.
<PAGE>
Acquisition of Ethernet Switching Assets
- ----------------------------------------
Consistent with the Company's strategy to focus on the networking and
infrastructure semiconductor businesses, in the third quarter of 1996, a
subsidiary of the Company acquired the ethernet switching assets, intellectual
property and certain other assets from Bit, Incorporated, a privately held
company in Beaverton, Oregon. These assets were acquired in exchange for 804,407
shares of the Company's common stock and other consideration. The aggregate
value of this transaction was approximately $8,107,000, which includes
acquisition costs incurred by the Company. The acquisition was accounted for as
a purchase transaction, with a charge in the quarter of $7,783,000 for
in-process research and development. Approximately $324,000 of technology assets
were capitalized, and will be amortized over seven years. (See Note 3).
Third Quarters of 1996 and 1995
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 subsidiary, PMC-Sierra, Inc. ("PMC").
Gross Profit
- ------------
Third Third
Quarter Quarter
1996 Change 1995
---- ------ ----
Gross profit ($000,000)
Networking products $11.7 50% $7.8
Percentage of networking net revenues 73% 76%
User interface products $2.1 (88%) $17.1
Percentage of user interface net revenues 11% 42%
<PAGE>
User interface products excluding
valuation reserve for modem inventory $6.8 (60%) $17.1
Percentage of user interface net revenues 36% 42%
Total gross profit $13.8 (44%) $24.9
Percentage of net revenues 40% 49%
Total gross profit excluding valuation
reserve for modem inventory $18.5 (26%) $24.9
Percentage of net revenues 53% 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 (see Note 2).
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 chipset products, which have lower gross
margins than networking products, the overall gross margin of the Company may
decline depending on the percentage of modem chipset 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 revenues of networking
products with higher gross profit.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
Third Third
Quarter Quarter
1996 Change 1995
---- ------ ----
Research and development $7.1 18% $6.0
Percentage of net revenues 20% 12%
In-process research & development $7.8 ---
Percentage of net revenues 22% ---
Marketing, general & administrative $7.4 3% $7.2
Percentage of net revenues 21% 14%
Purchase price adjustment-compensation --- $10.6
Percentage of net revenues --- 21%
Restructure costs $64.7 ---
Percentage of net revenues 186% ---
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.
<PAGE>
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. (See Note 3).
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 charge of $69,370,000 recorded in connection
with the Company's decision to exit from the modem chipset business and the
associated restructuring of the Company's non-networking product operations.
(See Note 2).
Interest Income (Expense), Net ($000,000
- ----------------------------------------
Third Third
Quarter Quarter
1996 Change 1995
---- ------ ----
Interest income (expense), net $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
offset 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
quarters of 1996. The actual results will be dependent upon the revenue and
profits of the various legal entities and product lines.
<PAGE>
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 during all three quarters of 1996 and user interface modem chipset
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 user interface modem chipset products 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 networking net revenues 74% 75%
User interface products $35.0 (20%) $44.0
Percentage of user interface net revenues 34% 43%
User interface products excluding valuation
reserve for modem chipset inventory $39.7 (10%) $44.0
Percentage of user interface net revenues 39% 43%
Total gross profit $71.8 13% $63.8
Percentage of net revenues 47% 49%
Total gross profit excluding valuation
reserve for modem chipset inventory $76.5 20% $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 chipset products, which
have lower gross margins than networking products, the overall gross margin of
the Company may decline depending on the percentage of modem chipset 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 revenues
of networking products with higher gross profit.
<PAGE>
Operating Expenses and Charges ($000,000)
- -----------------------------------------
First First
Nine Months Nine Months
1996 Change 1995
Research and development $23.4 42% $16.5
Percentage of net revenues 15.3% 12.7%
In-process research & development $7.8 ---
Percentage of net revenues 5.1%
Marketing, general & administrative $24.9 16% $21.4
Percentage of net revenues 16.4% 16.5%
Purchase price adjustment-compensation --- $10.6
Percentage of net revenues 8.2%
Restructure costs $64.7 ---
Percentage of net revenues 42.5% ---
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. (See Note 3).
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 on networking products.
<PAGE>
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 $69,370,000 in
connection with the Company's decision to exit from the modem chipset business
and the associated restructuring of the Company's non-networking product
operations. (See Note 2).
Interest Income (Expense), Net ($000,000
- ----------------------------------------
First First
Nine Months Nine Months
1996 Change 1995
---- ------ ----
Interest income (expense), net $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
offset 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
quarters 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 and 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.
<PAGE>
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results may vary due to a number of
factors, including, among others, the timing of new product introductions,
decreased demand or average selling prices for products, market acceptance of
products, demand for products of the Company's customers, the introduction of
products or technologies by the Company's competitors, competitive pressure on
product pricing, the Company's and its customers' inventory levels of the
Company's products (particularly discontinued modem products), product
availability from outside foundries, variations in manufacturing yields for the
company's products, expenditures for new product and process development, the
acquisition of wafer fabrication and other manufacturing capacity, and the
acquisition of businesses, products or technologies. At various times in the
past, the Company's foundry and other suppliers have experienced lower than
anticipated yields that have adversely affected production and, consequently,
the Company's operating results. There can be no assurance that the Company's
existing or future foundry and other suppliers will not experience
irregularities which could have a material adverse effect on the Company's
operating results. The Company from time to time may order in advance of
anticipated customer demand from its suppliers in response to anticipated long
lead times to obtain inventory and materials, which might result in excess
inventory levels if expected orders fail to materialize or other factors render
the Company's product or its customer's products less marketable. The Company
has limited ability to forecast its unit volumes of discontinued modem chipset
sales or the prices at which these sales will occur, particularly in light of
recent 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.
<PAGE>
The Company's current strategy is focused on networking high-speed interface
chips. Products for telecommunications and data communications applications are
based on industry standards that are continually evolving. Future transitions in
customer preferences could quickly obsolete Sierra products. The Company is
developing products for the Asynchronous Transfer Mode ("ATM")
telecommunications and networking market, which is in an early stage of
development. The emergence and adoption of new industry standards that compete
with ATM or maintenance by the industry of existing standards in lieu of new
standards could render the Company's ATM products unmarketable or obsolete. The
market for ATM equipment has not developed as rapidly as industry observers 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. Net
revenues derived from sales of ATM, T1/E1, DS3/E3 and SONET/SDH based products
amounted to 46% of the Company's total net revenues for the third quarter of
1996, and 33% of the Company's total net revenues for the first three quarters
of 1996. The gross profit derived from those products amounted to 65% of the
Company's total gross profit for the third quarter of 1996, and 48% of the
Company's total gross profit for the first three quarters of 1996.
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.
<PAGE>
A subsidiary of the Company acquired in-process research and development and
developed technology relating to Ethernet switching technology from Bit, Inc.
The acquired technology is generally in the early stages of development. The
Company has redesigned one product acquired from Bit, Inc. and has announced a
customer's intention to include this integrated circuit in the customer's
product. Two other products acquired from Bit, Inc. are in the design phase, two
more are undergoing product definition, and four have been conceptually
outlined. The Company will need to expend significant additional resources to
complete products based on this technology. Completion of products based on the
acquired technology is primarily dependent upon the Company's ability to hire
additional engineering staff in the areas of software and firmware design,
system level application development, product testing, and evaluation and
characterization. The Company estimates that in order to complete and bring to
market the first products based on the acquired technology, it will need to
expend approximately $3.3 million in 1997, and to acquire approximately $1.0
million of additional capital equipment in 1997. The Company anticipates that
internally generated cash flows will be the source of funds for these
expenditures.
The Company cannot assure that these products will be completed in a timely
manner or at all, or that if completed these products will be commercially
adopted.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change and by price erosion. The industry consists of major
domestic and international semiconductor companies, many of which have
substantially greater financial and other resources than the Company. Emerging
companies also provide significant competition in this segment of the
semiconductor market. The Company believes that its ability to compete
successfully in this market depends on a number of factors, including, among
others, the price, quality and performance of the Company's and its competitors'
products, the timing and success of new product introductions by the Company,
its customers and its competitors, the emergence of new standards, the
development of technical innovations, the ability to obtain adequate
manufacturing capacity and sources of raw materials, the efficiency of
production, the rate at which the Company's customers design the Company's
products into their products, the number and nature of the Company's competitors
in a given market, the assertion of the Company's and its competitors'
intellectual property rights and general market and economic conditions.
The Company 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.
<PAGE>
ACCESS TO WAFER FABRICATION AND OTHER MANUFACTURING CAPACITY
The Company does not own or operate a wafer fabrication facility, and all of its
semiconductor device requirements are supplied by outside foundries.
Substantially all of the Company's semiconductor products are currently
manufactured by third party foundry suppliers. The Company's foundry suppliers
fabricate products for other companies and produce products of their own design.
The Company's reliance on independent foundries involves a number of risks,
including the absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
delivery schedules, manufacturing yields and costs. In the event that these
foundries are unable or unwilling to continue to manufacture the Company's
products in required volumes, the Company will have to identify and qualify
acceptable additional or alternative foundries. This qualification process could
take six months or longer. No assurance can be given that any such source would
become available to the Company or that any such source would be in a position
to satisfy the Company's production requirements in a timely basis, if at all.
Any significant interruption in the supply of semiconductors to the Company
would result in the allocation of products to 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, Askey
Computer Corporation, 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.
<PAGE>
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 Singapore, Taiwan, Malaysia
and the Philippines. Due to its reliance on international sales and foreign
third-party manufacturing, assembly and testing operations, the Company is
subject to the risks of conducting business outside of the United States. These
risks include unexpected changes in, or impositions of, legislative or
regulatory requirements and policy changes affecting the telecommunications and
data communications markets, delays resulting from difficulty in obtaining
export licenses for certain technology, tariffs quotas, exchange rates and other
trade barriers and restrictions, longer payment cycles, greater difficulty in
accounts receivable collection, potentially adverse taxes, the burdens of
complying with a variety of foreign laws and other factors beyond the Company's
control. The Company is also subject to general geopolitical risks in connection
with its international operations, such as political, social and economic
instability, potential hostilities and changes in diplomatic and trade
relationships. Sales in Europe are generally denominated in local currencies,
while sales in the rest of the world are generally denominated in U.S. dollars.
As a result, the Company is subject to the risks of currency fluctuations. There
can be no assurance that one or more of the foregoing factors will not have a
material adverse effect on the Company's operating results.
FUTURE CAPITAL NEEDS
The Company must continue to make significant investments in research and
development as well as capital equipment and expansion of facilities for
networking products. The Company's future capital requirements will depend on
many factors, including, among others, product development, the Company's
ability to sell existing modem chipset inventories, investments in working
capital, and acquisitions of complementary 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.
<PAGE>
The Company has available a line of credit with a bank under which the Company
may borrow up to $10 million. The agreement contains various covenants
pertaining to tangible net worth and certain other financial ratios and
prohibits the payment of dividends without the bank's prior written consent.
These covenants include a negative pledge on all of the Company's assets except
that the Company may (i) enter into acquisitions with other companies, provided
that the cash expended for such acquisitions not exceed $5 million, (ii) enter
into off balance sheet equipment leases, provided that such leases not exceed
$15 million in the aggregate, and (iii) issue convertible securities with
subordination provisions satisfactory to the bank. As of September 29, 1996, the
Company was not in compliance with certain of its financial covenants. The
Company received a waiver of these non-compliances as of September 29, 1996, and
the terms and related covenants of the line of credit are being amended for the
current business.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
services of its key technical personnel, particularly those highly skilled at
the design and test functions involved in the development of high speed
networking products and related software. The competition for such employees is
intense. The Company has no employment agreements in place with these key
personnel. However, the Company from time to time issues options to purchase
shares of Common Stock of the Company subject to vesting. To the extent the
options granted by the Company to purchase its Common Stock shares have economic
value, such options could create retention incentives during the period prior to
vesting of the whole option. The loss of the services of one or more of these
key personnel, and any difficulties the Company may experience in hiring
qualified replacements, would materially and adversely affect the Company's
operating results. As a result of the Company's decision to exit the modem
business, certain key administrative and engineering personnel in the
non-networking activities may terminate their employment by the Company earlier
than planned by the Company. The Company cannot assure that the retention
incentives which the Company has put in place will be sufficient to retain these
individuals. If one or more of these personnel terminate their employment with
the Company, the operating results of the Company could be adversely affected.
PATENTS AND PROPRIETARY RIGHTS
The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company relies on a combination of patents,
trademarks, copyrights, trade secret laws, confidentiality procedures and
licensing arrangements to protect its intellectual property rights. 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
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.
<PAGE>
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. The Company or its customers or
foundries have in the past, and may from time to time in the future, be notified
of claims that the Company may be infringing patents or other intellectual
property rights owned by third parties. If it is necessary or desirable, the
Company may seek licenses under patents or intellectual property rights. There
can be no assurance that licenses will be available or that the terms of any
offered 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 Company's foundry suppliers requiring the technology.
In the past, the Company's customers have been required to obtain licenses from
and pay royalties to third parties for the sale of systems incorporating the
Company's semiconductor devices. If this occurs in the future, the customers'
businesses may be materially and adversely affected, which in turn would have a
material adverse effect on the Company's operating results. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products, spend significant
resources to develop non-infringing technology, discontinue the use of certain
processes or obtain licenses to the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Patent disputes in the semiconductor industry have
often been settled through cross-licensing arrangements. Because the Company
currently does not have a substantial portfolio of patents, the Company may not
be able to settle an alleged patent infringement claim through a cross-licensing
arrangement. Any successful third party claim against the Company or its
customers for patent or intellectual property infringement, would have a
material adverse effect on the Company's operating results.
ACQUISITIONS
The Company's strategy may involve, in part, acquisitions of products,
technologies or businesses from third parties. Identifying and negotiating these
acquisitions may divert substantial management time away from the Company's
operations. An acquisition could absorb substantial cash resources, could
require the Company to incur or assume debt obligations, or could involve the
issuance of additional equity securities of the Company. The issuance of
additional equity securities could dilute, and could represent an interest
senior to the rights of, then outstanding common stock. An acquisition which is
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.
<PAGE>
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 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 $1.9 million. These were partially offset by uses
of cash including a $9.7 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 $ (73,294) $ (1,221)
Loss from discontinued operations - (2,249)
------------------ ------------------
Net income (loss) $ (73,294) $ (3,470)
================== ==================
Weighted average common shares outstanding 29,782 27,230
Common stock equivalents - -
------------------ ------------------
Shares used in calculation of net income (loss) per share 29,782 27,230
================== ==================
Income (loss) from continuing operations per share $ (2.46) $ (0.05)
Loss from discontinued operations per share $ - $ (0.08)
------------------ ------------------
Net income (loss) per share $ (2.46) $ (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: March 28, 1997 /s/ James V. Diller
---------------- --------------------------------------------
James V. Diller
Chairman and Chief Executive Officer
Date: March 28, 1997 /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> 12,953
<CURRENT-ASSETS> 66,925
<PP&E> 47,922
<DEPRECIATION> (33,454)
<TOTAL-ASSETS> 126,897
<CURRENT-LIABILITIES> 65,166
<BONDS> 0
0
0
<COMMON> 131,930
<OTHER-SE> (95,996)
<TOTAL-LIABILITY-AND-EQUITY> 126,897
<SALES> 34,726
<TOTAL-REVENUES> 34,726
<CGS> 20,936
<TOTAL-COSTS> 20,936
<OTHER-EXPENSES> 86,939
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> (73,116)
<INCOME-TAX> 178
<INCOME-CONTINUING> (73,294)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,294)
<EPS-PRIMARY> (2.46)
<EPS-DILUTED> (2.46)
</TABLE>
