- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10 - Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended March 31, 1997 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)
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 March 31, 1997 - 29,151,167
- --------------------------------------------------------------------------------
<PAGE>
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated condensed balance sheets 3
- Consolidated condensed statements of operations 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 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SIERRA SEMICONDUCTOR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
March 31, December 31,
1997 1996
(unaudited)
----------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 46,828 $ 35,038
Short-term investments 4,955 7,024
Accounts receivable, net 14,206 13,907
Inventories 6,491 9,232
Prepaid expenses and other current assets 2,871 3,104
---------- ----------
Total current assets 75,351 68,305
Property and equipment, at cost 41,477 42,861
Accumulated depreciation and amortization (26,596) (26,183)
---------- ----------
14,881 16,678
Goodwill and other intangible assets, net 9,840 10,188
Investments and other assets 7,605 7,623
Deposits for wafer fabrication capacity 27,120 27,120
---------- ----------
$ 134,797 $ 129,914
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,377 $ 9,648
Accrued liabilities 10,985 9,546
Accrued income tax 2,753 4,050
Accrued restructure costs 14,510 16,754
Short-term debt and current portion of obligations
under capital leases and long-term debt 6,467 6,269
Net liabilities of discontinued operations 1,500 1,600
---------- ----------
Total current liabilities 42,592 47,867
Deferred income taxes 2,709 2,741
Noncurrent obligations under capital leases and
long-term debt 18,540 18,368
Special shares of PMC convertible into Sierra
common stock 11,335 12,494
Shareholders' equity:
Common stock, no par value 138,017 135,320
Accumulated deficit (78,396) (86,876)
---------- ----------
Total shareholders' equity 59,621 48,444
---------- ----------
$ 134,797 $ 129,914
========== ==========
See notes to consolidated condensed financial statements.
<PAGE>
SIERRA SEMICONDUCTOR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)
Three Months Ended
March 31, March 31,
1997 1996
(unaudited) (unaudited)
----------- ----------
Net revenues $ 33,574 $ 64,396
Cost of sales 9,851 34,107
---------- ---------
Gross profit 23,723 30,289
Other costs and expenses:
Research and development 6,040 8,406
Marketing, general and administrative 6,301 8,665
---------- ---------
Income from operations 11,382 13,218
Interest income (expense), net (75) 360
Income before provision for income taxes 11,307 13,578
Provision for income taxes 2,827 4,752
---------- ---------
Net income $ 8,480 $ 8,826
========== ==========
Net income per share $ 0.27 $ 0.29
========== ==========
Shares used in calculation of net income per share 31,895 30,790
========== ==========
See notes to consolidated condensed financial statements.
<PAGE>
SIERRA SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31, March 31,
1997 1996
(unaudited) (unaudited)
----------- -----------
Cash flows from operating activities:
Net income $ 8,480 $ 8,826
--------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,967 2,777
Changes in assets and liabilities
Accounts receivable (299) (3,249)
Inventories 2,741 (8,003)
Prepaid expenses and other 251 (1,733)
Accounts payable and accrued expenses (3,162) 5,778
Accrued restructuring costs (2,244) -
Net assets/liabilities associated with
discontinued operations (100) 1,004
-------- ----------
Net cash provided by operating activities 7,634 5,400
Cash flows from investing activities:
Proceeds from sales/maturities of short-term investments 7,039 9,984
Purchases of short-term investments (4,970) (10,018)
Investments in other companies - (3,000)
Proceeds from sale of equipment 1,012 -
Purchases of plant and equipment (64) (1,454)
-------- ----------
Net cash provided by (used in)
investing activities 3,017 (4,488)
Cash flows from financing activities:
Proceeds from payments of notes receivable - 31
Proceeds from issuance of long-term debt - 252
Repayment of notes payable and long-term debt (579) (15,665)
Proceeds from issuance of capital leases 1,107 -
Principal payments under capital lease obligations (927) (378)
Proceeds from issuance of common stock 1,538 483
-------- ----------
Net cash provided by (used in)
financing activities 1,139 (15,277)
-------- ----------
Net increase (decrease) in cash and cash equivalents 11,790 (14,365)
Cash and cash equivalents, beginning of the period 35,038 41,933
-------- ----------
Cash and cash equivalents, end of the period $ 46,828 $ 27,568
========== ===========
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, 1996.
The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of results to be expected in future periods.
2. On September 29, 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 1996 in cost of sales as an inventory
write-down and in operating expenses as restructure costs. The remaining
elements of the restructuring reserve as of December 31, 1996 and March 31, 1997
are as follows:
Restructuring Restructuring
Reserve Reserve
December 31, 1996 March 31, 1997
(unaudited)
(In thousands)
Employee termination benefits $ 4,574 $ 3,837
Loss on supplier commitments and
write-off of prepaid expenses 8,594 7,785
Excess facility costs 3,003 2,691
Severance and closure costs related
to Europe 583 197
------ ------
$16,754 $14,510
Cash expenditures associated with the restructuring plan were approximately $2.2
million in the first quarter of 1997. It is expected that approximately $3.5
million of cash expenditures related to the restructuring will occur in the
second quarter of 1997. Subsequent cash expenditures related primarily to leases
accrued in the restructuring will be approximately $11.1 million.
<PAGE>
3. The components of inventories are as follows (in thousands):
March 31, December 31,
1997 1996
---- ----
(unaudited)
Work-in-progress $2,625 $3,335
Finished goods 3,866 5,897
----- -----
$6,491 $9,232
====== ======
4. Recently Issued Accounting Standard.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods, basic
EPS would have been $0.28 and $0.30 for the quarters ended March 31, 1997 and
1996, respectively. Diluted EPS under SFAS 128 would not have been significantly
different than primary EPS currently reported for the periods.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
First Quarters of 1997 and 1996
Net Revenues
First First
Quarter Quarter
1997 Change 1996
---- ------ ----
Net revenues ($000,000)
Networking products $15.5 (13%) $17.8
User interface - other $14.1 (19%) $17.4
User interface - modem $4.0 (86%) $29.2
------ ----- -----
Total net revenues $33.6 (48%) $64.4
The Company's decrease in total net revenues was principally due to a decline in
sales of user interface products, primarily modem chipset products and graphics
chips, in connection with the Company's decision to exit these markets announced
in the third fiscal quarter of 1996. Sales of networking products also declined
from the comparable quarter of 1996, which was a record high sales quarter for
networking products. The Company expects continued sales of modem chipset
products to decline significantly in the second quarter, and may experience
declines in other user interface product sales. Sales of modem chipset products
are not expected to be material after the second quarter.
Gross Profit
First First
Quarter Quarter
1997 Change 1996
---- ------ ----
Gross profit ($000,000)
Networking products $12.0 (10%) $13.4
Percentage of networking net revenues 77% 75%
User interface products $11.7 (31%) $16.9
Percentage of user interface net revenues 65% 36%
Total gross profit $23.7 (22%) $30.3
Percentage of net revenues 71% 47%
Total gross profit decreased as a result of lower revenue during this period.
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. Gross profits on user interface products were higher than historical
levels because the Company had written down modem inventories to market value
in the third quarter of 1996. 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 the introduction and sale of higher-margin networking
products.
<PAGE>
Operating Expenses and Charges ($000,000)
First First
Quarter Quarter
1997 Change 1996
---- ------ ----
Research and development $6.0 (29%) $8.4
Percentage of net revenues 18% 13%
Marketing, general & administrative $6.3 (28%) $8.7
Percentage of net revenues 18% 13%
Research and development expenses decreased primarily due to decreases in
research and development personnel in user interface products as a result of the
third quarter 1996 restructuring of the Company's non-networking operations,
offset partially by increases in research and development spending and personnel
in the Company's networking product lines. As a percentage of net revenues,
research and development expenses increased as a result of the decline in sales.
In the near term, the Company expects research and development spending to
continue to decline in absolute dollars. In the longer term, the Company expects
increases in absolute dollars expended for research and development for
networking products.
Marketing, general and administrative expenses also declined primarily due to
the reduction in expenses and personnel resulting from the third quarter 1996
restructuring. 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 continue 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.
Interest Income (Expense), Net ($000,000)
First First
Quarter Quarter
1997 Change 1996
---- ------ ----
Interest income (expense), net ($0.08) (122%) $0.36
Percentage of net revenues (0.2%) 0.6%
Net interest expense primarily reflects interest expense incurred by the Company
to finance capital leases of equipment entered into in 1996 as part of an
operating agreement with a foundry to secure capacity, offset partially by
interest earned on cash balances.
The provision for income taxes consists primarily of estimated taxes on foreign
operations. U.S. taxes in the first quarter were reduced by the utilization of
the current portion of net operating losses associated with the third quarter
1996 restructure charge. The estimated tax rate recorded in the first quarter of
1997 is the Company's estimated tax rate for 1997 which reflects foreign taxes
on income, and U.S. taxes on income offset by the actual utilization of the
allowable third quarter 1996 restructure charges during the year.
<PAGE>
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.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly 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 those expressed or implied by such forward-looking statements.
The forward-looking statements include projections relating to revenues, gross
margins and future expenditures on research and development and marketing,
general and administrative activities. 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
<PAGE>
modems operating at speeds of up to 56 kbps. The Company expects sales of modem
products to decline further in the second quarter of 1997 and to be minimal
after June 30, 1997. 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 and fast
Ethernet switching 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. In the near term, as the Company continues to sell its
existing inventories of modem chipset products, the overall gross margin of the
Company may decline depending on the percentage of modem chipset product
revenues relative to total revenues. Overall gross margin may also be impacted
unfavorably due to anticipated erosion of modem pricing as the Company
liquidates its existing inventories. In the longer term, the Company may
experience declining gross profits as a percentage of total net revenues if
anticipated decreases in average selling prices of existing networking products
are not offset by commensurate reductions in product costs, or by an offsetting
increase in gross profit contribution from new higher gross margin networking
products. 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 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
<PAGE>
standards could render the Company's ATM products unmarketable or obsolete. The
market for ATM equipment has not developed as rapidly as industry observers have
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 gross
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 33% and 46% of the Company's total net revenues in
1996 and the first fiscal quarter of 1997, respectively. The gross profit
derived from those products amounted to 50% and 51% of the Company's total gross
profit in 1996 and the first fiscal quarter of 1997, respectively.
There can be no assurance that a significant market for the Company's current
networking 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.
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.
<PAGE>
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's competitors include, among others, Texas Instruments, Level One
Communications, 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 not
all standards have been established to date. 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 design-in
cycles in certain of the Company's customers products, the Company's competitors
have increasingly frequent opportunities to achieve design wins in next
generation systems. Any success by the Company's competitors in 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
<PAGE>
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 vendors 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 vendors 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 1995, 1996, and the first fiscal quarter of 1997 sales to Apple
Computer, Inc. represented 24%, 10%, and 8%, respectively, of net revenues of
the Company. In 1996, two modem and graphics board manufacturers, SCI
Manufacturing, Inc. and Askey Computer Corporation, each represented
approximately 11% of the Company's net revenues. In the first quarter of fiscal
1997, sales to SCI Manufacturing, Inc. represented 21% of the Company's net
revenues. Due to the Company's exit from the modem business, these customers are
not expected to be significant customers in the future.
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 the first quarter of fiscal 1997 and fiscal years 1996, 1995 and 1994,
international sales accounted for approximately 26%, 53%, 39% and 38% 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.
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 shares of Common Stock
or options to purchase Common Stock of the Company subject to vesting. To the
extent shares purchased from or options granted by the Company have economic
value, these securities could create retention incentives. 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.
<PAGE>
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. The Company
currently holds several patents in the networking and non-networking areas and
has a number of pending patent applications. 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.
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 licenses 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.
<PAGE>
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 1996, could involve significant one-time
write-offs, and could involve the amortization of goodwill and other intangible
assets 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.
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.
The Company has available a line of credit with a bank under which the Company
may borrow up to $10 million. Advances made under the line will be fully secured
by cash deposited by the Company. The agreement expires on July 1, 1997. The
agreement requires the Company to maintain, on a quarterly basis, minimum cash
equal to three times the then current outstanding principal balance of the term
loan. The agreement prohibits dividend payments without the bank's prior written
consent and other major transactions except that the Company may (i) acquire
other companies, using up to $1 million in cash, (ii) enter into off balance
sheet equipment leases, not to exceed $15 million in the aggregate, and (iii)
issue convertible securities with subordination provisions satisfactory to the
bank.
<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
telecommunications or networking equipment 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 increased
from $42.1 million on December 31, 1996 to $51.8 million on March 31, 1997. The
increase was primarily attributable to net income of $8.5 million in the first
fiscal quarter of 1997. Sources of cash from operating activities other than net
income were a $2.7 million decrease in inventories, and $2.0 million of non-cash
depreciation. Other non-operating sources of cash were $1.5 million of proceeds
from issuance of common stock (principally under the Company's stock option and
purchase plans), $1.1 million from capital leases, and $1.0 million from the
sale of excess non-networking fixed assets. Uses of cash for operations were a
$3.2 million decrease in accounts payable and accrued expenses, and $2.2 million
of cash used for restructuring costs. The Company also used $1.5 million in cash
to pay capital lease obligations, notes payable, and long term debt.
As of March 31, 1997, the Company's principal sources of liquidity included cash
and cash equivalents and short term investments of $51.8 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
1997.
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 April 18, 1997 to
disclose the Company's change in independent auditors.
<PAGE>
Exhibit 11.1
SIERRA SEMICONDUCTOR CORPORATION
CALCULATION OF EARNINGS PER SHARE
(In thousands, except for per share amounts)
Three Months Ended
March 31, March 31,
1997 1996
---------- -----------
Net income $ 8,480 $ 8,826
========== ===========
Weighted average common shares outstanding 30,774 29,231
Common stock equivalents 1,121 1,559
---------- -----------
Shares used in calculation of net income per share 31,895 30,790
========== ===========
Net income per share $ 0.27 $ 0.29
========== ===========
<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: May 13, 1997 /s/ James V. Diller
------------------------ ---------------------
James V. Diller
Chairman and Chief Executive Officer
Date: May 13, 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-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 46,828
<SECURITIES> 4,955
<RECEIVABLES> 14,206
<ALLOWANCES> 0
<INVENTORY> 6,491
<CURRENT-ASSETS> 75,351
<PP&E> 41,477
<DEPRECIATION> (26,596)
<TOTAL-ASSETS> 134,797
<CURRENT-LIABILITIES> 42,592
<BONDS> 0
0
0
<COMMON> 138,017
<OTHER-SE> (78,396)
<TOTAL-LIABILITY-AND-EQUITY> 134,797
<SALES> 33,574
<TOTAL-REVENUES> 33,574
<CGS> 9,851
<TOTAL-COSTS> 9,851
<OTHER-EXPENSES> 12,341
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> 11,307
<INCOME-TAX> 2,827
<INCOME-CONTINUING> 8,480
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,480
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
