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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
--- Act of 1934 for the Fiscal Year Ended December 31, 1996
Transition Report Pursuant to Section 13 or 15(b) of the Securities
--- Exchange Act of 1934
Commission File Number 0-19084
SIERRA SEMICONDUCTOR
CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2925073
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
2222 QUME DRIVE
SAN JOSE, CALIFORNIA 95131
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 434-9300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
Securities registered pursuant to Section 12(g)of the Act:
None
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 shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on January 31,
1997, as reported by the Nasdaq National Market, was approximately $433,768,664.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding voting stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of January 31, 1997, the Registrant had 28,822,282 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1997 Annual Meeting of
Shareholders are incorporated by reference in Items 10, 11, 12 and 13
Part III of this Form 10-K Report.
================================================================================
PART I
ITEM 1. Business.
General
Sierra Semiconductor Corporation ("Sierra" or the "Company") designs,
develops, markets and supports high-performance semiconductor system solutions
for advanced communications markets. The Company's products are used in
broadband communications infrastructures, high bandwidth networks and multimedia
personal computers. The Company is a leading supplier of ATM and SONET/SDH
integrated circuits in the communications infrastructure and networking markets,
and also provides these markets with T1/E1 and D3/E3 integrated circuits. The
Company also supplies highly integrated data and voice communications
semiconductor products to personal computer original equipment manufacturers
("PC OEM's"), but is planning to wind-down these product lines, and to focus on
the broadband infrastructure and networking markets. In August 1996 the Company
announced its decision to exit the personal computer modem chipset business and
to put the modem chipset product line up for sale. This action, which included
the restructuring of the Company's non-networking operations, resulted in a
one-time charge to earnings in the quarter ended September 30, 1996, of
approximately $69 million (see Details of Restructuring in Item 7).
The Company was incorporated in the State of California in November
1983 and commenced business in January 1984. All references to "Sierra" or the
"Company" include PMC-Sierra, Inc. ("PMC") and the Company's other subsidiaries,
unless the context otherwise requires. The Company's principal executive office
is located at 2222 Qume Drive, San Jose, California 95131. The Company's Common
Stock trades on the Nasdaq National Market under the symbol "SERA."
Industry Background
The Internet and its increased usage by business and residential
customers have put a strain on the telecommunications infrastructure that
supports the worldwide network of voice and data communications. The broadband
infrastructure, originally intended to support the telephone voice network, is
now increasingly used to transmit data communications. With the addition of data
traffic over the network, the average time that a user currently spends "on
line" is significantly higher than the average time that the same user
previously was connected when using voice communications only. Industry analysts
have predicted that this trend of increasing traffic flow will continue as more
users come "on line" to the Internet, as more services are available on the
Internet, and as more applications, especially video traffic, become widely
available. Also, telecommunications deregulation is occurring in the United
States and abroad. Telecommunications companies are expected to upgrade their
current product offerings and develop new products to handle increased volumes
of data traffic. Corporations are also upgrading their networks to enhance
internal electronic communication and provide greater access to external data
traffic. These trends create the following market opportunities:
o In the broadband or wide-area-network infrastructure market, high-
performance semiconductor solutions will be needed for Internet
Protocol ("IP"), Frame Relay, and Asynchronous Transfer Mode
("ATM") switching and data transmission protocols.
o In the local-area network ("LAN") equipment market, Sierra's
opportunities include ATM LAN backbone and gigabit ethernet
products.
o The LAN market also offers a new product opportunity in fast
ethernet switches at the workgroup level.
o In the Internet/Intranet infrastructure market, Internet service
providers (ISP's) and other equipment suppliers are expected to
require a greater number of point-of-presence switches to enable
more efficient transmission of data traffic from the users to and
through the Internet.
Products
Sierra provides semiconductor devices, and related service and support,
to equipment manufacturers which incorporate Sierra's products into electronic
communications equipment and systems.
The Company provides several semiconductor devices for ATM products.
The Company's network interface chips, operating at ranges from T1 line rates
(1.5 Megabits per second or Mbps) to OC-3 (622 Mbps) include solutions for the
physical (PHY) layer, the ATM layer, and ATM adapters. The S/UNI chip family
features a range of single- and multi- channel solutions for networks, for
either Local Area Networks (LANs) or Wide Area Networks (WANs). The Company also
provides a line of semiconductor devices, known as RCMP chips, which integrate
traffic policing, performance monitoring, address resolution, translation
algorithms, and fault management.
The Company is also developing physical layer solutions for Synchronous
Optical Network/Synchronous Digital Hierarchy (SONET/SDH) and T1/E1 equipment
manufacturers. The Company's Stel/ar family of products supports both the SONET
and SDH protocol standards, and provides tributary and aggregate interface
solutions, tributary processing, and other switching solutions such as add-drop
multiplexers. For other applications, like Frame Relay or Internet access, the
Company provides multi-channel digital T1/E1 framers, single chip multiplexers,
and analog line interface units under the Asynchronous/Plesiochronous Digital
Hierarchy (ASYNC/PDH) family. The T1/E1 line interface units are now produced as
single-channel as well as quad devices.
The Company announced, in the fourth quarter of 1996, an Ethernet
switch product called EtherDirector, which is an 8-port 10Base-T
switch-on-a-chip that is sold to and incorporated into other equipment
manufacturer's products that provide Ethernet switching to workgroups at the low
end of the LAN.
Sierra's products are sold principally to equipment manufacturers who
in turn sell their communication equipment to enterprises and telephone
installations. The Company's customers range from large WAN equipment providers
such at Alcatel, Lucent, and Stratacom, to LAN equipment providers such as
Cisco, Fore, Cabletron, and Newbridge, and to remote access equipment providers,
such as Ascend or U.S. Robotics. The above list of customers is not inclusive of
all Sierra's customers, but is intended to be illustrative of the type of
customers who buy the Company's products. Sierra's networking products are
standard products, and no products are custom designed for any one customer's
products or applications.
Personal Computer User Interface (Net Access) Products
Data and Voice Communications. The Company's principal data
communications products are modem integrated circuits operating at industry
standard protocols of up to 33.6 kilobits per second (kbps). These semiconductor
devices can be used by manufacturers to produce modems with a wide range of
features, including facsimile, integrated full duplex speakerphone, voice mail
and Sound Blaster compatible music synthesis capabilities. The Company's modem
products are PC and Macintosh compatible. The Company is in the process of
exiting the modem business and is only selling existing inventory and supporting
previously sold modem products.
Graphics and Multimedia Communications. The Company offers several
graphics and video communications products, primarily to Apple Computer
("Apple"). The Company provides Apple Computer with multimedia controllers, and
a range of phased loop lock ("PLL"), frequency synthesizers, monochrome and
color video digital-to-analog converter ("DAC") products. In 1996, 1995, and
1994, sales to Apple accounted for 10%, 24%, and 20%, respectively of Sierra's
net revenues.
Sales, Marketing and Distribution
Sierra sells its products through a direct sales force, independent
manufacturers' representatives and distributors. International sales were 53%,
39% and 38% of net revenues in 1996, 1995 and 1994, respectively. The increasing
percentage of international sales in 1996 over 1995 was principally the result
of modem products being sold to customers in the Far East. For networking
products, in 1996, North American sales were 75% of networking revenue, compared
to 77% in 1995. Sales are generally denominated in U.S. dollars. See "Risk
Factors--International Operations."
Backlog
Sales are made primarily pursuant to standard short-term purchase
orders for delivery of standard products. The quantity actually purchased by the
customer, as well as the shipment schedules, are frequently revised to reflect
changes in the customer's needs. As of December 31, 1996, the Company's backlog
was approximately $38.3 million, compared to approximately $88.3 million at the
end of the 1995 fiscal year. The decline in backlog is due in part to the
Company's exit from the modem business, which represented the majority of
backlog at the end of fiscal 1995. The Company's backlog includes all purchase
orders expected to be shipped within the next twelve months for semi-custom
products and within the next seven months for other products. A significant
portion of the backlog is cancelable without penalty at the discretion of the
customer. Accordingly, the Company believes that its backlog at any given time
is not a meaningful indicator of future revenues.
Manufacturing
The Company relies on independent foundries for the manufacture of its
products. The Company currently receives substantially all of its wafers in
finished form from Chartered Semiconductor Ptd. Ltd. ("Chartered"), and Taiwan
Semiconductor Manufacturing Corporation ("TSMC"). The supply agreement with
Chartered Semiconductor expires on November 17, 1999, although certain
provisions have been superseded by a wafer capacity agreement which expires in
December 2000 whereby Chartered Semiconductor is obligated to supply the Company
with a predetermined number of wafers per quarter. TSMC is obligated to provide,
and the Company is obligated to purchase certain quantities of wafers per year.
The Company's agreement with TSMC terminates on December 31, 2000. These
independent foundries produce versions of the Company's networking and
communications products at feature sizes down to 0.35 micron.
The Company has financial arrangements and deposits with certain of its
independent foundries. The Company deposited $3 million in 1995 and an
additional $9 million in 1996 with one foundry to secure capacity. Under an
agreement with another foundry, the Company paid $15 million in 1996 to secure
capacity. These agreements were renegotiated in 1996. These agreements now
require the Company to purchase a minimum number of wafers, scheduled on an
annual or quarterly basis. Under an agreement with a third foundry, the Company
committed to provide approximately $10 million of equipment to the foundry and
purchased $3 million of the foundry's equity stock. If the Company does not
purchase the minimum numbers of wafers, the Company may lose a portion of
amounts deposited or paid to secure capacity. Likewise, by not purchasing the
minimum amounts in any period, the deposits, prepayments, and other
consideration would be amortized over a lower number of wafers purchased, and
thus the cost per wafer would be proportionately higher in that period. See
"Risk Factors--Access to Wafer Fabrication Capacity; Dependence on Third Party
Manufacturers."
Wafers supplied by outside foundries must meet the Company's incoming
quality and electrical test pattern standards. The Company conducts its test
operations on advanced mixed signal and digital test equipment in its Burnaby,
British Columbia, Canada, and San Jose, California facilities and certain of its
foundries, and sends tested wafers to qualified subassemblers in Asia and
Canada. Tested units receive final quality assurance inspection in British
Columbia and in California. The testing currently done in San Jose, California
will be discontinued by the end of June 1997 as a result of the restructuring of
the Company's non-networking operations.
Research and Development
Sierra's current research and development efforts focus on increasing
the functionality and integration of its products. The Company's research and
development in the telecommunications infrastructure and local area networking
markets is targeted at increasing the speed at which its chips operate,
integrating multiple channels on single devices, and broadening the portfolio of
products which comply with the varying protocols in these markets. As a result
of the Company's decision to exit from the modem chipset business, and the
associated restructuring of the Company's non-networking product operations, the
Company has discontinued research and development on any future modem and other
non-networking products. The Company expended $29.4 million, $23.4 million, and
$15.7 million on research and development in fiscal 1996, 1995 and 1994,
respectively.
There can be no assurance that any new products will be successfully
developed or will achieve market acceptance. A failure in any of these areas
would materially and adversely affect the Company's operating results.
See "Risk Factors--Technological Change."
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 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.
Historically, average selling prices ("ASPs") in the semiconductor
industry have decreased over the life of the particular product. The willingness
of prospective customers to design the Company's products into their products
depends to a significant extent upon the ability of the Company to price its
products at a level that is cost effective for such customers. If the Company is
unable to reduce its costs sufficiently to offset declines in ASPs or is unable
to introduce new higher performance products with higher ASPs, the Company's
operating results would be materially and adversely affected. Any yield or other
production problems, shortages of supply that increase the Company's
manufacturing costs, or failure to reduce manufacturing costs, would have a
material adverse effect on the Company's operating results.
Licenses, Patents and Trademarks
The Company has granted Chartered Semiconductor a non-exclusive license
to manufacture and sell integrated circuits licensed for sale by Sierra and
integrated circuits designed by Chartered Semiconductor or its parent company.
Chartered Semiconductor also has a worldwide non-exclusive right to manufacture
digital integrated circuits for third parties, unless Sierra designed the
circuit or previously supplied the circuit to the customer. Chartered
Semiconductor has also licensed its manufacturing technology to Sierra for
non-exclusive use outside Singapore. The license agreement expires in November
1999. Upon termination of the agreement, the licenses to use technology
continue, but obligations to update licensed technology terminate.
The Company has several U.S. patents and a number of pending patent
applications in the U.S. and European countries. In addition to such factors as
innovation, technological expertise and experienced personnel, the Company
believes that a strong patent position is becoming increasingly important to
compete effectively in the industry and has an active program to acquire
additional patent protection. The Company applies for mask work protection on
its circuit designs. The Company attempts to protect its software, trade secrets
and other proprietary information by entering into proprietary information
agreements with employees and other security measures. Although the Company
intends to protect its rights vigorously, there can be no assurance that these
measures will be successful. See "Risk Factors--Patents and Proprietary Rights."
Sierra Semiconductor and its logo are registered trademarks and service
marks of the Company. The Company owns other trademarks and service marks not
appearing in this Form 10-K Annual Report. Other trademarks used in this Form
10-K Annual Report are owned by other entities.
Employees
As of December 31, 1996, the Company had 298 employees, including 122
in research and development, 44 in engineering and quality assurance, 48 in
marketing and sales, 32 in test operations and 52 in corporate and manufacturing
administration. None of the Company's employees is represented by a collective
bargaining agreement, nor has the Company ever experienced any work stoppage.
As of December 31, 1996, 118 employees employed as of the date of the
restructuring in the Company's modem and non-networking operations had reached
their planned termination dates and left the Company. During 1997, 127 employees
employed as of the date of the restructuring in the Company's modem and
non-networking operations will be terminated under the restructuring plan. See
"Risk Factors - Dependence on Key Personnel."
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 Annual 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 in "Business" relating to
trends in the broadband infrastructure, WAN, LAN and Internet/Intranet markets,
products under development for SONET/SDH and T1/E1 applications and research and
development goals; and projections in "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to gross margin, growth of the broadband communications market, results
of the Company's exit from the modem chip market, continued supply of
semiconductors to the Company by outside foundries and by assembly houses,
export sales, 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 recent introductions by competitors of modems operating
at speeds of up to 56 kbps. The Company expects sales of modem products to
decline over the first two quarters 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
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% of the Company's total net revenues for 1996. The
gross profit derived from those products amounted to 50% of the Company's total
gross profit for 1996.
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.
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
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 customer, 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 1995 and 1996 sales to Apple Computer, Inc. represented
24% and 10%, 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 future, sales to these customers are expected to decline, as the Company
shifts its focus away from non-networking products, and exits from the modem
chipset business. 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.
INTERNATIONAL OPERATIONS
During fiscal years 1996, 1995 and 1994, international sales accounted
for approximately 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. As a result of the
Company's decision to exit the modem chipset business and restructure its other
non-networking operations, certain key administrative and engineering personnel
in non-networking operations 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, which include retention
payments of up to six months salary, 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. 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.
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 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 business, 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.
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.
ITEM 2. Properties.
The Company's executive offices and its non-networking test, sales and
marketing, and design and engineering operations are located in an approximately
83,000 square foot leased facility in San Jose, California. The facility is
leased through December 2003. The Company also leases office facilities for its
non-networking sales staff in or near Boston, Dallas and Philadelphia and for
its engineering and design staff near Huntsville, Alabama. The Company is
attempting to sublease these facilities. Estimated commitments for excess
facility costs have been included in the third quarter 1996 restructuring
reserve. To the extent accrued as part of the restructuring, all costs
associated with these excess and redundant facilities have been and will be
charged to this restructure reserve.
PMC's headquarters facility, which includes its test, sales and
marketing, and design and engineering operations, is located in an approximately
72,000 square foot leased facility in Burnaby, British Columbia, Canada. This
facility is leased through April 2001. PMC also leases offices for its sales
staff in Massachusetts, North Carolina, Texas, California, Ontario (Canada) and
England. PMC-Sierra (Portland), Inc. leases an approximately 9,000 square foot
office. This facility is leased through March 1999.
ITEM 3. Legal Proceedings.
Not applicable.
ITEM 4. Submission of matters to a vote of Security Holders.
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Stock Price Information. The Company's Common Stock trades on the
Nasdaq National Market under the symbol SERA. The following table sets forth,
for the periods indicated, the high and low closing sale prices (adjusted for a
2 for 1 stock split, effective October 5, 1995) for the Company's Common Stock
as reported by the Nasdaq National Market:
1995 High Low
First Quarter....................................... $14.50 $ 8.06
Second Quarter...................................... 16.44 11.94
Third Quarter....................................... 27.38 15.88
Fourth Quarter...................................... 24.25 13.19
1996 High Low
First Quarter....................................... $24.75 $11.38
Second Quarter...................................... 20.88 11.00
Third Quarter....................................... 13.75 8.38
Fourth Quarter...................................... 17.50 12.00
As of January 31, 1997, there were approximately 513 holders of record
of the Company's Common Stock.
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future. The
Company's current bank credit agreement prohibits the payment of dividends
without prior consent of the lender.
ITEM 6. Selected Financial Data.
Summary Consolidated Financial Data
(in thousands, except for per share data)
Year Ended December 31,* (1)
STATEMENT OF OPERATIONS DATA: 1996(2) 1995(3) 1994(4) 1993(5) 1992
-------- -------- -------- -------- --------
Net revenues $188,371 $188,724 $104,764 $83,360 $92,278
Gross profit 93,423 91,614 46,960 37,660 50,158
Research and development 29,350 23,428 15,702 15,439 14,570
In process research and development 7,783 --- 12,748 --- ---
Marketing, general and administrative 30,691 30,051 23,683 22,487 22,053
Purchase price adjustment - compensation --- 10,624 --- --- ---
Restructuring and other charges 64,670 --- (1,559) 12,669 ---
-------- -------- -------- -------- --------
Income (loss) from operations (39,071) 27,511 (3,614) (12,935) 13,535
Income (loss) from continuing operations (48,150) 23,976 (7,916) (12,983) 11,844
Loss from discontinued operations --- (22,497) (666) --- ---
-------- -------- -------- -------- --------
Net income (loss) $(48,150) $1,479 $(8,582) $(12,983) $11,844
======== ======== ======== ======== ========
Per share data: (6)
Income (loss) from continuing operations $(1.62) $0.84 $(0.36) $(0.64) $0.54
Loss from discontinued operations --- $(0.79) $(0.03) --- ---
-------- -------- -------- -------- --------
Net income (loss) $(1.62) $0.05 $(0.39) $(0.64) $0.54
======== ======== ======== ======== ========
Shares used in calculation of net income (loss) 29,719 28,620 22,030 20,222 21,738
======== ======== ======== ======== ========
As of December 31,* (1)
BALANCE SHEET DATA: 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Cash, cash equivalents and short-term investments $42,062 $45,937 $15,830 $21,693 $34,843
Working capital 20,438 32,741 23,813 14,803 42,341
Total assets 129,914 184,860 85,959 71,850 89,540
Long term debt (including current portion) 24,637 12,718 9,069 11,872 14,575
Shareholders' equity 48,444 81,000 34,865 40,153 59,714
* The Company's fiscal year ends on the Sunday closest to December 31.
December 31 has been used as the fiscal year end for ease of presentation.
See Note 1 to Consolidated Financial Statements.
(1) Net revenues, gross profit, research and development, and marketing,
general and administrative expenses have been restated to exclude amounts
relating to Prometheus Products, Inc. For 1995, amounts related to
Prometheus previously reported within net revenues were $19.0 million;
gross profit (loss) was ($0.1) million; and net profits were ($4.6)
million. For 1994, net revenues were $3.8 million; gross profit was $0.3
million; and net loss was ($0.7) million. All previously reported amounts
have been included in "Loss from discontinued operations". Balance sheet
data has been restated to exclude amounts relating to Prometheus.
(2) Results for the year ended December 31, 1996 include a restructuring charge
of $69.4 million in the third quarter for the Company's exit from the modem
chipset business and the associated restructuring of its non-networking
operations. $4.7 million of this charge was recorded in cost of sales as an
inventory write down, and $64.7 million was recorded as a restructuring
cost in operating expenses. An in process research and development charge
of $7.8 million was recorded in the third quarter for the acquisition of
ethernet switching technology and other assets from Bit, Inc. Results of
operations include costs of continuing the development of ethernet
switching products and related activities from the date of the acquisition
on September 3, 1996.
(3) Results for the year ended December 31, 1995 include the loss from
discontinued operations related to Prometheus Products, Inc. of $22.5
million, purchase price adjustment relating to the finalization of the
acquisition of PMC-Sierra, Inc. of $10.6 million, and gain on sale of
shares of SiTel Sierra B.V. of $6.7 million.
(4) Results for the year ended December 31, 1994 include the operations of PMC
from the date of acquisition, September 2, 1994, and include in process
research and development of $12.7 million, settlement of the class action
lawsuit of $2.4 million, reversal of restructuring and other charges of
$1.6 million and a loss from discontinued operations of Prometheus of $0.7
million.
(5) Results for the year ended December 31, 1993 include restructuring and
other charges of $15.6 million.
(6) Share and per share information has been adjusted for the 2 for 1 stock
split effective October 5, 1995.
Quarterly Comparisons
The following tables set forth consolidated statements of operations
for each of the Company's last eight quarters and the percentage of the
Company's net revenues represented by each line item reflected in each
consolidated statement of operations. This quarterly information is unaudited
and has been prepared on the same basis as the annual consolidated financial
statements. In management's opinion, this quarterly information reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.
Quarterly Data (Unaudited)
(in thousands, except per share data)
Year Ended December 31, 1996(1) Year Ended December 31, 1995 (2) (3)
------------------------------------ ------------------------------------
Fourth Third Second First Fourth Third Second First
STATEMENT OF OPERATIONS DATA:
Net revenues $36,227 $34,726 $53,022 $64,396 $58,884 $50,700 $42,201 $36,939
Gross profit 21,679 13,790 27,665 30,289 27,781 24,907 20,836 18,090
Research and development 5,979 7,080 7,885 8,406 6,905 5,969 5,182 5,372
In process research and development --- 7,783 --- --- --- --- --- ---
Marketing, general and administrative 5,778 7,406 8,842 8,665 8,602 7,170 7,286 6,993
Purchase price adjustment --- --- --- --- --- 10,624 --- ---
Restructuring and other charges --- 64,670 --- --- --- --- --- ---
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations 9,922 (73,149) 10,938 13,218 12,274 1,144 8,368 5,725
Income (loss) from continuing 9,120 (73,294) 7,198 8,826 14,321 (1,221) 6,472 4,404
operations
Loss from discontinued operations --- --- --- --- (19,411) (2,249) (533) (304)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $9,120 $(73,294) $7,198 $8,826 $(5,090) $(3,470) $5,939 $4,100
======= ======= ======= ======= ======= ======= ======= =======
Per share data: (4)
Income (loss) from continuing $0.29 $(2.46) $0.24 $0.29 $0.47 $(0.05) $0.23 $0.16
operations
Loss from discontinued operations --- --- --- --- $(0.64) $(0.08) $(0.02) $(0.01)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $0.29 $(2.46) $0.24 $0.29 $(0.17) $(0.13) $0.21 $0.15
======= ======= ======= ======= ======= ======= ======= =======
Shares used in calculation of net
income/ (loss) 31,655 29,782 30,578 30,790 30,158 27,230 27,862 27,374
As a Percentage of Net Revenues (Unaudited)
Year Ended December 31, 1996(1) (3) Year Ended December 31, 1995 (2) (3)
------------------------------------ ------------------------------------
Fourth Third Second First Fourth Third Second First
Net revenues 100% 100% 100% 100% 100% 100% 100% 100%
Gross profit 60% 40% 52% 47% 47% 49% 49% 49%
Research and development 17% 20% 15% 13% 12% 12% 12% 15%
In process research and development --- 22% --- --- --- --- --- ---
Marketing, general and administrative 16% 21% 17% 14% 14% 14% 17% 19%
Purchase price adjustment-compensation --- --- --- --- --- 21% --- ---
Restructuring and other charges --- 186% --- --- --- --- --- ---
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations 27% -211% 21% 21% 21% 2% 20% 15%
Income (loss) from continuing operations 25% -211% 14% 14% 24% -2% 15% 12%
Loss from discontinued operations --- --- --- --- -33% -5% -1% -1%
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) 25% -211% 14% 14% -9% -7% 14% 11%
===== ===== ===== ===== ===== ===== ===== =====
(1) Results for the year ended December 31, 1996 include a restructuring charge
of $69.4 million in the third quarter for the Company's exit from the modem
chipset business and the associated restructuring of its non-networking
operations. $4.7 million of this charge was recorded in cost of sales as an
inventory write down, and $64.7 million was recorded as a restructuring
cost in operating expenses. An in process research and development charge
of $7.8 million was recorded in the third quarter for the acquisition of
ethernet switching technology and other assets from Bit, Inc. Results of
operations include costs of continuing the development of ethernet
switching products and related activities from the date of the acquisition
on September 3, 1996.
(2) Results for the year ended December 31, 1995 include the loss from
discontinued operations related to Prometheus Products, Inc. of $22.5
million, the third quarter purchase price adjustment relating to the
finalization of the acquisition of PMC-Sierra, Inc. of $10.6 million and
the fourth quarter gain on sale of SiTel Sierra B.V. of $6.7 million.
(3) Net revenues, gross profits, research and development, and marketing,
general and administrative expenses have been restated to exclude amounts
relating to Prometheus Products, Inc. For 1995, amounts related to
Prometheus previously reported within net revenues were $19.0 million;
gross profit was $(0.1) million; and net profits were $(4.6) million. All
previously reported amounts have been included in "Loss from discontinued
operations".
(4) Share and per share information has been adjusted for the 2 for 1 stock
split effective October 5, 1995.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Description of Forward-looking Statements. This portion of this Annual
Report contains forward-looking statements relating to the future activities of
the modem chipset business (which the Company exited during the third quarter of
fiscal 1996), modem-related revenues, gross margins, expenditures on research
and development, and marketing, general and administrative activities, and
sufficiency of capital resources. Actual results may differ from those projected
in the forward-looking statements for a number of reasons, including those
described in "Risk Factors."
General. Sierra Semiconductor designs, develops, markets and supports
high-performance system solutions for advanced communications markets. The
Company's products are used in broadband communications infrastructures, high
bandwidth networks and multimedia personal computers. In the third quarter of
1996 the Company announced its decision to exit from the personal computer modem
chipset business, and to restructure its non-networking operations, in order to
focus on the networking and infrastructure semiconductor businesses. Consistent
with this strategy, the Company acquired, in the third quarter, ethernet
switching assets, intellectual property and certain other assets from Bit, Inc.
In the fourth quarter of 1995, the Company discontinued operations of
Prometheus. The consolidated financial statements have been reclassified to
exclude the Prometheus results from continuing operations.
Restructuring
- -------------
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 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 and December 31, 1996
are as follows:
Restructuring Restructuring
Charge Reserve
September 29, Write-Down Cash December 31,
1996 of Assets Outlay 1996
(In Millions) ---- --------- -------- ----
Write down of inventories to net realizable value $23,000 $(23,000) $ --- $ ---
Employee termination benefits 6,985 --- (2,411) 4,574
Loss on supplier commitments and write off
of prepaid expenses 9,908 (905) (409) 8,594
Write down of excess fixed assets and assets
related to capacity commitments 16,580 (16,580) --- ---
Provision for price protection and product returns 5,047 (5,047) --- ---
Excess facility costs 3,411 --- (408) 3,003
Write down of goodwill related to Company's BV
subsidiary in Holland 2,459 (2,459) --- ---
Severance and closure costs related to Europe 1,980 --- (1,397) 583
------- ------ ------- -------
$69,370 $(47,991) $(4,625) $16,754
======== ======== ======== ========
The Company ceased manufacturing its modem chipset products in
September 1996 and expects to complete the shut down of the remaining
non-networking operations in San Jose by the middle of 1997. No sale was
anticipated in accounting for the restructuring. The Company will continue to
manufacture 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 have been and will continue to be reduced.
Termination benefits for approximately 245 employees associated with the
Company's non-networking operations have been and will be paid as employees
reach their termination dates, between November 1996 and July 1997. As of
December 31, 1996, 118 employees employed as of the date of the restructuring in
the Company's non-networking operations had reached their termination dates and
have left the Company as planned in the restructuring. 127 employees employed as
of the date of the restructuring in the Company's non-networking operations will
reach their termination dates per the restructure plan during 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 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 held for disposal. Based upon net undiscounted
estimated cash flows to be generated by these assets, no impairment of assets
which will continue to be utilized was identified.
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 leases obligation, resulted in an impairment of
approximately $6.9 million of the Company's assets.
The portion of the charge related to excess facility costs primarily
consists of amounts to be incurred by the Company under a seven year
noncancelable 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 accrued liabilities
were approximately $4.6 million in 1996. It is expected that approximately $5.7
million of cash expenditures related to the restructuring will occur during the
first half of 1997. Subsequent cash expenditures related primarily to leases
accrued in the restructuring will be approximately $11.1 million.
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 wafers for semiconductor devices. This caused
companies like Sierra to have 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 and in late 1995 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 faster modem
products. This combination resulted in increased levels of the Company's
inventory for both lower speed and higher speed modem products, as the foundries
had more capacity to produce product and became aggressive in trying to build
and ship even more semiconductor products to Sierra and other modem chipset
companies.
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 made the
decision 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 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 Company's decisions to exit from the modem chipset business and to
restructure its non-networking product operations are expected to result in a
decline of revenues derived from modem, graphic and custom integrated circuits.
In 1996, modem, graphic and custom integrated circuit revenues were $125.6
million, approximately 16% lower than revenues in 1995. In 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 in 1996 were $37.2 million, down from $40.7
million in 1995. The Company expects these expenses to decline significantly in
1997 due to reduced headcount and the elimination 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.
Acquisition of Ethernet Switching Assets
- ----------------------------------------
Consistent with the Company's strategy to focus on the networking and
infrastructure semiconductor business, 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.
Results of Operations
Net Revenues
- ------------
1996 Change 1995 Change 1994
---- ------ ---- ------ ----
Net revenues ($000,000)
Networking products $62.8 60% $39.2 390% $8.0
User interface - other $66.6 (28%) $92.8 10% $84.1
User interface - modem $59.0 4% $56.7 365% $12.7
----- ----- ----- ----- -----
Total net revenues $188.4 --- $188.7 80% $104.8
Net revenues in 1996 remained approximately at the same level as 1995
revenues. Substantial growth in sales of networking products, and a small
increase in modem chipset product sales, were offset by declines in other user
interface product sales, which were primarily due to lower sales of graphic chip
products. The small increase in 1996 modem chipset sales increase over 1995
resulted from increased unit sales of both V.34 and V.32 modem products in the
first half of the year, while in the second half of the year the Company
experienced declining unit sales and substantially lower prices for modem
products. The change in net revenues in 1995 from 1994 was primarily
attributable to increased sales of networking and modem products. Sales of modem
products are expected to decline during the first two quarters of 1997 and to be
minimal in the second half of 1997. The Company anticipates a decline in average
selling prices for these discontinued products and cannot predict the level of
unit sales. As a result, revenues for 1997 are expected to be lower than
revenues in 1996.
Gross Profit
- ------------
1996 Change 1995 Change 1994
---- ------ ---- ------ ----
Gross profit ($000,000)
Networking products $46.4 58% $29.3 432% $5.5
Percentage of net networking revenues 74% 75% 69%
User interface products $47.0 (25%) $62.3 50% $41.5
Percentage of net user interface revenues 37% 42% 43%
User interface products excluding valuation
reserve for modem chipset inventory $51.7 (17%) $62.3 50% $41.5
Percentage of net user interface revenues 41% 42% 43%
Total gross profit $93.4 2% $91.6 95% $47.0
Percentage of net revenues 50% 49% 45%
Total gross profit excluding valuation
reserve for modem chipset inventory $98.1 7% $91.6 95% $47.0
Percentage of net revenues 52% 49% 45%
Total gross profit increased from 1995 to 1996 as a result of increased
sales of higher gross margin networking products as a percentage of total net
revenues. Gross profit as a percentage of net revenues also increased due to the
increased proportion of sales of higher gross margin networking products. The
gross profit increase from 1994 to 1995 was primarily due to increased sales in
all product lines. Gross profit as a percentage of net revenues increased from
1994 to 1995 as a result of increased sales of higher margin networking
products. 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.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
1996 Change 1995 Change 1994
---- ------ ---- ------ ----
Research and development $29.4 26% $23.4 49% $15.7
Percentage of net revenues 16% 12% 15%
In-process research & development $7.8 --- --- --- $12.7
Percentage of net revenues 4% --- 12%
Marketing, general & administrative $30.7 2% $30.1 27% $23.7
Percentage of net revenues 16% 16% 23%
Purchase price adjustment-compensation --- --- $10.6 --- ---
Percentage of net revenues 6% ---
Restructure costs $64.7 --- --- --- $(1.6)
Percentage of net revenues 34% --- (1%)
Research and Development. Research and development expenses increased
in 1996 primarily due to greater research and development efforts for networking
products. As a percentage of net revenues, research and development expenses
increased as the rate of spending growth exceeded the rate of net revenues
growth. During 1995 research and development expenses increased from 1994
primarily due to increased investment in networking products. As a percentage of
net revenues, research and development expenses declined in 1995 from 1994 as
the rate of growth of sales exceeded the rate of growth of research and
development spending. 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 as associated headcount is reduced due
to the restructuring, offset partially by increases in research and development
spending on networking products.
In-Process Research and Development. In-process research and
development charges incurred in 1996 are a result of the acquisition of the
ethernet switching and other assets from Bit, Inc. The in-process research and
development charge in 1994 relates to the acquisition of PMC (see Note 2 to
Consolidated Financial Statements).
Marketing, General, and Administrative. In 1996, marketing, general,
and administrative expenses remained at the same levels as 1995 as increases in
these expenses in networking products primarily related to increased staffing
were offset by declines in these expenses and headcount of user interface groups
due to the restructuring. As a percentage of net revenues, total marketing,
general and administrative expenses remained at approximately the same level.
The increase in marketing, general and administrative expenses in 1995 relative
to 1994 was primarily due to support of networking products. As a percentage of
net revenues, marketing, general and administrative expenses declined from 1994
to 1995, as the rate of increase in spending was less than the rate of revenue
growth. In the near term, the Company expects marketing, general and
administrative spending to decline in absolute dollars, due to reduced personnel
performing these functions for user interface products, although the Company
does not expect to increase spending in these areas to support networking
products.
PMC Purchase Price Adjustment. In completing the PMC acquisition in the
third quarter of 1995, the Company recorded a $10.6 million charge relating to
the compensation expense associated with the purchase price adjustment shares
reserved for issuance to the employees/shareholders of PMC. The $9.1 million
balance of the acquisition cost was allocated to goodwill. See Note 2 to
Consolidated Financial Statements.
Restructuring. 1996 restructure costs are part of the charge of $69.4
million 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. The 1994 restructure credit reflects the
reversal of the remainder of a restructure charge deemed no longer necessary
from the 1993 restructuring of the Company's operations in Holland and the U.S.
Interest Income (Expense), Net ($000,000)
1996 Change 1995 Change 1994
---- ------ ---- ------ ----
Interest income (expense), net $0.7 37% $0.5 227% $(0.4)
Percentage of net revenues 0.4% 0.3%
Interest Income. Interest income increased in 1996 and 1995 due to
higher cash balances available to invest and earn interest. Interest expense in
1996 increased from 1995 due to short term borrowing. Interest expense currently
relates primarily to the Company's financing arrangements for leases, and
financing of previously established foundry commitments. Interest expense in
1995 declined from 1994 as 1994 interest expense related primarily to interest
expense on notes issued in 1987 and repaid in 1994. The 1994 interest expense
was offset partially by interest earned on the Company's cash balances (see Note
1 of Notes to Consolidated Financial Statements).
Gain on sale of SiTel Sierra. During the fourth quarter of 1995, the
Company sold its interest in SiTel-Sierra, B.V. to National Semiconductor
Corporation for $7.0 million in cash. This transaction resulted in a pre-tax
gain of $6.7 million. The Company acquired its shares of SiTel-Sierra, B.V., a
joint venture with TriTech Microelectronics Pte. Ltd. of Singapore, in 1994 in
exchange for the contribution of a license to certain technology owned by the
Company and certain assets of Sierra Semiconductor B.V.
Provision for Income Taxes. The 1996 income tax provision reflects the
effect of a nondeductible $7.8 million charge for the purchase of in-process
research and development relating to the Bit, Inc. acquisition and taxes on
foreign operations. The U.S. taxes are reduced by the utilization of net
operating loss and tax credit carryforwards. The recorded modem chipset business
restructure charge of $69.4 million did not result in a tax benefit because of
the uncertainty of future U.S. income as required by Statement of Financial
Accounting Standards No. 109. The 1995 income tax provision reflects the effect
of a nondeductible $10.6 million charge for the PMC purchase price adjustment.
The 1994 income tax provision reflects the effect of a nondeductible $12.7
million charge for purchase of in-process research and development and taxes on
foreign operations.
Discontinued Operations. During the fourth quarter of 1995, the Company
and its Board of Directors reached a decision to offer Prometheus Products, Inc.
for sale and, as a result, it has been reported as a discontinued operation in
the Company's consolidated financial statements. The Company recorded a $17.9
million discontinued operations charge to write down the assets and accrue
additional liabilities including a provision for future losses from operations
expected to be incurred during the sales process. The Company contracted with an
investment banking firm in the first quarter of 1996 to engage in efforts to
sell 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 1996
have been recorded against the discontinued operations provision established in
the fourth quarter of 1995.
Liquidity and Capital Resources. The Company's cash and cash
equivalents and short term investments decreased from $45.9 million at December
31, 1995 to $42.1 million at December 31, 1996. During 1996 the Company made
payments of approximately $19.6 million to reduce debt and for capital lease
obligations (primarily related to foundry agreements for future production
capacity), $4.0 million for the purchase of fixed assets, and $3.2 million for
equity investments in other companies. These uses of cash were partially offset
by cash sources of approximately $19.6 million from operating activities and
$3.1 million from the issuance of common stock (principally under the Company's
stock option and purchase plans). The uses of cash for operating activities were
a net loss of $48.2 million, an increase in inventory purchased of $17.4
million, a reduction in accounts payable of $15.1 million, an increase in
deposits for wafer capacity of $9.0 million, $4.6 million net change in
restructure liabilities (third quarter 1996 restructure), and a $2.5 million
change in net liabilities of discontinued operations (Prometheus). The primary
offsetting sources of cash from operating activities were a non cash restructure
charge of $69.4 million (for the Company's exit from the modem chipset business
and the associated restructuring of its non-networking operations), a decrease
of $20.0 million in accounts receivable balances, $10.9 million of non cash
depreciation expense, a non cash in-process research and development charge of
$7.8 million (for the acquisition of technology and other assets from Bit,
Inc.), and the receipt of proceeds of $7.0 million in the first quarter of 1996
from the sale of SiTel-Sierra B.V. in the fourth quarter of 1995.
As of December 31, 1996, the Company had available a line of credit
with a bank under which the Company may borrow up to $10 million with interest
at the bank's prime rate (6.9% at December 31, 1996). At December 31, 1996,
there were no amounts outstanding under the line of credit. At December 31,
1995, a $2.0 million standby letter of credit was outstanding under the line of
credit. In the fourth quarter of 1996, as a result of the restructure charge,
the Company's line of credit agreement with the bank was renegotiated to allow
the Company to borrow up to $10 million under the line of credit, provided that
each borrowing is fully cash secured. 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. The agreement expires on July
1, 1997. As of December 31, 1996 and 1995, the Company was in compliance with
all of its covenants.
The Company believes that existing sources of liquidity and anticipated
funds from operations will satisfy the Company's projected working capital and
capital expenditure requirements through the end of 1997. The Company's future
capital requirements will depend on many factors, including, among others, the
extent to which the Company pursues additional wafer fabrication capacity from
existing foundry suppliers or new suppliers, product development, and
acquisitions of complimentary businesses, products or technologies. From time to
time the Company may explore strategic investment opportunities which may
require funds in excess of currently available sources of liquidity.
Accordingly, the Company may choose to raise needed funds from debt and/or
equity financings.
ITEM 8. Financial Statements and Supplementary Data.
The chart entitled "Quarterly Data (Unaudited)" contained in Item 6
Part II hereof is hereby incorporated by reference into this Item 8 of Part II
of this Form 10-K.
SIERRA SEMICONDUCTOR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements Included in Item 8:
Page
Report of Ernst & Young LLP, Independent Auditors............................................................ 28
Consolidated Balance Sheet at December 31, 1996 and 1995..................................................... 29
Consolidated Statement of Operations for each of the three years in the period 30
ended December 31, 1996..................................................................................
Consolidated Statement of Shareholders' Equity for each of the three years in 31
the period ended December 31, 1996.......................................................................
Consolidated Statement of Cash Flows for each of the three years in the period 32
ended December 31, 1996..................................................................................
Notes to Consolidated Financial Statements................................................................... 34
Schedules for each of the three years in the period ended December 31, 1996
included in Item 14 (d):
II Valuation and Qualifying Accounts........................................................................ S-1
Schedules not listed bove have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the financial statements or the notes thereto.
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Sierra Semiconductor Corporation
We have audited the accompanying consolidated balance sheets of Sierra
Semiconductor Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sierra
Semiconductor Corporation at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
San Jose, California ERNST & YOUNG LLP
January 22, 1997
Sierra Semiconductor Corporation
Consolidated Balance Sheet
(in thousands)
December 31,
1996 1995
---- ----
ASSETS:
Current assets:
Cash and cash equivalents $35,038 $41,933
Short-term investments 7,024 4,004
Accounts receivable, net of allowance for doubtful accounts of $842 and
$1,081 in 1996 and 1995, respectively (including $3,662
and $8,827 due from related parties in 1996 and 1995, respectively, see Note 9) 13,907 39,320
Inventories 9,232 14,843
Prepaid expenses and other current assets 3,104 9,813
----- -----
Total current assets 68,305 109,913
Property and equipment, net 16,678 22,704
Goodwill and other intangible assets, net of accumulated
amortization of $2,305 ($1,499 in 1995) 10,188 13,856
Investments and other assets 7,623 5,147
Deposits for wafer fabrication capacity 27,120 33,240
------ ------
$129,914 $184,860
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $9,648 $22,866
Accrued liabilities 9,546 8,494
Accrued income taxes 4,050 7,737
Accrued restructure costs 16,754 ---
Short-term debt and current portion of obligations under capital leases and 6,269 33,979
long term debt
Net current liabilities of discontinued operations 1,600 4,096
----- -----
Total current liabilities 47,867 77,172
Deferred income taxes 2,741 2,179
Noncurrent obligations under capital leases and long-term debt 18,368 8,979
Commitments and contingencies
Special shares of PMC convertible into Sierra common stock
1,937 shares in 1996 (2,573 shares in 1995) 12,494 15,530
Shareholders' equity:
Preferred stock, no par value; 5,000 shares authorized, none outstanding --- ---
Convertible preferred stock, no par value; 500 shares authorized,
none outstanding --- ---
Common stock, no par value; 50,000 shares authorized; 28,647
issued and outstanding in 1996 (26,603 in 1995) 135,320 119,758
Accumulated deficit (86,876) (38,726)
------ ------
48,444 81,032
Less shareholders' notes receivable --- (32)
------ ------
Total shareholders' equity 48,444 81,000
------ ------
$129,914 $184,860
======== ========
See accompanying notes.
Sierra Semiconductor Corporation
Consolidated Statement of Operations
(in thousands, except for per share amounts)
Three Years Ended December 31,
1996 1995 1994
---- ---- ----
Net revenues(1) $188,371 $188,724 $104,764
Costs and expenses:
Cost of revenues 94,948 97,110 57,804
Research and development 29,350 23,428 15,702
In process research and development 7,783 --- 12,748
Marketing, general and administrative 30,691 30,051 23,683
Purchase price adjustment - compensation --- 10,624 ---
Restructuring and other charges 64,670 --- (1,559)
------- ------- -------
Income (loss) from operations (39,071) 27,511 (3,614)
Interest income (expense), net 679 497 (390)
Gain on sale of SiTel Sierra --- 6,700 ---
Class action lawsuit settlement --- --- (2,400)
------- ------- -------
Income (loss) before provision for income taxes (38,392) 34,708 (6,404)
Provision for income taxes 9,758 10,732 1,512
------- ------- -------
Net income (loss) from continuing operations (48,150) 23,976 (7,916)
Loss from discontinued operations --- (4,591) (666)
Loss on disposal of discontinued operations (including provision of
$1,200 for operating losses during the phase-out period) --- (17,906) ---
------- ------- -------
Loss from discontinued operations --- (22,497) (666)
------- ------- -------
Net income (loss) $(48,150) $1,479 $(8,582)
======== ======== ========
Income (loss) from continuing operations per share $(1.62) $ 0.84 $(0.36)
Loss from discontinued operations per share $ --- $(0.79) $(0.03)
------- ------- -------
Net income (loss) per share $(1.62) $ 0.05 $(0.39)
======== ======== ========
Shares used in calculation of net income (loss) per share 29,719 28,620 22,030
======== ======== ========
(1) Including $25,520, $46,074 and $20,622 from related parties in 1996, 1995 and 1994, respectively. See Note 9.
See accompanying notes.
Sierra Semiconductor Corporation
Consolidated Statement of Shareholders' Equity
(in thousands)
Convertible Shareholders' Total
Preferred Stock Common Stock Accumulated Notes Shareholders'
Shares Amount Shares Amount Deficit Receivable Equity
Balances at December 31, 1993 94 $ 1,856 19,731 $70,102 $(31,606) $ (199) $40,153
Conversion of convertible preferred
stock into common shares (83) (1,638) 171 1,638
Issuance of common shares under
stock benefit plans 1,011 3,004 3,004
Amortization of common stock grant 153 153
Accretion of redeemable convertible
preferred stock 16 (16)
Payment of shareholders' notes
receivable 137 137
Net loss (8,582) (8,582)
------ ------ ------ ------ ------ ------ ------
Balances at December 31, 1994 11 234 20,913 74,897 (40,204) (62) 34,865
Conversion of convertible preferred
stock into common shares (11) (235) 25 235
Issuance of common shares under
stock benefit plans 793 3,520 3,520
Accretion of redeemable convertible
preferred stock 1 (1)
Sale of common shares, net of
issuance costs of $1,484 1,150 19,216 19,216
Conversion of special shares into
common shares 3,722 19,906 19,906
Tax benefit of stock option
transactions 1,984 1,984
Payment of shareholders' notes
receivable 30 30
Net income 1,479 1,479
------ ------ ------ ------ ------ ------ ------
Balances at December 31, 1995 26,603 119,758 (38,726) (32) 81,000
Issuance of common shares under
stock benefit plans 604 3,072 3,072
Issuance of common stock to
capitalize PMC-Portland and
acquire assets of Bit 804 6,788 6,788
Adjustment to prior year common
stock issuance costs 38 38
Conversion of special shares into
common shares 636 3,036 3,036
Tax benefit of stock option
transactions 2,628 2,628
Payment of shareholders' notes
receivable 32 32
Net loss (48,150) (48,150)
------ ------ ------ ------ ------ ------ ------
Balances at December 31, 1996 $ 28,647 $135,320 $(86,876) $ --- $48,444
======= ======= ======= ======= ======= ======= =======
See accompanying notes.
Sierra Semiconductor Corporation
Consolidated Statement of Cash Flows
Increase (decrease) in cash and cash equivalents
(in thousands)
Three Years Ended December 31,
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(48,150) $1,479 $(8,582)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,922 8,888 6,493
Acquisition of in process technology and development from purchase of net 7,783 --- ---
assets of Bit
Compensation expense from purchase price adjustment of PMC-Sierra --- 10,624 ---
acquisition
Loss on discontinued operations of Prometheus Products, Inc. --- 17,906 ---
Acquisition of in process technology and development from purchase of
PMC-Sierra --- --- 12,748
Loss related to restructure reserve:
Accounts receivable 5,047 --- ---
Inventory 23,000 --- ---
Prepaid expenses 1,061 --- ---
Impairment of long-lived assets 16,425 --- ---
Impairment of goodwill of Holland operations 2,459 --- ---
Accruals for restructure related costs:
Severance and related costs 6,985 --- ---
Purchase commitments and other accruals 9,002 --- ---
Excess facilities costs 3,411 --- ---
Costs for closure of European subsidiaries 1,980 --- ---
Changes in assets and liabilities
Accounts receivable 20,023 (16,855) (12,511)
Inventories (17,389) (3,772) (677)
Prepaid expenses and other (711) (11,390) 6,757
Accounts payable and accrued expenses (15,109) 17,801 1,300
Accrued restructuring costs (4,624) --- ---
Net assets/liabilities associated with discontinued operations (2,496) (4,733) (9,077)
------- ------- -------
Net cash provided by (used in) operating activities 19,619 19,948 (3,549)
Cash flows from investing activities:
Proceeds from sales/maturities of short-term investments 15,984 3,188 10,910
Purchases of short-term investments (19,004) (3,984) ---
Investments in other companies (3,162) (1,430) (2,500)
Decrease in investments and other --- 150 ---
Purchase of PMC-Sierra, net of cash acquired --- --- 4,673
Purchase of Bit assets, net of cash acquired 71 --- ---
Additions to plant and equipment (4,000) (10,909) (6,565)
------- ------- -------
Net cash provided by (used in) investing activities (10,111) (12,985) 6,518
Cash flows from financing activities:
Proceeds from issuance of long-term debt 353 2,592 6,657
Proceeds from issuance of common stock 3,110 22,737 3,157
Proceeds from payments of notes receivable 32 30 137
Principal payments under capital lease obligations (2,310) (1,217) (1,383)
Repayment of notes payable and long-term debt (17,588) (1,794) (10,417)
------- ------- -------
Net cash provided by (used in) financing activities (16,403) 22,348 (1,849)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (6,895) 29,311 1,120
Cash and cash equivalents, beginning of the period 41,933 12,622 11,502
------- ------- -------
Cash and cash equivalents, end of the period $35,038 $41,933 $12,622
======== ======== ========
Three Years Ended December 31,
1996 1995 1994
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,278 $ 926 $ 1,764
Cash paid for income taxes $ 11,820 $ 1,851 $ 89
Supplemental disclosures of noncash investing and financing activities:
Conversion of convertible preferred stock into common stock --- $ 235 $ 1,638
Capital lease obligations incurred for purchase of property and equipment $ 16,145 $ 4,069 $ 827
Issuance of PMC special shares to be exchanged for common shares --- $18,935 $16,500
Conversion of PMC special shares into common stock $ 3,035 $19,906 ---
Short term debt obligations incurred for wafer fabrication capacity deposits --- $30,240 ---
Cancellation of short-term debt obligations incurred for wafer fabrication $(15,120) --- ---
capacity
During the years ended December 31, 1996, 1995, and 1994, the Company retired
assets with an original cost of $10,377, $2,851 and $4,855, respectively and
related accumulated depreciation of $9,858, $2,839 and $4,757, respectively.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies
Basis of presentation. The accompanying consolidated financial
statements include the accounts of Sierra Semiconductor Corporation ("the
Company" or "Sierra") and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated from the
consolidated financial statements. The Company's fiscal year ends on the Sunday
nearest December 31. For ease of presentation, December 31 has been utilized as
the fiscal year end for all financial statement captions. Fiscal years 1996,
1995 and 1994 each consisted of 52 weeks.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. Actual results
may differ from those estimates.
Cash equivalents and short-term investments. Cash equivalents consist
of highly liquid debt instruments with original maturities at date of
acquisition of 90 days or less that have insignificant interest rate risk.
Short-term investments consist of money market instruments with original
maturities greater than 90 days, but less than one year. The Company maintains
its cash and cash equivalents in several financial instruments with various
banks and investment banking institutions and maintains short-term investments
in several financial instruments. The diversification of risk is consistent with
Company policy to preserve the principal and maintain liquidity.
Under Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (FAS 115) management classifies
investments as available-for-sale or held-to-maturity at the time of purchase
and reevaluates such designation as of each balance sheet date. Debt securities
are classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost with corresponding premiums or discounts amortized over
the life of the investment to interest income. Marketable equity and debt
securities not classified as held-to-maturity are classified as
available-for-sale and reported at fair value. Unrealized gains or losses on
available-for-sale securities have not been included in equity as such amounts
are immaterial. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method.
Investments at December 31, 1996 mature through February 1997 and are classified as and consist
of the following (in thousands):
Amortized Gross Unrealized Estimated
Cost Gains Losses Fair Value
Held-to-maturity investments
Banker's Acceptances $ 1,711 $ --- $ --- $ 1,711
Commercial paper $21,470 $ 2 $ --- $21,472
Total Investments $23,181 $ 2 $ --- $23,183
======= ====== ====== =======
Total included in cash and cash equivalents $16,157 $ 1 $ --- $16,158
Total included in short-term investment 7,024 1 --- 7,025
------- ------ ------ -----
Total Investments $23,181 $ 2 $ --- $23,183
======= ====== ====== =======
Investments at December 31, 1995 matured through February 1996, are classified as and consist of the
following (in thousands):
Amortized Gross Unrealized Estimated
Cost Gains Losses Fair Value
Held-to-maturity investments
Commercial Paper $ 2,987 $ 1 $ --- $ 2,988
Available-for-sale investments
Auction rate preferreds 3,012 --- --- 3,012
------- ------ ------ -----
Total Investments $5,999 $ 1 $ --- $6,000
======= ====== ====== =======
Total included in cash and cash equivalents $1,995 $ --- $ --- $1,995
Total included in short-term investment 4,004 1 --- 4,005
------- ------ ------ -----
Total Investments $5,999 $ 1 $ --- $6,000
======= ====== ====== =======
Proceeds from sales and realized gains or losses on sales of
available-for-sale securities for all years presented were immaterial.
Inventories. Inventories are stated at the lower of cost (first-in,
first out) or market (estimated net realizable value). The components of
inventories are as follows (in thousands):
December 31,
1996 1995
---- ----
Work-in progress $3,335 $6,604
Finished goods 5,897 8,239
------ -----
$ 9,232 $14,843
======= =======
Property and equipment, net. Depreciation and amortization of property
and equipment are provided on the straight-line method over the estimated useful
lives of the assets, ranging from two to five years, or the applicable lease
term, whichever is shorter. $16,425 of assets were written down in connection
with the third quarter 1996 restructuring (see Note 12). The components of
property and equipment are as follows (in thousands):
December 31,
1996 1995
---- ----
Machinery and equipment $39,854 $45,059
Leasehold improvements 1,117 2,702
Furniture and fixtures 1,890 1,614
------- -----
Total cost 42,861 49,375
Accumulated depreciation (26,183) (26,671)
------- -------
$16,678 $22,704
======= =======
Intangible Assets. Goodwill associated with acquisitions is being
amortized on a straight-line basis over ten years and is carried at a net book
value of $7.9 million and $11.3 million at December 31, 1996 and 1995,
respectively. The 1996 net book value excludes the goodwill for the Company's
B.V. operations, which was written off in the third quarter restructuring.
Purchased technology is being amortized on a straight-line basis over seven
years. Among other considerations, to assess impairment, the Company
periodically calculates undiscounted future cash flows to determine that they
exceed the unamortized balance of the related intangible asset.
Deposits for wafer fabrication capacity. In 1995, the Company entered
into wafer fabrication supply agreements with various foundries. In connection
with these agreements, the Company made deposits of $3 million and $24 million
in 1995 and 1996 respectively. In 1996, certain of these agreements were
renegotiated such that no more deposits are required under one agreement and
approximately $15 million of notes payable and related deposits were offset (see
Note 5). Approximately $12 million is to be refunded in the year 2000.
Accrued liabilities. The components of accrued liabilities are as
follows (in thousands):
December 31,
1996 1995
---- ----
Accrued compensation and benefits $ 3,846 $ 2,343
Accrued royalties 1,628 1,649
Other accrued liabilities 4,072 4,502
------- -------
$ 9,546 $ 8,494
======= =======
Foreign currency translation. For all foreign operations, the U.S.
dollar is the functional currency. Assets and liabilities are remeasured at the
year-end exchange rates. Statements of operations are remeasured at the average
exchange rates during the year. Gains and losses from foreign currency
remeasurement are included in interest income and other, net.
The Company enters into foreign currency forward exchange contracts
(forward contracts) to reduce the impact of currency fluctuations on monetary
asset and liability positions of its foreign subsidiaries. Gains and losses
associated with currency rate changes on forward contracts are recorded
currently in income and were immaterial for all periods presented. At December
31, 1996 and 1995, the Company had no outstanding forward contracts.
Concentration of credit risk. The Company believes that the
concentration of credit risk in its trade receivables with respect to the
high-technology industry is substantially mitigated by the Company's credit
evaluation process, relatively short collection terms, and the geographical
dispersion of sales. The Company generally does not require collateral. Bad debt
write-offs have been insignificant for all years presented.
Revenue recognition. Revenue is recognized at the time of shipment to
the customer. Reserves are provided currently for estimated product returns and
price protection that may occur under Company programs. Such reserves were not
material at December 31, 1995 and 1994. In conjunction with the third quarter
1996 restructure reserve, the Company had accrued approximately $5 million as a
provision for price protection and product returns. At December 31, 1996, this
reserve was approximately $2 million.
Interest income (expense), net. The components of interest income and
interest expense, net are as follows (in thousands):
Year Ended
December 31,
1996 1995 1994
---- ---- ----
Interest income $1,840 $1,244 $825
Interest expense (1,278) (892) (1,249)
Other 117 145 34
------ ------ ------
$679 $497 $(390)
====== ====== ======
Net income (loss) per share. Net income (loss) per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Accretion attributed to convertible
preferred stock is deducted from net income available to common shareholders.
Potentially dilutive common equivalent shares consist of warrants and stock
options (using the treasury stock method). Fully diluted earnings per share have
not been presented because the amounts would not be significantly different.
Income Taxes. Deferred income taxes are provided for temporary
differences between financial statement and income tax reporting.
Stock Compensation. Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," (SFAS No. 123) permits, but does not
require companies to recognize compensation expense for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant or modification over the amount an
employee must pay to acquire the stock. Note 7 to the Consolidated Financial
Statements contains a summary of the pro forma effects to reported net income
and earnings per share for 1996 and 1995, if the Company had elected to
recognize compensation expense based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123. The effects of applying SFAS No. 123
for providing pro forma disclosures are not likely to be representative of the
effects on reported net income for future years.
NOTE 2. Acquisitions, Divestitures and Investments in Other Companies
Bit, Inc.
- ---------
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 $6.8 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 a subsidiary of the Company, 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. after the closure of the
acquisition on September 3, 1996. The proforma effect of combining the Bit, Inc.
transaction with the Company's operations in 1995 and prior to the acquisition
in 1996 are not reported separately because they are not considered to be
material.
I.C. Works, Inc.
- ----------------
During the first quarter of 1996, the Company acquired $3 million of
common stock of I.C. Works, Inc., a foundry located in San Jose, California. In
addition, the Company is obligated to provide semiconductor manufacturing
equipment to I.C. Works, Inc., which the Company has provided under capital
leases (see Note 5), in consideration for guaranteed wafer capacity at
discounted prices.
SiTel Sierra B.V.
- -----------------
During the fourth quarter of 1995, the Company sold its interest in
SiTel-Sierra B.V. to National Semiconductor Corporation. Proceeds from the sale
of this investment of $7 million in cash were received during the first quarter
of 1996. This transaction resulted in a pre-tax gain of $6.7 million.
Sierra Wireless, Inc.
- ---------------------
On July 7, 1993, the Company and MPR Teltech Ltd. (MPR) of British
Columbia, Canada announced an investment in a new company called Sierra Wireless
Inc. (Sierra Wireless). MPR contributed technology licenses in exchange for
Sierra Wireless's non-voting preferred stock. The Company invested approximately
$2.5 million of cash in exchange for shares of Sierra Wireless's non-voting
preferred stock. This initial investment was expensed in 1993 as Sierra Wireless
was still in its development stage. In 1996, 1995, and 1994, the Company
invested an additional approximately $0.2, $1.4, and $2.5 million, respectively,
in Sierra Wireless. These investments were capitalized and are being accounted
for as an equity investment on the cost basis, since Sierra Wireless is now an
operating company. Sierra Wireless has developed and is marketing portable
computer modems and modem sub-systems built to Cellular Digital Packet Data
(CDPD) performance specifications.
Prometheus Products, Inc.
- -------------------------
On October 2, 1994, the Company acquired Prometheus Products Inc.
(Prometheus), a distributor of software and hardware products for personal
computers headquartered in Tualatin, Oregon, in exchange for the elimination of
accounts receivable owed by Prometheus to the Company, a guaranteed cash payment
to the shareholders of Prometheus and future cash payments contingent upon
future sales and profits for Prometheus. The acquisition was accounted for as a
purchase. In December 1995, the Company decided to sell or dispose of Prometheus
(See Note 3).
PMC-Sierra
- ----------
On September 2, 1994, the Company acquired voting control of
PMC-Sierra, Inc. ("PMC") of Burnaby, British Columbia, Canada. PMC supplies
broadband transmission and networking chip set products for ATM, SONET/SDH,
T1/E1 and fast Ethernet applications. PMC was established in July 1992 by the
Company, which invested approximately $4.9 million of cash in exchange for PMC's
non-voting preferred stock representing approximately 61% of PMC's securities on
a fully diluted basis; MPR Teltech Ltd., a Canadian corporation which
contributed assets and technology licenses in exchange for non-voting preferred
stock; a venture capital investor, which purchased non-voting preferred stock
for cash; and PMC's employees, who purchased voting common stock.
The Company acquired voting control of PMC through a recapitalization
of PMC. In the recapitalization, the Company exchanged its PMC non-voting
preferred stock for PMC's voting Ordinary Shares, and PMC's other shareholders
exchanged their preferred stock and common stock for PMC Special Shares. Each
PMC A Special Share is currently redeemable at the holder's option for two
shares of the Company's Common Stock. The Company reserved 5,000,000 shares of
its Common Stock for issuance in connection with requests to redeem PMC Special
Shares then outstanding or issuable upon exercise.
The acquisition of voting control through PMC's recapitalization was
accounted for as a purchase of the interests of the other shareholders in PMC.
The total purchase price, based on the value of the 5,000,000 shares of the
Company's Common Stock reserved for issuance, was approximately $17.8 million.
The Company recorded a $12.7 million charge during the third quarter of 1994
related to the value of in-process research and development acquired in the
transaction. Additional purchased technology with a value of $3.2 million is
being amortized over seven years.
Under the terms of the recapitalization agreement, in the third quarter
of 1995 the Company adjusted the 1994 purchase price paid to the other PMC
shareholders. Accordingly, the minority shareholders received additional
consideration through the right to acquire an additional 1,294,722 shares of
Common Stock in exchange for PMC B Special Shares. The issuance of these shares
is reflected in the Company's accompanying financial statements as a special
charge to income of $10.6 million relating to compensation expense in 1995 and
an increase in goodwill of $9.1 million.
The Special Shares of PMC will be classified outside of shareholders'
equity until such shares are exchanged for Sierra Common Stock.
Before the recapitalization, the Company held only non-voting preferred
stock in PMC, and accordingly PMC's assets, liabilities and operating results
were not included in those of the Company. From the date of the
recapitalization, PMC's balance sheet and operating results have been
consolidated in the Company's financial statements.
The pro-forma operating results for 1994 with the inclusion of PMC,
would have been net revenue of $118,131, net loss of $(6,798), and a net loss
per share of $(0.27).
In conjunction with the acquisition of PMC, liabilities were assumed as
follows:
Fair value of assets acquired $33,048
Consideration paid:
Value of shares issued $16,500
Acquisition costs 1,300 (17,800)
-----
In process technology expensed (12,748)
--------
Liabilities assumed $2,500
NOTE 3. Discontinued Operations
On December 28, 1995, the Company's Board of Directors approved a plan
to sell or discontinue the operations of Prometheus Products, Inc.
("Prometheus"). The Company purchased Prometheus in the third quarter of 1994,
and has operated it as a separate business unit. Accordingly, Prometheus has
been treated as a discontinued operation and the Company's results of continuing
operations have been reclassified to remove Prometheus' previously reported
results. Revenues of Prometheus were $19,018,000 and $3,798,000 in 1995 and
1994, respectively. The loss from discontinued operations for the year ended
December 31, 1995 is net of an income tax benefit of $742,000. The components of
net current liabilities (in 000's) of discontinued operations at December 31,
1995 and 1996 are detailed in the table below.
1996 1995
-------- --------
Cash $ 150
Accounts receivable 3,000
Inventory 1,000
Property and equipment - net 150
Accounts payable (2,387)
Accrued liabilities $ (753) (4,844)
Guaranteed royalties (847) (1,165)
------- -------
Net current liabilities of discontinued operations $(1,600) $(4,096)
======== ========
The Company contracted with an investment banking firm in the first
quarter of 1996 to engage in efforts to sell 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 1996 have been recorded against the discontinued
operations provision established in the fourth quarter of 1995.
NOTE 4. Line of Credit
At December 31, 1996, the Company had available a line of credit with a
bank under which the Company may borrow up to $10 million with interest at the
bank's prime rate (6.9% at December 31, 1996). At December 31, 1996, there were
no amounts outstanding under the line of credit. At December 31, 1995, a $2.0
million standby letter of credit was outstanding under the line of credit. In
the fourth quarter of 1996, as a result of the restructure charge, the Company's
line of credit agreement with the bank was renegotiated to allow the Company to
borrow up to $10 million under the line of credit, provided that each borrowing
is fully cash secured. 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. The agreement expires on July 1, 1997. As
of December 31, 1996 and 1995, the Company was in compliance with all of its
covenants.
NOTE 5. Short-Term Debt and Obligations Under Capital Leases and Long Term Debt
The Company leases furniture and equipment under long-term capital
leases which have been accounted for as installment purchases. Accordingly,
capitalized costs of approximately $22,737,000 and $7,104,000, respectively, at
December 31, 1996 and 1995 and accumulated amortization of approximately
$4,710,000 and $2,242,000, respectively, are included in property and equipment.
Future minimum lease payments at December 31, 1996 under capital leases are as
follows (in thousands):
Year ended December 31 :
1997 $5,531
1998 5,443
1999 5,097
2000 4,281
2001 3,469
------
Total minimum lease payments 23,821
Less amount representing interest 4,474
-----
Present value of net minimum lease payments $19,347
=======
In 1996 the Company entered into two master capital leases, whereby the
Company is obligated to lease approximately $10 million of semiconductor
manufacturing equipment for one of its foundries. These leases have three year
terms, with two consecutive one year renewal options. The amounts in the table
above include commitments under these new leases. In conjunction with the
restructuring in 1996, the Company wrote off $6.9 million related to its
commitment to provide such equipment (see Note 11).
Short-term debt and long-term debt are as follows (in thousands):
December 31,
1996 1995
---- ----
Unsecured non-interest bearing promissory notes, payable in two equal installments, on
March 31, 1996 and October 31, 1996 --- $30,240
Secured equipment loans, payable in 48 monthly installments commencing
on September 12, 1994, interest ranging from 7.71% to 9.23% 3,567 5,000
Various unsecured notes, payable in various installments with interest
rates ranging from 0% to 9% 1,004 724
Bank term debt, payable in 37 monthly installments commencing on
December 1, 1994, interest rate at prime + 1.75% (10.25% at
December 31, 1995 and 10% at December 31, 1996) 719 1,504
----- -----
5,290 37,468
Less current portion (2,279) (32,521)
------- -------
$3,011 $4,947
======= =======
Maturities of long-term debt are as follows (in thousands):
Fiscal year ended
1997 $ 2,279
1998 1,405
1999 971
2000 106
2001 106
Thereafter 423
-------
$ 5,290
=======
Fair value of financial instruments. The estimated fair value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange.
The fair value of the unsecured promissory notes was approximately
$26,707,000 at December 31, 1995 versus a carrying value of $30,240,000. The
aggregate fair value of the Company's other long-term debt at December 31, 1996
and 1995 approximates its carrying value.
NOTE 6. Commitments and Contingencies
Operating leases. The Company leases its facilities under operating
lease agreements which expire at various dates through April 2006. Total rent
expense for the years ended December 31, 1996, 1995, and 1994 was $2.1 million,
$2.3 million, and $2.5 million, respectively. Minimum rental commitments under
these leases are as follows:
(In thousands)
Year ended December 31:
1997 $ 2,148
1998 2,154
1999 2,052
2000 1,869
2001 1,887
Thereafter 6,451
-------
$16,561
=======
In June 1996, the Company entered into a 7-year lease for a facility
which it occupied in the fourth quarter of 1996. The table above includes all
commitments related to this lease (see further discussion regarding this lease
under excess facility costs in Note 11).
Supply agreements. The Company's supply agreement with Chartered
Semiconductor expires on November 17, 199, but certain provisions have been
superseded by a wafer capacity agreement which expires in December 2000 whereby
Chartered is obligated to supply the Company with a predetermined number of
wafers per quarter. TSMC is obligated to provide, and the Company is obligated
to purchase, certain quantities of wafers per year under an agreement with TSMC
which terminates on December 31, 2000.
Development and licensing agreement. In the 1996, the Company entered
into an agreement with an integrated circuit design and development firm, for
the design and development of certain semiconductor products. Under this
agreement, the Company is obligated to pay $0.25 million in license fees, and
$2.3 million of royalty payments. The license fees were paid and expensed by the
Company in 1996. The royalty payment obligation must be paid by the Company
within two years of the Company's acceptance and verification of the licensed
designs.
Contingencies. In the normal course of business, the Company receives
and makes inquiries with regard to possible patent infringement. Where deemed
advisable, the Company may seek or extend licenses or negotiate settlements.
Outcomes of such negotiations may not be determinable at any point in time;
however, management does not believe that such licenses or settlements will,
individually or in the aggregate, have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Risks and Uncertainties. Technological change - the markets for the
Company's products are characterized by evolving industry standards and rapid
technological change and product obsolescence. The carrying value of the
Company's products in inventory may be materially impaired in the future should
these changes occur more quickly than the Company anticipated. Wafer capacity
agreements - as discussed above, the Company has entered into various agreements
to secure future wafer capacity. Should the Company need more capacity or if
there is a decline in demand for the Company's products reducing the need for
this contracted capacity, estimates related to the carrying value of deposits or
prepayments or related to future commitments could materially change.
Restructure reserves - restructure reserves include management's' best estimate
of the liabilities and the estimated future costs associated with the exit from
the modem chipset business and the associated restructuring of the Company's
non-networking operations. The actual amounts which the Company will ultimately
incur could differ materially in the near term from the amounts assumed in
estimating the costs associated with the restructuring.
NOTE 7. Shareholders' Equity
Convertible preferred stock The Company has authorized 5,000,000 shares
of undesignated preferred stock. The Company has also authorized 500,000 shares
of redeemable convertible preferred stock (the preferred stock). In February
1995, 11,488 shares of the preferred stock were converted and 24,766 shares of
Common Stock were issued.
Common Stock At December 31, 1996 and 1995, the Company had reserved
1,937,000 and 2,573,000 shares, respectively, of Common Stock to be issued to
holders of PMC special shares and options to purchase PMC special shares. The
holders of the special shares have the right to exchange one A special share for
two shares of Sierra Common Stock, and one B special share for 0.54612 share of
Sierra Common Stock. Upon exchange, amounts will be transferred from the PMC
special shares account to Sierra common stock on the consolidated balance sheet.
During 1996, the Company issued a warrant to purchase 25,000 shares of
common stock at $9.25 per share to an investment banking firm in settlement for
services previously expensed. The warrant expires in August 2000.
The Company has adopted a 1987 Incentive Stock Plan, a 1994 Incentive
Stock Plan and a 1996 Incentive Stock Plan (the "Plans"). Under the Plans
6,317,963 shares have been issued, 3,218,939 shares have been exercised and
1,528,549 shares remain available for future issuance to employees and
consultants. Options to purchase shares of the Company's common stock under the
Plan may be granted at not less than 85% of the fair value of the stock on the
date granted. The options generally expire after five to ten years and vest over
four years.
Changes during 1994, 1995, and 1996 in options outstanding for the
combined option plans were as follows:
Weighted Average
Options Available Exercise Price
For Issuance Shares Per Share
- --------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1993 601,038 2,855,216 $4.02
Authorized 1,200,000
Granted (1,273,000) 1,273,000 $4.39
Exercised --- (891,098) $2.75
Expired --- ---
Canceled 722,814 (722,814) $4.84
------- ---------
Outstanding at December 31, 1994 1,250,852 2,154,304 $4.41
Authorized 1,600,000
Granted (1,094,800) 1,094,800 $14.16
Exercised --- (588,742) $4.56
Expired (809,038) --- $5.12
Canceled 305,211 (305,211) $6.21
------- ---------
Outstanding at December 31, 1995 1,252,225 2,715,151 $8.13
Authorized 1,250,000
Granted (1,403,574) 1,403,574 $14.11
Exercised --- (503,825) $4.74
Expired (85,980) --- $4.07
Canceled 515,878 (515,878) $12.73
------- ---------
Outstanding at December 31, 1996 1,528,549 3,099,022 $10.63
========= =========
The following table summarizes information concerning options
outstanding for the combined option plans at December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ---- ------ ----------- -------
$ 0.00 - $ 0.00 20,000 9.75 $ 0.00 0 $ ---
$ 0.89 - $ 0.89 64,465 9.68 $ 0.89 42,437 $ 0.89
$ 3.50 - $ 4.75 812,885 6.91 $ 3.93 582,549 $ 3.93
$ 5.50 - $ 7.88 233,524 5.83 $ 5.72 226,585 $ 5.69
$ 8.63 - $ 12.88 854,755 9.04 $10.04 158,130 $ 8.88
$ 14.25 - $ 21.25 1,011,156 9.00 $17.07 220,329 $ 16.92
$ 22.25 - $ 26.06 102,237 8.83 $24.19 22,844 $ 25.13
- ----------------- --------- ---- ------ ---------- ------
$ 0.00 - $ 26.06 3,099,022 8.24 $10.63 1,252,874 $ 7.44
For 1995, there were 1,037,181 options exercisable at the end of 1995,
with a weighted average exercise price of $5.4267. The expiration dates of the
remaining outstanding options range from November 30, 2001 to December 2, 2006.
As of December 31, 1996, the number of shares authorized and available
for grant is 1,528,549 shares, with a total of 4,627,571 shares authorized but
unissued.
Employee Stock Purchase Plan In 1991, the Company adopted an Employee
Stock Purchase Plan (ESPP) under Section 423 of the Internal Revenue Code and
reserved 1,060,000 shares of common stock for issuance under the Plan. Under
this Plan, qualified employees are entitled to purchase shares at 85% of the
lower of fair market value at the beginning or end of the related subscription
period. There were 79,863 shares issued under the Plan during 1996 and 164,126
shares issued under the Plan during 1995. As of December 31, 1996, the number of
shares available for issuance under the purchase plan was 250,203 shares of
common stock.
Stock-based compensation In accordance with the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," ("FASB 123") the Company applies
APB Opinion 25 and related interpretations in accounting for its stock-based
awards and, accordingly, does not generally recognize compensation expense.
Pro forma information regarding net income (loss) and net income (loss)
per share is required by FASB 123 for awards granted or modified after December
31, 1994 as if the Company had accounted for its stock-based awards to employees
under the fair value method of FASB 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
Options ESPP
-------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
Expected life (years) 2.2 2.5 0.5 0.5
Expected volatility 0.8 0.6 0.8 0.6
Risk-free interest rate 5.7% 6.5% 5.3% 5.9%
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period (for
options) and the six-month purchase period (for stock purchases under the ESPP).
If the Company had elected to recognize compensation expense based on the fair
value of the options granted at grant date as prescribed by SFAS no. 123, net
income (loss) and net income (loss) per share would have been reduced to the pro
forma amounts indicated in the table below.
(in thousands except per share amounts):
1996 1995
- --------------------------------------------------------------------------------
Net income (loss) As reported $(48,150) $ 1,479
Pro forma $(54,006) $ 89
Net income (loss) per share As reported $ (1.62) $ 0.05
Pro forma $ (1.82) $ 0.00
Because FASB 123 is applicable only to awards granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1999. The weighted-average fair value of options granted during
1996 and 1995 were $6.94 and $5.99 per share, respectively.
The weighted-average fair value of employee stock purchase rights
exercised during 1996 was $3.78 per share. Options to purchase a total of
1,318,500 shares of common stock were granted during 1996 with exercise prices
equal to the market price of the stock on the grant date. The weighted-average
exercise price and weighted-average fair value of these options were $14.98 and
$6.69, respectively. Options to purchase a total of 85,074 shares of common
stock were granted during 1996 with exercise prices less than market value of
the stock on the grant date. The weighted-average exercise price and
weighted-average fair value of these options were $0.68 and $10.77,
respectively.
NOTE 8. Income Taxes
The income tax provisions, calculated under Statement of Financial
Accounting Standards No. 109 (FAS 109) consist of the following:
Three Years Ended December 31,
(In thousands)
1996 1995 1994
---- ---- ----
Current:
Federal $2,109 $3,167 $ ---
State 42 315 100
Foreign 8,844 5,621 1,018
----- ----- -----
Total Current 10,995 9,103 1,118
Deferred:
Federal (1,799) --- ---
Foreign 562 887 394
----- ----- -----
Total Deferred (1,237) 887 394
Provision for income taxes 9,758 9,990 1,512
Benefit allocated to loss from
discontinued operations --- 742 ---
----- ----- -----
Provision attributable to continuing
operations $9,758 $10,732 $1,512
======= ======= =======
Actual 1996 and 1995 current tax liabilities have been decreased by
$2,628,000 and $1,984,000, respectively, due to employee stock option related
tax benefits which were credited to common stock.
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate (35% in 1996 and 1995, and 34% in 1994) follows:
(In thousands) 1996 1995 1994
---- ---- ----
Tax at U.S. Federal statutory rate $(14,522) $12,148 $(2,404)
Net operating losses (utilized) not utilized 11,257 (7,079) (611)
In-process R&D costs relating to BIT, Inc.
acquisition 2,724 --- ---
Nondeductible charges arising from
acquisition of PMC --- 3,710 4,334
Incremental taxes on foreign earnings 9,406 1,988 ---
Other 893 (35) 193
------ ------ -------
Provision for income taxes $9,758 $10,732 $1,512
======= ======= =======
Pretax income (loss) from foreign operations was $23,044,000 in 1996,
$14,298,000 in 1995 and $(6,700,000) in 1994.
As of December 31, 1996, the Company has federal foreign tax credits of
$1,200,000 that expire in 1999 and 2000, if not utilized. The Company has
$6,902,000 of federal net operating losses acquired from Bit, Inc. which will
expire in 2011. Utilization of these net operating losses is subject to
substantial limitation due to ownership change limitations provided by the
Internal Revenue Code of 1986. The Company has state research and investment
credit carryforwards of $2,025,000 that expire beginning in 2002.
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 are as follows:
(In thousands)
1996 1995
---- ----
Deferred tax assets:
Operating loss carryforwards $2,416 $175
Credit carryforwards 2,436 4,115
Inventory valuation 4,638 4,637
Restructuring and other charges 27,662 2,954
------ -----
Total deferred tax assets 37,152 11,881
Valuation allowance (35,353) (8,929)
-------- -------
Total net deferred tax assets $1,799 $2,952
------- ------
Deferred tax liabilities:
Depreciation $(2,143) $(2,176)
Capitalized technology (598) (726)
Deferred income --- (2,229)
------- -------
Total deferred tax liabilities (2,741) (5,131)
-------- -------
Total net deferred taxes $(942) $(2,179)
====== ========
During 1996, the valuation allowance increased by approximately
$26,424,000. During 1995, the valuation allowance decreased by approximately
$5,800,000. During 1994, the valuation allowance increased by $93,000.
NOTE 9. Related Parties
The Company sold $18,936,000, $46,074,000 and $20,622,000 of products
in 1996, 1995 and 1994, respectively, to Apple Computer with whom a director of
the Company was affiliated. Outstanding amounts receivable from Apple Computer
were $1,733,000 and $8,827,000 at December 31, 1996 and 1995, respectively.
During the second quarter of 1996, an officer of Cisco Systems, Inc. ("Cisco")
joined the Company's Board. In 1996, the Company sold $6,584,000 of products to
Cisco. Outstanding accounts receivable from Cisco were $1,929,000 at December
31, 1996.
NOTE 10. Segment Information
The Company operates in one industry segment, which is the development,
production and sale of high performance integrated circuit system solutions for
the communications markets and the global information network.
In 1996, 1995, and 1994 sales to Apple Computer represented 10%, 24%,
and 20% of net revenues, respectively.
Export sales consist of direct sales and sales by the Company's sales
subsidiaries. U.S. export revenue from shipments to Europe represented
$23,684,000, $23,877,000, and $22,364,000 in 1996, 1995, and 1994, respectively,
while U.S. export revenue from shipments to the Far East were $59,337,000,
$38,533,000, and $13,500,000 of net revenues, respectively, during these
periods.
Geographic financial information is as follows:
1996 1995 1994
---- ---- ----
Net sales to unaffiliated customers:
United States $125,493 $149,326 $96,484
Canada 62,878 39,398 8,280
------ ------ ------
Total net sales $188,371 $188,724 $104,764
========= ========= ========
Operating income (loss):
United States $(63,976) $10,382 $(6,319)
Canada 24,905 17,129 2,705
------ ------ ------
Total operating income/(loss) $(39,071) $27,511 $(3,614)
========= ========= ========
Identifiable assets:
United States $53,989 $129,747
Canada 57,510 37,612
Other 18,415 17,501
------ ------
Total assets $129,914 $184,860
========= =========
NOTE 11. Restructuring
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 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 and December 31, 1996
are as follows:
Restructuring Restructuring
Charge Reserve
September 29, Write-Down Cash December 31,
1996 of Assets Outlay 1996
(In Millions) ---- --------- -------- ----
Write down of inventories to net realizable value $23,000 $(23,000) $ --- $ ---
Employee termination benefits 6,985 --- (2,411) 4,574
Loss on supplier commitments and write off
of prepaid expenses 9,908 (905) (409) 8,594
Write down of excess fixed assets and assets
related to capacity commitments 16,580 (16,580) --- ---
Provision for price protection and product returns 5,047 (5,047) --- ---
Excess facility costs 3,411 --- (408) 3,003
Write down of goodwill related to Company's BV
subsidiary in Holland 2,459 (2,459) --- ---
Severance and closure costs related to Europe 1,980 --- (1,397) 583
------- ------ ------- -------
$69,370 $(47,991) $(4,625) $16,754
======== ======== ======== ========
The Company ceased manufacturing its modem chipset products in
September 1996 and expects to complete the shut down of the remaining
non-networking operations in San Jose by the middle of 1997. No sale was
anticipated in accounting for the restructuring. The Company will continue to
manufacture 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 have been and will continue to be reduced.
Termination benefits for approximately 245 employees associated with the
Company's non-networking operations have been and will be paid as employees
reach their termination dates, between November 1996 and July 1997. As of
December 31, 1996, 118 employees employed as of the date of the restructuring in
the Company's non-networking operations had reached their termination dates and
have left the Company as planned in the restructuring. 127 employees employed as
of the date of the restructuring in the Company's non-networking operations will
reach their termination dates per the restructure plan during 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 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 value. Fair value was based on estimated net recoverable salvage
value of assets held for disposal. Based upon net undiscounted estimated cash
flows to be generated by these assets no impairment of assets which will
continue to be utilized was identified.
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 leases obligation, resulted in an impairment of
approximately $6.9 million of the Company's assets.
The portion of the charge related to excess facility costs primarily
consists of amounts to be incurred by the Company under a seven year
noncancelable 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 $4.6 million in 1996. It is expected that approximately $5.7
million of cash expenditures related to the restructuring will occur during the
first half of 1997. Subsequent cash expenditures related primarily to leases
accrued in the restructuring will be approximately $11.1 million.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information concerning the Company's directors required by this
Item is incorporated by reference to the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders ("Proxy Statement"). The following sets forth
information regarding executive officers of the Company as of February 28, 1997.
Name Age Position
- ------------------ --- --------------------------------------------------------------
James V. Diller 61 Chief Executive Officer and Chairman of the Board of Directors
Greg Aasen 42 Chief Operating Officer and Secretary of PMC-Sierra, Inc.
Robert L. Bailey 39 President and Chief Executive Officer of PMC-Sierra, Inc.
Glenn C. Jones 51 Senior Vice President, Finance and Chief Financial Officer
Officers serve at the discretion of the Board of Directors. There are
no family relationships between any of the directors or officers of the Company.
Mr. Diller is a founder of the Company and has served as President,
Chief Executive Officer and a Director since its formation in December 1983. He
was Sierra's President from formation until July 1993. In July 1993, he was
named as the Chairman of the Company's Board of Directors. He also served as
Chief Financial Officer of the Company from its formation until July 1987 and as
Acting Chief Financial Officer of the Company from September 1993 to February
1994. Prior to founding the Company, he was employed by National Semiconductor
for 15 years, most recently as Vice President of MOS Memory and Custom MOS
Products from May 1981 to December 1983. Other positions held by Mr. Diller
while at National Semiconductor include Vice President of the Consumer Products
Division, Managing Director of Southeast Asian Manufacturing Operations, Group
Director of Linear Circuits and Managing Director of European Operations. Mr.
Diller is a director of Elantec Semiconductor, a linear semiconductor company.
Mr. Aasen is a founder of PMC-Sierra, Inc. and has served as its Chief
Operating Officer and Secretary since its formation in June 1992. He has served
as a director of PMC-Sierra, Inc. since August 1994. Prior to joining PMC-Sierra
Inc., Mr. Aasen was a General Manager of PMC, a division of MPR Teltech, Ltd.
Mr. Bailey has served as President, Chief Executive Officer and
Director of PMC-Sierra, Inc. since December 1993. Prior to joining PMC-Sierra,
Inc., Mr. Bailey was employed by AT&T-Microelectronics from August 1989 to
November 1993 where he served as Vice President of Integrated Microperipheral
Products. Mr. Bailey became a Sierra director in October 1996. He is also a
director of Teltone Corporation, a designer and manufacturer of telecom
products.
Mr. Jones joined the Company in February 1994 as Senior Vice President,
Finance and Chief Financial Officer. Prior to joining the Company, he was
employed by Sybase, Inc., a database software firm, as Vice President, Strategic
Ventures from September 1992 through February 1994. He was employed from March
1992 through September 1992 by Gain Technology, Inc., a multimedia software
development firm, as its Vice President of Operations and Chief Financial
Officer. Prior to March 1992, Mr. Jones was employed by Metaphor Computer, Inc.,
a computer systems manufacturer, for over eight years, where in his last
position, he served as Executive Vice President, General Manager and Chief
Financial Officer.
ITEM 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements
The financial statements (including the notes thereto) listed in the
accompanying index to financial statements and financial statement schedules are
filed within this Annual Report on Form 10-K.
2. Financial Statement Schedules
The financial statement schedule listed on Page 28 in the accompanying
index to financial statements and financial statement schedule is filed within
this Annual Report on Form 10-K.
3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this Form
10-K Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
fourth fiscal quarter ended December 31, 1996.
(c) Exhibits
Exhibit Description Page
Number Number
------- -------------------------------------------------------------------- --------
2.1 Exchange Agreement dated September 2, (D)
1994 between Sierra and PMC.
2.2 Amended and Restated Shareholders (D)
Agreement dated September 2, 1994
among the Shareholders of PMC-Sierra, Inc.
2.3 Amendment to Exchange Agreement effective August 9, 1995 (G)
3.1 Restated Articles of Incorporation, as amended (H)
3.3 Bylaws, as amended (A)
4.1 Specimen of Common Stock Certificate (A)
4.3 Terms of PMC-Sierra, Inc. Special Shares (E)
4.4 Silicon Valley Bank Business Loan Agreement and Promissory Note, each dated
November 29, 1990 and Security Agreement dated February 22, 1990. (J)
4.4B Amendment dated December 29, 1996 to the Silicon Valley Bank Business Loan
Agreement and Promissory Note, dated November 29, 1990 and Security Agreement
dated February 22, 1990 --
10.1B 1987 Incentive Stock Plan, as amended (C)
10.2 1991 Employee Stock Purchase plan, as amended (A)
10.4 Form of Indemnification Agreement for directors and officers (A)
10.8 Warrants to Purchase Common Stock (A)
10.8B Warrant Purchase Agreement and Warrant to Purchase Shares of Common Stock
dated August 28, 1996 --
10.9D Technology License Agreement dated November 18, 1987, as amended
July 17, 1990 (A)
10.11 Net Building Space Lease dated November 1, 1996 (I)
10.14 Compass Design Automation, Inc. Software License Agreement dated
December 2, 1991* (B)
10.17 1994 Incentive Stock Plan (F)
10.18 Deposit Agreement with Chartered Semiconductor Pte., Ltd.* (K)
10.18B Amendment Agreement (No. 1) to Deposit Agreement with
Chartered Semiconductor Pte. Ltd.** --
10.19 Option Agreement among Sierra Semiconductor Corporation, PMC-Sierra, Inc.
and Taiwan Semiconductor Manufacturing Corporation** --
10.20 Net Building Lease (PMC-Sierra, Inc.) dated May 15, 1996
11.1 Calculation of earnings per share
22.1 Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney
* Confidential treatment has been granted as to a portion of this exhibit.
** Confidential treatment has been requested as to portions of this exhibit.
(A) Incorporated by reference from the same-numbered exhibit filed with
the Registrant's Registration Statement on Form S-1 (No. 33-39406).
(B) Incorporated by reference from the same-numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended December 29, 1991.
(C) Incorporated by reference from the same-numbered
exhibit filed with the Registrant's Form 10-K Annual
Report for the fiscal year ended January 3, 1993.
(D) Incorporated by reference from the same-numbered
exhibit filed with the Registrant's Current Report on
Form 8-K, filed on September 16, 1994, as amended.
(E) Incorporated by reference from exhibit 4 of the Schedule 13-D filed on
November 2, 1994 by GTE Corporation.
(F) Incorporated by reference from the same numbered
exhibit filed with the Registrant's Form 10-K Annual
report for the fiscal year ended January 2, 1994.
(G) Incorporated by reference from exhibit 2.1 filed with
Registrant's Current Report on Form 8-K, filed on
September 6, 1995, as amended on October 6, 1995.
(H) Incorporated by reference from exhibit 3.1 filed with the Registrant's
Form 10-Q for the quarter ended September 29, 1996.
(I) Incorporated by reference from the same numbered exhibit filed with
Registrant's Form 10-Q for the quarter ended June 30, 1996.
(J) Incorporated by reference from the same numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 (No. 33-39406).
(K) Incorporated by reference from the same numbered exhibit filed with the
Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 11, 1997 /s/ James V. Diller
----------------------------------------
James V. Diller, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James V. Diller and Glenn C. Jones,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ James V. Diller Chairman of the Board, April 11, 1997
- ----------------------- Chief Executive Officer and Director
James V. Diller (Principal Executive Officer)
/s/ Glenn C. Jones Senior Vice President, Finance and April 11, 1997
- ----------------------- Chief Financial Officer
Glenn C. Jones (Principal Financial Officer)
/s/ Michael L. Dionne April 11, 1997
- ----------------------- Director
Michael L. Dionne
/s/ Frank Marshall April 11, 1997
- ----------------------- Director
Frank Marshall
/s/ Robert Bailey April 11, 1997
- ----------------------- Director
Robert Bailey
/s/ Alexandre Balkanski April 11, 1997
- ----------------------- Director
Alexandre Balkanski
INDEX TO EXHIBITS
Exhibit Description Page
Number Number
-------- ----------------------------------------------------------------------- ------
4.4B Amendment dated December 29, 1996 to Silicon Valley Bank Business
Loan Agreement and Promissory Note and Security Agreement. 62
10.8 Warrant Purchase Agreement and Warrant to Purchase shares of Common Stock
dated August 28, 1996. 66
10.18 Amendment Agreement (No.1) to Deposit Agreement with Chartered Semiconductor
Pte. Ltd.** 82
10.19 Option Agreement among Sierra Semiconductor, PMC-Sierra, Inc. and Taiwan
Semiconductor Manufacturing Corporation as amended** 95
10.20 Net Building Lease (PMC-Sierra, Inc.) dated May 15, 1996 109
11.1 Calculation of Earnings Per Share 51
22.1 List of Subsidiaries 52
23.1 Consent of Ernst & Young LLP, Independent Auditors
** Confidential treatment has been requested as to portions of this exhibit.
Exhibit 11.1 SIERRA SEMICONDUCTOR CORPORATION
CALCULATION OF EARNINGS PER SHARE (1)
(in thousands, except per share amounts)
December 31,
1996 1995 1994
---- ---- ----
Income (loss) from continuing operations $(48,150) $23,976 $(7,916)
Loss from discontinued operations --- (22,497) (666)
------- ------- -------
Net income (loss) $(48,150) 1,479 (8,582)
Adjustments to net income (loss):
Accretion of convertible, redeemable preferred stock --- (1) (16)
------- ------- -------
Adjusted net income (loss) $(48,150) $1,478 $(8,598)
========= ========= ========
Weighted average common shares outstanding 29,719 27,018 22,030
Common stock equivalents --- 1,602 ---
Shares used in calculation of net income (loss) per share 29,719 28,620 22,030
Income (loss) from continuing operations per share $(1.62) $ 0.84 $ (0.36)
Loss from discontinued operations per share $ --- $ (0.79) $ (0.03)
------- ------- -------
Net income (loss) per share $(1.62) $ 0.05 $ (0.39)
========= ========= ========
(1) Share and per share information has been adjusted for a 2 for 1 stock split effective October 5, 1995
Exhibit 22.1 SIERRA SEMICONDUCTOR CORPORATION
LIST OF SUBSIDIARIES
Subsidiaries of
Sierra Semiconductor Corporation
1. PMC-Sierra, Inc., organized under the laws of British Columbia,
Canada, doing business only under its official name.
2. Prometheus Products, Inc., organized under the laws of California,
doing business only under its official name.
3. Sierra Semiconductor B.V., organized under the laws of the
Netherlands, doing business only under its official name.
4. Chartered Sierra Semiconductor, organized under the laws of the
Republic of Singapore, doing business only under its official name.
5. Sierra Semiconductor Canada, Inc. organized under the laws of
British Columbia, Canada, doing business only under its official name.
6. Sierra Semiconductor, Ltd., organized under the laws of the United
Kingdom, doing business only under its official name.
7. Sierra Semiconductor GmbH, organized under the laws of Germany,
doing business only under its official name.
8. Sierra Semiconductor Srl, organized under the laws of Italy, doing
business only under its official name.
9. PMC-Sierra Portland, Inc., organized under the laws of Delaware,
doing business only under its official name.
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-86930, 33-90393, 33-96620, 33-97490 and 333-15519), and in the
Registration Statements (Form S-8 Nos. 33-41027, 33-80988, 333-13387, 33-80992,
33-94790, 333-13359, and 333-13357) pertaining to the 1991 Employee Stock
Purchase Plan, 1994 Incentive Stock Plan, and PMC-Sierra, Inc. (Portland) 1996
Stock Option Plan of Sierra Semiconductor Corporation and in the related
Prospectuses, of our report dated January 22, 1997, with respect to the
consolidated financial statements and schedule of Sierra Semiconductor
Corporation included in this Annual Report (Form 10-K) for the year ended
December 31, 1996.
San Jose, California /s/ERNST & YOUNG LLP
April 10, 1997
S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1996, 1995 and 1994
(in thousands)
Additions Additions
Allowance for Balance at Charged to Charged
Doubtful Beginning Costs and to Other Balance at
Accounts of Year Expenses Accounts Write-offs End of Year
------------ --------- --------- --------- ---------- -----------
1996 $1,081 $666 $ --- $905 $ 842
1995 $1,648 $ 49 $ --- $616 $1,081
1994 $ 734 $871 $148 (1) $105 $1,648
(1) Represents amounts acquired in the acquisition of PMC charged to goodwill
and other intangible assets.
1993 Restructure
----------------
Additions Additions
Accrued Balance at Charged to Charged
Restructure Beginning Costs and to Other Balance at
Costs of Year Expenses Accounts Payments End of Year
------------ --------- --------- --------- ---------- -----------
1996 $ 373 $ --- $ --- $ --- $ 373
1995 $1,150 $ --- $ --- $ 777 $ 373
1994 $6,903 $(1,559) (2) $ --- $4,194 $1,150
(2) Represents reversal of restructuring and other charges.
1996 Restructure
----------------
Accruals
Additions Additions Reclassed
Accrued Balance at Charged to Charged to Other
Restructure Beginning Costs and to Other Restructure Balance at
Costs of Year Expenses Accounts Accounts Payments End of Year
------------ --------- --------- --------- ---------- ----------- -----------
1996 $ --- $28,154 $ --- $(6,775) $4,625 $16,754
1995 $ --- $ --- $ --- $ --- $ --- $ ---
1994 $ --- $ --- $ --- $ --- $ --- $ ---