UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 30, 1995
Commission file Number 0-17795
CIRRUS LOGIC, INC.
(Exact name of registrant as specified in its charter.)
CALIFORNIA 77-0024818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Warren Avenue, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(510) 623-8300
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 [ ]
The number of shares of the registrant's common stock, no par value, was
63,622,495 as of December 30, 1995.
<PAGE>
<TABLE>
Part 1. Financial Information
Item 1. Financial Statements
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Quarter Ended Three Quarters Ended
Dec. 30, Dec. 31, Dec. 30, Dec. 31,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $295,783 $228,599 $913,872 $615,807
Costs and expenses:
Cost of sales 197,273 135,658 551,456 346,000
Research and development 60,086 40,902 168,576 116,144
Selling, general and administrative 43,047 32,314 119,476 90,450
Non-recurring costs 1,195 - 1,195 3,856
Merger costs - - - 2,418
--------- --------- --------- ---------
Total costs and expenses 301,601 208,874 840,703 558,868
--------- --------- --------- ---------
(Loss)income from operations ( 5,818) 19,725 73,169 56,939
Interest and other income, net 561 1,417 2,994 5,098
--------- --------- --------- ---------
(Loss)income before provision for income taxes ( 5,257) 21,142 76,163 62,037
(Benefit) provision for income taxes ( 1,656) 6,660 23,990 19,542
--------- --------- --------- ---------
Net (loss)income ($3,601) $14,482 $52,173 $42,495
========= ========= ========= =========
Net (loss) income per common and common
equivalent share ($0.06) $0.23 $0.75 $0.67
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding 63,273 63,300 69,437 63,415
========= ========= ========= =========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<CAPTION>
Dec. 30, April 1,
1995 1995
(Unaudited)
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $134,391 $106,882
Short-term investments 44,231 80,144
Accounts receivable, net 197,036 161,333
Inventories 167,455 103,642
Other current assets 80,248 27,931
--------- ---------
Total current assets 623,361 479,932
Property and equipment, net 176,034 100,244
Joint venture manufacturing agreements, net
and investment in joint venture 77,071 63,735
Deposits and other assets 39,458 29,623
--------- ---------
$915,924 $673,534
========= =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $267,723 $162,002
Accrued salaries and benefits 29,078 32,508
Obligations under equipment loans and
capital leases, current portion 23,506 11,481
Income taxes payable 13,779 22,322
--------- ---------
Total current liabilities 334,086 228,313
Obligations under equipment loans and
capital leases, non-current 67,586 26,205
Commitments and contingencies
Shareholders' equity:
Capital stock 326,804 283,741
Retained earnings 187,448 135,275
--------- ---------
Total shareholders' equity 514,252 419,016
--------- ---------
$915,924 $673,534
========= =========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<CAPTION>
Three Quarters Ended
Dec. 30, Dec. 31,
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operations:
Net income $52,173 $42,495
Adjustments to reconcile net income to net
cash flows from operations:
Depreciation and amortization 43,793 27,217
Net change in operating assets and liabilities (42,622) (17,767)
--------- ---------
Net cash flows provided by operations 53,344 51,945
--------- ---------
Cash flows from investing activities:
Purchase of short-term investments (164,915) (255,782)
Proceeds from sale of short-term investments 200,828 222,223
Additions to property and equipment (106,215) (36,621)
Joint venture manufacturing agreements and
investment in joint venture (16,000) (63,800)
Increase in deposits and other assets (20,228) (16,939)
--------- ---------
Net cash flows used by investing activities (106,530) (150,919)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 27,883 6,311
Short-term borrowing 41,000 -
Borrowings on equipment loans 62,081 9,115
Principal payments on capital leases and loans (9,269) (8,882)
Repayment of short-term borrowing (41,000) -
--------- ---------
Net cash flows provided by financing activities 80,695 6,544
--------- ---------
Increase (decrease) in cash and cash equivalents 27,509 (92,430)
Cash and cash equivalents - beginning of period 106,882 193,825
--------- ---------
Cash and cash equivalents - end of period $134,391 $101,395
========= =========
Supplemental disclosure of cash flow information:
Interest paid $2,569 $1,803
Income taxes paid $16,667 $12,873
Tax benefit of stock option exercises $15,463 $ -
Equipment purchased under capitalized leases $594 $6,849
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
CIRRUS LOGIC, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated condensed financial statements have been prepared
by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of the Company, the financial
statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
financial position, operating results and cash flows for those
periods presented. These consolidated condensed financial
statements should be read in conjunction with the consolidated
financial statements, and notes thereto for the year ended
April 1, 1995, included in the Company's 1995 Annual Report on
Form 10-K. The results of operations for the interim periods
presented are not necessarily indicative of the results that may
be expected for the entire year.
2. Cash Equivalents and Investments
At December 30, 1995, the Company's cash equivalents and short-term
investments consisted primarily of U.S. Government Treasury and
agency securities, commercial paper, auction preferred stock,
municipal bonds and certificates of deposit. Cash equivalents
and short-term investments held at December 30, 1995 approximate fair
market value.
3. Inventories
Inventories are comprised of the following:
Dec. 30, April 2,
1995 1995
--------- ---------
(In thousands)
Work-in-process $ 101,037 $ 84,920
Finished goods 66,418 18,722
--------- ---------
Total $ 167,455 $ 103,642
========= =========
4. Income Taxes
The Company provides for income taxes during interim reporting
periods based upon an estimate of the annual effective tax rate.
Such estimate reflects an effective tax rate lower than the
federal statutory rate primarily because of the research and
development tax credit.
- 5 -
5. Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is based on the
weighted average common shares outstanding and dilutive common
equivalent shares (using the treasury stock or modified treasury
stock method, whichever applies). Common equivalent shares
include stock options and warrants. Dual presentation of primary
and fully diluted earnings per share is not shown on the face of
the income statement because the differences are insignificant.
6. Contingencies
On May 7, 1993, the Company was served with two shareholder class
action lawsuits filed in the United States District Court for the
Northern District of California. The lawsuits, which name the
Company and several of its officers and directors as defendants,
allege violations of the federal securities laws in connection
with the announcement by Cirrus Logic of its financial results for
the quarter ended March 31, 1993. The complaints do not specify
the amounts of damages sought. The Company believes that the
allegations of the complaints are without merit, and the Company
intends to vigorously defend itself. The Company believes that
the ultimate resolution of this matter will not have a material
adverse effect on its financial position, results of operations,
or cash flows.
Between November 7 and November 21, 1995, five shareholder class
action lawsuits were filed in the United States District Court for
the Northern District of California against the Company and several
of its officers and directors. The lawsuits allege violations of
the federal securities laws in connection with the announcement by
Cirrus Logic on November 7, 1995 that a major customer discontinued
orders for the Company's graphics and audio products. The complaints
do not specify the amounts of damages sought. By an order entered
January 4, 1996, the Court consolidated the five above referenced
actions under one consolidated complaint. The amended consolidated
complaint is to be filed later in February 1996. The Company
believes that the allegations of the complaint are without merit, and
the Company intends to defend itself vigorously. The Company
believes that the ultimate resolution of this matter will not have a
material adverse effect on its financial position, results of
operations, or cash flows.
7. Proposed Public Offerings
On October 23, 1995, the Company announced that it intended to
conduct a registered public offering of Common Stock and convertible
notes. In light of market conditions, the Company has decided
not to go forward with that offering.
8. Joint Venture Agreements and Manufacturing Contract
During September 1994, the Company and IBM completed a series of
agreements pertaining to joint manufacturing. In January 1995,
under the terms of the agreements, a new joint venture (MiCRUS)
began manufacturing semiconductor wafers for each parent company.
In January 1995, MiCRUS leased approximately $145 million of
wafer fabrication and infrastructure equipment pursuant to a lease
guaranteed jointly and severally by the Company and IBM. As part
of the initial agreement, Cirrus Logic committed to pay $36 million
as a cash contribution of which $14 million has been paid to date. In
addition, Cirrus Logic and IBM each committed to provide MiCRUS with
approximately $100 million of additional capital equipment, primarily
through lease financing, of which the final $30 million will be provided
by the Company in the fourth quarter of fiscal 1996.
In March 1995, IBM and the Company agreed to a $120 million
expansion of MiCRUS, of which Cirrus Logic committed to provide
$60 million in financing. The Company expects to use equipment
leases or lease guarantees to fulfill its financing commitment. This
expansion is expected to be in full production in fiscal 1997.
In addition, in October 1995, the Company committed to provide a
further $198 million to fund a second expansion of MiCRUS and to
support the migration to sub 0.5 micron process technology. Of
this amount the Company expects to spend $33 million in cash for
facilities and to provide equipment lease guarantees for the
balance. IBM has until February 15, 1996 to provide up to half of
the $198 million of the Company's commitment in order to obtain up
to half of the additional wafer capacity from the MiCRUS expansion.
In October 1995, the Company also concluded agreements with AT&T
to form a joint venture to build additional wafer production
capacity in an existing facility in Orlando, Florida owned by
AT&T. The agreements with AT&T obligate the Company to provide
$420 million in financing. The Company expects to finance $280
million of this amount through equipment leases or leases guarantees.
Of the $140 million balance, the Company will contribute $35 million
in installments over a three-year period and pay $105 million in
installments over a four-year period. The payment of $105 million
will be charged to the Company's cost of sales over the life of the
venture based upon the ratio of current units of production to
current and anticipated future units of production.
The Company has entered into a volume purchase agreement with TSMC
under which the Company has agreed to make advance payments to
TSMC of approximately $118 million, one-half in 1997 and one-half
in 1998. The Company also has concluded an agreement with UMC
which provides for a $90 million equity investment by the Company
during fiscal 1996 and 1997. The Company has recently initiated
discussions with UMC about rescheduling the project and postponing
the Company's investment. The Company completed a memorandum of
understanding in December 1995 with Digital Equipment
Corporation to enter into a semiconductor manufacturing
relationship to produce wafer products at Digital's state-of-the-
art Fab 6 facility in Hudson, Massachusetts. The Company is
evaluating this proposed venture in light of the current market
conditions.
The Company estimates that its total financial obligations for the
IBM, AT&T, UMC and TSMC transactions (excluding future wafer
purchases) may total $92 million in the remainder of fiscal 1996,
$480 million in fiscal 1997 and $240 million in the following
three years. The Company intends to obtain the necessary capital
through a combination of equity and/or debt financing, equipment
lease financing, lease guarantees and cash generated from
operations. In addition, the Company estimates that capital
expenditures for its own facilities, testing and other equipment
may total $600 to $700 million through fiscal 2000. The Company
expects to finance seventy to eighty percent of these capital
expenditures through equipment lease or loan financing. There can be
no assurance that financing will be available or, if available, will
be on satisfactory terms.
<PAGE>
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The information should be read along with the unaudited
consolidated condensed financial statements and the notes thereto
included in Item 1 of this Quarterly Report and the audited
consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal year ended April 1, 1995,
contained in the Annual Report to Shareholders. On June 1, 1995,
the Board of Directors approved a two-for-one split of the
Company's Common Stock. Shareholders of record as of June 19,
1995, received certificates reflecting the additional shares. The
certificates were distributed on July 17, 1995. All references to
the number of shares of Common Stock, warrants and options to
purchase shares of Common Stock, and share prices have been
restated to reflect the two-for-one split.
Except for historical information contained herein, this
Discussion and Analysis contains forward-looking statements. The
forward-looking statements contained herein are subject to certain
risks and uncertainties, including those discussed below or in the
Company's Form 10-K for the fiscal year ended April 1, 1995,
that could cause actual results to differ materially from those
projected. The Form 10-K referred to in this paragraph is
expressly incorporated herein by reference. Readers are cautioned
not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof.
The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements which
may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Results of Operations
Results of operations for the third quarter of fiscal 1996 were
materially affected by several adverse factors.
First, revenues from the sale of graphics and audio products
declined from the levels in the second quarter of fiscal 1996.
This decline was caused by slower than expected growth in the home
PC market, by dramatically reduced demand from a major customer
for certain graphics and audio products, and by softer than
expected business conditions in Taiwan.
Second, the slower than expected sales resulted in substantial
amounts of excess inventory of graphics products. This in turn
caused the Company to record an inventory writeoff of $19.5
million. After the Company released its preliminary financial
results, it observed a sharp decline in demand for its PicoPower
Pentium VL-bus core logic products and for certain other products.
These subsequent developments caused the Company to increase its
inventory write-off from $19.5 million to approximately $33 million
and to provide an additional $5 million for anticipated payments for
underutilization of capacity at its MiCRUS joint venture.
Third, because new graphics, audio and fax/modem products were
being introduced in the quarter, the value of the older products
declined substantially. The Company is in the process of
liquidating as much of the older inventory as possible during the
fourth quarter of fiscal 1996 and the first quarter of fiscal
1997.
The following table discloses the percentages that income
statement items are to net sales and the percentage change in the
dollar amounts for the same items compared to the similar period
in the prior fiscal year.
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage of Net Sales
Quarter Ended Three Quarters Ended
------------------- -------------------
Dec. 30, Dec. 31, Percent Dec. 30, Dec. 31, Percent
1995 1994 change 1995 1994 change
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100% 100% 29% 100% 100% 48%
Gross margin 33% 41% 6% 40% 44% 34%
Research and development 20% 18% 47% 18% 19% 45%
Selling, general and administrative 15% 14% 33% 13% 15% 32%
Non-recurring costs 0% - - 0% 1% -69%
Merger costs - - - - 0% -100%
(Loss) income from operations -2% 9% N/A 8% 9% 29%
(Loss)income before income taxes -2% 9% N/A 9% 10% 23%
Income taxes -1% 3% N/A 3% 3% 23%
Net (loss) income -1% 6% N/A 6% 7% 23%
</TABLE>
Net Sales
Net sales for the third quarter of fiscal 1996 were $295.8
million, an increase of 29% from the $228.6 million reported for
the third quarter of 1995. Net sales for the first three quarters
of fiscal 1996 were $913.9 million, an increase of 48% over the
$615.8 million reported for the same period of fiscal 1995. Sales
of mass storage and wireless communication products increased in
each of the first three quarters of fiscal 1996. Net sales of
graphics and audio products for the first three quarters of fiscal
1996 increased over the comparable period of fiscal 1995, but
declined in the third quarter of fiscal 1996 against the second
quarter of fiscal 1996.
For the third and first three quarters of fiscal 1996, export
sales (including sales to U.S.-based customers with manufacturing
plants overseas) were 55% and 58%, respectively, of total sales
compared to 61% and 57%, respectively for the corresponding
periods in fiscal 1995.
The Company's sales are currently denominated primarily in U.S.
dollars. The Company purchases hedging instruments to reduce
short-term foreign currency exposure related to trade receivables
denominated in foreign currencies.
Net sales to NEC accounted for approximately 12% of net sales in
the third quarter of fiscal 1996. No other customer accounted for
10% or more of sales during any other quarter of fiscal 1996 or
fiscal 1995.
Gross Margin
The gross margin was 33% in the third quarter of fiscal 1996,
compared to 41% for the third quarter of fiscal 1995. The gross
margin was 40% in the first three quarters of fiscal 1996,
compared to 44% for the same period of fiscal 1995. In the third
quarter and the first three quarters of fiscal 1996, the gross
margin percentage decreased as a result of a charge of
approximately $33 million in the third quarter for inventory
written down for lower-than-anticipated shipments of and demand
for graphics, core logic and other products and a $5 million charge
for anticipated payments for underutilization of capacity at its
MiCRUS joint venture.
The decline in the gross margin percentage for the first three
quarters of fiscal 1996 compared to fiscal 1995 was also the
result of higher wafer costs caused by an increase in wafer prices
for merchant wafers, an insufficient supply of 0.6 micron wafers
which made necessary the use of less cost effective 0.8 micron
wafers to meet expanded unit shipments, expediting expenses
related to premiums paid to suppliers to increase production of
the Company's products, lower yields on new products ramping into
production, and lower selling prices on certain graphics, audio
and fax/modem products.
Research and Development
Research and development expenditures increased $19.2 million over
the third quarter of fiscal 1995 to $60.1 million in the third
quarter of fiscal 1996. The expenditures in the third quarter and
the first three quarters of fiscal 1996 were approximately 20% and
18%, respectively, of net sales compared to 18% and 19%,
respectively, in the comparable periods of fiscal 1995. Expenses
increased in absolute amounts as the Company continued to invest
in new product development. The Company intends to continue making
substantial investments in research and development.
Selling, General and Administrative Expenses
Selling, general and administrative expenses represented
approximately 15% and 13%, respectively, of net sales in the third
quarter and the first three quarters of fiscal 1996, compared to
14% and 15%, respectively, in the corresponding periods of fiscal
1995. The absolute spending increase in fiscal 1996 reflects
increased direct expenses for the expanding sales force, increased
marketing expenses for promotions and advertising, and increased
administrative and legal expenses.
Income Taxes
The Company's effective tax rate was 31.5% for the third quarter
and first three quarters of fiscal 1996 and fiscal 1995. The
31.5% annual effective tax rate is less than the U.S. federal
statutory rate primarily because of the research and development
tax credit.
Liquidity and Capital Resources
The Company generated approximately $53.3 million of cash and cash
equivalents in its operating activities during the first three
quarters of fiscal 1996, and approximately $51.9 million during
the comparable period of fiscal 1995. The increase was primarily
caused by increased income from operations and an increase in the
non-cash effect of depreciation and amortization offset largely by
the net change in operating assets and liabilities.
The Company used $106.5 million in cash in investing activities
during the first three quarters of fiscal 1996, and $150.9 million
during the comparable period of fiscal 1995. Short-term
investments were the principal investing activities generating or
using cash along with additions to property and equipment and cash
used in joint venture arrangements.
Financing activities provided $80.7 million in cash during the
first three quarters of fiscal 1996 and $6.5 million during the
comparable period of fiscal 1995. Borrowings on equipment loans
and proceeds from the issuance of Common Stock were the principal
financing activities generating cash.
Cash, cash equivalents and short-term investments decreased $8.4
million from $187.0 million at April 1, 1995, to $178.6 million at
December 30, 1995. During the same period accounts receivable and
inventories increased $35.7 million and $63.8 million,
respectively, and accounts payable, accrued salaries and benefits,
income taxes payable and other accrued liabilities increased $93.7
million. The increases in inventory, accounts payable and accrued
liabilities are associated with the slowdown in the Company's
operations.
During September 1994, the Company and IBM completed a series of
agreements pertaining to joint manufacturing. In January 1995,
under the terms of the agreements, a new joint venture (MiCRUS)
began manufacturing semiconductor wafers for each parent company.
In January 1995, MiCRUS leased approximately $145 million of wafer
fabrication and infrastructure equipment pursuant to a lease
guaranteed jointly and severally by the Company and IBM. As part
of the initial agreement, Cirrus Logic committed to pay $36
million as a cash contribution of which $14 million has been paid.
In addition, Cirrus Logic and IBM each committed to provide MiCRUS
with approximately $100 million of additional capital, primarily
through lease financing, of which the final $30 million will be
provided by the Company in the fourth quarter of fiscal 1996.
In March 1995, IBM and the Company agreed to a $120 million
expansion of MiCRUS, of which Cirrus Logic committed to provide
$60 million in financing. The Company expects to use equipment
leases or lease guarantees to fulfill its financing commitment.
This expansion is expected to be in full production in fiscal
1997.
In addition, in October 1995, the Company committed to provide a
further $198 million to fund a second expansion of MiCRUS and to
support the migration to sub 0.5 micron process technology. Of
this amount the Company expects to spend $33 million in cash for
facilities and to provide equipment lease guarantees for the
balance. IBM has until February 15, 1996 to provide up to half of
the $198 million of the Company's commitment in order to obtain up
to half of the additional wafer capacity from the MiCRUS
expansion.
In October 1995, the Company also concluded agreements with AT&T
to form a joint venture to build additional wafer production
capacity in an existing facility in Orlando, Florida owned by
AT&T. The agreements with AT&T obligate the Company to provide
$420 million in financing. The Company expects to finance $280
million of this amount through lease or lease guarantees. Of the
$140 million balance, the Company will contribute $35 million in
installments over a three-year period and pay $105 million in
installments over a four-year period. The payment of $105 million
will be charged to the Company's cost of sales over the life of
the venture based upon the ratio of current units of production to
current and anticipated future units of production.
The Company has entered into a volume purchase agreement with TSMC
under which the Company has agreed to make advance payments to
TSMC of approximately $118 million, one-half in 1997 and one-half
in 1998. The Company also has concluded an agreement with UMC
which provides for a $90 million equity investment by the Company
during fiscal 1996 and 1997. The Company has recently initiated
discussions with UMC about rescheduling the project and postponing
the Company's investment. The Company completed a memorandum of
understanding in December 1995 with Digital Equipment
Corporation to enter into a semiconductor manufacturing
relationship to produce wafer products at Digital's state-of-the-
art Fab 6 facility in Hudson, Massachusetts. The Company is
evaluating this proposed venture in light of the current market
conditions.
The Company estimates that its total financial obligations for the
IBM, AT&T, UMC and TSMC transactions (excluding future wafer
purchases) may total $92 million in the remainder of fiscal 1996,
$480 million in fiscal 1997 and $240 million in the following
three years. The Company intends to obtain most of the
necessary capital through equipment lease financing and the
balance through a combination of debt and/or equity financing,
lease guarantees and cash generated from operations.
In addition to its investments in the various external
manufacturing ventures, the Company estimates that capital
expenditures for its own facilities, testing and other equipment
may total $600 to $700 million through fiscal 2000. The Company
expects to finance seventy to eighty percent of these capital
expenditures through equipment lease or loan financing. The
Company's future capital requirements also include financing the
growth of working capital items such as accounts receivable and
inventory. In addition, the Company has acquired technology
companies in the past and may do so in the future. Such potential
transactions may require substantial capital resources, which may
require the Company to seek additional debt or equity financing.
There can be no assurance that financing will be available or, if
available, will be on satisfactory terms. Failure to obtain
adequate financing would restrict the Company's ability to expand
its manufacturing infrastructure, to make other investments in
capital equipment, and to pursue other initiatives.
The Company has a revolving bank line of credit for up to a
maximum of $135 million, available through March 31, 1996, at the
bank's prime rate or, upon request of the Company, on the basis of
any or several Eurodollar rates plus a margin. As of December 30,
1995, there were no outstanding extensions under the facility
other than letter of credit instruments of approximately $43.4
million. The Company is now negotiating with the same bank for
a significant revolving line of credit. There is no assurance
that a final agreement will be reached.
Management continues to evaluate other possibilities for
additional financing. There is no assurance that financing will
be available or, if available, will be on satisfactory terms.
Future Operating Results
Quarterly Fluctuations
Revenues for the fourth quarter of fiscal 1996 are expected to
decline compared to the third quarter ended December 30, 1995.
The decline in revenues and other factors are expected to result
in a loss from operations in the fourth quarter.
A number of factors are causing revenues to decline from earlier
expectations. Sales of the Company's newest graphics product, a
64-bit video accelerator, and the Company's newest audio product,
the CS4236, are lower than expected because the rate of transition
from design to volume production has proceeded more slowly than
expected and because customers have been slow to ramp production
of their new products which incorporate these products. Sales of
the Company's v.32bis fax/modem products have declined because of
the slowdown in the home PC market which resulted in excess
inventories of such products. Additionally, the market is
transitioning from a v.32bis to a v.34 standard, and customers
are reducing their purchases of v.32bis products faster than
expected. Demand for PicoPower core logic products also dropped
substantially in the last month. In addition, sales of certain
other products have been slower than expected.
The decline in revenues will affect earnings directly. In
addition, the lower than expected sales primarily involve products
scheduled for production at MiCRUS, and this is causing the
Company to reduce its wafer production from MiCRUS during the
fourth quarter, which negatively affected primarily the third
quarter of fiscal 1996. Since MiCRUS has substantial fixed costs which
must be allocated to the wafer production, this capacity variance
may significantly increases the cost per wafer and could adversely
affect gross margin and earnings during the fourth quarter.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially
from quarter to quarter in the future. The Company's operating
results are affected by a wide variety of factors, many of which
are outside of the Company's control, including but not limited
to, economic conditions and overall market demand in the United
States and worldwide, the Company's ability to introduce new
products and technologies on a timely basis, changes in product
mix, fluctuations in manufacturing costs which affect the
Company's gross margins, declines in market demand for the
Company's and customers' products, sales timing, the level of
orders which are received and can be shipped in a quarter, the
cyclical nature of both the semiconductor industry and the markets
addressed by the Company's products, product obsolescence, price
erosion, and competitive factors. The Company's operating results
in the fourth quarter and in fiscal 1997 are likely to be affected
by these factors as well as others.
The Company must order wafers and build inventory well in advance
of product shipments. Because the Company's markets are volatile
and subject to rapid technology and price changes, there is a risk
that the Company will forecast incorrectly and produce excess or
insufficient inventories of particular products. This inventory
risk is heightened because many of the Company's customers place
orders with short lead times and because sales to these customers
have increased as a percentage of total sales, particularly for
certain graphics and audio products. In the third quarter, these
factors caused the Company to produce excess inventories of
particular products, and the Company's revenues and earnings were
adversely affected. In the fourth quarter of fiscal 1996, as it
has been in the past, a significant portion of the Company's
revenues from graphics and audio products is dependent on sales to
customers who place orders with short lead times for delivery in
the quarter. These factors increase not only the inventory risk
but also the difficulty of forecasting quarterly operating
results. Moreover, as is common in the semiconductor industry,
the Company frequently ships more product in the third month of
each quarter than in either of the first two months of the
quarter, and shipments in the third month are higher at the end of
that month. The concentration of sales in the last month of the
quarter contributes to the difficulty in predicting the Company's
quarterly results of operations.
The Company's products are in various stages of their product life
cycles. The Company's success is highly dependent upon its
ability to develop complex new products, to introduce them to the
marketplace ahead of the competition, and to have them selected
for design into products of leading system manufacturers. These
factors have become increasingly important to the Company's
results of operations because the rate of change in the markets
served by the Company continues to accelerate. Since product life
cycles are continually becoming shorter, revenues may be affected
quickly if new product introductions are delayed or if the
Company's products are not designed into the Company's customers'
successive generations of products.
The Company's gross margins also will depend on the Company's
success at introducing new products quickly and effectively
because the gross margins of semiconductor products decline as
competitive products are introduced. Gross margins for certain
audio products have already declined while such products have been
delayed and gross margins for certain older fax/data/modem
products have declined in response to the announcement and
introduction of newer products. Also, the Company must deliver
product to customers according to customer schedules. Delays in
new product introductions could affect revenues and gross margins
for current and follow-on products if customers shift to
competitors to meet their requirements.
Issues Relating to Manufacturing and Manufacturing Investment
During the first two quarters of fiscal 1996, the Company's sales
were constrained by its inability to obtain sufficient sources of
wafer supply to meet customer demand. This situation changed
during the third quarter of fiscal 1996, partly due to the reduced
rate of growth, and partly due to increases in output from MiCRUS.
In the third fiscal quarter, manufacturing supply exceeded demand
for certain of the Company's products.
Although the Company believes that its efforts to increase its
source of wafer supply through joint ventures and other
arrangements have significant potential benefits to the Company,
there are also risks. These arrangements reduce the Company's
flexibility to reduce the amount of wafers it is committed to
purchase and increase the Company's fixed manufacturing costs as a
percentage of overall costs of sales. As a result, the operating
results of the Company are becoming more sensitive to fluctuations
in revenues. In the case of the Company's joint ventures,
overcapacity results in underabsorbed fixed cost, which adversely
affects gross margins and earnings, just as underabsorbed MiCRUS
fixed cost has affected the Company's earnings in the
third quarter of fiscal 1996. In the case of the Company's "take
or pay" contracts with foundries, the Company must pay contractual
penalties if it fails to purchase its minimum commitments.
Moreover, the Company will benefit from the MiCRUS and AT&T joint
ventures only if they are able to produce wafers at or below
prices generally prevalent in the market. If, however, either of
these ventures is not able to produce wafers at competitive
prices, the Company's results of operations will be materially
adversely affected. The process of beginning production at and
increasing volume with the joint ventures inevitably involves
risks, and there can be no assurance that the manufacturing costs
of such ventures will be competitive. Additional risks include
the timely development of products, unexpected disruptions to the
manufacturing process, the difficulty of maintaining quality and
consistency, particularly at the smaller submicron levels,
dependence on equipment suppliers and technological obsolescence.
As a participant in manufacturing joint ventures and as an
investor in the company being formed by UMC, the Company also will
share in the risks encountered by wafer manufacturers generally,
including being subject to a variety of foreign, federal, state
and local governmental regulations related to the discharge and
disposal of toxic, volatile or otherwise hazardous materials used
in the manufacturing process. Any failure by the Company to
control the use of, or to restrict adequately the discharge of,
hazardous materials by the joint ventures under present or future
regulations could subject it to substantial liability or could
cause the manufacturing operations to be suspended. In addition,
the Company could be held financially responsible for remedial
measures if any of the joint venture manufacturing facilities were
found to be contaminated whether or not the Company or the joint
venture was responsible for such contamination.
The Company will not be in direct control of the joint ventures or
of the wafer manufacturing companies in which it invests. The
Company is dependent on the joint venture management and/or its
joint venture partners for the operation of the new manufacturing
facilities, including the hiring of qualified personnel. In
addition, the manufacturing processes and policies undertaken by
each manufacturing joint venture may not be optimized to meet the
Company's specific needs and products. If the joint ventures are
unable to manage the operations effectively, their ability to
implement state-of-the-art manufacturing processes, to produce
wafers at competitive costs, and to produce sufficient output
could be adversely affected. Also, the Company's joint venture
partners may enter into contractual or licensing agreements with
third parties, or may be subject to injunctions arising from
alleged violations of third party intellectual property rights,
which could restrict the joint venture from using particular
manufacturing processes or producing certain products.
The increase in the Company's wafer supply arrangements could
strain the Company's management and engineering resources. This
strain on resources could be exacerbated by the geographic
distances between the Company's headquarters and the various wafer
production facilities. There can be no assurance that the Company
will be able to hire additional management, engineering and other
personnel as needed, to manage its expansion programs effectively
and to implement new production capacity in a timely manner and
within budget.
The Company believes other manufacturers are also expanding or
planning to expand their fabrication capacity over the next
several years. There can be no assurance that the industry's
expansion of wafer production will not lead to overcapacity. If
this were to occur, the market price for wafers sold by third
party foundries could decline, and the wafers produced by the
Company's joint ventures could become more costly relative to
prevailing market prices.
Additionally, certain provisions of the MiCRUS and AT&T agreements
may cause the termination of the joint venture in the event of a
change in control of the Company. Such provisions could have the
effect of delaying, deferring or preventing a change of control of
the Company.
In connection with the financing of its expansion, the Company
will borrow money. Such indebtedness could cause the Company's
principal and interest obligations to increase substantially.
Moreover, as a consequence of existing wafer supply related
transactions, the Company's obligations under guarantees,
investment commitments and take or pay arrangements also will
increase substantially. The degree to which the Company will be
leveraged could adversely affect the Company's ability to obtain
additional financing for working capital, acquisitions or other
purposes and could make it more vulnerable to industry downturns
and competitive pressures. The Company's ability to meet its debt
service and other obligations will be dependent upon the Company's
future performance, which will be subject to financial, business
and other factors affecting the operations of the Company, many of
which are beyond its control. An inability to obtain financing to
meet these obligations could cause the Company to default on such
obligations.
Most of the Company's wafers are currently manufactured to the
Company's specifications by outside merchant wafer suppliers.
Although the Company has increased its future wafer supplies from
manufacturing joint ventures, the Company expects to continue to
purchase a majority of its wafers from, and to be reliant upon,
outside merchant wafer suppliers for at least the next two years
although the number of suppliers it uses may diminish. The
decrease in the number of suppliers used by the Company could
adversely affect the Company's ability to obtain wafers from third
party suppliers in the event the Company faces unanticipated
shortfalls in supply.
The Company also uses other outside vendors to package the wafer
die into integrated circuits. The Company's reliance on these
outside suppliers involves several risks, including the absence of
adequate availability of certain process technologies, or control
over delivery schedules, manufacturing yields, quality, and costs.
Although wafer supplies in general are expected to be sufficient
to meet expected demand in the fourth quarter, the Company's
results of operations could be adversely affected if particular
suppliers are unable to provide a sufficient and timely supply of
product, whether because of raw material shortages, capacity
constraints, unexpected disruptions at the plants, delays in
qualifying new suppliers or other reasons, or if the Company is
forced to purchase wafers from higher cost suppliers or to pay
expediting charges to obtain additional supply, or if the Company's
test facilities are disrupted for an extended period of time. The
Company's wafer supply also could be adversely affected if the
Company's suppliers are subject to injunctions arising from alleged
violations of third party intellectual property rights. The
enforcement of such an injunction could impede a supplier's ability
to provide wafers, components, or packaging services to the Company.
Because of the concentration of sales at the end of each quarter, a
disruption in the Company's production or shipping near the end of a
quarter could materially reduce the Company's revenues for that
quarter. Moreover, the Company's flexibility to move production from
another wafer manufacturing facility can be limited because such a
move can require significant re-engineering, which may take several
quarters. Accordingly, production may be constrained even though
capacity is available at one or more wafer manufacturing facilities.
In addition, the Company could encounter supply shortages in fiscal
1997 if sales grew substantially. Any supply shortage could
adversely affect sales and operating profits. Net sales and gross
margin also could be adversely affected if the Company receives
orders for large volumes of products to be shipped within short
periods and if the Company's product testing capacity is not adequate
to process such volumes.
The greater integration of functions and complexity of operations
of the Company's products also increase the risk that latent
defects or subtle faults could be discovered by customers or end
users after volumes of product have been shipped. If such defects
were significant, the Company could incur material recall and
replacement costs for product warranty.
Dependence on PC Market
Sales of most of the Company's products depend largely on sales of
personal computers (PCs). The growth in the PC market and the
growth in the market share enjoyed by the Company's PC OEM
customers was exceptionally strong during fiscal 1995 and the
first two quarters of 1996. However, certain of the Company's PC
OEM customers and their subcontractors experienced lower sales and
slower growth in the third quarter of fiscal 1996, apparently due
to less than anticipated consumer demand for certain products.
This led to an inventory correction by the PC and peripheral
device manufacturers, which resulted in a decline in demand for
products to be shipped in the third fiscal quarter and in the
Company's revenues. Some of the PC and peripheral device
manufacturers now have excess inventories of certain products
and/or product components which include the Company's graphics,
audio, and fax/modem products, which is expected to reduce demand
for the Company's products in the fourth fiscal quarter.
The reduced growth in the PC market, and any further reduction,
also could affect the financial health of a number of the
Company's customers, which could affect the Company's ability to
collect outstanding accounts receivable from these customers.
Product life cycles in the PC market are continually growing
shorter. As new products are introduced, there may be increases
in demand for new components. Shortages of key components could
constrain overall sales of PCs and thus indirectly constrain sales
of the Company's products.
In the third quarter, sales of certain of the Company's products
were dependent to a great degree on key customers, including
Intel, who supply motherboards to PC manufacturers, and on PC
manufacturers associated with the consumer marketplace. A number
of PC OEMs buy products directly from the Company and also buy
motherboards from Intel or other suppliers who in turn buy
products from the Company. Accordingly, a significant portion of
the Company's sales may depend directly or indirectly on the sales
to a particular PC OEM. This turned out to be the case in the
third quarter of fiscal 1996. Since the Company cannot track
sales by the motherboard manufacturers, however, the Company may
not be fully informed as to the extent or even the fact of its
indirect dependence on any particular PC OEM, and, therefore, may
be unable to assess the risk of such indirect dependence.
Increasing dominance of the PC motherboard or PC market by any one
customer increases the risks that the Company could experience
intensified pressure on product pricing and unexpected changes in
customer orders as a result of changes in the customers' market
share. Moreover, the Company's production schedules are based not
only on customer orders, but also on forecasted demand. These
issues may contribute to increasing volatility in the Company's
PC-related products, and thus may increase the risk of rapid
changes in revenues, margins, and earnings. Furthermore, the
intense price competition in the PC industry is expected to
continue to put pressure on the price of all PC components. Other
IC makers, including Intel, have expressed their interest in
integrating some multimedia or communications functions into their
microprocessor products. Successful integration of these
functions could reduce the Company's opportunities for IC sales in
these areas. As a component supplier to PC OEMs and to peripheral
device manufacturers, the Company is likely to experience a
greater magnitude of fluctuations in demand than the Company's
customers themselves experience. In addition, many of the
Company's products are used in PCs for the consumer market, and
the consumer PC market is more volatile than other segments of the
PC market.
Issues Relating to Graphics Products
Historically, the Company has had a large share of the market for
desktop graphics controllers and graphics accelerators. However,
the Company's market share as a percentage of the total market
declined in the third quarter of fiscal 1996.
Two-dimensional ("2D") graphics accelerators have replaced graphics
controllers as the mainstream PC graphics products. The market is
now changing to require accelerated graphics and video and,
eventually, 3D acceleration capability. The Company is
striving to bring products to market for these needs, but there
is no assurance that it will succeed in doing so in a timely
manner. If these products are not brought to the market in a
timely manner or do not address the market needs or cost or
performance requirements, then net sales would be adversely
affected.
The Company continues to experience intense competition in the
sale of graphics products. Several competitors recently
introduced products and adopted pricing strategies that have
increased competition in the desktop graphics market. These
competitive factors affected the Company's market share, gross
margins, and earnings. These factors may further adversely affect
revenues and gross margins for graphics accelerator products in
the future.
The Company has preliminary design wins for certain graphics
products expected to begin shipping in the fourth quarter of
fiscal 1996. Although the Company has conducted extensive testing
of the products and has released the products for volume
production, the Company's customers have not completed their own
testing and evaluation of the products. If as yet unseen bugs are
discovered or if the units were to perform poorly in customer
evaluations, key customers could decide not to use these products
in their own designs rather than risking the delay of their own
product introductions. In such event, revenues from the sale of
graphics products could be adversely affected.
Issues Relating to Audio Products
Most of the Company's revenues in the multimedia audio market
derive from the sales of 16-bit audio codecs and integrated 16-bit
codec plus controller solutions for the consumer PC market. In
the third quarter of fiscal 1996 revenues from audio products
declined against the prior quarter.
Due to the heavy concentration of multimedia PCs in the consumer
market, to be successful, an audio product must be compatible with
the new and existing software games that dominate consumer
multimedia PC usage. These games typically require 16-bit audio,
a SoundBlaster compatible audio controller and FM synthesis
emulation. Due to the price sensitive nature of the consumer PC
market, the market is moving from multi-chip solutions to
solutions that provide the codec, controller and synthesis
integrated into a single IC. If the Company is unable to provide
or is late to market with these highly integrated solutions, or if
its solutions are not compatible with new and existing software,
the Company could lose market share.
Revenues from the sale of audio products in the fourth quarter of
fiscal 1996 and in fiscal 1997 are likely to be significantly
affected by the success of a recently announced fully-integrated,
single-chip audio IC. The product has not yet passed customer
qualification and acceptance. If there are as yet unseen bugs or
if the product is not qualified and accepted by customers in time
for volume shipments in the fourth quarter of fiscal 1996,
revenues and gross margins from the sale of audio products could
be significantly impaired. The rate of transition from design into
production is proceeding slower than the Company had expected, and
customers have been slow to ramp production of their new products.
Moreover, the recent introduction of a fully-integrated
single-chip audio IC and aggressive pricing by competitors is
resulting in pricing pressures which are likely to adversely affect
the Company's revenues and gross margins from the sale of audio
products.
Issues Relating to Mass Storage Market
The disk drive market has historically been characterized by a
relatively small number of disk drive manufacturers and by periods
of rapid growth followed by periods of oversupply and contraction.
Additionally, growth in the mass storage market is directly
affected by growth in the PC market. To the extent the PC market
growth slows, disk drive demand would decline, directly impacting
demand for the Company's mass storage products. As a result,
suppliers to the disk drive industry experience large and sudden
fluctuations in product demand. Furthermore, the price
competitive nature of the disk drive industry continues to put
pressure on the price of all disk drive components.
The Company's mass storage revenues are derived primarily from
sales of disk drive controllers and more recently, from read
channel chips and CD-ROM drive controllers. Future mass storage
revenues will be heavily dependent on the acceptance and
qualification of new generations of controllers and read channel
chips by the Company's customers.
Recently the disk drive industry has become more consolidated.
Such consolidation, which is continuing, reduces the number of
customers for the Company's mass storage products and may increase
the desire of customers to source their components internally.
Revenues from the sale of mass storage products could be affected
in various ways as a result of the merger between Seagate and
Conner Peripherals. In the short term, the combined Seagate/Conner
entity could elect to eliminate overlapping disk drive product
offerings. Such a development could sharply reduce or increase
its demand for the Company's ICs depending on whether the
discontinued disk drive products do or do not use the Company's
ICs. Such a development also would increase the risk that the
Company builds excess inventory of ICs for the disk drives that
are suddenly discontinued or builds insufficient inventory and is
unable to meet demand for ICs for the disk drives that are
retained. In the long term, the greater size of the combined
entity may increase its ability to rely on internal sourcing of
components, which could reduce demand for the Company's products.
Revenues from the sale of mass storage products also could be
affected by the adoption rate of Windows 95. There remains some
uncertainty in the market place regarding the timing of demand for
disk drive storage capacity by end users as they decide whether or
not to purchase this new operating system. If disk drive
manufacturers incorrectly forecast demand, they may make
sudden and dramatic changes in disk drive product mix, which
increases the risk that the Company will produce excess or
insufficient inventories of various products.
Issues Relating to Wireless and Other Communication Products
Sales of the Company's Cellular Digital Packet Data ("CDPD")
products commenced during the quarter ended October 1, 1994.
Since that time the Company's subsidiary, PCSI, has sold over
3,500 base stations to customers building CDPD communications
infrastructure in anticipation of a developing market for CDPD
wireless data services. Future CDPD revenues will depend primarily
on the sale of subscriber units, modules and components. If the
CDPD market does not develop, or the Company's CDPD products are
not competitive with those being introduced by other suppliers,
then future revenues and earnings would be adversely affected.
Sales of digital cordless phone products, which were developed by
PCSI for the Japanese Personal Handyphone System ("PHS") market,
will depend upon the establishment of infrastructure and services
which are beyond PCSI's control. If PCSI is unsuccessful or
delayed in developing next generation chip sets for the PHS
market, future chip set sales could decline rapidly. All sales
are being conducted through the Company's Japanese marketing
partner which limits the Company's gross margins for its PHS
products. Sales of the current generation chip sets will decrease
during the fourth quarter of fiscal 1996 and the first quarter of
fiscal 1997 as PCSI's customer adjusts inventory supply to meet
manufacturing requirements. The same customer is currently in
discussions with PCSI regarding the next generation PHS chip
set. While PCSI is actively seeking this customer and other
customers for its next generation product, if PCSI is not
successful in developing and marketing the product then net sales,
gross margin and earnings would be adversely affected.
The Company expects a further decline in demand for and revenue
from the sale of fax/data/modem IC products as customers use
existing inventories of v.32bis product and as the market
transitions to v.34 products. The Company does not expect to begin
shipping v.34 fax/data/modem products until late in the first
quarter of fiscal 1997.
The Company's PCSI subsidiary was awarded a multi-million dollar
contract from AT&T Wireless Services, Inc. to develop and supply
base station equipment for the newly announced pACT (Personal Air
Communications Technology) network. PCSI was co-developer of this
narrowband PCS technology for next-generation wireless two-way
messaging. PCSI also announced that it expects to develop pACT
two-way messaging subscriber units as well as pACT chip sets for
original equipment manufacturers. Future pACT revenues and
earnings depend on PCSI's ability to develop and market competitive
products. If the pACT messaging market does not develop, or
PCSI's pACT products are not competitive with those being
introduced by other suppliers, then future revenues and earnings
would be adversely affected.
The Company's development of new technology in the wireless
communications business faces major challenges and risks which
could adversely affect the Company's results of operations.
Continued investment in research and development in technology for
which a market does not emerge could adversely affect the
Company's net sales, gross margin and earnings. Moreover,
investment in technology which proves incompatible with market
standards could impede the Company's ability to participate in
such markets. In addition, the timing and direction of the future
market development in this area could depend heavily on the
decisions of government regulators, which are subject to
significant delays and are outside of the Company's control. The
Company's competitors in wireless markets include some of the
world's largest, most successful and most technologically advanced
companies and there is no assurance that the Company will be able
to compete successfully.
Intellectual Property Matters
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The
Company and certain of its customers from time to time have been
notified that they may be infringing certain patents and other
intellectual property rights of others. In addition, customers
have been named in suits alleging infringement of patents by
customer products. Certain components of these products have been
purchased from the Company and may be subject to indemnification
provisions made by the Company to the customers. The Company has
not been named in any such suits. Although licenses are generally
offered in situations where the Company or its customers are named
in suits alleging infringement of patents or other intellectual
property rights, there can be no assurance that litigation will
not be commenced in the future regarding patents, mask works,
copyrights, trademarks, trade secrets, or indemnification
liability, or that any licenses or other rights can be obtained on
acceptable terms. Because successive generations of the
Company's products tend to offer an increasing number of
functions, there is a likelihood that more of these claims will
occur as the products become more highly integrated. The Company
cannot accurately predict the eventual outcome of any suit or
other alleged infringement of intellectual property. An
unfavorable outcome occurring in any such suit could have an
adverse effect on the Company's future operations and/or
liquidity. Furthermore, efforts of defending the Company against
future lawsuits, if any, could divert a significant portion of the
Company's financial and management resources.
Foreign Operations and Markets
Because many of the Company's subcontractors and several of the
Company's key customers, which customers collectively account for
a significant percentage of the Company's revenues, are located in
Japan and other Asian countries, the Company's business is subject
to risks associated with many factors beyond its control.
International operations and sales may be subject to political and
economic risks, including political instability, currency
controls, exchange rate fluctuations, and changes in import/export
regulations, tariff and freight rates. Although the Company buys
hedging instruments to reduce its exposure to currency exchange
rate fluctuations, the Company's competitive position can be
affected by the exchange rate of the U.S. dollar against other
currencies, particularly the Japanese yen. In addition, various
forms of protectionist trade legislation have been proposed in the
United States and certain other countries. Any resulting change
in current tariff structures or other trade and monetary policies
could adversely affect the Company's international operations.
There can be no assurance that the political and economic risks to
which the Company is subject will not result in customers of the
Company defaulting on payments due to the Company or in the
reduction of potential purchases of the Company's products.
Competition
The Company's business is intensely competitive and is
characterized by new product cycles, price erosion, and rapid
technological change. Competition typically occurs at the design
stage, where the customer evaluates alternative design approaches
that require integrated circuits. Because of shortened product
life cycles and even shorter design-in cycles, the Company's
competitors have increasingly frequent opportunities to achieve
design wins in next generation systems. In the event that
competitors succeed in supplanting the Company's products, the
Company's market share may not be sustainable and net sales, gross
margin, and earnings would be adversely affected. Competitors
include major domestic and international companies, many of which
have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing
and distribution of their products. Emerging companies are also
increasing their participation in the market, as well as customers
who develop their own integrated circuit products. Competitors
include manufacturers of standard semiconductors, application
specific integrated circuits and fully customized integrated
circuits, including both chip and board-level products. The
ability of the Company to compete successfully in the rapidly
evolving area of high-performance integrated circuit technology
depends significantly on factors both within and outside of its
control, including but not limited to, success in designing,
manufacturing and marketing new products, wafer supply, protection
of Company products by effective utilization of intellectual
property laws, product quality, reliability, ease of use, price,
diversity of product line, efficiency of production, the pace at
which customers incorporate the Company's integrated circuits into
their products, success of the customers' products and general
economic conditions. Also the Company's future success depends,
in part, upon the continued service of its key engineering,
marketing, sales, manufacturing, support and executive personnel,
and on its ability to continue to attract, retain and motivate
qualified personnel. The competition for such employees is
intense, and the loss of the services of one or more of these key
personnel could adversely affect the Company. Because of this and
other factors, past results may not be a useful predictor of future
results.
Part II. Other Information
Item 1. Legal Proceedings
Between November 7 and November 21, 1995, five shareholder class
action lawsuits were filed in the United States District Court for
the Northern District of California against the Company and several
of its officers and directors. The lawsuits allege violations of
the federal securities laws in connection with the announcement by
Cirrus Logic on November 7, 1995 that a major customer discontinued
orders for the Company's graphics and audio products. The complaints do
not specify the amounts of damages sought. By an order entered January
4, 1996, the Court consolidated the five above referenced actions
under one consolidated complaint. The amended consolidated
complaint is to be filed later in February 1996. The Company
believes that the allegations of the complaint are without merit,
and the Company intends to defend itself vigorously. The Company
believes that the ultimate resolution of this matter will not have a
material adverse effect on its financial position, results of
operations, or cash flows.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 11 Statement re: Computation of Earnings per share
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K
None.
<PAGE>
CIRRUS LOGIC, INC.
SIGNATURES
Pursuant to the requirement 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.
CIRRUS LOGIC, INC.
(Registrant)
February 13, 1996 /s/ Sam S. Srinivasan
Date Sam S. Srinivasan
Senior Vice President, Finance and
Administration, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
February 13, 1996 /s/ Michael L. Hackworth
Date Michael L. Hackworth
President, Chief Executive Officer
and Director (Principal Executive Officer)
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
Part II. Other information, Item 6a.
Exhibit 11
CIRRUS LOGIC, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<CAPTION>
Quarter Ended Three Quarters Ended
Dec. 30, Dec. 31, Dec. 30, Dec. 31,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 63,273 59,694 62,409 59,501
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method N/A 3,602 7,020 3,908
Common stock warrants, using treasury
stock or modified treasury stock method - 4 8 6
--------- --------- --------- ---------
Common and common equivalent shares used in
the calculation of net income per share 63,273 63,300 69,437 63,415
========= ========= ========= =========
Net (loss) income ($3,601) $14,482 $52,173 $42,495
========= ========= ========= =========
(Loss) earnings per share ($0.06) $0.23 $0.75 $0.67
========= ========= ========= =========
Fully diluted:
Weighted average shares outstanding 63,273 59,694 62,409 59,501
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method N/A 3,602 7,528 3,908
Common stock warrants, using treasury
stock or modified treasury stock method - 4 9 6
--------- --------- --------- ---------
Common and common equivalent shares used in
the calculation of net income per share 63,273 63,300 69,946 63,415
========= ========= ========= =========
Net (loss) income ($3,601) $14,482 $52,173 $42,495
========= ========= ========= =========
(Loss) earnings per share ($0.06) $0.23 $0.75 $0.67
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Mar-30-1996
<PERIOD-START> Apr-02-1995
<PERIOD-END> Dec-30-1995
<PERIOD-TYPE> 9-MOS
<CASH> 134,391
<SECURITIES> 44,231
<RECEIVABLES> 197,036
<ALLOWANCES> 0
<INVENTORY> 167,455
<CURRENT-ASSETS> 623,361
<PP&E> 176,034
<DEPRECIATION> 0
<TOTAL-ASSETS> 915,924
<CURRENT-LIABILITIES> 334,086
<BONDS> 0
0
0
<COMMON> 326,804
<OTHER-SE> 187,448
<TOTAL-LIABILITY-AND-EQUITY> 915,924
<SALES> 913,872
<TOTAL-REVENUES> 913,872
<CGS> 551,456
<TOTAL-COSTS> 551,456
<OTHER-EXPENSES> 289,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 76,163
<INCOME-TAX> 23,990
<INCOME-CONTINUING> 52,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,173
<EPS-PRIMARY> $0.75
<EPS-DILUTED> $0.75
</TABLE>
