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 June 29, 1996
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
64,662,644 as of June 29, 1996.
<PAGE>
<TABLE>
Part 1. Financial Information
Item 1. Financial Statements
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Quarter Ended
-------------------
June 29, July 1,
1996 1995
--------- ---------
<S> <C> <C>
Net sales $214,898 $300,269
Costs and expenses:
Cost of sales 132,407 177,689
Research and development 61,218 53,950
Selling, general and administrative 30,568 38,064
--------- ---------
Total costs and expenses 224,193 269,703
--------- ---------
(Loss) income from operations (9,295) 30,566
Interest and other (expense) income, net (1,341) 2,626
--------- ---------
(Loss) income before (benefit) provision for income taxes (10,636) 33,192
(Benefit) provision for income taxes (3,031) 10,455
--------- ---------
Net (loss) income ($7,605) $22,737
========= =========
Net (loss)income per common and common equivalent share ($0.12) $0.34
========= =========
Weighted average common and common
equivalent shares outstanding 64,159 67,775
========= =========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<CAPTION>
June 29, March 30,
1996 1996
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $112,224 $155,979
Short-term investments 12,219 19,279
Accounts receivable, net 127,542 133,718
Inventories 133,985 134,502
Deferred tax assets 53,622 52,662
Payments for joint venture equipment to be leased 115,930 94,683
Other current assets 5,915 4,004
--------- ---------
Total current assets 561,437 594,827
Property and equipment, net 171,763 170,248
Joint venture manufacturing agreements, net
and investment in joint ventures 105,405 104,463
Deposits and other assets 43,917 48,039
--------- ---------
$882,522 $917,577
========= =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Short-term borrowing $92,000 $80,000
Accounts payable and accrued liabilities 192,279 242,901
Accrued salaries and benefits 28,616 41,845
Obligations under equipment loans and
capital leases, current portion 27,891 26,575
Income taxes payable 34,171 20,863
--------- ---------
Total current liabilities 374,957 412,184
Obligations under equipment loans and
capital leases, non-current 72,642 71,829
Other long-term 4,906 4,898
Commitments and contingencies
Shareholders' equity:
Capital stock 338,530 329,574
Retained earnings 91,487 99,092
--------- ---------
Total shareholders' equity 430,017 428,666
--------- ---------
$882,522 $917,577
========= =========
<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>
Quarter Ended
-------------------
June 29, July 1,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operations:
Net (loss) income ($7,605) $22,737
Adjustments to reconcile net (loss) income to net
cash flows from operations:
Depreciation and amortization 22,826 12,752
Net change in operating assets and liabilities (66,913) (49,867)
--------- ---------
Net cash flows used by operations (51,692) (14,378)
--------- ---------
Cash flows from investing activities:
Purchase of short-term investments (2,008) (84,430)
Proceeds from sale of short-term investments 9,068 100,896
Additions to property and equipment (6,682) (29,037)
Joint venture manufacturing agreements and
investment in joint ventures (2,000) -
Increase in deposits and other assets (3,202) (5,588)
--------- ---------
Net cash flows used by investing activities (4,824) (18,159)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 7,777 12,506
Borrowings on short-term debt 92,000 41,000
Borrowings on long-term debt - 6,888
Payments on long-term debt and capital lease obligations (7,157) (3,459)
Payments on short-term debt (80,000) -
Increase in other long-term liabilities 141 -
--------- ---------
Net cash flows provided by financing activities 12,761 56,935
--------- ---------
(Decrease) increase in cash and cash equivalents (43,755) 24,398
Cash and cash equivalents - beginning of period 155,979 66,718
--------- ---------
Cash and cash equivalents - end of period $112,224 $91,116
========= =========
Supplemental disclosure of cash flow information:
Interest paid $2,634 $592
Income taxes (refunded) paid ($17,394) $872
Equipment purchased under capitalized leases $9,286 -
Tax benefit of stock option exercises $1,055 $5,976
<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
March 30, 1996, included in the Company's 1996 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 June 29, 1996, 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 June 29, 1996 approximate fair
market value.
During the quarter ended June 29, 1996, approximately $4.3 million
of securities classified as held-to-maturity as of March 30, 1996 were
sold for an immaterial loss. The securities sold were tax-advantaged
investments that the Company determined yielded less than other
securities it held at the time of sale. As of June 29, 1996, all
securities are classified as available-for-sale.
3. Inventories
Inventories are comprised of the following:
June 29, March 30,
1996 1996
--------- ---------
(In thousands)
Work-in-process $ 71,047 $ 69,244
Finished goods 62,938 65,258
--------- ---------
Total $ 133,985 $ 134,502
========= =========
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 foreign operating
results which are taxed at rates other than the U.S. statutory
rate and state research and investment tax credits.
5. Net (Loss) Income Per Common and Common Equivalent Share
Net (loss) 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 when appropriate. 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. Commitments and Contingencies
As of June 29, 1996, the Company is contingently liable for MiCRUS
equipment leases which have remaining payments of approximately
$309 million, payable through fiscal 2002.
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 hearing for the
defendants motions for summary judgment began on August 8, 1996.
The Company believes that the allegations of the complaint are
without merit, and the Company intends to defend itself vigorously.
The Company believes the likelihood is remote that the ultimate
resolution of this matter will 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 actions 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. A consolidated amended
complaint was filed on February 20, 1996 and an amended
consolidated supplemental complaint was filed on May 3, 1996.
This complaint alleges that certain statements made by defendants
during the period from July 23, 1995 through December 21, 1995 were
false and misleading and in violation of the federal securities
laws. The defendants' motion to dismiss the complaint are
currently scheduled for hearing on August 30, 1996. The complaint
does not specify the amounts of damages sought. The Company
believes that the allegations of the complaint are without merit,
and the Company intends to defend itself vigorously. The Company
believes the likelihood is remote that the ultimate resolution of
this matter will have a material adverse effect on its financial
position, results of operations or cash flows.
On February 21, 1996 a shareholder class action lawsuit was
filed in the Superior Court of California in and for the County of
Alameda against the Company and numerous fictitiously named
defendants alleged to be officers or agents of the Company. An
amended complaint, which added certain of the Company's officers
and directors as defendants, was filed on April 18, 1996. The
lawsuit alleges that certain statements made by the Company and
the individual defendants during the period from October 1, 1995
through February 14, 1996 were false and misleading and that
the defendants breached their fiduciary duties in making such
statements and violated California state common and statutory
law. The complaint does not specify the amounts of damages
sought. The Company believes that the allegations of the
complaint are without merit, and the Company intends to defend
itself vigorously. The Company believes the likelihood is remote
that the ultimate resolution of this matter will have a material
adverse effect on its financial position, results of operations or
cash flows.
7. Subsequent Events
During July 1996, the Company signed a definitive agreement with
National Semiconductor, Inc. for the sale of the PicoPower product
line. The final close is scheduled to occur in August and the
Company anticipates it will record a gain on the sale of approximately
$9 million in connection with the transaction.
On August 9, 1996, the Company completed the establishment of
Cirent Semiconductor, its partnership with Lucent Technologies for
wafer fabrication in Orlando, Florida.
<PAGE>
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This 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 March 30, 1996,
contained in the Annual Report to Shareholders on Form 10-K.
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 March 30, 1996, 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
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
Quarter Ended
-------------------
June 29, July 1, Percent
1996 1995 change
--------- --------- ----------
<S> <C> <C> <C>
Net sales 100% 100% -28%
Gross margin 38% 41% -33%
Research and development 28% 18% 13%
Selling, general and administrative 14% 13% -20%
(Loss) income from operations -4% 10% N/A
(Loss) income before income taxes -5% 11% N/A
(Benefit) provision for income taxes -1% 3% N/A
Net (loss) income -4% 8% N/A
</TABLE>
Net Sales
Net sales for the first quarter of fiscal 1997 were $214.9
million, a decrease of 28% from the $300.3 million reported for
the first quarter of fiscal 1996. Sales of mass storage products
increased in the first quarter of fiscal 1997 over the comparable
quarter in fiscal 1996, but the increase was more than offset by
decreases in net sales of graphics, audio and other products.
For the first quarter of fiscal 1997, export sales (including
sales to U.S.-based customers with manufacturing plants overseas)
were 65% of total sales compared to 61% for the corresponding
period in fiscal 1996.
The Company's sales are currently denominated primarily in U.S.
dollars. The Company may enter into foreign currency forward
exchange and option contracts to hedge certain of its foreign
currency exposures.
Sales to Seagate and Compaq were each approximately 10% of net
sales during the first quarter of fiscal 1997. No other customers
accounted for 10% or more of sales during the first quarter of
fiscal 1997 or fiscal 1996.
Gross Margin
The gross margin was 38% in the first quarter of fiscal 1997,
compared to 41% for the first quarter of fiscal 1996. The gross
margin decline was the result, in part, of sales of older products
with prices lower relative to prices in the first quarter of
fiscal 1996.
Research and Development
Research and development expenditures increased $7.3 million over
the first quarter of fiscal 1996 to $61.2 million in the first
quarter of fiscal 1997. The expenditures were approximately 28%
of net sales in the first quarter of fiscal 1997 compared to 18%
in the comparable period of fiscal 1996. 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 and expects these
expenditures will continue to increase through fiscal 1997 in
absolute terms.
Selling, General and Administrative Expenses
Selling, general and administrative expenses represented
approximately 14% and 13% of net sales in the first quarter of
fiscal 1997 and fiscal 1996, respectively. The absolute spending
decrease in fiscal 1997 reflects reduced compensation expenses,
decreased marketing expenses for promotions and advertising, and
decreased administrative expenses.
Income Taxes
The Company's effective tax rate was 28.5% for the first quarter
of fiscal 1997, as against 31.5% for the first quarter of fiscal
1996. The 28.5% estimated annual effective tax rate is less than
the U.S. federal statutory rate of 35%, and less than the
effective tax rate of 31.5% for the first quarter of fiscal 1996,
primarily because of foreign operating results which are taxed at
rates other than the U.S. statutory rate and state research and
investment tax credits.
The estimated effective tax rate for fiscal 1997 of 28.5% is
different than the annual effective tax rate of 13.3% for fiscal
1996 primarily because of certain operating losses incurred by the
Company in fiscal 1996 for which minimal tax benefits were
recognized.
Liquidity and Capital Resources
The Company used approximately $51.7 million of cash and cash
equivalents in its operating activities during the first quarter
of fiscal 1997 as compared to approximately $14.4 million during
the first quarter of fiscal 1996. The increased use of cash was
primarily caused by the loss from operations and the net change in
operating assets and liabilities offset somewhat by an increase in
the non-cash effect of depreciation and amortization.
The Company used $4.8 million in cash in investing activities
during the first quarter of fiscal 1997, and $18.2 million during
the comparable period of fiscal 1996. The Company reduced short-
term investment activities along with additions to property and
equipment during fiscal 1997.
Financing activities provided $12.8 million in cash during the
first quarter of fiscal 1997 and $56.9 million during the
comparable period of fiscal 1996. Net short-term borrowings
decreased and payments on long-term debt and capital lease
obligations increased during the first quarter of fiscal 1997.
Cash, cash equivalents and short-term investments decreased $50.9
million from $175.3 million at March 30, 1996, to $124.4 million
at June 29, 1996. During the same period accounts receivable and
inventories decreased $6.2 million and $0.5 million, respectively,
and accounts payable, accrued salaries and benefits, income taxes
payable and other accrued liabilities decreased $50.5 million.
The decreases in accounts receivable, inventory, accounts payable
and accrued liabilities are associated with the slowdown in the
Company's operations.
The semiconductor industry is extremely capital intensive. To
remain competitive, the Company must continue to invest in
advanced wafer manufacturing and in test equipment. The Company
estimates that its total financial obligations for the IBM, Lucent
Technologies, UMC and TSMC transactions (excluding wafer
purchases) may total $438 million in fiscal 1997 and $397 million
in the following three fiscal years. The Company intends to
obtain most of the necessary capital through direct or guaranteed
equipment lease financing and the balance through debt and/or
equity financing, and cash generated from operations.
In addition to its investments in the various external
manufacturing arrangements, the Company estimates that capital
expenditures for its own facilities, testing and other equipment
may total $600 million 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. 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.
Future Operating Results
Quarterly Fluctuations
Revenues for the second quarter of fiscal 1997 are expected to
increase over the first quarter ended June 29, 1996.
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 its 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 rest of 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 second quarter of
fiscal 1997, to a greater extent than commonly experienced 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 revenues and 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 successive generations of
products of the Company's customers.
In the second quarter of fiscal 1997, several of the Company's
key products are in the customer qualification stage. Customers
are currently completing board and system level designs and
qualification of these new products. Revenue, if any, from the
ultimate sales of these products could be postponed a quarter or
more by any board or system level design or qualification delays.
Also, the Company's gross margins will depend on the Company's
success at introducing and ramping production of new products
quickly and effectively because generally the gross margins of
semiconductor products decline as competitive products are
introduced. 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
In the first quarter of fiscal 1997, 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 (MiCRUS with IBM and
Cirent Semiconductor with Lucent Technologies) and other
arrangements have significant potential benefits to the Company,
there are also risks, some of which materialized in the third and
fourth quarter of fiscal 1996. 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 affected the Company's
earnings in the third and fourth 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 Cirent
Semiconductor 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 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 joint venture 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 these 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 Cirent
Semiconductor 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 operations, 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
the MiCRUS and Cirent Semiconductor 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. A decrease in the volume of wafers ordered or 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 packaging technologies, or
control over delivery schedules, manufacturing yields, quality,
and costs.
Although wafer and packaging supplies in general are expected to
be sufficient to meet expected demand during fiscal 1997, 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 or packaging 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 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 one wafer manufacturing facility to
another can be limited because such a move can require significant
re-engineering, which may take several quarters. These efforts
also dilute the engineering resources assigned to new product
development and adversely effect new product development
schedules. 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 fiscal 1996. However, certain of the
Company's PC OEM customers and their subcontractors experienced
lower sales and slower growth for products incorporating the
Company's products in the third and fourth quarter of fiscal 1996,
apparently due to less than anticipated consumer demand for such
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 and fourth quarters
of fiscal 1996 and in the Company's revenues. Some of the PC and
peripheral device manufacturers continued to experience excess
inventories of certain products and/or product components which
include the Company's graphics, audio, and fax/modem products
through the fourth quarter of fiscal 1996, which reduced demand
for the Company's products in the first quarter of fiscal 1997.
Customers continue to place orders with very short lead times,
which could result in excess supplies or shortages of certain
products.
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 last half of fiscal 1996, sales of certain of the Company's
products were dependent to a great degree on key customers 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, add-
in boards or modules from 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
motherboard, add-in board or module 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 customer's 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 Corporation, have expressed their
interest in integrating through hardware functions, adding through
special software functions, or kitting components to provide some
multimedia or communications features into or with their
microprocessor or microprocessor products. Successful integration
of these functions could substantially 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 last half of fiscal 1996.
The Company continues to experience intense competition in the
sale of graphics products. Several competitors 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 PC graphics market today consists primarily of two-dimensional
(2D) graphics accelerators, and 2D graphics accelerators with
video features. Revenues from the sale of graphics products in
fiscal 1997 are likely to be significantly dependent on the
success of the Company's 2D graphics accelerator, the CL-GD5446.
Although the Company has been informed by its customers of a
number of design wins for this product, sales will be subject to
market acceptance of the customers' products that incorporate the
CL-GD5446.
3D graphics acceleration is expected to become an important
capability in late fiscal 1997 and fiscal 1998, primarily in PC
products for the consumer marketplace. Several competitors have
already introduced 3D accelerators. The Company is striving to
bring products with 3D acceleration to market, but there is no
assurance that it will succeed in doing so in a timely manner. If
these products are not brought to market in a timely manner or do
not address the market needs or cost or performance requirements,
then graphics market share and sales would 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 last half of fiscal 1996 revenues from audio products declined
against the first half of fiscal 1996.
The consumer PC market generally requires that multimedia audio
solutions include 16-bit audio, a Sound Blaster compatible audio
controller and FM synthesis emulation. Pricing pressures are
forcing a transition from multi-chip solutions to products that
integrate the codec, controller and synthesis integrated into a
single IC. The Company's revenues from the sale of audio products
in fiscal 1997 are likely to be significantly affected by the
success of its recently introduced fully-integrated, single-chip
audio IC. Although this product has received a number of design
wins, sales will depend substantially on the market acceptance of
the customer products that incorporate this IC. Moreover,
aggressive competitive pricing pressures are expected to continue
and may adversely affect the Company's revenues and gross margins
from the sale of this product.
Three-dimensional spatial effects audio is expected to become an
important feature in late fiscal 1997 and in fiscal 1998,
primarily in products for the consumer marketplace. The Company
is developing such products, but there is no assurance that it
will succeed in doing so successfully. If the Company does not
succeed in developing spatial effects audio products in a timely
manner, or does not meet the cost or performance requirements of
the market, revenues from the sale of audio products would be
adversely affected.
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. Disk drive manufacturers often
build inventories during periods of anticipated growth, which
results in excess inventories when growth slows. Furthermore, the
price competitive nature of the disk drive industry continues to
put pressure on the price of all disk drive components. In
addition, on-going consolidation in the disk drive industry
reduces the number of customers for the Company's mass storage
products and may increase the desire of customers to source their
components internally.
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. The Company believes
that excess inventories held by its customers are likely to limit
sales of the Company's magnetic disk drive products in the second
quarter of fiscal 1997 and to limit sales of the Company's optical
disk drive products in the second and third quarters of fiscal
1997. Revenues from mass storage products in the second half of
fiscal 1997 are likely to depend heavily on the success of certain
3.5 inch disk drive products selected for use by Quantum, Seagate,
and Western Digital, which in turn depends upon obtaining timely
customer qualification of the new products and upon bringing the
products into volume production timely and cost-effectively.
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 the first generation digital cordless phone chip set
developed by PCSI for the Japanese Personal Handyphone System
("PHS") market are expected to decrease in the second and third
quarters of fiscal 1997 and to cease by the end of fiscal 1997.
PCSI is developing second generation chip sets for the PHS
cordless phone market and future PHS revenues will be dependent on
delivering these second generation chipsets. PCSI is in active
discussion with potential customers on the second generation
chipset, but if PCSI is not successful in developing and marketing
the product then net sales, gross margin and earnings would be
adversely affected.
Sales of the Company's fax/data/modem IC products will depend upon
the success of the v.34 product which began shipping in June
1996. Competition in this market is intense, and pricing
pressures are likely to affect margins.
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, as well as AT&T Wireless Services, Inc.'s
plans and schedules for network implementation. 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 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
communications 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 its 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 4. Submission of Matters to a Vote of Security Holders
On August 1, 1996, the Company held its Annual Meeting of
Shareholders. The matters voted upon at the meeting and the
results of those votes were as follows:
1. Election of Directors:
Votes
Votes For Withheld
---------- --------
Michael L. Hackworth 57,727,369 701,546
Suhas S. Patil 57,721,115 707,800
C. Gordon Bell 57,743,852 685,063
D. James Guzy 57,737,026 691,889
C. Woodrow Rea, Jr. 57,733,731 695,184
Walden C. Rhines 57,734,468 694,447
Robert H. Smith 57,731,464 697,451
2. Approve amendment to the 1989 Employee Stock Purchase Plan:
For Against Abstain No Vote
---------- ------- ------- -------
56,186,542 1,868,498 373,875 --
3. Adopt the 1996 Stock Plan and approve the reservation and
authorization of 2,500,000 shares of Common Stock reserved for
issuance under the terms of the plan:
For Against Abstain No Vote
---------- ---------- ------- -------
49,956,411 7,229,024 425,804 817,676
4. Approve appointment of Ernst & Young LLP as Auditors:
For Against Abstain No Vote
---------- ------- ------- -------
57,880,916 320,550 227,449 --
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 requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
CIRRUS LOGIC, INC.
(Registrant)
August 13, 1996 /s/ Thomas F. Kelly
Date Thomas F. Kelly
Executive Vice President, Finance and
Administration, Chief Financial Officer,
and Treasurer
(Principal Financial and Accounting Officer)
August 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
-------------------
June 29, July 1,
1996 1995
--------- --------
<S> <C> <C>
Primary:
Weighted average shares outstanding 64,159 61,258
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method N/A 6,494
Common stock warrants, using treasury
stock or modified treasury stock method - 23
--------- --------
Common and common equivalent shares used in
the calculation of net (loss) income per share 64,159 67,775
========= ========
Net (loss)income ($7,605) $22,737
========= ========
(Loss)earnings per share ($0.12) $0.34
========= ========
Fully diluted:
Weighted average shares outstanding 64,159 61,258
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method N/A 7,471
Common stock warrants, using treasury
stock or modified treasury stock method - 27
--------- --------
Common and common equivalent shares used in
the calculation of net (loss) income per share 64,159 68,756
========= ========
Net (loss)income ($7,605) $22,737
========= ========
(Loss)earnings per share ($0.12) $0.33
========= ========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Mar-29-1997
<PERIOD-START> Mar-31-1996
<PERIOD-END> Jun-29-1996
<PERIOD-TYPE> 3-MOS
<CASH> 112,224
<SECURITIES> 12,219
<RECEIVABLES> 127,542
<ALLOWANCES> 0
<INVENTORY> 133,985
<CURRENT-ASSETS> 561,437
<PP&E> 171,763
<DEPRECIATION> 0
<TOTAL-ASSETS> 882,522
<CURRENT-LIABILITIES> 374,957
<BONDS> 0
0
0
<COMMON> 338,530
<OTHER-SE> 91,487
<TOTAL-LIABILITY-AND-EQUITY> 882,522
<SALES> 214,898
<TOTAL-REVENUES> 214,898
<CGS> 132,407
<TOTAL-COSTS> 132,407
<OTHER-EXPENSES> 91,786
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,636)
<INCOME-TAX> (3,031)
<INCOME-CONTINUING> (7,605)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,605)
<EPS-PRIMARY> ($0.12)
<EPS-DILUTED> ($0.12)
</TABLE>
