UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 27, 1997
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 [ ] NO [X]
The number of shares of the registrant's common stock, no par value, was
67,425,042 as of September 27, 1997.
<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 Two Quarters Ended
----------------------- --------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales $223,960 $236,030 $425,583 $450,928
Costs and expenses and gain on sale of assets:
Cost of sales 135,047 145,870 257,518 278,277
Research and development 44,644 58,491 88,826 119,709
Selling, general and administrative 28,373 30,892 57,900 61,460
Gain on sale of assets 0 (6,913) 0 (6,913)
----------- ----------- ---------- ---------
Total costs and expenses and gain on sale of assets 208,064 228,340 404,244 452,533
----------- ----------- ---------- ---------
Income (loss) from operations 15,896 7,690 21,339 (1,605)
Interest and other (expense) income, net (3,128) (3,496) (5,028) (4,837)
----------- ----------- ---------- ---------
Income (loss) before provision (benefit) for income taxes 12,768 4,194 16,311 (6,442)
Provision (benefit) for income taxes 3,830 1,196 4,893 (1,835)
----------- ----------- ---------- ---------
Net Income (loss) $8,938 $2,998 $11,418 ($4,607)
=========== =========== ========== =========
Net income (loss) per common and common equivalent share $0.13 $0.05 $0.17 ($0.07)
=========== =========== ========== =========
Weighted average common and common
equivalent shares outstanding 70,549 64,776 69,199 64,468
=========== =========== ========== =========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<CAPTION>
Sept. 27, March 29,
1997 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $154,153 $151,540
Short-term investments 211,724 188,215
Accounts receivable, net 150,470 173,743
Inventories 93,365 127,252
Deferred tax assets 34,410 34,410
Equipment and leasehold improvement
advances to joint ventures 93,446 112,597
Other current assets 13,399 7,245
----------- -----------
Total current assets 750,967 795,002
Property and equipment, net 117,657 130,855
Manufacturing agreements, net
and investments in joint ventures 148,414 151,675
Deposits and other assets 58,357 59,289
----------- -----------
$1,075,395 $1,136,821
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and other accrued liabilities $204,695 $270,282
Accrued salaries and benefits 26,228 33,792
Current maturities of long-term
and capital lease obligations 27,677 30,999
Income taxes payable 32,125 31,259
----------- -----------
Total current liabilities 290,725 366,332
Capital lease obligations and long term debt 52,241 61,096
Other long-term obligations 5,370 5,196
Convertible subordinated notes 300,000 300,000
Commitments and contingencies 0 0
Shareholders' equity:
Capital stock 362,705 351,261
Retained earnings 64,354 52,936
----------- -----------
Total shareholders' equity 427,059 404,197
----------- -----------
$1,075,395 $1,136,821
=========== ===========
<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>
Two Quarters Ended
-----------------------
Sept. 27, Sept. 28,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operations:
Net income (loss) $11,418 ($4,607)
Adjustments to reconcile net income (loss) to net
cash flows from (used for) operations:
Depreciation and amortization 37,679 44,352
Net change in operating assets and liabilities (1,692) (110,620)
----------- -----------
Net cash flows provided by (used for) operations 47,405 (70,875)
----------- -----------
Cash flows used for investing activities:
Purchase of short-term investments (236,835) (2,008)
Proceeds from sales and maturities of short-term
investments 213,326 9,068
Additions to property and equipment (13,743) (11,269)
Proceeds from termination of UMC agreement 20,543 0
Joint venture manufacturing agreements and
investment in joint ventures (20,300) (29,000)
Increase in deposits and other assets (6,614) (5,595)
----------- -----------
Net cash flows used for investing activities (43,623) (38,804)
----------- -----------
Cash flows provided by (used for) financing activities:
Proceeds from issuance of common stock 11,008 9,667
Borrowings on short-term debt 0 162,000
Borrowings on long-term debt 5,683 1,596
Payments on long-term debt and capital lease obligations (17,860) (14,185)
Payments on short-term debt 0 (152,000)
Increase in other long-term liabilities 0 283
----------- -----------
Net cash flows provided by (used for)
financing activities (1,169) 7,361
----------- -----------
Increase (decrease) in cash and cash equivalents 2,613 (102,318)
Cash and cash equivalents - beginning of period 151,540 155,979
----------- -----------
Cash and cash equivalents - end of period $154,153 $53,661
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid 14,740 4,531
Income taxes (refunded) paid 754 (17,351)
Equipment purchased under capitalized leases 0 10,556
Tax benefit of stock option exercises 436 1,380
<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 29, 1997, included in the Company's 1997 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. Inventories
Inventories are comprised of the following:
Sept. 27, March 29,
1997 1997
--------- ---------
(In thousands)
Work-in-process $52,263 $ 79,276
Finished goods 41,102 47,976
--------- ---------
Total $93,365 $ 127,252
========= =========
3. 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, federal and state research tax credits, and state
investment tax credits.
4. Net Income (Loss) Per Common and Common Equivalent Share
Net income (loss) 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.
5. Commitments
As of September 27, 1997, the Company is contingently liable for MiCRUS and
Cirent equipment leases which have remaining payments of approximately $550
million, payable through fiscal 2004.
6. Recently Issued Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is required to be adopted by the Company
in its next fiscal quarter ended December 27, 1997. At that time the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating earnings per share, the dilutive effect of stock options will be
excluded. The implementation of Statement No. 128 is not expected to have an
impact on the calculation of primary or fully diluted earnings per share for
the quarter or two quarters ended September 27, 1997 or September 28, 1996.
7. Joint Ventures and Manufacturing Supply Agreements
In July of 1997, the Company terminated the foundry agreement and foundry
capacity agreement it had entered into with United Microelectronics
Corporation ("UMC"), a Taiwanese Company, in the fall of 1996. Under the
agreements, the Company had become an equity partner in United Silicon Inc., a
subsidiary of UMC, and had rights to purchase minimum volume amounts of
wafers. Pursuant to the termination, the Company relinquished its equity
interest and its rights to purchase the volume amounts, and it recovered the
cumulative cost of its investment in the venture.
<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 29,
1997, contained in the 1997 Annual Report on Form 10-K (the "1997 Form 10-
K"). This Discussion and Analysis contains forward-looking statements.
Such statements are subject to certain risks and uncertainties, including
those discussed below or in the 1997 Form 10-K that could cause actual
results to differ materially from the Company's expectations. Readers are
cautioned not to place undue reliance on any forward-looking statements, as
they 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.
During fiscal 1997, the Company implemented a strategy of focusing on the
markets for multimedia (graphics, video, and audio), mass storage, and
communications. As part of this strategy, the Company has been divesting
non-core business units and eliminating projects that do not fit within its
core markets. At the same time, the Company implemented a program to manage
costs and streamline operations. These efforts culminated in the fourth
quarter of fiscal 1997 with a reorganization into four market-focused
product divisions (Personal Computer Products, Communications Products, Mass
Storage Products, and Crystal Semiconductor Products), and a decision to
outsource its production testing and to consolidate certain corporate
functions. In connection with these actions, the Company effected a
workforce reduction of approximately 400 people in April 1997, representing
approximately 15 percent of its worldwide staff. While these actions
contributed to the Company's ability to generate net income in the first two
quarters of fiscal 1998, there is no assurance that the Company will regain
the levels of profitability that it achieved in the past or that losses will
not occur in the future.
Results of Operations
The following table discloses the percentages that income statement items
are of net sales and the percentage change in the dollar amounts for the
same items compared to the corresponding period in the prior fiscal year.
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage of Net Sales
Quarter Ended Two Quarters Ended
--------- --------- --------- ---------
Sept. 27, Sept. 28, Percent Sept. 27, Sept. 28, Percent
1997 1996 change 1997 1996 change
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100% 100% -5% 100% 100% -6%
Gross margin 40% 38% -1% 39% 38% -3%
Research and development 20% 25% -24% 21% 27% -26%
Selling, general and administrative 13% 13% -8% 14% 14% -6%
Gain on sale of assets 0% -3% N/A 0% -2% N/A
Income (loss) from operations 7% 3% 107% 5% 0% 1430%
Income (loss) before income taxes 6% 2% 204% 4% -1% 353%
Provision (benefit) for income taxes 2% 1% 220% 1% 0% 367%
Net income (loss) 4% 1% 198% 3% -1% 348%
</TABLE>
Net Sales
Net sales for the second quarter of fiscal 1998 were $224.0 million, a
decrease of 5% from $236.0 million for the second quarter of
fiscal 1997. Revenues from divested businesses in the second quarter
of fiscal 1998 were less than $0.5 million compared to $31.6 million in the
second quarter of fiscal 1997. Excluding revenues from divested businesses,
net sales increased by approximately $19.1 million primarily due to increased
sales in the mass storage division, primarily related to read channel devices,
which were offset by decreased sales in the PC products division, primarily
related to graphics products.
Net sales for the first two quarters of fiscal 1998 were $425.6 million, a
decrease of 6.0% from $450.9 million for the first two quarters of fiscal
1997. Revenues from divested businesses in the first two quarters
of fiscal 1998 were $10.8 million compared to $62.8 million in the first
two quarters of fiscal 1997. Excluding revenues from divested businesses,
net sales increased by $26.7 million primarily due to increased sales in
the mass storage division, primarily related to read channel devices, which
were offset by decreased sales in the PC products division, primarily
related to graphics products.
Export sales (including sales to U.S.-based customers with manufacturing
plants overseas) were 56% and 64% of total sales in the second quarter of
fiscal 1998 and 1997, respectively, and were 55% and 64% for the first two
quarters of fiscal 1998 and 1997, respectively. The decreases in export sales
as a percentage of total sales were primarily due to a reduction in sales of
PC products, primarily graphics products in the Pacific Rim and Japan.
The Company's sales are currently denominated primarily in U.S. dollars.
The Company currently enters into foreign currency forward exchange and option
contracts to hedge certain of its foreign currency exposures.
Sales to two customers comprised approximately 19% and 11% of sales in the
first two quarters of fiscal 1998. Sales to one customer were approximately
10% of net sales in the first two quarters of fiscal 1997.
Gross Margin
Gross margin was 40% in the second quarter of fiscal 1998 compared to 38% for
the second quarter of fiscal 1997. Gross margin was 39% in the first two
quarters of fiscal 1998 compared to 38% in the first two quarters of fiscal
1997. The increases in gross margin for both the second quarter and the first
two quarters of fiscal 1998 compared to the same periods of fiscal 1997 were
due to improved margins in mass storage products and a change in sales mix
towards mass storage products, which were offset somewhat by lower margins in
PC products, primarily related to graphics products.
Research and Development
Research and development expenses for the second quarter of fiscal 1998 were
$44.6 million, a decrease of 24% from $58.5 million in the second quarter of
fiscal 1997. Research and development expenses for the first two quarters of
fiscal 1998 were $88.8 million, a decrease of 26% from $119.7 million in the
first two quarters of fiscal 1997. Research and development expenditures
decreased in the second quarter and first two quarters of fiscal 1998 compared
to the same periods of the prior fiscal year primarily because of reduced
research and development expenditures for certain non-core businesses
including, particularly businesses divested in the last three quarters of
fiscal 1997. These expenditures continued to decrease in the first two
quarters of fiscal 1998 as a result of the April 1997 headcount reductions
which were made in connection with the Company's realignment into four market-
focused divisions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the second quarter of fiscal
1998 were $28.4 million, a decrease of 8% from $30.9 million in the second
quarter of fiscal 1997, and were relatively consistent at 13% of sales in
each of these quarters. Selling and administrative expenses in the first two
quarters of fiscal 1998 were $57.9 million, a decrease of 6% from $61.5
million in the first two quarters of fiscal 1997, and were relatively
consistent at 14% of sales in each of these periods.
Gain on Sale of Assets
During August 1996, the Company completed the sale of the PicoPower product
line to National Semiconductor, Inc. In connection with the transaction, the
Company recorded a gain of approximately $6.9 million.
Income Taxes
The Company's effective tax rate was a 30.0% provision in the first quarter
and first two quarters of fiscal 1998 compared to 28.5% provision for the
second quarter of fiscal 1997 and for the first two quarters of fiscal 1997.
The 30.0% estimated annual effective tax rate is less than the U.S. federal
statutory rate of 35.0%, primarily because of foreign operating results which
are taxed at rates other than the U.S. statutory rate, federal and state
research tax credits, and state investment tax credits.
Liquidity and Capital Resources
The Company generated approximately $47.4 million of cash and cash equivalents
in its operating activities during the first two quarters of fiscal 1998 and
used approximately $70.9 million during the first two quarters of fiscal 1997.
The increase in cash provided by operations was primarily because in the first
two quarters of fiscal 1997 cash used to purchase assets for the joint ventures,
pending the arrangement of lease financing by the joint ventures, exceeded the
receipt of cash from leasing companies upon the completion of the lease
financing by the joint ventures, whereas in the first two quarters of fiscal
1998, the Company's receipt of cash from leasing companies exceeded the cash
used to purchase such assets. Cashflows from operations in the first two
quarters of fiscal 1997 included approximately $88.0 million, net, that was
used for joint venture equipment to be leased. In the first two quarters of
of fiscal 1998 approximately $19.0 million, net, was generated from such
activities, the Company also had net income of $11.4 million in the first two
quarters of fiscal 1998 compared to a net loss of $4.6 million in the
corresponding two quarters of the prior fiscal year which contributed to the
increase in cash provided by operations.
The Company used $43.6 million in cash in investing activities during the
first two quarters of fiscal 1998 compared to $38.8 million during the
comparable period of fiscal 1997. The primary reasons for the change are that
in the first two quarters of fiscal 1998 the Company invested cash and cash
equivalents in short-term investments, whereas in the first two quarters of
1997 the Company transferred short-term investments into cash equivalents. In
addition, the Company received approximately $21 million from termination of
the UMC agreements and had smaller payments under its joint venture
manufacturing agreements in the first two quarters of fiscal 1998 than in the
same period of fiscal 1997.
Financing activities used $1.2 million in cash during the first two quarters
of fiscal 1998 and generated $7.4 million during the comparable period of fiscal
1997. In the first two quarters of fiscal 1997, net short-term borrowings
under a bank line of credit provided $10.0 million of financing. The Company
raised approximately $290.6 million in the third quarter of fiscal 1997
primarily through the issuance of convertible subordinated notes and,
as a result, is no longer using short-term borrowings as a source of
financing.
On June 30, 1997, the Company amended its existing bank lines of credit to
provide a commitment for letters of credit up to a maximum aggregate of
$35,000,000, expiring on June 30, 1998, which is collateralized by cash or
securities with interest at the higher of: (a) .50% per annum above the
latest federal funds rate (as defined in the Second Amended Credit
Agreement); and (b) the rate of interest in effect for such day as publicly
announced from time to time by the bank. The Company is currently
in compliance with all covenants under the bank line of credit. The Company
does not believe the amendment of its line of credit will have an impact on
its financial position or on its ability to finance its operations for the
foreseeable future.
The semiconductor industry is extremely capital intensive. To remain
competitive, the Company believes it must continue to invest in advanced
wafer manufacturing and test equipment. Investments will be made in the
various external manufacturing arrangements and its own facilities. The
Company intends to obtain most of the necessary capital through direct or
guaranteed equipment lease financing and the balance through debt,
equity financing, and/or existing cash balances. As of September 27, 1997, the
Company is contingently liable as guarantor or co-guarantor for MiCRUS and
Cirent equipment leases which have remaining payments of approximately
$550 million due through fiscal 2004. In addition, the Company has other
commitments related to its joint venture relationships with MiCRUS and
Cirent that total approximately $73 million at September 27, 1997.
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
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 1998 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. Such inventory imbalances
have occurred in the past and, for example, contributed significantly to the
Company's operating losses in fiscal 1997 and 1996. 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
at the end of the quarter contributes to difficulty in predicting the
Company's quarterly revenues and results of operations.
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. Both revenues and margins 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.
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.
Issues Relating to Manufacturing and Manufacturing Investment
The Company participates in joint ventures with IBM (MiCRUS joint venture) and
Lucent (Cirent joint venture) under a series of agreements intended to secure
a committed supply of wafers from manufacturing facilities operated by the
joint ventures. The joint ventures are controlled by IBM and Lucent,
respectively, and are dependent on the controlling partners advanced
proprietary manufacturing process technologies and manufacturing expertise.
These agreements include wafer purchase agreements under which the Company is
committed to purchase a fixed percentage of the output of the joint venture
manufacturing facilities. As a result, the operating results of the Company
may be more sensitive to changing business conditions, as anticipated
decreases in revenues could cause the Company to decide to not fulfill its
wafer purchase obligations. This would result in charges to the
Company from the joint ventures in amounts intended to cover the joint
ventures fixed costs related to the shortfall in wafer orders from the
Company. This would adversely impact gross margins and earnings, and would
compound the adverse impact on revenues from the conditions that caused the
Company to fail to fulfill its purchase commitments. During the fourth
quarter of fiscal 1997, the Company accrued $22.0 million for anticipated
shortfalls in its fulfillment of wafer purchase 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. During fiscal 1997, excess production capacity
in the industry lead to significant price competition between foundries and
the Company believes that in some cases this resulted in pricing from certain
foundries that was lower than the Company's cost of production from its
manufacturing joint ventures. The Company experienced pressures on its
selling prices during fiscal 1997 and the first two quarters of fiscal 1998,
which had a negative impact on its results of operations and it believes that
this was partially due to the fact that certain of its competitors were able
to obtain favorable pricing from these foundries.
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
discouraging, deferring or preventing a change of control of the Company.
In connection with the financing of its operations, the Company has borrowed
money and entered into substantial equipment lease obligations and is likely
to expand such commitments in the future. Such indebtedness could cause the
Company's principal and interest obligations to increase substantially. The
degree to which the Company is 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.
Although the Company has increased its future wafer supplies from the MiCRUS
and Cirent Semiconductor joint ventures, the Company expects to continue to
purchase portions of its wafers from, and to be reliant upon, outside
merchant wafer suppliers. The Company's current strategy is to fulfill its
wafer requirements using a balance of secured wafer supply from its joint
ventures and from outside merchant wafer suppliers. The Company also uses
other outside vendors to package the wafer die into integrated circuits and to
perform the majority of the Company's product testing.
During the second quarter of fiscal 1998 the Company reduced its purchase
obligations at Cirent by 50 percent, pursuant to an agreement under which
the Company can reacquire, at no incremental cost, an additional 10 percent
of the total Cirent wafer output and can sell any portion of its wafer
purchase obligation to third parties on a foundry basis. The agreement
also provides the Company with future access to certain Lucent advanced
process technologies including 0.18 micron process technology.
The Company's results of operations could be adversely affected in the
future, and have been in the past, 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 access to test facilities are disrupted for an extended period
of time. 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. Production
may be constrained even though capacity is available at one or more wafer
manufacturing facilities because of the difficulty of moving production from
one facility to another. Any supply shortage could adversely affect sales
and operating profits. The Company's reliance upon outside vendors for
assembly and test could also adversely impact sales and operating profits if
the Company were unable to secure sufficient access to the services of these
outside vendors.
Product development in the Company's markets is becoming more focused on the
integration of functionality on individual devices and there is a general
trend towards increasingly complex products. The greater integration of
functions and complexity of operations of the Company's products increases 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. The Company's relationship with customers could also be
adversely impacted by the recurrence of significant defects.
Dependence on PC Market
Sales of most of the Company's products depend largely on sales of personal
computers (PCs). Reduced growth in the PC market could affect the financial
health of the Company as well as its customers. Moreover, 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.
Other integrated circuit (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
products. Successful integration of these functions could substantially
reduce the Company's opportunities for IC sales in these areas.
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. Since the Company cannot track sales by motherboard,
add-in board or module manufacturers, 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.
The PC market is intensely price competitive. The PC manufacturers in turn
put pressure on the price of all PC components, and this pricing pressure is
expected to continue.
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. Growth in the mass
storage market is directly affected by growth in the PC market.
Furthermore, the price competitive nature of the disk drive industry
continues to put pressure on the price of all disk drive components. In
addition, consolidation in the disk drive industry has reduced the number of
customers for the Company's mass storage products and increased the risk of
large fluctuations in demand.
The Company believes that constraints in supply of certain read head
components to the disk drive industry limited sales of its mass storage
products in the fourth quarter of fiscal 1997. In addition, the Company
believes that excess inventories held by its customers limited sales of the
Company's mass storage products in the second quarter of fiscal 1997 and
limited sales of the Company's optical disk drive products in the third
quarter of fiscal 1997.
The Company's revenues from mass storage products are dependent on the
successful introduction by its customers of new disk drive products and can be
impacted by the timing of customers' transition to new disk drive products.
Recent efforts by certain of the Company's customers to develop their own ICs
for mass storage products could in the future reduce demand for the Company's
mass storage products, which could have an adverse effect on the Company's
revenues and gross margins from such products. In addition, in response to
the current market trend towards integrating hard disk controllers with
microcontrollers, the Company's revenues and gross margins from its mass
storage products will be dependent on the Company's ability to introduce
such integrated products in a commercially competitive manner.
Issues Relating to Graphics Products
The PC graphics market today consists primarily of both two-dimensional (2D)
and three-dimensional (3D) graphics accelerators and 2D and 3D graphics
accelerators with video features. Market demand for 3D graphics acceleration
began to grow in the third quarter of fiscal 1997 and is rapidly gaining
market share from 2D products.
The Company continues to experience intense competition in the sale of both
2D and 3D graphics products. Several competitors introduced products and
adopted pricing strategies that have increased competition in the desktop
graphics market. In addition, the 3D opportunity has resulted in the entry of
significant numbers of new competitors into the PC graphics market. These
competitive factors affected the Company's market share, gross margins, and
earnings in fiscal 1997 and in the first two quarters of fiscal 1998 and are
likely affect revenues and gross margins for graphics accelerator products
in the future.
During the second quarter of fiscal 1997, the Company introduced and began
shipping its first Rambus DRAM-based 3D accelerator for the mainstream PC
market. Net sales of the Company's 3D accelerator products were not material
in the first two quarters of fiscal 1998 or in fiscal 1997. The Company has
been attempting to bring additional products with 3D acceleration to market,
but has not succeeded in doing so in a timely manner. If these additional
products would not be brought to market in a timely manner or would
not address the market needs or cost or performance requirements, then the
Company's 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. Pricing pressures have forced a
transition from multi-chip solutions to products that integrate the Codec,
controller and synthesis into a single IC. The Company's revenues from the
sale of audio products in the remainder of fiscal 1998 are likely to be
significantly affected by the success of its recently introduced fully-
integrated, single-chip audio ICs. Moreover, aggressive competitive pricing
pressures have adversely affected and may continue to adversely affect the
Company's revenues and gross margins from the sale of single-chip audio ICs.
In addition, the introduction of new audio products from the Company's
competitors, the introduction of mediaprocessors and the introduction of MMX
processors with multimedia features by Intel Corporation could adversely
affect revenues and gross margins from the sale of the Company's audio
products.
Three-dimensional spatial effects audio became an important feature in the
first two quarters of fiscal 1998, primarily in products for the consumer
marketplace. If the Company's spatial effects audio products do not continue
to meet the cost or performance requirements of the market, revenues from the
sale of audio products will be adversely affected.
Issues Relating to Modem Products
The market for voice/data/fax modem chip sets is intensely competitive, and
competitive pricing pressures have affected and are likely to continue to
affect the average selling prices and gross margins from this product line.
The success of the Company's products will depend not only on the products
themselves but also on the degree and timing of market acceptance of new
performance levels developed by U.S. Robotics, which will be supported by the
Company's new products, and the development of standards with regard to these
new performance levels. Conflicting standards for 56K modems (the U.S.
Robotics x2 protocol versus the Rockwell Semiconductor K56flex) have had an
adverse impact on the rate of the market's transition from 33.6K to 56K
technology. As a result, sales volumes of 56K modem products have been lower
than anticipated, while continuing sales of 33.6K modems have been subject to
severe pricing pressures. There are indicators that a uniform standard may
be established in 1998, but, there is no assurance that the standard
setting process will not be subject to further delays. Moreover, as a
relatively new entrant to this market, the Company may be at a competitive
disadvantage to suppliers who have long-term customer relationships, have
greater market share or have greater financial resources. In addition, the
introduction of new modem products from the Company's competitors, the
introduction of media processors and the introduction of MMX processors with
multimedia features by Intel Corporation could adversely affect revenues and
gross margins from the sale of the Company's modem products.
Issues Related to Reorganization
During the fourth quarter of fiscal 1997, the Company decided to reorganize
into four market-focused divisions (Personal Computer Products,
Communications Products, Mass Storage Products, and Crystal Semiconductor
Products), outsource its production testing, and consolidate certain
corporate functions. In connection with these actions, the Company effected
a workforce reduction of approximately 400 people, representing
approximately 15% of the worldwide staff. Although the Company generated
net income in the first two quarters of fiscal 1998, there is no assurance
that these actions will be successful or have a positive impact on results of
operations. Furthermore, should such actions have a negative impact on the
Company's ability to design and develop new products, market new or existing
products, or produce and/or purchase products at competitive prices, these
actions could have an adverse impact on the Company's results of operations.
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 or other intellectual property rights 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. 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 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.
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. Further,
to the extent that volatility in foreign financial markets was to have an
adverse impact on economic conditions in a country or geographic region in
which the Company does business, demand for and supply of the Company's
products could be adversely impacted, which would have a negative impact on
the Company's revenues and earnings.
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
On December 12, 1996, the Company signed a Memorandum of Settlement with
plaintiffs' counsel in the federal class action and derivative lawsuits.
The agreement settled all pending securities claims against the Company for
an aggregate sum of $31.3 million, exclusive of interest, $2.3 million of
which would be contributed by the Company with the remainder being
contributed by the Company's insurers. The Company recorded the $2.3
million as other expense in the quarter ended December 28,1996.
The settlement included an amendment of the federal class action filed
in 1995 to include claims pending in state court with the intent that the
settlement would have the effect of extinguishing the state court claims.
The Court approved the settlement after hearings on June 13 and June
19,1997, overruling objections to the settlement, including those asserted
by the plaintiffs in the state action. The judgment approving the
settlement was signed on June 23, 1997. The order approving the settlement
became final on July 23, 1997. Subsequently, the plaintiffs in the state
action agreed to settle such action for an immaterial amount and
agreed to the dismissal of the state action withdrawn related appeals of
the federal settlement. The state action has been dismissed.
In addition, 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. Further, customers have been named in
suits alleging infringement of patents by the 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 such situations, 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.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10 Third Amendment to Cirent Joint Venture Formation
Agreement dated as of August 21, 1997
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.
(Registrant)
November 14, 1997 /s/ Ronald K. Shelton
Date Ronald K. Shelton
Vice President, Finance, Chief Financial Officer,
Principal Accounting Officer, and Treasurer
Exhibit 10
AMENDMENT NO. 3 TO JOINT VENTURE FORMATION AGREEMENT ("Amendment No. 3"),
dated as of August 21, 1997, by and among Lucent Technologies Inc., a
Delaware corporation ("Lucent"), as assignee and successor in interest, by
duly acknowledged assignment, to AT&T Corp., a New York Corporation
("AT&T"), ATOR Corp., a New York corporation ("ATOR"), Cirrus Logic, Inc.,
a California corporation ("Cirrus"), and Ciror, Inc., a California
corporation ("CIROR").
WHEREAS, the parties now desire to modify and supplement certain of
the Material Agreements among them referenced in the Joint Venture Formation
Agreement (the "JV Agreement"), dated as of October 23, 1995, by and among
AT&T (now Lucent), ATOR, Cirrus and CIROR, as amended by Amendments Nos. 1
and 2 to said JV Agreement, by and among said parties, dated May 1 and
July 31, 1996, respectively, specifically, the General Partnership Agreement,
the IC Wafer Supply Agreement, and the Technical Transfer Agreement, as well
as to further amend said JV Agreement hereby as necessary to be consistent
therewith;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, and intending to be legally
bound hereby, the parties hereto agree, subject to the terms and conditions
contained herein, as follows:
1. Definitions. Capitalized terms or terms with initial capitals
used herein and not otherwise defined herein will have the meanings assigned
to them in the JV Agreement.
2. The JV Agreement. The JV Agreement is deemed, and hereby is,
amended in the following respects:
(a) Section 3.02 (Annual Plan), subsection (a) is amended to change the
fiscal year of the Partnership for general accounting purposes from a calendar
year period to an annual period commencing October 1 of each year, effective
as of October 1, 1996, and the quarterly dates for review and update of the
Annual Plan by the Board of Governors of the Partnership are hereby changed
accordingly. The annual date for ratification or amendment of the Annual Plan
is hereby changed from January 1 to September 1 of each calendar year. In
addition, it is agreed hereby, by way of clarification, that the term "the
fiscal year next succeeding the last year then covered by the Annual Plan" as
used in said Section 3.02(a) shall refer to the fiscal year immediately
following the current fiscal year covered by the Annual Plan. The Partnership
will remain on a calendar year basis for tax purposes.
(b) Sections 3.02 (Annual Plan), 4.03 (Intellectual Property) and 4.04
(Operation of Plant and Business), as well as the Annual Plan itself, are
deemed, and hereby are, amended as necessary to effect the modifications and
supplements to the specific Material Agreements as set forth in Sections 4 and
5 below.
(c) Section 4.04 (c) (Costs) (ii)(a) (OR2 Working Capital) is amended to add:
"Effective October 1, 1998, the working capital required with respect to OR2
will be provided by the Lucent Partner and the Cirrus Partner in proportion
to their respective Take or Pay obligations under the IC Wafer Supply
Agreement, as amended."
3. The General Partnership Agreement ("GPA"). The GPA, dated as of
May 1, 1996, between ATOR and CIROR, is deemed, and hereby is, amended in the
following respects:
(a) Section 1.01 (Definitions) is amended to change the Fiscal Year of the
Partnership as therein defined for general accounting purposes in accordance
with Section 2(a) above of this Amendment No. 3 and all references to "Fiscal
Year" in the GPA are deemed modified accordingly, effective as of October 1,
1996. For tax purposes the Partnership will remain on a calendar year basis.
(b) Section 5.02 is amended to add the following:
"Such agreement or consent shall not unreasonably be withheld with respect to
a sale of the transferring Partner's interest, provided, without limitation,
that:
(a) Any such proposed sale must be of the transferring Partner's entire
interest in the Partnership and include substitution of the new Partner for
the transferring Partner;
(b) In the case of CIROR, such interest shall not include any technologies
made available pursuant to Amendment No. 3 to the Joint Venture Agreement,
including the Appendices thereto (other than 0.18 micron technology as
defined in the Technical Transfer Agreement, as amended, provided that
available equivalent versions, as therein defined, then exist); and
(c) Such transferring Partner shall not be in default of any of its payment
or other obligations under the Joint Venture Agreement, as amended, or any of
the Material Agreements referenced therein, and in the case of CIROR and Cirrus
Logic, Inc., shall be in compliance with all requirements of the Cirrus Asset
Lease and the Cirrus Guaranty, including the obtaining of any consents
required thereunder."
4. The Technical Transfer Agreement ("TTA"). The TTA, effective as of
June 30, 1996, by and among Lucent, Cirent Semiconductor ("Cirent") and
Cirrus, is deemed, and hereby is, amended by incorporating therein, effective
concurrently herewith, the Supplemental Agreement, a copy of which is annexed
hereto and made a part hereof as Appendix A.
5. The IC Wafer Supply Agreement ("WSA"). The WSA, made as of
August 9, 1996, by and among Lucent, Cirrus and Cirent, is deemed, and
hereby is, amended as follows:
(a) Section 2.0(b) is amended to add the following:
"Such agreement by the other Purchaser to any such proposed foundry basis sale
by the original Purchaser shall not unreasonably be withheld; provided,
however, that such prior agreement shall not be required for foundry services
within the following requirements:
(i) Such foundry basis sale by Cirrus may not include Wafers produced
using any technologies made available pursuant to Amendment No. 3 to the
Joint Venture Agreement, including the Appendices thereto (other than 0.18
micron technology as defined in the Technical Transfer Agreement, as
amended, provided that available equivalent versions, as therein defined,
then exist);
(ii) The other Purchaser shall be entitled, upon request, to full prior
disclosure of the process, technology and audit terms of such proposed
foundry basis sale;
(iii) The original Purchaser shall hold harmless and indemnify the other
Purchaser and Supplier from and against all liabilities, losses, damages,
claims or demands arising out of or in any way related to any such foundry
basis sale and the transaction involved therein, except for those arising
from such other Purchaser's or Supplier's fault;
(iv) The original Purchaser shall be the exclusive interface for the
foundry basis sale and shall bear all additional costs arising from such
foundry transaction;
(v) Disclosure to the foundry customer of design rules or other technical
information necessary for such foundry basis sale shall be pursuant to a
non-disclosure agreement, agreed upon by Cirrus and Lucent, limiting use of
such information to fabrication of Supplier;
(vi) All foundry basis sale agreements shall include terms requiring
compliance with US Export Laws and Regulations; and
(vii) Information which Cirrus may provide to prospective or actual
foundry customers shall be limited to the following, unless otherwise
agreed by Lucent, such agreement not to be unreasonably withheld:
- - Design rules
- - Electrical parameters
- - Extraction Models (e.g. SPICE)
- - A coarse process flow to be mutually agreed upon by Cirrus and
Lucent
- - A physical cross section
(b) The Wafer Purchase obligations and the Take or Pay Principles
set forth in Section 2 and Exhibit A thereof, respectively, as well
as the payment schedules set forth in Exhibit B thereof, are modified
by incorporating therein, effective concurrently herewith, as Exhibit
AB the Supplemental Take or Pay Principles and payment schedule, a
copy of which is annexed hereto and made a part hereof as Appendix B.
6. Closing. The parties will execute this Amendment No. 3 by their
duly authorized representatives, and Cirent will acknowledge same as
indicated below, at a closing to be held at the offices of Cirent,
9333 South Young Parkway, Orlando, Florida 32819, on August 21, 1997,
at 10:00 a.m. local time, or at such other place, date or time as the
parties hereto mutually agree upon. Such execution, the obligations
of Lucent, ATOR and Cirent, individually and collectively, to close,
and the continuation in effect of this Amendment No 3 are expressly
conditioned upon the following payments by Cirrus to Cirent,
representing the total amounts past or currently due from Cirrus
under various ofthe Material Agreements.
(a) The sum of $45.3 million, representing Wafer payments due under
the WSA, on or before said closing date; and
(b) The sum of $25 million, representing the balance of Wafer payments
due under the WSA, installation cost obligations and working capital
requirements, on or before October 1, 1997.
Such payments will be made by wire transfer to a designated Cirent bank
account or as may be otherwise directed by Lucent, ATOR or Cirent.
7. General. Except as specifically amended or modified hereby, all
terms and conditions of the JV Agreement and the Material Agreements
remain in full force and effect.
IN WITNESS HEREOF, this Amendment No. 3 has been duly executed by and
on behalf of each of the parties hereto, and duly acknowledged and
agreed to by Cirent, as of the date set forth above.
LUCENT TECHNOLOGIES INC.
By: /s/John T. Dickson
Name: John T. Dickson
Title: V.P., Integrated Circuits Division
ATOR CORP.
By: /s/Dennis M. Hill
Name: Dennis M. Hill
Title: President
CIRRUS LOGIC, INC.
By: /s/Michael L. Hackworth
Name: Michael L. Hackworth
Title: CEO and Chairman
CIROR, INC.
By: /s/Michael L. Hackworth
Name: Michael L. Hackworth
Title: CEO and Chairman
ACKNOWLEDGED AND AGREED TO:
CIRENT SEMICONDUCTOR G.P.
By: /s/Dennis M. Hill
Name: Dennis M. Hill
Title: Chairman of Board of Governors
SUPPLEMENTAL AGREEMENT
TO
TECHNICAL TRANSFER AGREEMENT
THIS SUPPLEMENTAL AGREEMENT ("TTA Supplement") is made and entered into
as of August 21, 1997 by and among Lucent Technologies Inc., a
Delaware corporation ("LUCENT"), Cirrus Logic, Inc., a California
corporation ("CIRRUS"), and Cirent Semiconductor G.P., a New York
general partnership ("LICENSEE"), as a supplement to the Technical
Transfer Agreement ("TTA"), effective as of June 30, 1996, by and
among said parties, and pursuant to Amendment No. 3 to the Joint
Venture Formation Agreement ("Amendment No. 3"), effective
concurrently herewith, by and among LUCENT, CIRRUS, ATOR Corp. a New
York corporation ("ATOR") and Ciror, Inc., a California corporation
("CIROR").
WHEREAS, the parties now desire, among other matters, to modify and
supplement the said TTA consistent with further agreements and
understandings between them;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and intending to be legally bound hereby, the
parties hereto agree, subject to the terms and conditions contained
herein and in said Amendment No. 3, as follows:
1. Capitalized terms or terms with initial capitals used herein and
not otherwise defined herein or in the Definitions Appendix hereto will
have the meanings assigned to them in this Amendment No. 3, the TTA or
the Joint Venture Formation Agreement, as the context requires.
2. Article 1.01 (Furnishing of Information) and Article 2.01
(Technical Information Grants) of the TTA are deemed, and hereby are,
amended to provide that LUCENT will furnish to LICENSEE and CIRRUS will
have access to LUCENT TECHNICAL INFORMATION relating to certain
additional technologies, in accordance with Section 4 below and the
other terms and conditions hereof, provided that they are then (a)
in PRODUCTION for LUCENT in OR2, (b) offered in AVAILABLE EQUIVALENT
VERSIONS from a THIRD PARTY FOUNDRY SOURCE, and (c) LICENSEE and CIRRUS
are current with respect to their payment obligations under the Joint
Venture Formation Agreement and the Material Agreements as therein
defined. The furnishing of said technologies and the TECHNICAL
INFORMATION pertaining thereto to LICENSEE and any access thereto by
CIRRUS will be in accordance with the terms and conditions of the TTA
and this TTA Supplement.
3. Articles 3.02 (Transfer of 0.35 and 0.25 MICRON TECHNOLOGY) and
3.03 (Fee at QUALIFICATION of 0.25 MICRON TECHNOLOGY) of the TTA are
amended as follows:
"In lieu of the two payments of ten million dollars ($10,000,000) each for
0.25 MICRON TECHNOLOGY due on transfer and QUALIFICATION, respectively,
LICENSEE shall pay LUCENT the sum of twenty million dollars ($20,000,000) as
follows:
(a) One-third (1/3) upon written notice of election by Cirrus to convert
to 0.25 MICRON TECHNOLOGY in accordance with Sections A2 and 3 of
Exhibit AB to the IC Wafer Supply Agreement, as amended August 21,
1997; and
(b) Two-thirds (2/3) upon beginning of PRODUCTION using said TECHNOLOGY
for CIRRUS."
4. Article 3.04 (Fees on Wafers) of the TTA is amended to add the
following:
"In additional part payment for the further rights granted hereunder by LUCENT
to LICENSEE, LICENSEE shall pay LUCENT additional fees of (a) (i) thirty-five
million United States dollars (U.S. $35,000,000) as the initial fee for
TECHNICAL INFORMATION relating to 0.18 MICRON TECHNOLOGY, and (ii) eighty
United States dollars (U.S. $80.00) for each such WAFER made by using said
0.18 MICRON TECHNOLOGY; or alternatively, (iii) twenty million United States
dollars (U.S.$20,000,000) as the initial fee for TECHNICAL INFORMATION
relating to said 0.18 MICRON TECHNOLOGY, and (iv) one hundred United States
dollars (U.S. $100.00) for each such WAFER made by using said 0.18 MICRON
TECHNOLOGY; (b) thirty United States dollars (U.S. $30.00) for each such
WAFER made using AVAILABLE EQUIVALENT VERSIONS of BiCMOS TECHNOLOGY; and
(c) thirty United States dollars (U.S. $30.00) for each such WAFER made using
AVAILABLE EQUIVALENT VERSIONS of the STANDARD FLASH MODULE.
The initial fees provided in subsections (a) (i) and (iii) above shall become
payable by LICENSEE to Lucent as follows:
(a) One-third (1/3) upon written notice of election by CIRRUS to convert
to said 0.18 MICRON TECHNOLOGY in accordance with Section A2 of Exhibit
AB to the IC Wafer Supply Agreement, as amended August 21, 1997; and
(b) Two-thirds (2/3) upon beginning of PRODUCTION using said TECHNOLOGY
for CIRRUS."
Additional fees for other technologies or modules (none of which will
have a minimum feature size finer than that in 0.18 MICRON TECHNOLOGY)
referenced in Section 2 above, which are offered in AVAILABLE EQUIVALENT
VERSIONS from a THIRD PARTY FOUNDRY SOURCE will be negotiated by the parties
but will not exceed an additional sixty United States dollars (U.S. $60.00)
per WAFER for each such individual technology or module used.
Additional fees for unique developments or modifications in the above
technologies or modules, and which LUCENT may agree to provide to LICENSEE,
will be negotiated by the parties but will not exceed an additional sixty
United States dollars (U.S. $60.00) per WAFER for each such development or
modification used."
5. Except as specifically amended or modified hereby, all terms and
conditions of the TTA remain in full force and effect.
IN WITNESS WHEREOF, this TTA Supplement has been duly executed by and
on behalf of each of the parties hereto as of the date set forth above.
LUCENT TECHNOLOGIES INC.
By: /s/Michael R. Greene
Name: Michael R. Greene
Title: Vice President - Intellectual Property
CIRRUS LOGIC, INC.
By: /s/Michael L. Hackworth
Name: Michael L. Hackworth
Title: CEO and Chairman
CIRENT SEMICONDUCTOR G.P.
By: /s/Dennis M. Hill
Name: Dennis M. Hill
Title: Chairman of Board of Governors
DEFINITIONS APPENDIX
0.18 MICRON TECHNOLOGY means technology enabling the fabrication of
SEMICONDUCTIVE DEVICES having line widths (a measure of minimum feature size)
as fine as 0.18 microns, and includes DIGITAL TECHNOLOGY and LINEAR TECHNOLOGY.
AVAILABLE EQUIVALENT VERSIONS means technologies qualified for
production and available from a THIRD PARTY FOUNDRY SOURCE and which provide
substantially the same functionality with comparable characteristics (e.g.,
access time, parametrics) under substantially the same design/layout rules
and using substantially the same numbers of masks.
DIGITAL TECHNOLOGY means the basic digital process.
BiCMOS TECHNOLOGY means technology in which a SEMICONDUCTIVE DEVICE
includes bipolar and complementary metal oxide semiconductors.
LINEAR TECHNOLOGY means adaptation of the digital technology to
include one or more of the following: threshold adjustments, capacitors,
fuses, and precision resistors.
PRODUCTION means that LICENSEE is supplying WAFER outs of a particular
technology after QUALIFICATION of that technology.
STANDARD FLASH MODULE means an electrically erasable, programmable
SEMICONDUCTIVE DEVICE having non-volatile memory cells in which erasure is
performed simultaneously on blocks of said cells.
THIRD PARTY FOUNDRY SOURCE means TSMC, VMC, Chartered Semiconductor
and other semiconductor manufacturing companies or entities that have an
annual revenue in excess of $75M per year from the sale of WAFERS to multiple
customers none of which has an equity position in or above consultations will
also include discussion of the potential impacts of various design rule changes
on yields and latch-up. Cirrus agrees to pay for the engineering lots used
in testing the design rule modifications.
EXHIBIT AB
TO
IC WAFER SUPPLY AGREEMENT
Supplemental Take or Pay Principles
and
Payment Schedule
The undersigned parties agree, effective as of August 21, 1997, that
the IC Wafer Supply Agreement ("WSA"), made as of August 9, 1996 by and among
said parties is deemed to be, and hereby is, amended by incorporating this
Exhibit AB as a supplement to and modification of the Take or Pay Principles
and the payment schedules set forth in Exhibits A and B, respectively, of
said WSA.
A. Exhibit A
The "Take or Pay Principles" set forth in Exhibit A to the WSA are
modified and supplemented as follows:
1. Lucent may convert up to 100% of its Capacity Allocation in OR2,
as defined in Section C below, at any time and in its sole discretion, to run
any silicon-based technologies, whether or not covered or scheduled in the
Annual Plan, provided only that there is No Material Deviation, as defined in
Section C below, caused by Lucent from the objectives and requirements of the
Annual Plan then in effect and the development of technologies as agreed to
in said Annual Plan remains on schedule. Lucent will hold Cirrus harmless
from loss or expense directly resulting from any Material Deviation so caused
by Lucent.
2. (a) Cirrus may convert any of its OR2 Capacity Allocation, as
defined in Section C below, to run any additional technologies furnished
pursuant to the Supplemental Agreement to the Technical Transfer Agreement
(Supplemental TTA) between the parties hereto, effective concurrently
herewith, provided that (i) due allowance is made for equipment line capacity,
ordering lead times and the current technology mixes of both parties, and (ii)
there is No Material Deviation, as defined in Section C below, caused by
Cirrus from the objectives and requirements of the Annual Plan then in effect.
Cirrus will hold Lucent harmless from loss or expense directly resulting from
any Material Deviation so caused by Cirrus.
(b) Up to one engineering lot of Wafers per month employing any
of the additional technologies described in Paragraph 2(a) above will, at
Cirrus' request, be made available by Supplier to Cirrus (from either OR1 or
OR2), prior to any conversion of capacity, at a price representing twice the
Cost of Production, as defined in Section C below, of such Wafers or lot.
3. If Supplier does not provide for Cirrus, by July 1, 1999, Wafers
processed using a qualified 0.25 micron digital technology from OR2 which are
Materially Equivalent (or better), as defined in Section C below and as
measured by cost and performance metrics agreed on in writing by the parties,
to that available from two or more third party foundry sources, Cirrus upon
90 days' prior written notice to Lucent and Supplier, may each quarter shift
a portion of its take or pay obligations to Lucent, at the rate of 5% per
fiscal year quarter of the total capacity of OR2 as provided in the then
current Annual Plan. Said action will not reduce any total amounts then
owed to Supplier by Lucent or Cirrus, and Cirrus' right so to shift its
obligations going forward will cease immediately upon Supplier's compliance
with the agreed metrics for such technology. Any such shift made pursuant
hereto will be irrevocable.
4. The rights provided in Paragraphs 1, 2 and 3 above are
exercisable by the respective referenced party only if such party is then
current with respect to its payment obligations under the Joint Venture
Formation Agreement and the Material Agreements as therein defined.
5. Lucent will take Wafers from Cirrus' Allocated Capacity in OR2
in accordance with the quantities and periods specified in Table 1 attached.
6. Paragraph (A) of Exhibit A is deemed, and hereby is, amended to
provide that from and after October 1, 1998, subject to Cirrus' compliance,
as of the date of commencement of such purchases, with Paragraph 4 hereof,
Lucent will purchase seventy-five percent (75%) and Cirrus will purchase
twenty-five percent (25%) of OR2's total production output for Wafers, based
on the forecasts provided in the Annual Plan, with cost responsibilities
determined pursuant to said Exhibit A as hereby amended and supplemented,
and Supplier agrees to sell to each Purchaser accordingly. Such take or
pay purchase percentages shall continue in effect for the remaining term of
the Partnership; provided, however, that from and after October 1, 1998
Cirrus will have the right to call back up to ten percent (10%) of said total
production output on two (2) years' prior written notice to Lucent and
Supplier plus an additional six (6) month period for transition, such call
back to continue in effect for the remaining term of the Partnership. The
Capacity Allocation for each Purchaser will at all times be equivalent to
such Purchaser's take or pay percentage.
7. It is agreed that 0.35 micron High Density Technology has been
qualified for production.
8. It is agreed that, to improve efficiencies in production by
Supplier:
(a) Lucent and Cirrus will on an ongoing basis discuss and share
methodology and layout information that affects ESD and/or latch-up.
(b) For each of the 0.35, 0.25 and 0.18 digital technologies,
consultation will be provided to Cirrus by Supplier as to which design rules
could be modified (without accompanying process changes) for SRAM cell designs,
without causing harm to other products in Supplier. The above consultations
will also include discussion of the potential impacts of various design rule
changes on yields and latch-up. Cirrus agrees to pay for the engineering
lots used in testing the design rule modifications.
(c) Supplier will, from time to time, provide tightening of the
design rules ("shrinks") for 0.35, 0.25 and 0.18 micron technologies for the
benefit of both purchasers, without additional payment.
9. The basis for take or pay cost calculations only (i.e., not
actual costs), with values shown for the particular fiscal year (quarter),
shall be as follows:
(a) It is agreed that neither Lucent nor Cirrus has a take
or pay obligation for the quarters up to and including June 30, 1997.
(b) It is agreed that, for the quarters beginning 7/1/97
and ending 9/30/98, the take or pay obligation of each Purchaser shall be
calculated as follows:
i. The fixed cost per Wafer (FCPW) for the calculation
is agreed to be as stated in the tables (A & B) below.
ii. Based on Table 1 (wafer outs assumed by Lucent) and
the annual plan, partner net wafer outs (WO) obligation is also shown.
iii. The Purchasers' total quarterly fixed cost obligation
(FCO) for each quarter is obtained by multiplying the above two items.
iv. The Beginning Fixed Inventory Value (BFIV) in a
quarter is equal to the number of wafers the Purchaser has in inventory
multiplied by their percentage completion multiplied by the fixed cost per
wafer stated in Table A or B. Percentage completion for a given lot is its
value excluding the starting material (Wafers) based on the then current cost
standard divided by the current standard cost value of a completed lot of
the same technology excluding starting material (wafers).
v. Change in Beginning Fixed Inventory Value (CBFIV) is
equal to the change from quarter to quarter of BFIV.
vi. Actual Wafers Out (WOA)
vii. The "take or pay" amount owed to Supplier by each Purchaser for the
quarter (starting with the quarter ending 3/31/98) is calculated as follows:
Amount = FCO - CBFIV - FCPW * WOA
Amount cannot be negative
Table A (Numbers Applicable to Cirrus Logic)
Q497* Q198 Q298 Q398 Q498
FCPW 1500 1500 1200 1000 900
WO 5260 7604 11525 12673 13162
FCO** 7890 11406 13830 12673 11845.8
Table B (Numbers Applicable to Lucent)
Q497* Q198 Q298 Q398 Q498
FCPW N/A N/A 1200 1000 900
WO N/A N/A 22365 36506 39486
FCO** N/A N/A 26838 36506 35537.4
*7/1/97 - 9/30/97
**Thousands of dollars
viii. It is also agreed that when the financial true-ups
are done at the close of each quarter (starting with the quarter ending
3/31/98), the amounts associated with the take or pay obligations will be
included, and that: (1) fixed cost variances be credited in proportion to
actual fixed cost billings (including take or pay) and (2) variable cost
variances are distributed in proportion to actual variable costs billings.
The parties will use best reasonable efforts to continue applying the
methodologies set forth in this subparagraph (b) for the remaining term
of the Partnership.
B. Exhibit B
Exhibit B, which sets forth the parties' payment obligations,
is supplemented by:
1. Adding the following to Paragraph III thereof:
"During such period Cirrus shall pay to Supplier additional fees of
(a) (i) thirty-five million United States dollars (U.S. $35,000,000) for
technical information relating to 0.18 micron technology pursuant to the
Supplemental TTA, and (ii) eighty United States dollars (U.S. $80.00) for
each such Wafer made using 0.18 micron technology; or alternatively at
Cirrus' choice, (iii) twenty million United States dollars (U.S. $20,000,000)
for technical information relating to 0.18 micron technology, and (iv) one
hundred United States dollars (U.S. $100.00) for each such Wafer made by
using 0.18 micron technology; (b) thirty United States dollars (U.S. $30.00)
for each such Wafer made using standard BiCMOS technology; and (c) thirty
United States dollars (U.S. $30.00) for each such Wafer made using the
standard flash module.
The fees provided in subparagraphs (a) (i) and (iii) above shall
become payable to Supplier as follows:
(a) One-third (1/3) upon written notice of election by Cirrus to
convert to 0.18 micron technology in accordance with Section A2 above; and
(b) Two-thirds (2/3) upon beginning of production using the
technology for Cirrus as defined in the Supplemental TTA.
Additional fees for other technologies or modules (none of which has
a minimum feature size finer than that in 0.18 micron technology) as
referenced in the Supplemental TTA, which are offered in available
equivalent versions from a third party foundry source, will be negotiated by
the Purchasers but will not exceed an additional sixty United States dollars
(U.S. $60.00) per Wafer for each such individual technology employed.
Additional fees for unique developments or modification in the above
technologies or modules, and which Lucent may agree to provide to Supplier,
will be negotiated by the Purchasers but will not exceed an additional sixty
United States dollars (U.S. $60.00) per Wafer for each such development or
modification used.
A sample calculation of per Wafer fee payments based on the above is set
forth in Table 2 attached."
2. Amending Paragraph IV as follows:
"In lieu of the two payments of ten million dollars ($10,000,000) each for
0.25 micron technology, due on or before June 30, 1999 and December 31, 1999,
respectively, Cirrus shall pay Supplier the sum of twenty million dollars
($20,000,000) as follows:
(a) One-third (1/3) upon written notice of election by Cirrus to convert to
0.25 micron technology in accordance with Sections A2 and A3 of this
Exhibit AB; and
(b) Two-thirds (2/3) upon beginning of production using the technology for
Cirrus as defined in the Supplemental TTA.
C. Definitions; General
1. (a) "Capacity Allocation" or "Allocated Capacity" means the planned
capacity to which each Purchaser is then entitled plus the proportional share
of any variation which exists. The proportional share is equal to the
percentage of the planned capacity to which each Purchaser is currently
entitled (i.e., if one Purchaser is currently entitled to 80% of the planned
capacity of a technology, its proportional share of the variation will be 80%).
(b) "No Material Deviation" means that the conversion will not cause any
material adverse change in the essential elements of the then current Annual
Plan.
(c) "Cost of Production" means the total costs and associated expenses of
manufacturing (including, without limitation, equipment set-up and take-down
time, special handling and testing) for each Wafer or lot produced. Such
total costs will not exceed 2 (two) times the standards cost for a production
wafer or lot of that size and technology.
(d) "Materially Equivalent" means that the Wafers meet or exceed the Lucent
target metrics shown in Table 3 attached, recognizing that the Lucent 0.25 um
Process Features listed in said Table may be different from typical or other
process features employed elsewhere in the semiconductor industry.
2. Except as specifically amended or supplemented hereby, all terms and
conditions of the WSA and Exhibits thereto remain in full force and effect.
AGREED TO, as of the effective date set forth above.
Lucent Technologies, Inc. Cirrus Logic, Inc.
By: /s/ John T. Dickson By: /s/ Michael L. Hackworth
Name: John T. Dickson Name: Michael L. Hackworth
Title: V.P., Integrated Circuits Div. Title: CEO and Chairman
Supplier - Cirent
Semiconductor, G.P.
By: /s/Dennis M. Hill
Name: Dennis M. Hill
Title: Chairman of Board of Governors
Table 1
WAFER OUTS PER MONTH ASSUMED BY LUCENT
1997 1998
JAN. 1415
FEB. 1655
MAR. 2350
APR. 3403
MAY 4207
JUNE 4307
JULY 4304
AUG. 4304
SEPT. 4554
OCT. 255
NOV. 1101
DEC. 1176
Table 2
Example of Fee
Payments per Wafe
Basic 0.18 micron technology
(linear or digital) $80
Use of Flash Module 30
Use of BiCMOS Module 30
Use of additional Module
(to be negotiated) 40
Use of a unique modification
(to be negotiated) 35
$215
TABLE 3
Benchmark
Metric Lucent Target (merged 2.5V/3.3V Range
NMOS Ion (uA/um) 630/700 475-700
PMOS Ion (uA/um) 215/340 200-340
Vtn (V) 0.55 0.4-0.6
Vtp (V) 0.9 0.4-0.6
tox (A) 50 50-65
Drawn Gate 0.24 0.24-0.25
Number of metal levels 4-5 4-6
M1 contacted ptich 0.84 .064-0.94
M2 contacted pitch 0.88 0.76-1.1
Other metal levels contact 0.88 0.76-3.0
Lucent 0.25um Process Features
Thin epi
LOCOS Isolation
Thin Gate Oxide
N+ Poly with Wsix
HDP Gap Fill with Undoped Cap Oxide
CMP
W Plug
Unframed Contacts
DUV at Active, Gate and Contact
I-Line at all other critical levels
Both 2.5V and 3.3V Optimized Devices
[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 Two Quarters Ended
------------ ------------ ------------ ------------
Sept.27, Sept. 28, Sept.27, Sept. 28,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 67,232 64,776 66,824 64,468
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method 3,317 0* 2,375 N/A
------------ ------------ ------------ ------------
Common and common equivalent shares used in
the calculation of net income (loss) per share 70,549 64,776 69,199 64,468
============ ============ ============ ============
Net income (loss) $8,938 $2,998 $11,418 ($4,607)
============ ============ ============ ============
Net income (loss) per share $0.13 $0.05 $0.17 ($0.07)
============ ============ ============ ============
Fully diluted:
Weighted average shares outstanding 67,232 64,776 66,824 64,468
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method 3,387 1,890 2,413 N/A
------------ ------------ ------------ ------------
Common and common equivalent shares used in
the calculation of net income (loss) per share 70,619 66,666 69,237 64,468
============ ============ ============ ============
Net income (loss) $8,938 $2,998 $11,418 ($4,607)
============ ============ ============ ============
Net income (loss) per share $0.13 $0.04 $0.16 ($0.07)
============ ============ ============ ============
<FN>
* For the quarter ended September 28, 1996, under the modified treasury
stock method, more common stock would have been repurchased than
issued. Since the effect of this would have increased net income per
share, the exercise of options is not assumed.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Mar-28-1998
<PERIOD-START> Mar-30-1997
<PERIOD-END> Sep-27-1997
<PERIOD-TYPE> 6-MOS
<CASH> 154,153
<SECURITIES> 211,724
<RECEIVABLES> 150,470
<ALLOWANCES> 0
<INVENTORY> 93,365
<CURRENT-ASSETS> 750,967
<PP&E> 117,657
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,075,395
<CURRENT-LIABILITIES> 290,725
<BONDS> 0
0
0
<COMMON> 362,705
<OTHER-SE> 64,354
<TOTAL-LIABILITY-AND-EQUITY> 1,075,395
<SALES> 425,583
<TOTAL-REVENUES> 425,583
<CGS> 257,518
<TOTAL-COSTS> 257,518
<OTHER-EXPENSES> 146,726
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,311
<INCOME-TAX> 4,893
<INCOME-CONTINUING> 11,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,418
<EPS-PRIMARY> $0.17
<EPS-DILUTED> $0.17
</TABLE>
