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 28, 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
67,012,137 as of June 28, 1997.
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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 28, June 29,
1997 1996
----------- -----------
<S> <C> <C>
Net sales $201,623 $214,898
Costs and expenses:
Cost of sales 122,471 132,407
Research and development 44,182 61,218
Selling, general and administrative 29,527 30,568
----------- -----------
Total costs and expenses 196,180 224,193
----------- -----------
Income (loss) from operations 5,443 (9,295)
Interest and other (expense) income, net (1,900) (1,341)
----------- -----------
Income (loss) before provision (benefit) for income taxes 3,543 (10,636)
Provision (benefit) for income taxes 1,063 (3,031)
----------- -----------
Net income (loss) $2,480 ($7,605)
=========== ===========
Net income (loss) per common and common equivalent share $0.04 ($0.12)
=========== ===========
Weighted average common and common
equivalent shares outstanding 67,849 64,159
=========== ===========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
</TABLE>
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<TABLE>
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<CAPTION>
June 28, Mar. 29,
1997 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $100,093 $151,540
Short-term investments 225,357 188,215
Accounts receivable, net 157,940 173,743
Inventories 97,773 127,252
Deferred tax assets 34,410 34,410
Payments for joint venture equipment to be leased 107,364 112,597
Other current assets 8,666 7,245
----------- -----------
Total current assets 731,603 795,002
Property and equipment, net 124,490 130,855
Manufacturing agreements, net
and investments in joint ventures 150,304 151,675
Deposits and other assets 57,299 59,289
----------- -----------
$1,063,696 $1,136,821
=========== ===========
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<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $206,130 $270,282
Accrued salaries and benefits 23,539 33,792
Obligations under equipment loans and
capital leases, current portion 27,784 30,999
Income taxes payable 28,956 31,259
----------- -----------
Total current liabilities 286,409 366,332
Obligations under equipment loans and
capital leases, non-current 57,617 61,096
Other long-term 5,299 5,196
Convertible subordinated notes 300,000 300,000
Commitments and contingencies 0 0
Shareholders' equity:
Capital stock 358,956 351,261
Retained earnings 55,415 52,936
----------- -----------
Total shareholders' equity 414,371 404,197
----------- -----------
$1,063,696 $1,136,821
=========== ===========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
</TABLE>
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<TABLE>
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<CAPTION>
Quarter Ended
-----------------------
June 28, Jun. 29,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operations:
Net income $2,480 ($7,605)
Adjustments to reconcile net (loss) income to net
cash flows from operations:
Depreciation and amortization 18,063 22,826
Net change in operating assets and liabilities (27,311) (66,913)
----------- -----------
Net cash flows provided by operations (6,768) (51,692)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments (157,852) (2,008)
Proceeds from sale of short-term investments 120,710 9,068
Additions to property and equipment (6,810) (6,682)
Joint venture manufacturing agreements and
investment in joint ventures 0 (2,000)
Increase in deposits and other assets (1,527) (3,202)
----------- -----------
Net cash flows used by investing activities (45,479) (4,824)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 6,657 7,777
Borrowings on short-term debt 0 92,000
Borrowings on long-term debt 3,588 0
Payments on long-term debt and capital lease obligations (9,445) (7,157)
Payments on short-term debt 0 (80,000)
Increase in other long-term liabilities 0 141
----------- -----------
Net cash flows provided by financing activities 800 12,761
----------- -----------
Increase in cash and cash equivalents (51,447) (43,755)
Cash and cash equivalents - beginning of period 151,540 155,979
----------- -----------
Cash and cash equivalents - end of period $100,093 $112,224
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $12,362 $2,634
Income taxes (refunded) paid $- ($17,394)
Equipment purchased under capitalized leases $- $9,286
Tax benefit of stock option exercises $436 $1,055
<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:
June 28, March 28,
1997 1997
--------- ---------
(In thousands)
Work-in-process $55,905 $ 79,276
Finished goods 41,868 47,976
--------- ---------
Total $ 97,773 $ 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 June 28, 1997, the Company is contingently liable for MiCRUS and
Cirent equipment leases which have remaining payments of approximately $538
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 December
31, 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 primary 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 quarters
ended June 28, 1997 or June 29, 1996.
7. Subsequent Events
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 of America National Trust and
Savings Association in San Francisco, California. The Company is currently
in compliance with all covenants under the bank line. 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.
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 28,
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
quarter 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
Quarter Ended
-------------------
June 28, June 29, Percent
1997 1996 change
--------- --------- ---------
<S> <C> <C> <C>
Net sales 100% 100% - 6%
Gross margin 39% 38% - 4%
Research and development 22% 28% - 28%
Selling, general and administrative 14% 14% - 3%
Income (loss) from operations 3% -4% N/A
Income (loss) before income taxes 2% -5% N/A
Provision (benefit)for income taxes 1% -1% N/A
Net income (loss) 1% -4% N/A
</TABLE>
Net Sales
Net sales for the first quarter of fiscal 1998 were $201.6 million, a
decrease of 6% from the $214.9 million reported for the first quarter of
fiscal 1997. Increased sales in the mass storage division were offset by
decreased sales in the PC products division, largely related to graphics
products, and decreased sales from divested businesses.
Export sales (including sales to U.S.-based customers with manufacturing
plants overseas) were 54% and 65% of total sales in the first quarter of
fiscal 1998 and 1997, respectively. The decrease in export sales as a
percentage of total sales was primarily due to a reduction in sales of PC
products in the Pacific Rim (which excludes Japan), primarily due to
competitive pricing pressures and demand constraints for certain of the
Company's products in the region.
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 one customer comprised approximately 15% of sales in the first
quarter of fiscal 1998 and sales to two customers comprised 10% each of
total sales in the first quarter of fiscal 1997.
Gross Margin
Gross margin was 39% in the first quarter of fiscal 1998, which was
relatively consistent compared to 38% for the first quarter of fiscal 1997.
Research and Development
Research and development expenses for the first quarter of fiscal 1998 were
$44.1 million, a decrease of 28% from $61.2 million in the first quarter of
fiscal 1997. Research and development expenditures decreased during the
final three quarters of fiscal 1997 as the Company focused its product
development efforts on its core businesses and these expenditures continued
to decrease in the first quarter 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 first quarter of fiscal
1998 were $29.5 million a decrease of 3% from $30.6 million in the first
quarter of fiscal 1997, and were relatively consistent at 14% of sales in
each of these quarters.
Income Taxes
The Company's effective tax rate was a 30.0% provision in the first quarter
of fiscal 1998 compared to a benefit of 28.5% the first quarter 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. In the
first quarter of fiscal 1997 the Company generated a tax benefit as a result
of its net loss for the period.
Liquidity and Capital Resources
The Company used approximately $6.8 million of cash and cash equivalents in
its operating activities during the first quarter of fiscal 1998 and used
approximately $51.7 million during the first quarter of fiscal 1997. The
decrease in cash used for operations was primarily due to having net income
of $2.5 million in the first quarter of fiscal 1998 compared to a loss of
$7.6 million in the same quarter of the prior fiscal year, and the net
change in operating assets and liabilities.
The Company used $45.5 million in cash in investing activities during the
first quarter of fiscal 1998 compared to $4.8 million during the comparable
period of fiscal 1997. The primary reason for the change is that during
the first quarter of fiscal 1998 the Company had a significantly higher
level of cash and equivalents and short-term investments than in the same
quarter of the prior fiscal, primarily related to the $290.6 million of
proceeds from the issuance of convertible debt in the third quarter of
fiscal 1997. In the first quarter of fiscal 1998, the Company invested a
higher proportion of its funds in short-term investments than it did in the
immediately prior quarter.
Financing activities provided $0.8 million in cash during the first quarter
of fiscal 1998 and $12.8 million during the comparable period of fiscal
1997. In the first quarter of fiscal 1997, net short-term borrowings
provided $12.0 million of financing. The Company raised approximately
$290.6 million in the third quarter of fiscal 1997 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 of America National Trust and
Savings Association in San Francisco, California. The Company is currently
in compliance with all covenants under the bank line. 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 in 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 and/or
equity financing. As of June 28, 1997, the Company is contingently liable
as guarantor or co-guarantor for MiCRUS and Cirent equipment leases which
have remaining payments of approximately $538 million due through fiscal
2004. In addition, the Company has other commitments related to its joint
venture relationships that total approximately $118 million at June 28, 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
In the first quarter of fiscal 1998 and in fiscal 1997, manufacturing supply
exceeded demand for certain of the Company's products and the Company
believes that its manufacturing capacity will exceed demand at least through
the third quarter of fiscal 1998. As a consequence, the Company incurs
charges related to its MiCRUS joint venture for failing to purchase
sufficient wafers and in the fourth quarter of fiscal 1997 the Company
recorded an accrual for anticipated under-use of wafer fabrication capacity,
which negatively impacted gross margins in that quarter. In the first
quarter of fiscal 1998, the Company did not record additional accruals as
its utilization of available wafer fabrication capacity was consistent with
the expectations in the previous quarter.
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 quarters of fiscal 1996 and the
second and fourth quarters of fiscal 1997. 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. During the
fourth quarter of fiscal 1997, the Company accrued $22.0 million for
anticipated under utilization of wafer fabrication capacity. 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. 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,
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 for at least the next two years. The Company also
uses other outside vendors to package the wafer die into integrated
circuits.
The Company's results of operations could be adversely affected in the
future, and has 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 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 greater integration of functions and complexity of operations of the
Company's products also 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.
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 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. Revenues from mass storage products in the
remainder of fiscal 1998 are likely to depend heavily on the success of
certain 3.5 inch disk drive products selected for use by various customers,
which in turn depends upon obtaining timely customer qualification of the
new products and bringing the products into volume production timely and
cost effectively.
The Company's revenues from mass storage products are dependent on the
successful introduction by its customers of 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 two-dimensional (2D)
graphics accelerators and 2D graphics accelerators with video features.
Market demand for three-dimensional (3D) graphics acceleration began to grow
in the third quarter of fiscal 1997 and is expected to grow stronger in
fiscal 1998, primarily in PC products for the consumer marketplace. Several
of the Company's competitors design, produce and market 3D accelerators.
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, and new competitors continue to enter the market. These
competitive factors affected the Company's market share, gross margins, and
earnings in fiscal 1997 and are likely to 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. Sales of the Company's 3D accelerator products were not material in
the first quarter of fiscal 1998 or in fiscal 1997. The Company is striving
to bring additional products with 3D acceleration to market, but there is no
assurance that it will succeed in doing so in a timely manner. If these
additional products are not brought to market in a timely manner or do not
address the market needs or cost or performance requirements, then the
Company's graphics market share and sales could be adversely affected.
Revenues from the sale of graphics products in fiscal 1998 are also likely
to be significantly dependent on the success of the Company's current DRAM-
based 2D graphics/video accelerators.
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 is expected to become an important
feature in fiscal 1998, primarily in products for the consumer marketplace.
The Company has begun shipping such products. If the Company's spatial
effects audio products do not meet the cost or performance requirements of
the market, revenues from the sale of audio products would be adversely
affected.
Issues Relating to Communications Market
Most of the Company's revenues from communications products are expected to
derive from sales of voice/data/fax modem chip sets. The market for these
products 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.
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 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 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 quarter 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.
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 includes 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 attorneys who filed the state action. The judgment approving the
settlement was signed on June 23, 1997. The order approving the settlement
shall become final on July 23, 1997. The attorneys who filed the state
action have filed an appeal of such order. The Company intends to defend
itself vigorously in such appeals. The Company believes that the
likelihood is remote that the ultimate resolution of these matters will have
a material adverse effect on its financial position, results of operations
or cash flows. However, there can be no certainty or assurance as to the
outcome of any litigation process.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On July 31, 1997, 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 57,525,372 1,923,267
Suhas S. Patil 57,545,897 1,902,742
C. Gordon Bell 57,581,951 1,866,688
D. James Guzy 57,603,393 1,845,246
Walden C. Rhines 57,602,296 1,846,343
Robert H. Smith 57,535,068 1,913,571
2. Approve amendment to the 1989 Employee Stock Purchase Plan:
For Against Abstain No Vote
---------- ------- ------- -------
55,745,460 3,297,380 405,799 --
3. Approve amendment to the 1996 Stock Plan:
For Against Abstain No Vote
---------- ---------- ------- -------
51,923,608 7,065,924 459,107 --
4. Ratify the appointment of Ernst & Young LLP as Independent Auditors:
For Against Abstain No Vote
---------- ------- ------- -------
58,635,981 533,480 279,268 --
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 12, 1997 /s/ Ronald K. Shelton
Date Ronald K. Shelton
Vice President, Finance, Chief Financial Officer,
Principal Accounting Officer, and Treasurer
[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 28, June 29,
1997 1996
------------ ------------
<S> <C> <C>
Primary:
Weighted average shares outstanding 66,416 64,159
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method 1,433 N/A
Common stock warrants, using treasury
stock or modified treasury stock method - -
------------ ------------
Common and common equivalent shares used in
the calculation of net income (loss) per share 67,849 64,159
============ ============
Net income (loss) 2,480 (7,605)
============ ============
Net income (loss) per share $0.04 ($0.12)
============ ============
Fully diluted:
Weighted average shares outstanding 66,416 64,159
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method 1,440 N/A
Convertible subordinated debt, using the
"if converted" method - -
Common stock warrants, using treasury
stock or modified treasury stock method - -
------------ ------------
Common and common equivalent shares used in
the calculation of net income (loss) per share 67,856 64,159
============ ============
Net income (loss) $2,480 ($7,605)
============ ============
Net income (loss) per share $0.04 ($0.12)
============ ============
</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> Jun-28-1997
<PERIOD-TYPE> 3-MOS
<CASH> 100,093
<SECURITIES> 225,357
<RECEIVABLES> 157,940
<ALLOWANCES> 0
<INVENTORY> 97,773
<CURRENT-ASSETS> 731,603
<PP&E> 124,490
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,063,696
<CURRENT-LIABILITIES> 286,409
<BONDS> 0
0
0
<COMMON> 358,956
<OTHER-SE> 55,415
<TOTAL-LIABILITY-AND-EQUITY> 1,063,696
<SALES> 201,623
<TOTAL-REVENUES> 201,623
<CGS> 122,471
<TOTAL-COSTS> 122,471
<OTHER-EXPENSES> 73,709
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,543
<INCOME-TAX> 1,063
<INCOME-CONTINUING> 2,480
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,480
<EPS-PRIMARY> $0.04
<EPS-DILUTED> $0.04
</TABLE>
