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 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
-----------------
Sept. 27, Sept
1997 19
----------- -----
<S> <C> <C>
Net sales $223,960 $23
Costs and expenses and gain on sale of assets:
Cost of sales 135,047 14
Research and development 44,644 5
Selling, general and administrative 28,373 3
Gain on sale of assets 0 (
----------- -----
Total costs and expenses and gain on sale of assets 208,064 22
----------- -----
Income (loss) from operations 15,896
Interest and other (expense) income, net (3,128) (
----------- -----
Income (loss) before provision (benefit) for income taxes 12,768
Provision (benefit) for income taxes 3,830
----------- -----
Net Income (loss) $8,938 $
=========== =====
Net income (loss) per common and common equivalent share $0.13
=========== =====
Weighted average common and common
equivalent shares outstanding 70,549 6
=========== =====
<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>
Sept. 27, Marc
1997 19
----------- -----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $154,153 $15
Short-term investments 211,724 18
Accounts receivable, net 150,470 17
Inventories 93,365 1
Deferred tax assets 34,410 3
Equipment and leasehold improvement
advances to joint ventures 93,446 11
Other current assets 13,399
----------- -----
Total current assets 750,967 79
Property and equipment, net 117,657 13
Manufacturing agreements, net
and investments in joint ventures 148,414 15
Deposits and other assets 58,357 5
----------- -----
$1,075,395 $1,13
=========== =====
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and other accrued liabilities $204,695 $27
Accrued salaries and benefits 26,228 3
Current maturities of long-term
and capital lease obligations 27,677 3
Income taxes payable 32,125 3
----------- -----
Total current liabilities 290,725 36
Capital lease obligations and long term debt 52,241 6
Other long-term obligations 5,370
Convertible subordinated notes 300,000 30
Commitments and contingencies 0
Shareholders' equity:
Capital stock 362,705 35
Retained earnings 64,354 5
----------- -----
Total shareholders' equity 427,059 40
----------- -----
$1,075,395 $1,13
=========== =====
<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 En
-----------------
Sept. 27, Sept
1997 19
----------- -----
<S> <C> <C>
Cash flows from operations:
Net income (loss) $11,418 ($
Adjustments to reconcile net income (loss) to net
cash flows from (used for) operations:
Depreciation and amortization 37,679 4
Net change in operating assets and liabilities (1,692) (11
----------- -----
Net cash flows provided by (used for) operations 47,405 (7
----------- -----
Cash flows used for investing activities:
Purchase of short-term investments (236,835) (
Proceeds from sales and maturities of short-term
investments 213,326
Additions to property and equipment (13,743) (1
Proceeds from termination of UMC agreement 20,543
Joint venture manufacturing agreements and
investment in joint ventures (20,300) (2
Increase in deposits and other assets (6,614) (
----------- -----
Net cash flows used for investing activities (43,623) (3
----------- -----
Cash flows provided by (used for) financing activities:
Proceeds from issuance of common stock 11,008
Borrowings on short-term debt 0 16
Borrowings on long-term debt 5,683
Payments on long-term debt and capital lease obligations (17,860) (1
Payments on short-term debt 0 (15
Increase in other long-term liabilities 0
----------- -----
Net cash flows provided by (used for)
financing activities (1,169)
----------- -----
Increase (decrease) in cash and cash equivalents 2,613 (10
Cash and cash equivalents - beginning of period 151,540 15
----------- -----
Cash and cash equivalents - end of period $154,153 $5
=========== =====
Supplemental disclosure of cash flow information:
Interest paid 14,740
Income taxes (refunded) paid 754 (1
Equipment purchased under capitalized leases 0 1
Tax benefit of stock option exercises 436
<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 Exchang
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 base
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 th
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 Compa
in its next fiscal quarter ended December 27, 1997. At that time the Compa
will be required to change the method currently used to compute earnings pe
share and to restate all prior periods. Under the new requirements for
calculating earnings per share, the dilutive effect of stock options will b
excluded. The implementation of Statement No. 128 is not expected to have
impact on the calculation of primary or fully diluted earnings per share fo
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.
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 th
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 an
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 manag
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, Mas
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 tw
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 wil
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
--------- ---------
Sept. 27, Sept. 28, Perce
1997 1996 chang
--------- --------- ------
<S> <C> <C> <C>
Net sales 100% 100%
Gross margin 40% 38%
Research and development 20% 25% -
Selling, general and administrative 13% 13%
Gain on sale of assets 0% -3%
Income (loss) from operations 7% 3% 1
Income (loss) before income taxes 6% 2% 2
Provision (benefit) for income taxes 2% 1% 2
Net income (loss) 4% 1% 1
</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 increas
sales in the mass storage division, primarily related to read channel devic
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 sa
as a percentage of total sales were primarily due to a reduction in sales o
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 opt
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 approximatel
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% f
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 fi
two quarters of fiscal 1998 compared to the same periods of fiscal 1997 wer
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
PC products, primarily related to graphics products.
Research and Development
Research and development expenses for the second quarter of fiscal 1998 wer
$44.6 million, a decrease of 24% from $58.5 million in the second quarter o
fiscal 1997. Research and development expenses for the first two quarters
fiscal 1998 were $88.8 million, a decrease of 26% from $119.7 million in th
first two quarters of fiscal 1997. Research and development expenditures
decreased in the second quarter and first two quarters of fiscal 1998 compa
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 mark
focused divisions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the second quarter of fisca
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 t
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, t
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. federa
statutory rate of 35.0%, primarily because of foreign operating results whi
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 equivale
in its operating activities during the first two quarters of fiscal 1998 an
used approximately $70.9 million during the first two quarters of fiscal 19
The increase in cash provided by operations was primarily because in the fi
two quarters of fiscal 1997 cash used to purchase assets for the joint vent
pending the arrangement of lease financing by the joint ventures, exceeded
receipt of cash from leasing companies upon the completion of the lease fin
by the joint ventures, whereas in the first two quarters of fiscal 1998, th
Company's receipt of cash from leasing companies exceeded the cash used to
purchase such assets. Cashflows from operations in the first two quarters
fiscal 1997 included approximately $88.0 million, net, that was used for jo
venture equipment to be leased. In the first two quarters 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 th
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.
addition, the Company received approximately $21 million from termination o
the UMC agreements and had smaller payments under its joint venture
manufacturing agreements in the first two quarters of fiscal 1998 than in t
same period of fiscal 1997.
Financing activities used $1.2 million in cash during the first two quarter
of fiscal 1998 and generated $7.4 million during the comparable period of f
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 Compa
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,
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
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 industr
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 produc
shipments. Because the Company's markets are volatile and subject to rapid
technology and price changes, there is a risk that the Company will forecas
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 th
Company's operating losses in fiscal 1997 and 1996. These factors increase
not only the inventory risk but also the difficulty of forecasting quarterl
operating results. Moreover, as is common in the semiconductor industry,
the Company frequently ships more product in the third month of each quarte
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 sale
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 o
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)
Lucent (Cirent joint venture) under a series of agreements intended to secu
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
committed to purchase a fixed percentage of the output of the joint venture
manufacturing facilities. As a result, the operating results of the Compan
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 i
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 borrowe
money and entered into substantial equipment lease obligations and is likel
to expand such commitments in the future. Such indebtedness could cause th
Company's principal and interest obligations to increase substantially. Th
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 industr
downturns and competitive pressures. The Company's ability to meet its deb
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 MiCRU
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
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 perio
of time. Because of the concentration of sales at the end of each quarter,
disruption in the Company's production or shipping near the end of a quarte
could materially reduce the Company's revenues for that quarter. Productio
may be constrained even though capacity is available at one or more wafer
manufacturing facilities because of the difficulty of moving production fro
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 i
the Company were unable to secure sufficient access to the services of thes
outside vendors.
Product development in the Company's markets is becoming more focused on th
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
risk that latent defects or subtle faults could be discovered by customers
end users after volumes of product have been shipped. If such defects were
significant, the Company could incur material recall and replacement costs
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 financia
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 consume
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 i
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 o
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
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 I
for mass storage products could in the future reduce demand for the Company
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 accelerati
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
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 ar
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 materi
in the first two quarters of fiscal 1998 or in fiscal 1997. The Company ha
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 controlle
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 pricin
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 MM
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 contin
to meet the cost or performance requirements of the market, revenues from t
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 t
Company's new products, and the development of standards with regard to the
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 low
than anticipated, while continuing sales of 33.6K modems have been subject
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 wit
multimedia features by Intel Corporation could adversely affect revenues an
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 effecte
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
operations. Furthermore, should such actions have a negative impact on the
Company's ability to design and develop new products, market new or existin
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 regardin
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 th
Company and may be subject to indemnification provisions made by the Compan
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
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
U.S. dollar against other currencies, particularly the Japanese yen. Furth
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
the Company does business, demand for and supply of the Company's products
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, a
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 t
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 it
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 hav
been notified that they may be infringing certain patents and other
intellectual property rights of others. Further, customers have been named
suits alleging infringement of patents by the customer products. Certain
components of these products have been purchased from the Company and may b
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 work
copyrights, trademarks, trade secrets, or indemnification liability, or tha
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
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 11, 1997 /s/ Ronald K. Shelton
Date Ronald K. Shelton
Vice President, Finance, Chief Financial Offi
Principal Accounting Officer, and Treasurer
Exhibit 10
AMENDMENT NO. 3 TO JOINT VENTURE FORMATION AGREEMENT ("Amendment No
of August 21, 1997, by and among Lucent Technologies Inc., a Delaware corpo
("Lucent"), as assignee and successor in interest, by duly acknowledged ass
AT&T Corp., a New York Corporation ("AT&T"), ATOR Corp., a New York corpora
Cirrus Logic, Inc., a California corporation ("Cirrus"), and Ciror, Inc., a
corporation ("CIROR").
WHEREAS, the parties now desire to modify and supplement certain of
Agreements among them referenced in the Joint Venture Formation Agreement (
Agreement"), dated as of October 23, 1995, by and among AT&T (now Lucent),
and CIROR, as amended by Amendments Nos. 1 and 2 to said JV Agreement, by a
parties, dated May 1 and July 31, 1996, respectively, specifically, the Gen
Partnership Agreement, the IC Wafer Supply Agreement, and the Technical Tra
Agreement, as well as to further amend said JV Agreement hereby as necessar
consistent therewith;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements hereinafter set forth, and intending to be legally bound hereby,
hereto agree, subject to the terms and conditions contained herein, as foll
1. Definitions. Capitalized terms or terms with initial capitals
not otherwise defined herein will have the meanings assigned to them in the
2. The JV Agreement. The JV Agreement is deemed, and hereby is, a
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 calen
year period to an annual period commencing October 1 of each year, effectiv
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 P
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"
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 Partners
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 an
supplements to the specific Material Agreements as set forth in Sections 4
5 below.
(c) Section 4.04 (c) (Costs) (ii)(a) (OR2 Working Capital) is amended to a
"Effective October 1, 1998, the working capital required with respect to OR
be provided by the Lucent Partner and the Cirrus Partner in proportion to t
respective Take or Pay obligations under the IC Wafer Supply Agreement, as
amended."
3. The General Partnership Agreement ("GPA"). The GPA, dated as o
between ATOR and CIROR, is deemed, and hereby is, amended in the following
(a) Section 1.01 (Definitions) is amended to change the Fiscal Year of the
Partnership as therein defined for general accounting purposes in accordanc
with Section 2(a) above of this Amendment No. 3 and all references to "Fisc
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 basi
(b) Section 5.02 is amended to add the following:
"Such agreement or consent shall not unreasonably be withheld with respect
sale of the transferring Partner's interest, provided, without limitation,
(a) Any such proposed sale must be of the transferring Partner's entire in
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
available pursuant to Amendment No. 3 to the Joint Venture Agreement, inclu
the Appendices thereto (other than 0.18 micron technology as defined in the
Technical Transfer Agreement, as amended, provided that available equivalen
versions, as therein defined, then exist); and
(c) Such transferring Partner shall not be in default of any of its paymen
other obligations under the Joint Venture Agreement, as amended, or any of
Material Agreements referenced therein, and in the case of CIROR and Cirrus
Inc., shall be in compliance with all requirements of the Cirrus Asset Leas
the Cirrus Guaranty, including the obtaining of any consents required there
4. The Technical Transfer Agreement ("TTA"). The TTA, effective a
1996, by and among Lucent, Cirent Semiconductor ("Cirent") and Cirrus, is d
hereby is, amended by incorporating therein, effective concurrently herewit
Supplemental Agreement, a copy of which is annexed hereto and made a part h
Appendix A.
5. The IC Wafer Supply Agreement ("WSA"). The WSA, made as of Aug
and among Lucent, Cirrus and Cirent, is deemed, and hereby is, amended as f
(a) Section 2.0(b) is amended to add the following:
"Such agreement by the other Purchaser to any such proposed foundry basis s
the original Purchaser shall not unreasonably be withheld; provided, howeve
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
Section 2 and Exhibit A thereof, respectively, as well as the payment sched
in Exhibit B thereof, are modified by incorporating therein, effective conc
herewith, as Exhibit AB the Supplemental Take or Pay Principles and payment
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 thei
authorized representatives, and Cirent will acknowledge same as indicated b
closing to be held at the offices of Cirent, 9333 South Young Parkway, Orla
32819, on August 21, 1997, at 10:00 a.m. local time, or at such other place
as the parties hereto mutually agree upon. Such execution, the obligations
ATOR and Cirent, individually and collectively, to close, and the continuat
of this Amendment No 3 are expressly conditioned upon the following payment
Cirent, representing the total amounts past or currently due from Cirrus un
the Material Agreements.
(a) The sum of $45.3 million, representing Wafer payments due unde
or before said closing date; and
(b) The sum of $25 million, representing the balance of Wafer paym
the WSA, installation cost obligations and working capital requirements, on
October 1, 1997.
Such payments will be made by wire transfer to a designated Cirent bank acc
be otherwise directed by Lucent, ATOR or Cirent.
7. General. Except as specifically amended or modified hereby, al
conditions of the JV Agreement and the Material Agreements remain in full f
effect.
IN WITNESS HEREOF, this Amendment No. 3 has been duly executed by a
each of the parties hereto, and duly acknowledged and agreed to by Cirent,
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
August 21, 1997 by and among Lucent Technologies Inc., a Delaware corporati
Cirrus Logic, Inc., a California corporation ("CIRRUS"), and Cirent Semicon
New York general partnership ("LICENSEE"), as a supplement to the Technical
Agreement ("TTA"), effective as of June 30, 1996, by and among said parties
to Amendment No. 3 to the Joint Venture Formation Agreement ("Amendment No.
concurrently herewith, by and among LUCENT, CIRRUS, ATOR Corp. a New York c
("ATOR") and Ciror, Inc., a California corporation ("CIROR").
WHEREAS, the parties now desire, among other matters, to modify and
said TTA consistent with further agreements and understandings between them
NOW, THEREFORE, in consideration of the mutual covenants and agreem
hereinafter set forth, and intending to be legally bound hereby, the partie
subject to the terms and conditions contained herein and in said Amendment
follows:
1. Capitalized terms or terms with initial capitals used herein an
defined herein or in the Definitions Appendix hereto will have the meanings
them in this Amendment No. 3, the TTA or the Joint Venture Formation Agreem
context requires.
2. Article 1.01 (Furnishing of Information) and Article 2.01 (Tech
Information Grants) of the TTA are deemed, and hereby are, amended to provi
will furnish to LICENSEE and CIRRUS will have access to LUCENT TECHNICAL IN
relating to certain additional technologies, in accordance with Section 4 b
other terms and conditions hereof, provided that they are then (a) in PRODU
LUCENT in OR2, (b) offered in AVAILABLE EQUIVALENT VERSIONS from a THIRD PA
SOURCE, and (c) LICENSEE and CIRRUS are current with respect to their payme
under the Joint Venture Formation Agreement and the Material Agreements as
defined. The furnishing of said technologies and the TECHNICAL INFORMATION
thereto to LICENSEE and any access thereto by CIRRUS will be in accordance
and conditions of the TTA and this TTA Supplement.
3. Articles 3.02 (Transfer of 0.35 and 0.25 MICRON TECHNOLOGY) and
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) a
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
"In additional part payment for the further rights granted hereunder by LUC
LICENSEE, LICENSEE shall pay LUCENT additional fees of (a) (i) thirty-five
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 Stat
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
$20,000,000) as the initial fee for TECHNICAL INFORMATION relating to said
MICRON TECHNOLOGY, and (iv) one hundred United States dollars (U.S. $100.00
each such WAFER made by using said 0.18 MICRON TECHNOLOGY; (b) thirty Unite
States dollars (U.S. $30.00) for each such WAFER made using AVAILABLE EQUIV
VERSIONS of BiCMOS TECHNOLOGY; and (c) thirty United States dollars (U.S.
for each such WAFER made using AVAILABLE EQUIVALENT VERSIONS of the STANDAR
MODULE.
The initial fees provided in subsections (a) (i) and (iii) above shall beco
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 wi
minimum feature size finer than that in 0.18 MICRON TECHNOLOGY) referenced
Section 2 above, which are offered in AVAILABLE EQUIVALENT VERSIONS from a
PARTY FOUNDRY SOURCE will be negotiated by the parties but will not exceed
additional sixty United States dollars (U.S. $60.00) per WAFER for each suc
individual technology or module used.
Additional fees for unique developments or modifications in the abo
or modules, and which LUCENT may agree to provide to LICENSEE, will be nego
by the parties but will not exceed an additional sixty United States dollar
$60.00) per WAFER for each such development or modification used."
5. Except as specifically amended or modified hereby, all terms an
the TTA remain in full force and effect.
IN WITNESS WHEREOF, this TTA Supplement has been duly executed by a
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
DEVICES having line widths (a measure of minimum feature size) as fine as 0
and includes DIGITAL TECHNOLOGY and LINEAR TECHNOLOGY.
AVAILABLE EQUIVALENT VERSIONS means technologies qualified for prod
available from a THIRD PARTY FOUNDRY SOURCE and which provide substantially
functionality with comparable characteristics (e.g., access time, parametri
substantially the same design/layout rules and using substantially the same
masks.
DIGITAL TECHNOLOGY means the basic digital process.
BiCMOS TECHNOLOGY means technology in which a SEMICONDUCTIVE DEVIC
bipolar and complementary metal oxide semiconductors.
LINEAR TECHNOLOGY means adaptation of the digital technology to inc
more of the following: threshold adjustments, capacitors, fuses, and preci
PRODUCTION means that LICENSEE is supplying WAFER outs of a particular tech
after QUALIFICATION of that technology.
STANDARD FLASH MODULE means an electrically erasable, programmable
DEVICE having non-volatile memory cells in which erasure is performed simul
blocks of said cells.
THIRD PARTY FOUNDRY SOURCE means TSMC, VMC, Chartered Semiconductor
semiconductor manufacturing companies or entities that have an annual reven
$75M per year from the sale of WAFERS to multiple customers none of which h
position in or above consultations will also include discussion of the pote
of various design rule changes on yields and latch-up. Cirrus agrees to pa
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, tha
Supply Agreement ("WSA"), made as of August 9, 1996 by and among said parti
be, and hereby is, amended by incorporating this Exhibit AB as a supplement
modification of the Take or Pay Principles and the payment schedules set fo
A and B, respectively, of said WSA.
A. Exhibit A
The "Take or Pay Principles" set forth in Exhibit A to the WSA are
supplemented as follows:
1. Lucent may convert up to 100% of its Capacity Allocation in OR2
Section C below, at any time and in its sole discretion, to run any silicon
technologies, whether or not covered or scheduled in the Annual Plan, provi
there is No Material Deviation, as defined in Section C below, caused by Lu
objectives and requirements of the Annual Plan then in effect and the devel
technologies as agreed to in said Annual Plan remains on schedule. Lucent
Cirrus harmless from loss or expense directly resulting from any Material D
caused by Lucent.
2. (a) Cirrus may convert any of its OR2 Capacity Allocation, as
Section C below, to run any additional technologies furnished pursuant to t
Agreement to the Technical Transfer Agreement (Supplemental TTA) between th
hereto, effective concurrently herewith, provided that (i) due allowance is
equipment line capacity, ordering lead times and the current technology mix
parties, and (ii) there is No Material Deviation, as defined in Section C b
Cirrus from the objectives and requirements of the Annual Plan then in effe
will hold Lucent harmless from loss or expense directly resulting from any
Deviation so caused by Cirrus.
(b) Up to one engineering lot of Wafers per month employing an
technologies described in Paragraph 2(a) above will, at Cirrus' request, be
by Supplier to Cirrus (from either OR1 or OR2), prior to any conversion of
price representing twice the Cost of Production, as defined in Section C be
Wafers or lot.
3. If Supplier does not provide for Cirrus, by July 1, 1999, Wafers
using a qualified 0.25 micron digital technology from OR2 which are Materia
(or better), as defined in Section C below and as measured by cost and perf
agreed on in writing by the parties, to that available from two or more thi
foundry sources, Cirrus upon 90 days' prior written notice to Lucent and Su
each quarter shift a portion of its take or pay obligations to Lucent, at t
per fiscal year quarter of the total capacity of OR2 as provided in the the
Annual Plan. Said action will not reduce any total amounts then owed to Su
Lucent or Cirrus, and Cirrus' right so to shift its obligations going forwa
immediately upon Supplier's compliance with the agreed metrics for such tec
such shift made pursuant hereto will be irrevocable.
4. The rights provided in Paragraphs 1, 2 and 3 above are exercisa
respective referenced party only if such party is then current with respect
obligations under the Joint Venture Formation Agreement and the Material Ag
therein defined.
5. Lucent will take Wafers from Cirrus' Allocated Capacity in OR2
with the quantities and periods specified in Table 1 attached.
6. Paragraph (A) of Exhibit A is deemed, and hereby is, amended to
from and after October 1, 1998, subject to Cirrus' compliance, as of the da
commencement of such purchases, with Paragraph 4 hereof, Lucent will purcha
percent (75%) and Cirrus will purchase twenty-five percent (25%) of OR2's t
output for Wafers, based on the forecasts provided in the Annual Plan, with
responsibilities determined pursuant to said Exhibit A as hereby amended an
and Supplier agrees to sell to each Purchaser accordingly. Such take or pa
percentages shall continue in effect for the remaining term of the Partners
however, that from and after October 1, 1998 Cirrus will have the right to
ten percent (10%) of said total production output on two (2) years' prior w
to Lucent and Supplier plus an additional six (6) month period for transiti
back to continue in effect for the remaining term of the Partnership. The
Allocation for each Purchaser will at all times be equivalent to such Purch
pay percentage.
7. It is agreed that 0.35 micron High Density Technology has been
production.
8. It is agreed that, to improve efficiencies in production by Sup
(a) Lucent and Cirrus will on an ongoing basis discuss and sha
and layout information that affects ESD and/or latch-up.
(b) For each of the 0.35, 0.25 and 0.18 digital technologies,
will be provided to Cirrus by Supplier as to which design rules could be mo
(without accompanying process changes) for SRAM cell designs, without causi
to other products in Supplier. The above consultations will also include
discussion of the potential impacts of various design rule changes on yield
latch-up. Cirrus agrees to pay for the engineering lots used in testing th
design rule modifications.
(c) Supplier will, from time to time, provide tightening of t
("shrinks") for 0.35, 0.25 and 0.18 micron technologies for the benefit of
purchasers, without additional payment.
9. The basis for take or pay cost calculations only (i.e., not act
with values shown for the particular fiscal year (quarter), shall be as fol
(a) It is agreed that neither Lucent nor Cirrus has a take
quarters up to and including June 30, 1997.
(b) It is agreed that, for the quarters beginning 7/1/97 a
or pay obligation of each Purchaser shall be calculated as follows:
i. The fixed cost per Wafer (FCPW) for the calculation
stated in the tables (A & B) below.
ii. Based on Table 1 (wafer outs assumed by Lucent) and
net wafer outs (WO) obligation is also shown.
iii. The Purchasers' total quarterly fixed cost obligati
is obtained by multiplying the above two items.
iv. The Beginning Fixed Inventory Value (BFIV) in a qua
number of wafers the Purchaser has in inventory multiplied by their
percentage completion multiplied by the fixed cost per wafer stated in Tabl
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 technolog
excluding starting material (wafers).
v. Change in Beginning Fixed Inventory Value (CBFIV) i
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
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 su
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 e
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 hund
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 Sta
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 be
payable to Supplier as follows:
(a) One-third (1/3) upon written notice of election by Cirrus to c
to 0.18 micron technology in accordance with Section A2 above; and
(b) Two-thirds (2/3) upon beginning of production using the techno
Cirrus as defined in the Supplemental TTA.
Additional fees for other technologies or modules (none of which ha
feature size finer than that in 0.18 micron technology) as referenced in th
Supplemental TTA, which are offered in available equivalent versions from a
party foundry source, will be negotiated by the Purchasers but will not exc
additional sixty United States dollars (U.S. $60.00) per Wafer for each suc
individual technology employed.
Additional fees for unique developments or modification in the above techno
or modules, and which Lucent may agree to provide to Supplier, will be nego
by the Purchasers but will not exceed an additional sixty United States dol
(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 fo
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, 199
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 t
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 ca
to which each Purchaser is then entitled plus the proportional share of any
which exists. The proportional share is equal to the percentage of the pla
to which each Purchaser is currently entitled (i.e., if one Purchaser is cu
entitled to 80% of the planned capacity of a technology, its proportional s
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 Annua
(c) "Cost of Production" means the total costs and associated expenses of
manufacturing (including, without limitation, equipment set-up and take-dow
handling and testing) for each Wafer or lot produced. Such total costs wil
(two) times the standards cost for a production wafer or lot of that size a
(d) "Materially Equivalent" means that the Wafers meet or exceed the Lucen
target metrics shown in Table 3 attached, recognizing that the Lucent 0.25
Features listed in said Table may be different from typical or other proces
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. Hackwo
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
------------ -----------
Sept.27, Sept. 28,
1997 1996
------------ -----------
<S> <C> <C>
Primary:
Weighted average shares outstanding 67,232 64,776
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method 3,317 0
------------ -----------
Common and common equivalent shares used in
the calculation of net income (loss) per share 70,549 64,776
============ ===========
Net income (loss) $8,938 $2,998
============ ===========
Net income (loss) per share $0.13 $0.05
============ ===========
Fully diluted:
Weighted average shares outstanding 67,232 64,776
Dilutive common stock equivalents:
Common stock options, using treasury stock
or modified treasury stock method 3,387 1,890
------------ -----------
Common and common equivalent shares used in
the calculation of net income (loss) per share 70,619 66,666
============ ===========
Net income (loss) $8,938 $2,998
============ ===========
Net income (loss) per share $0.13 $0.04
============ ===========
<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 EXTRACT
FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED
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>
