UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required) for the fiscal year ended March 29, 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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
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]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of June 3, 1996 was approximately
$1,093,027,000 based upon the closing price reported for such date on the
Nasdaq National Market. For purposes of this disclosure, shares of Common
Stock held by persons who hold more than 5% of the outstanding shares of
Common Stock and shares held by officers and directors of the Registrant have
been excluded because such persons may be deemed to be affiliates. This
determination is not necessarily conclusive.
The number of outstanding shares of the registrant's common stock, no
par value, was 66,156,295 as of March 29, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting
of Shareholders to be held July 31, 1997 are incorporated by reference into
Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
Cirrus Logic, Inc., ("Cirrus Logic" or the "Company") was
incorporated in California on February 3, 1984, as the successor
to a research corporation which had been incorporated in Utah in
1981. The Company commenced operations in November 1984. This
Form 10-K contains forward-looking statements within the meaning
of the Private Securities Reform Litigation Act of 1995. Such
forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those
projected. Such risks and uncertainties include the timing and
acceptance of new product introductions, the actions of the
Company's competitors and business partners, and those discussed
below in Management's Discussion & Analysis.
Cirrus Logic, Inc. is a leading manufacturer of integrated
circuits ("ICs") for the personal computer, consumer and
industrial markets. The Company has developed a broad portfolio
of products and technologies for multimedia, including graphics,
video and audio; mass storage, including magnetic hard disk and
CD-ROM; communications over local and wide area networks; and
advanced mixed-signal applications.
The Company's customers include most of the top manufacturers
of personal computers ("PCs") and PC-related equipment, including
Acer, Apple, Compaq, Dell, Hewlett-Packard, IBM, NEC, Packard Bell
and Toshiba. The Company also serves most of the major hard disk
drive manufacturers, including Fujitsu, Quantum, Seagate and
Western Digital. The Company believes that, in the PC multimedia
market, it is a major supplier of graphics accelerators and 16-bit
audio codecs, and that, in the mass storage market, it is a major
supplier of disk drive controllers, disk drive read channel ICs
and CD-ROM controllers. The Company also is a major supplier of PC
CardBus host adaptors for portable computers, and the Company has
recently introduced advanced ICs for V.34 bi voice/fax/ data
modems and LAN controllers for PC applications.
During fiscal 1997, the Company introduced a number of new
products in its core markets. Within the multimedia market, the
Company introduced its first Laguna RDRAM-based 3D graphics
accelerator ICs in September 1996 and in the same quarter the
Company began production of single-chip audio solutions that
integrate audio codec, controller and FM music synthesis and
provide 3D spatial sound effects. Within the mass storage market,
the Company began production of a new generation of its single-
chip digital PRML read-channel chips. These products have been
designed into systems by Seagate, Quantum and Western Digital.
The Company also introduced its first controller for recordable/
erasable CD drives, with increased playback speeds (up to 18x) and
increased record speeds (up to 8x).
Historically, the Company relied for its wafer manufacturing
needs upon "merchant wafers" manufactured by outside suppliers.
The Company is currently one of the world's largest purchasers of
merchant wafers. In response to its rapid growth, and in an
effort to gain more control over its wafer supply, the Company
pursued a strategy to expand its wafer supply sources by taking
direct ownership interests in wafer manufacturing joint ventures.
The Company believes such joint ventures provide important
competitive advantages, including: (i) assured wafer capacity,
(ii) wafer costs potentially lower than the cost of merchant
wafers, particularly during periods in which the industry is
capacity constrained, and (iii) early access to advanced process
technology from industry leaders. In 1994, the Company and IBM
formed MiCRUS, a manufacturing joint venture that produces wafers
for both companies. MiCRUS began operations in 1995 and is now
engaged in a second expansion. In addition, in July 1996, the
Company and Lucent Technologies (formerly AT&T Microelectronics)
formed Cirent Semiconductor, a manufacturing joint venture that
will produce wafers for both companies. Cirent Semiconductor
began operations in the fourth quarter of fiscal 1997. Both the
MiCRUS and the Cirent Semiconductor joint ventures require the
Company to provide or guarantee substantial equipment financing.
In November 1996, the Company completed a lease financing of
approximately $253 million of equipment for its Cirent
Semiconductor joint venture. Of this amount, approximately $160
million was released to reimburse the Company for equipment which
had already been purchased and the remainder has been committed
for future equipment purchases. In addition, the Company has
long-term volume purchase agreements with Taiwan Semiconductor
Manufacturing Co., Ltd. The Company believes that it will
continue to rely on merchant wafer suppliers for a substantial
portion of its wafer requirements for at least the next two years.
From fiscal 1992 through fiscal 1996 the Company grew
rapidly, with revenues increasing from $218 million to $1.15
billion as a result of internal growth and acquisitions. During
this period, the Company launched programs to pursue a variety of
market opportunities within the PC, communications and consumer
electronics markets. In early 1996, however, the Company
determined that the breadth of its programs was diverting
engineering and management resources from products for the
Company's core markets. Accordingly, during fiscal 1997, the
Company adopted and began implementing a strategy of focusing on
the markets for multimedia (graphics, video and audio), mass
storage and communications. As part of this strategy, the Company
began divesting non-core business units and eliminating
projects that did not fit within its core markets.
During the second quarter of fiscal 1997, the Company
completed the sale of the PicoPower product line to National
Semiconductor, Inc. The Company received approximately $17.6
million in cash for the PicoPower product line. In connection
with the transaction, the Company recorded a gain of approximately
$6.9 million.
During the third quarter of fiscal 1997, the Company
completed the sale to ADC Telecommunications Inc. of the PCSI
product group that produced CDPD (Cellular Digital Packet Data)
base station equipment for wireless service providers, and
developed pACT (personal Air Communications Technology) base
stations for AT&T Wireless Services Inc. The Company received
approximately $20.8 million in cash for the group. In connection
with the transaction, the Company recorded a gain of approximately
$12.0 million.
During the fourth quarter of fiscal 1997, the Company
completed the sale of the assets of PCSI's Wireless Semiconductor
Products to Rockwell International for $18.1 million in cash and
made the decision to shut down PCSI's Subscriber Product Group.
PCSI's Wireless Semiconductor Product Group provided digital
cordless chip solutions for PHS (Personal Handyphone System) and
DECT (Digital European Cordless Telecommunications) as well two-
way messaging chip solutions for pACT (personal Air Communications
Technology). In connection with the sale of the Wireless
Semiconductor Product Group and the shut-down of the Subscriber
Group, the Company recorded a net gain of $0.3 million in the
fourth quarter.
Also during fiscal 1997, the Company implemented a program to
manage costs and streamline operations. These efforts culminated in
the fourth quarter with a reorganization into four market focused
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 completed a workforce reduction of approximately
400 people in April 1997, representing approximately 15 percent of
the worldwide staff. Although the Company expects to realize the
immediate benefit of a reduced cost structure and anticipates
other benefits from the reorganization into market focused
divisions, there is no assurance that the Company will regain the
levels of profitably that it has achieved in the past or that
losses will not occur in the future.
The results of operations for the fourth quarter of fiscal 1997
were impacted by the reorganization, the outsourcing of production
testing, the consolidation of certain corporate functions and other
related factors. The results of operations for the fourth quarter
of fiscal 1997 include a restructuring charge of $21.0 million, the
majority of which is attributable to the workforce reduction, the
write-off of excess assets and accruals of excess facilities. In
addition, the results of operations also include charges totaling
approximately $34.5 million, which are included in cost of sales.
The majority of these charges are related to anticipated
manufacturing capacity variances and some inventory write-downs.
Excluding these charges, the Company's loss from operations for the
fourth quarter of fiscal 1997 would have been $1.5 million.
Background
ICs have become pervasive and are found in products ranging
from consumer electronics to automobiles. The PC industry is the
largest source of demand for ICs. The market also has expanded to
include a broad array of portable products from notebook computers
to pocket organizers and hand-held personal computing and
communications devices. In addition, the average IC content per
machine has increased as CD-ROM drives, 16-bit stereo sound, 64-
bit graphics accelerators, network access and
fax/modem/voicemail/speakerphones have become increasingly
standard.
The vast majority of PCs shipped today rely on
microprocessors from a single source. With the same processor
technology available across the spectrum of PC products, the
primary distinguishing characteristics of today's leading PCs have
become the graphics, video, audio, mass storage, and
communications capabilities and, in portable computers, weight,
form factor (size), screen quality and battery life. PC
functionality is controlled by increasingly complex subsystems, or
"computers within the computer," whose features, performance and
cost characteristics are largely determined by their semiconductor
components. Cirrus Logic has developed one of the industry's
broadest portfolios of products and technology to address the
multimedia, communications, and mass storage applications that are
among the primary features used by PC manufacturers to
differentiate their products. Semiconductor vendors to the
PC market must provide high levels of innovation and must contend
with increasingly short product lives and extreme cost pressures.
The first product to market that provides a desired new
functionality may earn attractive margins, but prices fall rapidly
once comparable competitive products are available.
These trends create substantial opportunity for
semiconductor suppliers but demand that a broad set of skills be
brought together within a single entity. The cost pressures, the
performance requirements and the drive to smaller form factors
have led to higher levels of integration, as circuit boards
containing many chips are replaced by one- or two-chip solutions.
Higher integration in turn requires designers to combine analog
and digital functions into mixed-signal circuits, to combine
disparate functions into single ICs, and to apply increasing
levels of systems and software expertise.
As the capabilities of the PC continue to evolve, the core
technologies of the computing, communications, and consumer
electronics markets have begun to converge. For example, consumer
audio and video electronics markets, traditionally based on analog
components, are now transitioning to digital technologies similar
to those developed for multimedia audio and video in the PC. This
convergence of technologies provides the opportunity for companies
developing advanced products for PCs to leverage their research
and development investments to serve the communications and
consumer electronics markets. In addition, the transition of these
markets from analog to digital technologies also may create
significant additional demand for IC capacity, since digital
designs require larger semiconductors and, consequently, more
wafer capacity.
ICs produced with newer, smaller physical dimensions for
the circuitry are substantially smaller and less expensive and
provide higher performance than ICs with the same functionality
produced with older generation technology. For this reason, the
demand for lower cost and higher performance ICs has forced the
semiconductor industry to adopt increasingly advanced
manufacturing processes. Most ICs for the markets served by the
Company are now manufactured using 0.6, 0.5 and 0.35-micron
processes. The Company believes that the next generation PCs are
likely to require that ICs be manufactured with processes of
0.25-micron or smaller. Historically, wafers produced with the
most advanced process technology have often been in short supply,
and the Company anticipates demand may exceed the supply of 0.25
micron and smaller wafers for the first two to three years after
those technologies become widely used in the Company's markets.
Markets and Products
Cirrus Logic targets large existing markets that are
undergoing major product or technology transitions, as well as
emerging markets that have forecasts of high growth. The Company
applies its analog, digital, and mixed-signal design capabilities,
systems-level engineering and software expertise to create highly
integrated solutions that enable its customers to differentiate
their products and reduce their time to market. These solutions
are implemented primarily in ICs and related software, but may
also include subsystem modules and system equipment.
Within the major growth markets represented by personal
computers, communications, industrial automation and consumer
electronics, the Company's products address key system-level
applications including multimedia (graphic, video, and audio),
magnetic and optical mass storage, communications, and hand-held
and portable computing and communication devices. The Company's
advanced mixed signal products, which target a variety of
industrial and other applications, serve as a technology driver
for product development throughout the Company.
Multimedia
The Company offers a broad range of multimedia products,
comprising primarily graphics, video, and audio integrated
circuits and software. These products bring TV-quality video and
CD-quality stereo audio to multimedia applications for PCs,
workstations, videoconferencing and consumer electronics.
The Company's customers in the multimedia market are
predominantly PC OEMs, as well as some of the leading add-in board
makers. For fiscal 1997, major OEM customers included Acer,
Compaq, Hewlett-Packard, IBM, NEC, Packard Bell and Toshiba, and
add-in board customers included Aztech Systems, Creative Labs, and
STB Systems.
PC Graphics and Video
The Company is a major supplier of graphics accelerators
and integrated graphics/video accelerators for desktop and
portable PCs. Significant revenues come from the Company's
families of 64-bit DRAM-based desktop graphics accelerators for
cost-sensitive and mainstream Pcs. These products are implemented
in several pin-compatible families which offer a range of price/
performance solutions for OEMs and graphics board makers. The
Company expects the following to be the most important of its
graphics and video products in the near term horizon.
<TABLE>
<CAPTION>
Description Key Features Status
----------------- ------------------------------------- ------------------
<S> <C> <C>
64-bit RDRAM-based High performance 2D and 3D Multiple products
Laguna 3D graphics, multiple video windows. in production. AGP
Accelerators (Advanced Graphics
Port) versions
expected to sample in
first quarter of
calendar 1997
64-bit DRAM-based Economical 2D graphics, high quality In production
VisualMedia quality video, video port, single
Accelerators single video window.
64-bit SGRAM-based High performance 2D graphics, Sampling.
VisualMedia two video windows.
Accelerators
64-bit DRAM-based Economical 2D graphics, single In production.
VisualMedia video window, high resolution LCD
Accelerators for panel support, low power operation.
Notebook PCS
</TABLE>
In the desktop PC market, Cirrus Logic was the first vendor
to introduce a cost-effective, single-chip integrated
graphics/video product for mainstream PCS. These products are sold
primarily to PC OEMs to be placed directly on the PC motherboard.
The Company has recently introduced the new family of Laguna 3D
Accelerators which provide high performance 64-bit graphics using
RDRAM technology, with multiple simultaneous windows of video on
screen. The Company has also recently begun shipping its first 3D
graphics product intended for the mainstream PC market.
Cirrus Logic is also among the leading suppliers of
graphics chips for portable PCs. The Company's products include
high performance graphics controllers using 64-bit EDO DRAM
accelerator architectures, as well as cost-effective 32-bit
controllers for sub-notebook PCS. The Company has developed
proprietary techniques for achieving high-quality images on
various resolution LCD panels, for simultaneous display on LCDs
and CRT monitors, and for low-voltage and mixed-voltage design for
power sensitive applications.
Audio
The Company offers a wide array of audio products for
multimedia PCs. These highly integrated chips and software bring
CD-quality sound and studio quality composition and mixing
capabilities to PCs and workstations.
The Company is a leading supplier of 16-bit stereo codecs
for PCs. These mixed-signal devices use the Company's delta sigma
technology to provide high quality audio input and output
functions for PC audio products including those that offer Dolby
Digital (AC-3), SoundBlaster, AdLib and Microsoft Sound
compatibility. The Company's audio chips also provide PCs with
audio decompression and FM and wavetable sound/music synthesis.
The Company's leading audio product is now a highly integrated
single-chip audio product that integrates codec, SoundBlaster and
FM synthesis functions. The Company has recently begun production
of products which provide special effects audio technology,
allowing PC games players to perceive sound as coming from various
points around them in a 3-D space.
The following are expected to be the most important of the
Company's PC audio products in calendar 1997.
<TABLE>
<CAPTION>
Description Key Features Status
------------------ --------------------------------------- ----------------
<S> <C> <C>
Integrated audio Single chip audio Codec, controller In production.
solution and FM music synthesis. Highest
audio quality.
Integrated audio Single-chip with SRS or Qsound spatial In production.
with 3D sound effects audio. Two products.
</TABLE>
Consumer Products
The Company currently offers over 60 products for the
consumer high-fidelity audio market. Product features include
analog/digital and digital/analog conversion and MPEG audio
decompression. The products provide digital high-fidelity audio
record and playback for high end professional recordings
audiophile quality stereo systems, set-top audio decoders, digital
audio tape ("DAT"), CD players, Compact Disk Interactive ("CDI")
and automotive stereo systems. Customers include Philips, Nokia
and Sony.
The Company also currently offers PC graphics controller
ICs which can output to standard televisions. These products are
being used by customers to develop products which are hybrids
between conventional PCS and TVs, including Internet appliances.
Mass Storage
The Company supplies chips that perform the key electronics
functions contained in advanced magnetic and optical disk drives.
Since pioneering the IDE (integrated drive electronics) standard
for embedded disk drive controllers in 1986, the Company has
helped facilitate the development of higher capacity 3.5-inch disk
drives for desktop computers and workstations and 2.5-inch, 1.8-
inch and 1.3-inch form factor drives for portable computers.
The Company continues to be a leading supplier of controllers to
the disk drive market. In fiscal 1996, the Company continued its
strategy of expanding its opportunity in the disk drive
electronics market by offering solutions in the areas of read
channel and motion control electronics. The Company's mass storage
customers include Fujitsu, Quantum, Seagate, Sony, Toshiba and
Western Digital. The following mass storage products are expected
to be the most important in the near term horizon:
<TABLE>
<CAPTION>
Descriptions Key Features Status
- ----------------------- ------------------------------------------ ----------------
<S> <C> <C>
Advanced Architecture Advanced data handling and error-detection/ In production.
PC AT and SSI Disk correction capabilities for data integrity
Controllers in high performance hard disk drives.
Multiple products.
Digital PRML Read Single-chip digital read/write channel In production.
Channels solutions. Proprietary algorithms allow
more data per disk. Multiple products.
Single-chip ATAPI CD-ROM High data rates (up to 20x speeds), and In production.
Controllers hardware error detection/correction
capabilities for simplified firmware
development. Multiple products.
SCSI and ATAPI CD-R High integration and performance (up to 18x Sampling.
(Recordable CD) read and 8x recording).Handles both CD-R
Controllers and CD-Erasable formats. Advanced
automation for simplified firmware
developments. Two products.
</TABLE>
The Company offers a broad family of magnetic storage
controller products for the AT IDE, PC-Card, Small Computer System
Interface ("SCSI") and high-speed SCSI-2 interface standards. To
achieve the high recording densities required by smaller disk
drives, the Company has pioneered a number of controller
innovations, including 88-bit Reed-Solomon error correction, zone-
bit recording and split-data fields.
The Company began volume shipments of its magnetic storage
read channel products in fiscal 1995, and was the first merchant
supplier to provide key data-detection technology known as
partial-response, maximum-likelihood ("PRML") for 3.5-inch and
small form factor drives. Based on the Company's CMOS mixed-signal
technology and its proprietary SofTarget approach to PRML,
these devices substantially increase the amount of data that can
be stored on a disk platter using existing industry-standard head
and media technology.
In fiscal 1995, Cirrus Logic began production of its first
CD-ROM controller product, with Sony Corporation as a development
partner and major customer. The Company has since introduced a
second and, recently, a third generation of CD-ROM controller
products. In the first quarter of fiscal 1997 the Company's CD-ROM
controllers were used by Optics Storage Pte. Ltd. in the
industry's first 12X speed CD-ROM drive, and more recent products
support CD-ROM speeds of up to 20X. In the second quarter of
fiscal 1997 the Company introduced its first controller products
for recordable/erasable CD drives.
Communications
The Company has expanded its offerings of communications
products, which now include modem, local area network and Internet
products. The following communications products are expected to be
the most important in calendar 1997:
<TABLE>
<CAPTION>
Description Key Features Status
- ----------------------- ------------------------------------ -----------------------
<S> <C> <C>
V.70, V.80, 56Kbps and Further developments within family V.70 and V.80 sampling
ISDN FastPath modems roadmap to support voice and data, 56Kbps and ISDN in
video conferencing, and high-speed development.
lines. Multiple products.
V.34+ FastPath modem Highly integrated voice/data/fax In production.
modem chip sets offering 33.6 Kbps
performance. Multiple products.
Multi-line Serial I/O Extensive family of intelligent In production.
Controllers multi-line input/output devices,
reducing processor overhead burden
in communications equipment.
Multiple products.
PC-Card, Card Bus Host Market-leading product line for In production.
Adapters expansion card slots in notebook
computers. Multiple products.
Local Area Network Highest level of integration for In production.
Controllers simplified design of local area
network controllers for motherboards
and interface cards. Two products.
</TABLE>
The Company introduced the industry's first two-chip
intelligent fax/data/voice modem in 1992. The Company subsequently
introduced several high-performance chip sets with enhanced
features for error correction and data compression, speakerphone
capability, and portable computer PC-CardBus applications. The
high level of integration made these products particularly
popular for small form factor PCMCIA cards.
The Company also offers host-adapter products for the PC
market. The Company believes it is the leading supplier of host
adapter chips for the PC-Card (formerly called PCMCIA) standard
and for Card Bus. These controllers allow for credit card sized
modules to be plugged into the computer to expand its
functionality in areas such as solid-state memory, hard disks,
fax/modems, networks, and, most recently multimedia audio.
The Company also provides serial and parallel I/O devices
that allow multi-channel, multi-protocol communications. These
devices are used in remote access equipment and terminal servers,
communications servers, routers, single board computers, laser
printers and workstations. Customers include Cisco, Compaq,
Motorola, Xylogics and Xyplex.
The Company is a leading supplier of monolithic T-1 line
interface transceivers for telecommunications equipment, with more
than 40 part types in production, and CMOS Ethernet local area
network line interface circuits. The Company produces the
industry's most highly integrated mixed-signal Ethernet controller
IC. Customers for these products include Acer, Alcatel, Cisco,
Compaq, IBM, Motorola, Northern Telecom and Samsung.
During fiscal 1996, the Company began producing wireless
infra-red ("IR") communications components which combine the
functions of a serial communications with an IR port for PC,
portable and pocket computer, and hand-held remote controller
applications.
Advanced Mixed Signal Applications
Through its Crystal Semiconductor Products Division, Cirrus
Logic offers a broad line of analog-to-digital converters
consisting of general-purpose and low-frequency measurement
devices. These circuits use a combination of self-calibrating
digital correction and delta sigma architectures to improve
accuracy and eliminate expensive discrete analog components. The
product family includes more than 100 products used in industrial
automation, instrumentation, medical, military and geophysical
applications. In addition to the broad mixed signal product
portfolio for the industrial market, the Crystal division also
provides leading-edge chip solutions of consumer audio and video
applications. The mixed-signal technology from the Crystal
division provides the foundation for product development
throughout Cirrus Logic.
Emerging Product Opportunities
The Company is also engaged in developing and is producing
high-integration system-on-a-chip solutions for dedicated Internet
appliances and Network Computers, and for hand-held and ultra-
portable computing and communications appliances such as Personal
Digital Assistants and Personal Communicators. The Company is
currently manufacturing two mixed signal products for the hand
held market. Among other features, they integrate touch screen,
audio, temperature and battery measurement and modem Codec
capabilities.
The Company provides an integrated CPU/Peripheral IC for
Internet appliances such as Oracle's "Network Computer" reference
design. The Company has developed highly integrated products for
hand-held computing and communications devices, and is working
with Apple Computer and others for their next generations of such
products. The Company's products in this market incorporate a CPU
core licensed from Advanced RISC Machines (ARM) Limited.
Manufacturing
Historically, the Company relied for its wafer manufacturing
needs upon merchant wafers manufactured by outside suppliers. The
Company believes it is currently one of the world's largest
purchasers of merchant wafers. The Company has also pursued a
strategy to expand its wafer supply sources by taking direct
ownership interests in wafer manufacturing ventures. In much of
1994 and 1995, the merchant market was unable to meet demand, and
the Company's merchant wafer suppliers sought to limit the
proportion of wafers they sold to any single customer, which
further restricted the Company's ability to buy wafers. Wafer
shortages increased the Company's supply costs and at times
prevented the Company from meeting the market demand for its own
products. In response to its rapid growth, and to historical and
anticipated supply shortages, the Company pursued a strategy to
expand its wafer supply sources by taking direct ownership
interests in wafer manufacturing joint ventures.
In 1994, the Company and IBM formed MiCRUS, a manufacturing
joint venture that produces wafers for both companies. MiCRUS
began operations in 1995 and is now engaging in a second
expansion. In addition, in July 1996, the Company and Lucent
Technologies (formerly AT&T Microelectronics) formed Cirent
Semiconductor, a manufacturing joint venture that will produce
wafers for both companies. Cirent Semiconductor began operations
in the fourth quarter of fiscal 1997. The Company believes that
it will continue to rely on merchant wafer suppliers for a
substantial portion of its wafer requirements for at least the
next two years.
The Company's manufacturing strategy is intended to provide
the following benefits:
Assured Capacity. The first goal is to secure a capacity
to provide improved control over wafer supplies,
particularly during periods of heightened industry-wide
demand.
Advantageous Cost Structure. Wafers produced by joint
ventures such as MiCRUS are potentially less expensive than
merchant wafers. Increasing its supply of wafers from such
joint ventures may help the Company achieve lower
manufacturing costs than its competitors
Access to Leading Process Technologies. By partnering with
world class manufacturers such as IBM and Lucent Technologies,
the Company can access leading process technologies which
allows it to reduce product cost, increase performance and
increase functionality.
In addition to its wafer supply arrangements, the Company
currently contracts with third party assembly vendors to package
the wafer die into finished products. The Company qualifies and
monitors assembly vendors using procedures similar in scope to
those used for wafer procurement. Assembly vendors provide fixed-
cost-per-unit pricing, as is common in the semiconductor industry.
Through fiscal 1997, the Company maintained its own staff for
production, engineering and testing. In fiscal 1998, the Company
will start outsourcing a substantial portion of its production
testing. As of April 30, 1997, subsequent to the headcount reduction
related to the restructing, the Company had approximately 26% of its
employee engaged in manufacturing related activities. The Company's
manufacturing division will continue to qualify and monitor
suppliers' production processes, participate in process
development, package development and process and product
characterization, perform mixed-signal production testing, support
R&D test applications and maintain quality standards.
MiCRUS
MiCRUS, which was established in 1994, produces wafers using
IBM's wafer processing technology, and is currently focusing on CMOS
wafers with 0.35 micron process technology and also processes wafers
with 0.8, 0.6 and 0.5 micron technology. MiCRUS leases an existing
IBM facility in East Fishkill, New York, and also makes process
technology payments to IBM, which totaled $56 million as of March
29, 1997. IBM and Cirrus Logic own 52% and 48%, respectively, of
MiCRUS. The terms of the joint venture initially entitled each
Company to purchase 50% of the MiCRUS output. If one company fails
to purchase its full entitlement, the shortfall may be purchased by
the other company or, under limited circumstances, offered to third
parties. However, if the wafers cannot be sold elsewhere, the
Company that failed to purchase its full entitlement will be
required to reimburse the joint venture for costs associated with
underutilized capacity. In addition, to the extent that the
facility fails to produce wafers at scheduled capacity, each company
will be required to bear its proportionate share of the
underabsorbed fixed costs. The joint venture has a remaining term
of seven years. MiCRUS is managed by a six-member governing board
of whom three are appointed by IBM, two are appointed by Cirrus
Logic and one is the chief executive officer of MiCRUS.
A $120 million expansion was completed in fiscal 1996. A
second expansion, with a currently budgeted cost of $198 million,
was agreed to in 1995 and is expected to be completed in 1998.
The Company is providing all of the capital for the second
expansion and, accordingly, will be entitled to all of the
additional wafers produced and will be required to reimburse the
joint venture for all of the additional costs associated with any
underutilization of the capacity resulting from such expansion.
In connection with the formation and expansion of the MiCRUS
joint venture, the Company has incurred obligations to make equity
contributions to MiCRUS, to pay MiCRUS for a manufacturing
agreement and to guarantee equipment lease obligations incurred by
MiCRUS. To date, the Company has made equity investments totaling
$23.8 million. No additional equity investments are scheduled.
However, the expansion of the MiCRUS production could require
additional equity contributions by the Company.
The manufacturing agreement payments total $71 million, of
which $56 million has been paid, $7.5 million is due before the
end of fiscal 1998 and $7.5 million is due to be paid in fiscal
1999. The manufacturing agreement payments are being charged to
the Company's cost of sales over the original eight-year life of
the venture based upon the ratio of current units of production to
current and anticipated future units of production.
The equipment financings which have been completed or are
committed to as of March 29, 1997 total $503 million, of which
$145 million was completed in fiscal 1995 and is guaranteed
jointly and severally by IBM and the Company, and $215 million
which was completed in fiscal 1996 and fiscal 1997 and is
guaranteed by the Company. In addition, the Company currently
intends to add an additional $60 million in equipment in fiscal
1998 and an additional $50 million in fiscal 1999 to expand MiCRUS
production. The additional amounts would be financed by an
equipment lease guaranteed by the Company. However, these
additional expenditures have not been committed and could be
reconsidered.
Cirent Semiconductor
Cirent Semiconductor will operate two wafer fabs in Orlando,
Florida, both located in the same complex, which is leased from
Lucent Technologies. Cirent Semiconductor also makes process
technology payments to Lucent Technologies, which totalled $35
million as of March 29, 1997. Cirent Semiconductor is already
operating the first fab, from which Lucent Technologies purchases
all of the output at a price that covers all costs associated with
that fab. The second fab has been built by Lucent Technologies and
is expected to begin operations in calendar 1997. The second fab is
scheduled to begin producing CMOS wafers using 0.35 micron processes
licensed from Lucent Technologies, and to migrate to a 0.25 micron
process. Lucent Technologies and Cirrus Logic each will be entitled
to purchase one-half of the output of the second fab. If one company
fails to purchase its full entitlement, the shortfall may be
purchased by the other company or offered to third parties. However,
if the wafers cannot be sold elsewhere, the company that failed to
purchase its full entitlement will be required to reimburse Cirent
Semiconductor for costs associated with underutilized capacity. In
addition, to the extent that the facility fails to produce wafers at
scheduled capacity, each company will be required to bear its
proportionate share of the underabsorbed fixed costs. Cirent
Semiconductor is owned 60% by Lucent Technologies and 40% by Cirrus
Logic and is managed by a Board of Governors, of whom three are
appointed by Lucent Technologies and two are appointed by Cirrus
Logic. The joint venture has a term of ten years.
In connection with the Cirent joint venture, the Company has
committed to make equity contributions to Cirent Semiconductor, to
make payments to Cirent Semiconductor for a manufacturing
agreement and to guarantee and/or become a co-lessee under
equipment lease obligations incurred by Cirent Semiconductor.
The commitment for equity investment as of March 29, 1997
totals $35 million, of which $2 million has been paid and $33
million is due in fiscal 1998. The Company will account for these
payments under the equity method.
The manufacturing agreement payments total $105 million, of
which $35 million has been paid, $50 million is due in the first
quarter of fiscal 1998 and $20 million is due in fiscal 2000.
These payments will be charged to the Company's cost of sales over
the life of the venture based upon the ratio of current units of
production to current and anticipated future units of production.
The Company has committed to guarantee and/or become a co-lessee of
leases covering up to $280 million of equipment for the Cirent
Semiconductor joint venture. In November 1996, the Company guaranteed
and became a co-lessee under a lease financing arrangement for up to
$253 million of equipment, subsequently reduced to $244.4 million, of
which $160 million has been used. These financings mature at various
dates from 1998 to 2004. The Company currently intends to enter into or
guarantee an additional $35.6 million in lease financings sometime
during fiscal 1998.
Other Wafer Supply Arrangements
Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"). In fiscal
1993 and fiscal 1996, the Company entered into volume purchase
agreements with TSMC. Under each agreement, the Company committed to
purchase a fixed minimum number of wafers at market prices and TSMC
guaranteed to supply certain quantities. The first agreement expired
in March 1997, the later expires in December 2001. Under the
agreement entered into in fiscal 1996, the Company has agreed to make
advance payments to TSMC of approximately $118 million, one-half in
fiscal 1998 and one-half in fiscal 1999. The parties have been
reevaluating these arrangements, and, although no written
agreement has been concluded, the Company believes that the
requirement for advance payments may be replaced by long-term
purchase commitments. Under the fiscal 1993 and 1996 agreements,
if the Company does not purchase the committed amounts, it may be
required to pay a per wafer penalty for any shortfall not sold by
TSMC to other customers. The Company estimates that under the
remaining term of the 1993 agreement, it is obliged to purchase
approximately $19 million of product. Over the term of the 1995
agreement, the Company estimates it must purchase approximately
$790 million of product in order to receive full credit for the
advance payments or avoid penalties if the requirement for advance
payments is eliminated.
United Microelectronics Corporation ("UMC"). In the fall of
1995, the Company entered into a foundry agreement and a foundry
capacity agreement with UMC, a Taiwanese company. The agreements
provide that UMC will form a new corporation under the laws of
Taiwan, to be called United Silicon, Inc., and that United
Silicon, Inc. will build a wafer fabrication facility and
manufacture and sell wafers, wafer die and packaged integrated
circuits. The agreements provide that United Silicon, Inc. will be
funded in part with debt and equipment lease financing from UMC
and in part with equity contributions from the Company and two
other U.S. semiconductor companies. The agreements contemplated
that the Company's total investment would be approximately $88
million, in exchange for which the Company would receive 15% of
the equity of United Silicon, Inc. as well as the right (but not
the obligation) to purchase up to 18.75% of the wafer output of
the new facility at fair market prices. The Company paid $20.6
million in the fourth quarter of fiscal 1996. The Company does not
expect to make the additional scheduled investment. Should the
Company not make any additional investments, the Company's ultimate
equity holding would be substantially less than 15% and the Company
would not retain rights to guaranteed capacity. However, the
Company would retain its equity holding in United Silicon, Inc., and
the Company believes that foregoing the rights to guaranteed
capacity would not result in an impairment of the recorded value of
the investment.
Patents, Licenses and Trademarks
To protect its products, the Company relies heavily on
trade secret, patent, copyright, mask work and trademark laws. The
Company applies for patents and copyrights arising from its
research and development activities and intends to continue this
practice in the future to protect its products and technologies.
The Company presently holds more than 230 U.S. patents, and in
several instances holds corresponding international patents, and
has more than 400 U.S. patent applications pending. The Company has
also licensed a variety of technologies from outside parties to
complement its own research and development efforts. The Company is
also receiving brand recognition of its products. The Laguna (TM) and
Visual Media (TM) family of graphics accelerators are examples of the
use of trademarks to gain brand recognition.
Research and Development
Research and development efforts concentrate on the design
and development of new products for each market and on the
continued enhancement of the Company's design automation tools.
Research and development efforts will be organized along the
Company's new market focused product divisions (Personal Computer
Products, Communications Products, Mass Storage Products and
Crystal Semiconductor Products) which the Company believes will
contribute to more efficient leveraging of its technologies in the
product development cycle. The Company also funds certain
advanced process technology development. Expenditures for
research and development in fiscal 1997, 1996, and 1995 were
$230.8 million, $238.8 million, and $165.6 million, respectively.
The Company expects the absolute amount of research and
development expense will decrease in fiscal 1998 primarily as a
result of the Company's fourth quarter reorganization and
consolidation efforts, and the related reduction in workforce. As
of April 30, 1997, the Company had approximately 44% of its employees
engaged in research and development activities. The Company's
future success is highly dependent upon its ability to develop
complex new products, to transfer new products to production in a
timely fashion, to introduce them to the marketplace ahead of the
competition and to have them selected for design into products of
leading systems manufacturers.
Competition
Markets for the Company's products are highly competitive,
and the Company expects that competition will increase. The
Company competes with other semiconductor suppliers who offer
standard semiconductors, application specific integrated circuits
and fully customized integrated circuits, including both chip and
board-level products. A few customers also develop integrated
circuits that compete with the Company's products. The Company's
competitive strategy has been to provide lower cost versions of
existing products and new, more advanced products for customers'
new designs.
While no single company competes with the Company in all of
the Company's product lines, the Company faces significant
competition in each of its product lines. The Company expects to
face additional competition from new entrants in each of its
markets, which may include both large domestic and international
semiconductor manufacturers and smaller, emerging companies.
The principal competitive factors in the Company's markets
include time to market; quality of hardware/software design and
end-market systems expertise; price; product benefits that are
characterized by performance, features, quality and compatibility
with standards; access to advanced process and packaging
technologies at competitive prices; and sales and technical
support.
Competition typically occurs at the design stage, where the
customer evaluates alternative design approaches that require
integrated circuits. Because its products have not been available
from second sources, the Company generally does not face direct
competition in selling its products to a customer once its
integrated circuits have been designed into that customer's
system. Nevertheless, 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.
Sales, Marketing and Technical Support
The Company's products are sold worldwide, and historically
50-65% of revenues have come from shipments to overseas
destinations. The Company maintains a worldwide sales force with
a matrixed organization, which is intended to provide centralized
coordination of strategic accounts, territory-based local support
and coverage of smaller customers, and specialized selling of
product lines with unique customer bases.
The Company maintains a major account team and a direct
domestic and international sales force for its PC-related
products. The major account team services the top PC and disk
drive manufacturers. The domestic sales force includes a network
of regional direct sales offices located in California and in
Colorado, Florida, Illinois, Massachusetts, North Carolina,
Oregon, Pennsylvania, and Texas. International sales offices and
organizations are located in Taiwan, Japan, Singapore, Korea, Hong
Kong, the United Kingdom, Germany, Italy, France and Barbados.
The Company supplements its direct sales force with sales
representative organizations and distributors. Technical support
staff are located at the sales offices and also at the Company's
facilities in Fremont, California; Broomfield, Colorado; San
Diego, California; Austin and Plano, Texas; Greenville, South
Carolina; Raleigh, North Carolina; and Tucson, Arizona.
The Company's Crystal Products Division maintains a separate,
smaller sales force for products sold to the industrial, and
consumer electronics.
Compaq Computer Corporation accounted for approximately 10%
of net sales in fiscal 1997. In fiscal 1996 and 1995, no customer
represented 10% or more of net sales. However, the loss of a
significant customer or a significant reduction in such a
customer's orders could have an adverse effect on the Company's
sales.
Export sales information is incorporated by reference from
the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II hereof.
Backlog
Sales are made primarily pursuant to standard short-term
purchase orders for delivery of standard products. The quantity
actually ordered by the customer, as well as the shipment
schedules, are frequently revised to reflect changes in the
customer's needs. Accordingly, the Company believes that its
backlog at any given time is not a meaningful indicator of future
revenues.
Employees
As of April 30, 1997, the Company had approximately 2,135
full-time equivalent employees, of whom 44% were engaged in
research and product development, 30% in sales, marketing, general
and administrative and 26% in manufacturing. In March 1997, the
Company's management approved a workforce reduction that occurred
on April 23, 1997 and resulted in a reduction of approximately 400
employees. The Company's future success will depend, in part, on
its ability to continue to attract, retain and motivate highly
qualified technical, marketing, engineering and management
personnel. None of the Company's employees is represented by any
collective bargaining agreements, although Cirent Semiconductor is
staffed by Lucent Technologies' employees who are represented by a
union. The Company believes that its employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with regard to
executive officers of Cirrus Logic, Inc. (ages are as of April 30,
1997):
Michael L. Hackworth (age 56), a founder of the Company, has served
as President, Chief Executive Officer and a director since January 1985. He
is also a director of Read-Rite Corporation. Previously he was employed by
Signetics Corporation for over thirteen years, most recently as Senior Vice
President of MOS and Linear Products.
George N. Alexy (age 48) was appointed to the Office of the
President and Chief Products and Marketing Officer in April 1997. He joined
the Company in 1987 as Vice President, Marketing and in May 1993, he was
promoted to Senior Vice President, Marketing. Previously, he was employed
by Intel Corporation for ten years, most recently as Product Marketing
Manager, High Performance Microprocessors.
Thomas F. Kelly (age 44) was appointed to the Office of the
President and Chief Operating Officer in April 1997. He joined the Company
in March 1996 as Executive Vice President, Finance and Administration,
Chief Financial Officer and Treasurer. Previously, he was Executive Vice
President and Chief Financial Officer of Frame Technology Corporation from
September 1993 to December 1995. Prior to Frame, he was Vice President and
Chief Financial Officer of Analog Design Tools from September 1984 to July
1989, when it was acquired by Valid Logic, Vice President and Chief
Financial Officer of Valid Logic through December 1991 and, following the
acquisition of Valid Logic by Cadence Design Systems, Senior Vice President
of Cadence Design Systems until July 1993.
Patrick V. Boudreau (age 56) joined the Company in October 1996 as
Vice President, Human Resources. He was Vice President, Human Resources for
Fujitsu Microelectronics from 1995 to 1996. From 1989 to 1995, he was
President of P.V.B. Associates, a management consulting and executive search
firm, as well as Senior Vice President of Lazer-Tron Corporation.
Eric C. Broockman (age 42) was appointed to the position of Vice
President and General Manager, Crystal Semiconductor Products Division in
April, 1997. He joined the Company in February 1995 as Vice President and
General Manager, Network Broadcast Products Division. Prior to joining the
Company, he was employed by IBM for 16 years, most recently as Product
Line Manager, DSP Business Unit.
William D. Caparelli (age 53) joined the Company in 1988 as Vice
President, Worldwide Sales. In May 1993 he was promoted to Senior Vice
President, Worldwide Sales. From 1985 to 1988, he served as Vice President,
North America Sales of VLSI Technology, Inc.
Steven Dines (age 43) was appointed Vice President and General
Manager, Mass Storage Products Division in May 1997. He joined the Company
in May 1991 as Member, Corporate Strategic Staff and in December 1991, he
assumed the position of Director, Mass Storage Products Marketing. In
November 1993, he was promoted to Vice President, Mass Storage. Prior to
joining the Company he spent twelve years at Advanced Micro Devices, most
recently as Director, Strategic Marketing for Europe and with IMP, Inc. as
Director, Product Planning and Applications.
Robert F. Donohue (age 54) joined the Company in May 1996 as Vice
President, Chief Legal Officer, General Counsel and Secretary. Prior to
joining the Company, he was Vice President, General Counsel and Secretary
of Frame Technology Corporation from 1993 to 1996 and Vice President, General
Counsel and Secretary of Cadence Design Systems, Inc. from 1989 to 1993.
Patrick A. O'Hearn (age 47), joined the Company in January 1997 as
Vice President, Personal Systems and was appointed to the position of Vice
President and General Manager, Communications Products Division in April
1997. Prior to joining the Company, he was President and CEO of ATM LTD,
a network equipment company from April 1994 to September 1996; Vice
President, Network Products at Fujitsu Microelectronics from January 1993
to April 1994 and Business Unit Manager for the ASIC and Custom Business
Unit at Philips Components (formerly Signetics) from April 1990 to
January 1993.
Edward C. Ross (age 55), joined the Company in September 1995 as
President, Worldwide Manufacturing Group. In April 1997, he became
President, Manufacturing and Technology. Prior to joining the Company, he
was President of Power Integrations, a manufacturer of high-voltage
integrated circuits, from January 1989 to January 1995.
Ronald K. Shelton (age 36) was appointed Vice President, Finance,
Chief Financial Officer and Treasurer in April 1997. He joined the Company
in September 1996 as Vice President, Finance and Corporate Controller. From
April 1992 to August 1996, he was Vice President, Finance and Administration
and Chief Financial Officer of Alliance Semiconductor Corporation. He was
Manager, Special Studies for Etec Systems, Inc. from April 1991 to March
1992 and prior to that he was Audit Manager at Deloitte & Touche.
ITEM 2. PROPERTIES
The Company's principal facilities, located in Fremont, California,
consist of approximately 480,000 square feet of office space leased
pursuant to agreements which expire in 2006 and 2007 plus renewal options.
This space is used for manufacturing, product development, sales,
marketing and administration.
The Company's Austin, Texas facilities consist of approximately
262,000 square feet. Certain leases expire in July 1997 with two three-year
options that could extend the term to July 2003. One lease expires in
2005. The Company's San Diego, California facility consists of
approximately 153,000 square feet of office space leased pursuant to a
lease that expires in 2006.
The Company also has facilities located in Tucson, Arizona;
Broomfield, Colorado; Nashua, New Hampshire; Raleigh, North Carolina;
Greenville, South Carolina; King of Prussia, Pennsylvania; Fort Worth and
Plano, Texas; Seattle, Washington; Pune, India; and Tokyo, Japan. The
Company also leases sales and sales support offices in the United States
in California, Colorado, Florida, Illinois, Massachusetts, Oregon,
Pennsylvania and Texas and internationally in Taiwan, Japan, Singapore,
Korea, Hong Kong, the United Kingdom, Germany, Italy, France and Barbados.
The Company plans to add additional manufacturing and sales offices to
support its growth.
ITEM 3. LEGAL PROCEEDINGS
On May 7, 1993, the Company was served with two shareholder
class action lawsuits filed in the United States District Court
for the Northern District of California. The lawsuits, which
name the Company and George N. Alexy, Douglas J. Bartek, William
H. Bennet, William D. Caparelli, Michael L. Hackworth, Man Shek
Lee, Kenyon Mei, Suhas S. Patil, Robert H. Smith, and Sam S.
Srinivasan, all current or former officers and directors of the
Company as defendants, allege violations of the federal
securities laws in connection with the announcement by Cirrus
Logic of its financial results for the quarter ended March 31,
1993. The complaints do not specify the amounts of damages
sought. The Company believes that the allegations of the
complaint are without merit. On November 1, 1996, defendants'
motion for summary judgment was granted in part and denied in
part.
Between November 7 and November 21, 1995, five shareholder
class action lawsuits were filed in the United States District
Court for the Northern District of California against the Company
and several of its officers and directors. A consolidated
amended complaint was filed on February 20, 1996 and an amended
consolidated supplemental complaint was filed on May 3, 1996
naming the Company and Michael L. Hackworth, Suhas Patil and Sam
Srinivasan, all current or former officers and directors of the
Company, as defendants. This complaint alleges that certain
statements made by defendants during the period from July 23, 1995
through December 21, 1995 were false and misleading and in
violation of the federal securities laws. The complaint does not
specify the amounts of damages sought. The Company believes that
the allegations of the complaint are without merit.
On February 21, 1996, a shareholder class action lawsuit
was filed in the Superior Court of California in and for the
County of Alameda against the Company and numerous fictitiously
named defendants alleged to be officers or agents of the Company.
An amended complaint, which added Michael L. Hackworth, Suhas
Patil and Sam Srinivasan, all current or former officers and
directors of the Company, as defendants was filed on April 18,
1996. On October 28, 1996, an identical class action lawsuit was
filed in the same court by the same plaintiffs' lawyers on
behalf of an additional plaintiff. These lawsuits, which were
consolidated on December 26, 1996, allege that certain
statements made by the Company and the individual defendants
during the period from October 1, 1995 through February 14, 1996
were false and misleading and violated California state common
and statutory law. The complaints do not specify the amounts of
damages sought. Defendants have answered the complaint denying
all of its material allegations. The Company believes that the
allegations of the complaints are without merit. On January 30,
1997, the court denied plaintiffs' motion for class
certification. Plaintiffs have appealed.
On January 28, 1997, a third State court complaint,
identical to its predecessors, was filed in the Superior Court
by another plaintiff against the Company, and Michael L.
Hackworth, Suhas Patil and Sam Srinivasan, all current or former
officers of the Company. Defendants have answered the complaint
denying all of its material allegations. On May 6, 1997, class
certification was denied in this case as well. Plaintiffs have
appealed.
On September 16, 1996, a shareholder derivative lawsuit was
filed in the United States District Court for the Northern
District of California against the Company, as a nominal
defendant, and Michael Hackworth, Suhas Patil, C. Gordon Bell, C.
Woodrow Rea, Jr., Robert H. Smith, Sam S. Srinivasan, William D.
Caparelli, Douglas J. Bartek and Kenyon Mei, all current or former
officers and directors of the Company. The complaint alleges the
individual defendants breached their fiduciary duties to the
Company between July 26, 1995 and February 13, 1996. The
complaint does not specify the amounts of damages sought. The
Company believes the allegations in the complaint are without
merit.
On December 12, 1996, the Company signed a Memorandum of
Settlement with plaintiffs' counsel in the federal class action
lawsuits. If approved, the agreement would settle 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 proposed settlement is expected to include 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
proposed settlement is subject to a number of contingencies,
including court approval.
Hearings for court approval of the settlement have been
scheduled for June 13 and 19, 1997. A number of objections to
the settlement have been filed, including by the attorneys who
filed the state actions which the parties seek to extinguish by
the settlement.
If for any reason the settlement is not approved, or if for
any reason the extinction of the state claims is not approved,
the Company intends to defend itself vigorously. Based on its
assessment of the cases and the availability of insurance, the
Company believes that, even if the settlement is not approved,
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.
The foregoing forward-looking statements with respect to the
proposed settlement are dependent on certain risks and
uncertainties including such factors, among others, as the
securing of court approval, the running of all relevant periods
for objection of appeals, and the state court's recognition of
the order on the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National
Market under the symbol "CRUS." The following table shows for the
periods indicated the high and low closing prices for the Common
Stock.
High Low
------ ------
Fiscal year ended April 1, 1995
First quarter $ 19.07 $ 14.00
Second quarter 17.35 12.69
Third quarter 15.57 10.63
Fourth quarter 19.13 11.50
Fiscal year ended March 30, 1996
First quarter 33.69 17.06
Second quarter 59.63 31.00
Third quarter 55.50 19.75
Fourth quarter 26.38 17.13
Fiscal year ended March 29, 1997
First quarter 25.13 16.88
Second quarter 21.88 13.38
Third quarter 24.13 15.75
Fourth quarter 17.11 10.77
At March 29, 1997, there were approximately 2,446 holders of
record of the Company's Common Stock.
The Company has not paid cash dividends on its Common Stock and
presently intends to continue a policy of retaining any earnings
for reinvestment in its business.
On December 12, 1996, U.S. $250,000,000 in 6% Convertible
Subordinated Notes due December 15, 2003 ("Notes") were offered
to qualified institutional buyers in reliance on Rule 144A under
the Securities Act of 1933, as amended, and to a limited number
of institutions that were accredited investors in a manner
exempt from the registration requirements of the Securities Act.
The Notes were also being offered by Goldman Sachs
International, as selling agent for Goldman Sachs & Co., Salomon
Brothers International Limited, as selling agent for Salomon
Brothers Inc., J.P. Securities Ltd., as selling agent for J.P.
Morgan Securities., Inc., and Robertson, Stephens & Company LLC,
outside the United States to non-U.S. persons in reliance on
Regulation S under the Securities Act. These Notes will be
convertible into shares of Common Stock of the Registrant at any
time on or after the 90th day following the last original issue
date of the Notes, and prior to the close of business on the
maturity date, unless previously redeemed or repurchased, at a
conversion rate of 41.2903 shares per US. $1,000 principal
amount of Notes (equivalent to a conversion price of
approximately U.S. $24.219 per share).
<TABLE>
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts and employees)
<CAPTION>
Fiscal years ended
---------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating summary:
Net sales $917,154 $1,146,945 $889,022 $557,299 $356,478
Operating costs and expenses and gain on sale of assets:
Cost of sales 598,795 774,350 512,509 298,582 193,759
Research and development 230,786 238,791 165,622 126,632 73,447
Selling, general and administrative 126,722 165,267 126,666 91,887 54,924
Gain on sale of assets, net (18,915) - - - -
Restructuring costs 20,954 11,566 - - -
Non-recurring costs - 1,195 3,856 - -
Merger costs - - 2,418 - 3,400
------------ ----------- ---------- ---------- ----------
Operating (loss) income (41,188) (44,224) 77,951 40,198 30,948
Foreign currency transaction gains - - 4,999 - -
Gain on sale of equity investment - - - 13,682 -
Interest expense (19,754) (5,151) (2,441) (2,196) (1,610)
Interest income and other, net 9,323 7,652 9,129 4,280 3,207
------------ ----------- ---------- ---------- ----------
(Loss) income before income taxes and cumulative
effect of accounting change (51,619) (41,723) 89,638 55,964 32,545
(Benefit) provision for income taxes (5,463) (5,540) 28,236 18,146 12,321
------------ ----------- ---------- ---------- ----------
(Loss) income before cumulative effect of
accounting change (46,156) (36,183) 61,402 37,818 20,224
Cumulative effect of change in method of
accounting for income taxes - - - 7,550 -
------------ ----------- ---------- ---------- ----------
Net (loss) income ($46,156) ($36,183) $61,402 $45,368 $20,224
============ =========== ========== ========== ==========
(Loss) income per common and common equivalent share
before cumulative effect of accounting change ($0.71) ($0.58) $0.96 $0.67 $0.39
Cumulative effect of accounting change per
common and common equivalent share - - - 0.13 -
------------ ----------- ---------- ---------- ----------
Net (loss) income per common and common
equivalent share ($0.71) ($0.58) $0.96 $0.80 $0.39
============ =========== ========== ========== ==========
Weighted average common and common equivalent
shares outstanding 65,008 62,761 63,680 56,402 52,424
Financial position at year end:
Total assets $1,136,821 $917,577 $673,534 $517,931 $258,292
Working capital 428,670 182,643 251,619 273,527 98,500
Capital lease obligations, excluding current 9,848 6,258 9,602 7,753 5,282
Long-term debt, excluding current 51,248 65,571 16,603 11,392 12,812
Convertible subordinated notes 300,000 - - - -
Total liabilities 732,624 488,911 254,518 173,616 114,876
Shareholders' equity 404,197 428,666 419,016 344,315 143,416
Current Ratio 2.17 1.44 2.10 2.77 2.02
Employees 2,557 3,151 2,331 1,854 1,369
<FN>
In April 1992, February 1993, and August 1994, the Company merged with Acumos Incorporated, Pacific Communication
Sciences, Inc. and PicoPower Technology, Inc., respectively. All of the consolidated financial information reflects the combined
operations of the companies.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANNUAL RESULTS OF OPERATIONS
Except for historical information contained herein, this Discussion and
Analysis contains forward-looking statements. The forward-looking
statements contained herein are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation
to publicly release the results of any revision to these forward-looking
statements, which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Overview
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. Although the Company
expects to realize the immediate benefit of a reduced cost structure and
anticipates other benefits from the reorganization into market focused
divisions, there is no assurance that the Company will regain the levels of
profitably that it has achieved in the past or that losses will not occur in
the future.
The results of operations for the fourth quarter of fiscal 1997 were
materially impacted by charges relating to the reorganization, the planned
outsourcing of production testing, the consolidation of certain corporate
functions, and other related factors. The results of operations for the
fourth quarter of fiscal 1997 include a restructuring charge of $21.0
million, the majority of which is attributable to the workforce reduction,
the write-off of excess assets, and accruals for excess facilities. In
addition, the results of operations also include charges totaling
approximately $34.5 million which are included in cost of sales, and are
related to anticipated under utilization of wafer fabrication capacity and
some inventory write-downs.
Net Sales
Net sales for fiscal 1997 were $917.2 million, a decrease of 20% from
the $1,146.9 million for fiscal 1996. During fiscal 1997, the Company
divested non-core business units and eliminated products that did not fit
its core markets. Net sales from the core businesses in fiscal 1997 were
approximately $840.5 million compared to $949.3 million in fiscal 1996. Net
sales for fiscal 1996 increased 29% over the $889.0 million for fiscal 1995.
Sales of graphics, audio, and mass storage products decreased in fiscal
1997 over fiscal 1996. Sales of fax/modem products increased in fiscal 1997
over fiscal 1996. The decline in net sales of graphics and audio products
in fiscal 1997 was the result of decreasing unit sales and declining average
selling prices. The decline in net sales of mass storage products was the
result of reduced sales of controller products offset somewhat by an
increase in sales of read-channel products. The increase in net sales of
fax/modem products was primarily the result of increased sales of newer
high-speed modem products, particularly in the fourth quarter of fiscal 1997
over the fourth quarter of fiscal 1996.
The net sales increase in fiscal 1996 compared to fiscal 1995 was the
result of growth in sales during the first three quarters of fiscal 1996
offset somewhat by a decline during the fourth quarter of fiscal 1996.
Sales of mass storage and wireless communication products increased in each
of the first three quarters of fiscal 1996 but declined in the fourth
quarter of fiscal 1996 against the third quarter of fiscal 1996. Net sales
of graphics and audio products for the first three quarters of fiscal 1996
increased over the comparable period of fiscal 1995, but declined in the
third and fourth quarters of fiscal 1996 against the second quarter of
fiscal 1996. Net sales of graphics and wireless communication products
declined in the fourth quarter of fiscal 1996 over the fourth quarter of
fiscal 1995.
Export sales, principally to Asia, include sales to overseas operations
of domestic corporations and were approximately $568 million in fiscal 1997
compared to approximately $647 million in fiscal 1996 and approximately $497
million in fiscal 1995. Export sales to the Pacific Rim were 32% and 34% of
net sales; to Japan were 22% and 17% of net sales; and to Europe and the
rest of the world were 7% and 6% of net sales, in fiscal 1997 and 1996,
respectively.
In fiscal 1997, net sales to Compaq Computer Corporation were
approximately 10% of net sales. In fiscal 1996 and 1995, no single customer
accounted for 10% or more of net sales.
Gross Margin
The gross margin percentage was 34.7% in fiscal 1997, compared to 32.5%
and 42.4% in fiscal 1996 and 1995, respectively.
The gross margin in fiscal 1997 was adversely impacted by $34.5 million
of charges that were recorded in the fourth quarter related to anticipated
under-use of wafer fabrication capacity of $22.0 million and inventory
write-downs of $12.5 million. The gross margin in fiscal 1996 was adversely
impacted by $70.8 million of fourth quarter charges related to inventory
write-downs, under use of capacity, and manufacturing variances. Exclusive
of these charges, the gross margin percentage was 38.5% and 38.7% in fiscal
1997 and fiscal 1996, respectively. While these gross margins were
relatively flat, they reflect reduced unit costs resulting from the
migration to larger wafers and more efficient processing technologies,
improved efficiencies at the Company's MiCRUS facility, and a decrease in
the cost of wafers and assembly services purchased from third-party
suppliers, all of which were offset by the impact of decreased average
selling prices for most of the Company's major products.
During fiscal 1996, the gross margin percentage declined from 40.8% in
the first quarter to a low of 4.4% in the fourth fiscal quarter. The gross
margin percentage decreased as a result of charges for inventory written
down for lower-than-anticipated shipments of and demand for graphics, audio,
core logic and other products and charges for underutilization of capacity
at the MiCRUS joint venture. The decline in the gross-margin percentage was
also the result of higher wafer costs caused by an increase in wafer prices
for merchant wafers, an insufficient supply of 0.6-micron wafers, which made
necessary the use of less-cost-effective 0.8-micron wafers to meet expanded
unit shipments, expediting expenses related to premiums paid to suppliers to
increase production of the Company's products, lower yields on new products
ramping into production, and lower selling prices on certain graphics,
audio, and fax/modem products.
During fiscal 1995, the gross margin percentage declined from a high of
47.8% in the first fiscal quarter to a low of 39.1% in the fourth fiscal
quarter.
Research and Development Expenses
Research and development expenses expressed as a percentage of net
sales were 25.2%, 20.8%, and 18.6% in fiscal 1997, 1996, and 1995,
respectively. During the last two quarters of fiscal 1997, the absolute
amount of expense decreased compared to the comparable quarters in fiscal
1996. This decrease was primarily the result of reduced spending in areas
other than those considered part of the Company's core business
opportunities including the impact of divestitures during the year. The
Company expects the absolute amount of research and development expense will
decrease in fiscal 1998 primarily as a result of the Company's business
divestitures and its fourth quarter decision to undertake a reorganization,
consolidation efforts, and a reduction in workforce.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses expressed as a percentage
of net sales represented approximately 13.8%, 14.4%, and 14.2% in fiscal
1997, 1996, and 1995, respectively. The dollar amount of such expenses in
fiscal 1997 decreased primarily as a result of reductions in compensation
expenses, marketing expenses for promotions and advertising, and
administrative expenses, including the impact of divestitures. The absolute
spending increase in fiscal 1996 over fiscal 1995 reflected increased direct
expenses for the expanded sales force, increased marketing expenses for
promotions and advertising, and increased administrative and legal expenses.
The Company expects the absolute amount of selling, general and
administrative expense to decrease in fiscal 1998 primarily as a result of
the Company's business divestitures and its fourth quarter decision to
undertake a reorganization, consolidation efforts, and a reduction in
workforce.
Gain on Sale of Assets
During the second quarter of fiscal 1997, the Company completed the
sale of the PicoPower product line to National Semiconductor, Inc. The
Company received approximately $17.6 million in cash for the PicoPower
product line. In connection with the transaction, the Company recorded a
gain of approximately $6.9 million.
During the third quarter of fiscal 1997, the Company completed the sale
to ADC Telecommunications Inc. of the PCSI product group that produced CDPD
(Cellular Digital Packet Data) base station equipment for wireless service
providers, and developed pACT (personal Air Communications Technology) base
stations for AT&T Wireless Services Inc. The Company received approximately
$20.8 million in cash for the group. In connection with the transaction,
the Company recorded a gain of approximately $12.0 million.
During the fourth quarter of fiscal 1997, the Company completed the
sale of the assets of PCSI's Wireless Semiconductor Products to Rockwell
International for $18.1 million in cash and made the decision to shut down
PCSI's Subscriber Product Group. PCSI's Wireless Semiconductor Product
Group provided digital cordless chip solutions for PHS (Personal Handyphone
System) and DECT (Digital European Cordless Telecommunications) as well two-
way messaging chip solutions for pACT (personal Air Communications
Technology). In connection with the sale of the Wireless Semiconductor
Product Group and the shut-down of the Subscriber Group, the Company
recorded a net gain of $0.3 million in the fourth quarter.
Restructuring Costs
Restructuring charges in fiscal 1997 of $21.0 million included $5.1
million related to workforce reductions and $15.9 million primarily related
to excess assets and facilities. The implementation of this plan commenced
during the fourth quarter of fiscal 1997 and will require a total cash
outlay of approximately $10.7 million, the majority of which is expected to
be paid in fiscal 1998.
In the fourth quarter of fiscal 1996, as a result of decreased demand
for the Company's products for use in personal computers, which accounts for
more than 80% of the Company's revenue, management reviewed the various
operating areas of the business and took certain steps to bring operating
expenses and capacity in line with demand. These actions resulted in a pre-
tax restructuring charge of approximately $11.6 million. The principal
actions in the restructuring involved the consolidation of support
infrastructure and the withdrawal from an unprofitable product line and
reduction of planned production capacity. This resulted in the elimination
of approximately 320 positions from the manufacturing, research and
development, sales and marketing, and administrative departments.
The major components of the restructuring charges were $7.6 million
related to workforce reductions and $4.0 million of capacity scaleback and
other costs. The implementation of this plan commenced during the fourth
quarter of fiscal 1996. Approximately $8.6 million of cash outlays occurred
in fiscal 1997. The balance of approximately $3.0 million, related
primarily to facilities lease payments, will occur in fiscal 1998.
Non-recurring and Merger Costs
In the third quarter of fiscal 1996, non-recurring costs were
approximately $1.2 million associated with the formation of the Cirent
Semiconductor joint venture with Lucent Technologies (formerly AT&T
Microelectronics).
In the second quarter of fiscal 1995, non-recurring and merger costs
were approximately $6.3 million. Non-recurring costs of $3.9 million were
primarily associated with the acquisition of technology and marketing rights
and the remaining minority interest in a subsidiary, and the formation of
the MiCRUS joint venture with IBM. Merger costs of approximately $2.4
million for the August 1994 combination of Cirrus Logic and PicoPower
included one-time costs for charges related to the combination of the two
companies, financial advisory services, and legal and accounting fees.
Interest Expense
Interest expense was $19.8 million, $5.2 million and $2.4 million in
fiscal 1997, 1996 and 1995, respectively. The increase in interest expense
was primarily the result of the issuance of convertible subordinated notes
in the third quarter of fiscal 1997 and increased borrowings on short-term
and long-term debt during fiscal 1997 and fiscal 1996.
Interest Income and Other, Net
Interest income and other, net in fiscal 1997 was $9.3 million compared
to $7.7 million in fiscal 1996 and $9.1 million in fiscal 1995. Interest
income increased in fiscal 1997 over fiscal 1996 as a result of an increase
in the amount of short-term investments. The decrease in fiscal 1996 over
fiscal 1995 was primarily the result of a decrease in the amount of short-
term investments.
Foreign Currency Transaction Gains
Sales of the Company's products are denominated primarily in U.S.
dollars. Accordingly, any increase in the value of the U.S. Dollar as
compared to currencies in the Company's principal overseas markets would
increase the local currency cost of the Company's products, which may
negatively affect sales in those markets. In addition, certain Japanese Yen
denominated intercompany receivables and yen denominated cash accounts are
subject to remeasurement into U.S. dollars. This remeasurement resulted in
a foreign currency gain of approximately $5.0 million in fiscal 1995.
Subsequent to fiscal 1995, the Company has hedged its exposure to the
Japanese Yen denominated assets through the use of foreign currency forward
and option contracts. Under this strategy, gains or losses on hedging
transactions are offset by gains or losses on the underlying foreign
currency assets or liabilities being hedged. Transaction gains and losses
were not material in fiscal 1997 and 1996. The Company does not enter into
derivative financial instruments for trading purposes.
Income Taxes
The benefit for income taxes was 10.6% in fiscal 1997 compared to a
benefit for income taxes of 13.3% in fiscal 1996 and a provision for income
taxes of 31.5% in fiscal 1995. The fiscal 1997 and 1996 rates are different
from the fiscal 1995 rate and from the U.S. statutory rate primarily because
of foreign operating results which are taxed at rates other than the U.S.
statutory rate. The fiscal 1995 31.5% effective tax rate is less than the
U.S. statutory rate primarily because of the research and development tax
credit and certain foreign earnings taxed at lower rates.
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter of fiscal 1997, a $244 million lease package
was completed, with Cirrus Logic as guarantor, to finance the advanced fab
equipment for the Cirent Semiconductor manufacturing joint venture. During
the same quarter, the Company completed an offering of $300 million of
convertible subordinated notes. The notes bear interest at six percent,
mature in December 2003, and are convertible into shares of the Company's
common stock at $24.219 per share.
During fiscal 1997, the Company generated $2.6 million of cash and cash
equivalents from its operating activities as compared to $7.7 million during
fiscal 1996 and $65.1 million in fiscal 1995. The fiscal 1997 decrease from
fiscal 1996 was primarily caused by the increase in the net loss from
operations, offset somewhat by the non-cash effect of depreciation and
amortization and the net change in operating assets and liabilities. The
fiscal 1996 decrease from fiscal 1995 was primarily caused by the loss from
operations and the net change in operating assets and liabilities offset
somewhat by the non-cash effect of depreciation and amortization.
The Company used $221.0 million in cash in investing activities during
fiscal 1997, $104.9 million during fiscal 1996 and $201.8 million during
fiscal 1995. The Company had a decrease in proceeds from short-term
investments and increased short-term investment purchases in fiscal 1997
over fiscal 1996. The cash used in fiscal 1997 was reduced somewhat by a
decrease in additions to property and equipment and the proceeds from sale
of assets. The decrease in investing activities during fiscal 1996 compared
to fiscal 1995 was primarily the result of liquidating investments during
fiscal 1996.
Net cash provided by financing activities was $214.0 million, $186.4
million and $9.6 million in fiscal 1997, 1996 and 1995, respectively.
During fiscal 1997, proceeds from the issuance of $300 million of
convertible subordinated notes provided the largest increase in resources
offset by repayment of short-term bank debt. During fiscal 1996, increased
borrowings on short-term and long-term debt and to a lesser extent, issuance
of common stock under stock plans provided the largest increase over fiscal
1995.
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 continue to 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, and cash generated from operations.
As of March 29, 1997, the Company is contingently liable as guarantor or co-
guarantor for MiCRUS and Cirent equipment leases which have remaining
payments of approximately $526.0 million due through 2004. In addition, the
Company has other commitments related to its joint venture relationships
that total approximately $118.0 million at March 29, 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.
As of March 29, 1997, the Company has a commitment for a bank line of
credit for borrowings up to a maximum of $150 million, expiring on October
31, 1999, at the banks' prime rate plus one-half percent. As of March 29,
1997, no borrowings were outstanding under the line. Borrowings are secured
by cash, accounts receivable, inventory, intellectual property, and stock in
the Company's subsidiaries. Use of the line is limited to the borrowing
base as defined by accounts receivable. Terms of the agreement include
satisfaction of certain financial ratios, minimum tangible net worth, cash
flow, and leverage requirements as well as a prohibition against the payment
of a cash dividend without prior bank approval. The Company was not in
compliance with certain financial ratios and the profitability covenant as
of March 29, 1997. The Company expects to amend or replace the existing
line of credit facility in fiscal 1998.
Management continues to evaluate other possibilities for additional
financing. There is no assurance that financing will be available or, if
available, will be on satisfactory terms.
Future Operating Results
Quarterly Fluctuations
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 that 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
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 inaccurately 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 in fact 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 in the last month 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
During fiscal 1997, manufacturing capacity exceeded demand for certain
of the Company's products and the Company believes that its manufacturing
capacity will exceed demand at least through the second quarter of fiscal
1998. As a consequence, the Company incurred charges related to its MiCRUS
joint venture for failing to purchase sufficient wafers and recorded a
fourth quarter accrual for anticipated under-use of wafer fabrication
capacity, negatively impacting gross margins.
Although the Company believes that its efforts to increase its source
of wafer supply through joint ventures (MiCRUS with IBM and Cirent
Semiconductor with Lucent Technologies) and other arrangements have
significant potential benefits to the Company, there are also risks, some of
which materialized in the third and fourth quarter of fiscal 1996 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, under use of wafer fabrication
capacity is charged to the Company in proportion to its capacity
commitments, which adversely affects gross margins and earnings. During the
fourth quarter of fiscal 1997, the Company accrued $22.0 million for
anticipated under use 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 could 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 delaying,
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 become in default of 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 and will begin using outside vendors for certain
production testing beginning in fiscal 1998.
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.
As the Company's products increase in complexity and integrate an
increasing number of functions on one semiconductor device, there is also an
increased 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 integrated circuit (IC) makers, including Intel Corporation, have
expressed their interest in integrating through hardware functions, adding
through special software functions, or kitting components to provide some
multimedia or communications features into or with their microprocessor
products. Successful integration of these functions could substantially
reduce the Company's opportunities for IC sales in these areas.
A number of PC OEMs buy products directly from the Company and also buy
motherboards, add-in boards or modules from suppliers who in turn buy
products from the Company. Accordingly, a significant portion of the
Company's sales may depend directly or indirectly on the sales to a
particular PC OEM. Since the Company cannot track sales by motherboard,
add-in board or module manufacturers, the Company may not be fully informed
as to the extent or even the fact of its indirect dependence on any
particular PC OEM, and, therefore, may be unable to assess the risk of such
indirect dependence.
The PC market is intensely price competitive. The PC manufacturers, in
turn, put pressure on the price of all PC components, and this pricing
pressure is expected to continue.
Issues Relating to 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 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 functions into a single IC. The Company's
revenues from the sale of audio products in 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 could
be adversely affected.
Issues Relating to Mass Storage Market
The disk drive market has historically been characterized by a
relatively small number of disk drive manufacturers and by periods of rapid
growth followed by periods of oversupply and contraction. 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 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 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. 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, such customers collectively accounting 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
results of operations 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. In addition, the integration
of additional functions onto individual devices is expected to result in a
convergence of existing markets and increase the number of competitors faced
by the Company. 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts)
<CAPTION>
Fiscal years ended
---------------------------------
March 29, March 30, April 1,
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Net sales $917,154 $1,146,945 $889,022
Operating costs and expenses and
gain on sale of assets:
Cost of sales 598,795 774,350 512,509
Research and development 230,786 238,791 165,622
Selling, general and administrative 126,722 165,267 126,666
Restructuring costs 20,954 11,566 -
Gain on sale of assets, net (18,915) - -
Non-recurring costs - 1,195 3,856
Merger costs - - 2,418
---------- ----------- ----------
Total operating costs and expenses
and gain on sale of assets 958,342 1,191,169 811,071
---------- ----------- ----------
Operating (loss) income (41,188) (44,224) 77,951
Interest expense (19,754) (5,151) (2,441)
Interest income and other, net 9,323 7,652 9,129
Foreign currency transaction gains - - 4,999
---------- ----------- ----------
(Loss) income before income taxes (51,619) (41,723) 89,638
(Benefit) provision for income taxes (5,463) (5,540) 28,236
---------- ----------- ----------
Net (loss) income (46,156) (36,183) 61,402
========== =========== ==========
Net (loss) income per common and
common equivalent share ($0.71) ($0.58) $0.96
========== =========== ==========
Weighted average common and common
equivalent shares outstanding 65,008 62,761 63,680
========== =========== ==========
<FN>
See accompanying notes.
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Thousands)
<CAPTION>
March 29, March 30,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $151,540 $155,979
Short-term investments 188,215 19,279
Accounts receivable, less allowance for doubtful
accounts of $12,770 in 1997 and $13,174 in 1996 173,743 133,718
Inventories 127,252 134,502
Deferred tax assets 34,410 52,662
Equipment and leasehold improvement advances to joint ventures 112,597 94,683
Other current assets 7,245 4,004
------------ ------------
Total current assets 795,002 594,827
------------ ------------
Property and equipment, at cost:
Machinery and equipment 252,643 247,390
Furniture and fixtures 15,767 15,293
Leasehold improvements 23,112 21,044
------------ ------------
291,522 283,727
Less accumulated depreciation and amortization (160,667) (113,479)
------------ ------------
Property and equipment, net 130,855 170,248
Manufacturing agreements, net of accumulated
amortization of $10,729 in 1997 and $3,921 in 1996,
and investment in joint ventures 151,675 104,463
Deposits and other assets 59,289 48,039
------------ ------------
$1,136,821 $917,577
============ ============
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
<S> <C> <C>
Current liabilities:
Short-term borrowing $ - $ 80,000
Accounts payable 231,178 214,299
Accrued salaries and benefits 33,792 41,845
Current maturities of long-term debt and
capital lease obligations 30,999 26,575
Income taxes payable 31,259 20,863
Other accrued liabilities 39,104 28,602
------------ ------------
Total current liabilities 366,332 412,184
------------ ------------
Capital lease obligations 9,848 6,258
Long-term debt 51,248 65,571
Other long-term 5,196 4,898
Convertible subordinated notes 300,000 -
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, no par value; 5,000
shares authorized, none issued - -
Common stock, no par value, 140,000 shares
authorized, 66,156 shares issued and
outstanding in 1997 and 63,951 in 1996 351,261 329,574
Retained earnings 52,936 99,092
------------ ------------
Total shareholders' equity 404,197 428,666
------------ ------------
$1,136,821 $917,577
============ ============
<FN>
See accompanying notes.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
<CAPTION>
Fiscal Years Ended
--------------------------------
March 29, March 30, April 1,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ($46,156) ($36,183) $61,402
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 87,960 64,301 34,329
Gain on sale of assets (18,915) - -
Provision for loss on property and equipment 10,278 - -
Compensation related to the issuance of
certain employee stock options 494 820 3,109
Changes in operating assets and liabilities:
Accounts receivable (42,438) 27,615 (76,448)
Inventories 2,367 (30,860) (24,837)
Payments for joint venture equipment to be leased (17,914) (94,683) -
Deferred tax and other current assets 14,659 (28,735) (3,650)
Accounts payable 16,879 73,854 51,494
Accrued salaries and benefits (7,858) 9,337 8,351
Income taxes payable 11,968 15,209 3,262
Other accrued liabilities (8,752) 7,045 8,093
---------- ---------- ----------
Net cash provided by operating activities 2,572 7,720 65,105
---------- ---------- ----------
Cash flows from investing activities:
Purchase of available for sale investments (182,552) (175,139) (234,065)
Proceeds from available for sale investments 13,616 228,092 187,900
Purchase of held to maturity investments - (10,444) (158,748)
Proceeds from held to maturity investments - 57,144 133,688
Proceeds from sales of assets 56,526 - -
Manufacturing agreements and investment in joint venture (54,000) (44,604) (63,800)
Additions to property and equipment (30,722) (127,802) (47,313)
Increase in deposits and other assets (23,903) (32,140) (19,429)
---------- ---------- ----------
Net cash used by investing activities (221,035) (104,893) (201,767)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of convertible notes 290,640 - -
Borrowings on long-term debt 10,009 74,973 13,292
Payments on long-term debt (21,154) (10,798) (8,688)
Payments on capital lease obligations (5,720) (4,051) (3,919)
Borrowings on short-term debt 172,000 121,000 -
Payments on short-term debt (252,000) (41,000) -
Proceeds from sale and leaseback of property and equipment - 13,067 -
Increase in other long-term liabilities 565 4,898 -
Issuance of common stock, net of issuance costs and
repurchases 19,684 28,345 8,870
---------- ---------- ----------
Net cash provided by financing activities 214,024 186,434 9,555
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (4,439) 89,261 (127,107)
Cash and cash equivalents at beginning of year 155,979 66,718 193,825
---------- ---------- ----------
Cash and cash equivalents at end of year $151,540 $155,979 $66,718
========== ========== ==========
Non-cash investing and financing activities:
Equipment purchased under capital leases $10,556 $594 $6,849
Tax benefit of stock option exercises 1,509 16,668 1,320
Cash payments (refunds) for:
Interest 8,381 4,358 2,464
Income taxes (25,625) 17,612 24,974
<FN>
See accompanying notes.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended March 29, 1997
(Thousands)
<CAPTION>
Common Stock
--------------------- Retained
Shares Amount Earnings Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, April 2, 1994 59,222 $270,442 $73,873 $344,315
Issuance of stock under stock plans
and other, net of repurchases 1,372 8,870 --- 8,870
Compensation related to the
issuance of certain employee options --- 3,109 --- 3,109
Net income --- --- 61,402 61,402
Tax benefit of stock option exercises --- 1,320 --- 1,320
---------- ---------- ---------- ----------
Balance, April 1, 1995 60,594 283,741 135,275 419,016
Issuance of stock under stock plans
and other, net of repurchases 3,357 28,345 --- 28,345
Compensation related to the
issuance of certain employee options --- 820 --- 820
Net loss --- --- (36,183) (36,183)
Tax benefit of stock option exercises --- 16,668 --- 16,668
---------- ---------- ---------- ----------
Balance, March 30, 1996 63,951 329,574 99,092 428,666
Issuance of stock under stock plans
and other, net of repurchases 2,205 19,684 --- 19,684
Compensation related to the
issuance of certain employee options --- 494 --- 494
Net loss --- --- (46,156) (46,156)
Tax benefit of stock option exercises --- 1,509 --- 1,509
---------- ---------- ---------- ----------
Balance, March 29, 1997 66,156 $351,261 $52,936 $404,197
========== ========== ========== ==========
<FN>
See accompanying notes.
</TABLE>
<PAGE>
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Major Customer Information
Cirrus Logic, Inc. (the "Company") operates principally in a single
industry segment. The Company is a leading manufacturer of advanced
integrated circuits for the desktop and portable computing,
telecommunications, industrial, and consumer electronics markets. The
Company applies its system-level expertise in analog and digital design to
innovate highly integrated, software-rich solutions. Cirrus Logic offers a
broad portfolio of products including highly integrated chips, software,
evaluation boards, manufacturing kits, and subsystem modules. The Company
performs its own wafer and product testing, engineering support and quality
and reliability assurance, and uses joint ventures and subcontractors to
manufacture wafers and assemble products. In fiscal 1998, a substantial
portion of the Company's wafer and product testing will be done by
subcontractors.
In fiscal 1997, one customer accounted for 10% or more of net sales.
In fiscal 1996 and 1995, no customer accounted for 10% or more of net sales.
Export sales include sales to overseas operations of domestic
corporations and represented 62%, 56% and 56% of net sales in fiscal 1997,
1996 and 1995, respectively. Export sales to the Pacific Rim were 32% and
34% of net sales; to Japan were 22% and 17% of net sales and to Europe and
the rest of the world were 7% and 6% of net sales, in fiscal 1997 and 1996,
respectively. There are no restrictions on the transfer of funds in
international markets in which the Company does business.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated. Accounts denominated in
foreign currencies have been remeasured in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency
Translation," using the U.S. dollar as the functional currency. Translation
adjustments relating to Cirrus Logic K.K., whose functional currency is the
Japanese yen, have not been material.
Cash Equivalents and Short-term Investments
Cash equivalents consist primarily of over-night deposits, commercial
paper, U.S. Government Treasury and Agency instruments, and money market
funds with original maturities of three months or less at date of purchase.
Short-term debt investments have original maturities greater than three
months. Short-term debt and equity investments consist of U.S. Government
Treasury and Agency instruments, money market preferred stock, auction
preferred stock, municipal bonds, certificates of deposit and commercial
paper.
Short-term Investments Held-to-Maturity and Available-for-Sale
Management determines the appropriate classification of certain debt
and equity securities at the time of purchase as either held-to-maturity,
trading or available-for-sale and reevaluates such designation as of each
balance sheet date.
Held-to-maturity securities are stated at cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization, as well as any interest on the securities, is included in
interest income and other, net. Held-to-maturity securities include only
those securities the Company has the positive intent and ability to hold to
maturity.
Securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair
value, with unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity, if material. Realized gains and losses,
declines in value judged to be other than temporary, and interest on
available-for-sale securities are included in interest income and other,
net.
Foreign Exchange Contracts
The Company may enter into foreign currency forward exchange and option
contracts to hedge certain of its foreign currency exposures. The Company's
accounting policies for these instruments are based on the Company's
designation of such instruments as hedging transactions. The criteria the
Company uses for designating an instrument as a hedge include its
effectiveness in exposure reduction and one-to-one matching of the
derivative financial instrument to the underlying transaction being hedged.
Gains and losses on foreign currency exchange and option contracts that are
designated and effective as hedges of existing transactions are recognized
in income in the same period as losses and gains on the underlying
transactions are recognized and generally offset. Gains and losses on
currency option contracts that are designated and effective as hedges of
transactions, for which a firm commitment has been attained, are deferred
and recognized in income in the same period that the underlying transactions
are settled and were not material as of March 29, 1997. The Company
generally does not require collateral from counterparties.
During fiscal 1996, the Company purchased foreign currency forward
exchange contracts to hedge certain yen denominated inventory purchases.
During fiscal 1997 and 1996, the Company purchased foreign currency option
contracts to hedge certain yen denominated net balance sheet accounts and
sales. As of March 29, 1997 and March 30, 1996, the Company had foreign
currency option contracts outstanding denominated in Japanese yen for
approximately $74,460,000 and $76,022,000, respectively. The fiscal 1997
contracts expire on June 27, 1997. The fiscal 1996 contracts expired
through June 1996.
While the contract amounts provide one measure of the volume of the
transactions outstanding at March 29, 1997 and March 30, 1996, they do not
represent the amount of the Company's exposure to credit risk. The
Company's exposure to credit risk (arising from the possible inability of
the counterparties to meet the terms of their contracts) is generally
limited to the amount, if any, by which the counterparty's obligations
exceed the obligations of the Company.
During fiscal 1995, the Company recorded approximately $5 million of
foreign currency transaction gains pertaining to the remeasurement of
certain unhedged balance sheet accounts denominated in Japanese yen.
Transaction gains and losses were not material in fiscal 1997 and 1996.
Inventories
The Company applies the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market principle to value its
inventories. One of the factors the Company consistently evaluates in
application of this principle is the extent to which products are accepted
into the marketplace. By policy, the Company evaluates market acceptance
based on known business factors and conditions by comparing forecasted
customer unit demand for the Company's products over a specific future
period or demand horizon to quantities on hand at the end of each accounting
period.
On a quarterly and annual basis, inventories are analyzed on a part-by-
part basis. Inventory quantities on hand in excess of forecasted demand, as
adjusted by management, are considered to have reduced market value and,
therefore, the cost basis is adjusted from standard cost to the lower of
cost or market. Typically, market value for excess or obsolete inventories
is considered to be zero. The short product life cycles and the competitive
nature of the industry are factors considered in the estimation of customer
unit demand at the end of each quarterly accounting period.
Inventories are comprised of the following (in thousands):
March 29, March 30,
1997 1996
--------- ---------
Work-in-process $ 79,276 $ 69,244
Finished goods 47,976 65,258
--------- ---------
$ 127,252 $ 134,502
========= =========
Property and Equipment
Property and equipment is recorded at cost. Depreciation and
amortization is provided on a straight-line basis over estimated useful
lives ranging from three to five years, or over the life of the lease for
equipment under capitalized leases, if shorter. Leasehold improvements are
amortized over the term of the lease or their estimated useful life,
whichever is shorter.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-
term investments and trade accounts receivable. By policy, the Company
places its investments only with high credit quality financial institutions
and, other than U.S. Government Treasury instruments, limits the amounts
invested in any one institution or in any type of instrument. Almost all of
the Company's trade accounts receivable are derived from sales to
manufacturers of computer systems and subsystems. The Company performs
ongoing credit evaluations of its customers' financial condition, limits its
exposure to accounting losses by limiting the amount of credit extended
whenever deemed necessary, utilizes letters of credit where appropriate and
generally does not require collateral.
Revenue Recognition
Revenue from product sales direct to customers is recognized upon
shipment. Certain of the Company's sales are made to distributors under
agreements allowing certain rights of return and price protection on
products unsold by distributors. Accordingly, the Company defers revenue
and gross profit on such sales until the product is sold by the
distributors.
Non-recurring and Merger Costs
In fiscal 1996, non-recurring costs were approximately $1.2 million
associated with the formation of the Cirent Semiconductor joint venture with
Lucent Technologies.
In fiscal 1995, non-recurring and merger costs were approximately $6.3
million. Non-recurring costs of $3.9 million were primarily associated with
the acquisition of certain technology and marketing rights and the remaining
minority interest in a subsidiary, and the formation of the MiCRUS joint
venture with International Business Machines Corporation (IBM). Merger
costs of approximately $2.4 million for the August 1994 combination of
Cirrus Logic and PicoPower included one-time charges related to the
combination of the two companies, financial advisory services, and legal and
accounting fees.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising costs
were not significant in fiscal 1997, 1996, and 1995.
Stock-based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no
compensation cost has been recognized for its fixed cost stock option plans
or its associated stock purchase plan. The Company provides additional pro
forma disclosures as required under Statement of Financial Accounting
Standard (FAS 123), "Accounting for Stock-Based Compensation." See Note
13.
Net (Loss) Income Per Common and Common Equivalent Share
Net (loss) income per common and common equivalent share is based on
the weighted average common shares outstanding and dilutive common
equivalent shares (using the treasury stock or modified treasury stock
method, whichever applies). Common equivalent shares include stock options
and warrants when appropriate. In periods in which there was a net loss,
common equivalent shares have been excluded as their impact would be anti-
dilutive. During December 1996, the Company issued convertible subordinated
notes. These securities are included in fully diluted earnings per share
computations for the period outstanding under the "if converted" method.
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.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, (FAS 128) "Earnings per Share," which is required to be
adopted on December 28, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
earnings per share, the dilutive effect of stock options will be excluded.
The impact is expected to result in no change in the primary loss per share
for the fiscal years ended March 29, 1997 and March 30, 1996 and to increase
the income per share by $0.08 for the fiscal year ended April 1, 1995. The
Company has not yet determined what the impact of FAS 128 will be on the
calculation of diluted earnings per share.
Financial Presentation
Certain prior year amounts on the Consolidated Financial Statements
have been reclassified to conform to the fiscal 1997 presentation.
2. GAIN ON SALE OF ASSETS
During the second quarter of fiscal 1997, the Company completed the
sale of the PicoPower product line to National Semiconductor, Inc. The
Company received approximately $17.6 million in cash for the PicoPower
product line. In connection with the transaction, the Company recorded a
gain of approximately $6.9 million.
During the third quarter of fiscal 1997, the Company completed the sale
to ADC Telecommunications Inc. of the PCSI product group that produced CDPD
(Cellular Digital Packet Data) base station equipment for wireless service
providers, and developed pACT (personal Air Communications Technology) base
stations for AT&T Wireless Services Inc. The Company received approximately
$20.8 million in cash for the group. In connection with the transaction,
the Company recorded a gain of approximately $12.0 million.
During the fourth quarter of fiscal 1997, the Company completed its
divestiture of PSCI by selling the assets of PCSI's Wireless Semiconductor
Products to Rockwell International for $18.1 million in cash and made the
decision to shut down PCSI's Subscriber Product Group. PCSI's Wireless
Semiconductor Product Group provided digital cordless chip solutions for PHS
(Personal Handyphone System) and DECT (Digital European Cordless
Telecommunications) as well two-way messaging chip solutions for pACT
(personal Air Communications Technology). In connection with the sale of
the Wireless Semiconductor Product Group and the shut-down of the Subscriber
Group, the Company recorded a net gain of $0.3 million in the fourth
quarter. The shut-down of the Subscriber Group resulted in severance costs
of $2.2 million, the write-off of excess assets (primarily computer and
related equipment) of $1.1 million, accruals for excess facilities of $0.9
million and an estimated net cost to settle contracted and other obligations
of $3.2 million.
3. FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Investment securities: The fair values for marketable debt and equity
securities are based on quoted market prices.
Foreign currency exchange and option contracts: The fair values of the
Company's foreign currency exchange forward and option contracts are
estimated based on quoted market prices of comparable contracts,
adjusted through interpolation where necessary for maturity
differences.
Short-term debt: The fair value of short-term debt approximates cost
because of the short period of time to maturity.
Long-term debt: The fair value of long-term debt is estimated based on
current interest rates available to the Company for debt instruments
with similar terms and remaining maturities.
The carrying amounts and fair values of the Company's financial
instruments at March 29, 1997 are as follows (in thousands):
Carrying Amount Fair Value
--------------- ----------
Cash $ 148,509 $ 148,509
Investment securities:
U.S. Government Treasury
instruments 179,395 180,183
U.S. Government Agency
instruments 11,111 11,184
Commercial paper 740 740
Long-term debt (current portion) (25,644) (25,290)
Long-term debt (351,248) (282,365)
The carrying amounts and fair values of the Company's financial
instruments at March 30, 1996 are as follows (in thousands):
Carrying Amount Fair Value
--------------- -----------
Cash and cash equivalents $ 155,979 $ 155,979
Investment securities:
U.S. Government Treasury
instruments 12,085 12,024
U.S. Government Agency
instruments 4,256 4,257
Municipal bonds 4,314 4,325
Short-term debt (80,000) (80,000)
Long-term debt (current portion) (22,460) (22,090)
Long-term debt (65,571) (63,023)
Investments
Available-for-sale securities have the following contracted maturities
at March 29, 1997 (in thousands):
Less than one year $ 181,048
One to two years 10,198
---------
Total $ 191,246
=========
Gross unrealized gains and gross unrealized losses on all classes of
securities were immaterial at March 29, 1997 and March 30, 1996.
The following is a reconciliation of the investment
categories to the balance sheet classification at March 29, 1997
(in thousands):
Cash and Cash Short-term
Equivalents Investments Total
----------- ----------- ---------
Cash $ 148,509 $ - $ 148,509
Available-for-sale
securities 3,031 188,215 191,246
----------- ----------- ---------
Total $ 151,540 $ 188,215 $ 339,755
=========== =========== =========
The following is a reconciliation of the investment categories to the
balance sheet classification at March 30, 1996
(in thousands):
Cash and Cash Short-term Long-term
Equivalents Investments Investments Total
----------- ----------- ----------- ---------
Cash $ 149,715 $ - $ - $ 149,715
Available-for-sale
securities 6,264 10,211 - 16,475
Held-to-maturity securities - 9,068 1,376 10,444
----------- ----------- ----------- ---------
Total $ 155,979 $ 19,279 $ 1,376 $ 176,634
=========== =========== =========== =========
4. USE OF ESTIMATES AND CONCENTRATIONS OF OTHER RISKS
The Company's financial statements are prepared in accordance with
generally accepted accounting principles that require the use of management
estimates. These estimates are impacted, in part, by the following risks
and uncertainties:
Inventories. The Company produces inventory based on orders received and
forecasted demand. 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.
Demand will differ from forecasts and such difference may have a material
effect on actual results of operations.
Dependence on PC Market. Sales of most of the Company's products depend
largely on sales of personal computers (PCs). Increasing dominance of the
PC motherboard or PC market by any one customer increases the risks that the
Company could experience intensified pressure on product pricing and
unexpected changes in customer orders as a result of changes in the
customers' market share. Moreover, the Company's production schedules are
based not only on customer orders, but also on forecasted demand. These
issues may contribute to increasing volatility in the Company's PC-related
products, and thus may increase the risk of rapid changes in revenues,
margins, and earnings. Furthermore, the intense price competition in the PC
industry is expected to continue to put pressure on the price of all PC
components. Other IC makers, including Intel Corporation, have expressed
their interest in integrating some multimedia or communications functions
into their microprocessor products. Successful integration of these
functions could reduce the Company's opportunities for IC sales in these
areas. As a component supplier to PC OEMs and to peripheral device
manufacturers, the Company is likely to experience a greater magnitude of
fluctuations in demand than the Company's customers themselves experience.
In addition, many of the Company's products are used in PCs for the consumer
market, and the consumer PC market is more volatile than other segments of
the PC market.
5. JOINT VENTURES AND MANUFACTURING SUPPLY AGREEMENTS
In 1994, the Company and IBM formed MiCRUS, a manufacturing joint
venture that produces wafers for both companies. MiCRUS began operations in
1995 and is now engaging in a second expansion. In addition, in July 1996,
the Company and Lucent Technologies formed Cirent Semiconductor, a
manufacturing joint venture that will produce wafers for both companies.
Cirent Semiconductor began operations in the fourth quarter of fiscal 1997.
MiCRUS
MiCRUS produces wafers using IBM's wafer processing technology, and is
currently focusing on CMOS wafers with 0.35 micron process technology and
also processes wafers with 0.8, 0.6 and 0.5 micron technology. MiCRUS
leases an existing IBM facility in East Fishkill, New York, and also makes
process technology payments to IBM, which totaled $56 million as of March
29, 1997. IBM and Cirrus Logic own 52% and 48%, respectively, of MiCRUS.
Activities of the joint venture are focused on the manufacture of
semiconductor wafers, and do not encompass direct product licensing or
product exchanges between the Company and IBM. The terms of the joint
venture initially entitled each company to purchase 50% of the MiCRUS
output. If one company fails to purchase its full entitlement, the
shortfall may be purchased by the other company or, under limited
circumstances, offered to third parties. However, if the wafers cannot be
sold elsewhere, the company that failed to purchase its full entitlement
will be required to reimburse the joint venture for costs associated with
underutilized capacity. In addition, to the extent that the facility fails
to produce wafers at scheduled capacity, each company will be required to
bear its proportionate share of the underabsorbed fixed costs. During
fiscal 1997 and 1996, the Company recorded charges to cost of sales of
approximately $10.0 million and $14 million, respectively, for the
underutilization of capacity. In addition, the Company accrued an estimate
of $22.0 million in the fourth quarter of fiscal 1997 for anticipated under
utilization of capacity in the first and second quarters of fiscal 1998.
The amount of this accrual is an estimate and the liability for under use of
capacity is ultimately subject to the actual use in those quarters. The
joint venture has a remaining term of seven years. MiCRUS is managed by a
six-member governing board of whom three are appointed by IBM, two are
appointed by Cirrus Logic and one is the chief executive officer of MiCRUS.
The joint venture is accounted for on the equity method. During fiscal
1997 and 1996, the Company purchased approximately $154.1 million and $77.1
million, respectively, of manufactured wafers from MiCRUS. As of March 29,
1997, and March 30, 1996, the Company had approximately $13.5 million and
$7.4 million, respectively, of accounts payable related to wafers purchased
from MiCRUS.
A $120 million expansion was completed in fiscal 1996 and a second
expansion, with a currently budgeted cost of $198 million, is expected to be
completed in 1998. The Company is providing all of the capital for the
second expansion and, accordingly, will be entitled to all of the additional
wafers produced and will be required to reimburse the joint venture for all
of the additional costs associated with any underutilization of the capacity
resulting from such expansion.
In connection with the formation and expansion of the MiCRUS joint
venture, the Company has incurred obligations to make equity contributions
to MiCRUS, to make payments to MiCRUS under a manufacturing agreement and to
guarantee equipment lease obligations incurred by MiCRUS. To date, the
Company has made equity investments totaling $23.8 million. No additional
equity investments are scheduled. However, the expansion of the MiCRUS
production could require additional equity contributions by the Company.
Payments under the manufacturing agreement as of March 29, 1997
totalled $71 million, of which $56 million has been paid, $7.5 million is
due in fiscal 1998 and $7.5 million is due in fiscal 1999. The
manufacturing agreement payments are being charged to the Company's cost of
sales over the original eight-year life of the venture based upon the ratio
of current units of production to current and anticipated future units of
production over the remaining life of the venture.
The equipment financings which have been completed or are committed to
as of March 29, 1997 total $503 million, of which $145 million was completed
in fiscal 1995 and is guaranteed jointly and severally by IBM and the
Company, and $215 million which was completed in fiscal 1996 and fiscal 1997
and is guaranteed by the Company. These financings mature at various dates
from 1998 to 2002. In addition, the Company currently intends to add an
additional $60 million in equipment in fiscal 1998 and an additional $50
million in fiscal 1999 to expand MiCRUS production. The additional amounts
would be financed by an equipment lease guaranteed by the Company. However,
these additional expenditures have not been committed and could be
reconsidered.
As of March 29, 1997, the Company has purchased approximately $36.2
million of manufacturing equipment for MiCRUS that the Company expects to
sell to an independent leasing company, in transactions which are not
expected to generate any significant gains or losses for the Company, that
will in turn lease the equipment to MiCRUS. Additionally, the Company has
invested approximately $29.7 million in facilities improvements on behalf of
MiCRUS in fiscal 1997. The Company expects to receive a note from MiCRUS
for this amount, payable over 6 years. As of March 29, 1997, the Company is
contingently liable for MiCRUS equipment leases, which have remaining
payments of approximately $324.4 million, payable through 2002.
Cirent Semiconductor
Cirent Semiconductor will operate two wafer fabs in Orlando, Florida,
both located in the same complex that is leased from Lucent Technologies.
Cirent Semiconductor also makes process technology payments to Lucent
Technologies, which totalled $35 million as of March 29, 1997. Cirent
Semiconductor is already operating the first fab, from which Lucent
Technologies purchases all of the output at a price that covers all costs
associated with that fab. The second fab has been built by Lucent
Technologies and is expected to begin operations in calendar 1997. The
second fab is scheduled to begin producing CMOS wafers using 0.35-micron
processes licensed from Lucent Technologies, and to migrate to a 0.25-micron
process. Lucent Technologies and Cirrus Logic each will be entitled to
purchase one-half of the output of the second fab. If one company fails to
purchase its full entitlement, the shortfall may be purchased by the other
company or offered to third parties. However, if the wafers cannot be sold
elsewhere, the company that failed to purchase its full entitlement will be
required to reimburse Cirent Semiconductor for costs associated with
underutilized capacity. In addition, to the extent that the facility fails
to produce wafers at scheduled capacity, each company will be required to
bear its proportionate share of the underabsorbed fixed costs. Cirent
Semiconductor is owned 60% by Lucent Technologies and 40% by Cirrus Logic
and is managed by a Board of Governors, of whom three are appointed by
Lucent Technologies and two are appointed by Cirrus Logic. The joint
venture has a term of ten years.
In connection with the Cirent joint venture, the Company has committed
to make equity contributions to Cirent Semiconductor, to make payments to
Cirent Semiconductor under a manufacturing agreement and to guarantee and/or
become a co-lessee under equipment lease obligations incurred by Cirent
Semiconductor.
The commitment for equity investment as of March 29, 1997 totals $35
million, of which $2 million has been paid and $33 million is expected to be
paid in fiscal 1998. The Company will account for these payments under the
equity method.
Payments under the manufacturing agreement total $105 million, of which
$35 million has been paid as of March 29, 1997, $50 million is due in fiscal
1998, and $20 million is due in fiscal 2000 for the achievement of
milestones by Cirent. These payments will be charged to the Company's cost
of sales over the life of the venture based upon the ratio of current units
of production to current and anticipated future units of production over the
remaining life of the agreement.
The Company has committed to guarantee and/or become a co-lessee of
leases covering up to $280 million of equipment for the Cirent Semiconductor
joint venture. In November 1996, the Company guaranteed and became a co-
lessee under a lease financing arrangement for up to $253 million of
equipment, subsequently reduced to $244.4 million, of which $160 million has
been used. These financings mature at various dates from 1998 to 2004. The
Company currently intends to enter into or guarantee an additional $35.6
million in lease financings sometime during fiscal 1998.
As of March 29, 1997, the Company has purchased approximately $46.7
million of manufacturing equipment for Cirent that the Company expects to
sell to the third party lessor under the November 1996 lease financing
arrangement, in transactions that are not expected to generate any
significant gains or losses for the Company, that will in turn lease the
equipment to Cirent. As of March 29, 1997, the Company is contingently
liable for Cirent equipment leases that have remaining payments of
approximately $201 million, payable through fiscal 2004. In addition, the
Company is contingently liable for approximately $70 million of debt
associated with the November 1996 lease financing arrangement, which has not
yet been used under the specified lease financing.
Under the terms of the joint venture agreements, the other joint
venture partners were responsible for the start-up costs for the years ended
December 31, 1996 and 1995. Accordingly, the Company's equity in the
earnings of the joint ventures were not material in either year. Condensed
combined financial information for MiCRUS and Cirent is as follows (in
thousands):
December 31,
---------------------------
1996 1995
----------- -----------
Current assets $ 160,000 $ 93,000
Non-current assets 150,000 108,000
----------- -----------
Total $ 310,000 $ 201,000
=========== ===========
Current liabilities $ 175,000 $ 83,000
Non-current liabilities 81,000 89,000
Partner's capital 54,000 29,000
----------- -----------
Total $ 310,000 $ 201,000
=========== ===========
Year Ended December 31,
---------------------------
1996 1995
----------- -----------
Revenue $ 250,000 $ 139,000
Expenses (310,000) (171,000)
----------- -----------
Net loss $ (60,000) $ (32,000)
=========== ===========
Other Wafer Supply Arrangements
Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC").
In fiscal 1993 and 1996, the Company entered into volume purchase
agreements with TSMC. Under each agreement, the Company committed to
purchase a fixed minimum number of wafers at market prices and TSMC
guaranteed to supply certain quantities. The fiscal 1993 agreement expired
in March 1997. The fiscal 1996 agreement expires in December 2001. Under
the agreement entered into in fiscal 1996, the Company has agreed to make
advance payments to TSMC of approximately $118 million, one-half in fiscal
1998 and one-half in fiscal 1999. The parties have been reevaluating these
arrangements, and, although no written agreement has been concluded, the
Company believes that the requirement for advance payments may be
eliminated, to be replaced by long-term purchase commitments. Under both
the fiscal 1993 and 1996 agreements, if the Company does not purchase the
committed amounts, it may be required to pay a per-wafer penalty for any
shortfall not sold by TSMC to other customers. Over the term of the fiscal
1996 agreement, the Company estimates it must purchase approximately $790
million of product in order to receive full credit for the advance payments
or avoid penalties if the requirement for advance payments is eliminated.
During fiscal 1997, 1996 and 1995, the Company purchased approximately $40.2
million, $37.2 million and $17.4 million, respectively, of product under the
fiscal 1993 supply agreement. In fiscal 1997, the Company purchased
approximately $56.6 million under the fiscal 1996 supply agreement.
United Microelectronics Corporation ("UMC").
In the fall of 1995, the Company entered into a foundry agreement and a
foundry capacity agreement with UMC, a Taiwanese company. The agreements
provide that UMC will form a new corporation under the laws of Taiwan, to be
called United Silicon, Inc., and that United Silicon, Inc. will build a
wafer fabrication facility and manufacture and sell wafers, wafer die and
packaged integrated circuits. The agreements provide that United Silicon,
Inc. will be funded in part with debt and equipment lease financing from UMC
and in part with equity contributions from the Company and two other U.S.
semiconductor companies. The agreements contemplated that the Company's
total investment would be approximately $88 million, in exchange for which
the Company would receive 15% of the equity of United Silicon, Inc. as well
as the right (but not the obligation) to purchase up to 18.75% of the wafer
output of the new facility at fair market prices. The Company paid $20.6
million in the fourth quarter of fiscal 1996. The Company does not expect
to make the additional scheduled investment. Should the Company not make
any additional investments, the Company's ultimate equity holding would be
substantially less than 15% and the Company would not retain rights to
guaranteed capacity. However, the Company would retain its equity holding
in United Silicon, Inc., and the Company believes that foregoing the rights
to guaranteed capacity would not result in an impairment of the recorded
value of the investment. The Company evaluates the net realizable value of
such investment on an ongoing basis.
6. OBLIGATIONS UNDER CAPITAL LEASES
The Company has capital lease agreements for machinery and equipment as
follows (in thousands):
March 29, March 30,
1997 1996
---------- ----------
Capitalized cost $ 30,594 $ 20,076
Accumulated amortization (15,957) (11,385)
---------- ----------
Total $ 14,637 $ 8,691
========== ==========
Amortization expense on assets capitalized under capital lease
obligations is included in depreciation and amortization. The lease
agreements are secured by the leased property.
Future minimum lease payments under capital leases for the following
fiscal years, together with the present value of the net minimum lease
payments as of March 29, 1997, are (in thousands):
1998 $ 6,092
1999 4,934
2000 3,228
2001 2,549
2002 736
---------
Total minimum lease payments 17,539
Less amount representing interest ( 2,336)
---------
Present value of net lease payments 15,203
Less current maturities ( 5,355)
---------
Capital lease obligations $ 9,848
=========
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
March 29, March 30,
1997 1996
---------- ----------
Installment notes with interest
rates ranging from 6.38% to 9.08% $ 76,892 $ 87,531
Installment purchase contract with
officer of subsidiary - 500
Less current maturities (25,644) (22,460)
--------- ----------
Long-term debt $ 51,248 $ 65,571
========= ==========
Principal payments for the following fiscal years are (in
thousands):
1998 $ 25,644
1999 21,540
2000 19,008
2001 8,806
2002 1,894
--------
Total $ 76,892
========
At March 29, 1997, installment notes are secured by machinery and
equipment with a net book value of $67,947,000 ($79,211,000 at March 30,
1996).
8. CONVERTIBLE SUBORDINATED NOTES
During December 1996, the Company completed an offering of $300 million
of convertible subordinated notes. The notes bear interest at six percent,
mature in December 2003, and are convertible into shares of the Company's
common stock at $24.219 per share. Expenses associated with the offering of
approximately $9.4 million are deferred and included in deposits and other
assets. Such expenses are being amortized to interest expense over the term
of the notes.
9. BANK ARRANGEMENTS
As of March 29, 1997, the Company has a commitment for a bank line of
credit for borrowings up to a maximum of $150 million expiring on October
31, 1999, at the banks' prime rate plus one-half percent. As of March 29,
1997, no borrowings were outstanding under the line. Borrowings are secured
by cash, accounts receivable, inventory, intellectual property, and stock in
the Company's subsidiaries. Use of the line is limited to the borrowing
base as defined by accounts receivable. Terms of the agreement include
satisfaction of certain financial ratios, minimum tangible net worth, cash
flow, and leverage requirements as well as a prohibition against the payment
of a cash dividend without prior bank approval. The Company was not in
compliance with the tangible net worth and profitably covenants as of March
29, 1997. The Company expects to amend or replace the existing line of
credit facility in fiscal 1998.
The Company has separate standby letters of credit of approximately
$10,000,000 with a wafer vendor to secure inventory purchases. The Company
also has a separate standby letter of credit of approximately $29,071,000
with a leasing company to secure lease payments under equipment leases the
leasing company has with MiCRUS (see note 5) which are guaranteed by the
Company. The Company also has approximately $1,000,000 of various other
lines of credit.
10. COMMITMENTS
Facilities and Equipment Under Operating Lease Agreements
The Company leases its facilities and certain equipment under operating
lease agreements, some of which have renewal options. Certain of these
arrangements provide for lease payment increases based upon future fair
market rates. The aggregate minimum future rental commitments under all
operating leases for the following fiscal years are (in thousands):
1998 $ 10,809
1999 10,364
2000 10,477
2001 9,875
2002 9,214
Thereafter 47,931
---------
Total minimum lease payments $ 98,670
=========
Total rent expense was approximately $12,580,000, $11,177,000
and $10,242,000 for fiscal 1997, 1996 and 1995, respectively.
11. RESTRUCTURING CHARGES
In the fourth quarter of fiscal 1997, the Company recorded a pre-tax
restructuring charge of $21.0 million in connection with a decision to
reorganize into four market focused divisions (Personal Computer Products,
Communications Products, Mass Storage Products and Crystal Semiconductor
Products), to outsource certain of its production testing and to consolidate
certain corporate functions. In connection with these actions, the Company
has effected a workforce reduction of approximately 400 people, representing
approximately 15 percent of the worldwide staff, and has begun the
consolidation of certain corporate functions. The Company expects the
outsourcing of production test to be substantially complete during fiscal
1998. Approximately $5.1 million of the restructuring charge is
attributable to the workforce reduction. The remaining $15.9 million
relates primarily to the write-off of excess assets (primarily excess test
equipment and leasehold improvements totalling approximately $9.5 million)
and facilities commitments (approximately $3.0 million), which were
determined using an expected future cash flows basis for determining the
impairment of the asset values and the amount of the facilities accrual.
Approximately $10.7 million of the accrual is expected to be discharged
through cash payments, $8.5 million of which is expected to be paid in
fiscal 1998. There were no expenditures charged against the accrual in
fiscal 1997.
In the fourth quarter of fiscal 1996, as a result of decreased demand
for the Company's products for use in personal computers, which accounted
for more than 80% of the Company's revenue, management reviewed the various
operating areas of the business and took certain steps to bring operating
expenses and capacity in line with demand. These actions resulted in a pre-
tax restructuring charge of approximately $11.6 million. The principal
actions in the restructuring involved the consolidation of support
infrastructure and the withdrawal from an unprofitable product line and
reduction of planned production capacity. This resulted in the termination
of approximately 320 positions from the manufacturing, research and
development, sales and marketing, and administrative departments.
The following sets forth the remaining balance of the Company's fiscal
1996 restructuring accrual as of March 29, 1997 (in thousands):
Severance and Capacity scale back
related benefits and other costs Total
---------------- ------------------- ----------
March 30, 1996 $ 7,536 $ 4,030 $ 11,566
Cash payments (6,904) (1,691) (8,595)
---------------- ------------------- ----------
March 29, 1997 $ 632 $ 2,339 $ 2,971
================ =================== ==========
No payments were made for the restructuring during fiscal 1996. The
remaining balance of the fiscal 1996 restructuring accrual as of March 29,
1997 is expected to be extinguished by cash payments to be made in fiscal
1998.
12. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have adopted 401(k) Profit Sharing
Plans ("the Plans") covering substantially all of their qualifying domestic
employees. Under the Plans, employees may elect to reduce their current
compensation by up to 15%, subject to annual limitations, and have the
amount of such reduction contributed to the Plans. The Plans permit, but do
not require, additional discretionary contributions by the Company on behalf
of all participants. During fiscal 1997, 1996 and 1995, the Company and its
subsidiaries matched employee contributions up to various maximums per plan
for a total of approximately $2,046,000, $2,111,000 and $1,849,000,
respectively. The Company intends to continue the contributions in fiscal
1998.
13. SHAREHOLDERS' EQUITY
Employee Stock Purchase Plan
In March 1989, the Company adopted the 1989 Employee Stock Purchase
Plan (ESPP). As of March 29, 1997, approximately 1,610,000 shares of Common
Stock are reserved for future issuance under this plan . During fiscal
1997, 1996 and 1995, 618,169, 593,820 and 461,252 shares, respectively, were
issued under the ESPP.
Preferred Stock
The Preferred Stock is authorized but unissued. The Board of Directors
has the authority to issue the undesignated Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued shares of Preferred Stock and
to fix the number of shares constituting any series and the designations of
such series, without any further vote or action by the shareholders.
Although it has no intention to do so, the Board of Directors, without
shareholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of
Common Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company.
Stock Option Plans
The Company has various stock option plans (the "Option Plans") under
which officers, key employees, non-employee directors and consultants may be
granted qualified and non-qualified options to purchase shares of the
Company's authorized but unissued Common Stock. Options are generally
priced at the fair market value of the stock on the date of grant. Options
are exercisable immediately but unvested shares are held in escrow and are
subject to repurchase at the original issuance price. Options currently
expire no later than ten years from date of grant.
In previous years, the Company also has issued non-qualified stock
options to purchase a total of 664,156 shares at prices ranging from $0.06
to $6.50 per share, subject to a vesting schedule of three and one-half or
four years and 23,000 shares as stock grants to employees at no cost which
vest over five years. The Company recognizes as compensation expense the
excess of the fair market value at the date of grant over the exercise price
of such options and grants. The compensation expense is amortized ratably
over the vesting period of the options and was $494,000, $820,000 and
$3,109,000 in fiscal 1997, 1996 and 1995, respectively.
Information relative to stock option activity is as follows (in
thousands):
Outstanding Options
--------------------------------
Options Weighted
Available Average
for Number of Aggregate Exercise
Grant Shares Price Price
--------- ------- ---------- --------
Balance, April 2, 1994 646 10,372 $ 91,964 $ 8.87
Shares authorized for issuance 4,796 - - -
Options granted (4,228) 4,228 57,574 13.62
Options exercised - (898) (3,337) 3.72
Options cancelled 272 (314) (4,407) 14.04
--------- ------- ---------- --------
Balance, April 1, 1995 1,486 13,388 141,794 10.59
Shares authorized for issuance 1,880 - - -
Options granted (3,086) 3,086 108,828 35.27
Options exercised - (2,704) (20,399) 7.54
Options cancelled 529 (575) (9,900) 17.22
--------- ------- ---------- --------
Balance, March 30, 1996 809 13,195 220,323 16.70
Shares authorized for issuance 3,500 - - -
Options granted (3,421) 3,421 67,089 19.61
Options exercised - (1,569) (12,418) 7.91
Options cancelled 2,465 (2,509) (55,648) 22.18
--------- ------- ---------- --------
Balance, March 29, 1997 3,353 12,538 $ 219,346 $ 17.49
========= ======= ========== ========
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$ 0.06 - $10.00 3,015,234 5.09 $ 7.11 2,565,316 $ 6.98
$10.00 - $15.00 2,993,978 6.96 13.31 1,667,009 12.90
$15.00 - $20.00 4,170,117 8.79 18.71 918,176 17.48
$20.00 - $56.88 2,358,727 8.30 33.94 418,833 31.75
---------- -----------
12,538,056 7.37 $ 17.49 5,569,334 $ 12.35
========== ===========
As of March 29, 1997, approximately 15,891,000 shares of
Common Stock were reserved for issuance under the Option Plans.
Shares Reserved for Future Issuance
The Company has a total of approximately 29,880,000 shares of common
stock reserved as of March 29, 1997 for issuances related to its convertible
subordinated notes, its Option Plans, and its ESPP.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for restricted
stock and performance-based awards. Had compensation cost for the Company's
other stock option plans been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company's fiscal 1997 net
loss and loss per share would have been increased by approximately $19.1
million, or $0.29 per share and the Company's fiscal 1996 net loss and loss
per share would have been increased by approximately $13.6 million, or $0.22
per share. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period (for
options) and the six-month purchase period (for stock purchases under the
ESPP).
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in the opinion of management, the existing models
do not necessarily provide a reliable single measure of the fair value of
its options.
The effects on pro forma disclosure of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of
future years. Because SFAS No. 123 is applicable only to options granted
subsequent to April 1, 1995, the pro forma effect will not be fully
reflected until 2000.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model using a dividend yield of 0%
and the following additional weighted-average assumptions used for grants:
Employee Employee Stock
Option Plans Purchase Plan
------------------- ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Expected volatility 68.87% 68.87% 74.47% 74.47%
Risk-free interest rate 6.1% 5.8% 5.7% 5.3%
Expected lives (in years) 5.0 5.0 0.5 0.5
14. INCOME TAXES
(Loss) income before income taxes and cumulative effect of
accounting change consists of (in thousands):
1997 1996 1995
---------- ---------- ---------
United States $ (25,176) $ (21,168) $ 57,541
Foreign (26,443) (20,555) 32,097
---------- ---------- ---------
Total $ (51,619) $ (41,723) $ 89,638
========== ========== =========
The (benefit) provision for income taxes consists of (in thousands):
1997 1996 1995
---------- ---------- ----------
Federal
Current $ (15,264) $ 25,303 $ 27,829
Deferred 7,041 (28,182) (2,180)
---------- ---------- ----------
(8,223) (2,879) 25,649
State
Current ( 1,077) 3,402 2,936
Deferred 812 (10,110) (1,308)
---------- ---------- ----------
( 265) (6,708) 1,628
Foreign
Current 3,025 4,047 959
---------- ---------- ----------
Total $ ( 5,463) $ (5,540) $ 28,236
========== ========== ==========
The (benefit) provision for income taxes differs from the amount
computed by applying the statutory federal rate to pretax income as follows:
1997 1996 1995
------- ------- -------
Expected income tax (benefit) provision at
the U.S. federal statutory rate (35.0%) (35.0%) 35.0%
Provision (benefit) for state income taxes,
net of federal effect ( .4%) (10.5%) 1.4%
Foreign operating results taxed at rates
other than the U.S. statutory rate 27.9% 35.9% (3.0%)
Research and development credits
(flow-through method) ( 5.0%) ( 3.1%) (4.6%)
Other 1.9% ( 0.6%) 2.7%
------- ------- -------
(Benefit) provision for income taxes (10.6%) (13.3%) 31.5%
======= ======= =======
Under SFAS No. 109, deferred income tax assets and liabilities reflect the
net tax effects of tax carryforwards and temporary differences between the
carrying amounts of assets and liabilities for financial reporting and the
amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities are (in thousands):
March 29, March 30,
1997 1996
--------- ---------
Deferred tax assets:
Inventory valuation $ 21,129 $ 25,817
Accrued expenses and allowances 21,457 35,447
Net operating loss carryforwards 3,687 3,051
Research and development credit
carryforwards 14,193 4,507
State investment tax credit
carryforwards 4,442 4,042
Other 4,521 2,690
--------- ---------
Total deferred tax assets 69,429 75,554
--------- ---------
Deferred tax liabilities:
Depreciation 9,239 8,124
Other 5,114 4,501
--------- ---------
Total deferred tax liabilities 14,353 12,625
--------- ---------
Total net deferred tax assets $ 55,076 $ 62,929
========= =========
The Company has research and development tax credit carryforwards for
federal and state tax purposes of approximately $14.2 million, expiring from
2006 through 2012. The Company also has state investment tax credit
carryforwards of approximately $4.4 million expiring from 2004 through 2005.
As a result of a prior merger, the Company has net operating loss
carryforwards for federal tax purposes of approximately $8.5 million, expiring
from 2002 through 2008. These net operating loss carryforwards are available
to offset certain future consolidated taxable income.
15. LEGAL MATTERS
The Company and certain of its customers from time to time have been
notified that they may be infringing certain patents and other intellectual
property rights of others. Further, customers have been named in suits
alleging infringement of patents by the customer products. Certain components
of these products have been purchased from the Company and may be subject to
indemnification provisions made by the Company to the customers. The Company
has not been named in any such suits. Although licenses are generally offered
in such situations, there can be no assurance that litigation will not be
commenced in the future regarding patents, mask works, copyrights, trademarks,
trade secrets, or indemnification liability, or that any licenses or other
rights can be obtained on acceptable terms.
On May 7, 1993, the Company was served with two shareholder class action
lawsuits filed in the United States District Court for the Northern District of
California. The lawsuits, which name the Company and several of its officers
and directors as defendants, allege violations of the federal securities laws
in connection with the announcement by Cirrus Logic of its financial results
for the quarter ended March 31, 1993. The complaints do not specify the
amounts of damages sought.
Between November 7 and November 21, 1995, five shareholder class actions
lawsuits were filed in the United States District Court for the Northern
District of California against the Company and several of its officers and
directors. A consolidated amended complaint was filed on February 20, 1996 and
an amended consolidated supplemental complaint was filed on May 3, 1996. This
complaint alleges that certain statements made by defendants during the period
from July 23, 1995 through December 21, 1995 were false and misleading and in
violation of the federal securities laws. The complaint does not specify the
amounts of damages sought.
On February 21, 1996 a shareholder class action lawsuit was filed in the
Superior Court of California in and for the County of Alameda against the
Company and numerous fictitiously named defendants alleged to be officers or
agents of the Company. An amended complaint, which added certain of the
Company's officers and directors as defendants was filed on April 18, 1996.
The lawsuit alleges that certain statements made by the Company and the
fictitiously named defendants during the period from October 1, 1995 through
February 14, 1996 were false and misleading and that the defendants breached
their fiduciary duties in making such statements in violation of California
State Common and Statutory law. The complaint does not specify the amounts of
damages sought.
During December 1996, the Company and certain of its current and former
directors and officers, reached an agreement in principle which would settle
all pending securities claims against the Company for an aggregate sum of $31.3
million, exclusive of interest, $2.3 million of which will be paid by the
Company with the remainder being paid by the Company's insurers. The Company
recorded the $2.3 million as other expense in the quarter ended December 28,
1996.
The proposed settlement includes the amendment of the federal class action
filed in 1995 to include claims pending in the State court with the intent that
the settlement would have the effect of extinguishing the State court claims.
The proposed settlement, which is subject to a number of contingencies, is
expected to be approved by the courts before July 1997.
16. SUBSEQUENT EVENT
The Company's Board of Directors approved an option exchange program
effective April 30, 1997. Unless the employee elected not to participate in
the exchange, at close of market on April 30, 1997, replacement options with an
exercise price of $9.1975 per share were granted to current employees with
outstanding options with exercise prices above $9.1875 per share and the old
options were cancelled. In connection with this program, the replacement
options have been issued with the same vesting schedule as the old options,
however, all replacement options are subject to a one year blackout of
exercise. If an employee voluntarily terminates his employment prior to the
end of the blackout period, the replacement options will be forfeited.
<PAGE>
REPORT OF ERNST & YOUNG LLP
Independent Auditors
The Board of Directors and Shareholders
Cirrus Logic, Inc.
We have audited the accompanying consolidated balance sheets of Cirrus
Logic, Inc. as of March 29, 1997 and March 30, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended March 29, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cirrus Logic,
Inc. at March 29, 1997 and March 30, 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 29, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/Ernst & Young LLP
San Jose, California
April 23, 1997, except for
Note 16, as to which the date
is April 30, 1997.
<PAGE>
<TABLE>
CONSOLIDATED SUPPLEMENTARY FINANCIAL DATA
(Amounts in thousands except per share amounts)
(Unaudited)
<CAPTION>
Fiscal years by quarter
----------------------------------------------------------------------------
1997 1996
------------------------------------ ------------------------------------
4th ++ 3rd + 2nd 1st 4th ** 3rd * 2nd 1st
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating summary:
Net sales $212,917 $253,309 $236,030 $214,898 $233,073 $295,783 $317,820 $300,269
Cost of sales 163,905 156,613 145,870 132,407 222,894 197,273 176,494 177,689
Loss (gain) on sale of assets, net 7 (12,009) (6,913) - - - - -
Restructuring costs 20,954 - - - 11,566 - - -
Non-recurring costs - - - - - 1,195 - -
Operating (loss) income (56,943) 17,360 7,690 (9,295) (117,393) (5,818) 48,421 30,566
(Loss) income before income taxes (59,596) 14,419 4,194 (10,636) (117,886) (5,257) 48,228 33,192
Net (loss) income ($51,859) $10,310 $2,998 ($7,605) ($88,356) ($3,601) $33,037 $22,737
Net income (loss) per common and common equivalent
share ($0.79) $0.16 $0.05 ($0.12) ($1.38) ($0.06) $0.47 $0.34
Weighted average common and common equivalent shares
outstanding 65,917 66,460 64,776 64,159 63,813 63,273 70,997 67,775
<FN>
* In the third quarter of fiscal 1996, cost of sales increased as a result of a charge of approximately $33 million for inventory
written down for lower-than-anticipated shipments of and demand for graphics, core logic and other products and a $5 million
charge for anticipated payments for underutilization of capacity at its MiCRUS joint venture.
** In the fourth quarter of fiscal 1996, cost of sales increased as a result of chargs for general market conditions and the
transition to new product releases. Also, there is a restructuring charge related to the streamlining of operations.
+ In the third quarter of fiscal 1997, other expenses increased as a result of a charge of approximately $2.3 million for the
settlement of pending security claims against the Company.
++ The fourth quarter of fiscal 1997 includes $34.5 million that was charged to cost of sales for under use of wafer
fabrication capacity and inventory write-downs, and $21.0 million related to a workforce reduction, excess assets
and excess facilities commitments.
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers - See the section entitled "Executive
Officers of the Registrant" in Part I, Item 1 hereof.
(b) Directors - The information required by this Item is
incorporated by reference to the section entitled "Election
of Directors" in the Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the sections entitled "Executive Compensation" and various
stock benefit plan proposals in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference
to the sections entitled "Share Ownership of Directors, Executive
Officers and Certain Beneficial Owners" of the Registrant's Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by
reference to the section entitled "Employment Agreements and
Certain Transactions" in the Registrant's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The following consolidated financial statements of the Registrant
and Report of Ernst & Young LLP, Independent Auditors are included
herewith:
(i) Consolidated Balance Sheets as of March 29, 1997 and
March 30, 1996.
(ii) Consolidated Statements of Operations for the years ended
March 29, 1997, March 30, 1996 and April 1, 1995.
(iii) Consolidated Statements of Shareholders' Equity for the
years ended March 29, 1997, March 30, 1996 and
April 1, 1995.
(iv) Consolidated Statements of Cash Flows for the years ended
March 29, 1997, March 30, 1996 and April 1, 1995.
(v) Notes to Consolidated Financial Statements.
(vi) Report of Ernst & Young LLP, Independent Auditors.
2. Financial Statement Schedule
The following consolidated financial statement schedule is filed
as part of this report and should be read in conjunction with the
consolidated financial statements:
Schedule
II Valuation and Qualifying Accounts
All other schedules have been omitted since the required
information is not present or not present in amounts sufficient to
require submission of the schedule or because the information
required is included in the consolidated financial statements or
notes thereto.
CIRRUS LOGIC INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Charged to Balance
at Beginning Costs and at Close
Item of Period Expenses Deductions (1) of Period
- ----------------------- ------------- ----------- ------------ ------------
(Amounts in thousands)
1995
Allowance for doubtful
accounts $ 8,237 $ 4,631 ($ 3,429) $ 9,439
1996
Allowance for doubtful
accounts $ 9,439 $ 4,094 ($ 359) $ 13,174
1997
Allowance for doubtful
accounts $ 13,174 $ 518 ($ 922) $ 12,770
(1) Uncollectible accounts written off, net of recoveries
3. Exhibits
The following exhibits are filed as part of or incorporated by
reference into this Report:
3.1 (9) Restated Articles of Incorporation of Registrant, as
amended.
3.2 (1) Form of Restated Articles of Incorporation of
Registrant.
3.3 (1) By-laws of Registrant, as amended.
4.0 (1) Article III of Restated Articles of Incorporation of
Registrant (See Exhibits 3.1 and 3.2).
10.1 (10) Amended 1987 Stock Option Plan.
10.2 (10) Amended 1989 Employee Stock Purchase Plan.
10.3 (1) Description of Executive Bonus Plan.
10.4 (1) Fourth Amendment to Preferred Shares Purchase
Agreements, Founders Registration Rights Agreements, and
Warrant Agreements and Consent between the Registrant
and certain shareholders of the Registrant dated May 15,
1987, as amended April 28, 1989.
10.5 (1) Form of Indemnification Agreement.
10.6 (1) License Agreement between Registrant and Massachusetts
Institute of Technology dated December 16, 1987.
10.7 (1) Lease between Prudential Insurance Company of America
and Registrant dated June 1, 1986.
10.8 (1) Lease between McCandless Technology Park, Milpitas, and
Registrant dated March 31, 1989.
10.9 (1) Agreement for Foreign Exchange Contract Facility between
Bank of America National Trust and Savings Association
and Registrant, dated April 24, 1989.
10.10 (2) 1990 Directors Stock Option Plan and forms of Stock
Option Agreement.
10.11 (2) Lease between Renco Investment Company and Registrant
dated December 29, 1989.
10.12 (3) Loan agreement between First Interstate Bank of
California and Silicon Valley Bank and Registrant, dated
September 29, 1990.
10.13 (2) Loan agreement between Orix USA Corporation and the
Registrant dated April 23, 1990.
10.14 (2) Loan agreement between USX Credit Corporation and
Registrant dated December 28, 1989.
10.15 (3) Loan agreement between Household Bank and Registrant
dated September 24, 1990.
10.16 (3) Loan agreement between Bank of America and Registrant
dated March 29, 1991.
10.17 (4) Equipment lease agreement between AT&T Systems Leasing
Corporation and Registrant dated December 2, 1991.
10.18 (4) Lease between Renco Investment Company and Registrant
dated May 21, 1992.
10.19 (5) Loan agreement between Deutsche Credit Corporation and
Registrant dated March 30, 1993.
10.20 (5) Lease between Renco Investment Company and Registrant
dated February 28, 1993.
10.21 (6) Lease between Renco Investment Company and Registrant
dated May 4, 1994.
10.22 (7) Participation Agreement dated as of September 1, 1994
among Registrant, International Business Machines
Corporation, Cirel Inc. and MiCRUS Holdings Inc.
10.23 (7) Partnership Agreement dated as of September 30, 1994
between Cirel Inc. and MiCRUS Holdings Inc.
10.24 (8) Amended and Restated Credit Agreement between Registrant
and Bank of America dated January 31, 1995.
10.25 (9) General Partnership Agreement dated as of October 23, 1995
between the Company and AT&T.
10.26 (9) Joint Venture Formation Agreement dated as of October 23, 1995
between the Company and AT&T.
10.27 (9) Foundry Venture Agreement dated as of September 29, 1995
between the Company and United Microelectronics Corporation ("UMC").
10.28 (9) Written Assurances Re Foundry Venture Agreement dated as of
September 29, 1995 between the Company and UMC.
10.29 (9) Foundry Capacity Agreement dated as of September 29, 1995
between the Company and UMC.
10.30 (10) Multicurrency Credit Agreement dated April 30, 1996 between
the Company and the Bank of America and Other Banks
11.1 Statement re: Computation of Per Share Earnings.
19.1 Proxy Statement to the 1997 Annual Meeting of
Shareholders.
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Article 5 Financial Data Schedule for 4th Qtr 10-K
(1) Incorporated by reference to Registration Statement
No. 33-28583.
(2) Incorporated by reference to Registrant's Report on Form 10-K
for the fiscal year ended March 31, 1990.
(3) Incorporated by reference to Registrant's Report on Form 10-K
for the fiscal year ended March 31, 1991.
(4) Incorporated by reference to Registrant's Report on Form 10-K
for the fiscal year ended March 31, 1992.
(5) Incorporated by reference to Registrant's Report on Form 10-K
for the fiscal year ended March 31, 1993.
(6) Incorporated by reference to Registrant's Report on Form 10-K
for the fiscal year ended April 2, 1994.
(7) Incorporated by reference to Registrant's Report on Form 10-Q/A
for the quarterly period ended October 1, 1994.
(8) Incorporated by reference to Registrant's Report on Form 10-K
for the fiscal year ended April 1, 1995.
(9) Incorporated by reference to Registrant's Report on Form 10-Q/A
for the quarterly period ended September 30, 1995.
(10)Incorporated by reference to Registrant's Report on Form 10-K
for the fiscal year ended March 30, 1996.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CIRRUS LOGIC, INC.
By: /s/ Ronald K. Shelton
Ronald K. Shelton
Vice President, Finance, Chief Financial Officer,
Principal Accounting Officer, and Treasurer.
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Ronald K. Shelton,
his attorney-in-fact, with the power of substitution,
for him in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits thereto
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated:
/s/ Michael L. Hackworth /s/ C. Gordon Bell
Michael L. Hackworth C. Gordon Bell
President, Chief Executive Director, June 17, 1997
Officer and Director
June 17, 1997
/s/ Suhas S. Patil /s/ D. James Guzy
Suhas S. Patil D. James Guzy
Chairman of the Board, Director, June 17, 1997
and Director
June 17, 1997
/s/ Ronald K. Shelton /s/ Walden C. Rhines
Ronald K. Shelton Walden C. Rhines
Vice President, Finance Director, June 17, 1997
Chief Financial Officer,
Principal Accounting Officer,
and Treasurer
June 17, 1997
/s/ Robert H. Smith
Robert H. Smith
Director, June 17, 1997
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
EXHIBIT 11.1
CIRRUS LOGIC, INC.
STATEMENT RE: COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In thousands, except per share amounts)
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Primary:
Weighted average common shares outstanding 65,008 62,761 59,708
Dilutive common stock equivalents:
Common stock options, using treasury stock
method N/A N/A 3,964
Common stock warrants, using treasury
stock method N/A N/A 8
--------- --------- ---------
Common and common equivalent shares used in
the calculation of net (loss) income per share 65,008 62,761 63,680
========= ========= =========
Net (loss) income ($46,156) ($36,183) $61,402
========= ========= =========
Net (loss) income per share ($0.71) ($0.58) $0.96
========= ========= =========
---------------------------------------
Fully diluted:
Weighted average common shares outstanding 65,008 62,761 59,708
Dilutive common stock equivalents:
Common stock options, using treasury stock
method N/A N/A 4,096
Common stock warrants, using treasury
stock method N/A N/A 8
Convertible subordinated debt, using the
"if converted" method N/A - -
--------- --------- ---------
Common and common equivalent shares used in
the calculation of net (loss) income per share 65,008 62,761 63,812
========= ========= =========
Net (loss) income ($46,156) ($36,183) $61,402
========= ========= =========
Net (loss) income per share ($0.71) ($0.58) $0.96
========= ========= =========
</TABLE>
[ARTICLE] 5
[MULTIPLIER] 1,000
EXHIBIT 21.1
CIRRUS LOGIC INC.
SUBSIDIARIES OF REGISTRANT
Acumos Incorporated (California)
Cirel Inc. (California)
Ciror, Inc. (California)
Cirrus Logic Holdings, Inc. (California)
Cirrus Logic International Ltd. (Bermuda)
Cirrus Logic International SARL (France)
Cirrus Logic Korea Co., LTD. (Korea)
Cirrus Logic, GmBh. (Germany)
Cirrus Logic, K.K. (Japan)
Cirrus Logic, Software India, Pvt. Ltd. (India)
Cirrus Logic (U.K.) Limited (United Kingdom)
Crystal Semiconductor Corporation (Delaware)
Pacific Communications Sciences, Inc. (Delaware)
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Forms S-8 No. 33-37409, 33-31697, 33-43914, 33-47453,
33-53990, 33-60464, 33-71862, 33-83148, 33-65495, and 333-16417)
pertaining to one or more of the following: the Cirrus Logic, Inc.
1987 Stock Option Plan; the Cirrus Logic, Inc. 1989 Employee Stock
Purchase Plan; the Cirrus Logic, Inc. 1990 Directors' Stock Option
Plan; the Cirrus Logic, Inc. 1991 Non-qualified Stock Option Plan;
the DST Stock Option Plan; the Crystal Semiconductor Corporation
1987 Incentive Stock Option Plan; the Acumos, Inc. 1989 Stock
Option Plan; the Pacific Communication Sciences, Inc. 1987 Stock
Option Plan; the PicoPower Technology Inc. 1992 Stock Option Plan
and the 1996 Stock Plan of our report dated April 23, 1997, (except
for Note 16, as to which the date is April 30, 1997), with respect to
the consolidated financial statements and schedule of Cirrus Logic,
Inc. included in the Annual Report (Form 10-K) for the year ended
March 29, 1997.
/s/Ernst & Young LLP
San Jose, California
June 12, 1997
<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-29-1997
<PERIOD-START> Mar-31-1996
<PERIOD-END> Mar-29-1997
<PERIOD-TYPE> 12-MOS
<CASH> 151,540
<SECURITIES> 188,215
<RECEIVABLES> 186,513
<ALLOWANCES> (12,770)
<INVENTORY> 127,252
<CURRENT-ASSETS> 795,002
<PP&E> 291,522
<DEPRECIATION> (160,667)
<TOTAL-ASSETS> 1,136,821
<CURRENT-LIABILITIES> 366,332
<BONDS> 0
0
0
<COMMON> 351,261
<OTHER-SE> 52,936
<TOTAL-LIABILITY-AND-EQUITY> 1,136,821
<SALES> 917,154
<TOTAL-REVENUES> 917,154
<CGS> 598,795
<TOTAL-COSTS> 598,795
<OTHER-EXPENSES> 359,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (19,754)
<INCOME-PRETAX> (51,619)
<INCOME-TAX> (5,463)
<INCOME-CONTINUING> (46,156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> ($0.71)
<EPS-DILUTED> ($0.71)
</TABLE>
