FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 26, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-17795
CIRRUS LOGIC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0024818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Warren Avenue, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-8300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the registrant's common stock, $0.001 par value,
was 60,457,448 as of June 26, 1999
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended
June 26, June 27,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $120,553 $177,931
Costs and expenses:
Cost of sales 71,386 117,819
Research and development 26,694 35,522
Selling, general and administrative 22,663 27,090
Restructuring costs, gain on sale of
assets and other, net 127,210 (3,006)
----------- -----------
Total costs and expenses 247,953 177,425
Income (loss) from operations (127,400) 506
Interest and other income (expense), net (346) 306
----------- -----------
Income (loss) before provision
for income taxes (127,746) 812
Provision for income taxes - 296
----------- -----------
Net income (loss) ($127,746) $516
=========== ===========
Net income (loss) per share:
Basic ($2.12) $0.01
=========== ===========
Diluted ($2.12) $0.01
=========== ===========
Weighted average common shares outstanding:
Basic 60,171 66,650
Diluted 60,171 67,461
</TABLE>
[FN]
See Notes to the Unaudited Consolidated Condensed Financial Statements
<PAGE>
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 26, March 27,
1999 1999
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $178,858 $144,457
Restricted cash 80,277 86,277
Short-term investments - 74,616
Accounts receivable, net 67,431 66,063
Inventories 45,409 40,262
Other current assets 44,385 19,039
----------- -----------
Total current assets 416,360 430,714
Property and equipment, net 47,732 48,024
Investment in joint venture - 14,000
Deposits and other assets 37,278 39,892
----------- -----------
$501,370 $532,630
=========== ===========
Liabilities and Net Capital Deficiency
Current liabilities:
Accounts payable and accrued liabilities $111,395 $201,669
Restructuring accrual 198,693 5,364
Current maturities of long-term debt
and capital lease obligations 18,840 23,076
Income taxes payable 35,980 36,593
----------- -----------
Total current liabilities 364,908 266,702
Long term obligations and convertible
subordinated notes 319,235 323,648
Commitments and contingencies
Net capital deficiency:
Capital stock 328,878 326,185
Accumulated deficit (511,651) (383,905)
----------- -----------
Total net capital deficiency (182,773) (57,720)
----------- -----------
$501,370 $532,630
=========== ===========
</TABLE>
[FN]
See Notes to the Unaudited Consolidated Condensed Financial Statements
<PAGE>
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended
June 26, June 27,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($127,746) $516
Adjustments to reconcile net income to net
cash flows from operations:
Depreciation and amortization 7,631 18,379
Non-cash portion of restructuring charges 33,051 -
Other non-cash charges 862 -
Net change in operating assets and liabilities 51,530 (68,260)
----------- -----------
Net cash used in operations (34,672) (49,365)
Cash flows from investing activities:
Purchase of short-term investments - (69,617)
Proceeds from sale of short-term investments 74,616 55,268
Additions to property and equipment (890) (5,838)
Increase in deposits and other assets (4,007) (8,056)
Decrease in restricted cash 6,000 9,934
----------- -----------
Net cash provided by (used in) investing activities 75,719 (18,309)
Cash flows from financing activities:
Proceeds from issuance of common stock 2,003 2,686
Payments on long-term debt and
capital lease obligations (8,649) (6,824)
Repurchase and retirement of common stock - (52,787)
----------- -----------
Net cash used in financing activies (6,646) (56,925)
Net increase (decrease) in cash and cash equivalents 34,401 (124,599)
Cash and cash equivalents at beginning of period 144,457 307,184
----------- -----------
Cash and cash equivalents at end of period $178,858 $182,585
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $11,591 $10,102
Income taxes paid $158 $7,787
</TABLE>
<PAGE>
CIRRUS LOGIC, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated condensed financial statements have been prepared by
Cirrus Logic, Inc. (the "Company", the "Registrant" or "Cirrus") pursuant
to rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position, operating
results and cash flows for those periods presented. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements, and notes thereto for the year ended
March 27, 1999, included in the Company's 1999 Annual Report on Form 10-
K. The results of operations for the interim periods presented are not
necessarily indicative of the results that may be expected for the entire
year.
Certain reclassifications have been made to the 1999 financial statements
to conform to the 2000 presentation. Such reclassifications had no
effect on the results of operations or net capital deficiency.
2. Inventories
Net inventories are comprised of the following:
<TABLE>
<CAPTION>
June 26, March 27,
1999 1999
--------- ---------
(in thousands)
<S> <C> <C>
Work in process $27,963 $25,165
Finished goods 17,446 15,097
--------- ---------
Total $45,409 $40,262
========= =========
</TABLE>
3. Income Taxes
In the first quarter of fiscal 2000, the Company did not provide for any
income tax. The Company expects no net income tax provision in the
current year due to the magnitude of the loss realized in the first
quarter.
Statement of Financial Accounting Standards 109 provides for the
recognition of deferred tax assets if realization of such assets is more
likely than not. The Company has provided a valuation allowance equal to
its net deferred tax assets due to uncertainties regarding their
realization. The realizability of the deferred tax assets will be
evaluated on a quarterly basis.
4. Restructuring of Joint Ventures
During the first quarter of fiscal 2000, the Company substantially completed
the remaining restructuring activities previously announced in the second
quarter of fiscal 1999. The Company finalized negotiations with
International Business Machines Corporation ("IBM") to restructure the
Company's interest in the MiCRUS joint venture and also finalized
negotiations with Lucent Technologies, Inc. ("Lucent") to terminate the
Company's interest in the Cirent joint venture. In connection with the
finalization of these two agreements, the Company recorded restructuring
charges of $128.2 million during the first quarter of fiscal 2000,
$1 million of which is included in cost of sales. The restructuring charge
includes $135 million in direct payments, $32 million worth of The Company's
contributed common stock, $4.8 million fair value of the related embedded
stock derivative, $9.3 million of lease buyout costs and $16.4 million of
equipment write-offs. These charges were offset by the reversal of
approximately $71.9 million of previously accrued wafer purchase commitment
charges due to the renegotiated terms of the Company's purchase commitments
with its former partners.
MiCRUS
The terms of the MiCRUS restructuring agreement, entered into during
the first quarter of fiscal 2000, require the Company to pay $135 million
in cash to IBM and issue into an escrow account shares of the Company's
common stock with a fair value (based on the average closing price of the
Company's common stock for the 20 days prior to closing) of $32 million.
Under the escrow arrangement, the escrow period ends on April 1, 2000,
wherein some or all of the shares will be released to IBM. If the fair
value of the shares on April 1, 2000 is less than $32 million, Cirrus must
pay the difference to IBM in cash. If the fair value of the shares exceeds
$32 million, shares equal to one-half of the excess over $32 million are
returned to the Company and the remaining shares are released to IBM.
During the six month period following April 1, 2000, IBM may sell on the
open market the Cirrus stock it received. If at the end of the six month
period on October 1, 2000, IBM has sold at least 15% of the Cirrus stock,
it can require Cirrus to purchase the remaining shares for cash such that
the total received by IBM, including the amounts IBM received in open
market sales is $32 million. If during the six month period ending on
October 1, 2000, the Cirrus stock received by IBM appreciates to over
$32 million, IBM may keep all proceeds from the sale of stock in excess
of $32 million up to a maximum of $48 million. Amounts received by IBM
in excess of $48 million must be returned to Cirrus.
Because Cirrus has guaranteed IBM a minimum of $32 million in cash, either
through open market sales of Cirrus stock or through repurchase of the stock
directly by Cirrus, the fair value of the shares placed in escrow as well
as the value of the embedded stock derivative granted to IBM has been
recorded in the balance sheet as a liabilitiy. The fair value of the
embedded stock derivative of $4.8 million was estimated by the Company
based on discussions with outside investment advisors.
The Company also transferred to IBM the Company's partnership interest and
certain assets relating to the partnership's operation, and will forgive
certain debts owed to the Company by IBM and/or MiCRUS relating to the use
of certain assets prior to the closing, which occurred on July 19, 1999.
See Note 10.
In exchange for this consideration, IBM will release the Company of its
obligations to support the partnership and to maintain certain lease
payment guarantees issued jointly and severally with IBM. IBM will be
responsible for the costs associated with winding down the partnership,
including costs associated with employee terminations and the dismantling
of equipment, except costs incurred by the partnership prior to the
closing date. The Company also committed to an amended wafer purchase
agreement.
Cirent
The terms of the Cirent termination agreement, which was also entered into
during the first quarter of fiscal 2000, require the Company to pay to
Cirent $9.3 million which Cirent will use as partial payment in connection
with the buyout of certain leases associated with assets utilized in the
Cirent manufacturing facility. The Company will sell its interest in the
joint venture and certain associated assets to an affiliate of Lucent for
$14 million and will not be responsible for any future operating costs
or equipment lease liabilities associated with the fab. The Company also
committed to an amended wafer purchase agreement.
5. Net Income Per Share
The following table sets forth the computation of basic and diluted
earnings per share (In thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
June 26, June 27,
1999 1998
----------- -----------
<S> <C> <C>
Numerator:
Net income (loss) ($127,746) $516
Denominator:
Denominator for basic net income (loss)
per share - weighted-average shares 60,171 66,650
Dilutive common stock equivalents,
using treasury stock method - 811
----------- -----------
Denominator for diluted net income
(loss) per share 60,171 67,461
=========== ===========
Basic net income (loss) per share ($2.12) $0.01
=========== ===========
Diluted net income (loss) per share ($2.12) $0.01
=========== ===========
</TABLE>
Incremental common shares attributable to the exercise of outstanding
options of 7,106,849 shares for the three months ended June 26, 1999 were
excluded from the computation of diluted net income per share because the
effect would be antidilutive.
As of June 26, 1999, the Company had outstanding convertible notes to
purchase 12,387,000 shares of common stock that were not included in the
computation of diluted net income per share because the effect would be
antidilutive.
On July 19, 1999, the Company placed 3,562,364 shares of common stock in
escrow in connection with the restructuring of the MiCRUS joint venture.
See Note 10.
On July 27, 1999, the Company issued 1,250,000 shares of common stock
in connection with the Company's purchase of AudioLogic, Inc. See Note 10.
6. Commitments and Contingencies
As of June 26, 1999, the Company had approximately $8.4 million of
forward exchange contracts denominated in yen, which expire in September,
1999.
Due to the terms of the MiCRUS restructuring agreement and pending closing
on the Cirent termination agreement (both as discussed in Note 4), as of
June 26, 1999 the Company remains contingently liable for MiCRUS and Cirent
equipment leases which have remaining payments of approximately $450 million
payable through 2004.
7. Comprehensive Income
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
Quarter Ended
June 26, June 27,
1999 1998
----------- -----------
<S> <C> <C>
Net income (loss) ($127,746) $516
Change in unrealized loss on foreign
currency translation adjustments (100) (356)
----------- -----------
Total ($127,846) $160
=========== ===========
</TABLE>
8. Segment information
Information on reportable segments is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended
June 26, June 27,
1999 1998
---------- ---------
<S> <C> <C>
AUDIO DIVISION
Revenues 55,642 46,623
Operating profit 8,329 8,234
MASS STORAGE DIVISION
Revenues 37,800 71,843
Operating profit 5,002 18,813
PRECISION DATA CONVERSION DIVISION
Revenues 12,088 16,485
Operating profit 1,213 5,250
ALL OTHER
Revenues 15,023 42,980
Operating profit (loss) (141,944) (31,791)
TOTAL
Revenues 120,553 177,931
Operating profit (loss) (127,400) 506
</TABLE>
9. Recently Issued Accounting Standards
In June 1998, the Statement of Financial Accounting Standards (SFAS)
No. 133 "Accounting for Derivative Instruments and Hedging
Activities", was issued and, as amended by SFAS No. 137 "Deferral
of Effective Date of FASB Statement 133", is effective for fiscal
years commencing after June 15, 2000. SFAS 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives
and hedging activities. The Company does not believe SFAS 133 will have
a material impact on earnings or the financial condition of the Company.
10. Subsequent Events
On July 19, 1999 the Company placed 3,562,364 shares of common stock in
escrow in connection with the restructuring of the MiCRUS joint venture
as discussed in Note 4. These shares were valued at $32 million based
on the 20-day average of the Company's quoted share price. Additionally,
during July 1999 the Company has paid approximately $135 million in cash
in connection with the restructuring of the MiCRUS joint venture.
On July 27, 1999 the Company issued 1,250,000 common shares in connection
with the Company's purchase of AudioLogic, Inc. The agreement provides
for additional contingent shares to be issued to the extent that the
shares issued initially are valued at an amount less than $25 million at
the one-year anniversary of the closing. This transaction will be
accounted for in the second quarter of fiscal 2000 as a purchase. The
Company anticipates that a portion of the purchase price will result in
an in-process research and development charge during the second quarter
of fiscal 2000.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information should be read along with the unaudited consolidated
condensed financial statements and the notes thereto included in Item 1
of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the fiscal year ended
March 27, 1999, contained in the 1999 Annual Report on Form 10-K (the
"1999 Form 10-K"). This Discussion and Analysis contains forward-looking
statements. Such statements are subject to certain risks and
uncertainties, including those discussed below or in the 1999 Form 10-K
that could cause actual results to differ materially from the Company's
expectations. Readers are cautioned not to place undue reliance on any
forward-looking statements, as they reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly
release the results of any revision to these forward-looking statements
which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Results of Operations
The following table discloses the percentages that income statement items
are of net sales.
<TABLE>
<CAPTION>
Percentage of Net Sales
Quarter Ended
June 26, June 27,
1999 1998
----------- ------------
<S> <C> <C>
Net sales 100% 100%
Gross margin 41% 34%
Research and development 22% 20%
Selling, general and administrative 19% 15%
Restructuring costs, gain on sale of assets
and other, net 106% -2%
----------- ------------
Income (loss) from operations -106% 0%
----------- ------------
Income (loss) before income taxes -106% 0%
Provision for income taxes 0% 0%
----------- ------------
Net income (loss) -106% 0%
=========== ============
</TABLE>
Net Sales
Net sales for the first quarter of fiscal 2000 decreased by $57.4
million, or 32%, to $120.6 million from $177.9 million for the first
quarter of fiscal 1999. Revenues in the first quarter of fiscal 1999
include amounts from businesses subsequently divested by the Company.
Revenues from non-core businesses in the first quarter of fiscal 2000
were $12.9 million compared to $34 million in the first quarter of
fiscal 1999. Excluding revenues from non-core businesses, net sales from
core businesses, consisting of mass storage, audio, high-precision
data conversion and embedded products decreased approximately $36.3
million primarily due to a significant decline in sales from the Company's
mass storage products. This decline was somewhat offset by increased
sales of the Company's audio products
Export sales (including sales to U.S.-based customers with manufacturing
plants overseas) were 74% and 66% of total sales in the first quarter of
fiscal 2000 and fiscal 1999, respectively.
The Company's sales are currently denominated primarily in U.S. dollars.
The Company currently enters into foreign currency forward exchange and
option contracts to hedge certain of its foreign currency exposures.
Sales to one customer comprised approximately 17% of sales in the first
quarter of fiscal 2000 and 11% of sales in the first quarter of fiscal
1999. Sales to two other customers comprised approximately 14% and 10%
of sales in the first quarter of fiscal 1999.
Gross Margin
Gross margin was 41% in the first quarter of fiscal 2000 compared to 34%
for the first quarter of fiscal 1999. Gross margin increased for the
first quarter of fiscal 2000 primarily due to lower margins during the
first quarter of fiscal 1999 realized in the Company's non-core business
units. Also contributing to the increase are lower wafer costs incurred
in the Company's core businesses in the first quarter of fiscal 2000
versus the first quarter of fiscal 1999.
Research and Development
Research and development expenses for the first quarter of fiscal 2000
decreased by $8.8 million, or 25% to $26.7 million from $35.5 million in
the first quarter of fiscal 1999. The decrease in research and
development expenses for the first quarter of fiscal 2000 compared to the
same period of fiscal 1999 is primarily due to spending in non-core
businesses in the first quarter of 1999 and lower headcount during the
first quarter of fiscal 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the first quarter of
fiscal 2000 decreased $4.4 million, or 16% to $22.7 million from
$27.1 million in the first quarter of fiscal 1999. The decrease is
primarily due to spending in non-core businesses in fiscal 1999 and
lower headcount during the first quarter of fiscal 2000 as a result
of restructuring and divestiture activities.
Restructuring Costs, Gain on Sale of Assets and Other, Net
During the first quarter of fiscal 2000 the Company recorded
restructuring and other charges of $128.2 million relating to the
termination of its interests in two manufacturing joint ventures,
MiCRUS and Cirent, $1 million of which is included in cost of sales.
The restructuring charge includes $135 million in direct payments,
$32 million worth of the Company's contributed common stock, $4.8
million fair value of the related embedded stock derivative, $9.3
million of lease buyout costs and $16.4 million of equipment write-offs.
These charges were offset by the reversal of approximately $71.9 million
of previously accrued wafer purchase commitment charges due to the
renegotiated terms of the Company's purchase commitments with its former
partners.
To date, the Company has paid approximately $135 million in cash in
connection with these restructuring activities. The Company expects
to pay an additional $15 million during the second quarter of fiscal
2000. See Note 4 of Notes to the Unaudited Consolidated Condensed
Financial Statements.
The Company believes that as a result of these transactions the Company
has substantially completed the restructuring activities that it
initiated during the second quarter of fiscal 1999 and the Company does
not expect to incur significant accrued wafer purchase commitment or
other charges in the future relating to these activities.
The fiscal 1999 first quarter gain was primarily due to the
recovery of a holdback on the sale of a previously divested business
unit.
Income Taxes
The Company did not provide for any income tax in the first quarter of
fiscal 2000 compared to a provision of 36.5% in the first quarter of
fiscal 1999. The Company does not expect to recognize any net income tax
provision during the current fiscal year due to the magnitude of the loss
realized in the first quarter.
Liquidity and Capital Resources
The Company used approximately $34.7 million of cash and cash equivalents
in its operating activities during the first quarter of fiscal 2000 and
used approximately $49.4 million during the first quarter of fiscal 1999.
The cash used by operations in the first quarter of fiscal 2000 was
primarily due to payments required for joint venture operations and lease
payoffs.
The Company provided $75.7 million in cash from investing activities
during the first quarter of fiscal 2000 compared to cash used by
investing activities of $18.3 million during the comparable period of
fiscal 1999. The cash provided by investing activities for fiscal 2000
is primarily due to sales of the Company's short-term investments.
The Company used $6.6 million in cash for financing activities during the
first quarter of fiscal 2000 while using $56.9 million during the
comparable period of fiscal 1999. During the first quarter of fiscal
1999, the Company repurchased $52.8 million worth of its common stock.
Cash used in financing activities for fiscal 2000 is due to payments on
the Company's outstanding debt partially offset by new issuances of stock
relating to the exercise of stock options and the employee stock purchase
plan.
At June 26, 1999, the Company had $259.1 million of cash, cash equivalents
and restricted cash of which $80.3 million is restricted cash. During July
1999, the Company paid $135 million in cash in connection with the
restructuring of the MiCRUS joint venture. The Company expects the
restriction on $28.4 million of the restricted cash to be removed during the
second quarter of fiscal 2000.
The semiconductor industry is extremely capital intensive. The Company
has made investments in various external manufacturing arrangements and
in its own facilities. The Company obtained most of the necessary
capital through direct or guaranteed equipment lease financing with the
balance through debt, equity financing, and cash balances.
Historically, the Company has generated cash in an amount sufficient to
fund its operations. The Company anticipates that its existing capital
resources and cash flow generated from future operations will enable it
to maintain its current level of operations for the foreseeable future.
The Company may revise its operating plans in response to future changes
in the semiconductor industry in general and the demand for its products
in particular. The Company believes that significant changes in the
economic environment, which may affect worldwide demand for technology
products, could materially and adversely impact the Company, including
with respect to such matters as its ability to fund its future
operations.
Future Operating Results
Quarterly Fluctuations
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from
quarter to quarter in the future. The Company's operating results are
affected by a wide variety of factors, many of which are outside of the
Company's control, including but not limited to, economic conditions and
overall market demand in the United States and worldwide, the Company's
ability to introduce new products and technologies on a timely basis,
changes in product mix, fluctuations in manufacturing costs which affect
the Company's gross margins, declines in market demand for the Company's
and its customers' products, sales timing, the level of orders which are
received and can be shipped in a quarter, the cyclical nature of both the
semiconductor industry and the markets addressed by the Company's
products, product obsolescence, price erosion, and competitive factors.
The Company's operating results in the rest of fiscal 2000 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 products 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 Raw Materials Procurement
During fiscal 1998 and fiscal 1999, excess production capacity in the
industry led to significant price competition between merchant
semiconductor 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 1998,
which had a negative impact on its results of operations and it believes
that this was partially due to the fact that certain of its competitors
were able to obtain more favorable pricing from such foundries.
The Company's current strategy is to fulfill its wafer requirements using
outside merchant wafer suppliers, including the Company's former joint
venture partners. The Company also uses other outside vendors to package
the wafer die into integrated circuits and to perform the majority of the
Company's product testing.
The Company's results of operations could be adversely affected in the
future, as they have been so affected in the past, if particular
suppliers are unable to provide a sufficient and timely supply of
product, whether because of raw material shortages, capacity constraints,
unexpected disruptions at the plants, delays in qualifying new suppliers
or other reasons, or if the Company is forced to purchase wafers or
packaging from higher cost suppliers or to pay expediting charges to
obtain additional supply, or if the Company's test facilities are
disrupted for an extended period of time. Because of the concentration
of sales at the end of each quarter, a disruption in the Company's
production or shipping near the end of a quarter could materially reduce
the Company's revenues for that quarter. Production may be constrained
even though capacity is available at one or more wafer manufacturing
facilities because of the difficulty of moving production from one
facility to another. Any supply shortage could adversely affect sales
and operating profits. The Company's reliance upon outside vendors for
assembly and test could also adversely impact sales and operating profits
if the Company was unable to secure sufficient access to the services of
these outside vendors.
In connection with the financing of its operations, the Company has
borrowed money and entered into substantial equipment lease obligations.
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.
Product development in the Company's markets is becoming more focused on
the integration of functionality on individual devices and there is a
general trend towards increasingly complex products. The greater
integration of functions and complexity of operations of the Company's
products increase the risk that latent defects or subtle faults could be
discovered by customers or end users after volumes of product have been
shipped. If such defects were significant, the Company could incur
material recall and replacement costs for product warranty. The Company's
relationship with customers could also be adversely impacted by the
recurrence of significant defects.
Dependence on PC Market
Sales of many of the Company's products will continue to 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. In addition, the Company's de-emphasis of PC products and its
focus on non-PC markets could have an adverse affect on the Company's PC
product sales as customers seek other supply sources with greater
commitments to the PC market.
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 manufacturer, 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 risks
of such indirect dependence.
Issues Relating to Mass Storage Market
The mass storage market has historically been characterized by a
relatively small number of magnetic 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. Recent market demands for sub-$1,000 PCs puts further
pressure on the price of disk drives and disk drive components.
Revenues from mass storage products in fiscal 2000 are likely to depend
heavily on the success of certain 3.5 inch magnetic 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 and
can be impacted by the timing of customers' transition to new disk drive
products. Recent efforts by certain of the Company's customers to
develop their own ICs for mass storage products could in the future
reduce demand for the Company's mass storage products, which could have
an adverse effect on the Company's revenues and gross margins from such
products. In addition, in response to the current market trend towards
integrating hard disk controllers with microcontrollers, the Company's
revenues and gross margins from its mass storage products will be
dependent on the Company's ability to introduce such integrated products
in a commercially competitive manner.
Finally, while the Company believes it is well positioned for the trend
toward integration of HDD electronic components with the first product on
the market to combine the three primary electronic components, some of
the Company's competitors have also announced plans to introduce
integrated drive electronics components. Some of these competitors have
substantially greater resources to accomplish the technical obstacles of
integration and greater access to the advanced technologies necessary to
provide integrated HDD electronic components.
Issues Relating to Audio Products
Most of the Company's revenues in the audio market derive from the sales
of audio codecs and integrated 16-bit codec-plus-controller solutions for
the PC market and consumer electronics equipment. In the PC market, the
transition to the AC-link codecs attached to core logic using the
multimedia features of the processor and single chip solutions are
lowering the average selling price in the audio IC market. The Company's
revenues from the sale of PC audio products in fiscal 2000 are likely to
be significantly affected by this transition to core logic connected
audio and by the introduction of cost reduced, 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 audio ICs.
Three-dimensional, spatial-effects audio became an important feature in
fiscal 1999, primarily in products for the consumer electronics
marketplace. 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 Precision Mixed-Signal Products
Precision Data Converter Products is a very broad market with many well
established competitors. The Company's ability to compete in this market
will be adversely affected if it cannot establish broad sales channels or
if it does not develop and maintain a broad enough product line to
compete effectively. In addition, the customer product design in time is
long. Customer delays in product development and introductions creates
risk relative to the Company's revenue plans. Further, the Company's
products in this market are technically very complex. The complexity of
the products contributes to risks in getting products to market on a
timely basis, which could impact the Company's revenue plans. The
scarcity of analog engineering talent also contributes to risks related
to product development timing in this market.
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. An unfavorable outcome occurring in any such suit
could have an adverse effect on the Company's future operations and/or
liquidity.
Foreign Operations and Markets
Because many of the Company's subcontractors and several of the Company's
key customers which collectively account for a significant percentage of
the Company's revenues are located in Japan and other Asian countries,
the Company's business is subject to risks associated with many factors
beyond its control. International operations and sales may be subject to
political and economic risks, including political instability, currency
controls, exchange rate fluctuations, and changes in import/export
regulations, tariff and freight rates. Although the Company buys hedging
instruments to reduce its exposure to currency exchange rate
fluctuations, the Company's competitive position can be affected by the
exchange rate of the U.S. dollar against other currencies, particularly
the Japanese yen. Further, to the extent that volatility in foreign
financial markets was to have an adverse impact on economic conditions in
a country or geographic region in which the Company does business, demand
for and supply of the Company's products could be adversely impacted,
which would have a negative impact on the Company's revenues and
earnings.
A significant number of the Company's customers and suppliers are in
Asia. The recent turmoil in the Asian financial markets does not appear
to have had a material impact on the Company's sales orders or bookings.
However, the financial instability in these regions may have an adverse
impact on the financial position of end users in the region which could
impact future orders and/or the ability of such users to pay the Company
or the Company's customers, which could also impact the ability of such
customers to pay the Company. The Company performs extensive financial
due diligence on customers and potential customers and generally requires
material sales to Asia to either be secured by letters of credit or
transacted on a cash on demand basis. Given the prior situation in Asia,
the Company now requires that the letters of credit be established
through American banking institutions. During this volatile period, the
Company expects to carefully evaluate the collection risk related to the
financial position of customers and potential customers. The results of
such evaluations will be considered in structuring the terms of sale, in
determining whether to accept sales orders, in evaluating the recognition
of revenue on sales in the area and in evaluating the collectability of
outstanding accounts receivable from the region. In situations where
significant collection risk exists, the Company will either not accept
the sales order, defer the recognition of related revenues, or, in the
case of previously transacted sales, establish appropriate bad debt
reserves. Despite these precautions, should the volatility in Asia have
a material adverse impact on the financial position of end users of the
customers products in Asia, the Company could experience a material
adverse impact on its results of operations.
Competition
The Company's business is intensely competitive and is characterized by
new product cycles, price erosion, and rapid technological change and new
companies entering the markets. 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. 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 these and other factors, past results may not be a useful
predictor of future results.
Impact of Year 2000
The "Year 2000 Issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year
2000 compliant, they may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing incorrect reporting and disruptions of
operations, including, among other things, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities. The issue spans both information technology and non-
information technology systems that use date data. In addition to the
Company's own systems, the Company relies, directly and indirectly, on
external systems of its customers, suppliers, creditors, financial
organizations, utilities providers and government entities, both domestic
and international ("Third Parties").
The Company currently has a project plan in place to address the Year
2000 Issue with its internal systems and Third Parties which is designed
to deal with its most critical systems and processes first. Those
identified as "mission critical" are systems and/or processes whose
failure would cause a material impact on the Company's operations and
financial statements. The project plan includes the identification,
assessment, testing, remediation/validation and the development of
contingency plans of the Company's Year 2000 issues primarily through the
use of internal personnel. In addition, the Company has engaged the
services of external consultants to provide Year 2000 progress assessment
of the Company's efforts. The external consultants review the Company's
activities regarding Year 2000 readiness and provide recommendations
designed to improve the Company's Year 2000 readiness.
In the third quarter of calendar year 1996, the Company began a program
to replace mission-critical internal business systems. The decision to
purchase software to replace these systems was made primarily in order to
meet the Company's future business requirements, which included
consideration of Year 2000 Issues. The Company is currently in the
process of installing software licensed from SAP America, Inc. The first
phase of this project was completed in June 1998 and included finance,
sales and logistics. The second phase of the project includes a human
resource system completed in June of this year and manufacturing,
estimated to complete in October of this year. This multi-phased
implementation is expected to cover all major internal business systems
used by the Company. While Year 2000 compliance is an important software
feature the Company considered when purchasing the software replacement,
the Company's decision to replace mission critical business systems was
primarily to make important functional improvements necessary to remain
competitive in the current business environment. Therefore, the Company
has not allocated a portion of the total project cost as a Year 2000
Issue. The Company does not believe that any incremental project costs
associated with Year 2000 compliance to be material, as this feature was
included with the software purchased by the Company to satisfy its
business needs. The Company presently believes that with the
installation of this software into its internal business systems, the
Year 2000 Issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company. Therefore, the Company
has completed a plan to remediate the existing manufacturing system as
part of a company wide contingency plan.
To date, 99.5% of the Company's products have been tested and found to
be Year 2000 compliant. A list of compliant products is available on the
Company's web site (www.cirrus.com). The Company considers a product or
system to be Year 2000 compliant if the date/time data is accurately
processed (included, but not limited to, calculating, comparing, and
sequencing) from, into and between the twentieth and twenty-first
centuries, and the years 1999 and 2000 along with leap year calculations.
To date, the Company has not identified any non-compliant products and
therefore, no material costs have been incurred with respect to
remediation. The Company believes that it is unlikely to experience a
material adverse impact on its financial condition or results of
operations due to product related Year 2000 compliance issues. However,
since the assessment process is ongoing, Year 2000 implications are not
fully known, and potential liability issues are not clear. Therefore,
the full potential impact of the Year 2000 on the Company is not known at
this time.
Another consequence related to the Company's products is the impact upon
the Company's ability to ship to or collect payment from customers who
themselves have business operational problems as a result of the Year
2000 Issue. Although the Company believes that it is unlikely to
experience a material adverse impact on its financial conditions or
results of operations due to customer-related problems, the Company could
experience such an impact if any of its major customers or a large number
of its other customers suffer a material disruption in their ability to
accept or pay for the Company's product shipments.
The Company's project plan also includes a comprehensive program to
assess the Year 2000 compliance of its key suppliers. The Company has
initiated formal communications with its significant suppliers and
financial institutions to determine the extent to which the Company is
vulnerable to those Third Parties who fail to remedy their own Year 2000
Issues. As of June 1999, the Company has contacted its significant
suppliers and financial institutions and has received assurances of Year
2000 compliance from a number of those contacted. To date the Company
has received responses to its initial inquiries from 100% of its mission
critical suppliers. However, some of these suppliers are still in the
process of completing their work on the Year 2000 Issues and failure of
these mission critical suppliers to be compliant would result in
manufacturing shutdowns for a certain period of time. The Company is
currently taking steps to assess whether these suppliers are taking all
the appropriate actions to fix any Year 2000 Issues they might have and
to be prepared to continue functioning effectively as a supplier to the
Company. However, as there can be no guarantee that the Company's
suppliers will be Year 2000 compliant prior to the millennium, many
significant suppliers have been second sourced and most contingency plans
have been developed during the first calendar quarter of 1999. This
process was completed in the second calendar quarter of 1999.
Contingency plans related to mission critical suppliers that are not
considered to be making adequate steps to ensure Year 2000 compliance
consist of the identification of substitutes and second-source suppliers,
and in certain situations includes a planned increase in the level of
inventory carried. No material cost related to Year 2000 compliance of
Third Parties has been incurred to date. The Company believes that its
reasonably most likely worst case Year 2000 scenario would involve
problems with the systems of its Third Parties rather than with the
Company's internal systems or its products. However, based upon
information communicated to the Company from Third Parties, management
believes that it is unlikely to experience a material adverse impact due
to problems related to Third Parties and expects that the cost of these
projects over the next two years will not have a material effect on the
Company's financial position or overall trends in results of operations.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form
10-K for the Year Ended March 27, 1999.
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 12.1 Statement Regarding Computation of Ratios of
Earnings to Fixed Charges
Financial Data Schedule
b. Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K on August 3, 1999,
pursuant to Item 2 of Form 8-K, reporting the disposition of the
Company's interest in the MiCRUS joint venture.
<PAGE>
CIRRUS LOGIC, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CIRRUS LOGIC, INC.
(REGISTRANT)
/s/GLENN C. JONES
Date: August 4, 1999 -----------------------
Glenn C. Jones
Vice President, Chief
Financial Officer,
Treasurer and
Secretary
[MULTIPLIER]1,000
Part II. Other Information, Item 6a
Exhibit 12.1
CIRRUS LOGIC, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS TO FIXED CHARGES
(in thousands, except ratio of earnings to fixed charges)
<TABLE>
<CAPTION>
Quarter Ended
June 26, June 27,
1999 1998
----------- -----------
<S> <C> <C>
Income (loss) before income taxes ($127,746) $812
Fixed Charges (1) 7,173 6,789
----------- -----------
Total earnings and fixed charges (120,573) 7,601
Fixed Charges (1) 7,173 6,789
Ratio of earnings to fixed charges (2) N/A 1.1x
=========== ===========
ADJUSTED FOR MiCRUS AND CIRENT FIXED CHARGES:
Fixed Charges (3) 13,138 13,696
Ratio of earnings to fixed charges (4) N/A N/A
=========== ===========
<FN>
(1) Fixed charges consist of interest expense incurred, including capital
leases, amortization of interest costs and the portion of rental
expense under operating leases deemed by the Company to be
representative of the interest factor.
(2) Earnings were inadequate to cover fixed charges for the quarter ended
June 26, 1999 by approximately $127.7 million.
(3) Fixed charges consist of interest expense incurred, including capital
leases, amortization of interest costs, portion of rental expense
under operating leases deemed by the Company to be representative of
the interest factor, interest on capitalized leases and the interest
factor associated with operating leases of the Company's MiCRUS and
Cirent joint ventures.
(4) Earnings would have been inadequate to cover fixed charges for the
quarters ended June 26, 1999 and June 27, 1998 by approximately $133.7
million and $6.1 million, respectively.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<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-25-2000>
<PERIOD-START> <MAR-28-1999>
<PERIOD-END> <JUN-26-1999>
<PERIOD-TYPE> 3-MOS
<CASH> 259,135
<SECURITIES> -
<RECEIVABLES> 67,431
<ALLOWANCES> -
<INVENTORY> 45,409
<CURRENT ASSETS> 416,360
<PP&E> 188,750
<DEPRECIATION> 141,018
<TOTAL-ASSETS> 501,370
<CURRENT-LIABILITIES> 364,908
<BONDS> 319,235
-
-
<COMMON> 328,878
<OTHER-SE> (511,651)
<TOTAL-LIABILITY-AND-EQUITY> 501,370
<SALES> 120,553
<TOTAL-REVENUES> 120,553
<CGS> 71,386
<TOTAL-COSTS> 71,386
<OTHER-EXPENSES> 176,567
<LOSS-PROVISION> -
<INTEREST-EXPENSE> -
<INCOME-PRETAX> (127,746)
<INCOME-TAX> -
<INCOME-CONTINUING> (127,746)
<DISCONTINUED> -
<EXTRAORDINARY> -
<CHANGES> -
<NET-INCOME> (127,746)
<EPS-BASIC> (2.12)<FN>
<EPS-DILUTED> (2.12)
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
</FN>
</TABLE>
