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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 for the fiscal year ended March 25, 2000
Commission File Number 0-17795
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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.)
4210 South Industrial Drive, Austin, TX 78744
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(512) 445-7222
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
Preferred Share Purchase Rights
(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 [X] NO [_]
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. [_]
Aggregate market value of the registrant's Common Stock held by non-
affiliates of the registrant as of April 25, 2000 was approximately
$876,459,360 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, $0.001
par value, was 65,730,200 as of April 25, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
Cirrus Logic, Inc. was reincorporated in the state of Delaware on February
17, 1999. Prior to this date, we had been incorporated in California since
February 3, 1984 as the successor to a research corporation which had been
incorporated in Utah in 1981. Our principal executive offices are located at
4210 South Industrial Drive, Austin, Texas 78744. Our telephone number at that
address is (512) 445-7222.
We design and manufacture integrated circuits that employ high-performance
analog and digital signal processing (DSP) technologies. Our products, sold
under our own name and the Crystal(R), Maverick(TM), and 3Ci(TM) product
brands, enable system-level applications in the Analog (audio, communications
and data acquisition), Internet (embedded processors and optical storage), and
Magnetic Storage (hard disk drive electronics integration and read channels)
markets.
Within the analog, Internet and magnetic storage markets, we serve a broad
customer base. Key customers include Apple, Creative Technologies, Dell,
Fujitsu, Hewlett Packard, Hitachi, IBM, Sony, Trigem, and Western Digital.
Markets and Products
We target large existing markets, as well as emerging growth markets that
derive value from our expertise in advanced mixed-signal design processing,
systems-level engineering and software expertise to create integrated
solutions that enable our customers to differentiate their products and
accelerate their time to market. These solutions are implemented primarily in
integrated circuits, or ICs, and related software/firmware, but may also
include subsystem modules or system equipment designs and related software.
Our products currently address key system-level applications for consumer
audio and industrial measurement and control as well as magnetic and optical
mass storage, and to a lesser extent applications for high-speed Internet
access, handheld and portable computing and power measurement.
In the second quarter of fiscal 1999, we launched a major initiative to
refine our business strategy and revitalize growth through concentration on
our leadership positions in the analog, Internet, and magnetic storage
markets. This initiative included the phasing out of certain non-strategic
businesses along with reducing our total fixed wafer fabrication capacity by
approximately 70%. We have since divested elements of our communications
product line and the personal computer ("PC") Modem business in addition to
outsourcing our PC graphics support. Further, our future intention is to
continue de-emphasizing new product developments targeted primarily for the PC
motherboard and emphasize non-PC motherboard market opportunities in the
Analog, Internet, and Magnetic Storage markets. However, sales of many of our
products over the near term will continue to depend largely on the sales of
PCs.
ANALOG PRODUCTS BUSINESS GROUP
Our analog line of products address PC and consumer audio, data acquisition,
industrial automation and control, and communications applications.
Computer Audio Products Division
The Computer Audio division currently offers over 25 products for the
computer market. We are one of the leading suppliers of stereo codecs for the
PC market including ISA, AC-97 and serial interface codecs. These mixed signal
devices provide high-quality audio for input and output functions of PC audio
products, including those that offer 3D processing, SoundBlaster
compatibility, Microsoft Sound compatibility and music synthesis. The Computer
Audio Division also offers personal computer interface digital signal
processor, or PCI DSP, controller products, which provide special effects
processing and allow PC gamers to perceive sound as coming from various points
around them in a 3D space, sound equalizers, acoustic echo cancellation for
exceptional Internet audio and acceleration for Microsoft Direct Sound and
other interfaces such as A3D and EAX. Customers include Apple, Creative
Technologies, Dell, Hewlett Packard and IBM.
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The following Computer Audio products are expected to be the most important
in the near term:
<TABLE>
<CAPTION>
Descriptions Key Features Status
---------------------- ------------------------------------- ---------------
<C> <S> <C>
Audio Codecs Analog-to-digital and digital-to- In production.
analog converters for PC and computer
workstation audio. Multiple products
(AC-97, I2S and other serial
formats).
ISA Audio Codecs High-integration ISA bus PC audio In production.
controllers. Highest audio quality,
Sound Blaster and FM synthesis with
Optional 3D audio effects. Multiple
products.
DSP with Integrated Special effects digital signal In production.
High Performance Codec processors.
PCI Audio Controllers High-integration PCI bus PC audio In production.
controllers. Range of low-cost to
high-performance DSP-based solutions.
DSP solutions offer advanced audio
processing such as 3D positioning for
games, wavetable music synthesis &
sound equalization. Multiple
products.
Next Generation Low power analog-to-digital and In development.
Audio Codecs digital-to-analog converters for PC
and computer workstation audio.
Multiple products based on next
generation formats.
Consumer Audio Products Division
The Consumer Audio Division currently offers over 75 products for the
consumer and professional/automotive audio markets. We supply products for the
high-fidelity audio market including analog-to-digital and digital-to-analog
converters, codecs and a family of DSP-based audio decoders that support the
major audio standards such as Dolby AC-3, AAC, DTS, 5.1 Channel MPEG audio
decoding, THX and other effects processing. The product applications include
audio/video amplifiers, set-top audio decoders, digital audio tapes, MP3(TM)
players, CD players, powered speakers, DVD players and video CD players.
Customers include Sony, Harman Kardon, Kenwood, Nokia, Pace, and Panasonic.
Our professional/automotive product line includes analog-to-digital and
digital-to-analog converters and digital audio transmitters, transceivers and
receivers, and DSP-based audio solutions. Product applications include high-
end professional recording equipment, high performance digital mixing
consoles, special effects digital signal processors and automotive stereo
systems. The following products are expected to be the most important in the
near term:
<CAPTION>
Descriptions Key Features Status
---------------------- ------------------------------------- ---------------
<C> <S> <C>
Audio Codecs Analog-to-digital and digital-to- In production.
analog converters for consumer audio
equipment and professional audio
equipment.
Multi-Standard, Home entertainment systems meeting In production.
Multi-Channel multiple popular standards (Dolby,
Audio Decoders AAC, Digital Theatre Systems, MPEG-2)
with single-chip solutions.
Analog-to-Digital, Consumer applications such as A/V In production.
Digital-to-Analog equipment, DVD players, Set-top
Converters boxes, CD mini disc & MP3(TM)
players, high end professional
recording equipment, high performance
digital mixing consoles.
High Performance High performance digital mixing In production.
Sample Rate Converters consoles, CD-R players, professional
audio recording equipment
</TABLE>
3
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<TABLE>
<CAPTION>
Descriptions Key Features Status
---------------------- ------------------------------------- ---------------
<C> <S> <C>
DSP with Integrated Special effects digital signal In production.
High Performance Codec processors.
Digital Audio Consumer and professional In production.
interface products applications including A/V equipment,
effects processors, mixing consoles,
and digital speaker systems.
High efficiency Low power converters and high power In development.
PWM converters amplifiers for consumer, automotive,
and power amplifiers and professional systems.
Precision Data Conversion
The Precision Data Conversion business is comprised of the Data Acquisition
and Communications product lines.
Data Acquisition
We design, manufacture and market analog, digital and mixed-signal
integrated circuits for data acquisition, instrumentation and imaging
applications. Our Crystal brand is associated with the most high-performance
mixed-signal and signal processing solutions for these markets. Our broad line
of analog-to-digital converters consist of general-purpose and low-frequency
measurement devices. These devices use patented self-calibration techniques
with delta sigma, successive approximation and pipelined architectures to
improve accuracy and reduce system-level cost.
In addition to supporting a discrete product family, our mixed-signal
expertise design techniques are applied to IC solutions across our product
line.
Our data acquisition product family includes more than 100 products used in
industrial automation, instrumentation, medical, military and geophysical
applications. Our customers include National Instruments, Rockwell Automation
and Schlumberger.
Communications
We design, manufacture and market semiconductor products that enable
Ethernet solutions for use in emerging broadband communication systems. Our
embedded Ethernet controller products are used in a variety of applications
including products that provide broadband high-speed Internet access such as
digital cable set-top boxes, cable modems and ADSL modem systems, as well as
Voice-over-internet-protocol, or VOIP, telephony systems, Ethernet switch
systems, and other embedded system applications.
In addition, we develop and market integrated circuit products that provide
telecommunication line interface solutions for telecommunications and data
communications equipment. The following communications products are expected
to be the most important in the near term:
<CAPTION>
Descriptions Key Features Status
---------------------- ------------------------------------- ---------------
<C> <S> <C>
Embedded Ethernet Highest level of integration, In production.
Controllers simplified design of 10BASE-T and
10/100 local area network controllers
and single and multi-channel analog
front ends for motherboards,
interface cards and network
equipment. Multiple products.
Telecom T1/E1 Line Broad family of high-performance, In production.
Interface Controllers mixed-signal devices for interfacing
network equipment and end-user
equipment to T1 and E1 lines.
Multiple products.
</TABLE>
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INTERNET SOLUTIONS BUSINESS GROUP
Our Internet line of products provides solutions for optical storage and
embedded processor applications.
OPTICAL STORAGE
We supply integrated circuits that perform key electronics functions in
advanced optical disc drives. We entered the optical storage market in fiscal
1995 with a CD-ROM decoder product, followed by three more generations of CD-
ROM decoders with read speeds of up to 45x. In fiscal 1997, we introduced our
first CD-R/CD-RW encoder/decoder products and are currently on our fourth
generation, supporting up to 16x write and 48x read speeds. We also provide
integrated circuits for the DVD drive electronics market.
We currently sell products to Sony in the optical storage market. The
following optical storage products are expected to be the most important in
the near term:
<TABLE>
<CAPTION>
DESCRIPTIONS KEY FEATURES STATUS
----------------------- ------------------------------------ --------------
<C> <S> <C>
ATAPI CD-R/RW Up to 16x write and 48x read speeds. In production.
(Recordable/Rewritable) High-speed ATAPI Ultra DMA 33 host
Encoder/Decoder. transfer. Automated architecture and
ECC performance. Multiple products.
Integrated DVD Drive Integrated DVD Drive Electronics, Sampling.
Manager incorporating partial response
maximum likelihood, or PRML, Read
Channel, servo control and decoder
functions for DVD-ROM and DVD-Player
applications.
</TABLE>
EMBEDDED PROCESSORS
During fiscal 1999, we created the Embedded Processor Division to develop,
manufacture, and market highly integrated, system-on-chip, or SOC, solutions
for several emerging applications through the incorporation of our system
peripherals and mixed signal components with CPU cores licensed from ARM Ltd.
The division's focus is on the Application Specific Standard Product (ASSP)
device category offering products in the areas of handheld information
appliances, industrial computing systems, portable digital audio solutions,
and network and Internet computing devices.
In fiscal 2000, we introduced the Maverick brand of market specific
processors, or MSP(TM) specifically targeting personal digital assistants, or
PDA, handheld digital audio players, and Internet access appliances, such as
the electronic book or smartphone. These products are the industry's first
chips to support both MP3(TM) and Microsoft's Windows Media Audio. With the
Maverick line, we have already become a leading supplier of Internet audio
SOC's with several major design wins. The Maverick family also addresses the
issue of content security for the Internet audio market by embedding
InterTrust Technologies digital rights management, or DRM, software on the
chip, allowing the music industry to pursue the Internet as a secure method of
distribution. Maverick customers include S3/Diamond Multimedia, Creative
Technologies, and IdeaGrove. We also have products designed for low-cost,
Internet terminals, screen phones and game boxes. These products are currently
targeted at European markets and enable inexpensive Internet access for a
broad range of consumers through the television. Major customers include Alba
plc and Ravisent Technologies.
The following embedded processor products are expected to be the most
important in the near term:
<TABLE>
<CAPTION>
DESCRIPTIONS KEY FEATURES STATUS
--------------------- --------------------------------------- --------------
<C> <S> <C>
High-performance Highly integrated 32-bit ARM RISC In production.
System-on-Chip with processor core with advanced peripheral
CRT/LCD Controller functions for Internet-enabled
appliances, such as set-top boxes,
screen-phones and game boxes that are
wall outlet based. Multiple products.
High performance, low Integrated ARM 720T processor core with In production
power, System-on-Chip LCD and DRAM controllers, USB and Sampling.
with LCD controller interface, Digital Audio Interface, and
DRM software. Used in handheld digital
audio player, PDA, and Internet access
appliance applications for portable,
battery powered devices. Multiple
products including Maverick(TM) family.
</TABLE>
5
<PAGE>
MAGNETIC STORAGE BUSINESS GROUP
We supply integrated circuits that perform the key electronics functions
contained in advanced magnetic and removable disk drives. In fiscal 1999, we
introduced the industry's first integration of a hard disk controller, a read
channel and a microcontroller ("3Ci"), offering extremely high integration, as
well as the industry's first open architecture firmware solution embodying the
ARM-enabled microprocessor. The open architecture model was further advanced
during the year by the collaborative development of the ARM9E microcontroller
with ARM and Lucent Microelectronics, with a goal of providing software
compatible solutions from two of the major suppliers of hard disk
microelectronics. In fiscal 2000 we announced that Fujitsu had designed the
3Ci integrated platform into its XV10 family of high volume desktop hard disk
drives. In addition, we introduced our second generation 3Ci solution
implemented in 0.25 micron technology, further strengthening our lead over our
competitors for integrated drive electronics solutions. Multiple customers are
evaluating the second-generation 3Ci product and related derivatives. Our
magnetic storage customers during fiscal 2000 included Fujitsu, Hitachi, and
Western Digital. The following magnetic storage products are expected to be
the most important in the near term:
<TABLE>
<CAPTION>
Descriptions Key Features Status
-------------------- --------------------------------- ---------------------
<C> <S> <C>
Advanced Advanced data handling and error- In production
Architecture PC AT- detection/correction capabilities (UDMA33/66)
UDMA33/66/100 for data integrity in high- and sampling
Disk Controllers and performance hard disk drives. (UDMA 100).
IEEE1394 Disk Multiple products.
Controllers
Digital PRML Single-chip digital read/write In production
Read/Write channel solutions. Advanced (450Mbits/s) and
Channels digital signal processing sampling
algorithms allow more data per (550Mbits/s).
disk. Multiple products.
Single-chip Drive Single-chip open architecture In production
Electronics Platform electronics solution (330Mbits/s UDMA66)
(3CI) incorporating the PRML Read Sampling
Channel, PC AT UDMA Disk (450Mbits/s UDMA100).
Controller, ARM-enabled 32-bit
RISC processor, micro-DSP, ROM,
RAM and Servo Logic.
</TABLE>
Manufacturing
Historically, we relied upon merchant wafers manufactured by outside
suppliers for our wafer manufacturing needs. In much of 1994 and 1995, the
merchant market was unable to meet demand, and our merchant wafer suppliers
sought to limit the proportion of wafers they sold to any single customer,
which further restricted our ability to buy wafers. Wafer shortages increased
our supply costs and at times caused us difficulties in meeting the market
demand for our own products. In response to our rapid growth, and to
historical and anticipated supply shortages, we began pursuing a strategy to
expand our wafer supply sources by taking direct ownership interests in wafer
manufacturing joint ventures. In 1994, we joined with International Business
Machines Corporation ("IBM") to form MiCRUS, a manufacturing joint venture, to
produce wafers for both companies. MiCRUS began operations in 1995. In July
1996, we joined with Lucent Technologies, Inc. ("Lucent") to form Cirent
Semiconductor ("Cirent"), a manufacturing joint venture, to produce wafers for
both companies. Cirent began operations in 1997. In addition, during the time
that we were partners in the joint ventures, we continued to rely on merchant
wafer suppliers for a portion of our wafer requirements. During fiscal 1999,
we assessed our manufacturing capacity needs and evaluated the carrying value
of the assets recorded in connection with both the MiCRUS and Cirent joint
ventures. The result of this evaluation in conjunction with the restructuring
of operations to focus on the analog, Internet and magnetic storage business
groups is that we wrote-off our MiCRUS and Cirent related assets and divested
our interests in those manufacturing joint ventures. Those
6
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actions resulted in fiscal 1999 asset impairment charges of $188.4 million.
Additionally, restructuring charges were incurred in fiscal 2000 and fiscal
1999 of $126.6 million ($1 million of which is included in cost of sales) and
$23.8 million, respectively. See Note 12 to the Notes to the Consolidated
Financial Statements. Following these divestitures, we returned to the fabless
business model we had used previously.
In addition to our wafer supply arrangements, we currently contract with
third party assembly vendors to package the wafer die into finished products.
We qualify and monitor 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.
During fiscal 1998, we started outsourcing a substantial portion of our
production testing. Our manufacturing organization has continued to qualify
and monitor suppliers' production processes, to participate in process
development, package development and process and product characterization, to
perform mixed-signal production testing, to support R&D activities and to
maintain quality standards. As of April 25, 2000, we had approximately 33% of
our employees engaged in manufacturing-related activities.
OTHER WAFER SUPPLY ARRANGEMENTS
In fiscal 1996, we entered into a volume purchase agreement with Taiwan
Semiconductor Manufacturing Co., Ltd. (TSMC), which was amended in September
1997 and expires in December 2000. Under the agreement, we will purchase from
TSMC 50% of our wafer needs that are not filled by MiCRUS and Cirent, provided
that TSMC can meet the technological and other requirements of our customers.
TSMC is committed to supply these wafer needs.
PATENTS, LICENSES AND TRADEMARKS
To protect our products, we rely heavily on trade secret, patent, copyright,
mask work and trademark laws. We apply for patents arising from our research
and development activities and intend to continue this practice in the future
to protect our products and technologies. We presently hold 577 U.S. patents,
356 U.S. patent applications pending, and various corresponding international
patents and applications. We have also licensed a variety of technologies
important to our business from outside parties to complement our own research
and development efforts.
RESEARCH AND DEVELOPMENT
We concentrate our research and development efforts on the design and
development of new products for each market and on the continued enhancement
of our design automation tools. Product-oriented research and development
efforts are organized along the Analog, Internet and Magnetic Storage Business
Groups. We also fund certain advanced process technology development as well
as other emerging product opportunities. Expenditures for research and
development in fiscal 2000, 1999 and 1998 were $111.8 million (excluding
acquired in-process research and development expenses of $8.0 million in
fiscal year 2000), $130.3 million and $179.6 million, respectively. As of
April 25, 2000, we had approximately 36% of our employees engaged in research
and development activities. Our future success is highly dependent upon our
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 our products are highly competitive, and we expect that
competition will increase. We compete 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
our products. Our competitive strategy has been to provide lower-cost versions
of existing products and new, more advanced products for customers' new
designs.
7
<PAGE>
While no single company competes with us in all of our product lines, we
face significant competition in each of our product lines. We expect to face
additional competition from new entrants in each of our markets, which may
include both large domestic and international semiconductor manufacturers and
smaller, emerging companies.
The principal competitive factors in our 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 our products have not been available from second sources, we generally
do not face direct competition in selling our products to a customer once our
integrated circuits have been designed into that customer's system.
Nevertheless, because of shortened product life cycles and even shorter
design-in cycles, our competitors have increasingly frequent opportunities to
achieve design wins in next-generation systems. In the event that competitors
succeed in supplanting our products, our market share may not be sustainable
and net sales, gross margin and earnings would be adversely affected.
SALES, MARKETING AND TECHNICAL SUPPORT
Our products are sold worldwide, and historically 50-75% of revenues have
come from shipments to overseas destinations. We maintain 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 domestic sales force includes a network of regional direct sales offices
located in California, Florida, Illinois, Maryland, Massachusetts, Oregon, and
Texas. International sales offices and organizations are located in Taiwan,
Japan, Singapore, Korea, Hong Kong, the United Kingdom, Germany, France, the
Netherlands and Barbados. We supplement our direct sales force with sales
representative organizations and distributors. Technical support staff are
located at the sales offices and also at our facilities in Fremont,
California; Broomfield, Colorado; Austin, Texas and Nashua, New Hampshire.
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.
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, we believe that our backlog at any given
time is not a meaningful indicator of future revenues.
EMPLOYEES
As of April 25, 2000, we had approximately 1,255 full-time equivalent
employees, of whom 36% were engaged in research and product development, 31%
in sales, marketing, general and administrative and 33% in manufacturing. Our
future success will depend, in part, on our ability to continue to attract,
retain and motivate highly qualified technical, marketing, engineering and
management personnel. Due to the highly competitive nature of the marketplace
that we operate in, we may from time to time lose key employees to certain of
our competitors. We have been able to hire qualified personnel in the past to
fill open positions created by such occurrences although there can be no
assurance that we will be able to do this in the future. None of our employees
is represented by any collective bargaining agreements.
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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 25, 2000):
David D. French (age 43) joined the Company in June 1998 as President and
Chief Operating Officer, and assumed additional duties with his appointment as
Chief Executive Officer in February 1999. As President & CEO, French oversees
worldwide operations and corporate functions. Formerly a Vice President and
General Manager for Analog Devices, French has worked in the semiconductor
industry for more than 20 years, mostly as a manager of businesses focused on
embedded applications. Prior to joining Analog Devices in 1988, French held
management posts at Texas Instruments and Fairchild Semiconductor.
Patrick V. Boudreau (age 59) joined the Company in October 1996 as Senior
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.
Jason Carlson (age 38) joined the Company in January 2000 as Vice President
and General Manager of the newly formed Consumer Audio Products Division.
Prior to joining Cirrus, he was President and CEO of AudioLogic, Inc., a
technology development company focused on proprietary digital signal
processing and pulse width modulation for audio applications which the Company
acquired in July 1999. Prior to AudioLogic, he was a co-founder of ReSound
Corp., a hearing health care products manufacturer. At ReSound he held various
management positions.
Robert V. Dickinson (age 58) has been Vice President and General Manager of
the Optical Storage Division since August 1999. He joined the Company in
December 1992 as Vice President, Japan Business Development and subsequently
served as President, Cirrus Logic K.K., President, Graphics Company and Vice
President, Quality and Customer Satisfaction. Prior to joining the Company he
held division general management positions at Western Digital, Zilog and
Burroughs and was President and CEO of two startup companies, Mouse Systems
and Verticom.
Craig Ensley (age 50) was appointed Vice President, Corporate Marketing in
March 1999. He was Vice President and General Manager, Flat Panel Electronics
Division from April 1997 to February 1999. Previously he served as Vice
President and General Manager of the Computer Products Division of our
subsidiary, Crystal Semiconductor Corporation from 1993. He joined Crystal in
May 1986 as Vice President, Marketing. Prior to joining Crystal he was the
Director of Marketing for the Semiconductor Division of Rockwell International
where he had worked for 12 years.
Keith Essency (age 53) joined the Company in July 1999 as Vice President and
General Manager of the Computer Audio Products Division. Prior to joining the
Company, he was the Operations Manager of Motorola Semiconductor Product
Sector's Video Communications Solutions and as Operations Manager, DSP
Infrastructure Products.
Robert W. Fay (age 53) is Vice President, Chief Financial Officer,
Treasurer, and Corporate Secretary. He joined the company in November of 1999
as Vice President of Finance. Prior to joining the Company, he worked at
Harris Corporation, most recently as its Vice President -- Corporate
Controller and Vice President -- Treasurer and Vice President and Chief
Financial Officer for that Company's semiconductor sector.
Terry Leeder (age 51) joined Cirrus Logic as Vice President, Worldwide Sales
in June 1999. Prior to joining the Company, he served as Vice President,
Marketing, Applications and Japan Sales at Power Integrations, Inc. Most
recently, he was President and CEO of Medianix Semiconductor, Inc., a
manufacturer of application-specific DSP integrated circuits.
Matthew R. Perry, Ph.D. (age 37) is Vice President and General Manager of
the Embedded Processors Division. He joined the Company in December 1995 as
Manager, Strategic Planning and Business Development.
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He was Director, Marketing from August 1996 through May 1997, Sr. Director,
Engineering from May 1997 though January 1998 and Vice President, Strategic
Marketing from January 1998 through May 1998.
ITEM 2. PROPERTIES
Our principal facilities, located in Austin, Texas, consist of approximately
251,566 square feet of office and manufacturing space leased pursuant to
agreements which expire from 2001 to 2005 plus renewal options. This space is
used for manufacturing, product development, sales, marketing and
administration.
Our Fremont, California facilities consist of approximately 484,922 square
feet of office space leased pursuant to agreements which expire from 2004 to
2009 plus renewal options. However, in connection with our restructuring
activities in fiscal 1999, we have subleased approximately 190,000 square feet
of this office space and are currently offering for sublease another
approximately 100,000 square feet.
We also have design centers located in Broomfield, Colorado; Boca Raton,
Florida; Pune, India; Singapore and Tokyo, Japan. We also lease sales and
sales support offices in the United States in California, Colorado, Florida,
Illinois, Maryland, Massachusetts, North Carolina, Oregon, Texas and Virginia
and internationally in Taiwan, Japan, Singapore, Korea, Hong Kong, the United
Kingdom, Germany, France, Italy and Barbados.
ITEM 3. LEGAL PROCEEDINGS
We and certain of our 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 us and may be subject to indemnification provisions made
by us to the customers. We have 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.
Occasionally, suits arise from prior business relationships. We have been
named in two such matters, one filed by a prior distributor and another
unrelated matter where we are named as a shareholder. While the ultimate
outcome cannot be predicted with certainty, we do not expect these matters to
have a material adverse effect on our consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
Fiscal year ended March 28, 1998
First quarter.................................................... $13.00 $8.50
Second quarter................................................... 17.56 10.31
Third quarter.................................................... 17.44 10.38
Fourth quarter .................................................. 11.38 9.69
Fiscal year ended March 27, 1999
First quarter ................................................... 11.25 8.94
Second quarter .................................................. 12.44 6.06
Third quarter.................................................... 12.94 5.88
Fourth quarter .................................................. 12.94 6.88
Fiscal year ended March 25, 2000
First quarter ................................................... 10.13 6.00
Second quarter .................................................. 12.44 7.50
Third quarter ................................................... 16.50 9.31
Fourth quarter .................................................. 24.00 11.63
</TABLE>
At April 25, 2000, there were approximately 1,407 holders of record of our
Common Stock.
We have not paid cash dividends on our Common Stock and currently intend to
continue a policy of retaining any earnings for reinvestment in our business.
In 1996, we issued $300,000,000 par value of 6% Convertible Subordinated
Notes due December 15, 2003 ("Notes"). The Notes remain outstanding and are
convertible into shares of our common stock at a conversion rate of 41.2903
shares per $1,000 principal amount of Notes (equivalent to a conversion price
of approximately $24.219 per share), unless previously redeemed by us. The
issuance of these notes was underwritten by Goldman Sachs & Co., Salomon
Brothers, Inc., J.P. Morgan & Co., and Robertson Stephens Company. The
proceeds from the sale of these notes were used to repay certain senior
indebtedness, for general working capital purposes and for expenditures
associated with our investment in manufacturing.
11
<PAGE>
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts, ratios and employees)
The information contained below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Operating summary:
Net sales............... $ 564,400 $ 628,105 $954,270 $917,154 $1,146,945
Costs and expenses and
gain on sale of assets
and other, net:
Cost of sales......... 349,720 703,029 605,484 598,795 774,350
Research and
development.......... 111,755 130,347 179,552 230,786 238,791
Selling, general and
administrative....... 89,949 98,275 117,273 126,722 165,267
Gain on sale of
assets, net.......... -- (3,988) (20,781) (18,915) --
Restructuring costs
and other, net....... 125,612 80,505 14,464 20,954 12,761
Acquired in-process
research and
development
expenses............. 8,013 -- -- -- --
Abandonment of assets
charge............... 12,201 -- -- -- --
--------- --------- -------- -------- ----------
Income (loss) from
operations............. (132,850) (380,063) 58,278 (41,188) (44,224)
Interest expense........ (23,754) (22,337) (27,374) (19,754) (5,151)
Interest income......... 8,096 16,786 19,893 8,053 7,759
Realized gain on the
sale of marketable
equity securities...... 92,463 -- -- -- --
Other income (expense).. 8,949 4,242 5,206 1,270 (107)
--------- --------- -------- -------- ----------
Income (loss) before
income taxes........... (47,096) (381,372) 56,003 (51,619) (41,723)
Provision (benefit) for
income taxes........... -- 46,031 19,510 (5,463) (5,540)
--------- --------- -------- -------- ----------
Net income (loss)....... $ (47,096) $(427,403) $ 36,493 $(46,156) $ (36,183)
========= ========= ======== ======== ==========
Net income (loss) per
common share--basic.... $ (0.77) $ (6.77) $ 0.54 $ (0.71) $ (0.58)
Net income (loss) per
common share--diluted.. $ (0.77) $ (6.77) $ 0.52 $ (0.71) $ (0.58)
Weighted average common
shares outstanding:
Basic................. 61,554 63,149 67,333 65,007 62,761
Diluted............... 61,554 63,149 69,548 65,007 62,761
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Financial position at year
end:
Total assets............... $504,832 $532,630 $1,137,542 $1,136,821 $917,577
Working capital............ 237,076 164,012 476,154 428,670 182,643
Capital lease obligations,
excluding current......... 321 1,457 5,475 9,848 6,258
Long-term debt, excluding
current................... 3,147 12,960 32,559 51,248 65,571
Convertible subordinated
notes..................... 299,000 300,000 300,000 300,000 --
Total liabilities.......... 488,534 590,350 681,199 732,624 488,911
Stock issued under the
restructuring agreement
with IBM.................. 32,000 -- -- -- --
Stockholders' equity (net
capital deficiency)....... (15,702) (57,720) 456,343 404,197 428,666
(Unaudited)
Current Ratio.............. 2.29 1.61 2.40 2.17 1.44
Employees.................. 1,278 1,342 1,774 2,557 3,151
</TABLE>
13
<PAGE>
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,
but not limited to those discussed below, that could cause actual results to
differ materially from those projected. You are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. We undertake 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.
In September 1998, we announced a program to restructure our business to
fully concentrate on our precision linear and mixed-signal positions in the
analog, Internet, and magnetic storage markets. The program forecasted a
workforce reduction of 400 to 500 employees and restructuring and other
charges of up to $500.0 million. In January 1999, we subsequently indicated
that these charges might exceed $500.0 million. We indicated in an
announcement in September 1998 that the timing of recording the restructuring
charges was uncertain and dependent upon a number of different factors,
including negotiations related to our joint ventures.
During fiscal 1999, we recorded restructuring charges of approximately
$390.0 million, of which charges to cost of sales included $188.0 million
related to asset impairment (see Note 12 to the Notes to the Consolidated
Financial Statements), $90.0 million related to wafer purchase commitment
charges (see Note 1 to the Notes to the Consolidated Financial Statements),
and $35.0 million related to inventory write-downs (see Note 1 to the Notes to
the Consolidated Financial Statements). In addition, we recorded charges of
$78.0 million related to severance and related benefits along with facilities
scale back and other costs in restructuring costs and other, net (see Note 12
to the Notes to the Consolidated Financial Statements).
During the first quarter of fiscal 2000, we substantially completed the
restructuring activities which were initiated in the second quarter of fiscal
1999. We restructured our relationships with our manufacturing joint ventures
and returned to the fabless business model we had used previously. As part of
the first quarter restructuring, we recorded charges of $128.2 million in
restructuring costs, $1.0 million of which is in cost of sales. These
restructuring charges included a $135.0 million direct cash payment to one of
the joint venture partners, $36.8 million related to certain Cirrus common
stock which we issued to one of the joint venture partners, $9.3 million of
lease buyout costs and $16.4 million of equipment write-offs. These charges
were partially offset by the reversal of approximately $71.9 million of
previously accrued wafer purchase commitment charges due to the renegotiated
terms of our purchase commitments with our former partners.
Net Sales
Net sales for fiscal 2000 were $564.4 million, a decrease of 10.1% from
$628.1 million in fiscal 1999. Revenues in fiscal 2000 and 1999 included
amounts from businesses which have been divested by us and are included in our
End of Life business group. Revenues from divested businesses in fiscal 2000
were $75.9 million compared to $110.8 million in fiscal 1999. Net sales from
the core businesses in fiscal 2000 were approximately $488.5 million compared
to $517.3 million in fiscal 1999. Sales of core products decreased during
fiscal 2000 primarily due to reduced volumes in the magnetic storage business
partially offset by increased volumes in the analog and Internet business
groups. Average selling prices declined in fiscal 2000.
Net sales in fiscal 1999 decreased by $108.0 million from fiscal 1998,
excluding revenues from divested businesses and $60.0 million of revenues from
patent cross-license agreements in fiscal 1999, largely due to decreased sales
in mass storage products, primarily related to decreased unit volumes and
average selling prices of read channel devices and controllers which were
offset by increased sales in audio products, primarily related to increased
unit volume.
14
<PAGE>
Export sales, principally to Asia, include sales to U.S.-based customers
with manufacturing plants overseas and were approximately $421.0 million in
fiscal 2000 compared to approximately $462.0 million in fiscal 1999 and
approximately $506.0 million in fiscal 1998. Export sales to the Pacific Rim
(excluding Japan) were 47%, 40% and 31% of net sales; to Japan were 19%, 25%
and 15% of net sales; and to Europe and to the rest of the world were 8%, 8%
and 7% of net sales, in fiscal 2000, 1999 and 1998, respectively.
Our sales are currently denominated primarily in U.S. dollars. From time to
time we enter into foreign currency forward exchange and option contracts to
hedge certain of our foreign currency exposures related to sales and balance
sheet accounts denominated in yen. We have not experienced any significant
losses related to our foreign exchange activity.
Sales to Western Digital accounted for more than 10% of net sales in fiscal
2000. Two customers accounted for approximately 14% and 13%, respectively of
net sales in fiscal 1999. Two customers accounted for approximately 19% and
11%, respectively of net sales in fiscal 1998. No other customers accounted
for 10% or more of net sales in fiscal 2000, 1999 or 1998. The loss of a
significant customer or a significant reduction in such a customer's orders
could have an adverse effect on our sales.
Gross Margin
Gross margin was 38% in fiscal 2000. Gross margin in fiscal 2000 was
impacted by declining average selling prices in the audio, magnetic and
optical storage businesses. This was partially offset by lower production
costs in the audio and magnetic storage units. Additionally, our sales mix in
fiscal 2000 shifted toward lower margin analog business group products.
Overall, we expect gross margins in the near term to improve slightly as we
ramp production volume on higher margin products in the Internet business
group and integrated disk drive products from the 3Ci product family.
Gross margin for fiscal 1999 was negative 11.9%. Included in gross margin
for fiscal 1999 was $188.4 million related to the write-off of both MiCRUS and
Cirent joint venture assets which were deemed to be impaired in fiscal 1999
based upon an assessment that future cash flows were insufficient to recover
the carrying value of the assets, $90.3 million of charges related to excess
wafer purchase commitments for MiCRUS and Cirent, and $34.5 million of
inventory write-downs associated with products related to businesses being
phased out. During fiscal 1999, we assessed our manufacturing capacity needs
and evaluated the carrying value of the assets recorded in connection with
both the MiCRUS and Cirent joint ventures. This evaluation was necessitated by
the restructuring of our operations, along with the future expected decreases
in sales, gross margins and cash flows from the manufacture and sale of our
products produced by the joint ventures which resulted in excess manufacturing
capacity. Expected undiscounted future cash flows were not sufficient to
recover the carrying value of such assets. Therefore, an impairment loss of
$188.4 million was recognized in the fourth quarter of fiscal 1999 to reduce
the carrying value of the assets to fair value, calculated using expected
discounted cash flows for both MiCRUS and Cirent. See Note 12 to the Notes to
the Consolidated Financial Statements.
Gross margin was 36.6% in fiscal 1998. The gross margin percentage in fiscal
1998 was primarily a result of improved margins in mass storage due to a
change in mix within the mass storage products towards read channel products,
an overall change in product mix within the Company towards mass storage
products and $60.0 million of patent cross-license revenues in the fourth
quarter which had no corresponding cost of sales. These improvements were
offset by lower margins in PC products and $53.0 million of charges recorded
in the fourth quarter related to wafer purchase commitments for MiCRUS and
Cirent. The lower margins in PC products were primarily related to declining
average selling prices on graphics and modem products.
Research and Development Expenses
Research and development expenses expressed as a percentage of net sales
were 19.8%, 20.8%, and 18.8% in fiscal 2000, 1999 and 1998, respectively.
Research and development expenditures decreased by $18.6 million in fiscal
2000 and $49.2 million in fiscal 1999 primarily due to lower headcounts
related to the fiscal 1999 restructuring efforts to focus research and
development on our precision linear and mixed-signal positions in the analog,
Internet, and magnetic storage markets.
15
<PAGE>
Selling, General and Administrative Expenses
Selling, general, and administrative expenses expressed as a percentage of
net sales represented approximately 15.9%, 15.6% and 12.3% in fiscal 2000,
1999 and 1998, respectively. Selling, general, and administrative expenses
decreased $8.3 million in fiscal 2000 and $19.0 million in fiscal 1999
primarily due to a decrease in bad debt expense attributable to our efforts to
collect accounts receivable, a decrease in the allowance for bad debts and
restructuring activities during fiscal 1999 which included the divestiture of
several non-core businesses and headcount reductions made in order for the
support structure to be in line with our current business model.
Gain on Sale of Assets
Gain on sale of assets in fiscal 1999 includes $2.2 million relating to the
recovery of a holdback from the fiscal 1997 sale of the Infrastructure Product
Group of our Pacific Communication Sciences, Inc. ("PCSI") subsidiary to ADC
Telecommunications, Inc.
During the third quarter of fiscal 1998, we sold our Nuera Communications,
Inc. subsidiary for cash proceeds of approximately $21.5 million ($16.1
million net of $5.4 million of Nuera's own cash) and recorded a gain of
approximately $11.1 million. Gain on sale of assets also includes the reversal
of $9.7 million that had previously been accrued for losses on facilities
commitments in connection with the sale and shut down of the operating
divisions of PCSI in the fourth quarter of fiscal 1997.
Restructuring Costs and Other, Net
During the first quarter of fiscal 2000, we substantially completed the
restructuring activities that were initiated in the second quarter of fiscal
1999. We restructured our relationships with our manufacturing joint ventures
and returned to a fabless business model. As part of the first quarter
restructuring, we recorded charges of $128.2 million in restructuring costs,
$1.0 million of which is in cost of sales. These restructuring charges
included a $135.0 million direct cash payment to one of the joint venture
partners, $36.8 million related to certain Cirrus common stock which we issued
to one of the joint venture partners, $9.3 million of lease buyout costs and
$16.4 million of equipment write-offs. These charges were partially offset
with the reversal of approximately $71.9 million of previously accrued wafer
purchase commitment charges due to the renegotiated terms of our purchase
commitments with our former partners.
During the second quarter of fiscal 1999, we commenced certain activities
related to our previously announced restructuring and recorded charges in the
second quarter of fiscal 1999 related to those activities. These actions
included an immediate workforce reduction along with write-downs and write-
offs of obsolete inventory, equipment and facilities. In connection with these
actions, we recorded a net restructuring charge of $28.5 million consisting of
$4.3 million for workforce reductions, $8.2 million for write-downs or write-
offs of equipment, intangibles and other assets, $10.0 million for facility
commitments (net of $2.2 million reversal of previously accrued losses on
facilities in connection with the third quarter fiscal 1998 discontinuation of
certain product development efforts in graphics products), and the remaining
amount representing other committed liabilities and expenses.
During the third quarter of fiscal 1999, we continued with our restructuring
activities previously announced in the second quarter of fiscal 1999 and
recorded additional charges of $13.0 million. Our restructuring activities for
the third quarter of fiscal 1999 included the divestiture of non-core
businesses and the outsourcing of the Fremont manufacturing test floor. In
connection with these actions, we recorded charges consisting of $4.2 million
for work force reductions, $8.3 million for write-downs and write-offs of
equipment and other assets relating to the Fremont manufacturing test floor,
and the remaining amount representing other committed liabilities and
expenses.
We continued with the 1999 restructuring activities during the fourth
quarter of fiscal 1999. These activities resulted in $34.8 million of charges
which primarily consisted of $23.8 million write-off of the equity investment
in MiCRUS, $8.8 million loss on the sale of the modem and communications
businesses and $2.0 million of write-offs of fixed assets and net gain on sale
of assets in connection with our business divestiture.
16
<PAGE>
Restructuring costs and other, net for fiscal 1999 included total
restructuring charges of $75.5 million and $5.0 million for write-downs and
write-offs of property and equipment. As of March 25, 2000 we have a remaining
restructuring accrual of $6.8 million of which we expect to discharge
approximately $5 million in fiscal 2001 through cash payments.
We recorded restructuring costs of $11.8 million in the third quarter of
fiscal 1998 in connection with a discontinuation of certain strategies and
product development efforts in the graphics product group of our PC products
division. This resulted in a workforce reduction of approximately 65
positions. The primary components of the restructuring charge were $8.4
million related to excess assets and facility leases and $1.8 million of
severance payments that were made during fiscal 1998. Restructuring costs and
other also includes a $2.0 million reversal of amounts that had been
previously accrued for losses on facilities in connection with the April 1997
restructuring and other costs of $4.7 million representing additional
compensation costs in connection with the same restructuring that were earned
and recorded in the third quarter of fiscal 1998. As of March 27, 1999,
activities related to the fiscal 1998 restructuring of our graphics product
group were completed.
Acquired In-Process Research & Development Expenses
During the second quarter of fiscal 2000, we recorded $8.0 million or 1.4%
of net sales of acquired in-process research and development expenses
resulting from our acquisition of AudioLogic, Inc. which was supported by an
independent appraisal (See Note 6 to the Notes to the Consolidated Financial
Statements). We expensed these amounts on the acquisition date because the
acquired technology had not yet reached technological feasibility and had no
future alternative uses. We can give no assurance that acquisitions of
businesses, products or technologies by us in the future will not result in
substantial charges for acquired in-process research and development that may
cause fluctuations in our quarterly or annual operating results.
The in-process research and development relates to the highest performance,
all-digital pulse width modulation (PWM) technology for amplification of next
generation audio systems. AudioLogic's technology will provide solutions for
virtually all audio applications at 2 to 3 times better power efficiency than
alternative power amplifier and digital signal processing methods. The in-
process research and development is comprised of three significant PWM
development projects (#2,#3, and #4b). We periodically review the stage of
completion and likelihood of success of each of the in-process research and
development projects. The current status of the in-process research and
development projects are as follows:
PWM #2
The main applications for this product are low-end consumer audio products,
notebook computer speakers and headphones. This product is a low power
consumer. We estimate that the development cycle for this product will
continue for approximately eight months. The estimated cost to complete the
development of the PWM #2 technology is expected to be approximately $0.1
million.
PWM #3
This product will supply the PC speaker, after-market automotive, high-end
consumer audio and shelf-top audio system markets. This product is a medium
power consumer. We estimate that the development cycle for this product will
continue for approximately 15 months. The estimated cost to complete the
development of the PWM #3 technology is expected to be approximately $0.2
million.
PWM #4b
The applications for this product are high-power mass market consumer and
high volume professional audio products. We estimate that the development
cycle for this product will continue for approximately 15 months. The
estimated cost to complete the development of the PWM #4b technology is
expected to be approximately $0.2 million.
17
<PAGE>
These products are currently in the design stage of the development cycle.
We believe the associated risks of developing these products into commercially
viable products will be our ability to perform further research and
development to determine technological feasibility in light of competing
solutions and the increasingly sophisticated needs of our customers.
Value Assigned to In-Process Research and Development
We assigned value to the in-process research and development projects by
calculating the estimated stage of completion (expressed as a percentage of
completion) for each project, applying the percentage to the expected net cash
flows for each project, and discounting the net cash flows back to their
present value. We determined the stage of completion by analyzing the costs
incurred (as of the valuation date) divided by the total estimated costs to
complete the projects. The revenue estimates used to value the purchased in-
process research and development were based on estimates of relevant market
sizes and growth factors, expected trends in technology and the nature and
expected timing of new product introductions by us. The rates we utilized to
discount the net cash flows to their present value are based on AudioLogic's
weighted average rate of return. Given the nature of the risks associated with
the difficulties and uncertainties in completing each project and thereby
achieving technological feasibility and the size of AudioLogic the weighted
average rate of return was adjusted. Based on these factors, a discount rate
of 30% was deemed appropriate for AudioLogic. The estimates used in valuing
in-process research and development were based upon assumptions we believe to
be reasonable but which are inherently uncertain and unpredictable. Our
assumptions may be incomplete or inaccurate, and no assurance can be given
that unanticipated events and circumstances will not occur. Accordingly,
actual results may vary from the projected results. Any such variance may
result in a material adverse effect on our financial condition and results of
operations. With respect to the acquired in-process technologies, the
calculations of value were adjusted to reflect the value creation efforts of
AudioLogic prior to the acquisition.
Following are the estimated completion percentages and technology lives:
<TABLE>
<CAPTION>
ESTIMATED EXPECTED
PERCENTAGE USEFUL
PRODUCT OF COMPLETION LIFE
------- ------------- --------
<S> <C> <C>
PWM #2........................................... 82% 4 years
PWM #3........................................... 63% 4 years
PWM #4b.......................................... 63% 4 years
</TABLE>
The value assigned to each acquired in-process research and development
project as of the acquisition date were as follows (in thousands):
<TABLE>
<CAPTION>
VALUE
PRODUCT ASSIGNED
------- --------
<S> <C>
PWM #2....................... $4,300
PWM #3....................... 3,200
PWM #4b...................... 500
Other....................... 13
------
$8,013
======
</TABLE>
The terms of the AudioLogic purchase agreement provide for additional cash
or stock consideration to the extent that our stock price (calculated as a
ten-day average) does not exceed $20 per share on the one-year anniversary of
the closing, July 27, 2000. Such additional consideration would be valued at
approximately $5.6 million as of April 25, 2000 because the ten-day average
stock price on that date was $15.50. We expect to capitalize such costs, if
any are incurred, as additional consideration for the purchase of the company.
ABANDONMENT OF ASSETS CHARGE
During fiscal 2000, we made a strategic decision to abandon the development
efforts previously undertaken on the manufacturing component of our enterprise
resource planning software. In connection with this decision, we recorded an
asset abandonment charge of approximately $11.3 million.
18
<PAGE>
Interest Expense
Interest expense was $23.8 million, $22.3 million and $27.4 million in
fiscal 2000, 1999 and 1998, respectively. The decrease in interest expense in
fiscal 1999 compared to fiscal 1998 is primarily due to the reduction in
capital leases from the fiscal 1999 restructuring activities.
Interest Income
Interest income in fiscal 2000 was $8.1 million compared to $16.8 million in
fiscal 1999 and $19.9 million in fiscal 1998. Interest income in fiscal 2000
declined from fiscal 1999 due to cash payments required in connection with the
restructuring activities in the first quarter. This was partially offset by
cash inflows later in the year from the liquidation of certain investments.
Interest income decreased in fiscal 1999 over fiscal 1998 as a result of the
reduction in cash balance primarily due to stock repurchase activities and
cash used by operations in fiscal 1999.
Realized Gains on the Sale of Marketable Equity Securities
We realized gains of $76.8 million in fiscal 2000 due to sales of stock and
associated options we sold in Phone.com, Inc. (Nasdaq: PHCM). We also realized
a gain of $15.7 million in the fourth quarter of fiscal 2000 due to the sale
of our interest in Ambient Technologies to Intel Corporation.
Other Income
Other income for fiscal 2000 includes $5.6 million from the release of a
wafer purchase accrual previously established in connection with the sale of a
technology license due to lower wafer demand than was previously forecasted.
Also included in other income is a $3.1 million reduction of a liability
associated with our stock issued as part of the divestiture of the MiCRUS
manufacturing joint venture.
Other income for fiscal 1999 includes gains on the disposal of certain
equity investments and foreign currency transaction gains. In fiscal 1998,
other income (expense), net, includes gains on the disposal of certain equity
investments and foreign currency transaction gains, which were partially
offset by certain legal settlements.
Income Taxes
We recognized no income tax benefit for fiscal 2000 losses because of
current operating losses and net operating loss carryforwards from 1999.
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" provides for the recognition of deferred tax assets if realization of
such assets is more likely than not. We have provided a valuation allowance
equal to our net deferred tax assets due to uncertainties regarding their
realization. We evaluate the realizability of the deferred tax assets on a
quarterly basis.
The tax provision for fiscal 1999 primarily resulted from $47.0 million of
deferred income tax expense recorded as a valuation allowance to offset net
deferred tax assets which had been recognized as of March 28, 1998. The
effective tax rate for fiscal 1998 was equal to the U.S. federal statutory
rate and state income taxes offset by federal and state research tax credits.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, we used $179.4 million of cash from our operating
activities as opposed to using $15.6 million and generating $193.1 million of
cash from operating activities during fiscal 1999 and fiscal 1998,
respectively. The cash used in operations in fiscal 2000 was primarily due to
a net loss of $139.6 million (excluding gains from the sale of securities of
$92.5 million) combined with a $79.4 million reduction in accounts payable.
The fiscal 1999 decrease in operating cash flow was primarily due to the net
loss of
19
<PAGE>
$427.4 million realized in fiscal 1999, $292.3 million of which was related to
non-cash transactions unique to fiscal 1999. The remaining decrease related to
an increase in payments during the year for accounts payable and accrued
liabilities offset by lower collections of accounts receivable due to the
decrease in sales during fiscal 1999. Cash provided from operations in fiscal
1998 was due to improved accounts receivable and inventory turnover, funding
received for equipment and leasehold advances to the joint ventures and
positive net income. Included in net income from operations in fiscal 1998 was
$60.0 million of patent cross-license revenues. These increases were partially
offset by a reduction in accounts payable.
We generated $184.5 million from investing activities in fiscal 2000
compared with using cash of $31.7 million and $25.1 million in investing
activities during fiscal 1999 and fiscal 1998, respectively. During fiscal
2000, we sold $74.6 million of short term investments to fund operations and
for restructuring commitments. We also sold approximately two-thirds of our
holdings in the common stock of Phone.com, and our interest in Ambient
Technologies for a combined $93.0 million. In addition, we sold our interest
in the Cirent manufacturing facility for $14 million. Additionally, the
release of $29.1 million of restricted cash due to reduced lease commitments
provided additional funding. These increases were partially offset by
investments of $27.0 million into new equipment, software and the ERP system.
Cash used by investing activities for 1999 was similar with the fiscal 1998
amount as the proceeds from the sale of assets and termination of the UMC
agreement were offset by the manufacturing agreement and investment payments
during the year to the joint ventures in fiscal 1998. Part of the fiscal 1998
increase in cash was due to a higher percentage of our investments in
securities with original maturities less than ninety days than in the prior
fiscal year. As a result, short term investments generated a net cash flow of
$62.8 million during the fiscal year. In addition, during fiscal 1998 we
received approximately $20.5 million from the termination of the UMC
agreements, and approximately $16.1 million from the sale of Nuera (proceeds
of $21.5 million less Nuera's own cash of $5.4 million).
Net cash used for financing activities was $5.6 million, $115.5 million and
$12.3 million in fiscal 2000, 1999 and 1998, respectively. We used cash for
financing activities in fiscal 2000 for payments on long term debt and capital
lease obligations which was partially offset by cash provided from employee
stock option exercises. Cash used in financing activities for fiscal 1999 was
primarily due to our repurchase of $100.1 million worth of treasury stock. The
cash used in fiscal 1998 was primarily due to payments on our outstanding
lease obligations and debt.
As of March 25, 2000, we are contingently liable as guarantor or co-
guarantor for equipment leases of MiCRUS which have remaining payments of
approximately $170.6 million due through calendar year 2003 compared to $449.6
million of remaining payments for equipment leases of MiCRUS and Cirent as of
March 27, 1999. The decrease is because of lease payments and our release from
guaranty responsibilities for Cirent leases.
As of March 25, 2000, we have a bank line of credit providing a commitment
for letters of credit up to a maximum aggregate of $55.0 million, which
expires on June 30, 2000. The letters of credit are collateralized by cash or
securities with interest at the higher of: (a) .50% per annum above the latest
federal funds rate (as defined in the Second Amended Credit Agreement); or (b)
the rate of interest in effect for such day as publicly announced from time to
time by the bank. We are currently in compliance with all covenants under the
bank line of credit. We expect to amend or replace the existing line of credit
facility in fiscal 2001. We do not believe the amendment of our line of credit
will have an impact on our financial position or on our ability to finance our
operations for the foreseeable future.
As of March 25, 2000, we had approximately $30.2 million outstanding letters
of credit and an additional $24.8 million available under this line of credit.
These letters of credit are secured by cash and securities of $37.8 million,
which are recorded as restricted cash. Of these amounts, $35.5 million is used
to support equipment lease agreements of the MiCRUS facility. The letters of
credit to support these amounts will expire and the funds will no longer be
restricted upon termination of the underlying lease agreements. IBM has agreed
to use its best efforts to effect such a termination by March 31, 2001 or
replace our guarantee.
Although we can not assure that we will be able to generate cash in the
future, we anticipate that our existing capital resources and cash flow
generated from future operations will enable us to maintain our current level
of operations for the foreseeable future.
20
<PAGE>
Factors That May Affect Future Operating Results
We have historically experienced fluctuations in our operating results and
expect these fluctuations may continue in future periods.
Our quarterly and annual operating results are affected by a wide variety of
factors that could materially and adversely affect our net sales, gross
margins and operating income. These factors include:
. the volume and timing of orders received;
. changes in the mix of our products sold;
. market acceptance of our products and the products of our customers;
. competitive pricing pressures;
. our ability to expand manufacturing output to meet increasing demand;
. our ability to introduce new products on a timely basis;
. fixed costs associated with minimum purchase commitments under supply
contracts if demand decreases;
. the timing and extent of our research and development expenses;
. cyclical semiconductor industry conditions;
. the failure to anticipate changing customer product requirements;
. fluctuations in manufacturing costs;
. disruption in the supply of wafers or assembly services;
. the ability of customers to make payments to us;
. increases in material costs;
. certain production and other risks associated with using independent
manufacturers; and
. product obsolescence, price erosion and other competitive factors.
Historically in the integrated circuit industry, average selling prices of
products have decreased over time. If we are unable to introduce new products
with higher margins or reduce manufacturing costs to offset anticipated
decreases in the prices of our existing products, our operating results will
be adversely affected. Our business is characterized by short-term orders and
shipment schedules, and customer orders typically can be canceled or
rescheduled without penalty to the customer. In addition, because of fixed
costs in the integrated circuit industry, we are limited in our ability to
reduce costs quickly in response to any revenue shortfalls. As a result of the
foregoing or other factors, we may experience material adverse fluctuations in
our future operating results on a quarterly or annual basis.
Our success depends on our ability to introduce new products on a timely
basis.
Our success depends upon our ability to develop new precision linear and
mixed-signal circuits for new and existing markets, to introduce such products
in a timely manner, and to have such products gain market acceptance. The
development of new precision linear and mixed-signal circuits is highly
complex and from time to time we have experienced delays in developing and
introducing new products. Successful product development and introduction
depends on a number of factors, including:
. proper new product definition,
. timely completion of design and testing of new products,
21
<PAGE>
. achievement of acceptable manufacturing yields and
. market acceptance of our products and the products of our customers.
Although we seek to design products that have the potential to become
industry standard products, we cannot assure you that any products introduced
by us will be adopted by such market leaders, or that any products initially
accepted by our customers that are market leaders will become industry
standard products. Both revenues and margins may be materially affected if new
product introductions are delayed or if our products are not designed into
successive generations of our customers' products. We cannot assure you that
we will be able to meet these challenges or adjust to changing market
conditions as quickly and cost-effectively as necessary to compete
successfully. Our failure to develop and introduce new products successfully
could harm our business and operating results.
Successful product design and development is dependent on our ability to
attract, retain and motivate qualified design engineers, of which there is a
limited number. Due to the complexity and variety of precision linear and
mixed-signal circuits, the limited number of qualified circuit designers and
the limited effectiveness of computer-aided design systems in the design of
such circuits, we cannot assure you that we will be able to successfully
develop and introduce new products on a timely basis.
Our products are complex and could contain defects, which could reduce sales
of those products or result in claims against us.
Product development in the markets we serve is becoming more focused on the
integration of functionality on individual devices. There is a general trend
towards increasingly complex products. The greater integration of functions
and complexity of operations of our products increase the risk that latent
defects or subtle faults could be discovered by our customers or end users
after volumes of product have been shipped. This could result in:
. material recall and replacement costs for product warranty and support;
. our customer relationships could also be adversely impacted by the
recurrence of significant defects;
. delay in recognition or loss of revenues, loss of market share or
failure to achieve market acceptance; and
. diversion of the attention of our engineering personnel from our product
development efforts.
The occurrence of any of these problems could result in the delay or loss of
market acceptance of our products and would likely harm our business. In
addition, any defects or other problems with our products could result in
financial or other damages to our customers who could seek damages from us for
their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
The integrated circuit industry is very cyclical and an industry downturn
would adversely affect our business.
The integrated circuit industry is characterized by:
. rapid technological change;
. cyclical market patterns;
. significant price erosion;
. periods of over-capacity and production shortages;
. variations in manufacturing costs and yields; and
. significant expenditures for capital equipment and product development.
The industry has from time to time experienced depressed business
conditions. Although the semiconductor industry in recent periods has
experienced increased demand and production capacity constraints, we cannot
assure you that these conditions will continue. In addition, we cannot assure
you that any future downturn in the industry will not be severe or that any
such downturn will not have a material adverse effect on our business and
results of operations. We cannot assure you that we will not experience
substantial period-to-period fluctuations in operating costs due to general
semiconductor industry conditions or other factors.
22
<PAGE>
Any downturn in the markets we serve would harm our business.
A majority of our products are incorporated into products such as personal
computers, mass storage, audio and industrial electronics, and embedded
processor products. These markets may from time to time experience cyclical,
depressed business conditions, often in connection with, or in anticipation
of, a decline in general economic conditions. Such industry downturns have
resulted in reduced product demand and declining average selling prices. Our
business would be harmed by any future downturns in the markets that we serve.
The following sections detail the risks associated with serving these
various markets
There are risks associated with our dependence on the PC market.
The following are risks associated with our involvement in the PC markets:
. greatly pronounced demand fluctuations characteristic of our role as a
component supplier to PC original equipment manufacturers, or OEMs, and
to peripheral device manufacturers;
. our involvement in the consumer PC market, the most volatile segment of
the PC market;
. increased competition from other IC makers, including Intel Corporation,
who plan to incorporate features into or with their microprocessor
products which replicate those of our products;
. loss of customer base as we refocus on non-PC markets; and
. as a supplier to manufacturers at different levels of the production
chain, our potential dependence on the success of a particular PC OEM
due to our inability to accurately identify end-users of our product.
There are risks associated with serving the magnetic and optical storage
markets.
The following are risks associated with serving the mass storage market:
. historically dramatic supply and demand fluctuations in the magnetic
disk drive market, which is closely linked to growth in the PC market;
. direct correlation between the competitive nature of the disk drive
industry and the price of disk drive components;
. our dependence on the success of certain 3.5 inch magnetic disk drive
products that incorporate our products into their design;
. our dependence on the successful introduction by our customers of new
disk drive products that in turn can be impacted by the timing of
customers' transition to new disk drive products;
. reduced demand for our mass storage products due to recent efforts by
certain of our customers to develop their own ICs for mass storage
products;
. our ability to respond effectively to the market trend of integrating
hard disk controllers with micro-controllers; and
. our ability to successfully compete with other firms with greater
resources to accomplish the technical obstacles of integration and
greater access to the advanced technologies necessary to provide
integrated HDD electronic components.
There are risks related to serving the audio products markets.
In the audio products market, we have the potential to experience decreased
revenues due to
. decreased average selling prices in the audio IC market due to the PC
industry's transition to the AC-link codecs attached to core logic using
the multimedia features of the processor and single chip solution;
. in the PC audio products market, the transition to core logic connected
audio and by the introduction of cheaper, fully-integrated, single-chip
audio ICs;
23
<PAGE>
. aggressive competitive pricing pressures in the audio ICs market; and
. the inability of our audio products to meet cost or performance
requirements of the three-dimensional, spatial-effects audio market.
There are risks related to serving the precision data conversion market.
Decreased revenues from sales to the precision mixed-signal products market
could be caused by the following:
. our inability to establish broad sales channels and our failure to
develop and maintain a sufficiently broad competitive product line;
. customer delays in their product development and introductions ;
. our inability to reach the marketplace due to the technical complexity
of our products and the time requirements for their development; and
. our inability to attract, hire, and retain scarce analog engineering
talent necessary for rapid product development in this market.
There are risks related to serving the embedded processor products market.
We could experience decreased revenues from sales of our embedded processor
products due to the following factors:
. increased competition from other semiconductor manufacturers now
entering the market due to the increased popularity of consumer goods
incorporating embedded processor products, such as portable digital
audio players, smart cellular phones, set-top Internet and e-mail access
boxes, and personal digital appliances;
. our inability to meet embedded processor products requirements of an
industry that has yet to define product standards;
. customer delays in their product development and introductions; and
. price competition from over 30 other embedded processor products
manufacturers who have licensed ARM Ltd. CPU cores, the same CPU core we
license, and who will likely produce products around these cores which
are very similar to ours.
Shifts in industry-wide capacity may cause our results to fluctuate and such
shifts have resulted and could in the future result in significant inventory
write-downs.
Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in our
quarterly or annual operating results. We must order wafers and build
inventory well in advance of product shipments. Because the integrated circuit
industry is highly cyclical and is subject to significant downturns resulting
from excess capacity, overproduction, reduced demand or technological
obsolescence, there is a risk that we will forecast inaccurately and produce
excess or insufficient inventories of particular products. This inventory risk
is heightened because many of our customers place orders with short lead
times. Due to the product manufacturing cycle characteristic of integrated
circuit manufacturing and the inherent imprecision by our customers to
accurately forecast their demand, product inventories may not always
correspond to product demand, leading to shortages or surpluses of certain
products. As a result of such inventory imbalances, future inventory write-
downs may occur due to lower of cost or market accounting, excess inventory or
inventory obsolescence.
Because foundry capacity is limited we may be required to enter into costly
long-term supply arrangements to secure foundry capacity.
We currently purchase all of our wafers from outside foundries. Market
conditions could result in wafers being in short supply and prevent us from
having adequate supply to meet our customer requirements. Any
24
<PAGE>
prolonged inability to utilize our foundries as a result of fire, natural
disaster or otherwise would have a material adverse effect on our financial
condition and results of operations. If we are not able to obtain additional
foundry capacity as required, our business could be harmed in the following
ways:
. our relationships with our customers would be harmed and consequently
our sales would likely be reduced; and
. we may be forced to purchase wafers or packaging from higher cost
suppliers or to pay expediting charges to obtain additional supply
In order to secure additional foundry capacity, we have entered into
contracts that commit us to purchase specified quantities of silicon wafers
over extended periods. In fact, during fiscal 1998 and fiscal 1999, the
industry experienced an excess in production capacity that we believe, in some
cases, resulted in our competitors paying wafer prices which were lower than
our cost of production from our manufacturing joint ventures. Consequently, we
experienced pressures on our selling prices during fiscal years 1998, 1999 and
2000, which harmed our revenues and reduced our margins. In the future, we may
not be able to secure capacity with foundries in a timely fashion or at all,
and such arrangements, if any, may not be on terms favorable to us. Moreover,
if we are able to secure foundry capacity, we may be obligated to utilize all
of that capacity or incur penalties. Such penalties may be expensive and could
harm our financial results.
We are dependent on our subcontractors in Asia to perform key manufacturing
functions for us.
We depend on third party subcontractors in Asia for the supply and packaging
of our products. 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 we seek to reduce our
dependence on our sole and limited source suppliers, this concentration of
suppliers and manufacturing operations in Asia subjects us to the risks of
conducting business internationally, including political and economic
conditions in Asia. Any disruption or termination of any of our supply or
manufacturing could occur, and such disruptions could harm our business and
operating results.
We have significant international sales and risks associated with our
international sales could harm our operating results.
Export sales, principally to Asia, include sales to U.S-based customers with
manufacturing plants overseas, and accounted for approximately 75%, 74% and
53% of our net sales in 2000, 1999 and 1998, respectively. We expect export
sales to continue to represent a significant portion of product sales. This
reliance on sales internationally subjects us to the risks of conducting
business internationally, including political and economic conditions. For
example, the financial instability in a given region, such as Asia, 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 us or our
customers, which could also impact the ability of such customers to pay us.
While we expect to carefully evaluate the collection risk related to the
financial position of customers and potential customers in structuring the
terms of sale, in determining whether to accept sales orders, and in
evaluating the recognition of revenue, if a region's volatility harms the
financial position of our customers, our results of operations could be
harmed. Our international sales operations involve a number of other risks,
including:
. unexpected changes in regulatory requirements;
. changes in diplomatic and trade relationships;
. delays resulting from difficulty in obtaining export licenses for
technology;
. tariffs and other barriers and restrictions; and
. the burdens of complying with a variety of foreign laws.
In addition, while we may buy hedging instruments to reduce our exposure to
currency exchange rate fluctuations, our competitive position can be affected
by the exchange rate of the U.S. dollar against other currencies, particularly
the Japanese yen. Consequently, increases in the value of the dollar would
increase the price in local currencies of our products in foreign markets and
make our products relatively more expensive.
25
<PAGE>
We cannot assure you that regulatory, political and other factors will not
adversely affect our operations in the future or require us to modify our
current business practices.
Potential intellectual property claims and litigation could subject us to
significant liability for damages and could invalidate our proprietary rights.
Our success depends on our ability to obtain patents and licenses and to
preserve our other intellectual property rights covering our manufacturing
processes, products and development and testing tools. We seek patent
protection for those inventions and technologies for which we believe such
protection is suitable and is likely to provide a competitive advantage to us.
Notwithstanding our attempts to protect our proprietary rights, we believe
that our future success will depend primarily upon the technical expertise,
creative skills and management abilities of our officers and key employees
rather than on patent and copyright ownership. We also rely substantially on
trade secrets and proprietary technology to protect our technology and
manufacturing know-how, and work actively to foster continuing technological
innovation to maintain and protect our competitive position.
Although we are not currently a defendant to any material litigation, the
integrated circuit industry is characterized by frequent litigation regarding
patent and other intellectual property rights. We cannot assure you that any
patent owned by us will not be invalidated, circumvented or challenged, that
rights granted thereunder will provide competitive advantages to us or that
any of our pending or future patent applications will be issued with the scope
of the claims sought by us, if at all. In addition, effective copyright and
trade secret protection may be unavailable or limited in certain foreign
countries. We cannot assure you that steps taken by us to protect our
intellectual property will be adequate or that our competitors will not
independently develop or patent substantially equivalent or superior
technologies.
As is typical in the semiconductor industry, we and our customers have from
time to time received, and may in the future receive, communications from
third parties asserting patents, maskwork rights, or copyrights on certain of
our products and technologies. Although we are not currently a defendant to
any material litigation, in the event a third party were to make a valid
intellectual property claim and a license was not available on commercially
reasonable terms, our operating results could be harmed. Litigation, which
could result in substantial cost to us and diversion of our resources, may
also be necessary to defend us against claimed infringement of the rights of
others. An unfavorable outcome in any such suit could have an adverse effect
on our future operations and/or liquidity.
Strong competition in the high-performance integrated circuit market may
harm our business.
The high-performance integrated circuit industry is highly competitive and
subject to rapid technological change. Significant competitive factors in our
markets include:
. product features, reliability, performance and price;
. the diversity and timing of new product introductions;
. the emergence of new computer standards and other customer systems;
. product quality;
. efficiency of production; and
. customer support.
Because of shortened product life cycles and even shorter design-in cycles,
our competitors have increasingly frequent opportunities to achieve design
wins in next generation systems. In the event that competitors succeed in
supplanting our products, our market share may not be sustainable and net
sales, gross margin, and results of operations would be adversely affected.
Our principal competitors include: Analog Devices, Applied Micro Devices,
Atmel, Burr-Brown, Creative Technologies, ESS Technologies, Intel, Linear
Technology, Lucent Technologies, Motorola, ST Microelectronics, Texas
Instruments and Yamaha; many of whom have substantially greater financial and
other resources than we do with which to pursue engineering, manufacturing,
marketing and distribution of their products. We expect intensified
competition from emerging
26
<PAGE>
companies and from customers who develop their own integrated circuit
products. Increased competition could adversely affect our business. We cannot
assure you that we will be able to compete successfully in the future or that
competitive pressures will not adversely affect our financial condition and
results of operations. Competitive pressures could reduce market acceptance of
our products and result in price reductions and increases in expenses that
could adversely affect our business and our financial condition.
In addition, our future success depends, in part, upon the continued service
of our key engineering, marketing, sales, manufacturing, support, and
executive personnel, and on our 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 our business.
OUR FINANCIAL RESULTS ARE SENSITIVE TO SECURITIES PRICES, INCLUDING OUR OWN
In connection with the restructuring of the MiCRUS joint venture, we issued
2.4 million shares of our common stock in April of 2000. We made guarantees to
IBM regarding the market value of that stock in future periods, and as a
result, our earnings may be adversely affected in future periods by declines
in the market price of our stock.
As of March 25, 2000, we own approximately 0.3 million shares of common
stock in Phone.com, Inc. with a market value of $47.5 million. During February
of 2000, we sold 0.3 million call options in Phone.com for a premium of $5.1
million with an average exercise price of approximately $125 per share. The
fair value of our holdings in Phone.com stock will fluctuate as the stock
price of Phone.com fluctuates. The fair value of our holdings in Phone.com as
of April 25, 2000 was $20.4 million.
YEAR 2000 UPDATE
To date there has been no negative impact to our business as a result of the
Year 2000 date change. We will continue to monitor date issues going forward
but do not anticipate that such issues will affect our business in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURE
We are exposed to market risks associated with interest rate and currency
movements on market securities, outstanding debt and non-U.S. dollar
denominated assets and liabilities. We assess these risks on a regular basis
and has established policies to protect against the adverse effects of these
and other potential exposures. All of the potential changes noted below are
based on sensitivity analysis performed on our financial position at March 25,
2000. Actual results may differ materially.
At March 25, 2000, our marketable securities consist of short-term, fixed
rate securities and long term debt, of which the majority represents
convertible subordinated notes bearing interest at a fixed rate. An immediate
10% change in interest rates would not have a material effect on either our
debt or investment portfolios, and would also have no material impact on the
results of operations.
A majority of the our revenue and spending is transacted in U.S. dollars.
However, we do enter into transactions in other currencies, primarily Japanese
yen. We attempt to limit our exposure to changing foreign exchange rates
through financial market instruments. Short-term exposures to changing foreign
exchange rates are managed by financial market transactions, principally
through the purchase of both forward foreign exchange contracts and put and
call options in order to hedge certain firm commitments denominated in foreign
currencies. Our foreign exchange policy also authorizes the use of hybrid
foreign exchange products that combine elements of both options and forward
contracts. We will enter into contracts that are most attractive to our
hedging position in the market at the time of execution. Any contracts
executed by us are denominated in the same currency as
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<PAGE>
the underlying transaction (primarily Japanese yen) and the terms of the
contracts generally match the underlying transactions. The effect of an
immediate 10% change in exchange rates would not have a material effect on our
financial condition or results of operations.
Our foreign exchange policy allows for the use of forward and options
contracts, as well as hybrids of these instruments, to hedge our foreign
currency exposures. The majority of our hedging transactions are considered
cash flow hedges and do not qualify for hedge accounting treatment. As
currently anticipated under Statement of Financial Accounting Standards No.
133, these instruments would be classified as derivatives and recorded at fair
value. As previously stated, the most common form of instruments used by us
are forward contracts and options, primarily denominated in Japanese yen. We
actively pursue options using a "zero cost" strategy where there is no
operations impact to the execution of the underlying transaction. The options
are then "marked to market" on a monthly basis based upon fluctuations of the
underlying currency in relation to the U. S. dollar, and the gains or losses
are reflected in operations. Upon termination of the derivative instrument,
the cumulative gain or loss is included in operations. Forward foreign
currency exchange contracts receive similar treatment. There were no open
hedges at March 25, 2000.
From time to time we may hedge our foreign currency exposures, primarily
Japanese yen denominated sales. We repatriate these amounts on a quarterly or
monthly basis, depending on underlying accounts receivable collections.
Foreign currency exchange contracts are entered into at the beginning of each
fiscal quarter in order to hedge these transactions and typically expire at
the end of each fiscal quarter. The transactions are marked to market, monthly
and the cumulative gains or losses are recognized during the quarter
operations. In the event that the anticipated transaction did not occur,
options contracts would expire with a negative impact to operations. However,
to the extent that we did not have like amounts of foreign currency in an
offshore foreign exchange account, forward contracts would require us to
purchase any deficient amount of the underlying currency at spot market rates
in order to settle with our financial institution counter-party. Any gains or
losses from these types of transactions would be reflected in operations. We
believe that the impact of these types of occurrences would have an immaterial
effect on our operations.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal years ended
-------------------------------
March 25, March 27, March 28,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales...................................... $ 564,400 $ 628,105 $ 954,270
Costs and expenses, gain on sale of assets and
other, net
Cost of sales................................. 349,720 703,029 605,484
Research and development...................... 111,755 130,347 179,552
Selling, general and administrative........... 89,949 98,275 117,273
Gain on sale of assets, net................... -- (3,988) (20,781)
Restructuring costs and other, net............ 125,612 80,505 14,464
Acquired in-process research and development
expenses..................................... 8,013 -- --
Abandonment of assets charge.................. 12,201 -- --
--------- --------- ---------
Total costs and expenses, gain on sale of
assets and other, net....................... 697,250 1,008,168 895,992
--------- --------- ---------
Income (loss) from operations.................. (132,850) (380,063) 58,278
Interest expense............................... (23,754) (22,337) (27,374)
Interest income................................ 8,096 16,786 19,893
Realized gain on the sale of marketable equity
securities.................................... 92,463 -- --
Other income................................... 8,949 4,242 5,206
--------- --------- ---------
Income (loss) before provision (benefit) for
income taxes.................................. (47,096) (381,372) 56,003
Provision for income taxes..................... -- 46,031 19,510
--------- --------- ---------
Net income (loss).............................. $ (47,096) $(427,403) $ 36,493
========= ========= =========
Net income (loss) per share:
Basic......................................... $ (0.77) $ (6.77) $ 0.54
========= ========= =========
Diluted....................................... $ (0.77) $ (6.77) $ 0.52
========= ========= =========
Weighted average common shares outstanding:
Basic......................................... 61,554 63,149 67,333
Diluted....................................... 61,554 63,149 69,548
</TABLE>
See accompanying notes.
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<PAGE>
CONSOLIDATED BALANCE SHEETS
(Thousands, except per share amounts)
<TABLE>
<CAPTION>
March 25, March 27,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $ 144,034 $144,457
Restricted cash......................................... 57,173 86,277
Short-term investments.................................. -- 74,616
Marketable equity securities............................ 48,077 --
Accounts receivable, less allowance for doubtful
accounts of $3,870 in 2000 and $9,296 in 1999.......... 94,672 66,063
Inventories, net........................................ 53,288 40,262
Other current assets.................................... 23,421 19,039
--------- --------
Total current assets.................................. 420,665 430,714
Property and equipment, at cost:
Machinery and equipment................................. 159,404 149,828
Furniture and fixtures.................................. 11,903 16,046
Leasehold improvements.................................. 20,063 20,401
--------- --------
191,370 186,275
Less accumulated depreciation and amortization.......... (156,640) (138,251)
--------- --------
Property and equipment, net........................... 34,730 48,024
Investment in joint ventures.............................. -- 14,000
Deposits and other assets................................. 49,437 39,892
--------- --------
$ 504,832 $532,630
========= ========
Liabilities and Net Capital Deficiency
Current liabilities:
Accounts payable........................................ $ 87,970 $ 64,707
Accounts payable--joint ventures........................ -- 102,268
Accrued salaries and benefits........................... 12,578 13,724
Current maturities of long-term debt and capital lease
obligations............................................ 12,829 23,076
Income taxes payable.................................... 40,193 36,593
Deferred revenues....................................... 13,989 9,232
Other accrued liabilities............................... 16,030 17,102
--------- --------
Total current liabilities............................. 183,589 266,702
Capital lease obligations................................. 321 1,457
Long-term debt............................................ 3,147 12,960
Other long-term liabilities............................... 2,477 9,231
Convertible subordinated notes............................ 299,000 300,000
Commitments and contingencies
Stock issued under the restructuring agreement with IBM... 32,000 --
Net capital deficiency
Convertible preferred stock, $0.001 par value; 5,000
shares authorized, none issued......................... -- --
Common stock, $0.001 par value, 280,000 shares
authorized, 63,306 shares issued and outstanding in
2000 and 60,103 in 1999................................ 63 60
Additional paid-in capital.............................. 367,952 327,601
Accumulated deficit..................................... (431,001) (383,905)
Accumulated other comprehensive income (loss)........... 47,284 (1,476)
--------- --------
Total net capital deficiency.......................... (15,702) (57,720)
--------- --------
$ 504,832 $532,630
========= ========
</TABLE>
See accompanying notes.
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
<TABLE>
<CAPTION>
MARCH 25, MARCH 27, MARCH 28,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ (47,096) $(427,403) $ 36,493
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activites:
Depreciation and amortization................ 32,218 62,281 71,869
Deferred tax asset valuation allowance....... -- 46,698 --
Non-cash portion of restructuring charges.... 30,768 52,147 4,405
Write-off and write-down of property and
equipment................................... 12,201 5,029 --
Write-off of manufacturing payments and
advances for equipment and leasehold
improvements to joint ventures.............. -- 188,386 --
Gain on sale of assets....................... -- (3,988) (11,082)
Acquired in-process research and development
expenses.................................... 8,013 -- --
Gain on sale of marketable equity
securities.................................. (92,463) -- --
Compensation related to the issuance of
certain employee stock options and
restricted stock............................ 4,008 1,781 493
Changes in operating assets and liabilities:
Accounts receivable......................... (28,338) 36,963 66,411
Inventories................................. (12,856) 54,936 21,574
Funds received for joint venture equipment
leased, net................................ -- 32,676 14,886
Deferred tax and other assets............... (4,062) (5,149) 2,566
Accounts payable............................ (79,418) (38,221) (21,034)
Accrued salaries and benefits............... (4,128) (29,130) 11,449
Income taxes payable........................ 3,600 (1,460) 6,794
Other accrued liabilities................... (1,837) 8,886 (11,685)
--------- --------- ---------
Net cash (used in) provided by operations..... (179,390) (15,568) 193,139
--------- --------- ---------
Cash flows from investing activities:
Purchase of available for sale investments... -- (215,405) (370,794)
Proceeds from sale of short term
investments................................. 74,616 266,167 433,631
Proceeds from sale of equity investments..... 92,956 -- --
Proceeds from sale of assets, net............ -- 4,273 16,142
Proceeds from termination of UMC agreement... -- -- 20,543
(Increase) decrease in manufacturing
agreements and investment in joint venture.. 14,000 (7,500) (44,500)
Additions to property and equipment.......... (8,412) (12,665) (27,639)
Increase in deposits and other assets........ (18,558) (20,521) (12,294)
Cash acquired from AudioLogic, Inc.
acquisition, net of cash costs.............. 841 -- --
(Increase) decrease in restricted cash....... 29,104 (46,040) (40,237)
--------- --------- ---------
Net cash (used in) provided by investing
activities................................... 184,547 (31,691) (25,148)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on long-term debt................. -- -- 5,980
Payments on long-term debt................... (20,854) (21,287) (21,124)
Payments on capital lease obligations........ (1,542) (5,508) (12,363)
Borrowings on short-term debt................ 200 -- --
Issuance of common stock, net of issuance
costs....................................... 16,616 11,412 15,160
Repurchase and retirement of common stock.... -- (100,085) --
--------- --------- ---------
Net cash used in financing activies........... (5,580) (115,468) (12,347)
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (423) (162,727) 155,644
Cash and cash equivalents at beginning of
year......................................... 144,457 307,184 151,540
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 144,034 $ 144,457 $ 307,184
========= ========= =========
Non-cash investing and financing activities:
Acquisition of AudioLogic, Inc. for common
stock....................................... $ 22,712 $ -- $ --
Cash payments (refunds) for:
Interest..................................... $ 22,641 $ 23,724 $ 26,878
Income taxes................................. (3,600) 1,116 7,022
</TABLE>
See accompanying notes.
31
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Three Years Ended March 25, 2000
(Thousands)
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional Earnings Other
-------------- Paid-in (Accumulated Comprehensive
Shares Amount Capital Deficit) Income (loss) Total
------ ------ ---------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 29,
1997................... 66,156 $66 $352,411 $ 52,936 $(1,216) $404,197
Components of
comprehensive
income (loss):
Net income.............. -- -- -- 36,493 -- 36,493
Change in unrealized
loss on foreign
currency translation
adjustments............ -- -- -- -- (492) (492)
--------
Total comprehensive
income (loss).......... -- -- -- -- -- 36,001
--------
Issuance of stock under
stock plans............ 2,019 2 15,650 -- -- 15,652
Compensation related to
the issuance of certain
employee options....... -- -- 493 -- -- 493
------ --- -------- --------- ------- --------
Balance, March 28,
1998................... 68,175 68 368,554 89,429 (1,708) 456,343
Components of
comprehensive
income (loss):
Net loss................ -- -- -- (427,403) -- (427,403)
Change in unrealized
gain on foreign
currency translation
adjustments............ -- -- -- -- 232 232
--------
Total comprehensive
income (loss).......... -- -- -- -- -- (427,171)
--------
Issuance of stock under
stock plans............ 1,636 2 11,410 -- -- 11,412
Repurchase of Common
Stock.................. (9,708) (10) (54,144) (45,931) -- (100,085)
Compensation related to
the issuance of certain
employee options....... -- -- 1,781 -- -- 1,781
------ --- -------- --------- ------- --------
Balance, March 27,
1999................... 60,103 60 327,601 (383,905) (1,476) (57,720)
Components of
comprehensive
income (loss):
Net loss................ -- -- -- (47,096) -- (47,096)
Unrealized gain on
marketable equity
securities............. -- -- -- -- 47,820 47,820
Change in unrealized
gain on foreign
currency translation
adjustments............ -- -- -- -- 940 940
--------
Total comprehensive
income (loss).......... -- -- -- -- -- 1,664
Issuance of stock under
stock plans............ 1,993 2 16,614 -- -- 16,616
Issuance of stock for
acquisition of
AudioLogic, Inc........ 1,210 1 22,711 -- -- 22,712
Compensation related to
the issuance of certain
employee options....... -- -- 1,026 -- -- 1,026
------ --- -------- --------- ------- --------
Balance, March 25,
2000................... 63,306 $63 $367,952 $(431,001) $47,284 $(15,702)
====== === ======== ========= ======= ========
</TABLE>
See accompanying notes.
32
<PAGE>
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Cirrus Logic, Inc. (the "Company") designs and manufactures integrated
circuits that employ precision linear and advanced mixed-signal processing
technologies. Our products, sold under our own name and the Crystal, Maverick,
and 3Ci product brands, enable system-level applications in the analog,
Internet, and magnetic storage markets.
In February 1999, the Company was reincorporated in the State of Delaware.
The accompanying consolidated financial statements have been retroactively
restated to give effect to the reincorporation.
In September 1998, we announced a program to restructure our business to
fully concentrate on our precision linear and mixed-signal positions in the
analog, Internet, and magnetic storage markets. During fiscal 1999, we
recorded restructuring charges of approximately $390 million, of which charges
to cost of sales included $188 million related to asset impairment, $90
million related to wafer purchase commitment charges and $35 million related
to inventory write-downs. In addition, we recorded charges of $78 million
related to severance and related benefits along with facilities scale back and
other costs in restructuring costs and other, net. During fiscal 2000, we
completed the restructuring activities and recorded net charges totaling
$126.6 million, $1 million of which is in cost of sales, primarily as a result
of divesting our interests in our manufacturing joint ventures. See Note 12.
CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
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. and eMicro Corporation, whose functional currencies are the Japanese yen
and Singapore dollar, respectively, are included as components of
stockholders' equity and comprehensive income (loss).
CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash equivalents and restricted cash consist primarily of overnight
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 and consist of U.S. Government Treasury and Agency
instruments, municipal bonds, certificates of deposit and commercial paper.
SHORT-TERM INVESTMENTS: HELD-TO-MATURITY AND AVAILABLE-FOR-SALE
We determine the appropriate classification of marketable debt and equity
securities at the time of purchase as either held-to-maturity, trading or
available-for-sale and reevaluate such designation as of each balance sheet
date. We have classified all marketable securities for fiscal 2000 and fiscal
1999 as available for sale.
Held-to-maturity debt 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. Held-to-maturity securities include only those securities we
have the positive intent and ability to hold to maturity.
33
<PAGE>
Securities not classified as held-to-maturity are classified as available-
for-sale. Available-for-sale securities, which include investments in
marketable equity securities, are carried at fair value, with unrealized gains
and losses, net of tax, included as a component of stockholders' equity and
comprehensive income (loss). Realized gains and losses, declines in value
judged to be other than temporary, and interest on available-for-sale
securities are included in net income.
Foreign Exchange Contracts
We may enter into foreign currency forward exchange and option contracts to
hedge certain of our foreign currency transaction, translation and
remeasurement exposures. Our accounting policies for some of these instruments
are based on our designation of such instruments as hedging transactions.
Instruments not designated as a hedge transaction are "marked to market" at
the end of each accounting period. The criteria we use for designating an
instrument as a hedge include 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 foreign 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.
From time to time we may hedge our foreign currency exposures, primarily
Japanese yen denominated sales. We repatriate these amounts on a quarterly or
monthly basis, depending on underlying accounts receivable collections.
Foreign currency exchange contracts are entered into at the beginning of each
fiscal quarter in order to hedge these transactions and typically expire at
the end of each fiscal quarter. The transactions are marked to market,
monthly, and the cumulative gains or losses are recognized in net income for
the quarter. In the event that the anticipated transaction did not occur,
options contracts would expire with a negative impact to operations. However,
to the extent that we did not have like amounts of foreign currency in our
offshore foreign exchange account, forward contracts would require us to
purchase any deficient amount of the underlying currency at spot market rates
in order to settle with our financial institution counter-party. Any gains or
losses from these types of transactions would be reflected in operations.
During fiscal 2000, 1999 and 1998, we purchased foreign currency option
contracts to hedge certain yen denominated net balance sheet accounts and
sales. As of March 25, 2000, we did not have any foreign exchange contracts
outstanding. As of March 27, 1999, we had two option contracts outstanding
denominated in Japanese yen, both with exercise dates on June 25, 1999. We
purchased an option from the bank to sell 1.8 million yen to the bank for
$15.0 million on the exercise date. We also sold an option to the bank to
purchase 0.9 million yen from us for $7.5 million on the same exercise date.
As of March 28, 1998, we had foreign currency forward exchange and option
contracts outstanding denominated in Japanese yen for approximately $15.6
million.
While the contract amounts provide one measure of the volume of the
transactions outstanding at March 25, 2000 and March 27, 1999, they do not
represent the amount of our exposure to credit risk. Our 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 our obligations.
Transaction gains and losses were not material in fiscal 2000, 1999, and
1998.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-
term investments, foreign currency exchange contracts and trade accounts
receivable. We are exposed to credit risk to the extent of the amounts
recorded on the balance sheet. By policy, we place our cash equivalents and
short term investments and foreign currency exchange contracts only with high
credit quality financial institutions and, other than U.S. Government Treasury
instruments, limit the amounts invested in any one institution or in any type
of instrument. We perform ongoing credit evaluations of our customers'
financial condition, limit our exposure to accounting losses by limiting the
amount of credit extended
34
<PAGE>
whenever deemed necessary, utilize letters of credit where appropriate and
available and generally do not require collateral. We sell a significant
amount of products in the Pacific Rim and Japan. Our exposure to risk with
Asian customers has been largely mitigated through the use of letters of
credit.
INVENTORIES
We use the lower of cost or market method to value our inventories. One of
the factors we consistently evaluate in application of this method is the
extent to which products are accepted into the marketplace. By policy, we
evaluate market acceptance based on known business factors and conditions by
comparing forecasted customer unit demand for our 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, we analyze inventories 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 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):
<TABLE>
<CAPTION>
MARCH 25, MARCH 27,
2000 1999
--------- ---------
<S> <C> <C>
Work-in process..................................... $44,539 $25,165
Finished goods...................................... 8,749 15,097
------- -------
$53,288 $40,262
======= =======
</TABLE>
During fiscal 1999, we recorded $34.5 million of charges to cost of sales
for inventory write-downs associated with products being phased out in
connection with our 1999 restructuring plan.
OTHER CURRENT ASSETS
At March 25, 2000 our other current assets included approximately $1.5
million of employee receivables and $4.0 million of accounts receivable from
Basis Communications Corporation, a related party.
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.
Depreciation expense for fiscal years 2000, 1999 and 1998 was $27,782,000,
$36,967,000 and $48,328,000 , respectively.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," we recognize impairment losses on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. We measure any impairment loss by comparing
the fair value of the asset to its carrying amount. We estimate fair value
based on discounted future cash flows. See Note 12 for additional discussion
of impairment charges relating to manufacturing supply agreements and
equipment and leasehold advances.
WAFER PURCHASE COMMITMENTS
We have firm commitments to purchase wafers from third party suppliers. We
estimate our wafer needs on an ongoing basis and in certain cases may reduce
our wafer purchase commitments by selling a portion of our committed wafer
capacity to others or allowing third parties to utilize our available wafer
starts under our wafer purchase commitments. Our ability to adjust short-term
production mix and volume throughput at our third party suppliers is limited
by contract, and changes within six months of manufacturing start dates are
difficult to make given order lead times, set-up times, design cycle times,
manufacturing cycle times, and customer and foundry
35
<PAGE>
qualification times. If our firm wafer purchase commitments exceed our wafer
needs and we are unable to sell the excess to others, we accrue losses on firm
wafer purchase commitments in excess of estimated wafer needs over the short-
term (six months) to the extent they would result in inventory losses were the
Company to fulfill the commitment and take delivery of the inventory. During
fiscal 1999 and 1998, we accrued and expensed estimated losses under wafer
purchase commitments of $90.3 million and $53.0 million, respectively. As of
March 27, 1999 we had accruals for charges incurred and estimated losses under
wafer purchase commitments of $74.5 million. We did not have a similar accrual
as of March 25, 2000 because we estimate we will be able to utilize the lower
purchase commitment under our renegotiated supply agreements with our former
joint venture partners (See Note 12).
Revenue Recognition
Revenue from product sales direct to customers is recognized upon shipment.
Certain of our sales are made to distributors under agreements allowing
certain rights of return and price protection on products unsold by
distributors. Accordingly, we defer revenue and gross profit on such sales
until the product is sold by the distributors.
Revenues in fiscal 1998 include $60.0 million from two patent cross-license
agreements under which we have no ongoing obligations. These revenues were
recognized in fiscal 1998 upon the execution of the agreements.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising costs were $2.2
million, $3.3 million and $4.9 million in fiscal years 2000, 1999, and 1998,
respectively.
Other Income
Other income for fiscal 2000 includes $5.6 million from the release of a
wafer purchase accrual previously established in connection with the sale of a
technology license due to lower wafer demand than was previously forecasted.
Also included in other income is a $3.1 million reduction of a liability
associated with our stock issued as part of the divestiture of the MiCRUS
manufacturing joint venture. (See Note 12).
In fiscal 1999, other income includes gains on the disposal of certain
investments in common stock and foreign currency transaction gains. In fiscal
1998, other income includes gains on the disposal of certain investments in
common stock and foreign currency transaction gains, which were somewhat
offset by certain legal settlements.
Stock-based Compensation
We account 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 our fixed cost stock option plans or our associated
stock purchase plan when the exercise price is equal to the fair value on the
date of grant. We provide additional pro forma disclosures as required under
Statement of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" (See Note 14).
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", ("SFAS 109") deferred income taxes are provided
for the temporary differences between the basis of assets and liabilities, for
financial reporting purposes and for income tax return purposes.
Net Income Per Share
Basic and diluted net income (loss) per share are calculated in accordance
with Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share".
36
<PAGE>
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
MARCH MARCH 27, MARCH 28,
25, 2000 1999 1998
-------- --------- ---------
<S> <C> <C> <C>
Numerator:
Net income (loss).............................. $(47,096) $(427,403) $36,493
======== ========= =======
Denominator:
Denominator for basic net income (loss) per
share--weighted-average shares................ 61,554 63,149 67,333
Dilutive common stock equivalents, using trea-
sury stock method............................. -- -- 2,215
-------- --------- -------
Denominator for diluted net income (loss) per
share......................................... 61,554 63,149 69,548
======== ========= =======
Basic net income (loss) per share............... $ (0.77) $ (6.77) $ 0.54
======== ========= =======
Diluted net income (loss) per share............ $ (0.77) $ (6.77) $ 0.52
======== ========= =======
</TABLE>
Incremental common shares attributable to the exercise of outstanding
options of 2,298,000, 5,836,000, and 1,546,000 shares as of March 25, 2000,
March 27, 1999 and March 28, 1998, respectively, were excluded from the
computation of diluted net income (loss) per share because the effect would be
antidilutive.
As of March 25, 2000, the Company had outstanding convertible notes to
purchase approximately 12,387,000 shares of common stock that were not
included in the computation of diluted net income (loss) per share because the
effect would be antidilutive. Additionally, 2,314,000 shares issued as part of
the divestiture of the MiCRUS manufacturing joint venture (See Note 12) were
excluded from the computation of diluted net loss per share for the year ended
March 25, 2000 because the effect would be anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform to the 2000 presentation. Such reclassifications had no
effect on the results of operations or stockholders' equity.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities," was
issued and is effective for us no later than April 1, 2001. At this time, due
to the options available under SFAS 133, we have not determined the full
impact it will have on our earnings or financial condition.
In March 1999, we adopted Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" which was issued by the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants. SOP 98-1 requires
the capitalization of certain costs incurred in connection with developing or
obtaining internal use software.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements". We
will report the cumulative effect of a change in accounting principle in the
first quarter of fiscal 2001 to reflect our adoption of new revenue
recognition policies as a result of this guidance. In the past, we have
recognized revenue on international shipments when the products are shipped.
Title to inventory for most of our international shipments passes upon arrival
at the port of destination. Effective with the first quarter of fiscal 2001,
we will recognize revenue on international shipments based on passage of title
rather than on the date of shipment, which has been our historical method.
37
<PAGE>
3. GAIN ON SALE OF ASSETS
Gain on sale of assets in fiscal 1999 includes $2.2 million relating to the
recovery of a holdback from the fiscal 1997 sale of the Infrastructure Product
Group of our Pacific Communication Sciences, Inc. ("PCSI") subsidiary to ADC
Telecommunications, Inc.
In the third quarter of fiscal 1998, we sold our Nuera Communications, Inc.
subsidiary for cash proceeds of approximately $21.5 million ($16.1 million net
of $5.4 million of Nuera's own cash) and recorded a gain of approximately
$11.1 million. Gain on sale of assets in fiscal 1998 also includes the
reversal of $9.7 million that had previously been accrued for losses on
facilities commitments in connection with the sale and shut down of the
operating divisions of PCSI in the fourth quarter of fiscal 1997.
4. FINANCIAL INSTRUMENTS
FAIR VALUES OF FINANCIAL INSTRUMENTS
We used the following methods and assumptions to estimate our 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: We estimated the fair
values of our foreign currency exchange forward and option contracts based
on quoted market prices of comparable contracts, adjusted through
interpolation where necessary for maturity differences.
Long-term debt: We estimated the fair value of long-term debt based on
estimated current interest rates for debt instruments with similar terms
and remaining maturities. We based the fair value of the subordinated notes
upon quoted market prices.
The carrying amounts and fair values of our financial instruments at March
25, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Cash................................................... $148,238 $148,238
Investment securities:
Commercial paper...................................... 30,205 30,398
Certificates of Deposit............................... -- --
US Government Agency instruments...................... 22,764 22,949
Municipal Bond........................................ -- --
Marketable equity securities.......................... 48,077 48,077
Long-term debt......................................... 315,297 318,695
</TABLE>
The carrying amounts and fair values of our financial instruments at March
27, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Cash................................................... $127,621 $127,621
Investment securities:
Commercial paper...................................... 101,333 101,333
Certificates of Deposit............................... 30,043 30,032
US Government Agency instruments...................... 26,053 26,011
Municipal Bond........................................ 20,300 20,300
Long-term debt......................................... 337,493 243,904
</TABLE>
38
<PAGE>
INVESTMENTS
At March 25, 2000, all available-for-sale debt securities have contractual
maturities of less than one year. Gross realized and unrealized gains and
losses on all classes of debt securities were immaterial at and for the
periods ended March 25, 2000 and March 27, 1999. Unrealized gains on
marketable equity securities were $48 million at March 25, 2000 and $0 at
March 27, 1999.
5. USE OF ESTIMATES AND CONCENTRATIONS OF OTHER RISKS
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States which may require the use
of management estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Estimates are used for, but not limited
to, the accounting for doubtful accounts, inventory reserves, depreciation and
amortization, sales returns, taxes and contingencies. Actual results could
differ from these estimates which include the following risks and
uncertainties:
INVENTORIES. We produce inventory based on orders received and forecasted
demand. We must order wafers and build inventory well in advance of product
shipments. Because our markets are volatile and subject to rapid technology
and price changes, there is a risk that we will forecast incorrectly and
produce excess or insufficient inventories of particular products. This
inventory risk is heightened because many of our customers place orders with
short lead times. Demand will differ from forecasts and such differences may
have a material effect on actual results of operations.
WAFER PURCHASE COMMITMENTS. We have firm commitments to purchase wafers from
our suppliers and will accrue losses to the extent firm wafer purchase
commitments exceed our estimated wafer needs for the next six months. We
continuously forecasts our estimated wafer needs. However, there is a risk
that our ultimate wafer purchases will differ from our forecasted wafer needs.
Accordingly, the amount of the accrual may differ from the actual liability
for losses under the wafer purchase commitments and such differences may have
a material effect on actual results of operations.
6. ACQUISITION OF AUDIOLOGIC, INC.
On July 27, 1999, we completed the acquisition of AudioLogic, Inc.
("AudioLogic"), a Colorado-based company specializing in low power mixed-
signal integrated circuit design. The acquisition was completed through a
stock-for-stock transaction whereby each share of AudioLogic was exchanged for
0.3006 shares of Cirrus Logic, Inc. common stock. Using the same ratio, each
outstanding, unexercised option in AudioLogic granted under the AudioLogic,
Inc. 1992 Stock Option Plan was exchanged for an option to purchase the common
stock of Cirrus Logic, Inc.
As part of the stock transaction, we guaranteed that the value of the shares
and unexercised options will be at least $25 million at the one-year
anniversary of the closing, July 27, 2000. To the extent that the value of the
shares issued is less than $25 million on July 27, 2000, we may settle the
difference in cash or additional shares. We valued the per share consideration
paid for AudioLogic based on the price of our stock on the closing date of the
transaction combined with the discounted difference between the guaranteed
price per share and the price per share on the closing date. Also included in
the calculation of total consideration is the fair value of the assumed
options and estimated transaction costs.
39
<PAGE>
The total purchase price of $22.9 million was allocated to the estimated
fair value of assets acquired and liabilities assumed based on independent
appraisals and management estimates as follows: (in thousands)
<TABLE>
<S> <C>
Fair value of tangible net assets................................ $ 1,213
Existing technology.............................................. 6,353
Existing agreements.............................................. 4,100
Covenants not-to-compete......................................... 1,900
Trademark........................................................ 700
Assembled workforce.............................................. 600
In-process technology............................................ 8,013
-------
Total assets acquired............................................ $22,879
=======
</TABLE>
Existing Technology
To determine the value of the existing technology we discounted the expected
future cash flow attributable to the existing technology, taking into account
risks related to the characteristics and applications of the technology,
existing and future markets, and assessment of the life cycle stage of the
technology.
Existing Agreements
We based the valuation of AudioLogic's existing agreements on the discounted
net cash flow expected to be realized from licensing revenues and product
sales anticipated under the agreements.
Covenants Not-to-Compete
We valued the agreements signed between Cirrus and certain members of
AudioLogic's management team establishing covenants not-to-compete based on
assessing the differential cash flows expected from competition in the absence
of these agreements. The key differential drivers are expected future lost
revenue and incremental research and development costs.
Trademark
We valued the AudioLogic trademark based on a discounted cost-savings
approach using an assumed royalty rate which is customary for the
semiconductor industry.
Assembled workforce
We estimated the value of the assembled workforce by evaluating the
workforce in place at the acquisition date and utilized the cost approach to
estimate the value of replacing the workforce. Costs considered in replacing
the workforce included costs to recruit and interview candidates, as well as
the cost to train new employees.
In-Process Research and Development
We estimated that $8.0 million of the purchase price represented purchased
in-process technology that had not yet reached technological feasibility and
had no alternative future use. Accordingly, we expensed this amount in the
second quarter of fiscal year 2000 following consummation of the acquisition.
We estimated the value assigned to purchased in-process technology by
identifying research projects in areas for which technological feasibility had
not been achieved using appropriate income based valuation methodologies. We
determined the value by calculating the estimated stage of completion
(expressed as a percentage of completion) for each project, applying the
percentage to the expected net cash flows for each project, and discounting
the net cash flows back to their present value. The stage of completion was
determined by analyzing the costs incurred (as of the
40
<PAGE>
valuation date) divided by the total estimated costs to complete the projects.
We used a discount rate that included a factor that took into account the
uncertainty surrounding the successful development of the purchased in-process
technology projects.
Development of in-process technology remains a substantial risk due to
factors including the remaining effort to achieve technical feasibility,
rapidly changing customer markets and competitive threats from other
companies. Additionally, the value of other intangible assets acquired may
become impaired. The in-process research and development charge valuation was
prepared by an independent appraiser of technology assets, based on inputs
from management of the Company and AudioLogic, utilizing valuation
methodologies and techniques that we believe are reasonable.
We are amortizing the amounts allocated to existing technology, existing
agreements, covenants not-to-compete, trademark and assembled workforce over
their respective estimated useful lives of between three and four years using
the straight-line method.
7. OBLIGATIONS UNDER CAPITAL LEASES
We have capital lease agreements for machinery and equipment as follows (in
thousands):
<TABLE>
<CAPTION>
March 25, March 27,
2000 1999
--------- ---------
<S> <C> <C>
Capitalized cost...................................... $19,736 $19,736
Accumulated amortization.............................. (18,501) (16,971)
------- -------
Total................................................. $ 1,235 $ 2,765
======= =======
</TABLE>
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 25, 2000, are (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
2001.............................................................. $1,209
2002.............................................................. 326
------
Total minimum lease payments...................................... 1,535
Less amount representing interest................................. (78)
------
Present value of net lease payments............................... 1,457
Less current maturities........................................... (1,136)
------
Capital lease obligations......................................... $ 321
======
</TABLE>
41
<PAGE>
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
March 25, March 27,
2000 1999
--------- ---------
<S> <C> <C>
Installment notes with interest rates ranging
from 6.12% to 9.47%............................ $ 14,840 $ 34,494
Less current maturities......................... (11,693) (21,534)
-------- --------
Long-term debt.................................. $ 3,147 $ 12,960
======== ========
</TABLE>
Principal payments due in the following fiscal years are (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- -------
<S> <C>
2001............................................................ $11,693
2002............................................................ 2,811
2003............................................................ 336
-------
Total........................................................... $14,840
=======
</TABLE>
At March 25, 2000, installment notes are secured by machinery and equipment
with a net book value of $6,774,000.
9. CONVERTIBLE SUBORDINATED NOTES
In 1996, we issued $300.0 million par value of convertible subordinated
notes that bear interest at six percent, mature in December 2003, and are
convertible into shares of our common stock at $24.219 per share. Expenses
associated with the offering of approximately $9.4 million were deferred and
included in other assets. Such expenses are being amortized to interest
expense over the term of the notes. We repurchased $1 million of these notes
in the fourth quarter of fiscal 2000 at a price of 102.50% of par.
10. BANK ARRANGEMENTS
As of March 25, 2000, we have a bank line of credit providing a commitment
for letters of credit up to a maximum aggregate of $55.0 million, which
expires on June 30, 2000 and is collateralized by cash or securities with
interest at the higher of: (a) .50% per annum above the latest federal funds
rate (as defined in the Second Amended Credit Agreement); or (b) the rate of
interest in effect for such day as publicly announced from time to time by the
bank. We are currently in compliance with all covenants under the bank line of
credit. We expect to amend or replace the existing line of credit facility in
fiscal 2001. We do not believe the amendment of our line of credit will have
an impact on our financial position or on our ability to finance our
operations for the foreseeable future.
As of March 25, 2000, we had approximately $30.2 million outstanding letters
of credit and an additional $24.8 million available under this line of credit.
These letters of credit are secured by cash and securities of $37.8 million,
which are recorded as restricted cash. Of these amounts, $35.5 million is used
to support equipment lease agreements of the MiCRUS facility. The letters of
credit to support these amounts will expire and the funds will no longer be
restricted upon termination of the underlying lease agreements. IBM has agreed
to use its best efforts to effect such a termination by March 31, 2001 or
replace our guarantee.
11. 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.
42
<PAGE>
The aggregate minimum future rental commitments under all operating leases
for the following fiscal years are (in thousands):
<TABLE>
<CAPTION>
Net
Facilities Equipment Total
Facilities Subleases Commitments Commitments Commitments
---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
2001.................... $ 8,826 $ 4,851 $ 3,975 $2,411 $ 6,386
2002.................... 8,386 4,432 3,954 143 4,097
2003.................... 7,648 4,405 3,243 18 3,261
2004.................... 7,578 4,559 3,019 -- 3,019
2005.................... 7,036 3,672 3,364 -- 3,364
Thereafter.............. 10,594 8,807 1,787 -- 1,787
------- ------- ------- ------ -------
Total minimum lease
payments............... $50,068 $30,726 $19,342 $2,572 $21,914
======= ======= ======= ====== =======
</TABLE>
Total rent expense was approximately $9,049,000, $7,277,000 and $11,061,000
for fiscal 2000, 1999 and 1998, respectively. Sublease rental income was
$3,873,000, $2,587,000 and $1,116,000 for fiscal 2000, 1999 and 1998,
respectively.
We have firm commitments to purchase $114.9 million of wafers from our
suppliers during fiscal 2001.
We guarantee jointly and severally with IBM $170.6 million for equipment
financings for the MiCRUS facility as of March 25, 2000. These financings have
maturities ranging from 2000 to 2003.
12. RESTRUCTURING CHARGES AND MANUFACTURING AGREEMENTS
Fiscal 1998 Restructuring
We recorded restructuring costs of $11.8 million in the third quarter of
fiscal 1998 in connection with a discontinuation of certain strategies and
product development efforts in the graphics product group. This resulted in a
workforce reduction of approximately 65 positions. The primary components of
the restructuring charge were $3.5 million related to excess assets, $4.9
million related to excess facilities and $1.8 million of severance payments
that were made during the third quarter of fiscal 1998. In fiscal 1999, we
reversed $3.5 million that had been previously accrued for excess facility
commitments. The total cash outlays related to these charges was $4.5 million
of which $1.3 million was paid in fiscal 1999 and $3.2 was paid in fiscal
1998. As of March 27, 1999, activities related to this restructuring were
completed.
The following sets forth our fiscal 1998 restructuring activity for fiscal
years 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Severance Facilities
and related scale back and
benefits other costs Total
----------- -------------- -------
<S> <C> <C> <C>
Fiscal 1998 provision.................... $ 1,833 $ 9,976 $11,809
Amount utilized.......................... (1,833) (1,553) (3,386)
------- ------- -------
Balance, March 28, 1998.................. -- 8,423 8,423
Amount utilized.......................... -- (4,903) (4,903)
Adjustments.............................. -- (3,520) (3,520)
------- ------- -------
Balance, March 27, 1999.................. $ -- $ -- $ --
======= ======= =======
</TABLE>
Fiscal 1999 and 2000 Restructuring
In fiscal 1999 we initiated a restructuring plan principally aimed at
divesting certain product lines and production activities. This plan was also
intended to reduce our fixed wafer purchase commitments, primarily by
divesting our interests in our two manufacturing joint ventures with
International Business Machines Corporation ("IBM") and Lucent Technologies,
Inc. ("Lucent"), MiCRUS and Cirent, respectively.
43
<PAGE>
Fiscal 1999 Activities
During the second quarter of fiscal 1999, we commenced a workforce reduction
along with write-downs and write-offs of obsolete inventory, equipment and
facilities. In connection with these actions, we recorded a net restructuring
charge of $28.5 million consisting of $4.3 million for workforce reductions,
$8.2 million for write-downs or write-offs of equipment, intangibles and other
assets, $10.0 million for facility commitments and the remaining amount
representing other committed liabilities and expenses.
During the third quarter of fiscal 1999, we continued with our restructuring
activities and recorded additional charges of $13.0 million. Our restructuring
activities for the third quarter of fiscal 1999 included the divestiture of
non-core businesses and the outsourcing of the Fremont manufacturing test
floor. In connection with these actions, we recorded charges consisting of
$4.2 million for work force reductions, $8.3 million for write-downs and
write-offs of equipment and other assets relating to the Fremont manufacturing
test floor, and the remaining amount representing other committed liabilities
and expenses.
Continuation of our restructuring activities during the fourth quarter of
fiscal 1999 resulted in $34.8 million of charges. These charges primarily
consisted of a $23.8 million write-off of the equity investment in MiCRUS, an
$8.8 million loss on the sale of our modem and communications businesses and a
$2.0 million write-off of fixed assets in connection with two of our business
units. We sold a portion of our communications business to form Basis
Communications Corporation ("Basis"). We have a continued ownership in Basis
of approximately 20% as of March 25, 2000 (See Note 18--Subsequent Events).
Subsequent to the incorporation of Basis, we sold approximately $14.7 million
of product to Basis and recorded a negative $0.5 million margin on these sales
which is being reported in the End of Life operating segment (See Note 16). We
also sold our modem business to Ambient Technologies, Inc. ("Ambient"). We
retained a continued ownership in Ambient of approximately 16% until the
fourth quarter of fiscal 2000 when we sold our interest in Ambient to Intel
Corporation for a gain of $15.7 million.
Also during fiscal 1999, we assessed our manufacturing capacity needs and
evaluated the carrying value of the assets recorded in connection with both
the MiCRUS and Cirent joint ventures, principally manufacturing payments,
equipment and leasehold improvement advances. This evaluation was necessitated
by the restructuring of our operations along with the future expected
decreases in the sales, gross margins and cash flows from the manufacture and
sale of our products produced by the joint ventures which resulted in excess
manufacturing capacity. Expected undiscounted future cash flows were not
sufficient to recover the carrying value of such assets based on cash flow
analyses which were performed on MiCRUS and Cirent separately. Therefore, an
impairment loss of $188.4 million, representing the excess of the carrying
value over the estimated fair value of the assets, was recognized in the
fourth quarter of fiscal 1999.
Fiscal 2000 Activities
During the first quarter of fiscal 2000, we completed the divestiture of our
interests in MiCRUS and Cirent and restructured our manufacturing supply
agreements with them. In connection with the finalization of these two
agreements, we recorded net 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 a $135 million direct cash payment to
one of the joint venture partners, $36.8 million related to certain Cirrus
common stock which we issued to the one of the joint venture partners, $9.3
million of lease buyout costs and $16.4 million of equipment write-offs. These
charges were partially offset by the reversal of approximately $71.9 million
of previously accrued wafer purchase commitment charges due to the
renegotiated terms of our purchase commitments with our former partners.
MiCRUS
The terms of the MiCRUS restructuring agreement, entered into during the
first quarter of fiscal 2000, required us to pay $135 million in cash to IBM
and issue into an escrow account shares of our common stock with a fair value
(based on the average closing price of our common stock for the 20 days prior
to closing) of
44
<PAGE>
$32 million. Under the escrow arrangement, the escrow period ended on April 3,
2000. On that date, 2.4 million shares were released to IBM and the remaining
shares were returned to us due to contractual limitations on the value to be
realized by IBM. During the six month period following April 3, 2000, IBM may
sell on the open market the Company stock it received. If at the end of the
six month period on September 30, 2000, IBM has sold at least 15% of our
stock, it can require us 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. Our earnings may be adversely affected in future
periods by declines in the market price of our stock and the resulting cash
payments that may be required. IBM may keep all proceeds from the sale of the
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 us.
We also transferred to IBM our partnership interest and certain assets
relating to the partnership's operation, and forgave certain debts owed to us
by IBM and/or MiCRUS relating to the use of certain assets prior to the
closing.
In exchange for this consideration, IBM released us of our obligations to
support the partnership and agreed to use its best efforts to release us of
our obligations to maintain certain lease payment guarantees issued jointly
and severally with IBM by March 31, 2001 or to replace our guarantee. IBM is
responsible for the costs associated with winding down the partnership,
including costs associated with employee terminations and the dismantling of
equipment. We also entered into an amended wafer purchase agreement with
substantially reduced minimum purchase commitments.
Cirent
The terms of the Cirent termination agreement, which we also entered into
during the first quarter of fiscal 2000, required us to pay to Lucent $9.3
million which Lucent was to use as partial payment in connection with the
buyout of certain leases associated with assets utilized in the Cirent
manufacturing facility. We sold our interest in the joint venture and certain
associated assets to an affiliate of Lucent for $14 million and are not
responsible for any future operating costs or equipment lease liabilities
associated with the Cirent manufacturing facility. In addition, we entered
into an amended wafer purchase agreement whereby we paid Lucent a $5 million
deposit and pledged $20 million of our accounts receivable to collateralize
future wafer purchase commitments.
The following sets forth the activity in our fiscal 1999 and 2000
restructuring accruals as of March 25, 2000 (in thousands):
<TABLE>
<CAPTION>
SEVERANCE FACILITIES
AND RELATED SCALE BACK AND
BENEFITS OTHER COSTS TOTAL
----------- -------------- --------
<S> <C> <C> <C>
Fiscal 1999 provision................... $ 8,466 $ 69,938 $ 78,404
Amount utilized......................... (7,657) (57,165) (64,822)
------- -------- --------
Balance, March 27, 1999................. 809 12,773 13,582
Fiscal 2000 provision................... 8 195,900 195,908
Amount utilized......................... (605) (203,150) (203,755)
Adjustments............................. (212) 1,256 1,044
------- -------- --------
Balance, March 25, 2000................. $ -- $ 6,779 $ 6,779
======= ======== ========
</TABLE>
As of March 25, 2000, approximately 497 employees have been terminated in
connection with our restructuring activities. During fiscal 2000 and 1999,
$158.9 million and $12.6 million of cash was used for restructuring costs.
Approximately $5.0 million of cash is expected to be paid in fiscal 2001.
OTHER WAFER SUPPLY ARRANGEMENTS
TAIWAN SEMICONDUCTOR MANUFACTURING CO., LTD. ("TSMC").
In fiscal 1996, we entered into a volume purchase agreement with TSMC, which
was amended in September 1997 and expires in December 2000. Under the
agreement, we will purchase from TSMC 50% of our wafer needs that are not
filled by MiCRUS and Cirent, provided that TSMC can meet the technological and
other requirements of our customers. TSMC is committed to supply these wafer
needs.
45
<PAGE>
13. EMPLOYEE BENEFIT PLANS
We have adopted 401(k) Profit Sharing Plans (the "Plans") covering
substantially all of our 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 us on behalf of all participants. During fiscal 2000, 1999
and 1998, we matched employee contributions up to various maximums per plan
for a total of approximately $478,000, $1,156,000 and $1,007,000,
respectively. We intend to continue the contributions in fiscal 2001.
14. STOCKHOLDERS' EQUITY
EMPLOYEE STOCK PURCHASE PLAN
In March 1989, we adopted the 1989 Employee Stock Purchase Plan (ESPP). As
of March 25, 2000, approximately 1,233,000 shares of Common Stock are reserved
for future issuance under this plan. During fiscal 2000, 1999 and 1998,
409,666, 526,921 and 640,501 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 stockholders.
STOCK OPTION PLANS
We have 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 our authorized but
unissued Common Stock. Options are generally priced at the fair market value
of the stock on the date of grant. Options are either exercisable upon vesting
or 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 the date of grant.
In previous years, we have 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.
During fiscal 1998, 9,200 shares of the stock grants were cancelled and
retired. In fiscal 2000 and fiscal 1999 we issued 70,000 and 250,000 shares of
restricted stock, respectively, to certain employees at no cost which vest
over one to two years. The non-vested portion of these shares has been
excluded from the income (loss) per share number in accordance with SFAS 128.
We recognize the excess of the grant date fair market over the exercise price
as compensation expense ratably over the vesting period. We recorded
compensation expense of $1,026,000, $1,781,000, and $493,000 in fiscal 2000,
1999 and 1998, respectively, relating to restricted stock.
46
<PAGE>
Information relative to stock option activity is as follows (in thousands):
<TABLE>
<CAPTION>
Outstanding Options
-------------------------
Options Available Weighted Average
for Grant Shares Exercise Price
----------------- ------- ----------------
<S> <C> <C> <C>
Balance, March 29,
1997................... 3,394 12,538 $17.49
Shares authorized for
issuance............... 1,000 -- --
Options granted......... (10,304) 10,304 10.10
Options exercised....... -- (1,387) 7.37
Options cancelled....... 11,191 (11,191) 18.85
Options expired......... (2,542) -- --
------- ------- ------
Balance, March 28,
1998................... 2,739 10,264 9.96
Shares authorized for
issuance............... 2,100 -- --
Options granted......... (2,572) 2,572 7.13
Options exercised....... -- (1,115) 6.18
Options cancelled....... 2,882 (2,882) 10.37
Options expired......... (1,953) -- --
------- ------- ------
Balance, March 27,
1999................... 3,196 8,839 $ 9.47
Shares authorized for
issuance............... 2,000 -- --
Options granted......... (4,154) 4,154 8.79
Options exercised....... -- (1,588) 8.80
Options cancelled....... 2,854 (2,854) 9.40
Options expired......... (679) -- --
------- ------- ------
Balance, March 25,
2000................... 3,217 8,551 $ 9.29
======= ======= ======
</TABLE>
As of March 25, 2000, approximately 11,768,337 shares of Common stock were
reserved for issuance under the Option Plans.
The weighted average exercise price of options granted at fair value during
fiscal 2000 was $8.94.
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices (in thousands) Life Price (in thousands) Price
------------------------ ------------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$0.00-$5.88............. 646 7.88 $ 5.03 76 $ 1.69
$5.89-$10.69............ 6,440 7.62 8.58 3,198 9.15
$10.70-$14.63........... 1,159 8.64 12.92 185 12.11
$14.64-$21.00........... 281 8.56 17.81 137 15.48
$21.01-$44.50........... 25 2.56 37.25 25 37.25
----- ---- ------ ----- ------
8,551 7.79 $ 9.29 3,621 $ 9.57
===== ==== ====== ===== ======
</TABLE>
As of March 27, 1999 and March 28, 1998, the number of options exercisable
were 4,546,887 and 2,052,000, respectively.
On April 30, 1997, the Company engaged in an option exchange program under
which 7,092,233 replacement options with an exercise price of $9.1875 per
share were granted to current employees with outstanding options with exercise
prices above $9.1875 per share and the old options were cancelled, unless the
employee elected not to participate in the exchange. In connection with this
program, replacement options were issued with the same vesting schedule as the
old options.
47
<PAGE>
Shares Reserved for Future Issuance
We have a total of approximately 25,388,500 shares of common stock reserved
as of March 25, 2000 for issuance related to our convertible subordinated
notes, the Option Plans, and the ESPP.
Stock-Based Compensation
If we had calculated compensation cost for our stock option plans based upon
the fair value at the grant date for awards under the Option Plans consistent
with the optional methodology prescribed under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the net
income (loss) and net income (loss) per share would have been as shown below
(in thousands, except per share data):
<TABLE>
<CAPTION>
2000 1999 1998
-------- --------- -------
<S> <C> <C> <C>
Net income (loss) as reported................. $(47,096) $(427,403) $36,493
Proforma net income (loss).................... $(81,763) $(438,849) $ 5,812
Basic net income (loss) per share as
reported..................................... $ (0.77) $ (6.77) $ 0.54
Proforma basic net income (loss) per share.... $ (1.33) $ (6.95) $ 0.08
Diluted net income (loss) per share as
reported..................................... $ (0.77) $ (6.77) $ 0.52
Proforma diluted net income (loss) per share.. $ (1.33) $ (6.95) $ 0.08
</TABLE>
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 our 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.
We estimated the fair value of each option grant 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:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Employee Option Plans:
Expected stock price volatility.................... 68.52% 69.21% 69.46%
Risk-free interest rate............................ 6.1% 5.0% 6.2%
Expected lives (in years).......................... 5.2 5.0 5.0
Employee Stock Purchase Plan:
Expected stock price volatility.................... 68.52% 69.21% 69.46%
Risk-free interest rate............................ 5.7% 5.2% 5.8%
Expected lives (in years).......................... 0.5 0.5 0.5
</TABLE>
During fiscal 2000, 1999 and 1998, all options, except restricted stock,
were granted at an exercise price equal to the closing market price on the
grant date. Using the Black-Scholes option valuation model, the weighted
average estimated fair values of employee stock options granted in fiscal
2000, 1999 and 1998 were $6.50, $4.74 and $5.55, respectively. The weighted
average estimated fair values for purchase rights granted under the ESPP for
fiscal 2000, 1999 and 1998 were $2.99, $3.44 and $4.37, respectively.
48
<PAGE>
Rights Plan
In May 1998, the Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each share of common stock outstanding
held on record as of May, 15, 1998. Each Right will entitle stockholders to
purchase one one-hundredth of a share of our Series A Participating Preferred
Stock at an exercise price of $60. The Rights only become exercisable in
certain limited circumstances following the tenth day after a person or group
announces acquisitions of or tender offers for 15% or more of our common
stock. For a limited period of time following the announcement of any such
acquisition or offer, the Rights are redeemable by the Company at a price of
$0.01 per Right. If the Rights are not redeemed each Right will then entitle
the holder to purchase common stock having the value of twice the exercise
price. For a limited period of time after the exercisability of the Rights,
each Right, at the discretion of the Board, may be exchanged for one share of
common stock per Right. The Rights will expire in the fiscal year 2009.
Stock Repurchase
In fiscal 1998, the Board of Directors authorized the purchase of up to 10
million shares of our common stock in the open market from time to time,
depending upon market conditions, share price and other conditions. During
fiscal 1999, we completed our stock repurchase plan by repurchasing and
retiring approximately 9.7 million shares of our common stock from the open
market for approximately $100 million.
15. INCOME TAXES
Income (loss) before provision (benefit) for income taxes consists of (in
thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------- --------- -------
<S> <C> <C> <C>
United States................................ $ 33,304 $(264,088) $49,757
Foreign...................................... (80,400) (117,284) 6,246
-------- --------- -------
Total........................................ $(47,096) $(381,372) $56,003
======== ========= =======
</TABLE>
The provision (benefit) for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------ ------- -------
<S> <C> <C> <C>
Federal
Current....................................... $ -- $(1,096) $ 6,890
Deferred...................................... -- 33,757 8,524
------ ------- -------
-- 32,661 15,414
State
Current....................................... -- -- 1,532
Deferred...................................... -- 12,941 (146)
------ ------- -------
-- 12,941 1,386
Foreign
Current....................................... -- 429 2,710
------ ------- -------
$ -- $46,031 $19,510
====== ======= =======
</TABLE>
49
<PAGE>
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory federal rate to pretax income as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ----- ----
<S> <C> <C> <C>
Expected income tax provison (benefit) at the US
federal statutory rate.......................... (35.0)% (35.0)% 35.0 %
Provision for state income taxes, net of federal
effect............................................ -- 2.2 % 1.6 %
In-process research and development expenses....... 6.0 % -- --
Valuation allowance................................ (30.9)% 33.9 % --
Unbenefited foreign losses......................... 59.7 % 10.8 % --
Foreign operating results taxed at rates other than
the US statutory rate............................. -- -- 1.1 %
Research and development credits (flow-through
method)........................................... -- -- (3.6)%
Other.............................................. 0.2% 0.2 % 0.7 %
------ ----- ----
Provision (benefit) for income taxes............... -- 12.1 % 34.8 %
====== ===== ====
</TABLE>
Significant components of our deferred tax assets and liabilities are (in
thousands):
<TABLE>
<CAPTION>
March 25, March 27,
2000 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory valuation................................. $ 3,480 $ 22,775
Accrued expenses and allowances..................... 13,650 18,865
Net operating loss carryforwards.................... 54,712 36,491
Research and development credit carryforwards....... 34,849 30,021
State investment tax credit carryforwards........... 4,192 3,954
Joint venture impairment............................ 8,858 38,333
Other............................................... 11,391 7,554
-------- ---------
Total deferred tax assets............................ 131,132 157,993
Valuation allowance for deferred tax assets......... (99,495) (149,045)
-------- ---------
Net deferred tax assets.............................. 31,637 8,948
Deferred tax liabilities:
Unrealized gains.................................... 17,693 --
Depreciation and Amortization....................... 12,699 8,207
Other............................................... 1,245 741
-------- ---------
Total deferred tax liabilities....................... 31,637 8,948
-------- ---------
Total net deferred tax assets........................ $ -- $ --
======== =========
</TABLE>
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes" provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. We have provided a
valuation allowance equal to our net deferred tax assets due to uncertainties
regarding their realization. We evaluate the realizability of our deferred tax
assets on a quarterly basis.
The valuation allowance decreased by $49.6 million in fiscal 2000. In fiscal
1999, the valuation allowance increased by $149.0 million. Approximately $0.6
million of the valuation allowance is attributable to the tax benefit
associated with the exercise of employee stock options, which will be credited
to additional paid-in capital when realized.
At March 25, 2000, we had net operating loss and tax credit carryforwards
for federal income tax purposes of approximately $144.0 million and $25.2
million, respectively, that expire in 2004 through 2020. We also had state
credit carry forward of approximately $14.5 million that expires in 2004
through 2007.
50
<PAGE>
In fiscal 1999, we recorded deferred income tax expense of $47 million as a
valuation allowance against previously recorded net deferred tax assets
recognized as of March 28, 1998.
16. SEGMENT INFORMATION
We design and manufacture integrated circuits that employ precision linear
and advanced mixed-signal processing technologies. Due to the changing nature
of the markets we serve and in order to align ourselves with those markets we
changed our internal business organization during fiscal 2000. We are
organized into three principal businesses or operating segments: Analog
Products Business Group, Internet Solutions Business Group and the Magnetic
Storage Business Group with the remaining products grouped as End of Life.
Each of these business groups has one or more general managers who report
directly to the Chief Executive Officer ("CEO"). The CEO has been identified
as the Chief Operating Decision Maker as defined by SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". We have restated
segment results for prior periods as a result of our fiscal 2000 realignment.
The Analog Division includes audio products for both the consumer audio and
PC markets. These products provide digital high-fidelity audio record and
playback for high-end professional recordings, set-top audio decoders, digital
audiotapes, CD players, Compact Disk Interactive, automotive stereo systems
and CD-quality sound and mixing capabilities for PC's and workstations. It
also includes advanced analog and digital integrated circuits for data
acquisition, instrumentation and imaging applications along with developing
network products for LAN, WAN and the Internet environment. These products are
used in industrial automation, instrumentation, medical, military, geophysical
and communications applications. The Internet division consists of optical
storage and embedded processor solutions. Optical storage provides integrated
circuits for advanced optical disc drives. This includes integrated circuits
for the CD-RW market as well as the integrated DVD Drive Manager for the
electronics DVD market. Our embedded processor solutions are used in a wide
variety of consumer products including Internet appliances, smart phones,
screen phones, game boxes, hand-held digital assistants, and portable Internet
audio decoders. The Magnetic Storage Division provides integrated circuits
contained in advanced magnetic and removable disk drives. This group helps its
customers engineer and develop higher capacity 3.5-inch disk drives for
desktop computers and workstations and 2.5-inch form factor drives for
portable computers. Our products in all operating groups are sold directly to
original equipment manufacturers and distributors throughout the world. The
End of Life Segment includes our product lines which have either been divested
or subsequently sold. These product lines primarily consist of graphics,
modem, communications and flat panel electronics.
In addition to these four operating segments, accounting, administration,
facilities, finance, human resources, legal, marketing, procurement and sales
groups also report to the CEO. The CEO does not evaluate the operating
segments based upon fully allocated profit and loss statements, and the
segments' reportable operating profit excludes allocated expenses. Operating
segments do not have material sales to other segments, and accordingly, there
are no inter-segment revenues to be reported. We also do not allocate our
restructuring charges, interest and other income, interest expense or income
taxes to operating segments. We do not identify or allocate assets by
operating segments, nor does the CEO evaluate the divisions based upon these
criteria.
Information on reportable segments for fiscal 2000, 1999 and 1998 is as
follows:
Business Segment Net Revenues:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Analog........................................... $311,472 $268,972 $224,643
Internet......................................... 43,437 24,995 27,094
Magnetic Storage................................. 133,058 213,919 380,478
End of Life...................................... 75,949 110,848 269,042
Corporate and all other.......................... 484 9,371 53,013
-------- -------- --------
Total............................................ $564,400 $628,105 $954,270
======== ======== ========
</TABLE>
51
<PAGE>
Business Segment Operating Profit (Loss):
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Analog.................................... $ 52,020 $ 47,036 $ 56,504
Internet.................................. (7,938) (2,613) 4,670
Magnetic Storage.......................... 14,307 54,543 143,166
End of Life............................... 20,588 (31,480) (37,868)
Corporate and all other................... (66,002) (371,032) (114,511)
Restructuring costs, gain on sale of
assets and other, net.................... (145,825) (76,517) 6,317
--------- --------- ---------
Consolidated income (loss) from
operations............................... (132,850) (380,063) 58,278
--------- --------- ---------
Interest Expense.......................... (23,754) (22,337) (27,374)
Interest Income........................... 8,096 16,786 19,893
Other income (expense), net............... 101,412 4,242 5,206
--------- --------- ---------
Income (loss) before provision for income
taxes.................................... $ (47,096) $(381,372) $ 56,003
========= ========= =========
</TABLE>
Geographic Area
The following illustrates revenues by geographic locations based on product
shipment destination and royalty payer location:
<TABLE>
<CAPTION>
(in thousands of dollars)
--------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
United States.................................... $143,358 $165,989 $448,666
Pacific Rim...................................... 265,268 251,787 299,771
Japan............................................ 107,800 158,189 139,375
Other foreign countries.......................... 47,974 52,140 66,458
-------- -------- --------
Total consolidated revenues...................... $564,400 $628,105 $954,270
======== ======== ========
</TABLE>
The following illustrates property, plant and equipment (net) by geographic
locations, based on physical location:
<TABLE>
<CAPTION>
(in thousands of dollars)
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
United States.................................... $ 32,778 $ 46,217
Signapore........................................ 1,127 1,121
Pacific Rim (including Japan).................... 710 450
Other foreign countries.......................... 115 236
------------ ------------
Total consolidated property, plant and equipment,
net............................................. $ 34,730 $ 48,024
============ ============
</TABLE>
One customer accounted for approximately 12% of net sales in fiscal 2000.
Two customers accounted for approximately 14% and 13%, respectively of net
sales in fiscal 1999. Two customers accounted for approximately 19% and 11%,
respectively of net sales in fiscal 1998. The loss of a significant customer
or a significant reduction in such a customer's orders could have an adverse
effect on our sales.
17. LEGAL MATTERS
We and certain of our 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 us and may be subject to indemnification provisions made
by us to the customers. We have not been named
52
<PAGE>
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.
Occasionally, suits arise from prior business relationships. We have been
named in two such matters, one filed by a prior distributor and another
unrelated matter where we are named as a shareholder. While the ultimate
outcome cannot be predicted with certainty, we do not expect these matters to
have a material adverse effect on our consolidated financial position.
18. SUBSEQUENT EVENTS
On May 3, 2000 we disclosed that we have signed a definitive agreement with
Creative Technology Ltd. ("Creative") and Vertex Technology Fund (II) Ltd.
("Vertex") whereby Creative and Vertex have made financial investments into
eMicro Corporation ("eMicro"), a fabless joint manufacturing venture based in
Singapore. Under the terms of the agreement, eMicro will become a licensee of
Cirrus Logic's proprietary circuits and a strategic supplier of audio codecs
and other mixed-signal chip solutions to Creative Technology.
On May 18, 2000 we sold our holdings of approximately 1 million shares of
Series A preferred stock in Basis Communications Corporation ("Basis") to
Intel Corporation ("Intel") for $61.2 million. This sale was part of a tender
offer whereby Intel purchased the outstanding preferred & common stock of
Basis for $61.18 per share. Also on this date, we exercised a warrant to
purchase 0.5 million shares of common stock in Basis at an exercise price of
$0.05 per share which we then sold to Intel for $30.6 million. Intel also paid
us, on behalf of Basis, $12 million for two outstanding notes receivable from
Basis plus accrued interest of $1.4 million. Intel withheld from the total
consideration paid, $11.2 million pursuant to the indemnification provisions
of the merger agreement between Intel and Basis. As a result of these
transactions, on May 18, 2000 we received from Intel cash totaling
approximately $94 million. In our financial statements for the first quarter
of fiscal 2001, we expect to report a gain of approximately $92 million.
During May 2000, we repurchased from the open market $28.1 million par value
of our 6% convertible notes. We expect to recognize an extraordinary gain in
the first fiscal quarter of 2001 of approximately $2.8 million as a result of
these repurchases. Additionally, on May 31, 2000 we announced that the Board
of Directors has authorized us to purchase up to $100 million in aggregate of
the convertible notes during favorable market conditions.
53
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cirrus Logic, Inc.
We have audited the accompanying consolidated balance sheets of Cirrus
Logic, Inc. as of March 25, 2000 and March 27, 1999, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
March 25, 2000. 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 auditing standards generally
accepted in the United States. 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 25, 2000 and March 27, 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 25, 2000, in conformity with accounting principles generally accepted in
the United States. 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
Austin, Texas
April 25, 2000, except Note 18, as to
which the date is May 31, 2000
54
<PAGE>
CONSOLIDATED SUPPLEMENTARY FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEARS BY QUARTER
---------------------------------------------------------------------------------
2000 1999
--------------------------------------- ----------------------------------------
4TH **** 3RD *** 2ND ** 1ST * 4TH +++ 3RD ++ 2ND+ 1ST
-------- -------- -------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating summary:
Net sales............... $160,246 $150,759 $132,842 $ 120,553 $ 127,423 $153,062 $ 169,689 $177,931
Cost of sales........... 105,263 93,435 79,637 71,386 258,122 171,477 155,611 117,819
Restructuring costs,
(gain) loss on sale of
assets and other, net.. (1,599) -- -- 127,210 32,964 18,037 28,522 (3,006)
Acquired in-process re-
search
& development expenses.. -- -- 8,013 -- -- -- -- --
Abandonment of assets
charge................. 1,026 11,174 -- -- -- -- -- --
Income (loss) from oper-
ations................. 6,002 (6,056) (5,395) (127,400) (214,935) (90,235) (75,399) 506
Income (loss) before in-
come taxes............. 62,081 27,923 (9,354) (127,746) (215,026) (92,551) (74,607) 812
Net income (loss)....... $ 62,081 $ 27,923 $ (9,354) $(127,746) $(214,359) $(92,551) $(121,009) $ 516
Net income (loss) per
share:
Basic.................. $ 0.99 $ 0.45 $ (0.15) $ (2.12) $ (3.55) $ (1.50) $ (1.90) $ 0.01
Diluted +.............. $ 0.82 $ 0.40 $ (0.15) $ (2.12) $ (3.55) $ (1.50) $ (1.90) $ 0.01
Weighted average common
shares outstanding:
Basic.................. 62,593 62,134 61,353 60,171 60,393 61,807 63,748 66,650
Diluted................ 81,599 80,911 61,353 60,171 60,393 61,807 63,748 67,461
</TABLE>
-------
* The first quarter of fiscal 2000 includes $128.2 million in restructuring
charges, $1.0 million of which is in cost of sales, due to the
restructuring of our relationships with our manufacturing joint venture
partners.
** The second quarter of fiscal 2000 includes $8.0 million acquired in-
process research & development expenses which were incurred due to the
acquisition of AudioLogic, Inc.
*** The third quarter of fiscal 2000 includes $10.2 million in asset
abandonment charges due to the write-off of costs incurred for the
manufacturing module of the enterprise resource planning software. Also,
in the third quarter we sold a portion of our common stock interest in
Phone.com, Inc. for a gain of $34.3 million.
**** The fourth quarter of fiscal 2000 includes gains on the sale of common
stock in Phone.com, Inc. and Ambient Technologies for a combined $58.2
million.
+ The second quarter of fiscal 1999 includes $47.8 million that was charged
to cost of sales for wafer purchase commitments and inventory write-
downs; restructuring costs of $28.5 million related to a workforce
reduction, excess assets and excess facilities commitments and a $46.7
million valuation allowance for deferred tax assets.
++ The third quarter of fiscal 1999 includes $78.1 million that was charged
to cost of sales for wafer purchase commitments and inventory write-downs
and restructuring costs of $18.1 million related to a divestitures and
asset write-offs.
+++ The fourth quarter of fiscal 1999 includes $188.7 million that was
charged to cost of sales for write-off of MiCRUS and Cirent joint venture
assets which were deemed to be impaired along with wafer purchase
commitment charges and restructuring cost of $34.7 million related to the
write-off of MiCRUS equity investment, excess assets write-off and the
loss on sale of our modem and communications businesses.
+ Diluted earnings per share for Q3 and Q4 of fiscal 2000 include an
adjustment to increase net income by $4.5 million, which is the quarterly
after tax interest savings associated with the convertible debt.
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 -
Set forth below is certain information regarding the directors:
<TABLE>
<CAPTION>
Name Age Position with the Company Director Since
------------------------ ---- ----------------------------------------------- --------------
<S> <C> <C> <C>
Michael L. Hackworth.... 59 Chairman of the Board and Director 1985
Suhas S. Patil.......... 55 Chairman Emeritus and Director 1984
David D. French......... 43 President, Chief Executive Officer and Director 1999
D. James Guzy(1)(3)..... 64 Director 1984
Walden C. Rhines(1)(3).. 53 Director 1995
Robert H.
Smith(1)(2)(3)......... 63 Director 1990
Alfred S. Teo (1) (2)... 54 Director 1998
</TABLE>
--------
(1) Member of the Governance Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Michael L. Hackworth is currently Chairman of the Board of Cirrus Logic,
Inc. Prior to becoming Chairman, he had served as President and Chief
Executive Officer since January 1985. Before joining the Company, Hackworth
spent 14 years at Signetics Corp., a subsidiary of N.V. Philips, where he held
various management positions, his last one being Senior Vice President. Prior
to joining Signetics (now Philips Semiconductors), he served in a number of
general management and marketing and sales management positions at Motorola
and Fairchild Semiconductor.
Dr. Patil was a founder of Cirrus Logic's predecessor company in 1981, and a
founder of Cirrus Logic in 1984. Dr. Patil was appointed Chairman Emeritus in
July 1997. Prior to that, he served as Chairman of the Board since 1984. He
served as Vice President, Research and Development until March 1990 and
Executive Vice President, Products and Technology through April 1997. Dr.
Patil was an Associate Professor of Computer Science at the University of Utah
from 1976 to 1980 and an Assistant Professor of Electrical Engineering and
Computer Science at the Massachusetts Institute of Technology from 1970 to
1975. He invented the Storage/Logic Array during his work at MIT and the
University of Utah.
David D. French joined the Company in June 1998 as President and Chief
Operating Officer, and assumed additional duties with his appointment as Chief
Executive Officer in February 1999. As President/CEO, French oversees
worldwide operations and corporate functions. Formerly a Vice President and
General Manager for Analog Devices, French has worked in the semiconductor
industry for more than 20 years, mostly as a key manager of businesses focused
on embedded applications. Prior to joining Analog Devices in 1988, French held
management posts at Texas Instruments and Fairchild Semiconductor.
D. James Guzy is Chairman, President, and CEO of SRC Computer Corporation, a
developer of super-computer systems. He is also Chairman of the Board of PLX
Technology, Incorporated. Since 1969 he has served as president of the Arbor
Company, a limited partnership involved in the electronics and computer
industry.
56
<PAGE>
Mr. Guzy is also a director of Intel Corporation, Micro Component Technology,
Inc., Novellus Systems, Inc., Davis Selected Group of Mutual Funds, Alliance
Capital Management Technology Fund, and a member of the boards of directors of
several private technology companies.
Dr. Rhines is the President and Chief Executive Officer and a director of
Mentor Graphics Corporation, a maker of electronic design automation products.
Previously, he was employed by Texas Instruments Inc. from 1972 to 1993, most
recently as Executive Vice President, Semiconductor Group. He is also a
director of TriQuint Semiconductor.
Mr. Smith is the Executive Vice President, Finance and Administration, Chief
Financial Officer and Secretary of Novellus Systems, Inc., a capital equipment
manufacturer. Prior to joining Novellus in 1995, he served as an industry
consultant since 1990. He was President of Maxwell Communication Corporation
North America, a printing, publishing, telecommunications and information
management company, from August 1988 to July 1990. Prior to that, he was
Executive Vice President, Finance and Chief Financial Officer of
R. R. Donnelley & Sons Company, a printing organization from 1982 to 1986. He
was employed by Control Data from 1973 to 1982, most recently as Vice
President having responsibility for all acquisitions and joint ventures for
the company. He was a Vice President of Memorex Corporation from 1969 to 1973.
Mr. Teo is the Chairman and Chief Executive Officer of the Sigma Plastics
Group since 1979, Chairman and Chief Executive Officer of Red Line Express
since 1984, and Alpha Technologies, Inc. since 1990. He is also a director of
Fleet Bank, N.A. and Musicland Stores Corporation. Mr. Teo is a Trustee of St.
Joseph's Hospital and of Stevens Institute of Technology.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our executive
officers and directors and persons who own more than 10% of a registered class
of our equity securities to file initial reports of ownership and changes in
ownership with the Securities and Exchange Commission (SEC) and to furnish
copies of these reports to us. Based on a review of these reports and written
representations from our directors and officers regarding the necessity of
filing a report, we believe that during fiscal 2000 the following Forms were
not filed in a timely manner (the number of related transactions are in
parenthesis): Mr. Carlson-Form 3(3); Mr. Boudreau-Form 4(3); Mr. Dickinson-
Form 4 (15); Mr. Ensley-Form 5 (0); Mr. Essency-Form 3 (0); Mr. French-Form
5 (2); Mr. Guzy-Form 5 (1); Mr. Hackworth-Form 4 (12); Mr. Leeder-Forms 3 and
5 (1); Mr. Patil-Form 4 (2); Mr. Perry-Form 5 (0); Mr. Rhines-Form 4 (4); Mr.
Smith-Form 5 (1); Mr. Teo-Form 5 (1); Mr. Broockman (former officer)-Form 4
(27); Mr. Jones (former officer)-Form 5 (2); Mr. Roberts (former officer)-Form
4 (39); and Mr. Swift (former officer)-Form 4 (15). All of these Forms were
subsequently filed or will be filed with the SEC.
57
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned during the fiscal
years ended March 25, 2000, March 27, 1999 and March 28, 1998 by the Chief
Executive Officer during the Last Fiscal Year and the other four highest-paid
executive officers.
LONG-TERM COMPENSATION AWARDS
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
---------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
-------------------- STOCK UNDERLYING ALL OTHER
NMEAAND PRINCIPAL POSITION YEAR SALARY(1) BONUS AWARDS OPTIONS COMPENSATION
--------------------------- ---- -------------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
David D. French......... 2000 $ 373,624 $ 150,000(2) -- -- $757,212(3)
President and Chief Ex- 1999 231,250 300,000(4) $ 2,375,000(4) 393,750 721,899(4)
ecutive Officer 1998 -- -- -- -- --
Glenn C. Jones.......... 2000 $ 231,095 $ 50,000 $ 393,750(5) -- --
Advisor, Former Chief 1999 -- -- -- -- --
Financial Officer 1998 -- -- -- -- --
Arthur Swift............ 2000 $ 246,333 $ 17,725 -- -- $ 2,296
VP GM Optical Storage 1999 193,502 71,023 -- -- --
Division 1998 172,142 90,000 -- -- --
Henry M. Josefczyk ..... 2000 $ 263,349 $ 149,262(6) -- -- --
Senior Vice President, 1999 265,018 175,814(7) -- 35,000 $ 1,000
Worldwide Sales 1998 107,026 220,000(8) -- 150,000 --
Terry Leeder ........... 2000 $ 188,225 $ 50,000 -- -- --
Vice President, 1999 -- -- -- -- --
Worldwide Sales 1998 -- -- -- -- --
</TABLE>
--------
(1) Amounts shown are before salary reductions resulting from employee
contributions to the Cirrus Logic, Inc. 401(k) Profit Sharing Plan.
(2) Mr. French's bonus for fiscal year 2000 is payable from the Company's
Variable Compensation Plan.
(3) This amount reflects (1) a $750,000 loan made by the Company to Mr. French
on July 21, 1999 and (2) earnings from a previous fiscal year paid
retroactively.
(4) Upon joining the Company in June 1998, Mr. French received a hiring bonus
of $150,000 and 250,000 shares of restricted stock at zero value. In
addition, the Company entered into a Bridge Loan Agreement with Mr. French
for $721,899 for the purchase of his home in Texas. The loan carries an
interest rate of 5.64% and is secured by a first deed of trust on the
property. Mr. French's employment agreement guaranteed a minimum payment
of $150,000 for the 1999 Variable Compensation Program. Such amount was
paid in May 1999.
(5) This amount represents a grant of 50,000 shares of restricted stock to Mr.
Jones at zero value and is calculated by multiplying the number of shares
granted by the fair market value of the stock on the date of the grant,
$7.8750 per share.
(6) Mr. Josefczyk received commissions under the fiscal 2000 Sales Commission
Plan.
(7) Mr. Josefczyk received commissions under the fiscal 1999 Sales Commission
Plan.
(8) Mr. Josefczyk received a hiring bonus of $100,000 upon his joining the
Company in November 1997 and $120,000 in commissions under the fiscal 1998
Sales Commission Plan.
58
<PAGE>
Option Grants in Last Fiscal Year
The following table provides information with respect to options granted in
the Last Fiscal Year to the Named Executive Officers.
<TABLE>
<CAPTION>
Potential Realizable Value
of Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
------------------------- ---------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise Expiration
Granted(1) Fiscal Year (2) Price Date 5%(3) 10%(3)
---------- -------------- -------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
David D. French......... 75,000 1.83% $ 7.1250 06/03/09 $ 366,066 $ 851,656
50,000 1.22% 9.0000 07/29/09 283,003 717,184
Glenn C. Jones.......... 25,000 * 7.8750 04/20/09 123,814 313,768
30,000 * 14.6250 02/02/10 275,928 699,255
Arthur Swift............ 37,500 * 7.1250 06/03/09 168,033 425,828
11,111 * 9.0000 07/29/09 62,889 159,373
26,389 * 9.0000 07/29/09 149,363 378,515
Henry M. Josefczyk...... -- -- --
Terry Leeder............ 150,000 3.66% $ 8.6250 07/07/09 $ 813,632 $ 2,061,904
</TABLE>
--------
* indicates less than 1%.
(1) All options have exercise prices equal to the fair market value of the
Company's Common Stock on the date of grant. The Compensation Committee
has the discretion and authority to amend and reprice the outstanding
options. No options were repriced during the Last Fiscal Year.
(2) Based on 4,093,625 shares granted to all employees during the Last Fiscal
Year from the 1987 Stock Option Plan.
(3) The 5% and 10% assumed compound rates of annual stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of future Common Stock
prices.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table provides information with respect to option exercises in
the Last Fiscal Year by the Named Executive Officers and the value of their
unexercised options at Fiscal Year End.
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-The-Money
Unexercised Options at
Options at Fiscal Year
Fiscal Year End End(1)
--------------- ----------------
Name Exercised Realized Vested Unvested Vested Unvested
---- --------- -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Glenn C. Jones.............. 0 $ 0 25,000 30,000 325,000 187,500
Arthur Swift................ 10,000 91,875 23,750 0 233,667 0
10,000 91,875
832 7,644
6,000 63,000
</TABLE>
--------
(1) Value is based on fair market value of the Company's common stock of
$20.875 per share on March 24, 2000 (the last trading day of the Last
Fiscal Year), less the exercise price.
59
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock as of March
25, 2000 by (i) each stockholder known to the Company to be a beneficial owner
of more than 5% of the Company's Common Stock; (ii) each director; (iii) each
of the Named Executive Officers and (iv) all current executive officers and
directors of the Company as a group. Unless otherwise indicated in the
footnotes, the beneficial owner has sole voting and investment power with
respect to the securities beneficially owned, subject only to community
property laws, if applicable.
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIAL OWNER SHARES(1) PERCENT
---------------- ---------- -------
<S> <C> <C>
Alfred S. Teo (2), Director................................ 8,121,158 12.2%
MacKay Shields LLC (3), 5% stockholder..................... 3,443,205 5.2%
Michael L. Hackworth(4), Chairman of the Board............. 1,160,187 1.7%
Suhas S. Patil(5), Chairman Emeritus and Director.......... 1,304,562 1.9%
David D. French(6), Chief Executive Officer and Director... 460,414 *
D. James Guzy(7), Director................................. 185,906 *
Henry M. Josefczyk(8), Former Senior Vice President World-
wide Sales................................................ 85,875 *
Walden C. Rhines(9), Director.............................. 29,124 *
Glenn C. Jones, Former Vice President Finance, Chief Finan-
cial Officer and Treasurer(10)............................ 75,000 *
Robert H. Smith(11), Director.............................. 23,124 *
Terry Leeder, Vice President Worldwide Sales (12).......... 2,000 *
All current executive officers and directors as a group (22
Persons)(13).............................................. 11,689,707 17.5%
</TABLE>
--------
* Less than 1%
(1) All options granted under the Amended 1987 Stock Option Plan and the
Amended 1990 Directors' Stock Option Plan are immediately exercisable, but
shares issued upon exercise of unvested options are subject to vesting
restrictions. Accordingly, all outstanding options granted under both
Plans are exercisable within 60 days of March 25, 2000. See the "Option
Exercises in Last Fiscal Year and Fiscal Year End Option Values" table for
vested and unvested shares. Options granted under the 1996 Stock Plan are
exercisable only when vested. Under the 1996 Stock Plan, 117,649 shares
are currently exercisable within 60 days of March 25, 2000 for the current
officers.
(2) Includes (a) 16,458 shares issuable upon exercise of options held by Mr.
Teo exercisable within 60 days of March 25, 2000, (b) 8,035,600 held by
Alfred S. and Annie Teo, (c) 112,800 shares held by Alpha Industries, Inc.
Retirement Plan dated January 1, 1984, of which Mr. Teo is the Trustee
(3) This information is provided on the Schedule 13G filed with the Securities
and Exchange Commission on February 8, 2000. The amount of shares
represented is exclusive of the 78,452 shares over which New York Life
Insurance Company, MacKay Shield LLC's parent company, has sole
dispositive power.
(4) Includes 893,750 shares issuable upon exercise of options held by Mr.
Hackworth exercisable within 60 days of March 25, 2000.
(5) Includes (i) 440,000 shares issuable upon exercise of options held by Dr.
Patil exercisable within 60 days of March 25, 2000, (ii) 791,162 held by
Dr. Patil and (iii) 73,400 shares held by family members and trusts for
the benefit of family members, with respect to which Dr. Patil disclaims
beneficial ownership.
(6) Includes 160,414 shares issuable upon exercise of options held by Mr.
French exercisable within 60 days of March 25, 2000.
(7) Includes 23,124 shares issuable upon exercise of options held by Mr. Guzy
exercisable within 60 days of March 25, 2000. Also includes 132,782 shares
held by Arbor Company, of which Mr. Guzy is President and may therefore be
deemed to be the beneficial owner.
(8) Includes 200 shares held by Mr. Josefczyk's wife and 84,375 shares
issuable upon exercise of options held by Mr. Josefczyk exercisable within
60 days of March 25, 2000.
(9) Includes (i) 23,124 shares issuable upon exercise of options held by Mr.
Rhines exercisable within 60 days of March 25, 2000 and (ii) 6,000 shares
held by his wife.
60
<PAGE>
(10) Includes 25,000 shares issuable upon exercise of options held by Mr.
Jones exercisable within 60 days of March 25, 2000
(11) Includes 23,124 shares issuable upon exercise of options held by Mr.
Smith exercisable within 60 days of March 25, 2000.
(12) As reported to the SEC on Form 5.
(13) Includes 1,973,605 shares issuable upon exercise of options held by
executive officers and directors exercisable within 60 days of March 25,
2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 31, 2000, the Company became party to a promissory note for the
principal amount of $790,000 wherein Jason Carlson, Vice President of the
Consumer Audio Division of the Company, and Georgette Carlson are the makers
of such note, each being jointly and severally liable for the same. The note
carries an 8% interest rate. The funds advanced by such promissory note were
utilized for the payment of a portion of the purchase price and secured by the
Carlsons' residence in Travis County, Texas.
On July 21, 1999 the Company became party to a promissory note for the
principal amount of $750,000 wherein David D. French, President and Chief
Executive Officer of the Company, is the maker of such note. The note carries
an 5.82% interest rate and is secured by 90,000 shares of the Company's common
stock which is held in escrow. The note and accrued interest are due and
payable five years from the date of the note or upon termination of
employment, voluntary or involuntary, by Mr. French.
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 25, 2000 and March 27, 1999.
(ii) Consolidated Statements of Operations for the years ended March 25, 2000,
March 27, 1999 and March 28, 1998.
(iii) Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)
for the years ended March 25, 2000, March 27, 1999 and March 28, 1998.
61
<PAGE>
(iv) Consolidated Statements of Cash Flows for the years ended March 25, 2000,
March 27, 1999 and March 28, 1998.
(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
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and Payments / Close of
Item of Period Expenses Deductions Period
---- ---------- ---------- ---------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
1998
Accrued wafer purchase
commitments................... $30,200 $53,000 $(19,400) $63,800
Allowance for doubtful
accounts...................... $12,770 $ 630 $ (2,224)(1) $11,176
1999
Accrued wafer purchase
commitments................... $63,800 $90,300 $(79,600) $74,500
Allowance for doubtful
accounts...................... $11,176 -- $ (1,880)(1) $ 9,296
2000
Accrued wafer purchase
commitments................... $74,500 -- $(73,824)(2) $ 676
Allowance for doubtful
accounts...................... $ 9,296 $ 357 $ (5,783)(3) $ 3,870
</TABLE>
--------
(1) Uncollectible accounts written off, net of recoveries and sale of assets.
(2) Reversal of wafer purchase commitment accrual in connection with first
quarter restructuring activities.
(3) Allowance reduced due to improved collection experience.
62
<PAGE>
3. EXHIBITS
The following exhibits are filed as part of or incorporated by reference into
this Report:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.1 (8) 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.
4.1 (1) Article III of Restated Articles of Incorporation of Registrant
(See Exhibits 3.1 and 3.2).
10.1 (9) Amended 1987 Stock Option Plan.
10.2 (9) Amended 1989 Employee Stock Purchase Plan.
10.3 (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.
10.4 (1) Form of Indemnification Agreement.
10.5 (1) Agreement for Foreign Exchange Contract Facility between Bank of
America National Trust and Savings Association and Registrant,
dated April 24, 1989.
10.6 (2) 1990 Directors Stock Option Plan and forms of Stock Option
Agreement.
10.7 (2) Lease between Renco Investment Company and Registrant dated
December 29, 1989.
10.8 (2) Loan agreement between USX Credit Corporation and Registrant dated
December 28, 1989.
10.10 (4) Equipment lease agreement between AT&T Systems Leasing Corporation
and Registrant dated December 2, 1991.
10.11 (4) Lease between Renco Investment Company and Registrant dated May 21,
1992.
10.12 (5) Loan agreement between Deutsche Credit Corporation and Registrant
dated March 30, 1993.
10.13 (5) Lease between Renco Investment Company and Registrant dated
February 28, 1993.
10.14 (6) Lease between Renco Investment Company and Registrant dated May 4,
1994.
10.15 (7) Participation Agreement dated as of September 1, 1994 among
Registrant, International Business Machines Corporation, Cirel Inc.
and MiCRUS Holdings Inc.
10.16 (7) Partnership Agreement dated as of September 30, 1994 between Cirel
Inc. and MiCRUS Holdings Inc.
10.17 (8) General Partnership Agreement dated as of October 23, 1995 between
the Company and AT&T.
10.18 (8) Joint Venture Formation Agreement dated as of October 23, 1995
between the Company and AT&T.
10.19 (10) Second Amended and Restated Multicurrency Credit Agreement between
Registrant and Bank of America dated June 30, 1997.
10.20 (11) Third Amendment to the Joint Venture Formation Agreement with
Cirent dated August 21, 1997.
10.21 (12) Restructuring agreement among Cirrus Logic, Inc., International
Business Machines Corporation, Cirel, Inc., MiCRUS Holding, Inc.
and MiCRUS.
12.0 Statement Setting Forth the Computation of Ratios of Earnings to
Fixed Charges.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.0 Article 5 Financial Data Schedule (March 25, 2000)
</TABLE>
63
<PAGE>
--------
(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-Q/A for the
quarterly period ended September 30, 1995.
(9) Incorporated by reference to Registrant's Report on Form 10-K for the
fiscal year ended March 30, 1996.
(10) Previously filed.
(11) Incorporated by reference to Registrant's Report on Form 10-Q/A for the
quarterly period ended September 27, 1997.
(12) Incorporated by reference to Registrant's Current Report on Form 8-K dated
August 3, 1999.
(b) Reports on Form 8-K
None.
64
<PAGE>
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.
/s/ Robert W. Fay
By:____________________________
Robert W. Fay
Vice President, Chief Financial
Officer,
Treasurer and Secretary
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert W. Fay, 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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Michael L. Hackworth Chairman of the Board and June 19, 2000
_________________________________ Director
Michael L. Hackworth
/s/ Suhas S. Patil Chairman Emeritus and June 19, 2000
_________________________________ Director
Suhas S. Patil
/s/ David D. French President, Chief Executive June 19, 2000
_________________________________ Officer
David D. French and Director
/s/ Robert W. Fay Vice President, Chief June 19, 2000
_________________________________ Financial Officer,
Robert W. Fay Treasurer and Secretary
/s/ D. James Guzy Director June 19, 2000
_________________________________
D. James Guzy
/s/ Walden C. Rhines Director June 19, 2000
_________________________________
Walden C. Rhines
/s/ Robert H. Smith Director June 19, 2000
_________________________________
Robert H. Smith
/s/ Alfred S. Teo Director June 19, 2000
_________________________________
Alfred S. Teo
</TABLE>
65
