FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended December 25, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-17795
CIRRUS LOGIC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0024818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Warren Avenue, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-8300
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the registrant's common stock, $0.001 par
value, was 65,983,132 as of December 25, 1999
Part 1. Financial Information
Item 1. Financial Statements
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Quarter Ended Three Quarters Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales $150,759 $153,062 $404,154 $500,682
Costs and expenses:
Cost of sales 93,435 171,477 244,458 444,907
Research and development 28,936 31,105 83,571 100,772
Selling, general and administrative 23,270 22,678 68,580 76,578
Restructuring costs, gain on sale of
assets and other, net - 18,037 127,211 43,553
Acquired in-process research and
development - - 8,013 -
Abandonment of assets charge 11,174 - 11,174 -
----------- ----------- ----------- -----------
Total costs and expenses 156,815 243,297 543,007 665,810
Loss from operations (6,056) (90,235) (138,853) (165,128)
Realized gain on sale of marketable
equity securities 34,293 - 34,293 -
Interest income (expense), net (3,875) (2,965) (12,263) (5,763)
Other income (expense), net 3,561 649 7,646 4,545
----------- ----------- ----------- -----------
Income (loss) before provision for
for income taxes 27,923 (92,551) (109,177) (166,346)
Provision for income taxes - - - 46,698
----------- ----------- ----------- -----------
Net income (loss) $27,923 ($92,551) ($109,177) ($213,044)
=========== =========== =========== ===========
Net income (loss) per share:
Basic $0.45 ($1.50) ($1.78) ($3.33)
Diluted $0.40 ($1.50) ($1.78) ($3.33)
Weighted average common shares outstanding:
Basic 62,134 61,807 61,219 64,068
Diluted 80,911 61,807 61,219 64,068
See Notes to the Unaudited Consolidated Condensed Financial
Statements
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
Dec. 25, March 27,
1999 1999
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $56,620 $144,457
Restricted cash 58,378 86,277
Short-term investments - 74,616
Marketable equity securities 72,162 -
Accounts receivable, net 81,985 66,063
Inventories, net 53,418 40,262
Other current assets 34,825 19,039
----------- -----------
Total current assets 357,388 430,714
Property and equipment, net 36,728 48,024
Investment in joint venture - 14,000
Deposits and other assets 52,194 39,892
----------- -----------
$446,310 $532,630
=========== ===========
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $113,589 $207,033
Current maturities of long-term debt
and capital lease obligations 14,616 23,076
Income taxes payable 37,002 36,593
----------- -----------
Total current liabilities 165,207 266,702
Long term obligations and
convertible subordinated notes 311,129 323,648
Commitments and contingencies
Net capital deficiency:
Common stock and additional paid-in capital 391,404 326,185
Unrealized gain on marketable equity securities 71,652 -
Accumulated deficit (493,082) (383,905)
----------- -----------
Total net capital deficiency (30,026) (57,720)
----------- -----------
$446,310 $532,630
=========== ===========
See Notes to the Unaudited Consolidated Condensed Financial
Statements
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Quarters Ended
Dec. 25, Dec. 26,
1999 1998
----------- -----------
Cash flows from operating activities:
Net income (loss) ($109,177) ($213,044)
Adjustments to reconcile net income to net
cash flows from operations:
Depreciation and amortization 23,842 52,787
Other non-cash charges 40,013 16,470
Deferred tax valuation allowance - 46,402
Write-off of property & equipment and other assets 11,861 5,029
Gain on sale of assets and other - (2,241)
Realized gain on sale of marketable
equity securities (34,293) -
Amortization of deferred stock compensation 899 1,313
Net change in operating assets and liabilities (138,029) 68,988
----------- -----------
Net cash used in operations (204,884) (24,296)
Cash flows from investing activities:
Purchase of short-term investments - (183,608)
Proceeds from sale of short-term investments 74,616 194,995
Proceeds from sale of marketable equity securities 34,533 -
Joint venture manufacturing agreements and
investment in joint ventures 14,000 (7,500)
Additions to property and equipment (5,730) (12,623)
Net proceeds from sale of assets - 2,241
Increase in deposits and other assets (16,685) (23,035)
Increase in cash from AudioLogic, Inc. acquisition 1,010 -
(Increase) decrease in restricted cash 27,899 (14,133)
----------- -----------
Net cash flows used by investing activities 129,643 (43,663)
Cash flows from financing activities:
Proceeds from issuance of common stock 8,383 11,280
Payments on long-term debt and capital
lease obligations (20,979) (22,086)
Repurchase and retirement of common stock - (93,111)
----------- -----------
Net cash used for financing activies (12,596) (103,917)
Net decrease in cash and cash equivalents (87,837) (171,876)
Cash and cash equivalents at beginning of period 144,457 307,184
----------- -----------
Cash and cash equivalents at end of period $56,620 $135,308
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $11,128 $22,652
Income taxes paid $621 $9,012
See Notes to the Unaudited Consolidated Condensed Financial
Statements
CIRRUS LOGIC, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated condensed financial statements have been prepared
by Cirrus Logic, Inc. (the "Company", the "Registrant", or
"Cirrus") pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In
the opinion of the Company, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position,
operating results and cash flows for those periods presented.
These consolidated condensed financial statements should be read
in conjunction with the consolidated financial statements, and
notes thereto for the year ended March 27, 1999, included in the
Company's 1999 Annual Report on Form 10-K. The results of
operations for the interim periods presented are not necessarily
indicative of the results that may be expected for the entire
year.
2. Inventories
Net inventories are comprised of the following:
Dec. 25, March 27,
1999 1999
----------- -----------
Work in process $42,834 $25,165
Finished goods 10,584 15,097
----------- -----------
Total $53,418 $40,262
=========== ===========
3. Income Taxes
In the first three quarters of fiscal 2000, the Company did not
provide for any income taxes. The Company expects no net income
tax provision in the current year due to the magnitude of the loss
realized in the first quarter.
Statement of Financial Accounting Standards 109 provides for the
recognition of deferred tax assets if realization of such assets
is more likely than not. The Company has provided a valuation
allowance equal to its net deferred tax assets due to
uncertainties regarding their realization. The realizability of
the deferred tax assets will be evaluated on a quarterly basis.
4. Restructuring of Joint Ventures
During the first quarter of fiscal 2000, the Company substantially
completed the remaining restructuring activities previously
announced in the second quarter of fiscal 1999. The Company
finalized negotiations with International Business Machines
Corporation ("IBM") to restructure the Company's interest in the
MiCRUS joint venture and also finalized negotiations with Lucent
Technologies, Inc. ("Lucent") to terminate the Company's interest
in the Cirent joint venture. In connection with the finalization
of these two agreements, the Company recorded restructuring
charges of $128.2 million during the first quarter of fiscal 2000,
$1 million of which is included in cost of sales. The
restructuring charge includes $135 million in direct payments, $32
million of the Company's contributed common stock, $4.8 million
fair value of the related embedded stock derivative, $9.3 million
of lease buyout costs and $16.4 million of equipment write-offs.
These charges were partially offset by the reversal of
approximately $71.9 million of previously accrued wafer purchase
commitment charges due to the renegotiated terms of the Company's
purchase commitments with its former partners.
MiCRUS
The terms of the MiCRUS restructuring agreement, entered into
during the first quarter of fiscal 2000, required the Company to
pay $135 million in cash to IBM and issue into an escrow account
shares of the Company's common stock with a fair value (based on
the average closing price of the Company's common stock for the 20
days prior to closing) of $32 million. Under the escrow
arrangement, the escrow period ends on April 3, 2000, wherein some
or all of the shares will be released to IBM. If the fair value
of the shares on April 3, 2000 is less than $32 million, Cirrus
must pay the difference to IBM in cash. If the fair value of the
shares exceeds $32 million, shares equal to one-half of the excess
over $32 million are returned to the Company and the remaining
shares are released to IBM. During the six month period following
April 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 the Cirrus stock, it can
require Cirrus to purchase the remaining shares for cash such that
the total received by IBM, including the amounts IBM received in
open market sales, is $32 million. If during the six month period
ending on September 30, 2000, the Company stock received by IBM
appreciates to over $32 million, IBM may keep all proceeds from
the sale of stock in excess of $32 million up to a maximum of $48
million. Amounts received by IBM in excess of $48 million must be
returned to Cirrus.
Because Cirrus has guaranteed IBM a minimum of $32 million in
cash, either through open market sales of Cirrus stock or through
repurchase of the stock directly by Cirrus, the fair value of the
embedded stock derivative granted to IBM has been recorded in the
balance sheet as a liability. During the third quarter of fiscal
2000, the Company recorded a $1.7 million gain due to appreciation
in the Company's stock price. The fair value of the embedded
stock derivative of $3.1 million as of December 25, 1999 was
estimated by the Company based on the Company's current estimate
of the financial outcome of this arrangement.
The Company also transferred to IBM the Company's partnership
interest and certain assets relating to the partnership's
operation, and forgave certain debts owed to the Company by IBM
and/or MiCRUS relating to the use of certain assets prior to the
closing.
In exchange for this consideration, IBM will release the Company
of its obligations to support the partnership and to maintain
certain lease payment guarantees issued jointly and severally with
IBM. IBM is responsible for the costs associated with winding
down the partnership, including costs associated with employee
terminations and the dismantling of equipment. The Company also
entered into an amended wafer purchase agreement.
Cirent
The terms of the Lucent termination agreement, which was also
entered into during the first quarter of fiscal 2000, required the
Company to pay to Lucent $9.3 million which Lucent will use as
partial payment in connection with the buyout of certain leases
associated with assets utilized in the Cirent manufacturing
facility. The Company sold its interest in the joint venture and
certain associated assets to an affiliate of Lucent for $14
million and is not responsible for any future operating costs or
equipment lease liabilities associated with the fab. In
addition, the Company entered into an amended wafer purchase
agreement whereby the Company paid Lucent a $5 million deposit and
pledged $20 million of its accounts receivable to collateralize
future wafer purchase commitments.
5. Acquisition of AudioLogic, Inc.
On July 27, 1999, the Company completed its 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
.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, the Company guaranteed that the
value of the converted 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, the Company may settle the
difference in cash or additional shares. The Company valued the
per share consideration paid for AudioLogic based on the price of
the Company's 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. 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)
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
=========
Existing Technology
To determine the value of the existing technology ($6.4 million),
the expected future cash flow attributable to the existing
technology was discounted, 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
The valuation of AudioLogic's existing agreements ($4.1 million)
was based on the discounted net cash flow expected to be realized
from licensing revenues and product sales anticipated under the
agreements.
Covenants Not-to-Compete
The agreements signed between Cirrus and certain members of
AudioLogic's management team establishing covenants not-to-compete
were valued ($1.9 million) 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
The AudioLogic trademark was valued ($0.7 million) based on a
discounted cost-savings approach using an assumed royalty rate
which is customary for the semiconductor industry.
Assembled workforce
To determine the value of the assembled workforce ($0.6 million),
Cirrus evaluated 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
Management estimates that $8.0 million of the purchase price
represents purchased in-process technology that has not yet
reached technological feasibility and has no alternative future
use. Accordingly, this amount was expensed in the second quarter
of fiscal year 2000 following consummation of the acquisition. The
value assigned to purchased in-process technology was determined
by identifying research projects in areas for which technological
feasibility had not been achieved using appropriate income based
valuation methodologies. The value was determined 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
valuation date) divided by the total estimated costs to complete
the projects. The discount rate 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
to the Company 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 the Company
believes are reasonable.
The amounts allocated to existing technology, existing
agreements, covenants not-to-compete, trademark and assembled
workforce are being amortized over their respective estimated
useful lives of between three and four years using the straight-
line method.
6. Marketable Equity Securities
During the third quarter of fiscal 2000, the Company sold a
portion of its investment in Phone.com, Inc., realizing a gain of
$34.3 million. The remaining fair value of the Company's holdings
in Phone.com and other equities at December 25, 1999 is $72.2
million. In connection with Phone.com's secondary public
offering, completed during the fiscal third quarter, the Company
signed an agreement which prohibits the Company from selling
additional shares until February 15, 2000. Phone.com is traded on
the Nasdaq National Market under the symbol "PHCM".
7. Net Income Per Share
The following table sets forth the computation of basic and
diluted earnings per share (In thousands, except per share
amounts):
Quarter Ended Three Quarters Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Numerator:
Net income (loss) - numerator for basic
earnings per share $27,923 ($92,551) ($109,177) ($213,044)
Effect of dilutive securities:
Interest on convertible subordinated notes 4,500 - - -
----------- ----------- ----------- -----------
Numerator for diluted earnings per share $32,423 ($92,551) ($109,177) ($213,044)
Denominator:
Denominator for basic net income (loss)
per share - weighted-average shares 62,134 61,807 61,219 64,068
Effect of dilutive securities:
Employee stock options 2,733 - - -
Contingent stock-acquisition shares 699 - - -
Contingent restructuring shares 2,959 - - -
6% convertible subordinated notes 12,386 - - -
----------- ----------- ----------- -----------
Denominator for diluted earnings per share 80,911 61,807 61,219 64,068
Basic net income (loss) per share $0.45 ($1.50) ($1.78) ($3.33)
=========== =========== =========== ===========
Diluted net income (loss) per share $0.40 ($1.50) ($1.78) ($3.33)
=========== =========== =========== ===========
Incremental common shares attributable to the exercise of
outstanding options of 1,266,700 shares for the three quarters
ended December 25, 1999 were excluded from the computation of
diluted net loss per share because the effect would be
antidilutive. Incremental common shares attributable to the
exercise of outstanding options of 3,634,000 and 5,350,000 shares,
respectively, for the quarter and three quarters ended December
26, 1998 were excluded from the computation of diluted net loss
per share because the effect would be antidilutive.
8. Commitments and Contingencies
Due to the terms of the MiCRUS restructuring agreement (as
discussed in Note 4), as of December 25, 1999 the Company remains
contingently liable for MiCRUS equipment leases which have
remaining payments of approximately $182.7 million payable through
2003.
9. Comprehensive Income
The components of comprehensive income (loss), net of tax, are as
follows (in thousands):
Quarter Ended Three Quarters Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income (loss) $27,923 ($92,551) ($109,177) ($213,044)
Change in unrealized gain on investments,
net of sales (9,538) - 71,652 -
Change in unrealized loss on foreign
currency translation adjustments 132 1,772 (1,224) 1,477
------------ ------------ ------------ ------------
Total $18,517 ($90,779) ($38,749) ($211,567)
============ ============ ============ ============
10. Segment information
Information on reportable segments is as follows (in thousands):
Quarter Ended Three Quarters Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues:
Audio division $67,433 $56,470 $187,860 $162,776
Mass storage division 44,159 57,379 115,732 186,234
Precision data conversion division 14,242 12,958 41,769 42,617
All other 24,925 26,255 58,793 109,055
----------- ----------- ----------- -----------
Total $150,759 $153,062 $404,154 $500,682
=========== =========== =========== ===========
Operating profit (losses):
Audio division $13,884 $8,665 $34,605 $32,334
Mass storage division 1,856 10,977 9,866 41,669
Precision data conversion division 2,376 534 8,356 7,562
All other (24,172) (110,411) (191,680) (246,693)
----------- ----------- ----------- -----------
Total ($6,056) ($90,235) ($138,853) ($165,128)
=========== =========== =========== ===========
11. Abandonment of Assets Charge
During the third quarter of fiscal 2000, the Company made a
strategic decision to abandon the development efforts previously
undertaken on the manufacturing component of the Company's
enterprise resource planning software purchased from SAP America,
Inc. In connection with this decision, the Company recorded an
asset abandonment charge of approximately $10.2 million.
12. Recently Issued Accounting Standards
In June 1998, the Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued and, as amended by SFAS No. 137 "Deferral
of Effective Date of FASB Statement 133", is effective for fiscal
years commencing after June 15, 2000. SFAS 133 provides a
comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The Company
does not believe SFAS 133, as amended by SFAS 137, will have a
material impact on earnings or the financial condition of the
Company.
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This information should be read along with the unaudited
consolidated condensed financial statements and the notes thereto
included in Item 1 of this Quarterly Report and the audited
consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal year ended March 27, 1999,
contained in the 1999 Annual Report on Form 10-K (the "1999 Form
10-K"). This Discussion and Analysis contains forward-looking
statements. Such statements are subject to certain risks and
uncertainties, including those discussed below or in the 1999 Form
10-K that could cause actual results to differ materially from the
Company's expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements, as they reflect
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any
revision to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Results of Operations
The following table discloses the percentages that income
statement items are of net sales.
Percentage of Net Sales
Quarter Ended Three Quarters Ended
Dec. 25, Dec. 26 Dec. 25, Dec. 26
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales 100% 100% 100% 100%
Gross margin 38% -12% 40% 11%
Research and development 19% 20% 21% 20%
Selling, general and administrative 15% 15% 17% 15%
Restructuring costs, gain on sale of
assets and other, net 0% 12% 31% 9%
Acquired in-process research &
development expenses 0% 0% 2% 0%
Abandonment of assets charge 7% 0% 3% 0%
---------- ---------- ---------- ----------
Income (loss) from operations -4% -59% -34% -33%
---------- ---------- ---------- ----------
Income (loss) before income taxes 19% -60% -27% -33%
Provision for income taxes 0% 0% 0% 9%
---------- ---------- ---------- ----------
Net income (loss) 19% -60% -27% -43%
========== ========== ========== ==========
Net Sales
Net sales for the third quarter of fiscal 2000 decreased by $2.3
million, or 2%, to $150.8 million from $153.1 million for the
third quarter of fiscal 1999. Revenues in the third quarter of
fiscal 1999 include amounts from businesses subsequently divested
by the Company. Revenues from non-core and divested businesses,
consisting primarily of telecommunications, networking and display
products, in the third quarter of fiscal 2000 were $21.6 million
compared to $22.2 million in the third quarter of fiscal 1999.
Excluding revenues from non-core businesses, net sales from core
businesses, consisting of mass storage, audio, high-precision data
conversion and embedded processor products decreased approximately
$1.7 million.
Net sales for the first three quarters of fiscal 2000 decreased
$96.5 million or 19% to $404.2 million from $500.7 million for the
first three quarters of fiscal 1999. Revenues in the first three
quarters of fiscal 1999 include amounts from businesses
subsequently divested by the Company. Revenues from non-core and
divested businesses in the first three quarters of fiscal 2000
were $51.9 million compared to $98.7 million in the comparable
period of fiscal 1999, a decrease of $46.8 million or 47%.
Excluding revenues from non-core businesses, net sales from core
businesses decreased approximately $49.7 million.
Net sales for the Company's core businesses have decreased during
the first three quarters of fiscal 2000 compared to fiscal 1999
due to a decline in sales from the Company's mass storage
products. This decline was partially offset by increased sales of
the Company's audio products.
For the third quarter of fiscal 2000, unit volumes compared to the
same period of the prior year have decreased by 14% for mass
storage products and increased by 120% for audio products. For
the first three quarters of fiscal 2000, unit volumes compared to
the same period of the prior year have decreased by 31% for mass
storage products and increased by 94% for audio products. Unit
volumes in the audio division have increased during fiscal 2000
compared to fiscal 1999 at a faster rate than audio revenue due to
a decline in average selling prices. Overall pricing pressure in the
PC market is contributing to the decline in audio average selling prices.
Export sales (including sales to U.S.-based customers with
manufacturing plants overseas) were 75% and 78% of total sales
in the third quarter of fiscal 2000 and fiscal 1999, respectively,
and were 74% and 72% of total sales in the first three
quarters of fiscal 2000 and fiscal 1999, respectively.
The Company's sales are currently denominated primarily in U.S.
dollars. The Company may enter into foreign currency forward
exchange and option contracts to hedge certain of its foreign
currency exposures.
Sales to one customer comprised approximately 13% of sales in the
first three quarters of fiscal 2000 and fiscal 1999. Sales to
another customer comprised approximately 13% of sales in the first
three quarters fiscal 1999.
Gross Margin
Gross margin was 38% in the third quarter of fiscal 2000 compared
to -12% for the third quarter of fiscal 1999. Gross margin was
40% in the first three quarters of fiscal 2000 compared to 11% for
the first three quarters of fiscal 1999.
Gross margins in fiscal 1999 were negatively impacted by
wafer purchase commitment charges of $89.9 million, of which
$62.2 million was recognized during the third quarter, and
$30.7 million of inventory write-down charges, of which
$10.6 million was recognized during the third quarter of fiscal
1999. Excluding these charges, gross margins would have been 39%
in the third quarter of fiscal 1999 and 36% for the first three
quarters of fiscal 1999. Gross margins are down slightly for the
third quarter of fiscal 2000 from 1999 due to a shift in revenue
mix to certain audio products with lower margins. For the first
three quarters of fiscal 2000, gross margins are higher versus
fiscal 1999 due to a change in the mix of products shipped to
higher margin products in mass storage and non-core products
during fiscal 2000.
Research and Development
Research and development expenses for the third quarter of fiscal
2000 decreased by $2.2 million, or 7%, to $28.9 million from
$31.1 million in the third quarter of fiscal 1999.
Research and development expenses for the first three quarters of
fiscal 2000 decreased by $17.2 million, or 17% to $83.6 million
from $100.8 million in the first three quarters of fiscal 1999.
Research and development expenses have decreased during fiscal
2000 compared to fiscal 1999 primarily due to lower headcount
during fiscal 2000 resulting from the Company realignment into
four market focused divisions. Research and development expenses for
the third quarter and first three quarters of fiscal 2000 are relatively
flat as a percentage of net sales compared to the comparable periods of
fiscal 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the third quarter
of fiscal 2000 increased $0.6 million, or 3% to $23.3 million
from $22.7 million in the third quarter of fiscal 1999.
Selling, general and administrative expenses in the first three
quarters of fiscal 2000 decreased $8.0 million, or 10% to $68.6
million from $76.6 million in the first three quarters of fiscal
1999.
Selling, general and administrative (SG&A) expenses have decreased
during fiscal 2000 compared to fiscal 1999 primarily due to lower
headcount during fiscal 2000 as a result of prior restructurings.
SG&A expenses as a percentage of net sales are flat for the third
quarter of fiscal 2000 compared to the third quarter of fiscal 1999.
For the first three quarters of fiscal 2000, SG&A expenses as a
percentage of net sales increased to 17% from 15% for the comparable
period of fiscal 1999 due to costs incurred during the first half
of fiscal 2000 in connection with the Company's enterprise resource
planning system.
Restructuring Costs, Gain on Sale of Assets and Other, Net
During the first quarter of fiscal 2000, the Company recorded
restructuring and other charges of $128.2 million relating to the
Company's termination of its interests in two manufacturing joint
ventures, MiCRUS and Cirent, $1 million of which is included is
cost of sales. The restructuring charge includes $135 million in
direct payments, $32 million worth of the Company's contributed
common stock, $4.8 million fair value of the related embedded
stock derivative, $9.3 million of lease buyout costs and $16.4
million of equipment write-offs. These charges were offset by the
reversal of approximately $71.9 million of previously accrued
wafer purchase commitment charges due to the renegotiated terms of
the Company's purchase commitments with its former partners. To
date, the Company has paid approximately $167 million in cash in
connection with these restructuring activities. The Company does
not expect there to be further significant payments during fiscal
year 2000 relating to these restructuring activities. However,
additional cash payments may be required under the MiCRUS
restructuring agreement in fiscal year 2001 depending on the
Company's stock price. See Note 4 of Notes to the Unaudited
Consolidated Condensed Financial Statements.
The Company believes that as a result of these transactions the
Company has substantially completed the restructuring activities
that it initiated during the second quarter of fiscal 1999 and the
Company does not expect to incur significant accrued wafer
purchase commitment charges in the future relating to these
activities.
Acquired In-Process Research & Development Expenses
During the second quarter of fiscal 2000, Cirrus recorded $8.0
million or 6% of net sales of acquired research and development
expenses resulting from Cirrus' acquisition of AudioLogic, Inc.
(See Note 5 to the Condensed Consolidated Financial Statements).
These amounts were expensed on the acquisition date because the
acquired technology had not yet reached technological feasibility
and had no future alternative uses. There can be 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 six months. The
estimated cost to complete the development of the PWM #2
technology is expected to be approximately $0.1 million ratably
until its completion in the first quarter of fiscal 2001.
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
18 months. The estimated cost to complete the development of the
PWM #3 technology is expected to be approximately $0.3 million
ratably until its completion in the first quarter of fiscal 2001.
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 18 months. The estimated cost to complete the
development of the PWM #4b technology is expected to be
approximately $0.3 million ratably until its completion in the
first quarter of fiscal 2001.
These products are currently in the designing 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
The value assigned to in-process research and development projects
was determined 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 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 utilized to
discount the net cash flows to their present value are based on
Company'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:
Estimated Expected
Percentage Useful
Product of Completion Life
- ----------- -------------- -----------
PWM #2 82% 4 years
PWM #3 63% 4 years
PWM #4b 63% 4 years
The value assigned to each acquired in-process research and
development project as of the acquisition date were as follows (in
thousands):
Value
Product Assigned
- ----------- -----------
PWM #2 $4,300
PWM #3 3,200
PWM #4b 500
Other 13
-----------
$8,013
===========
Abandonment of Assets Charge
During the third quarter of fiscal 2000, the Company made a
strategic decision to abandon the development efforts previously
undertaken on the manufacturing component of the Company's
enterprise resource planning software purchased from SAP America,
Inc. In connection with this decision, the Company recorded an
asset abandonment charge of approximately $10.2 million.
The Company does not expect to incur additional write-offs in
future periods relating to the SAP manufacturing system.
Income Taxes
The Company did not provide for any income taxes in the first
three quarters of fiscal 2000. The Company does not expect to
recognize any net income tax provision during the current fiscal
year due to the magnitude of the loss realized in the first
quarter.
Liquidity and Capital Resources
The Company used approximately $204.9 million of cash and cash
equivalents in its operating activities during the first three
quarters of fiscal 2000 and used approximately $24.3 million
during the first three quarters of fiscal 1999. The cash used by
operations in the first three quarters of fiscal 2000 was
primarily due to payments required for the termination of the
Company's joint venture operations with IBM and Lucent.
The Company provided $129.6 million in cash from investing
activities during the first three quarters of fiscal 2000 compared
to cash used in investing activities of $43.7 million during the
comparable period of fiscal 1999. The cash provided by investing
activities for fiscal 2000 is primarily due to sales of the
Company's short-term investments.
The Company used $12.6 million in cash for financing activities
during the first three quarters of fiscal 2000 while using $103.9
million during the comparable period of fiscal 1999. During the
first three quarters of fiscal 1999, the Company repurchased $93.1
million of its common stock. Cash used in financing activities
for fiscal 2000 is due to payments on the Company's outstanding
debt partially offset by cash provided by stock issued from the
exercise of stock options and the employee stock purchase plan.
At December 25, 1999, the Company had $115 million of cash, cash
equivalents and restricted cash of which $58.4 million is
restricted cash. The restrictions on cash are due to outstanding
letter of credits required for certain leases agreements. The
Company does not expect the amount of restricted cash to change
significantly during the fourth quarter of fiscal 2000.
In connection with the financing of its operations, the Company
has borrowed money and entered into substantial equipment lease
obligations. The Company's ability to meet its debt service and
other obligations will be dependent upon the Company's future
performance, which will be subject to financial, business, and
other factors affecting the operations of the Company, many of
which are beyond its control.
Historically, the Company has generated cash in an amount
sufficient to fund its operations. The Company anticipates that
its existing capital resources and cash flow generated from future
operations will enable it to maintain its current level of
operations for the foreseeable future. The Company may revise its
operating plans in response to future changes in the semiconductor
industry in general and the demand for its products in particular.
The Company believes that significant changes in the economic
environment, which may affect worldwide demand for technology
products, could materially and adversely impact the Company,
including with respect to such matters as its ability to fund its
future operations.
As of December 25, 1999, the Company holds approximately 0.6
million shares of common stock in Phone.com, Inc. (Phone.com) with
a market value of $71.9 million.
In connection with Phone.com's secondary stock offering, the
Company signed an agreement which prohibits the Company from
selling its Phone.com shares until after February 15, 2000.
Phone.com is traded on the Nasdaq National Market under the symbol
"PHCM".
Quarterly Fluctuations
YOU SHOULD EXPECT THAT CIRRUS' OPERATING RESULTS MAY FLUCTUATE IN
FUTURE PERIODS.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially
from quarter to quarter in the future. The Company's operating
results are affected by a wide variety of factors, many of which
are outside of the Company's control, including but not limited
to, economic conditions and overall market demand in the United
States and worldwide, the Company's ability to introduce new
products and technologies on a timely basis, changes in product
mix, fluctuations in manufacturing costs which affect the
Company's gross margins, declines in market demand for the
Company's and its customers' products, sales timing, the level of
orders which are received and can be shipped in a quarter, the
cyclical nature of both the semiconductor industry and the markets
addressed by the Company's products, product obsolescence, price
erosion, and competitive factors. The Company's operating results
in the remainder of fiscal 2000 are likely to be affected by these
factors as well as others.
Inventory Risks
CIRRUS MAY PRODUCE INVENTORY IN QUANTITIES WHICH ARE IN EXCESS OF
CURRENT DEMAND. OUR INVENTORY MAY ALSO BECOME OBSOLETE.
The Company must order wafers and build inventory well in advance
of product shipments. Because the Company's markets are volatile
and subject to rapid technology and price changes, there is a risk
that the Company will forecast inaccurately and produce excess or
insufficient inventories of particular products. This inventory
risk is heightened because many of the Company's customers place
orders with short lead times. Such inventory imbalances have
occurred in the past and in fact contributed significantly to the
Company's operating losses over the last three years. These
factors increase not only the inventory risk but also the
difficulty of forecasting quarterly operating results. Moreover,
as is common in the semiconductor industry, the Company frequently
ships more products in the third month of each quarter than in
either of the first two months of the quarter, and shipments in
the third month are higher at the end of that month. The
concentration of sales in the last month of the quarter
contributes to difficulty in predicting the Company's quarterly
revenues and results of operations.
Issues Relating to Manufacturing and Raw Materials Procurement
During fiscal 1998 and fiscal 1999, excess production capacity in
the industry led to significant price competition between merchant
semiconductor foundries and the Company believes that in some
cases this resulted in pricing from certain foundries that was
lower than the Company's cost of production from its former
manufacturing joint ventures. The Company experienced pressures
on its selling prices during fiscal 1998, which had a negative
impact on its results of operations and it believes that this was
partially due to the fact that certain of its competitors were
able to obtain more favorable pricing from such foundries.
The Company's current strategy is to fulfill its wafer
requirements using outside merchant wafer suppliers, including the
Company's former joint venture partners. The Company also uses
other outside vendors to package the wafer die into integrated
circuits and to perform some of the Company's product testing.
The Company believes that the current strategy will result in
procurement terms which more closely track with market conditions.
A LACK OF SUFFICIENT CAPACITY IN THE SEMICONDUCTOR INDUSTRY MAY
ADVERSELY AFFECT CIRRUS' ABILITY TO OBTAIN RAW MATERIALS.
The Company's results of operations could be adversely affected in
the future, as they have been so affected in the past, if
particular suppliers are unable to provide a sufficient and timely
supply of product, whether because of raw material shortages,
capacity constraints, unexpected disruptions at the plants, delays
in qualifying new suppliers or other reasons, or if the Company is
forced to purchase wafers or packaging from higher cost suppliers
or to pay expediting charges to obtain additional supply, or if
the Company's test facilities are disrupted for an extended period
of time. Because of the concentration of sales at the end of each
quarter, a disruption in the Company's production or shipping near
the end of a quarter could materially reduce the Company's
revenues for that quarter. Production may be constrained even
though capacity is available at one or more wafer manufacturing
facilities because of the difficulty of moving production from one
facility to another. Any supply shortage could adversely affect
sales and operating profits. The Company's reliance upon outside
vendors for assembly and test could also adversely impact sales
and operating profits if the Company was unable to secure
sufficient access to the services of these outside vendors.
On September 20, 1999 a magnitude 7.6 earthquake struck Taiwan
where two of the Company's key suppliers are located. Some
shipments to our customers were delayed in the fiscal third
quarter as a result of reduced allocations arising from the
earthquake. Our suppliers have worked with us to minimize the
resulting impact to us and we expect that the delayed shipments
will be completed and shipped in the fiscal fourth quarter. We do
not expect further production issues as a result of the
earthquake.
Sensitivity to Security Prices
CIRRUS IS EXPOSED TO FLUCTUATIONS IN THE PRICES OF CERTAIN STOCKS,
INCLUDING OUR OWN.
As discussed in Note 4 to the Condensed Consolidated Financial
Statements, the Company issued $32 million of common stock into an
escrow account during the second quarter of fiscal 2000 in
connection with the restructuring of the MiCRUS joint venture.
The Company has made certain guarantees to IBM regarding the
market value of that stock in future periods. As a result, the
Company's earnings would be adversely affected in future periods
by declines in the market price of the Company's stock. As a
result of analyzing the fair value of this derivative liability
during the third quarter of fiscal 2000, Cirrus recorded a $1.7
million gain due to appreciation in Cirrus' stock price.
As of December 25, 1999, the Company holds approximately 0.6
million shares of common stock in Phone.com, Inc. (Phone.com) with
a market value of $71.9 million. The fair value of the Company's
holdings in Phone.com will fluctuate as the stock price of
Phone.com fluctuates.
Dependence on PC Market
CIRRUS' OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY A DECLINE
IN THE RATE OF GROWTH IN THE PC INDUSTRY.
Sales of many of the Company's products will continue to depend
largely on sales of personal computers (PCs). Reduced growth in
the PC market could affect the financial health of the Company as
well as its customers. Moreover, as a component supplier to PC
OEMs and to peripheral device manufacturers, the Company is likely
to experience a greater magnitude of fluctuations in demand than
the Company's customers themselves experience. In addition, many
of the Company's products are used in PCs for the consumer market,
and the consumer PC market is more volatile than other segments of
the PC market.
Other integrated circuit (IC) makers, including Intel Corporation,
have expressed their interest in integrating through hardware
functions, adding through special software functions, or kitting
components to provide some multimedia or communications features
into or with their microprocessor products. Successful
integration of these functions could substantially reduce the
Company's opportunities for IC sales in these areas. In addition,
the Company's de-emphasis of PC products and its focus on non-PC
markets could have an adverse affect on the Company's PC product
sales as customers seek other supply sources with greater
commitments to the PC market.
A number of PC OEMs buy products directly from the Company and
also buy motherboards, add-in boards or modules from suppliers who
in turn buy products from the Company. Accordingly, a significant
portion of the Company's sales may depend directly or indirectly
on the sales to a particular PC OEM. Since the Company cannot
track sales by motherboard, add-in board or module manufacturer,
the Company may not be fully informed as to the extent or even the
fact of its indirect dependence on any particular PC OEM, and,
therefore, may be unable to assess the risks of such indirect
dependence.
Issues Relating to Mass Storage Market
The mass storage market has historically been characterized by a
relatively small number of magnetic disk drive manufacturers and
by periods of rapid growth followed by periods of oversupply and
contraction. Growth in the mass storage market is directly
affected by growth in the PC market. Furthermore, the price
competitive nature of the disk drive industry continues to put
pressure on the price of all disk drive components. Recent market
demands for sub-$1,000 PCs puts further pressure on the price of
disk drives and disk drive components.
Revenues from mass storage products in fiscal 2000 are likely to
depend heavily on the success of certain 3.5 inch magnetic disk
drive products selected for use by various customers, which in
turn depends upon obtaining timely customer qualification of the
new products and bringing the products into volume production
timely and cost effectively.
The Company's revenues from mass storage products are dependent on
the successful introduction by its customers of new disk drive
products and can be impacted by the timing of customers'
transition to new disk drive products. Recent efforts by certain
of the Company's customers to develop their own ICs for mass
storage products could in the future reduce demand for the
Company's mass storage products, which could have an adverse
effect on the Company's revenues and gross margins from such
products. In addition, in response to the current market trend
towards integrating hard disk controllers with microcontrollers,
the Company's revenues and gross margins from its mass storage
products will be dependent on the Company's ability to introduce
such integrated products in a commercially competitive manner.
The Company generates most of its revenue for magnetic storage
from two of the nine major HDD manufacturers.
Finally, while the Company believes it is well positioned for the
trend toward integration of HDD electronic components with the
first product on the market to combine the three primary
electronic components, some of the Company's competitors have also
announced plans to introduce integrated drive electronics
components. Some of these competitors have substantially greater
resources to accomplish the technical obstacles of integration and
greater access to the advanced technologies necessary to provide
integrated HDD electronic components.
Issues Relating to Audio Products
Most of the Company's revenues in the audio market derive from the
sales of audio codecs and integrated 16-bit codec-plus-controller
solutions for the PC market and consumer electronics equipment.
In the PC market, the transition to the AC-link codecs attached to
core logic using the multimedia features of the processor and
single chip solutions are lowering the average selling price in
the audio IC market. The Company's revenues from the sale of PC
audio products in fiscal 2000 are likely to be significantly
affected by this transition to core logic connected audio and by
the introduction of cost reduced, fully-integrated, single-chip
audio ICs. Moreover, aggressive competitive pricing pressures
have adversely affected and may continue to adversely affect the
Company's revenues and gross margins from the sale of audio ICs.
Three-dimensional, spatial-effects audio became an important
feature in fiscal 1999, primarily in products for the consumer
electronics marketplace. If the Company's spatial-effects audio
products do not meet the cost or performance requirements of the
market, revenues from the sale of audio products could be
adversely affected.
Issues Relating to Precision Mixed-Signal Products
Precision Data Converter Products is a very broad market with many
well established competitors. The Company's ability to compete in
this market will be adversely affected if it cannot establish
broad sales channels or if it does not develop and maintain a
broad enough product line to compete effectively. In addition,
the customer product design in time is long. Customer delays in
product development and introductions creates risk relative to the
Company's revenue plans. Further, the Company's products in this
market are technically very complex. The complexity of the
products contributes to risks in getting products to market on a
timely basis, which could impact the Company's revenue plans. The
scarcity of analog engineering talent also contributes to risks
related to product development timing in this market.
Issues Relating to Embedded Processor Products
Many of the solutions that utilize the Company's embedded
processor products are sold into markets that are generally
considered emerging markets. As such, the size of these markets
is presently small but expected to grow over time. Revenue for
the Company's embedded processor products will depend
significantly on the success of the solutions that are based on
the Company's products along with the actual growth of the markets
for these solutions.
Examples of the emerging markets that the Company's embedded
processor products sell into include portable digital audio
players, smart cellular phones, set top internet and e-mail access
boxes, and personal digital appliances. As the individual markets
for these products grow, many competing semiconductor
manufacturers are expected to enter the market for devices that
these products are based upon and drive the selling price for the
devices lower. Because these markets are at such an early stage,
clear definitions of the required feature sets in the products
have not been established. The Company's products could
experience problems in the market place if the feature sets are
not consistent with the emerging market requirements.
Many of the Company's customers who are building solutions for
emerging market products are smaller organizations whose resources
and abilities are limited and whose business plans involve a
significant amount of risk. Customer delays in product
development and introductions creates risk relative to the
Company's revenue plans.
In addition, the Company's embedded processor products are
presently based on CPU cores that are licensed from ARM Ltd.
There are over 30 other companies that have licensed CPU cores
from ARM that could enter the market for the Company's embedded
processor products. These products could be very similar to the
Company's products and drive down the prices for the Company's
products.
Intellectual Property Matters
FUTURE ISSUES MAY ARISE INVOLVING INTELLECTUAL PROPERTY RIGHTS
WHICH COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The
Company and certain of its customers from time to time have been
notified that they may be infringing certain patents and other
intellectual property rights of others. In addition, customers
have been named in suits alleging infringement of patents or other
intellectual property rights by customer products. Certain
components of these products have been purchased from the Company
and may be subject to indemnification provisions made by the
Company to its customers. Although licenses are generally
offered in situations where the Company or its customers are named
in suits alleging infringement of patents or other intellectual
property rights, there can be no assurance that any licenses or
other rights can be obtained on acceptable terms. An unfavorable
outcome occurring in any such suit could have an adverse effect on
the Company's future operations and/or liquidity.
Foreign Operations and Markets
CIRRUS IS EXPOSED TO UNFAVORABLE ECONOMIC CONDITIONS WORLDWIDE.
Because many of the Company's subcontractors and several of the
Company's key customers which collectively account for a
significant percentage of the Company's revenues are located in
Japan and other Asian countries, the Company's business is subject
to risks associated with many factors beyond its control.
International operations and sales may be subject to political and
economic risks, including political instability, currency
controls, exchange rate fluctuations, and changes in import/export
regulations, tariff and freight rates. Although the Company may
buy hedging instruments to reduce its exposure to currency
exchange rate fluctuations, the Company's competitive position can
be affected by the exchange rate of the U.S. dollar against other
currencies, particularly the Japanese yen. Further, to the extent
that volatility in foreign financial markets was to have an
adverse impact on economic conditions in a country or geographic
region in which the Company does business, demand for and supply
of the Company's products could be adversely impacted, which would
have a negative impact on the Company's revenues and earnings.
A significant number of the Company's customers and suppliers are
in Asia. The recent turmoil in the Asian financial markets does
not appear to have had a material impact on the Company's sales
orders or bookings. However, the financial instability in these
regions may have an adverse impact on the financial position of
end users in the region which could impact future orders and/or
the ability of such users to pay the Company or the Company's
customers, which could also impact the ability of such customers
to pay the Company. The Company performs extensive financial due
diligence on customers and potential customers and generally
requires material sales to Asia to either be secured by letters of
credit or transacted on a prepayment basis. Given the prior
situation in Asia, the Company now requires that the letters of
credit be established through American banking institutions.
During this volatile period, the Company expects to carefully
evaluate the collection risk related to the financial position of
customers and potential customers. The results of such
evaluations will be considered in structuring the terms of sale,
in determining whether to accept sales orders, in evaluating the
recognition of revenue on sales in the area and in evaluating the
collectability of outstanding accounts receivable from the region.
In situations where significant collection risk exists, the
Company will either not accept the sales order, defer the
recognition of related revenues, or, in the case of previously
transacted sales, establish appropriate bad debt reserves.
Despite these precautions, should the volatility in Asia have a
material adverse impact on the financial position of end users of
the customers products in Asia, the Company could experience a
material adverse impact on its results of operations.
Competition
THE SEMICONDUCTOR INDUSTRY IS HIGHLY COMPETITIVE.
The Company's business is intensely competitive and is
characterized by new product cycles, price erosion, and rapid
technological change and new companies entering the markets.
Competition typically occurs at the design stage, where the
customer evaluates alternative design approaches that require
integrated circuits. Because of shortened product life cycles and
even shorter design-in cycles, the Company's competitors have
increasingly frequent opportunities to achieve design wins in next
generation systems. In the event that competitors succeed in
supplanting the Company's products, the Company's market share may
not be sustainable and net sales, gross margin, and results of
operations would be adversely affected. Competitors include major
domestic and international companies, many of which have
substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing
and distribution of their products. Emerging companies are also
increasing their participation in the market, as well as customers
who develop their own integrated circuit products.
Competitors include manufacturers of standard semiconductors,
application-specific integrated circuits and fully customized
integrated circuits, including both chip and board-level products.
The ability of the Company to compete successfully in the rapidly
evolving area of high-performance integrated circuit technology
depends significantly on factors both within and outside of its
control, including, but not limited to, success in designing,
manufacturing and marketing new products, wafer supply, protection
of Company products by effective utilization of intellectual
property laws, product quality, reliability, ease of use, price,
diversity of product line, efficiency of production, the pace at
which customers incorporate the Company's integrated circuits into
their products, success of the customers' products, and general
economic conditions. Also the Company's future success depends,
in part, upon the continued service of its key engineering,
marketing, sales, manufacturing, support, and executive personnel,
and on its ability to continue to attract, retain, and motivate
qualified personnel. The competition for such employees is
intense, and the loss of the services of one or more of these key
personnel could adversely affect the Company. Because of these
and other factors, past results may not be a useful predictor of
future results.
The Company's success is highly dependent upon its ability to
develop complex new products, to introduce them to the marketplace
ahead of the competition, and to have them selected for design
into products of leading system manufacturers. Both revenues and
margins may be affected quickly if new product introductions are
delayed or if the Company's products are not designed into
successive generations of products of the Company's customers.
These factors have become increasingly important to the Company's
results of operations because the rate of change in the markets
served by the Company continues to accelerate.
Product development in the Company's markets is becoming more
focused on the integration of functionality on individual devices
and there is a general trend towards increasingly complex
products. The greater integration of functions and complexity of
operations of the Company's products increase the risk that latent
defects or subtle faults could be discovered by customers or end
users after volumes of product have been shipped. If such defects
were significant, the Company could incur material recall and
replacement costs for product warranty. The Company's relationship
with customers could also be adversely impacted by the recurrence
of significant defects.
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 3. Quantitative and Qualitative Disclosures about Market
Risk.
Reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Registrant's
Annual Report on Form 10-K for the Year Ended March 27, 1999.
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
On July 29, 1999, the Company held its Annual Meeting of Shareholders.
The matters voted upon at the meeting and the results of those votes
were as follows:
1. Election of Directors
Votes Votes
For Against
-------------- --------------
David D. French 53,165,992 889,788
D. James Guzy 53,205,097 960,895
Michael L. Hackworth 52,674,275 1,491,717
Suhas S. Patil 52,874,170 1,061,718
Walden C. Rhines 53,104,274 1,061,718
Robert H. Smith 53,078,743 1,087,249
Alfred S. Teo 53,264,996 900,996
2. Approve amendment to the 1989 Employee Stock Purchase Plan
For Against Abstain
-------------- -------------- --------------
51,302,264 2,380,693 483,035
3. Approve amendment to the 1996 Stock Plan
For Against Abstain
-------------- -------------- --------------
44,984,492 8,703,326 508,174
4. Ratification of Ernst & Young LLP as Independent Auditors
For Against Abstain
-------------- -------------- --------------
53,555,978 451,808 158,206
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 12.1 Statement Regarding Computation of Ratios
of Earnings to Fixed Charges
Exhibit 27.1 Financial Data Schedule
b. Reports on Form 8-K
None.
Part II. Other information, item 6a
Exhibit 12.1
CIRRUS LOGIC, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS TO FIXED CHARGES
(in thousands, except ratio of earnings to fixed charges)
Three Quarters Ended
Dec. 25, Dec. 26,
1999 1998
----------- -----------
Loss before income taxes ($109,177) ($166,346)
Fixed Charges (1) 19,715 20,093
----------- -----------
Total earnings and fixed charges (89,462) (146,253)
Fixed Charges (1) 19,715 20,093
Ratio of earnings to fixed charges (2) N/A N/A
=========== ===========
ADJUSTED FOR MiCRUS AND CIRENT FIXED CHARGES:
Fixed Charges (3) 35,867 42,785
Ratio of earnings to fixed charges (4) N/A N/A
=========== ===========
(1) Fixed charges consist of interest expense incurred, including
capital leases, amortization of interest costs and the portion
of rental expense under operating leases deemed by the Company
to be representative of the interest factor.
(2) Earnings were inadequate to cover fixed charges for the three
quarters ended December 25, 1999 and December 26, 1998 by
approximately $128.9 million and $186.4 million, respectively.
(3) Fixed charges consist of interest expense incurred, including
capital leases, amortization of interest costs, a portion of
rental expense under operating leases which are deemed by the
Company to be representative of the interest factor, interest on
capitalized leases and the interest factor associated with
operating leases of the Company's MiCRUS joint venture.
Such charges are included for the Cirent joint venture with respect
to the first quarter of fiscal 2000 and the first three quarters
of fiscal 1999 and are excluded from the remainder of fiscal 2000
due to the termination of the Company's interest in the Cirent joint
venture in the first quarter.
(4) Earnings would have been inadequate to cover fixed charges for
the three quarters ended December 25, 1999 and December 26,
1998 by approximately $145.0 million and $209.1 million,
respectively.
CIRRUS LOGIC, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
CIRRUS LOGIC, INC.
(Registrant)
February 7, 2000 /S/GLENN C. JONES
Date Glenn C. Jones
Vice President,
Chief Financial Officer,
Treasurer and Secretary