UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 28, 1996
Commission file Number 0-17795
CIRRUS LOGIC, INC.
(Exact name of registrant as specified in its charter.)
CALIFORNIA 77-0024818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Warren Avenue, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(510) 623-8300
Indicate by check mark whether the registrant(1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the registrant's common stock, no par value, was
65,649,776 as of December 28, 1996.
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. 28, Dec. 30, Dec. 28, Dec. 30,
1996 1995 1996 1995
---------- --------- ---------- ---------
Net sales $253,309 $295,783 $704,237 $913,872
Costs and expenses and gain on sale of assets:
Cost of sales 156,613 197,273 434,890 551,456
Research and development 59,828 60,086 179,537 168,576
Selling, general and administrative 31,517 43,047 92,977 119,476
Gain on sale of assets (12,009) - (18,922) -
Non-recurring costs - 1,195 - 1,195
---------- --------- ---------- ---------
Total costs and expenses and gain on sale of assets 235,949 301,601 688,482 840,703
---------- --------- ---------- ---------
Income (loss) from operations 17,360 (5,818) 15,755 73,169
Interest and other (expense) income, net (2,941) 561 (7,778) 2,994
---------- --------- ---------- ---------
Income (loss) before provision (benefit) for income taxes 14,419 (5,257) 7,977 76,163
Provision (benefit) for income taxes 4,109 (1,656) 2,274 23,990
---------- --------- ---------- ---------
Net income (loss) $10,310 ($3,601) $5,703 $52,173
========== ========= ========== =========
Net income (loss) per common and common equivalent share $0.16 ($0.06) $0.09 $0.75
========== ========= ========== =========
Weighted average common and common
equivalent shares outstanding 66,460 63,273 66,382 69,437
========== ========= ========== =========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
Dec. 28, March 30,
1996 1996
----------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 213,767 $155,979
Short-term investments 140,103 19,279
Accounts receivable, net 152,384 133,718
Inventories 128,034 134,502
Deferred tax assets 52,662 52,662
Payments for joint venture equipment to be leased 76,180 94,683
Other current assets 13,421 4,004
----------- ---------
Total current assets 776,551 594,827
Property and equipment, net 152,698 170,248
Manufacturing agreements, net
and investments in joint ventures 154,095 104,463
Deposits and other assets 50,377 48,039
----------- ---------
$1,133,721 $917,577
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowing $ - $ 80,000
Accounts payable and accrued liabilities 219,047 242,901
Accrued salaries and benefits 23,879 41,845
Obligations under equipment loans and
capital leases, current portion 28,540 26,575
Income taxes payable 39,997 20,863
----------- ---------
Total current liabilities 311,463 412,184
Obligations under equipment loans and
capital leases, non-current 63,220 71,829
Other long-term 5,078 4,898
Convertible subordinated notes 300,000 -
Commitments and contingencies
Shareholders' equity:
Capital stock 349,165 329,574
Retained earnings 104,795 99,092
----------- ---------
Total shareholders' equity 453,960 428,666
----------- ---------
$1,133,721 $917,577
=========== =========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Quarters Ended
---------------------
Dec. 28, Dec. 30,
1996 1995
----------- ---------
Cash flows from operations:
Net income $5,703 $52,173
Adjustments to reconcile net income to net
cash flows from operations:
Gain on sale of assets (18,922) -
Depreciation and amortization 65,649 43,793
Net change in operating assets and liabilities (38,770) (42,622)
----------- ---------
Net cash flows provided by operations 13,660 53,344
----------- ---------
Cash flows from investing activities:
Proceeds from sale of assets 38,426 -
Purchase of short-term investments (133,256) (260,944)
Proceeds from sale of short-term investments 12,432 299,888
Additions to property and equipment (21,067) (106,215)
Joint venture manufacturing agreements and
investment in joint ventures (54,000) (16,000)
Increase in deposits and other assets (9,138) (20,228)
----------- ---------
Net cash flows used by investing activities (166,603) (103,499)
----------- ---------
Cash flows from financing activities:
Proceeds from issuance of convertible notes 290,640 -
Proceeds from issuance of common stock 16,867 27,883
Borrowings on short-term debt 172,000 41,000
Borrowings on long-term debt 4,342 62,081
Payments on long-term debt and capital lease obligations (21,542) (9,269)
Payments on short-term debt (252,000) (41,000)
Increase in other long-term liabilities 424 -
----------- ---------
Net cash flows provided by financing activities 210,731 80,695
----------- ---------
Increase in cash and cash equivalents 57,788 30,540
Cash and cash equivalents - beginning of period 155,979 66,718
----------- ---------
Cash and cash equivalents - end of period $213,767 $97,258
=========== =========
Supplemental disclosure of cash flow information:
Interest paid $8,925 $2,569
Income taxes (refunded) paid ($19,148) $16,667
Equipment purchased under capitalized leases $10,556 $594
Tax benefit of stock option exercises $2,352 $15,463
<FN>
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 the
Company 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 except for the $2.3 million charge to other
expense during the quarter ended December 28, 1996, related to the agreement
in principle to settle all securities claims against the Company (see Note
8). These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements, and notes thereto for
the year ended March 30, 1996, included in the Company's 1996 Annual Report
on Form 10-K. The results of operations for the interim periods presented
are not necessarily indicative of the results that may be expected for the
entire year.
2. Inventories
Inventories are comprised of the following:
December 28, March 30,
1996 1996
--------- ---------
(In thousands)
Work-in-process $ 78,545 $ 69,244
Finished goods 49,489 65,258
--------- ---------
Total $ 128,034 $ 134,502
========= =========
3. Gain on Sale of Assets
During August 1996, the Company completed the sale of the PicoPower product
line to National Semiconductor, Inc. The Company received approximately
$17.6 million in cash for the PicoPower product line. In connection with
the transaction, the Company recorded a gain of approximately $6.9 million.
During December 1996, the Company completed the sale to ADC
Telecommunications Inc. of the PCSI product group that produced CDPD
(Cellular Digital Packet Data) base station equipment for wireless service
providers, and developed pACT (personal Air Communications Technology) base
stations for AT&T Wireless Services Inc. The Company received approximately
$20.8 million in cash for the group. In connection with the transaction,
the Company recorded a gain of approximately $12.0 million.
During January 1997, the Company completed the sale of PCSI's Wireless
Semiconductor Products assets to Rockwell International for $18.1 million
in cash. This group provided digital cordless chip solutions for PHS
(Personal Handyphone System) and DECT (Digital European Cordless
Telecommunications) as well two-way messaging chip solutions for pACT
(personal Air Communications Technology).
4. Bank Arrangements
As of December 28, 1996, the Company has a commitment for a bank line of
credit for borrowings up to a maximum of $150 million expiring on
October 31, 1999, at the banks' prime rate plus one-half percent. As of
December 28, 1996, no borrowings were outstanding under the line.
Borrowings are secured by cash, accounts receivable, inventory,
intellectual property, and stock in the Company's subsidiaries. Use of
the line is limited to the borrowing base as defined by accounts
receivable. Terms of the agreement include satisfaction of certain
financial ratios, minimum tangible net worth, cash flow, and leverage
requirements as well as a prohibition against the payment of a cash
dividend without prior bank approval.
5. Income Taxes
The Company provides for income taxes during interim reporting periods based
upon an estimate of the annual effective tax rate. Such estimate reflects an
effective tax rate lower than the federal statutory rate primarily because of
foreign operating results which are taxed at rates other than the U.S.
statutory rate, federal and state research tax credits, and state investment
tax credits.
6. Net Income (Loss) Per Common and Common Equivalent Share
Net income (loss) per common and common equivalent share is based on the
weighted average common shares outstanding and dilutive common equivalent
shares (using the treasury stock or modified treasury stock method, whichever
applies). Common equivalent shares include stock options and warrants when
appropriate. During December 1996, the Company issued convertible subordinated
notes. These securities are included in fully diluted earnings per share
computations for the period outstanding under the "if converted" method.
Dual presentation of primary and fully diluted earnings per share is not
shown on the face of the income statement because the differences are
insignificant.
7. Convertible Subordinated Notes
During December 1996, the Company completed an offering of $300 million
of convertible subordinated notes. The notes bear interest at six
percent, mature in December 2003, and are convertible into shares of the
Company's common stock at $24.219 per share. Expenses associated with the
offering of approximately $9.3 million are deferred and included in deposits
and other assets. Such expenses are being amortized to interest expense over
the term of the notes.
8. Commitments and Contingencies
As of December 28, 1996, the Company is contingently liable for MiCRUS and
Cirent equipment leases which have remaining payments of approximately
$625 million, payable through fiscal 2002.
During December 1996, the Company and certain of its current and former
directors and officers, reached an agreement in principle which, if approved,
would settle all pending securities claims against the Company for an
aggregate sum of $31.3 million, exclusive of interest, $2.3 million of which
will be paid by the Company with the remainder being paid by the Company's
insurers. The Company recorded the $2.3 million as "other expense" in the
quarter ended December 28, 1996.
The proposed settlement would include the amendment of the federal class
action filed in 1995 to include claims pending in the State court with the
intent that the settlement would have the effect of extinguishing the State
court claims. The proposed settlement is subject to a number of
contingencies, including the agreement to and execution of a definitive
agreement and court approval.
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 30,
1996, contained in the Annual Report to Shareholders on 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 Company's Form 10-K for the fiscal year ended
March 30, 1996, that could cause actual results to differ materially from
the Company's expectations. The Form 10-K referred to in this paragraph
is expressly incorporated herein by reference. Readers are cautioned not
to place undue reliance on any forward-looking statements, as they reflect
management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly release the results of any revision to these
forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
During fiscal 1997, the Company is implementing a strategy of focusing on
the markets for multimedia (graphics, video and audio), mass storage and
communications. As part of this strategy, the Company has been divesting
non-core business units and eliminating projects that do not fit within
its core markets. At the same time, the Company has been implementing a
program to manage costs and streamline operations. Nevertheless, there is
no assurance that the Company will regain the levels of profitably that it
has achieved in the past or that losses will not occur in the future.
Results of Operations
The following table discloses the percentages that income statement items
are to net sales and the percentage change in the dollar amounts for the
same items compared to the similar period in the prior fiscal year.
Percentage of Net Sales Percentage of Net Sales
Quarter Ended Three Quarters Ended
------------------- -------------------
Dec. 28, Dec. 30, Percent Dec. 28, Dec. 30, Percent
1996 1995 change 1996 1995 change
--------- --------- --------- --------- --------- ---------
Net sales 100% 100% -14% 100% 100% -23%
Gross margin 38% 33% -2% 38% 40% -26%
Research and development 24% 20% 0% 25% 18% 7%
Selling, general and administrative 12% 15% -27% 13% 13% -22%
Gain on sale of assets -5% - N/A -3% - N/A
Non-recurring costs - 0% -100% - 0% -100%
Income (loss) from operations 7% -2% N/A 2% 8% -78%
Income (loss) before income taxes 6% -2% N/A 1% 8% -90%
Provision (benefit)for income taxes 2% -1% N/A 0% 3% -91%
Net income (loss) 4% -1% N/A 1% 6% -89%
Net Sales
Net sales for the third quarter of fiscal 1997 were $253.3 million, a
decrease of 14% from the $295.8 million reported for the third quarter of
fiscal 1996. Net sales for the first three quarters of fiscal 1997 were
$704.2 million, a decrease of 23% from the $913.9 million reported for the
comparable period of fiscal 1996. Sales of graphics, audio, mass storage
and fax/modem products decreased in the third quarter and the first three
quarters of fiscal 1997 over the comparable periods in fiscal 1996.
For the third and first three quarters of fiscal 1997, export sales
(including sales to U.S.-based customers with manufacturing plants
overseas) were 59% and 62% of total sales compared to 55% and 58%,
respectively, for the corresponding periods in fiscal 1996.
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 were approximately 10% of net sales during the first
three quarters of fiscal 1997. No other customers accounted for 10% or
more of sales during the first three quarters of fiscal 1997 or fiscal
1996.
Gross Margin
The gross margin was 38% in the third quarter of fiscal 1997, compared to
33% for the third quarter of fiscal 1996. The gross margin was 38% in the
first three quarters of fiscal 1997, compared to 40% for the first three
quarters of fiscal 1996. The gross margin increase in the third quarter
of fiscal 1997 compared to the third quarter of fiscal 1996 was the result
in part of sales of higher margin products introduced earlier in fiscal
1997. The gross margin percentage in fiscal 1996 was reduced by charges
of approximately $33 million for inventory written down for lower-than-
anticipated shipments and demand for graphics, core logic and other
products and a $5 million charge for under use of capacity at its MiCRUS
joint venture. The gross margin decline for the first three quarters in
fiscal 1997 was the result, in part, of sales of older products with
prices lower relative to prices for those same parts in the first three
quarters of fiscal 1996. The gross margin was also reduced by under-
loading charges in the second quarter of fiscal 1997 from the MiCRUS
facility.
Research and Development
Research and development expenditures decreased $0.3 million over the
third quarter of fiscal 1996 to $59.8 million in the third quarter of
fiscal 1997. The expenditures in the third quarter and the first three
quarters of fiscal 1997 were approximately 24% and 25%, respectively, of
net sales compared to 20% and 18% in the comparable periods of fiscal
1996. During the third quarter of fiscal 1997, as a result of the Company
concentrating new product development on projects in its core
markets, expenses primarily related to reduced headcount decreased in an
absolute amount compared to the comparable period of fiscal 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses represented approximately 12%
and 13% of net sales in the third quarter and the first three quarters of
fiscal 1997, respectively, compared to 15% and 13%, respectively, in the
corresponding periods in fiscal 1996. The dollar amount of such expenses
decreased as a result of reductions in compensation expenses, marketing
expenses for promotions and advertising, and administrative expenses.
Gain on Sale of Assets
During August 1996, the Company completed the sale of the PicoPower
product line to National Semiconductor, Inc. The Company received
approximately $17.6 million in cash for the PicoPower product line. In
connection with the transaction, the Company recorded a gain of
approximately $6.9 million.
During December 1996, the Company completed the sale to ADC
Telecommunications Inc. of the PCSI product group that produced CDPD
(Cellular Digital Packet Data) base station equipment for wireless service
providers, and developed pACT (personal Air Communications Technology)
base stations for AT&T Wireless Services Inc. The Company received
approximately $20.8 million in cash for the group. In connection with the
transaction, the Company recorded a gain of approximately $12.0 million.
During January 1997, the Company completed the sale of PCSI's Wireless
Semiconductor Products group's assets to Rockwell International for $18.1
million cash. This group provided digital cordless chip solutions for PHS
(Personal Handyphone System) and DECT (Digital European Cordless
Telecommunications) as well two-way messaging chip solutions for pACT
(personal Air Communications Technology).
Income Taxes
The Company's effective tax rate was 28.5% for the third and the first
three quarters of fiscal 1997, as against 31.5% for the comparable periods
of fiscal 1996. The 28.5% estimated annual effective tax rate is less
than the U.S. federal statutory rate of 35%, and less than the effective
tax rate of 31.5% for the third quarter of fiscal 1996, primarily because
of foreign operating results which are taxed at rates other than the U.S.
statutory rate, federal and state research tax credits, and state
investment tax credits.
Liquidity and Capital Resources
During December 1996, the Company completed an offering of $300 million of
convertible subordinated notes. The notes bear interest at six percent,
mature in December 2003, and are convertible into shares of the Company's
common stock at $24.2188 per share. In addition during the third quarter
of fiscal 1997, a $250 million lease package was completed, with Cirrus
Logic as guarantor, to finance the advanced fab equipment for the Cirent
Semiconductor manufacturing joint venture.
The Company generated approximately $13.7 million of cash and cash
equivalents in its operating activities during the first three quarters of
fiscal 1997 as compared to generating approximately $53.3 million during
the first three quarters of fiscal 1996. The decrease in cash generated
from operations was primarily caused by the reduction in net income and
the non-cash effect of the gain on sale of assets offset somewhat by an
increase in the non-cash effect of depreciation and amortization and the
net change in operating assets and liabilities.
The Company used $166.6 million in cash in investing activities during the
first three quarters of fiscal 1997, and $103.5 million during the
comparable period of fiscal 1996. The Company reduced short-term
investment activities and additions to property and equipment and
increased investing in joint venture manufacturing agreements and joint
ventures in fiscal 1997 over fiscal 1996. The cash used in fiscal 1997
was reduced somewhat by the proceeds from sale of assets.
Financing activities provided $210.7 million in cash during the first
three quarters of fiscal 1997 and $80.7 million during the comparable
period of fiscal 1996. The increase was primarily the result of the
proceeds from the convertible subordinated notes issued in December 1996,
offset by the repayment of short-term debt.
As of December 28, 1996, the Company has a commitment for a bank line of
credit for borrowings up to a maximum of $150 million expiring on
October 31, 1999, at the banks' prime rate plus one-half percent. As of
December 28, 1996, no borrowings were outstanding under the line.
Borrowings are secured by cash, accounts receivable, inventory,
intellectual property, and stock in the Company's subsidiaries. Use of
the line is limited to the borrowing base as defined by accounts
receivable. Terms of the agreement include satisfaction of certain
financial ratios, minimum tangible net worth, cash flow, and leverage
requirements as well as a prohibition against the payment of a cash
dividend without prior bank approval.
The semiconductor industry is extremely capital intensive. To remain
competitive, the Company believes it must continue to invest in advanced
wafer manufacturing and in test equipment. Investments will be made in
the various external manufacturing arrangements and its own facilities.
The Company intends to obtain most of the necessary capital through direct
or guaranteed equipment lease financing and the balance through debt
and/or equity financing, and cash generated from operations.
There can be no assurance that financing will be available or, if
available, will be on satisfactory terms. Failure to obtain adequate
financing would restrict the Company's ability to expand its manufacturing
infrastructure, to make other investments in capital equipment, and to
pursue other initiatives.
Future Operating Results
Quarterly Fluctuations
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from
quarter to quarter in the future. The Company's operating results are
affected by a wide variety of factors, many of which are outside of the
Company's control, including but not limited to, economic conditions and
overall market demand in the United States and worldwide, the Company's
ability to introduce new products and technologies on a timely basis,
changes in product mix, fluctuations in manufacturing costs which affect
the Company's gross margins, declines in market demand for the Company's
and its customers' products, sales timing, the level of orders which are
received and can be shipped in a quarter, the cyclical nature of both the
semiconductor industry and the markets addressed by the Company's
products, product obsolescence, price erosion, and competitive factors.
The Company's operating results in the rest of fiscal 1997 and 1998 are
likely to be affected by these factors as well as others.
The Company must order wafers and build inventory well in advance of
product shipments. Because the Company's markets are volatile and subject
to rapid technology and price changes, there is a risk that the Company
will forecast incorrectly and produce excess or insufficient inventories
of particular products. This inventory risk is heightened because many of
the Company's customers place orders with short lead times. Such
inventory imbalances have occurred in the past and in fact contributed
significantly to the Company's operating losses in fiscal 1996. These
factors increase not only the inventory risk but also the difficulty of
forecasting quarterly operating results. Moreover, as is common in the
semiconductor industry, the Company frequently ships more product in the
third month of each quarter than in either of the first two months of the
quarter, and shipments in the third month are higher at the end of that
month. The concentration of sales in the last month of the quarter
contributes to difficulty in predicting the Company's quarterly revenues
and results of operations.
The Company's success is highly dependent upon its ability to develop
complex new products, to introduce them to the marketplace ahead of the
competition, and to have them selected for design into products of leading
system manufacturers. Both revenues and margins may be affected quickly
if new product introductions are delayed or if the Company's products are
not designed into successive generations of products of the Company's
customers. These factors have become increasingly important to the
Company's results of operations because the rate of change in the markets
served by the Company continues to accelerate.
Issues Relating to Manufacturing and Manufacturing Investment
In the first three quarters of fiscal 1997, manufacturing supply exceeded
demand for certain of the Company's products. One consequence was the
Company incurred charges at its MiCRUS facility for failing to purchase
sufficient wafers, negatively impacting gross margins.
Although the Company believes that its efforts to increase its source of
wafer supply through joint ventures (MiCRUS with IBM and Cirent
Semiconductor with Lucent Technologies) and other arrangements have
significant potential benefits to the Company, there are also risks, some
of which materialized in the third and fourth quarter of fiscal 1996 and
the second quarter of fiscal 1997. These arrangements reduce the
Company's flexibility to reduce the amount of wafers it is committed to
purchase and increase the Company's fixed manufacturing costs as a
percentage of overall costs of sales. As a result, the operating results
of the Company are becoming more sensitive to fluctuations in revenues.
In the case of the Company's joint ventures, overcapacity results in
underabsorbed fixed cost, which adversely affects gross margins and
earnings. In the case of the Company's "take or pay" contracts with
foundries, the Company must pay contractual penalties if it fails to
purchase its minimum commitments.
Moreover, the Company will benefit from the MiCRUS and Cirent
Semiconductor joint ventures only if they are able to produce wafers at or
below prices generally prevalent in the market. If, however, either of
these ventures is not able to produce wafers at competitive prices, the
Company's results of operations will be materially adversely affected.
The process of beginning production and increasing volume with the joint
ventures inevitably involves risks, and there can be no assurance that the
manufacturing costs of such ventures will be competitive.
Certain provisions of the MiCRUS and Cirent Semiconductor agreements may
cause the termination of the joint venture in the event of a change in
control of the Company. Such provisions could have the effect of
delaying, deferring or preventing a change of control of the Company.
In connection with the financing of its operations, the Company has
borrowed money and entered into substantial equipment lease obligations
and is likely to expand such commitments in the future. Such indebtedness
could cause the Company's principal and interest obligations to increase
substantially. The degree to which the Company is leveraged could
adversely affect the Company's ability to obtain additional financing for
working capital, acquisitions or other purposes and could make it more
vulnerable to industry downturns and competitive pressures. The Company's
ability to meet its debt service and other obligations will be dependent
upon the Company's future performance, which will be subject to financial,
business and other factors affecting the operations of the Company, many
of which are beyond its control. An inability to obtain financing to meet
these obligations could cause the Company to default on such obligations.
Although the Company has increased its future wafer supplies from the
MiCRUS and Cirent Semiconductor joint ventures, the Company expects to
continue to purchase portions of its wafers from, and to be reliant upon,
outside merchant wafer suppliers for at least the next two years. The
Company also uses other outside vendors to package the wafer die into
integrated circuits.
The Company's results of operations could be adversely affected in the
future, and has been in the past, if particular suppliers are unable to
provide a sufficient and timely supply of product, whether because of raw
material shortages, capacity constraints, unexpected disruptions at the
plants, delays in qualifying new suppliers or other reasons, or if the
Company is forced to purchase wafers or packaging from higher cost
suppliers or to pay expediting charges to obtain additional supply, or if
the Company's test facilities are disrupted for an extended period of
time. Because of the concentration of sales at the end of each quarter, a
disruption in the Company's production or shipping near the end of a
quarter could materially reduce the Company's revenues for that quarter.
Production may be constrained even though capacity is available at one or
more wafer manufacturing facilities because of the difficulty of moving
production from one facility to another. Any supply shortage could
adversely affect sales and operating profits.
The greater integration of functions and complexity of operations of the
Company's products also 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.
Dependence on PC Market
Sales of most of the Company's products depend largely on sales of
personal computers (PCs). Reduced growth in the PC market could affect
the financial health of the Company as well as its customers. Moreover,
as a component supplier to PC OEMs and to peripheral device manufacturers,
the Company is likely to experience a greater magnitude of fluctuations in
demand than the Company's customers themselves experience. In addition,
many of the Company's products are used in PCs for the consumer market,
and the consumer PC market is more volatile than other segments of the PC
market.
Other IC makers, including Intel Corporation, have expressed their
interest in integrating through hardware functions, adding through special
software functions, or kitting components to provide some multimedia or
communications features into or with their microprocessor products.
Successful integration of these functions could substantially reduce the
Company's opportunities for IC sales in these areas.
A number of PC OEMs buy products directly from the Company and also buy
motherboards, add-in boards or modules from suppliers who in turn buy
products from the Company. Accordingly, a significant portion of the
Company's sales may depend directly or indirectly on the sales to a
particular PC OEM. Since the Company cannot track sales by motherboard,
add-in board or module manufacturers, the Company may not be fully
informed as to the extent or even the fact of its indirect dependence on
any particular PC OEM, and, therefore, may be unable to assess the risk of
such indirect dependence.
The PC market is intensely price competitive. The PC manufacturers in
turn put pressure on the price of all PC components, and this pricing
pressure is expected to continue.
Issues Relating to Graphics Products
The Company continues to experience intense competition in the sale of
graphics products. Several competitors introduced products and adopted
pricing strategies that have increased competition in the desktop graphics
market, and new competitors continue to enter the market. These
competitive factors affected the Company's market share, gross margins,
and earnings in the third quarter of fiscal 1997 and are likely to affect
revenues and gross margins for graphics accelerator products in the
future.
The PC graphics market today consists primarily of two-dimensional ("2D")
graphics accelerators, and 2D graphics accelerators with video features.
Market demand for three-dimensional ("3D") graphics acceleration began to
grow in the third quarter of fiscal 1997 and is expected to grow stronger
in the fourth quarter of fiscal 1997 and fiscal 1998, primarily in PC
products for the consumer marketplace. Several competitors are already in
production of 3D accelerators.
During the second quarter of fiscal 1997, the Company introduced and began
shipping its first RAMBUS DRAM ("RDRAM")-based 3D accelerator for the
mainstream PC market. The Company is striving to bring additional
products with 3D acceleration to market, but there is no assurance that it
will succeed in doing so in a timely manner. If these additional
products, which are not expected to be available for sampling until the
fourth quarter of fiscal 1997, are not brought to market in a timely
manner or do not address the market needs or cost or performance
requirements, then the Company's graphics market share and sales will be
adversely affected. Revenues from the sale of graphics products in the
fourth quarter of fiscal 1997 and in fiscal 1998 are also likely to be
significantly dependent on the success of the Company's current DRAM-based
2D graphics/video accelerators and the Company's newly introduced SGRAM-
based 2D graphics/video accelerators.
Issues Relating to Audio Products
Most of the Company's revenues in the multimedia audio market derive from
the sales of 16-bit audio Codecs and integrated 16-bit Codec plus
controller solutions for the consumer PC market. Pricing pressures have
forced a transition from multi-chip solutions to products that integrate
the Codec, controller and synthesis into a single IC. The Company's
revenues from the sale of audio products in the fourth quarter of fiscal
1997 are likely to be significantly affected by the success of its
recently introduced fully-integrated, single-chip audio ICs. Moreover,
aggressive competitive pricing pressures have adversely affected and may
continue to adversely affect the Company's revenues and gross margins from
the sale of single-chip audio ICs. In addition, the introduction of new
audio products from the Company's competitors, the introduction of
mediaprocessors and the introduction of MMX processors with multimedia
features by Intel Corporation could adversely affect revenues and gross
margins from the sale of the Company's audio products.
Three-dimensional spatial effects audio is expected to become an important
feature in the fourth quarter of fiscal 1997 and in fiscal 1998, primarily
in products for the consumer marketplace. The Company has begun shipping
such products. If the Company's spatial effects audio products do not
meet the cost or performance requirements of the market, revenues from the
sale of audio products would be adversely affected.
Issues Relating to Mass Storage Market
The disk drive market has historically been characterized by a relatively
small number of disk drive manufacturers and by periods of rapid growth
followed by periods of oversupply and contraction. Growth in the mass
storage market is directly affected by growth in the PC market.
Furthermore, the price competitive nature of the disk drive industry
continues to put pressure on the price of all disk drive components. In
addition, consolidation in the disk drive industry has reduced the number
of customers for the Company's mass storage products and increased the
risk of large fluctuations in demand.
The Company believes that excess inventories held by its customers limited
sales of the Company's mass storage products in the second quarter of
fiscal 1997 and limited sales of the Company's optical disk drive products
in the third quarter of fiscal 1997. Revenues from mass storage products
in the fourth quarter of fiscal 1997 and fiscal 1998 are likely to depend
heavily on the success of certain 3.5 inch disk drive products selected
for use by various customers, which in turn depends upon obtaining timely
customer qualification of the new products and upon bringing the products
into volume production timely and cost-effectively.
The Company's revenues from mass storage products are dependent on the
successful introduction by its customers of new disk drive products.
Recent efforts by certain of the Company's customers to develop their own
ICs for mass storage products could in the future reduce demand for the
Company's mass storage products, which could have an adverse effect on the
Company's revenues and gross margins from such products. In addition, in
response to the current market trend towards integrating hard disk
controllers with microcontrollers, the Company's revenues and gross
margins from its mass storage products will be dependent on the Company's
ability to introduce such integrated products in a commercially
competitive manner.
Issues Relating to Communications Market
Most of the Company's revenues from communications products are expected
to derive from sales of voice/data/fax modem chip sets. The market for
these products is intensely competitive, and competitive pricing pressures
have affected and are likely to continue to affect the average selling
prices and gross margins from this product line. The success of the
Company's products will depend not only on the products themselves but
also on the degree and timing of market acceptance of new performance
levels developed by U.S. Robotics, which will be supported by the
Company's new products, and the development of standards with regard to
these new performance levels. Moreover, as a relatively new entrant to
this market, the Company may be at a competitive disadvantage to suppliers
who have long-term customer relationships, have greater market share or
have greater financial resources. In addition, the introduction of new
modem products from the Company's competitors, the introduction of
mediaprocessors and the introduction of MMX processors with multimedia
features by Intel Corporation could adversely affect revenues and gross
margins from the sale of the Company's modem products.
Intellectual Property Matters
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company and
certain of its customers from time to time have been notified that they
may be infringing certain patents and other intellectual property rights
of others. In addition, customers have been named in suits alleging
infringement of patents or other intellectual property rights by customer
products. Certain components of these products have been purchased from
the Company and may be subject to indemnification provisions made by the
Company to its customers. Although licenses are generally offered in
situations where the Company or its customers are named in suits alleging
infringement of patents or other intellectual property rights, there can
be no assurance that any licenses or other rights can be obtained on
acceptable terms. Because successive generations of the Company's
products tend to offer an increasing number of functions, there is a
likelihood that more of these claims will occur as the products become
more highly integrated. The Company cannot accurately predict the
eventual outcome of any suit or other alleged infringement of intellectual
property. An unfavorable outcome occurring in any such suit could have an
adverse effect on the Company's future operations and/or liquidity.
Foreign Operations and Markets
Because many of the Company's subcontractors and several of the Company's
key customers, which customers collectively account for a significant
percentage of the Company's revenues, are located in Japan and other Asian
countries, the Company's business is subject to risks associated with many
factors beyond its control. International operations and sales may be
subject to political and economic risks, including political instability,
currency controls, exchange rate fluctuations, and changes in
import/export regulations, tariff and freight rates. Although the Company
buys hedging instruments to reduce its exposure to currency exchange rate
fluctuations, the Company's competitive position can be affected by the
exchange rate of the U.S. dollar against other currencies, particularly
the Japanese yen.
Competition
The Company's business is intensely competitive and is characterized by
new product cycles, price erosion and rapid technological change.
Competition typically occurs at the design stage, where the customer
evaluates alternative design approaches that require integrated circuits.
Because of shortened product life cycles and even shorter design-in
cycles, the Company's competitors have increasingly frequent opportunities
to achieve design wins in next generation systems. In the event that
competitors succeed in supplanting the Company's products, the Company's
market share may not be sustainable and net sales, gross margin, and
earnings would be adversely affected. Competitors include major domestic
and international companies, many of which have substantially greater
financial and other resources than the Company with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Emerging companies are also increasing their participation in the market,
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 this and other
factors, past results may not be a useful predictor of future results.
Part II. Other Information
Item 1. Legal Procedings
During December 1996, the Company and certain of its current and former
directors and officers, reached an agreement in principle which, if approved,
would settle all pending securities claims against the Company for an
aggregate sum of $31.3 million, exclusive of interest, $2.3 million of which
will be paid by the Company with the remainder being paid by the Company's
insurers.
The proposed settlement would include the amendment of the federal class
action filed in 1995 to include claims pending in the State court with the
intent that the settlement would have the effect of extinguishing the State
court claims. The proposed settlement is subject to a number of
contingencies, including the agreement to and execution of a definitive
agreement and court approval.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10.31 Indenture Dated as of December 15, 1996
6% Convertible Suborinated Notes
Exhibit 11 Statement re: Computation of Earnings per share
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K
None.
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 11, 1997 /s/ Thomas F. Kelly
Date Thomas F. Kelly
Executive Vice President, Finance and
Administration, Chief Financial Officer,
and Treasurer
(Principal Financial Officer)
February 11, 1997 /s/ Ronald K. Shelton
Date Ronald K. Shelton
Vice President, Finance
(Principal Accounting Officer)