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 September 27, 1997
Commission file Number 0-17795
CIRRUS LOGIC, INC.
(Exact name of registrant as specified in its charter.)
CALIFORNIA 77-0024818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Warren Avenue, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(510) 623-8300
Indicate by check mark whether the registrant(1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ ] NO [X]
The number of shares of the registrant's common stock, no par value, was
67,425,042 as of September 27, 1997.
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
-----------------
Sept. 27, Sept
1997 19
----------- -----
Net sales $223,960 $23
Costs and expenses and gain on sale of assets:
Cost of sales 135,047 14
Research and development 44,644 5
Selling, general and administrative 28,373 3
Gain on sale of assets 0 (
----------- -----
Total costs and expenses and gain on sale of assets 208,064 22
----------- -----
Income (loss) from operations 15,896
Interest and other (expense) income, net (3,128) (
----------- -----
Income (loss) before provision (benefit) for income taxes 12,768
Provision (benefit) for income taxes 3,830
----------- -----
Net Income (loss) $8,938 $
=========== =====
Net income (loss) per common and common equivalent share $0.13
=========== =====
Weighted average common and common
equivalent shares outstanding 70,549 6
=========== =====
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
Sept. 27, Marc
1997 19
----------- -----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $154,153 $15
Short-term investments 211,724 18
Accounts receivable, net 150,470 17
Inventories 93,365 1
Deferred tax assets 34,410 3
Equipment and leasehold improvement
advances to joint ventures 93,446 11
Other current assets 13,399
----------- -----
Total current assets 750,967 79
Property and equipment, net 117,657 13
Manufacturing agreements, net
and investments in joint ventures 148,414 15
Deposits and other assets 58,357 5
----------- -----
$1,075,395 $1,13
=========== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $204,695 $27
Accrued salaries and benefits 26,228 3
Current maturities of long-term
and capital lease obligations 27,677 3
Income taxes payable 32,125 3
----------- -----
Total current liabilities 290,725 36
Capital lease obligations and long term debt 52,241 6
Other long-term obligations 5,370
Convertible subordinated notes 300,000 30
Commitments and contingencies 0
Shareholders' equity:
Capital stock 362,705 35
Retained earnings 64,354 5
----------- -----
Total shareholders' equity 427,059 40
----------- -----
$1,075,395 $1,13
=========== =====
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Two Quarters En
-----------------
Sept. 27, Sept
1997 19
----------- -----
Cash flows from operations:
Net income (loss) $11,418 ($
Adjustments to reconcile net income (loss) to net
cash flows from (used for) operations:
Depreciation and amortization 37,679 4
Net change in operating assets and liabilities (1,692) (11
----------- -----
Net cash flows provided by (used for) operations 47,405 (7
----------- -----
Cash flows used for investing activities:
Purchase of short-term investments (236,835) (
Proceeds from sales and maturities of short-term
investments 213,326
Additions to property and equipment (13,743) (1
Proceeds from termination of UMC agreement 20,543
Joint venture manufacturing agreements and
investment in joint ventures (20,300) (2
Increase in deposits and other assets (6,614) (
----------- -----
Net cash flows used for investing activities (43,623) (3
----------- -----
Cash flows provided by (used for) financing activities:
Proceeds from issuance of common stock 11,008
Borrowings on short-term debt 0 16
Borrowings on long-term debt 5,683
Payments on long-term debt and capital lease obligations (17,860) (1
Payments on short-term debt 0 (15
Increase in other long-term liabilities 0
----------- -----
Net cash flows provided by (used for)
financing activities (1,169)
----------- -----
Increase (decrease) in cash and cash equivalents 2,613 (10
Cash and cash equivalents - beginning of period 151,540 15
----------- -----
Cash and cash equivalents - end of period $154,153 $5
=========== =====
Supplemental disclosure of cash flow information:
Interest paid 14,740
Income taxes (refunded) paid 754 (1
Equipment purchased under capitalized leases 0 1
Tax benefit of stock option exercises 436
<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 Exchang
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 29, 1997, included in the Company's 1997 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:
Sept. 27, March 29,
1997 1997
--------- ---------
(In thousands)
Work-in-process $52,263 $ 79,276
Finished goods 41,102 47,976
--------- ---------
Total $93,365 $ 127,252
========= =========
3. Income Taxes
The Company provides for income taxes during interim reporting periods base
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 th
U.S. statutory rate, federal and state research tax credits, and state
investment tax credits.
4. 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. 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.
5. Commitments
As of September 27, 1997, the Company is contingently liable for MiCRUS and
Cirent equipment leases which have remaining payments of approximately $550
million, payable through fiscal 2004.
6. Recently Issued Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is required to be adopted by the Compa
in its next fiscal quarter ended December 27, 1997. At that time the Compa
will be required to change the method currently used to compute earnings pe
share and to restate all prior periods. Under the new requirements for
calculating earnings per share, the dilutive effect of stock options will b
excluded. The implementation of Statement No. 128 is not expected to have
impact on the calculation of primary or fully diluted earnings per share fo
the quarter or two quarters ended September 27, 1997 or September 28, 1996.
7. Joint Ventures and Manufacturing Supply Agreements
In July of 1997, the Company terminated the foundry agreement and foundry
capacity agreement it had entered into with United Microelectronics
Corporation ("UMC"), a Taiwanese Company, in the fall of 1996. Under the
agreements, the Company had become an equity partner in United Silicon Inc.
subsidiary of UMC, and had rights to purchase minimum volume amounts of
wafers. Pursuant to the termination, the Company relinquished its equity
interest and its rights to purchase the volume amounts, and it recovered th
cumulative cost of its investment in the venture.
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 an
notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year ended March 29,
1997, contained in the 1997 Annual Report on Form 10-K (the "1997 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 1997 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.
During fiscal 1997, the Company implemented a strategy of focusing on the
markets for multimedia (graphics, video, and audio), mass storage, and
communications. As part of this strategy, the Company has been divesting
non-core business units and eliminating projects that do not fit within its
core markets. At the same time, the Company implemented a program to manag
costs and streamline operations. These efforts culminated in the fourth
quarter of fiscal 1997 with a reorganization into four market-focused
product divisions (Personal Computer Products, Communications Products, Mas
Storage Products, and Crystal Semiconductor Products), and a decision to
outsource its production testing and to consolidate certain corporate
functions. In connection with these actions, the Company effected a
workforce reduction of approximately 400 people in April 1997, representing
approximately 15 percent of its worldwide staff. While these actions
contributed to the Company's ability to generate net income in the first tw
quarters of fiscal 1998, there is no assurance that the Company will regain
the levels of profitability that it achieved in the past or that losses wil
not occur in the future.
Results of Operations
The following table discloses the percentages that income statement items
are of net sales and the percentage change in the dollar amounts for the
same items compared to the corresponding period in the prior fiscal year.
Percentage of Net Sales
Quarter Ended
--------- ---------
Sept. 27, Sept. 28, Perce
1997 1996 chang
--------- --------- ------
Net sales 100% 100%
Gross margin 40% 38%
Research and development 20% 25% -
Selling, general and administrative 13% 13%
Gain on sale of assets 0% -3%
Income (loss) from operations 7% 3% 1
Income (loss) before income taxes 6% 2% 2
Provision (benefit) for income taxes 2% 1% 2
Net income (loss) 4% 1% 1
Net Sales
Net sales for the second quarter of fiscal 1998 were $224.0 million, a
decrease of 5% from $236.0 million for the second quarter of
fiscal 1997. Revenues from divested businesses in the second quarter
of fiscal 1998 were less than $0.5 million compared to $31.6 million in the
second quarter of fiscal 1997. Excluding revenues from divested businesses
net sales increased by approximately $19.1 million primarily due to increas
sales in the mass storage division, primarily related to read channel devic
which were offset by decreased sales in the PC products division, primarily
related to graphics products.
Net sales for the first two quarters of fiscal 1998 were $425.6 million, a
decrease of 6.0% from $450.9 million for the first two quarters of fiscal
1997. Revenues from divested businesses in the first two quarters
of fiscal 1998 were $10.8 million compared to $62.8 million in the first
two quarters of fiscal 1997. Excluding revenues from divested businesses,
net sales increased by $26.7 million primarily due to increased sales in
the mass storage division, primarily related to read channel devices, which
were offset by decreased sales in the PC products division, primarily
related to graphics products.
Export sales (including sales to U.S.-based customers with manufacturing
plants overseas) were 56% and 64% of total sales in the second quarter of
fiscal 1998 and 1997, respectively, and were 55% and 64% for the first two
quarters of fiscal 1998 and 1997, respectively. The decreases in export sa
as a percentage of total sales were primarily due to a reduction in sales o
PC products, primarily graphics products in the Pacific Rim and Japan.
The Company's sales are currently denominated primarily in U.S. dollars.
The Company currently enters into foreign currency forward exchange and opt
contracts to hedge certain of its foreign currency exposures.
Sales to two customers comprised approximately 19% and 11% of sales in the
first two quarters of fiscal 1998. Sales to one customer were approximatel
10% of net sales in the first two quarters of fiscal 1997.
Gross Margin
Gross margin was 40% in the second quarter of fiscal 1998 compared to 38% f
the second quarter of fiscal 1997. Gross margin was 39% in the first two
quarters of fiscal 1998 compared to 38% in the first two quarters of fiscal
1997. The increases in gross margin for both the second quarter and the fi
two quarters of fiscal 1998 compared to the same periods of fiscal 1997 wer
due to improved margins in mass storage products and a change in sales mix
towards mass storage products, which were offset somewhat by lower margins
PC products, primarily related to graphics products.
Research and Development
Research and development expenses for the second quarter of fiscal 1998 wer
$44.6 million, a decrease of 24% from $58.5 million in the second quarter o
fiscal 1997. Research and development expenses for the first two quarters
fiscal 1998 were $88.8 million, a decrease of 26% from $119.7 million in th
first two quarters of fiscal 1997. Research and development expenditures
decreased in the second quarter and first two quarters of fiscal 1998 compa
to the same periods of the prior fiscal year primarily because of reduced
research and development expenditures for certain non-core businesses
including, particularly businesses divested in the last three quarters of
fiscal 1997. These expenditures continued to decrease in the first two
quarters of fiscal 1998 as a result of the April 1997 headcount reductions
which were made in connection with the Company's realignment into four mark
focused divisions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the second quarter of fisca
1998 were $28.4 million, a decrease of 8% from $30.9 million in the second
quarter of fiscal 1997, and were relatively consistent at 13% of sales in
each of these quarters. Selling and administrative expenses in the first t
quarters of fiscal 1998 were $57.9 million, a decrease of 6% from $61.5
million in the first two quarters of fiscal 1997, and were relatively
consistent at 14% of sales in each of these periods.
Gain on Sale of Assets
During August 1996, the Company completed the sale of the PicoPower product
line to National Semiconductor, Inc. In connection with the transaction, t
Company recorded a gain of approximately $6.9 million.
Income Taxes
The Company's effective tax rate was a 30.0% provision in the first quarter
and first two quarters of fiscal 1998 compared to 28.5% provision for the
second quarter of fiscal 1997 and for the first two quarters of fiscal 1997
The 30.0% estimated annual effective tax rate is less than the U.S. federa
statutory rate of 35.0%, primarily because of foreign operating results whi
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
The Company generated approximately $47.4 million of cash and cash equivale
in its operating activities during the first two quarters of fiscal 1998 an
used approximately $70.9 million during the first two quarters of fiscal 19
The increase in cash provided by operations was primarily because in the fi
two quarters of fiscal 1997 cash used to purchase assets for the joint vent
pending the arrangement of lease financing by the joint ventures, exceeded
receipt of cash from leasing companies upon the completion of the lease fin
by the joint ventures, whereas in the first two quarters of fiscal 1998, th
Company's receipt of cash from leasing companies exceeded the cash used to
purchase such assets. Cashflows from operations in the first two quarters
fiscal 1997 included approximately $88.0 million, net, that was used for jo
venture equipment to be leased. In the first two quarters of fiscal 1998,
approximately $19.0 million, net, was generated from such activities. The
Company also had net income of $11.4 million in the first two quarters of
fiscal 1998 compared to a net loss of $4.6 million in the corresponding
two quarters of the prior fiscal year which contributed to the increase in
cash provided by operations.
The Company used $43.6 million in cash in investing activities during the
first two quarters of fiscal 1998 compared to $38.8 million during the
comparable period of fiscal 1997. The primary reasons for the change are th
in the first two quarters of fiscal 1998 the Company invested cash and cash
equivalents in short-term investments, whereas in the first two quarters of
1997 the Company transferred short-term investments into cash equivalents.
addition, the Company received approximately $21 million from termination o
the UMC agreements and had smaller payments under its joint venture
manufacturing agreements in the first two quarters of fiscal 1998 than in t
same period of fiscal 1997.
Financing activities used $1.2 million in cash during the first two quarter
of fiscal 1998 and generated $7.4 million during the comparable period of f
1997. In the first two quarters of fiscal 1997, net short-term borrowings
under a bank line of credit provided $10.0 million of financing. The Compa
raised approximately $290.6 million in the third quarter of fiscal 1997
primarily through the issuance of convertible subordinated notes and,
as a result, is no longer using short-term borrowings as a source of
financing.
On June 30, 1997, the Company amended its existing bank lines of credit to
provide a commitment for letters of credit up to a maximum aggregate of
$35,000,000, expiring on June 30, 1998, which is collateralized by cash or
securities with interest at the higher of: (a) .50% per annum above the
latest federal funds rate (as defined in the Second Amended Credit
Agreement); and (b) the rate of interest in effect for such day as publicly
announced from time to time by the bank. The Company is currently
in compliance with all covenants under the bank line of credit. The Company
does not believe the amendment of its line of credit will have an impact on
its financial position or on its ability to finance its operations for the
foreseeable future.
The semiconductor industry is extremely capital intensive. To remain
competitive, the Company believes it must continue to invest in advanced
wafer manufacturing and 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,
equity financing, and/or existing cash balances. As of September 27, 1997,
Company is contingently liable as guarantor or co-guarantor for MiCRUS and
Cirent equipment leases which
have remaining payments of approximately $550 million due through fiscal
2004. In addition, the Company has other commitments related to its joint
venture relationships with MiCRUS and Cirent that total approximately
$73 million at September 27, 1997.
There can be no assurance that financing will be available or, if available
will be on satisfactory terms. Failure to obtain adequate financing would
restrict the Company's ability to expand its manufacturing infrastructure,
to make other investments in capital equipment, and to pursue other
initiatives.
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
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 industr
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 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 produc
shipments. Because the Company's markets are volatile and subject to rapid
technology and price changes, there is a risk that the Company will forecas
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, for example, contributed significantly to th
Company's operating losses in fiscal 1997 and 1996. These factors increase
not only the inventory risk but also the difficulty of forecasting quarterl
operating results. Moreover, as is common in the semiconductor industry,
the Company frequently ships more product in the third month of each quarte
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 sale
at the end 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 o
operations because the rate of change in the markets
served by the Company continues to accelerate.
Issues Relating to Manufacturing and Manufacturing Investment
The Company participates in joint ventures with IBM (MiCRUS joint venture)
Lucent (Cirent joint venture) under a series of agreements intended to secu
a committed supply of wafers from manufacturing facilities operated by the
joint ventures. The joint ventures are controlled by IBM and Lucent,
respectively, and are dependent on the controlling partners advanced
proprietary manufacturing process technologies and manufacturing expertise.
These agreements include wafer purchase agreements under which the Company
committed to purchase a fixed percentage of the output of the joint venture
manufacturing facilities. As a result, the operating results of the Compan
may be more sensitive to changing business conditions, as anticipated
decreases in revenues could cause the Company to decide to not fulfill its
wafer purchase obligations. This would result in charges to the
Company from the joint ventures in amounts intended to cover the joint
ventures fixed costs related to the shortfall in wafer orders from the
Company. This would adversely impact gross margins and earnings, and would
compound the adverse impact on revenues from the conditions that caused the
Company to fail to fulfill its purchase commitments. During the fourth
quarter of fiscal 1997, the Company accrued $22.0 million for anticipated
shortfalls in its fulfillment of wafer purchase 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 i
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. During fiscal
1997, excess production capacity in the industry lead to significant price
competition between foundries and the Company believes that in some cases
this resulted in pricing from certain foundries that was lower than the
Company's cost of production from its manufacturing joint ventures. The
Company experienced pressures on its selling prices during fiscal 1997
and the first two quarters of 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 favorable
pricing from these foundries.
Certain provisions of the MiCRUS and Cirent Semiconductor agreements may
cause the termination of the joint venture in the event of a change in
control of the Company. Such provisions could have the effect of
discouraging, deferring or preventing a change of control of the Company.
In connection with the financing of its operations, the Company has borrowe
money and entered into substantial equipment lease obligations and is likel
to expand such commitments in the future. Such indebtedness could cause th
Company's principal and interest obligations to increase substantially. Th
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 industr
downturns and competitive pressures. The Company's ability to meet its deb
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 MiCRU
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. The Company's current strategy is to fulfill its
wafer requirements using a balance of secured wafer supply from its joint
ventures and from outside merchant wafer suppliers. The Company also uses
other outside vendors to package the wafer die into integrated circuits and
perform the majority of the Company's product testing.
During the second quarter of fiscal 1998 the Company reduced its purchase
obligations at Cirent by 50 percent, pursuant to an agreement under which
the Company can reacquire, at no incremental cost, an additional 10 percent
of the total Cirent wafer output and can sell any portion of its wafer
purchase obligation to third parties on a foundry basis. The agreement
also provides the Company with future access to certain Lucent advanced
process technologies including 0.18 micron process technology.
The Company's results of operations could be adversely affected in the
future, and have 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 access to test facilities are disrupted for an extended perio
of time. Because of the concentration of sales at the end of each quarter,
disruption in the Company's production or shipping near the end of a quarte
could materially reduce the Company's revenues for that quarter. Productio
may be constrained even though capacity is available at one or more wafer
manufacturing facilities because of the difficulty of moving production fro
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 i
the Company were unable to secure sufficient access to the services of thes
outside vendors.
Product development in the Company's markets is becoming more focused on th
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 increases
risk that latent defects or subtle faults could be discovered by customers
end users after volumes of product have been shipped. If such defects were
significant, the Company could incur material recall and replacement costs
product warranty. The Company's relationship with customers could also be
adversely impacted by the recurrence of significant defects.
Dependence on PC Market
Sales of most of the Company's products depend largely on sales of personal
computers (PCs). Reduced growth in the PC market could affect the financia
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 consume
PC market is more volatile than other segments of the PC market.
Other integrated circuit (IC) makers, including Intel Corporation, have
expressed their interest in integrating through hardware functions, adding
through special software functions, or kitting components to provide some
multimedia or communications features into or with their microprocessor
products. Successful integration of these functions could substantially
reduce the Company's opportunities for IC sales in these areas.
A number of PC OEMs buy products directly from the Company and also buy
motherboards, add-in boards or modules from suppliers who in turn buy
products from the Company. Accordingly, a significant portion of the
Company's sales may depend directly or indirectly on the sales to a
particular PC OEM. Since the Company cannot track sales by motherboard,
add-in board or module manufacturers, the Company may not be fully informed
as to the extent or even the fact of its indirect dependence on any
particular PC OEM, and, therefore, may be unable to assess the risk of such
indirect dependence.
The PC market is intensely price competitive. The PC manufacturers in turn
put pressure on the price of all PC components, and this pricing pressure i
expected to continue.
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 o
customers for the Company's mass storage products and increased the risk of
large fluctuations in demand.
The Company believes that constraints in supply of certain read head
components to the disk drive industry limited sales of its mass storage
products in the fourth quarter of fiscal 1997. In addition, the Company
believes that excess inventories held by its customers limited sales of the
Company's mass storage products in the second quarter of fiscal 1997 and
limited sales of the Company's optical disk drive products in the third
quarter of fiscal 1997.
The Company's revenues from mass storage products are dependent on the
successful introduction by its customers of new disk drive products and can
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 I
for mass storage products could in the future reduce demand for the Company
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 Graphics Products
The PC graphics market today consists primarily of both two-dimensional (2D
and three-dimensional (3D) graphics accelerators and 2D and 3D graphics
accelerators with video features. Market demand for 3D graphics accelerati
began to grow in the third quarter of fiscal 1997 and is rapidly gaining
market share from 2D products.
The Company continues to experience intense competition in the sale of both
2D and 3D graphics products. Several competitors introduced products and
adopted pricing strategies that have increased competition in the desktop
graphics market. In addition, the 3D opportunity has resulted in the entry
significant numbers of new competitors into the PC graphics market. These
competitive factors affected the Company's market share, gross margins, and
earnings in fiscal 1997 and in the first two quarters of fiscal 1998 and ar
likely affect revenues and gross margins for graphics accelerator products
in the future.
During the second quarter of fiscal 1997, the Company introduced and began
shipping its first Rambus DRAM-based 3D accelerator for the mainstream PC
market. Net sales of the Company's 3D accelerator products were not materi
in the first two quarters of fiscal 1998 or in fiscal 1997. The Company ha
been attempting to bring additional products with 3D acceleration to market
but has not succeeded in doing so in a timely manner. If these additional
products would not be brought to market in a timely manner or would
not address the market needs or cost or performance requirements, then the
Company's graphics market share and sales would be adversely affected.
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 controlle
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 remainder of fiscal 1998 are likely to be
significantly affected by the success of its recently introduced fully-
integrated, single-chip audio ICs. Moreover, aggressive competitive pricin
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 MM
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 became an important feature in the
first two quarters of fiscal 1998, primarily in products for the consumer
marketplace. If the Company's spatial effects audio products do not contin
to meet the cost or performance requirements of the market, revenues from t
sale of audio products will be adversely affected.
Issues Relating to Modem Products
The market for voice/data/fax modem chip sets 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 t
Company's new products, and the development of standards with regard to the
new performance levels. Conflicting standards for 56K modems (the U.S.
Robotics x2 protocol versus the Rockwell Semiconductor K56flex) have had an
adverse impact on the rate of the market's transition from 33.6K to 56K
technology. As a result, sales volumes of 56K modem products have been low
than anticipated, while continuing sales of 33.6K modems have been subject
severe pricing pressures. There are indicators that a uniform standard may
be established in 1998, but, there is no assurance that the standard
setting process will not be subject to further delays. 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 media processors and the introduction of MMX processors wit
multimedia features by Intel Corporation could adversely affect revenues an
gross margins from the sale of the Company's modem products.
Issues Related to Reorganization
During the fourth quarter of fiscal 1997, the Company decided to reorganize
into four market-focused divisions (Personal Computer Products,
Communications Products, Mass Storage Products, and Crystal Semiconductor
Products), outsource its production testing, and consolidate certain
corporate functions. In connection with these actions, the Company effecte
a workforce reduction of approximately 400 people, representing
approximately 15% of the worldwide staff. Although the Company generated
net income in the first two quarters of fiscal 1998, there is no assurance
that these actions will be successful or have a positive impact on results
operations. Furthermore, should such actions have a negative impact on the
Company's ability to design and develop new products, market new or existin
products, or produce and/or purchase products at competitive prices, these
actions could have an adverse impact on the Company's results of operations
Intellectual Property Matters
The semiconductor industry is characterized by frequent litigation regardin
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 th
Company and may be subject to indemnification provisions made by the Compan
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
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
U.S. dollar against other currencies, particularly the Japanese yen. Furth
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
the Company does business, demand for and supply of the Company's products
be adversely impacted, which would have a negative impact on the Company's
revenues and earnings.
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, a
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 t
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 it
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 Proceedings
On December 12, 1996, the Company signed a Memorandum of Settlement with
plaintiffs' counsel in the federal class action and derivative lawsuits.
The agreement settled all pending securities claims against the Company for
an aggregate sum of $31.3 million, exclusive of interest, $2.3 million of
which would be contributed by the Company with the remainder being
contributed by the Company's insurers. The Company recorded the $2.3
million as other expense in the quarter ended December 28,1996.
The settlement included an amendment of the federal class action filed
in 1995 to include claims pending in state court with the intent that the
settlement would have the effect of extinguishing the state court claims.
The Court approved the settlement after hearings on June 13 and June
19,1997, overruling objections to the settlement, including those asserted
by the plaintiffs in the state action. The judgment approving the
settlement was signed on June 23, 1997. The order approving the settlement
became final on July 23, 1997. Subsequently, the plaintiffs in the state
action agreed to settle such action for an immaterial amount and
agreed to the dismissal of the state action withdrawn related appeals of
the federal settlement. The state action has been dismissed.
In addition, the Company and certain of its customers from time to time hav
been notified that they may be infringing certain patents and other
intellectual property rights of others. Further, customers have been named
suits alleging infringement of patents by the customer products. Certain
components of these products have been purchased from the Company and may b
subject to indemnification provisions made by the Company to the customers.
The Company has not been named in any such suits. Although licenses are
generally offered in such situations, there can be no assurance that
litigation will not be commenced in the future regarding patents, mask work
copyrights, trademarks, trade secrets, or indemnification liability, or tha
any licenses or other rights can be obtained on acceptable terms.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10 Third Amendment to Cirent Joint Venture Formation
Exhibit 11 Statement re: Computation of Earnings per share
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K
None.
CIRRUS LOGIC, INC.
(Registrant)
November 11, 1997 /s/ Ronald K. Shelton
Date Ronald K. Shelton
Vice President, Finance, Chief Financial Offi
Principal Accounting Officer, and Treasurer