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 June 27, 1998
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
63,606,727 as of June 27, 1998.
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
-----------------------
June 27, June 28,
1998 1997
----------- -----------
Net sales $177,931 $201,623
Costs and expenses:
Cost of sales 117,819 122,471
Research and development 35,522 44,182
Selling, general and administrative 27,090 29,527
Restructuring costs, gain on sale of assets and other, net (3,006) 0
----------- -----------
Total costs and expenses 177,425 196,180
----------- -----------
Income from operations 506 5,443
Interest and other income (expense), net 306 (1,900)
----------- -----------
Income before provision for income taxes 812 3,543
Provision for income taxes 296 1,063
----------- -----------
Net income $516 $2,480
=========== ===========
Net income per share:
Basic $0.01 $0.04
=========== ===========
Diluted $0.01 $0.04
=========== ===========
Weighted average common shares outstanding:
Basic 66,650 66,416
=========== ===========
Diluted 67,461 67,849
=========== ===========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
June 27, Mar. 28,
1998 1998
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $212,888 $347,421
Short-term investments 139,727 125,378
Accounts receivable, net 96,281 103,073
Inventories 94,676 103,703
Deferred tax assets 28,505 28,505
Equipment and leasehold improvement
advances to joint ventures 93,232 97,711
Other current assets 14,738 10,402
----------- -----------
Total current assets 680,047 816,193
Property and equipment, net 92,984 99,364
Manufacturing agreements, net
and investments in joint ventures 163,505 166,953
Deposits and other assets 60,230 55,032
----------- -----------
$996,766 $1,137,542
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $182,564 $233,600
Accrued salaries and benefits 16,155 41,832
Current maturities of long-term
and capital lease obligations 26,404 26,554
Income taxes payable 30,544 38,053
----------- -----------
Total current liabilities 255,667 340,039
Capital lease obligations and long term debt 31,360 38,034
Other long-term obligations 2,981 3,126
Convertible subordinated notes 300,000 300,000
Commitments and contingencies
Shareholders' equity:
Capital stock 341,546 366,914
Retained earnings 65,212 89,429
----------- -----------
Total shareholders' equity 406,758 456,343
----------- -----------
$996,766 $1,137,542
=========== ===========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
(Unaudited)
Quarter Ended
-----------------------
June 27, June 28,
1998 1997
----------- -----------
Cash flows from operations:
Net income $516 $2,480
Adjustments to reconcile net income to net
cash flows from operations:
Depreciation and amortization 18,379 18,063
Net change in operating assets and liabilities (68,260) (27,311)
----------- -----------
Net cash flows used in operations (49,365) (6,768)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments (69,617) (157,852)
Proceeds from sale of short-term investments 55,268 120,710
Additions to property and equipment (5,838) (6,810)
Increase in deposits and other assets (8,056) (1,527)
----------- -----------
Net cash flows used by investing activities (28,243) (45,479)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,686 6,657
Borrowings on long-term debt 0 3,588
Payments on long-term debt and capital lease obligations (6,824) (9,445)
Repurchase and retirement of common stock (52,787) 0
----------- -----------
Net cash flows (used in) provided by financing activities (56,925) 800
----------- -----------
Decrease in cash and cash equivalents (134,533) (51,447)
Cash and cash equivalents - beginning of period 347,421 151,540
----------- -----------
Cash and cash equivalents - end of period $212,888 $100,093
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $10,102 $12,362
Income taxes paid $7,787 0
Tax benefit of stock option exercises 0 $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
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company,
the financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
financial position, operating results and cash flows for those periods
presented. These consolidated condensed financial statements should be
read in conjunction with the consolidated financial statements, and
notes thereto for the year ended March 28, 1998, included in the
Company's 1998 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:
June 27, March 28,
1998 1998
--------- ---------
(In thousands)
Work-in-process $64,384 $66,558
Finished goods 30,292 37,145
--------- ---------
Total $94,676 $103,703
========= =========
3. Shareholders' Equity
Stock Repurchase
During the quarter, pursuant to the Company's Board of Directors
previously approved plan to repurchase up to 10 million shares of its
common stock, the Company repurchased approximately 5.2 million shares
of common stock at a cost of $52.8 million.
4. 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 greater than the federal statutory rate
primarily because of state income taxes, partially offset by foreign
operating results which are taxed at rates other than U.S. federal
statutory rates.
5. Restructuring Costs, Gain on Sale of Assets and Other, Net
Restructuring costs, gain on sale of assets and other, net includes
$2.2 million relating to the recovery of a holdback from the fiscal
1997 sale of the PCSI's Infrastructure Product Group to ADC
Telecommunications, Inc. and reversal of $0.8 million that had been
previously accrued for losses on facilities in connection with the
third quarter fiscal 1998 discontinuation of certain strategies and
product development efforts in graphics products.
6. Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement
128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform
to the Statement 128 requirement.
The following table sets forth the computation of basic and diluted
earnings per share (In thousands, except per share amounts):
Quarter Ended
June 27, June 28,
1998 1997
----------- ----------
Numerator:
Net income $516 $2,480
Denominator:
Denominator for basic net income per share -
weighted-average shares 66,650 66,416
Dilutive common stock equivalents, using treasury
stock method 811 1,433
----------- ----------
Denominator for diluted net income per share 67,461 67,849
=========== ==========
Basic net income per share $0.01 $0.04
=========== ==========
Diluted net income per share $0.01 $0.04
=========== ==========
Options to purchase 3,073,000 shares of common stock were outstanding
as of June 27, 1998 but were not included in the computation of diluted
net income per share because the options' average exercise price was
greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
As of June 27, 1998, the Company had outstanding convertible notes to
purchase 12,387,000 shares of common stock that were not included in
the computation of diluted net income per share because the notes'
exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
7. Commitments
As of June 27, 1998, the Company is contingently liable for MiCRUS and
Cirent equipment leases which have remaining payments of approximately
$509 million, payable through fiscal 2005.
8. Recently Issued Accounting Standards
As of March 29, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS
130 has no impact on the Company's net income or shareholders' equity.
SFAS 130 requires foreign currency translation adjustments, which prior
to adoption was reported in shareholders' equity, to be included in the
other comprehensive income.
The components of comprehensive income, net of tax, are as follows (in
thousands):
Three Months Ended
June 27, June 28,
1998 1997
--------- ---------
Net income $516 $2,480
Change in unrealized loss on foreign
currency translation adjustments (356) 339
--------- ---------
Comprehensive income $160 $2,819
========= =========
In June 1998, the Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", was issued and is effective for fiscal years commencing
after June 15, 1999. SFAS 133 provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. The Company does not believe SFAS 133 will have a material
impact on earnings or the financial condition of the Company.
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 28, 1998, contained in the 1998 Annual Report on Form 10-K
(the "1998 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 1998 Form 10-K
that could cause actual results to differ materially from the
Company's expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements, as they reflect
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any
revision to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of Operations
The following table discloses the percentages that income statement
items are of net sales 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
--------- ---------
June 27, June 28, Percent
1998 1997 change
--------- --------- ---------
Net sales 100% 100% -12%
Gross margin 34% 39% -24%
Research and development 20% 22% -20%
Selling, general and administrative 15% 14% -8%
Restructuring costs, gain on sale of assets and other, net -2% 0% N/A
Income from operations 0% 3% -91%
Income before income taxes 0% 2% -77%
Provision for income taxes 0% 1% -72%
Net income 0% 1% -79%
Net Sales
Net sales for the first quarter of fiscal 1999 were $177.9 million, a
decrease of 12% from $201.6 million for the first quarter of fiscal
1998. Revenues in the first quarter of fiscal 1998 included amounts
from businesses subsequently divested by the Company. Excluding
revenues from divested businesses, net sales decreased approximately
$10.0 million due to decreased sales in the Mass Storage division, PC
Products division, primarily related to graphics products, and the
Communication division which were somewhat offset by increased sales of
industrial products in the Crystal Semiconductor division.
Export sales (including sales to U.S.-based customers with
manufacturing plants overseas) were 66% and 54% of total sales in the
first quarter of fiscal 1999 and fiscal 1998, respectively. The
increases in export sales as a percentage of total sales were related
primarily to an increase in sales of mass storage controller products
in Japan and a reduction in sales to certain U.S. - based mass storage
customers.
The Company's sales are currently denominated primarily in U.S.
dollars. The Company currently enters into foreign currency forward
exchange and option contracts to hedge certain of its foreign currency
exposures.
Sales to three customers comprised approximately 14%, 11% and 10% of
sales in the first quarter of fiscal 1999 and sales to one customer
were approximately 15% of net sales in the first quarter of fiscal
1998.
Gross Margin
Gross margin was 34% in the first quarter of fiscal 1999 compared to
39% for the first quarter of fiscal 1998. The decrease in gross
margins was primarily due to pricing pressures in a number of product
areas including mass storage products and PC products, primarily
graphics and audio products, and lower unit volumes than in the
comparative period.
Research and Development
Research and development expenses for the first quarter of fiscal 1999
were $35.5 million, a decrease of 20% from $44.2 million in the first
quarter of fiscal 1998. Research and development expenditures
decreases were the result of the divestiture of certain non-core
businesses in fiscal 1998 and reduction of product development efforts
with the PC graphics products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the first quarter of
fiscal 1999 were $27.1 million, a decrease of 8% from $29.5 million in
the first quarter of fiscal 1998 and were relatively consistent at 15%
and 14% of sales in each of these quarters, respectively. Selling,
general and administrative expenditures decreases were primarily a
result of the divestiture of certain non-core businesses in fiscal
1998.
Restructuring Costs, Gain on Sale of Assets and Other, Net
Restructuring costs, gain on sale of assets and other, net includes
$2.2 million relating to the recovery of a holdback from the fiscal
1997 sale of the Infrastructure Product Group of the Company's PCSI
subsidiary to ADC Telecommunications, Inc. and $0.8 million that had
been previously accrued for losses on facilities in connection with the
third quarter of fiscal 1998 discontinuation of certain strategies and
product development efforts in the graphics products.
Income Taxes
The Company's effective tax rate was 36.5% in the first quarter of
fiscal 1999 compared to 30.0% in the first quarter of fiscal 1998. The
36.5% estimated annual effective tax rate is greater than the U.S.
federal statutory rate of 35.0% because of state income taxes,
partially offset by foreign operating results which are taxed at rates
other than U.S. federal statutory rates.
Realization of the Company's net deferred tax assets is dependent on
future U.S. taxable income. While the Company believes that it is more
likely than not that such assets will be realized, other factors,
including those mentioned in the discussion of Future Operating
Results, may impact the ultimate realization of such assets. The
deferred tax assets realizability is evaluated on a quarterly basis.
Liquidity and Capital Resources
The Company used approximately $49.4 million of cash and cash
equivalents in its operating activities during the first quarter of
fiscal 1999 and used approximately $6.8 million during the first quarter
of fiscal 1998. The cash used by operations in the first quarter of
fiscal 1999 was primarily due to accounts payable and accrued
liabilities payment cycle timing.
The Company used $28.2 million in cash in investing activities during
the first quarter of fiscal 1999 compared to $45.5 million during the
comparable period of fiscal 1998. The primary reason for the change is
that in the first quarter of fiscal 1999 the Company invested less of
its cash and cash equivalents in short-term investments than in the
first quarter of 1998.
Financing activities used $56.9 million in cash during the first
quarter of fiscal 1999 and generated $0.8 million during the comparable
period of fiscal 1998. During the first quarter of fiscal 1999, the
Company repurchased $52.8 million worth of its common stock.
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 June 27, 1998, the Company is contingently liable as guarantor or
co-guarantor for equipment leases at its semiconductor fabrication
joint ventures, MiCRUS and Cirent, which have remaining payments of
approximately $509 million due through fiscal 2005. In addition, the
Company has other commitments related to its joint venture
relationships with MiCRUS that total approximately $7.5 million at June
27, 1998.
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 1999 are likely to be affected by these factors as
well as others.
The Company must order wafers and build inventory well in advance of
product shipments. Because the Company's markets are volatile and
subject to rapid technology and price changes, there is a risk that the
Company will forecast inaccurately and produce excess or insufficient
inventories of particular products. This inventory risk is heightened
because many of the Company's customers place orders with short lead
times. Such inventory imbalances have occurred in the past and in fact
contributed significantly to the Company's operating losses in fiscal
1997 and 1996. These factors increase not only the inventory risk but
also the difficulty of forecasting quarterly operating results.
Moreover, as is common in the semiconductor industry, the Company
frequently ships more 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
The Company participates in joint ventures with International Business
Machines Corp. ("IBM"), the MiCRUS joint venture, and Lucent
Technologies, the Cirent Semiconductor joint venture, under a series of
agreements intended to secure a committed supply of wafers from
manufacturing facilities operated by the joint ventures. The joint
ventures are controlled by IBM and Lucent Technologies, 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 is
committed to purchase a fixed percentage of the output of the joint
venture manufacturing facilities. As a result, the operating results
of the Company 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. The Company determines any estimated
shortfalls in such purchase commitments over the short-term (six-
months) and accrues such amounts to the extent they would result in
inventory losses were the Company to fulfill the commitment and take
delivery of the related inventory. The Company's gross margins and
earnings were adversely impacted by such charges in the amounts of
$53.0 million, $22.0 million, $12.1 million, $7.8 million and $6.2
million in the fourth quarter of fiscal 1998, the fourth and second
quarters of fiscal 1997 and the second and first quarter of fiscal
1996, respectively. With its other foundry sources, the Company
becomes committed upon placing orders and is subject to penalties for
cancellations.
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 could 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 1998 and the first quarter of fiscal 1999,
excess production capacity in the industry lead to significant price
competition between merchant semiconductor foundries and the Company
believes that in some cases this resulted in pricing from certain
foundries that was lower than the Company's cost of production from its
manufacturing joint ventures. The Company experienced pressures on its
selling prices during fiscal 1998, which had a negative impact on its
results of operations and it believes that this was partially due to
the fact that certain of its competitors were able to obtain more
favorable pricing from such foundries.
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 become in default of such
obligations.
Although the Company has increased its future wafer supplies from
MiCRUS and Cirent Semiconductor, 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 to perform the majority of the Company's
product testing.
During the second quarter of fiscal 1998 the Company reduced its
purchase obligations at Cirent Semiconductor 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 Semiconductor 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, as they have been so affected in the past, if particular
suppliers are unable to provide a sufficient and timely supply of
product, whether because of raw material shortages, capacity
constraints, unexpected disruptions at the plants, delays in qualifying
new suppliers or other reasons, or if the Company is forced to purchase
wafers or packaging from higher cost suppliers or to pay expediting
charges to obtain additional supply, or if the Company's test
facilities are disrupted for an extended period of time. Because of
the concentration of sales at the end of each quarter, a disruption in
the Company's production or shipping near the end of a quarter could
materially reduce the Company's revenues for that quarter. Production
may be constrained even though capacity is available at one or more
wafer manufacturing facilities because of the difficulty of moving
production from one facility to another. Any supply shortage could
adversely affect sales and operating profits. The Company's reliance
upon outside vendors for assembly and test could also adversely impact
sales and operating profits if the Company was unable to secure
sufficient access to the services of these outside vendors.
Product development in the Company's markets is becoming more focused
on the integration of functionality on individual devices and there is
a general trend towards increasingly complex products. The greater
integration of functions and complexity of operations of the Company's
products increase the risk that latent defects or subtle faults could
be discovered by customers or end users after volumes of product have
been shipped. If such defects were significant, the Company could
incur material recall and replacement costs for product warranty. The
Company's relationship with customers could also be adversely impacted
by the recurrence of significant defects.
Dependence on PC Market
Although the Company's future direction is to emphasize non-PC market
opportunities in mass storage, communications, consumer electronics and
industrial automation, sales of many of the Company's products will
continue to depend largely on sales of personal computers (PCs).
Reduced growth in the PC market could affect the financial health of
the Company as well as its customers. Moreover, as a component
supplier to PC OEMs and to peripheral device manufacturers, the Company
is likely to experience a greater magnitude of fluctuations in demand
than the Company's customers themselves experience. In addition, many
of the Company's products are used in PCs for the consumer market, and
the consumer PC market is more volatile than other segments of the PC
market.
Other integrated circuit (IC) makers, including Intel Corporation, have
expressed their interest in integrating through hardware functions,
adding through special software functions, or kitting components to
provide some multimedia or communications features into or with their
microprocessor products. Successful integration of these functions
could substantially reduce the Company's opportunities for IC sales in
these areas. In addition, the Company's de-emphasis of PC products and
its focus on non-PC markets could have an adverse affect on the
Company's PC product sales as customers seek other supply sources with
greater commitments to the PC market.
A number of PC OEMs buy products directly from the Company and also buy
motherboards, add-in boards or modules from suppliers who in turn buy
products from the Company. Accordingly, a significant portion of the
Company's sales may depend directly or indirectly on the sales to a
particular PC OEM. Since the Company cannot track sales by
motherboard, add-in board or module manufacturer, the Company may not
be fully informed as to the extent or even the fact of its indirect
dependence on any particular PC OEM, and, therefore, may be unable to
assess the risks of such indirect dependence.
Issues Relating to Mass Storage Market
The 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. Recent market demands for sub-$1,000 PCs puts further
pressure on the price of disk drives and 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 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. Revenues from mass
storage products for the remainder of fiscal 1999 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 bringing the
products into volume production timely and cost effectively.
The Company's revenues from mass storage products are dependent on the
successful introduction by its customers of new disk drive products and
can be impacted by the timing of customers' transition to new disk
drive products. Recent efforts by certain of the Company's customers
to develop their own ICs for mass storage products could in the future
reduce demand for the Company's mass storage products, which could have
an adverse effect on the Company's revenues and gross margins from such
products. In addition, in response to the current market trend towards
integrating hard disk controllers with microcontrollers, the Company's
revenues and gross margins from its mass storage products will be
dependent on the Company's ability to introduce such integrated
products in a commercially competitive manner.
During the last half of fiscal 1998, major companies in the disk drive
industry, including certain of the Company's customers, have reported
declines in business. In addition, the Company's mass storage products
were not designed into a major customer's next generation product which
is expected to run in fiscal 1999. Consequently, these factors are
expected to have an adverse impact on the mass storage division's
revenue through at least the second half of fiscal 1999.
Issues Relating to Graphics Products
In November 1997, the Company changed its direction in graphics from
reliance on 2D and 3D stand alone products to a strategy of providing
future integrated multimedia products. Concurrently, the Company
realigned and reduced its graphics research and development and
marketing activities toward this new product direction, resulting in a
workforce reduction of approximately sixty-five employees. While the
Company continues to sell its line of existing 2D and 3D graphics
products, levels and duration of future revenues from these products is
uncertain. Further, if the new integrated function products are not
brought to market in a timely manner or do not address the market needs
or costs of performance requirements, then the Company's market share
and sales will be adversely affected.
Issues Relating to Consumer Electronics Products
Most of the Company's revenues in the consumer electronics arena are in
the multimedia audio market and are derived from the sales of audio
codecs and integrated 16-bit codec-plus-controller solutions for the PC
market and consumer electronics equipment. In the PC market, pricing
pressures have forced a transition from multi-chip solutions to
products that integrate the codec, controller and synthesis functions
into a single IC. The Company's revenues from the sale of PC audio
products in fiscal 1999 are likely to be significantly affected by the
introduction of cost reduced, fully-integrated, single-chip audio ICs.
Moreover, aggressive competitive pricing pressures have adversely
affected and may continue to adversely affect the Company's revenues
and gross margins from the sale of audio ICs. 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 became an important feature in
fiscal 1998, primarily in products for the consumer electronics
marketplace. If the Company's spatial-effects audio products do not
meet the cost or performance requirements of the market, revenues from
the sale of audio products could be adversely affected.
Issues Relating to Communications Products
The communications 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 of this product line. 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 with multimedia
features by Intel Corporation could adversely affect revenues and gross
margins from the sale of the Company's modem products.
Issues Relating to Industrial Products
Industrial Products is a very broad market with many well established
competitors. The Company's ability to compete in this market will be
adversely affected if it cannot establish broad sales channels or if it
does not develop and maintain a broad enough product line to compete
effectively. In addition, the customer product design in time is long.
Customer delays in product development and introductions create risk
relative to the Company's revenue plans. Further, the Company's
products in this market are technically very complex. The complexity
of the products contributes to risks in getting products to market on a
timely basis, which could impact the Company's revenue plans. The
scarcity of analog engineering talent also contributes to risks related
to product development and introduction timing in this market.
Intellectual Property Matters
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company
and certain of its customers from time to time have been notified that
they may be infringing certain patents and other intellectual property
rights of others. In addition, customers have been named in suits
alleging infringement of patents or other intellectual property rights
by customer products. Certain components of these products have been
purchased from the Company and may be subject to indemnification
provisions made by the Company to its customers. Although licenses
are generally offered in situations where the Company or its customers
are named in suits alleging infringement of patents or other
intellectual property rights, there can be no assurance that any
licenses or other rights can be obtained on acceptable terms. An
unfavorable outcome occurring in any such suit could have an adverse
effect on the Company's future operations and/or liquidity.
Foreign Operations and Markets
Because many of the Company's subcontractors and several of the
Company's key customers, such customers collectively accounting for a
significant percentage of the Company's revenues, are located in Japan
and other Asian countries, the Company's business is subject to risks
associated with many factors beyond its control. International
operations and sales may be subject to political and economic risks,
including political instability, currency controls, exchange rate
fluctuations, and changes in import/export regulations, tariff and
freight rates. Although the Company buys hedging instruments to reduce
its exposure to currency exchange rate fluctuations, the Company's
competitive position can be affected by the exchange rate of the U.S.
dollar against other currencies, particularly the Japanese yen.
Further, to the extent that volatility in foreign financial markets was
to have an adverse impact on economic conditions in a country or
geographic region in which the Company does business, demand for and
supply of the Company's products could be adversely impacted, which
would have a negative impact on the Company's revenues and earnings.
A significant number of the Company's customers and suppliers are in
Asia. The recent turmoil in the Asian financial markets does not
appear to have had a direct material impact on the Company's sales
orders or bookings. However, the financial instability in these
regions may have an adverse impact on the financial position of end
users in the region which could impact future orders and/or the ability
of such users to pay the Company or the Company's customers, which
could also impact the ability of such customers to pay the Company.
The Company performs extensive financial due diligence on customers and
potential customers and generally required material sales to Asia to
either be secured by letters of credit or transacted on a cash on
demand basis. Given the current situation in Asia, the Company has
begun to require the letters of credit to be established through
American banking institutions. During this volatile period, the
Company expects to carefully evaluate the collection risk related to
the financial position of customers and potential customers. The
results of such evaluations will be considered in structuring the terms
of sale, in determining whether to accept sales orders, in evaluating
the recognition of revenue on sales in the area and in evaluating the
collectability of outstanding accounts receivable from the region. In
situations where significant collection risk exists, the Company will
either not accept the sales order, defer the recognition of related
revenues, or, in the case of previously transacted sales, establish
appropriate bad debt reserves. Despite these precautions, should the
current volatility in Asia have a material adverse impact on the
financial position on end users of the customers products in Asia, the
Company could experience a material adverse impact on its results of
operations.
Competition
The Company's business is intensely competitive and is characterized by
new product cycles, price erosion, and rapid technological change.
Competition typically occurs at the design stage, where the customer
evaluates alternative design approaches that require integrated
circuits. Because of shortened product life cycles and even shorter
design-in cycles, the Company's competitors have increasingly frequent
opportunities to achieve design wins in next generation systems. In
the event that competitors succeed in supplanting the Company's
products, the Company's market share may not be sustainable and net
sales, gross margin, and results of operations would be adversely
affected. Competitors include major domestic and international
companies, many of which have substantially greater financial and other
resources than the Company with which to pursue engineering,
manufacturing, marketing and distribution of their products. Emerging
companies are also increasing their participation in the market, as
well as customers who develop their own integrated circuit products.
Competitors include manufacturers of standard semiconductors,
application-specific integrated circuits and fully customized
integrated circuits, including both chip and board-level products. The
ability of the Company to compete successfully in the rapidly evolving
area of high-performance integrated circuit technology depends
significantly on factors both within and outside of its control,
including, but not limited to, success in designing, manufacturing and
marketing new products, wafer supply, protection of Company products by
effective utilization of intellectual property laws, product quality,
reliability, ease of use, price, diversity of product line, efficiency
of production, the pace at which customers incorporate the Company's
integrated circuits into their products, success of the customers'
products, and general economic conditions. Also the Company's future
success depends, in part, upon the continued service of its key
engineering, marketing, sales, manufacturing, support, and executive
personnel, and on its ability to continue to attract, retain, and
motivate qualified personnel. The competition for such employees is
intense, and the loss of the services of one or more of these key
personnel could adversely affect the Company. Because of these and
other factors, past results may not be a useful predictor of future
results.
Impact of Year 2000
The "Year 2000 Issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. If
the Company's computer programs with date-sensitive functions are not
Year 2000 compliant, they may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company is currently in the process of modifying and/or replacing
significant portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and
thereafter. The Company presently believes that with modifications to
testing software and conversions to new software, the Year 2000 Issue
will not pose significant operational problems for its internal
computer systems. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 Issue could have a
material impact on the operations of the Company. The Company will use
both internal and external resources to reprogram or replace and test
the software for Year 2000 modifications.
In addition, the Year 2000 Issue creates risk for the Company from
unforeseen problems from third parties with whom the Company deals on
financial transactions. Such failures of the Company's third parties'
computer systems could have a material impact on the Company's ability
to conduct its business. The Company is also assessing the capability
of its products sold to customers over a period of years to handle the
Year 2000 Issue and has a plan in place to address product issues
during fiscal 1999. Management believes that the likelihood of a
material adverse impact due to problems with internal systems or
products sold to customers is remote and expects that the cost of these
projects over the next two years will not have a material effect on the
Company's financial position or overall trends in results of
operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
On July 21, 1998, the Company held its Annual Meeting of Shareholders.
The matters voted upon at the meeting and the results of those votes
were as follows:
1. Election of Directors:
Votes
Votes For Withheld
---------- --------
Michael L. Hackworth 58,649,104 3,917,164
Suhas S. Patil 58,802,335 3,763,933
C. Gordon Bell 58,969,702 3,596,566
D. James Guzy 58,962,573 3,603,695
Walden C. Rhines 58,952,046 3,614,222
Robert H. Smith 58,953,219 3,613,049
Alfred S. Teo 60,092,340 2,473,928
2. Approve amendment to the 1989 Employee Stock Purchase Plan:
For Against Abstain No Vote
---------- ------- ------- -------
55,927,525 5,349,933 391,300 897,510
3. Approve amendment to the 1996 Stock Plan:
For Against Abstain No Vote
---------- ------- ------- -------
47,203,785 14,028,236 436,737 897,510
4. Approve amendment to the 1990 Directors' Stock Option Plan:
For Against Abstain No Vote
---------- ------- ------- -------
52,983,692 8,210,793 474,273 897,510
5. Approve reincorporation as a Delaware corporation:
For Against Abstain No Vote
---------- ------- ------- -------
33,890,340 7,289,336 415,909 20,970,683
6. Approve number of authorized shares of Common Stock:
For Against Abstain No Vote
---------- ------- ------- -------
55,067,104 6,805,108 645,456 48,600
7. Ratify the appointment of Ernst & Young LLP as Independent Auditors:
For Against Abstain No Vote
---------- ------- ------- -------
61,320,753 909,054 336,461 -
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
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)
August 11, 1998 /s/ Ronald K. Shelton
Date Ronald K. Shelton
Vice President, Finance, Chief Financial Officer,
Principal Accounting Officer, and Treasurer