FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 25, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-17795
CIRRUS LOGIC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0024818
(State or other jurisdiction of (I.R.S. Employer
(incorporation or organization) Identification No.)
3100 West Warren Avenue, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-8300
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the registrant's common stock,
$0.001 par value, was 65,576,078 as of September 25, 1999
Part 1. Financial Information
Item 1. Financial Statements
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Quarter Ended Two Quarters Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales $132,842 $169,689 $253,395 $347,620
Costs and expenses:
Cost of sales 79,637 155,611 151,023 273,430
Research and development 27,940 34,145 54,634 69,667
Selling, general and administrative 22,647 26,810 45,310 53,900
Restructuring costs, gain on sale of
assets and other, net - 28,522 127,210 25,516
Acquired in-process research and
development expenses 8,013 - 8,013 -
----------- ----------- ----------- -----------
Total costs and expenses 138,237 245,088 386,190 422,513
Loss from operations (5,395) (75,399) (132,795) (74,893)
Interest and other income (expense), net (3,959) 792 (4,305) 1,098
----------- ----------- ----------- -----------
Loss before provision for income taxes (9,354) (74,607) (137,100) (73,795)
Provision for income taxes - 46,402 - 46,698
----------- ----------- ----------- -----------
Net loss ($9,354) ($121,009) ($137,100) ($120,493)
=========== =========== =========== ===========
Net loss per share:
Basic ($0.15) ($1.90) ($2.26) ($1.85)
Diluted ($0.15) ($1.90) ($2.26) ($1.85)
Weighted average common shares outstanding:
Basic 61,353 63,748 60,762 65,199
Diluted 61,353 63,748 60,762 65,199
(See Notes to the Unaudited Consolidated
Condensed Financial Statements)
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
(Unaudited)
Sept. 25, March 27,
1999 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $41,521 $144,457
Restricted cash 58,733 86,277
Short-term investments - 74,616
Marketable equity securities 81,940 -
Accounts receivable, net 78,296 66,063
Inventories, net 47,613 40,262
Other current assets 37,051 19,039
----------- -----------
Total current assets 345,154 430,714
Property and equipment, net 39,126 48,024
Investment in joint venture - 14,000
Deposits and other assets 63,137 39,892
----------- -----------
$447,417 $532,630
=========== ===========
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $127,840 $207,033
Current maturities of long-term debt
and capital lease obligations 18,148 23,076
Income taxes payable 37,454 36,593
----------- -----------
Total current liabilities 183,442 266,702
Long term obligations and
convertible subordinated notes 315,500 323,648
Commitments and contingencies
Net capital deficiency:
Common stock and additional paid-in capital 388,290 326,185
Unrealized gain on marketable equity securities 81,190 -
Accumulated deficit (521,005) (383,905)
----------- -----------
Total net capital deficiency (51,525) (57,720)
----------- -----------
$447,417 $532,630
=========== ===========
(See Notes to the Unaudited Consolidated
Condensed Financial Statements)
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Two Quarters Ended
Sept. 25, Sept. 26,
1999 1998
----------- -----------
Cash flows from operating activities:
Net income (loss) ($137,100) ($120,493)
Adjustments to reconcile net income to net
cash flows from operations:
Depreciation and amortization 15,616 38,467
Other non-cash charges 40,417 28,522
Deferred tax valuation allowance - 46,402
Compensation relating to the issuance of certain
employee stock 692 719
Net change in operating assets and liabilities (118,711) (45,627)
----------- -----------
Net cash used in operations (199,086) (52,010)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments - (69,617)
Proceeds from sale of short-term investments 74,616 105,344
Proceeds from restructuring of joint venture 14,000 -
Additions to property and equipment (2,846) (8,699)
Increase in deposits and other assets (11,630) (13,757)
Increase in cash from AudioLogic, Inc. acquisition 1,010 -
Decrease in restricted cash 27,544 5,199
----------- -----------
Net cash flows used by investing activities 102,694 18,470
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 6,532 4,829
Borrowings on long-term debt - -
Payments on long-term debt and capital lease obligation (13,076) (13,352)
Repurchase and retirement of common stock - (54,609)
----------- -----------
Net cash (used for) provided by financing activies (6,544) (63,132)
----------- -----------
Net increase (decrease) in cash and cash equivalents (102,936) (96,672)
Cash and cash equivalents at beginning of period 144,457 307,184
----------- -----------
Cash and cash equivalents at end of period $41,521 $210,512
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $1,463 $11,483
Income taxes paid $158 $7,911
(See Notes to the Unaudited Consolidated
Condensed Financial Statements)
CIRRUS LOGIC, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated condensed financial statements have been prepared
by Cirrus Logic, Inc. (the "Company", the "Registrant", or
"Cirrus") pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of the Company, the financial
statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
financial position, operating results and cash flows for those
periods presented. These consolidated condensed financial
statements should be read in conjunction with the consolidated
financial statements, and notes thereto for the year ended March
27, 1999, included in the Company's 1999 Annual Report on Form 10-
K. The results of operations for the interim periods presented
are not necessarily indicative of the results that may be expected
for the entire year.
2. Inventories
Net inventories are comprised of the following:
Sept. 25, March 27,
1999 1999
----------- -----------
Work in process $37,301 $25,165
Finished goods 10,312 15,097
----------- -----------
Total $47,613 $40,262
=========== ===========
3. Income Taxes
Statement of Financial Accounting Standards 109 provides for the
recognition of deferred tax assets if realization of such assets
is more likely than not. The Company has provided a valuation
allowance equal to its net deferred tax assets due to
uncertainties regarding their realization. The realizability of
the deferred tax assets will be evaluated on a quarterly basis.
4. Restructuring of Joint Ventures
During the first quarter of fiscal 2000, the Company substantially
completed the remaining restructuring activities previously
announced in the second quarter of fiscal 1999. The Company
finalized negotiations with International Business Machines
Corporation ("IBM") to restructure the Company's interest in the
MiCRUS joint venture and also finalized negotiations with Lucent
Technologies, Inc. ("Lucent") to terminate the Company's
interest in the Cirent joint venture. In connection with the
finalization of these two agreements, the Company recorded
restructuring charges of $128.2 million during the first quarter
of fiscal 2000, $1 million of which is included in cost of sales.
The restructuring charge includes $135 million in direct payments,
$32 million of the Company's contributed common stock, $4.8
million fair value of the related embedded stock derivative, $9.3
million of lease buyout costs and $16.4 million of equipment
write-offs. These charges were offset by the reversal of
approximately $71.9 million of previously accrued wafer purchase
commitment charges due to the renegotiated terms of the Company's
purchase commitments with its former partners.
MiCRUS
The terms of the MiCRUS restructuring agreement, entered into
during the first quarter of fiscal 2000, required the Company to
pay $135 million in cash to IBM and issue into an escrow account
shares of the Company's common stock with a fair value (based on
the average closing price of the Company's common stock for the 20
days prior to closing) of $32 million. Under the escrow
arrangement, the escrow period ends on April 3, 2000, wherein some
or all of the shares will be released to IBM. If the fair value
of the shares on April 3, 2000 is less than $32 million, Cirrus
must pay the difference to IBM in cash. If the fair value of the
shares exceeds $32 million, shares equal to one-half of the excess
over $32 million are returned to the Company and the remaining
shares are released to IBM. During the six month period following
April 3, 2000, IBM may sell on the open market the Company stock
it received. If at the end of the six month period on September
30, 2000, IBM has sold at least 15% of the Cirrus stock, it can
require Cirrus to purchase the remaining shares for cash such that
the total received by IBM, including the amounts IBM received in
open market sales, is $32 million. If during the six month period
ending on September 30, 2000, the Company stock received by IBM
appreciates to over $32 million, IBM may keep all proceeds from
the sale of stock in excess of $32 million up to a maximum of $48
million. Amounts received by IBM in excess of $48 million must be
returned to Cirrus.
Because Cirrus has guaranteed IBM a minimum of $32 million in
cash, either through open market sales of Cirrus stock or through
repurchase of the stock directly by Cirrus, the fair value of the
embedded stock derivative granted to IBM has been recorded in the
balance sheet as a liability. The fair value of the embedded
stock derivative of $4.8 million was estimated by the Company
based on the Company's current estimate of the financial outcome
of this arrangement.
The Company also transferred to IBM the Company's partnership
interest and certain assets relating to the partnership's
operation, and forgave certain debts owed to the Company by IBM
and/or MiCRUS relating to the use of certain assets prior to the
closing.
In exchange for this consideration, IBM will release the Company
of its obligations to support the partnership and to maintain
certain lease payment guarantees issued jointly and severally with
IBM. IBM is responsible for the costs associated with winding
down the partnership, including costs associated with employee
terminations and the dismantling of equipment. The Company also
entered into an amended wafer purchase agreement.
Cirent
The terms of the Lucent termination agreement, which was also
entered into during the first quarter of fiscal 2000, required the
Company to pay to Lucent $9.3 million which Lucent will use as
partial payment in connection with the buyout of certain leases
associated with assets utilized in the Cirent manufacturing
facility. The Company sold its interest in the joint venture and
certain associated assets to an affiliate of Lucent for $14
million and is not responsible for any future operating costs or
equipment lease liabilities associated with the fab. In
addition, the Company entered into an amended wafer purchase
agreement whereby the Company paid Lucent a $5 million deposit and
pledged $20 million of its accounts receivable to collateralize
future wafer purchase commitments.
5. Acquisition of AudioLogic, Inc.
On July 27, 1999 the Company completed its acquisition of
AudioLogic, Inc. ("AudioLogic"), a Colorado-based company
specializing in low power mixed-signal integrated circuit design.
The acquisition was completed through a stock-for-stock
transaction whereby each share of AudioLogic was exchanged for
.3006 shares of Cirrus Logic, Inc. common stock. Using the same
ratio, each outstanding, unexercised option in AudioLogic granted
under the AudioLogic, Inc. 1992 Stock Option Plan was exchanged
for an option to purchase the common stock of Cirrus Logic, Inc.
As part of the stock transaction, the Company guaranteed that the
value of the converted shares and unexercised options will be at
least $25 million at the one-year anniversary of the closing, July
27, 2000. To the extent that the value of the shares issued is
less than $25 million on July 27, 2000, the Company may settle the
difference in cash or additional shares. The Company valued the
per share consideration paid for AudioLogic based on the price of
the Company's stock on the closing date of the transaction
combined with the discounted difference between the guaranteed
price per share and the price per share on the closing date. Also
included in the calculation of total consideration is the fair
value of the assumed options and estimated transaction costs. The
total purchase price of $22.9 million was allocated to the
estimated fair value of assets acquired and liabilities assumed
based on independent appraisals and management estimates as
follows:
Fair value of tangible net assets $1,213
Existing technology 6,353
Existing agreements 4,100
Covenants not-to-compete 1,900
Trademark 700
Assembled workforce 600
In-process technology 8,013
---------
Total assets acquired $22,879
=========
Existing Technology
To determine the value of the existing technology ($6.4 million),
the expected future cash flow attributable to the existing
technology was discounted, taking into account risks related to
the characteristics and applications of the technology,
existing and future markets, and assessment of the life cycle
stage of the technology.
Existing Agreements
The valuation of AudioLogic's existing agreements ($4.1 million)
was based on the discounted net cash flow expected to be realized
from licensing revenues and product sales anticipated under the
agreements.
Covenants Not-to-Compete
The agreements signed between Cirrus and certain members of
AudioLogic's management team establishing covenants not-to-compete
were valued ($1.9 million) based on assessing the differential
cash flows expected from competition in the absence of these
agreements. The key differential drivers are expected future lost
revenue and incremental research and development costs.
Trademark
The AudioLogic trademark was valued ($0.7 million) based on a
discounted cost-savings approach using an assumed royalty rate
which is customary for the semiconductor industry.
Assembled workforce
To determine the value of the assembled workforce ($0.6 million),
Cirrus evaluated the workforce in place at the acquisition date
and utilized the cost approach to estimate the value of replacing
the workforce. Costs considered in replacing the workforce
included costs to recruit and interview candidates, as well as the
cost to train new employees.
In-Process Research and Development
Management estimates that $8.0 million of the purchase price
represents purchased in-process technology that has not yet
reached technological feasibility and has no alternative future
use. Accordingly, this amount was expensed in the second quarter
of fiscal year 2000 following consummation of the acquisition. The
value assigned to purchased in-process technology was determined
by identifying research projects in areas for which technological
feasibility had not been achieved using appropriate income based
valuation methodologies. The value was determined by calculating
the estimated stage of completion (expressed as a percentage of
completion) for each project, applying the percentage to the
expected net cash flows for each project, and discounting the net
cash flows back to their present value. The stage of completion
was determined by analyzing the costs incurred (as of the valuation
date) divided by the total estimated costs to complete the projects.
The discount rate included a factor that took into account the
the uncertainty surrounding the successful development of the
purchased in-process technology projects.
Development of in-process technology remains a substantial risk
to the Company due to factors including the remaining effort to
achieve technical feasibility, rapidly changing customer markets
and competitive threats from other companies. Additionally, the
value of other intangible assets acquired may become impaired. The
in-process research and development charge valuation was
prepared by an independent appraiser of technology assets,
based on inputs from management of the Company and AudioLogic,
utilizing valuation methodologies and techniques the Company
believes are reasonable.
The amounts allocated to existing technology, existing
agreements, covenants not-to-compete, trademark and assembled
workforce are being amortized over their respective estimated
useful lives of between three and four years using the straight-
line method.
6. Marketable Equity Securities
During the second quarter of fiscal 2000, the Company recorded an
$81.2 million unrealized gain on marketable equity securities
relating to the Company's equity investment in Phone.com, Inc.
This investment is considered available for sale at September 25,
1999. In connection with Phone.com's recent initial public
offering, the Company signed an agreement which prohibits the
Company from selling its Phone.com shares until after December 8,
1999. Phone.com is traded on the Nasdaq National Market under
the ticker symbol "PHCM".
7. Net Income Per Share
The following table sets forth the computation of basic and
diluted earnings per share (In thousands, except per share
amounts):
Quarter Ended Two Quarters Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Numerator:
Net loss ($9,354) ($121,009) ($137,100) ($120,493)
Denominator:
Denominator for basic net loss
per share - weighted-average shares 61,353 63,748 60,762 65,199
Dilutive common stock equivalents,
using treasury stock method - - - -
----------- ----------- ----------- -----------
Denominator for diluted net loss
per share 61,353 63,748 60,762 65,199
=========== =========== =========== ===========
Basic net loss per share ($0.15) ($1.90) ($2.26) ($1.85)
=========== =========== =========== ===========
Diluted net loss per share ($0.15) ($1.90) ($2.26) ($1.85)
=========== =========== =========== ===========
Incremental common shares attributable to the exercise of
outstanding options of 1,317,875 and 662,297 shares, respectively,
for the three and six months ended September 25, 1999 were
excluded from the computation of diluted net loss per share
because the effect would be antidilutive. Incremental common
shares attributable to the exercise of outstanding options of
8,532,000 and 6,208,000 shares, respectively, for the three and
six month periods ended September 26, 1998 were excluded from the
computation of diluted net loss per share because the effect would
be antidilutive.
The Company excluded 3,562,364 shares from the computations of
basic and diluted net loss because those shares were issued into
an escrow account, on a contingent basis, until April 3, 2000 (See
Note 4 regarding the MiCRUS restructuring agreement).
8. Commitments and Contingencies
Due to the terms of the MiCRUS restructuring agreement (as
discussed in Note 4), as of September 25, 1999 the Company remains
contingently liable for MiCRUS equipment leases which have
remaining payments of approximately $195 million payable through
2003.
9. Comprehensive Income
The components of comprehensive income (loss), net of tax, are as
follows (in thousands):
Quarter Ended Two Quarters Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income (loss) ($9,354) ($121,009) ($137,100) ($120,493)
Change in unrealized gain on investments 81,190 - 81,190 -
Change in unrealized loss on foreign
currency translation adjustments 1,192 265 1,092 (296)
------------ ------------ ------------ ------------
Total $73,028 ($120,744) ($54,818) ($120,789)
============ ============ ============ ============
10. Segment information
Information on reportable segments is as follows (in thousands):
Quarter Ended Two Quarters Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues:
Audio division $64,785 $59,683 $120,427 $106,306
Mass storage division 33,773 57,011 71,542 128,855
Precision data conversion division 15,439 13,174 27,527 29,659
All other 18,845 39,821 33,899 82,800
----------- ----------- ----------- -----------
Total $132,842 $169,689 $253,395 $347,620
=========== =========== =========== ===========
Operating profit (losses):
Audio division $12,391 $14,227 $20,720 $14,227
Mass storage division 3,007 8,366 8,010 30,691
Precision data conversion division 4,767 738 5,980 7,027
All other (25,560) (98,730) (167,505) (126,838)
----------- ----------- ----------- -----------
Total ($5,395) ($75,399) ($132,795) ($74,893)
=========== =========== =========== ===========
11. Recently Issued Accounting Standards
In June 1998, the Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued and, as amended by SFAS No. 137
"Deferral of Effective Date of FASB Statement 133", is effective
for fiscal years commencing after June 15, 2000. SFAS 133
provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities.
The Company does not believe SFAS 133, as amended by SFAS 137,
will have a material impact on earnings or the financial condition
of the Company.
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This information should be read along with the unaudited
consolidated condensed financial statements and the notes thereto
included in Item 1 of this Quarterly Report and the audited
consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal year ended March 27, 1999,
contained in the 1999 Annual Report on Form 10-K (the "1999 Form
10-K"). This Discussion and Analysis contains forward-looking
statements. Such statements are subject to certain risks and
uncertainties, including those discussed below or in the 1999 Form
10-K that could cause actual results to differ materially from the
Company's expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements, as they reflect
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any
revision to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Results of Operations
The following table discloses the percentages that income
statement items are of net sales.
Percentage of Net Sales
Quarter Ended Two Quarters Ended
Sept. 25, Sept. 26 Sept. 25, Sept. 26
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales 100% 100% 100% 100%
Gross margin 40% 8% 40% 21%
Research and development 21% 20% 22% 20%
Selling, general and administrative 17% 16% 18% 16%
Restructuring costs, gain on sale of
assets and other, net 0% 17% 50% 7%
Acquired in-process research &
development expenses 6% 0% 3% 0%
---------- ---------- ---------- ----------
Income (loss) from operations -4% -44% -52% 22%
---------- ---------- ---------- ----------
Income (loss) before income taxes -7% -44% -54% -21%
Provision for income taxes 0% 27% 0% 13%
---------- ---------- ---------- ----------
Net income (loss) -7% -71% -54% -35%
========== ========== ========== ==========
Net Sales
Net sales for the second quarter of fiscal 2000 decreased by $36.8
million, or 21.7%, to $132.8 million from $169.7 million for the
second quarter of fiscal 1999. Revenues in the second quarter of
fiscal 1999 include amounts from businesses subsequently divested
by the Company. Revenues from non-core and divested businesses,
consisting primarily of telecommunications, networking and display
products in the second quarter of fiscal 2000 were $17.3 million
compared to $39.5 million in the second quarter of fiscal 1999.
Excluding revenues from non-core businesses, net sales from core
businesses consisting of mass storage, audio, high-precision data
conversion and embedded products decreased approximately $14.6
million.
Net sales for the first two quarters of fiscal 2000 decreased
$94.2 million or 27.1% to $253.4 million from $347.6 million for
the first two quarters of fiscal 1999. Revenues in the first two
quarters of fiscal 1999 include amounts from businesses subsequently
divested by the Company. Revenues from non-core and divested
businesses in the first two quarters of fiscal 2000 were $30.3
million compared to $76.6 million, a decrease of $46.3 million or
60.4%. Excluding revenues from non-core businesses, net sales
from core businesses decreased approximately $48 million.
Net sales for the Company's core businesses have decreased during
fiscal 2000 due to a decline in sales from the Company's mass
storage products. This decline was somewhat offset by increased
sales of the Company's audio products.
Export sales (including sales to U.S.-based customers with
manufacturing plants overseas) were 73% and 72% of total sales in
the second quarter of fiscal 2000 and fiscal 1999, respectively,
and were 73% and 69% of total sales in the first two quarters of
fiscal 2000 and fiscal 1999, respectively
The Company's sales are currently denominated primarily in U.S.
dollars. The Company may enter into foreign currency forward
exchange and option contracts to hedge certain of its foreign
currency exposures.
Sales to one customer comprised approximately 14% of sales in the
first two quarters of fiscal 2000 and 12% of sales in the first
two quarters of fiscal 1999. Sales to another customer comprised
approximately 13% of sales in the first two quarters fiscal 1999.
Gross Margin
Gross margin was 40% in the second quarter of fiscal 2000 compared
to 8% for the second quarter of fiscal 1999. Gross margin was
40% in the first two quarters of fiscal 2000 compared to 21% for
the first two quarters of fiscal 1999.
Gross margin has increased during fiscal 2000 primarily due to
significant wafer purchase commitment charges incurred during the
second quarter of fiscal 1999.
Research and Development
Research and development expenses for the second quarter of fiscal
2000 decreased by $6.2 million, or 18.2%, to $27.9 million from
$34.1 million in the second quarter of fiscal 1999.
Research and development expenses for the first two quarters of
fiscal 2000 decreased by $15 million, or 21.6% to $54.6 million
from $69.7 million in the first two quarters of fiscal 1999.
Research and development expenses have decreased during fiscal
2000 compared to fiscal 1999 primarily due to lower headcount
during fiscal 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the second quarter
of fiscal 2000 decreased $4.2 million, or 15.5% to $22.6 million
from $26.8 million in the second quarter of fiscal 1999.
Selling, general and administrative expenses in the first two
quarters of fiscal 2000 decreased $8.6 million, or 15.9% to $45.3
million from $53.9 million in the first two quarters of fiscal
1999.
Selling, general and administrative expenses have decreased during
fiscal 2000 compared to fiscal 1999 primarily due to lower headcount
during fiscal 2000.
Restructuring Costs, Gain on Sale of Assets and Other, Net
During the first quarter of fiscal 2000, the Company recorded
restructuring and other charges of $128.2 million relating to the
Company's termination of its interests in two manufacturing joint
ventures, MiCRUS and Cirent, $1 million of which is included is
cost of sales. The restructuring charge includes $135 million in
direct payments, $32 million worth of the Company's contributed
common stock, $4.8 million fair value of the related embedded
stock derivative, $9.3 million of lease buyout costs and $16.4
million of equipment write-offs. These charges were offset by the
reversal of approximately $71.9 million of previously accrued
wafer purchase commitment charges due to the renegotiated terms of
the Company's purchase commitments with its former partners. To
date, the Company has paid approximately $167 million in cash in
connection with these restructuring activities. The Company does
not expect there to be further significant payments during fiscal
year 2000 relating to these restructuring activities. However,
additional cash payments may be required in fiscal year 2001
depending on the Company's stock price. See Note 4 of Notes to
the Unaudited Consolidated Condensed Financial Statement.
The Company believes that as a result of these transactions the
Company has substantially completed the restructuring activities
that it initiated during the second quarter of fiscal 1999 and the
Company does not expect to incur significant accrued wafer
purchase commitment charges in the future relating to these
activities.
Acquired In-Process Research & Development Expenses
During the second quarter of fiscal 2000, Cirrus recorded $8.0
million or 6% of net sales of acquired research and development
expenses resulting from Cirrus' acquisition of AudioLogic, Inc.
(See Note 5 to the Condensed Consolidated Financial Statements).
These amounts were expensed on the acquisition date because the
acquired technology had not yet reached technological feasibility
and had no future alternative uses. There can be no assurance
that acquisitions of businesses, products or technologies by us in
the future will not result in substantial charges for acquired in-
process research and development that may cause fluctuations in
our quarterly or annual operating results.
The in-process research and development relates to the highest
performance, all-digital pulse width modulation (PWM) technology
for amplification of next generation audio systems. AudioLogic's
technology will provide solutions for virtually all audio
applications at 2 to 3 times better power efficiency than
alternative power amplifier and digital signal processing methods.
The in-process research and development is comprised of three
significant PWM development projects (#2,#3, and #4b). The following
is a brief description of each significant acquired in-process
research and development project as of the date of the acquisition.
PWM #2
The main applications for this product are low-end consumer audio
products, notebook computer speakers and headphones. This product
is a low power consumer. We estimate that the development cycle
for this product will continue for approximately nine months. The
estimated cost to complete the development of the PWM #2
technology is expected to be approximately $0.1 million ratably
until its completion in the first quarter of fiscal 2000.
PWM #3
This product will supply the PC speaker, after-market automotive,
high-end consumer audio and shelf-top audio system markets. This
product is a medium power consumer. We estimate that the
development cycle for this product will continue for approximately
21 months. The estimated cost to complete the development of the
PWM #3 technology is expected to be approximately $0.3 million
ratably until its completion in the first quarter of fiscal 2001.
PWM #4b
The applications for this product are high-power mass market
consumer and high volume professional audio products. We estimate
that the development cycle for this product will continue for
approximately 21 months. The estimated cost to complete the
development of the PWM #4b technology is expected to be
approximately $0.3 million ratably until its completion in the
first quarter of fiscal 2001.
These products are currently in the designing stage of the
development cycle. We believe the associated risks of developing
these products into commercially viable products will be our
ability to perform further research and development to determine
technological feasibility in light of competing solutions and the
increasingly sophisticated needs of our customers.
Value Assigned to In-Process Research and Development
The value assigned to in-process research and development projects
was determined by calculating the estimated stage of completion
(expressed as a percentage of completion) for each project, applying
the percentage to the expected net cash flows for each project, and
discounting the net cash flows incurred (as of the valuation date)
divided by the total estimated costs to complete the projects.
The revenue estimates used to value the purchased in-process
research and development were based on estimates of relevant
market sizes and growth factors, expected trends in technology
and the nature and expected timing of new product introductions
by us. The rates utilized to discount the net cash flows to
to their present value are based on Company's weighted
average rate of return. Given the nature of the risks associated
with the difficulties and uncertainties in completing each
project and thereby achieving technological feasibility and
the size of AudioLogic the weighted average rate of return was
adjusted. Based on these factors, a discount rate of 30% was
deemed appropriate for AudioLogic. The estimates used in valuing
in-process research and development were based upon assumptions we
believe to be reasonable but which are inherently uncertain and
unpredictable. Our assumptions may be incomplete or inaccurate,
and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may vary
from the projected results. Any such variance may result in a
material adverse effect on our financial condition and results of
operations. With respect to the acquired in-process technologies,
the calculations of value were adjusted to reflect the value
creation efforts of AudioLogic prior to the acquisition.
Following are the estimated completion percentages and technology
lives:
Estimated Expected
Percentage Useful
Product of Completion Life
- ----------- -------------- -----------
PWM #2 82% 4 years
PWM #3 63% 4 years
PWM #4b 63% 4 years
The value assigned to each acquired in-process research and
development project as of the acquisition date were as follows (in
thousands):
Value
Product Assigned
- ----------- -----------
PWM #2 $4,300
PWM #3 3,200
PWM #4b 500
Other 13
-----------
$8,013
===========
Income Taxes
The Company did not provide for any income taxes in the first two
quarters of fiscal 2000 compared to a provision of 63.3% in the
first two quarters of fiscal 1999. The Company does not expect
to recognize any net income tax provision during the current
fiscal year due to the magnitude of the loss realized in the first
quarter.
Liquidity and Capital Resources
The Company used approximately $199.1 million of cash and cash
equivalents in its operating activities during the first two
quarters of fiscal 2000 and used approximately $52 million during
the first two quarters of fiscal 1999. The cash used by
operations in the first two quarters of fiscal 2000 was primarily
due to payments required for the termination of the Company's
joint venture operations with IBM and Lucent.
The Company provided $102.7 million in cash from investing
activities during the first two quarters of fiscal 2000 compared
to cash provided by investing activities of $18.5 million during the
comparable period of fiscal 1999. The cash provided by investing
activities for fiscal 2000 is primarily due to sales of the
Company's short-term investments.
The Company used $6.5 million in cash for financing activities
during the first two quarters of fiscal 2000 while using $63.1
million during the comparable period of fiscal 1999. During the
first two quarters of fiscal 1999, the Company repurchased $54.6
million of its common stock. Cash used in financing activities
for fiscal 2000 is due to payments on the Company's outstanding
debt partially offset by cash provided by stock issued from the
exercise of stock options.
At September 25, 1999, the Company had $100.3 million of cash,
cash equivalents and restricted cash of which $58.7 million is
restricted cash. The restrictions on cash are due to outstanding
letter of credits required for certain leases agreements. The
Company does not expect the amount of restricted cash to change
significantly during the third quarter of fiscal 2000. During the
second quarter of fiscal 2000, the Company paid Lucent
Technologies a $5 million deposit and pledged $20 million of its
accounts receivable to collateralize future wafer purchase
commitments with the Cirent manufacturing facility.
In connection with the financing of its operations, the Company
has borrowed money and entered into substantial equipment lease
obligations. The Company's ability to meet its debt service and
other obligations will be dependent upon the Company's future
performance, which will be subject to financial, business, and
other factors affecting the operations of the Company, many of
which are beyond its control.
Historically, the Company has generated cash in an amount
sufficient to fund its operations. The Company anticipates that
its existing capital resources and cash flow generated from future
operations will enable it to maintain its current level of
operations for the foreseeable future. The Company may revise its
operating plans in response to future changes in the semiconductor
industry in general and the demand for its products in particular.
The Company believes that significant changes in the economic
environment, which may affect worldwide demand for technology
products, could materially and adversely impact the Company,
including with respect to such matters as its ability to fund its
future operations.
As of September 25, 1999, the Company holds approximately 0.4
million shares of common stock in Phone.com, Inc. (Phone.com) with
a market value of $81.9 million. In connection with Phone.com's
initial public offering, the Company signed an agreement which
prohibits the Company from selling its Phone.com shares until
after December 8, 1999. Phone.com is traded on the Nasdaq
National Market under the ticker symbol "PHCM".
Quarterly Fluctuations
YOU SHOULD EXPECT THAT CIRRUS' OPERATING RESULTS MAY FLUCTUATE IN
FUTURE PERIODS.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially
from quarter to quarter in the future. The Company's operating
results are affected by a wide variety of factors, many of which
are outside of the Company's control, including but not limited
to, economic conditions and overall market demand in the United
States and worldwide, the Company's ability to introduce new
products and technologies on a timely basis, changes in product
mix, fluctuations in manufacturing costs which affect the
Company's gross margins, declines in market demand for the
Company's and its customers' products, sales timing, the level of
orders which are received and can be shipped in a quarter, the
cyclical nature of both the semiconductor industry and the markets
addressed by the Company's products, product obsolescence, price
erosion, and competitive factors. The Company's operating results
in the remainder of fiscal 2000 are likely to be affected by these
factors as well as others.
Inventory Risks
CIRRUS MAY PRODUCE INVENTORY IN QUANTITIES WHICH ARE IN EXCESS OF
CURRENT DEMAND. OUR INVENTORY MAY ALSO BECOME OBSOLETE.
The Company must order wafers and build inventory well in advance
of product shipments. Because the Company's markets are volatile
and subject to rapid technology and price changes, there is a risk
that the Company will forecast inaccurately and produce excess or
insufficient inventories of particular products. This inventory
risk is heightened because many of the Company's customers place
orders with short lead times. Such inventory imbalances have
occurred in the past and in fact contributed significantly to the
Company's operating losses over the last three years. These
factors increase not only the inventory risk but also the
difficulty of forecasting quarterly operating results. Moreover,
as is common in the semiconductor industry, the Company frequently
ships more products in the third month of each quarter than in
either of the first two months of the quarter, and shipments in
the third month are higher at the end of that month. The
concentration of sales in the last month of the quarter
contributes to difficulty in predicting the Company's quarterly
revenues and results of operations.
Issues Relating to Manufacturing and Raw Materials Procurement
During fiscal 1998 and fiscal 1999, excess production capacity in
the industry led to significant price competition between merchant
semiconductor foundries and the Company believes that in some
cases this resulted in pricing from certain foundries that was
lower than the Company's cost of production from its former
manufacturing joint ventures. The Company experienced pressures
on its selling prices during fiscal 1998, which had a negative
impact on its results of operations and it believes that this was
partially due to the fact that certain of its competitors were
able to obtain more favorable pricing from such foundries.
The Company's current strategy is to fulfill its wafer
requirements using outside merchant wafer suppliers, including the
Company's former joint venture partners. The Company also uses
other outside vendors to package the wafer die into integrated
circuits and to perform some of the Company's product testing.
The Company believes that the current strategy will result in
procurement terms which more closely track with market conditions.
A LACK OF SUFFICIENT CAPACITY IN THE SEMICONDUCTOR INDUSTRY MAY
ADVERSELY AFFECT CIRRUS' ABILITY TO OBTAIN RAW MATERIALS.
The Company's results of operations could be adversely affected in
the future, as they have been so affected in the past, if
particular suppliers are unable to provide a sufficient and timely
supply of product, whether because of raw material shortages,
capacity constraints, unexpected disruptions at the plants, delays
in qualifying new suppliers or other reasons, or if the Company is
forced to purchase wafers or packaging from higher cost suppliers
or to pay expediting charges to obtain additional supply, or if
the Company's test facilities are disrupted for an extended period
of time. Because of the concentration of sales at the end of each
quarter, a disruption in the Company's production or shipping near
the end of a quarter could materially reduce the Company's
revenues for that quarter. Production may be constrained even
though capacity is available at one or more wafer manufacturing
facilities because of the difficulty of moving production from one
facility to another. Any supply shortage could adversely affect
sales and operating profits. The Company's reliance upon outside
vendors for assembly and test could also adversely impact sales
and operating profits if the Company was unable to secure
sufficient access to the services of these outside vendors.
THE RECENT EARTHQUAKE IN TAIWAN MAY HAVE AN ADVERSE AFFECT ON OUR
ABILITY TO DELIVER PRODUCTS.
On September 20, 1999 a magnitude 7.6 earthquake struck Taiwan
where two of the Company's key suppliers are located. The Company
has conducted an internal review to assess the impact that damage
caused by the earthquake may have on the Company's operations. The
Company will continue to monitor any supply shortages caused by
this earthquake during the coming months. It is uncertain what
impact this earthquake has had on the Company's suppliers and
customers.
Sensitivity to Security Prices
CIRRUS IS EXPOSED TO FLUCTUATIONS IN THE PRICES OF CERTAIN STOCKS,
INCLUDING OUR OWN.
As discussed in Note 4 to the Condensed Consolidated Financial
Statements, the Company issued $32 million of common stock into an
escrow account during the second quarter of fiscal 2000 in
connection with the restructuring of the MiCRUS joint venture.
The Company has made certain guarantees to IBM regarding the
market value of that stock in future periods. As a result, the
Company's earnings would be adversely affected in future periods
by declines in the market price of the Company's stock.
As of September 25, 1999 the Company holds approximately 0.4
million shares in Phone.com, Inc. The fair value of the Company's
holdings in Phone.com will fluctuate as the stock price of
Phone.com fluctuates.
Dependence on PC Market
CIRRUS' OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY A DECLINE
IN THE RATE OF GROWTH IN THE PC INDUSTRY.
Sales of many of the Company's products will continue to depend
largely on sales of personal computers (PCs). Reduced growth in
the PC market could affect the financial health of the Company as
well as its customers. Moreover, as a component supplier to PC
OEMs and to peripheral device manufacturers, the Company is likely
to experience a greater magnitude of fluctuations in demand than
the Company's customers themselves experience. In addition, many
of the Company's products are used in PCs for the consumer market,
and the consumer PC market is more volatile than other segments of
the PC market.
Other integrated circuit (IC) makers, including Intel Corporation,
have expressed their interest in integrating through hardware
functions, adding through special software functions, or kitting
components to provide some multimedia or communications features
into or with their microprocessor products. Successful
integration of these functions could substantially reduce the
Company's opportunities for IC sales in these areas. In addition,
the Company's de-emphasis of PC products and its focus on non-PC
markets could have an adverse affect on the Company's PC product
sales as customers seek other supply sources with greater
commitments to the PC market.
A number of PC OEMs buy products directly from the Company and
also buy motherboards, add-in boards or modules from suppliers who
in turn buy products from the Company. Accordingly, a significant
portion of the Company's sales may depend directly or indirectly
on the sales to a particular PC OEM. Since the Company cannot
track sales by motherboard, add-in board or module manufacturer,
the Company may not be fully informed as to the extent or even the
fact of its indirect dependence on any particular PC OEM, and,
therefore, may be unable to assess the risks of such indirect
dependence.
Issues Relating to Mass Storage Market
The mass storage market has historically been characterized by a
relatively small number of magnetic disk drive manufacturers and
by periods of rapid growth followed by periods of oversupply and
contraction. Growth in the mass storage market is directly
affected by growth in the PC market. Furthermore, the price
competitive nature of the disk drive industry continues to put
pressure on the price of all disk drive components. Recent market
demands for sub-$1,000 PCs puts further pressure on the price of
disk drives and disk drive components.
Revenues from mass storage products in fiscal 2000 are likely to
depend heavily on the success of certain 3.5 inch magnetic disk
drive products selected for use by various customers, which in
turn depends upon obtaining timely customer qualification of the
new products and bringing the products into volume production
timely and cost effectively.
The Company's revenues from mass storage products are dependent on
the successful introduction by its customers of new disk drive
products and can be impacted by the timing of customers'
transition to new disk drive products. Recent efforts by certain
of the Company's customers to develop their own ICs for mass
storage products could in the future reduce demand for the
Company's mass storage products, which could have an adverse
effect on the Company's revenues and gross margins from such
products. In addition, in response to the current market trend
towards integrating hard disk controllers with microcontrollers,
the Company's revenues and gross margins from its mass storage
products will be dependent on the Company's ability to introduce
such integrated products in a commercially competitive manner.
The Company generates most of its revenue for magnetic storage
from two of the nine major HDD manufacturers.
Finally, while the Company believes it is well positioned for the
trend toward integration of HDD electronic components with the
first product on the market to combine the three primary
electronic components, some of the Company's competitors have also
announced plans to introduce integrated drive electronics
components. Some of these competitors have substantially greater
resources to accomplish the technical obstacles of integration and
greater access to the advanced technologies necessary to provide
integrated HDD electronic components.
Issues Relating to Audio Products
Most of the Company's revenues in the audio market derive from the
sales of audio codecs and integrated 16-bit codec-plus-controller
solutions for the PC market and consumer electronics equipment.
In the PC market, the transition to the AC-link codecs attached to
core logic using the multimedia features of the processor and
single chip solutions are lowering the average selling price in
the audio IC market. The Company's revenues from the sale of PC
audio products in fiscal 2000 are likely to be significantly
affected by this transition to core logic connected audio and by
the introduction of cost reduced, fully-integrated, single-chip
audio ICs. Moreover, aggressive competitive pricing pressures
have adversely affected and may continue to adversely affect the
Company's revenues and gross margins from the sale of audio ICs.
Three-dimensional, spatial-effects audio became an important
feature in fiscal 1999, primarily in products for the consumer
electronics marketplace. If the Company's spatial-effects audio
products do not meet the cost or performance requirements of the
market, revenues from the sale of audio products could be
adversely affected.
Issues Relating to Precision Mixed-Signal Products
Precision Data Converter Products is a very broad market with many
well established competitors. The Company's ability to compete in
this market will be adversely affected if it cannot establish
broad sales channels or if it does not develop and maintain a
broad enough product line to compete effectively. In addition,
the customer product design in time is long. Customer delays in
product development and introductions creates risk relative to the
Company's revenue plans. Further, the Company's products in this
market are technically very complex. The complexity of the
products contributes to risks in getting products to market on a
timely basis, which could impact the Company's revenue plans. The
scarcity of analog engineering talent also contributes to risks
related to product development timing in this market.
Issues Relating to Embedded Processor Products
Many of the solutions that utilize the Company's embedded
processor products are sold into markets that are generally
considered emerging markets. As such, the size of these markets
is presently small but expected to grow over time. Revenue for
the Company's embedded processor products will depend
significantly on the success of the solutions that are based on
the Company's products along with the actual growth of the markets
for these solutions.
Examples of the emerging markets that the Company's embedded
processor products sell into include portable digital audio
players, smart cellular phones, set top internet and e-mail access
boxes, and personal digital appliances. As the individual markets
for these products grow, many competing semiconductor
manufacturers are expected to enter the market for devices that
these products are based upon and drive the selling price for the
devices lower. Because these markets are at such an early stage,
clear definitions of the required feature sets in the products
have not been established. The Company's products could
experience problems in the market place if the feature sets are
not consistent with the emerging market requirements.
Many of the Company's customers who are building solutions for
emerging market products are smaller organizations whose resources
and abilities are limited and whose business plans involve a
significant amount of risk. Customer delays in product
development and introductions creates risk relative to the
Company's revenue plans.
In addition, the Company's embedded processor products are
presently based on CPU cores that are licensed from ARM Ltd.
There are over 30 other companies that have licensed CPU cores
from ARM that could enter the market for the Company's embedded
processor products. These products could be very similar to the
Company's products and drive down the prices for the Company's
products.
Intellectual Property Matters
FUTURE ISSUES MAY ARISE INVOLVING INTELLECTUAL PROPERTY RIGHTS
WHICH COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The
Company and certain of its customers from time to time have been
notified that they may be infringing certain patents and other
intellectual property rights of others. In addition, customers
have been named in suits alleging infringement of patents or other
intellectual property rights by customer products. Certain
components of these products have been purchased from the Company
and may be subject to indemnification provisions made by the
Company to its customers. Although licenses are generally
offered in situations where the Company or its customers are named
in suits alleging infringement of patents or other intellectual
property rights, there can be no assurance that any licenses or
other rights can be obtained on acceptable terms. An unfavorable
outcome occurring in any such suit could have an adverse effect on
the Company's future operations and/or liquidity.
Foreign Operations and Markets
CIRRUS IS EXPOSED TO UNFAVORABLE ECONOMIC CONDITIONS WORLDWIDE.
Because many of the Company's subcontractors and several of the
Company's key customers which collectively account for a
significant percentage of the Company's revenues are located in
Japan and other Asian countries, the Company's business is subject
to risks associated with many factors beyond its control.
International operations and sales may be subject to political and
economic risks, including political instability, currency
controls, exchange rate fluctuations, and changes in import/export
regulations, tariff and freight rates. Although the Company may
buy hedging instruments to reduce its exposure to currency
exchange rate fluctuations, the Company's competitive position can
be affected by the exchange rate of the U.S. dollar against other
currencies, particularly the Japanese yen. Further, to the extent
that volatility in foreign financial markets was to have an
adverse impact on economic conditions in a country or geographic
region in which the Company does business, demand for and supply
of the Company's products could be adversely impacted, which would
have a negative impact on the Company's revenues and earnings.
A significant number of the Company's customers and suppliers are
in Asia. The recent turmoil in the Asian financial markets does
not appear to have had a material impact on the Company's sales
orders or bookings. However, the financial instability in these
regions may have an adverse impact on the financial position of
end users in the region which could impact future orders and/or
the ability of such users to pay the Company or the Company's
customers, which could also impact the ability of such customers
to pay the Company. The Company performs extensive financial due
diligence on customers and potential customers and generally
requires material sales to Asia to either be secured by letters of
credit or transacted on a prepayment basis. Given the prior
situation in Asia, the Company now requires that the letters of
credit be established through American banking institutions.
During this volatile period, the Company expects to carefully
evaluate the collection risk related to the financial position of
customers and potential customers. The results of such
evaluations will be considered in structuring the terms of sale,
in determining whether to accept sales orders, in evaluating the
recognition of revenue on sales in the area and in evaluating the
collectability of outstanding accounts receivable from the region.
In situations where significant collection risk exists, the
Company will either not accept the sales order, defer the
recognition of related revenues, or, in the case of previously
transacted sales, establish appropriate bad debt reserves.
Despite these precautions, should the volatility in Asia have a
material adverse impact on the financial position of end users of
the customers products in Asia, the Company could experience a
material adverse impact on its results of operations.
Competition
THE SEMICONDUCTOR INDUSTRY IS HIGHLY COMPETITIVE.
The Company's business is intensely competitive and is
characterized by new product cycles, price erosion, and rapid
technological change and new companies entering the markets.
Competition typically occurs at the design stage, where the
customer evaluates alternative design approaches that require
integrated circuits. Because of shortened product life cycles and
even shorter design-in cycles, the Company's competitors have
increasingly frequent opportunities to achieve design wins in next
generation systems. In the event that competitors succeed in
supplanting the Company's products, the Company's market share may
not be sustainable and net sales, gross margin, and results of
operations would be adversely affected. Competitors include major
domestic and international companies, many of which have
substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing
and distribution of their products. Emerging companies are also
increasing their participation in the market, as well as customers
who develop their own integrated circuit products.
Competitors include manufacturers of standard semiconductors,
application-specific integrated circuits and fully customized
integrated circuits, including both chip and board-level products.
The ability of the Company to compete successfully in the rapidly
evolving area of high-performance integrated circuit technology
depends significantly on factors both within and outside of its
control, including, but not limited to, success in designing,
manufacturing and marketing new products, wafer supply, protection
of Company products by effective utilization of intellectual
property laws, product quality, reliability, ease of use, price,
diversity of product line, efficiency of production, the pace at
which customers incorporate the Company's integrated circuits into
their products, success of the customers' products, and general
economic conditions. Also the Company's future success depends,
in part, upon the continued service of its key engineering,
marketing, sales, manufacturing, support, and executive personnel,
and on its ability to continue to attract, retain, and motivate
qualified personnel. The competition for such employees is
intense, and the loss of the services of one or more of these key
personnel could adversely affect the Company. Because of these
and other factors, past results may not be a useful predictor of
future results.
The Company's success is highly dependent upon its ability to
develop complex new products, to introduce them to the marketplace
ahead of the competition, and to have them selected for design
into products of leading system manufacturers. Both revenues and
margins may be affected quickly if new product introductions are
delayed or if the Company's products are not designed into
successive generations of products of the Company's customers.
These factors have become increasingly important to the Company's
results of operations because the rate of change in the markets
served by the Company continues to accelerate.
Product development in the Company's markets is becoming more
focused on the integration of functionality on individual devices
and there is a general trend towards increasingly complex
products. The greater integration of functions and complexity of
operations of the Company's products increase the risk that latent
defects or subtle faults could be discovered by customers or end
users after volumes of product have been shipped. If such defects
were significant, the Company could incur material recall and
replacement costs for product warranty. The Company's relationship
with customers could also be adversely impacted by the recurrence
of significant defects.
Impact of Year 2000
THE YEAR 2000 PROBLEM MAY HAVE AN ADVERSE EFFECT ON CIRRUS'
ABILITY TO DELIVER PRODUCTS TO OUR CUSTOMERS WITHOUT
INTERRUPTION.
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
incorrect reporting and disruptions of operations, including,
among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The issue spans both information technology and non-information
technology systems that use date data. In addition to the
Company's own systems, the Company relies, directly and
indirectly, on external systems of its customers, suppliers,
creditors, financial organizations, utilities providers and
government entities, both domestic and international ("Third
Parties").
The Company currently has a project plan in place to address the
Year 2000 Issue with its internal systems and Third Parties which
is designed to deal with its most critical systems and processes
first. Those identified as "mission critical" are systems
and/or processes whose failure would cause a material impact on
the Company's operations and financial statements. The project
plan includes the identification, assessment, testing,
remediation/validation and the development of contingency plans of
the Company's Year 2000 issues primarily through the use of
internal personnel. In addition, the Company has engaged the
services of external consultants to provide Year 2000 progress
assessment of the Company's efforts. The external consultants
review the Company's activities regarding Year 2000 readiness and
provide recommendations designed to improve the Company's Year
2000 readiness.
In the third quarter of calendar year 1996, the Company began a
program to replace mission-critical internal business systems.
The decision to purchase software to replace these systems was
made primarily in order to meet the Company's future business
requirements, which included consideration of Year 2000 Issues.
The Company has installed software licensed from SAP America, Inc.
The first phase of this project was completed in June 1998 and
included finance, sales and logistics. The second phase of the
project included a human resource system and a fixed assets system
and was completed in June of this year. This multi-phased implementation
is expected to utlimatley cover all major internal business systems
used by the Company. While Year 2000 compliance is an important software
feature the Company considered when purchasing the software replacement,
the Company's decision to replace mission critical business systems
was primarily to make important functional improvements necessary
to remain competitive in the current business environment.
Therefore, the Company has not allocated a portion of the total
project cost as a Year 2000 Issue. The Company does not believe
that any incremental project costs associated with Year 2000
compliance to be material, as this feature was included with the
software purchased by the Company to satisfy its business needs.
The Company presently believes that with the installation of this
software into its internal business systems, the Year 2000 Issue
will not pose significant operational problems for its computer
systems.
Cirrus Logic currently utilizes two different manufacturing legacy
systems (based in Austin and Fremont) to perform the manufacturing
scheduling, work in process (WIP) tracking, and product costing
functions. The Austin based system has been successfully tested
and was found to be fully compliant while the effort and risk to
upgrade the Fremont system to a year 2000 compliant state was
deemed prohibitive. In September of this year, Cirrus Logic
decided to postpone the installation of the SAP Manufacturing
module. Since the Austin manufacturing legacy system has proven to
be a viable contingency, Cirrus Logic has made the decision to
migrate the products currently in production in Fremont to the
compliant Austin system. As both legacy systems are almost
identical in function, the migration of these products is of
minimal risk. Cirrus Logic expects to have all of its products
fully migrated to the Austin legacy system by November 30th.
The Company does not expect to incur significant costs to migrate
the Fremont system.
To date, 100% of the Company's products have been tested and found
to be Year 2000 compliant. A list of compliant products is
available on the Company's web site (www.cirrus.com). The Company
considers a product or system to be Year 2000 compliant if the
date/time data is accurately processed (included, but not limited
to, calculating, comparing, and sequencing) from, into and between
the twentieth and twenty-first centuries, and the years 1999 and
2000 along with leap year calculations. To date, the Company has
not identified any non-compliant products and therefore, no
material costs have been incurred with respect to remediation.
The Company believes that it is unlikely to experience a material
adverse impact on its financial condition or results of operations
due to product related Year 2000 compliance issues.
Another consequence related to the Company's products is the
impact upon the Company's ability to ship to or collect payment
from customers who themselves have business operational problems
as a result of the Year 2000 Issue. Although the Company believes
that it is unlikely to experience a material adverse impact on its
financial conditions or results of operations due to customer-
related problems, the Company could experience such an impact if
any of its major customers or a large number of its other
customers suffer a material disruption in their ability to accept
or pay for the Company's product shipments.
The Company's project plan also includes a comprehensive program
to assess the Year 2000 compliance of its key suppliers. The
Company has initiated formal communications with its significant
suppliers and financial institutions to determine the extent to
which the Company is vulnerable to those Third Parties who fail to
remedy their own Year 2000 Issues. As of September 1999, the Company
has contacted its significant suppliers and financial institutions
and has received assurances of Year 2000 compliance from a number
of those contacted. To date the Company has received responses to
its initial inquiries from 100% of its mission critical suppliers.
However, some of these suppliers are still in the process of
completing their work on the Year 2000 Issues and failure of these
mission critical suppliers to be compliant would result in
manufacturing shutdowns for a certain period of time. The Company
is currently taking steps to assess whether these suppliers are
taking all the appropriate actions to fix any Year 2000 Issues
they might have and to be prepared to continue functioning
effectively as a supplier to the Company. However, as there can
be no guarantee that the Company's suppliers will be Year 2000
compliant prior to the millennium, many significant suppliers have
been second sourced and most contingency plans have been developed
during the first calendar quarter of 1999. This process was
completed in the second calendar quarter of 1999. Contingency
plans related to mission critical suppliers that are not
considered to be making adequate steps to ensure Year 2000
compliance consist of the identification of substitutes and
second-source suppliers, and in certain situations includes a
planned increase in the level of inventory carried. No material
cost related to Year 2000 compliance of Third Parties has been
incurred to date. The Company believes that its reasonably most
likely worst case Year 2000 scenario would involve problems with
the systems of its Third Parties rather than with the Company's
internal systems or its products. However, based upon information
communicated to the Company from Third Parties, management
believes that it is unlikely to experience a material adverse
impact due to problems related to Third Parties 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.
In addition to risks involving the Company's suppliers and
customers, the Company is also subject to business interruption of
indeterminate duration if there are problems with the
infrastructure in various parts of the world including power,
water supply, air or ground transportation, or government
operations such as customs clearance. Although we do not expect
significant problems to arise due to infrastructure failures, we
cannot assure you that business interruptions will not occur as
these possibilities are not under our control.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.
Reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Registrant's
Annual Report on Form 10-K for the Year Ended March 27, 1999.
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10.1 Employment Agreement between David French
and Cirrus Logic, Inc.
Exhibit 10.2 Promissory Note between David D. French
and Cirrus Logic, Inc.
Exhibit 12.1 Statement Regarding Computation of Ratios
of Earnings to Fixed Charges
Financial Data Schedule
b. Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K on August
3, 1999, pursuant to Item 2 of Form 8-K, reporting the
disposition of the Company's interest in the MiCRUS joint
venture.
The Registrant filed a Current Report on Form 8-K on
September 3, 1999, pursuant to Item 5 of Form 8-K, reporting
the terms of the Security Agreement entered into with Cirent
Semiconductor GP.
Part II. Other information, item 6a
Exhibit 12.1
CIRRUS LOGIC, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS TO FIXED CHARGES
(in thousands, except ratio of earnings to fixed charges)
Two Quarters Ended
Sept. 25, Sept. 26,
1999 1998
----------- -----------
Loss before income taxes ($137,100) ($73,795)
Fixed Charges (1) 13,958 13,218
----------- -----------
Total earnings and fixed charges (123,142) (60,577)
Fixed Charges (1) 13,958 13,218
Ratio of earnings to fixed charges (2) N/A N/A
=========== ===========
ADJUSTED FOR MiCRUS AND CIRENT FIXED CHARGES:
Fixed Charges (3) 26,829 27,360
Ratio of earnings to fixed charges (4) N/A N/A
=========== ===========
(1) Fixed charges consist of interest expense incurred, including
capital leases, amortization of interest costs and the portion
of rental expense under operating leases deemed by the Company
to be representative of the interest factor.
(2) Earnings were inadequate to cover fixed charges for the two
quarters ended September 25, 1999 and September 26, 1998 by
approximately $137.1 million and $73.8 million, respectively.
(3) Fixed charges consist of interest expense incurred, including
capital leases, amortization of interest costs, portion of
rental expense under operating leases deemed by the Company to
be representative of the interest factor, interest on
capitalized leases and the interest factor associated with
operating leases of the Company's MiCRUS and Cirent joint
ventures.
(4) Earnings would have been inadequate to cover fixed charges for
the two quarters ended September 25, 1999 and September 26,
1998 by approximately $150 million and $87.9 million,
respectively.
CIRRUS LOGIC, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
CIRRUS LOGIC, INC.
(Registrant)
November 4, 1999 /S/GLENN C. JONES
Date Glenn C. Jones
Vice President, Chief
Financial Officer,
Treasurer and Secretary