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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
[_] 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
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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.)
4210 South Industrial Drive, Austin, TX 78744
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(512) 445-7222
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,
outstanding as of July 27, 2002 was 83,415,249.
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CIRRUS LOGIC, INC.
FORM 10-Q QUARTERLY REPORT
QUARTERLY PERIOD ENDED JUNE 29, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet - June 29, 2002 (unaudited) and March 30, 2002 3
Consolidated Condensed Statement of Operations (unaudited) - Three Months Ended June 29,
2002 and June 30, 2001 4
Consolidated Condensed Statement of Cash Flows (unaudited) - Three Months Ended June 29,
2002 and June 30, 2001 5
Notes to the Consolidated Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 15
Page 2
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(in thousands)
Jun. 29, Mar. 30,
2002 2002
---------------------- ----------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 131,897 $ 140,529
Restricted cash 12,807 12,807
Marketable equity securities 2,174 2,258
Accounts receivable, net 28,889 42,158
Inventories, net 36,591 27,985
Other current assets 19,593 19,928
---------------------- ----------------------
Total current assets 231,951 245,665
Property and equipment, net 33,816 36,549
Goodwill and intangibles, net 190,248 194,660
Other assets 3,445 4,756
---------------------- ----------------------
$ 459,460 $ 481,630
====================== ======================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 68,214 $ 75,936
Current maturities of long-term debt and capital lease obligations 248 566
Income taxes payable 42,175 42,178
---------------------- ----------------------
Total current liabilities 110,637 118,680
Long-term obligations 3,658 3,709
Minority interest in eMicro 599 1,092
Stockholders' equity:
Capital stock 865,380 862,729
Accumulated deficit (520,538) (504,699)
Accumulated other comprehensive income (276) 119
---------------------- ----------------------
Total stockholders' equity 344,566 358,149
---------------------- ----------------------
$ 459,460 $ 481,630
====================== ======================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 3
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(in thousands, except per share amounts; unaudited)
Three Months Ended
-----------------------------------------
Jun. 29, Jun. 30,
2002 2001
------------------- -------------------
Net sales $ 76,024 $ 179,083
Costs and expenses:
Cost of sales 37,391 158,413
Research and development 32,649 30,369
Selling, general and administrative 20,471 24,938
Restructuring costs 2,085 1,919
------------------- -------------------
Total costs and expenses 92,596 215,639
Loss from operations (16,572) (36,556)
Realized gain on sale of marketable equity securities 1,400 10,967
Interest expense (23) (65)
Interest income 763 2,886
Other income 74 574
------------------- -------------------
Loss before income taxes and loss from discontinued operations (14,358) (22,194)
Provision for income taxes 29 -
------------------- -------------------
Loss from continuing operations (14,387) (22,194)
Loss from discontinued operations (1,452) (803)
------------------- -------------------
Net loss $ (15,839) $ (22,997)
=================== ===================
Basic earnings (loss) per share:
From continuing operations $ (0.17) $ (0.30)
Discontinued operations (0.02) (0.01)
------------------- -------------------
$ (0.19) $ (0.31)
=================== ===================
Diluted earnings (loss) per share:
From continuing operations $ (0.17) $ (0.30)
Discontinued operations (0.02) (0.01)
------------------- -------------------
$ (0.19) $ (0.31)
=================== ===================
Weighted average common shares outstanding:
Basic 83,018 74,253
Diluted 83,018 74,253
The accompanying notes are an integral part of these consolidated
condensed financial statements.
Page 4
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
Three Months Ended
------------------------------
Jun. 29, Jun. 30,
2002 2001
------------ -------------
Cash flows from operating activities:
Net loss $ (15,839) $ (22,997)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 11,273 7,266
Acquired in-process research and development expense - 1,910
Gain on sale of marketable equity securities (1,400) (10,967)
Other non-cash charges 1,392 (64)
Net change in operating assets and liabilities (2,206) (2,513)
------------ -------------
Net cash used in operating activities (6,780) (27,365)
------------ -------------
Cash flows from investing activities:
Proceeds from sale of equity investments 1,400 10,967
Additions to property and equipment (2,536) (4,624)
Investments in technology (2,052) (3,407)
Acquisition of companies, net of cash acquired - (10,533)
Decrease (increase) in deposits and other assets 65 (1,774)
------------ -------------
Net cash used in investing activities (3,123) (9,371)
------------ -------------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations (337) (1,258)
Repurchase and retirement of common stock - (68,461)
Issuance of common stock, net of issuance costs 1,608 4,831
------------ -------------
Net cash provided by (used in) financing activities 1,271 (64,888)
------------ -------------
Net decrease in cash and cash equivalents (8,632) (101,624)
Cash and cash equivalents at beginning of period 140,529 253,136
------------ -------------
Cash and cash equivalents at end of period $ 131,897 $ 151,512
============ =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Page 5
CIRRUS LOGIC, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated condensed financial statements have been prepared by
Cirrus Logic, Inc. ("we," "our," "us," 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 accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. In our
opinion, the financial statements reflect all adjustments, including normal
recurring adjustments, necessary for a fair presentation of the financial
position, operating results and cash flows for those periods presented. These
unaudited consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements, and notes thereto for
the year ended March 30, 2002, included in our 2002 Annual Report on Form 10-K.
The results of operations for the interim period presented are not necessarily
indicative of the results that may be expected for the entire year.
Certain reclassifications have been made to the fiscal 2002 financial
statements to conform to the fiscal 2003 presentation. Such reclassifications
had no effect on the results of operations or stockholders' equity, other than
as disclosed in Note 6.
2. Adoption of New Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS 144 applies to
recognized long-lived assets of a business enterprise and not-for-profit
organizations to be "held and used" or to be disposed of. SFAS 144 also applies
to groups of assets, which may include assets and liabilities other than
long-lived assets. SFAS 144 supersedes SFAS 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30 ("APB 30"), "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
SFAS 144 also extends the reporting of a discontinued operation to a "component
of an entity" and requires related operating losses to be recognized in the
period(s) in which they occur (rather than as of the measurement date as
previously required by APB 30). Therefore, discontinued operations are no longer
measured on a net realizable basis, and future operating losses are no longer
recognized before they occur. We adopted SFAS 144 effective March 31, 2002 and
reclassified the results of operations of eMicro to discontinued operations in
the first quarter of fiscal year 2003. See Note 6 for further information. The
remaining provisions of SFAS 144 did not have a material impact on our financial
position or results of operations.
In June 2001, the FASB issued SFAS 141, "Business Combinations," and SFAS
142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS 141 also defines the criteria for recognizing and reporting
intangible assets acquired in a business combination as assets apart from
goodwill. Under SFAS 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are tested annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over their
useful lives (but with no maximum life) and tested for impairment in accordance
with SFAS 144. The amortization provisions of SFAS 142 applied immediately to
goodwill and intangible assets acquired after June 30, 2001. Consequently,
goodwill totaling $122.9 million from the three business combinations initiated
after June 30, 2001 was not amortized during fiscal year 2002. During fiscal
2002, we continued to amortize goodwill and assembled workforce totaling $2.7
million, acquired before July 1, 2001, based on a weighted-average useful life
of 3.9 years. We adopted the remaining provisions of SFAS 142 on March 31, 2002,
the beginning of fiscal year 2003. In conjunction with our adoption of SFAS 142,
we ceased amortizing goodwill and are required to perform a transitional
impairment test on all goodwill, totaling $125.6 million, during the first six
months of fiscal year 2003. Any impairment charges resulting from the initial
application of the new rules will be classified as a cumulative effect of change
in accounting principle. We do not anticipate that the transitional impairment
test will have a material impact on our financial position or results of
operations.
Page 6
3. Inventories
Net inventories are comprised of the following (in thousands):
Jun. 29, Mar. 30,
2002 2002
----------- ----------
Work-in process $ 28,053 $23,400
Finished goods 8,538 4,585
----------- ----------
$ 36,591 $27,985
=========== ==========
4. Income Taxes
We incurred income tax expense of $29 thousand for the first fiscal
quarter. The income tax expense consisted primarily of estimated withholdings
and income tax due in certain foreign jurisdictions.
SFAS 109, "Accounting for Income Taxes," provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. We
have provided a valuation allowance equal to our net deferred tax assets due to
uncertainties regarding their realization. We evaluate the realizability of our
deferred tax assets on a quarterly basis.
5. Restructuring Costs
During the first quarter of fiscal 2003, we announced intentions to further
reduce costs and align operating expenses with our current revenue model. We
plan to eliminate approximately 150 employee positions worldwide, or 13% of the
total workforce, from various business functions and job classes over the first
half of fiscal year 2003. During the first quarter of fiscal 2003, we recorded a
restructuring charge of $1.7 million to cover costs associated with a portion of
these workforce reductions and $0.4 million related to facility consolidations.
We will record an additional restructuring charge in the second quarter of
fiscal year 2003 for the remainder of the costs associated with the workforce
reduction.
During fiscal 2002, we announced a change to our business model that
de-emphasized our magnetic storage chip business and focused on
consumer-entertainment electronics. As a result of these strategic decisions and
in response to ongoing economic and industry conditions, we eliminated
approximately 420 employee positions worldwide from various business functions
and job classes over the course of fiscal 2002. We recorded a restructuring
charge of $6.4 million in operating expenses to cover costs associated with
these workforce reductions. In addition, we recorded a $4.5 million
restructuring charge in operating expenses for costs associated with facility
consolidations. As part of the fiscal 2002 restructuring, we reduced our
workforce by approximately 120 employees worldwide in the first quarter of
fiscal 2002 and recorded an associated restructuring charge of $1.9 million.
The following details the change in our restructuring accrual during the
first quarter of fiscal year 2003:
Balance Liability at
Mar. 30, Total Jun. 29,
2002 Charge Paid 2002
----------- --------- --------- -----------
Employee separations $ 152 $ 1,661 $ (111) $ 1,702
Facility consolidations 4,481 424 (789) 4,116
----------- --------- --------- -----------
Total $ 4,633 $ 2,085 $ (900) $ 5,818
=========== ========= ========= ===========
As of June 29, 2002, we have a remaining restructuring accrual of $5.8
million. We expect to discharge the remaining balance associated with severance
and related benefits of approximately $1.7 million through cash payments during
fiscal 2003. The balance of $4.1 million for facilities and other costs relates
to net lease expenses and other anticipated lease termination costs that will be
paid over the respective lease terms through fiscal 2013.
Page 7
6. Discontinued Operations - eMicro Corporation Joint Venture
In April 2002, the eMicro Board of Directors recommended the dissolution of
eMicro. In June 2002, the shareholders of eMicro voted to dissolve the joint
venture, and it ceased operations during the first quarter of fiscal 2003. We
anticipate we will be able to complete the disbursement of assets process
approximately 60 days from August 5, 2002, the date upon which we filed to
dissolve the venture. We currently consolidate the balances of eMicro in our
financial statements at 100% and record an offset for the 25% outside ownership
interest as a separate component on the balance sheet. The following amounts for
eMicro are included in our consolidated balance sheet as of June 29, 2002 and
represent less than 1% of our consolidated total assets:
Jun. 29,
2002
---------------
Cash and cash equivalents $ 2,406
Trade receivables 610
Other current assets 29
Long-term assets 13
Accounts payable and accrued liabilities (1,172)
Minority interest in eMicro (599)
In conjunction with the cessation of operations of eMicro during the first
quarter of fiscal year 2003, we recorded its results of operations as
discontinued in the quarter and reclassified the prior year results of
operations to discontinued operations for comparative purposes in accordance
with SFAS 144. eMicro's revenue and operating loss included in discontinued
operations for the first quarter of fiscal 2003 was $0.9 million and $2.0
million, respectively. eMicro's revenue and operating loss included in
discontinued operations for the first quarter of fiscal 2002 was $0.6 million
and $1.1 million, respectively.
7. Legal Matters
On October 19, 2001, we filed a lawsuit against Fujitsu, Ltd. in the United
States District Court for the Northern District of California. We are alleging
claims for breach of contract and anticipatory breach of contract, and seek
damages in excess of $46 million. The basis for our complaint is Fujitsu's
refusal to pay for chips delivered to and accepted by it. On December 17, 2001,
Fujitsu filed an answer and a counterclaim. Fujitsu alleges claims for breach of
contract, breach of warranty, quantum meruit/equitable indemnity, and
declaratory relief. The basis for the claims is our sale of allegedly defective
chips to Fujitsu, which chips allegedly caused Fujitsu's hard disk drives to
fail. The counterclaim does not specify the damages Fujitsu seeks, other than to
allege it has sustained "tens of millions" of dollars in damages. Our claim is
based on chips that are not included in Fujitsu's counterclaim but for which
Fujitsu has not paid. We believe that any potential liability in connection with
Fujitsu's counterclaim is covered by insurance coverage and claims we have
against third parties. To facilitate the resolution of all claims in one
lawsuit, including our claims against potentially responsible third parties, we
and Fujitsu agreed to realign our claims with Fujitsu as the plaintiff and us as
the defendant and counterclaimant. This realignment allowed us to file in the
same lawsuit a third-party claim alleging breach of contract and warranty
against Amkor Technology, Inc., the company that recommended and sold us the
goods that allegedly caused Fujitsu's hard disk drives to fail. Amkor filed an
answer to our third-party claim and a third-party complaint for implied
contractual indemnity against Sumitomo Bakelite Co., Ltd., the company that sold
the allegedly defective goods to Amkor. We intend to defend and prosecute our
lawsuit vigorously.
On July 5, 2001, Western Digital Corporation and its Malaysian subsidiary,
Western Digital (M) SDN.BHD, filed a lawsuit against us in the Superior Court of
the State of California, Orange County, in connection with the purchase of "read
channel" chips from us, as explained in more detail below. On August 20, 2001,
we filed a cross-complaint against the plaintiffs, and on October 9, 2001, the
Court granted our motion for judgment on the pleadings that resulted in the
dismissal of the plaintiffs' entire original complaint.
The plaintiffs filed an amended complaint, in which they alleged that they
entered into an oral supply contract for "read channel" chips with us, and that
we breached the contract and our duty of good faith and fair dealing. This
amended complaint seeks, among other things, unspecified damages, which appear
to be in excess of $60 million,
Page 8
and declaratory relief. We filed a cross-complaint against the plaintiffs,
alleging causes of action for breach of contract, fraud and negligent
misrepresentation. We are seeking damages in excess of $53 million, as well as
punitive damages. The plaintiffs currently owe us amounts exceeding $53 million
for products we have shipped and for non-cancelable orders placed with us.
On December 24, 2001, the court granted our application for writs of
attachment against the plaintiffs in the amount of approximately $25 million.
The court issued its order granting the application on March 11, 2002. The
plaintiffs appealed the order, and the appeal is pending. Pursuant to an
agreement we entered into, the plaintiffs have delivered to us a letter of
credit in the amount of approximately $25 million in substitution for an
attachment of their property. We will have the right to draw under the letter of
credit in the event we prevail in the litigation. We intend to defend and
prosecute the claims asserted by the plaintiffs and collect all amounts owed to
us.
During the fourth quarter of fiscal 2002, we recorded a $73.3 million
charge to reserve disputed receivables associated with the ongoing litigation
with Fujitsu and Western Digital. If we are successful in collecting these
receivables through the ongoing litigation, we will record an equivalent
reduction in operating expense. These receivables and the related allowances
were reclassified from short-term to long-term as of March 30, 2002 to reflect
our expectation regarding the timing of cash collection.
Currently we are in arbitration with the former shareholders of LuxSonor
Semiconductors, Inc. regarding claims we have made against the escrow account,
which was set up to compensate the Company in the event of certain breaches of
warranties and covenants by LuxSonor made in the Agreement of Merger. We filed a
claim for approximately $7.8 million against the proceeds in the escrow account,
primarily due to working capital deficiencies of LuxSonor on the date of
closing, and have recorded $7.8 million on our balance sheet under "Other
Assets." In the event we do not collect the full $7.8 million, goodwill recorded
on the acquisition will increase by the difference between the amount collected
and the claim amount.
From time to time, various claims, charges, and litigation are asserted or
commenced against us arising from, or related to, contractual matters,
intellectual property, personnel and employment disputes, as well as other
issues. Frequent claims and litigation involving patent and other intellectual
property rights are not uncommon in the semiconductor industry. As to any such
claims or litigation, we cannot predict the ultimate outcome with certainty. In
the event a third party makes a valid intellectual property claim and a license
is not available on commercially reasonable terms, we would be forced either to
redesign or to stop production of products incorporating that intellectual
property, and our operating results could be materially and adversely affected.
Litigation may also be necessary to enforce our intellectual property rights or
to defend us against claims of infringement, and this litigation may be costly
and divert the attention of key personnel.
8. Comprehensive Income
The components of comprehensive income, net of tax, are as follows (in
thousands):
Three Months Ended
---------------------------
Jun. 29, Jun. 30,
2002 2001
------------- -------------
Net loss $ (15,839) $ (22,997)
Change in unrealized gain on marketable equity securities (780) 4,775
Change in unrealized loss on foreign currency translation adjustments 385 124
------------- -------------
$ (16,234) $ (18,098)
============= =============
Page 9
9. Segment Information
We design and market high-performance analog and DSP chip solutions for
consumer entertainment electronics that allow people to see, hear, connect, and
enjoy digital entertainment. We determine our operating segments in accordance
with SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information." Our chief executive office ("CEO") has been identified as the
chief operating decision maker as defined by SFAS 131.
As a result of numerous changes within the Company during fiscal 2002 and
certain other factors, outlined in our annual report on Form 10-K for fiscal
2002, we now operate in one operating segment - Consumer Entertainment
Electronics. This change was effective with the fourth quarter of fiscal 2002.
We have restated the disclosure for the prior year to conform to the
current-year presentation.
Information on reportable segments is as follows (in thousands):
Three Months Ended
------------------------------
Jun. 29, Jun. 30,
2002 2001
--------------- --------------
Revenues by Segment:
Consumer Entertainment Electronics $ 76,024 $ 59,256
Magnetic Storage - 119,827
--------------- --------------
Total $ 76,024 $ 179,083
=============== ==============
Operating Profit by Segment:
Consumer Entertainment Electronics $ (14,899) $ (32,018)
Magnetic Storage 412 (2,619)
--------------- --------------
Total (14,487) (34,637)
--------------- --------------
Restructuring costs (2,085) (1,919)
Interest income, net 740 2,821
Other income 1,474 11,541
--------------- --------------
Loss before income taxes and loss from discontinued operations $ (14,358) $ (22,194)
=============== ==============
10. Subsequent Events
Following the Annual Meeting, the Board of Directors adopted the 2002
Cirrus Logic, Inc. Stock Option Plan. The maximum number of options to purchase
shares of common stock that may be issued under the plan is 6 million, subject
to an annual increase equal to four percent of the number of shares of the
Company's common stock outstanding as of the last day of the immediately
preceding fiscal year. The Compensation Committee of the Board of Directors will
administer the plan, under which grants may not be made to any officers or
directors of the Company.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Item 1
of this Quarterly Report and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the fiscal year ended March 30, 2002, contained in
the 2002 Annual Report on Form 10-K. Certain statements contained herein may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve a number of
risks, uncertainties and other factors that could cause actual results to differ
materially, as discussed more fully herein or in the 2002 Annual Report on Form
10-K. Certain reclassifications have been made to conform to the 2003
presentation. Such reclassifications had no effect on the results of operations
or stockholders' equity, other than as discussed in Note 6 to the financial
statements.
Cirrus Logic, Inc. ("we," "our," "us," the "Company") is a leading supplier
of high-performance analog and DSP chip solutions for consumer entertainment
electronics, marketed under the Cirrus(R) brand name, that allow people to see,
hear, connect, and enjoy digital entertainment. Our mixed-signal devices are
designed for specific markets that derive value from our expertise in advanced
mixed-signal design processing, systems-level engineering, and software
knowledge. Our products enable original equipment manufacturers ("OEMs") to
accelerate development of leading-edge digital entertainment products that are
in high consumer demand.
Results of Operations
The following table summarizes the results of our operations for the first
quarter of fiscal 2003 and 2002 as a percentage of net sales. All percentage
amounts were calculated using the underlying data in thousands:
Percentage of Net Sales
--------------------------
Three Months Ended
--------------------------
Jun. 29, Jun. 30,
2002 2001
------------ ------------
Net sales 100% 100%
Gross margin 51% 12%
Research and development 43% 17%
Selling, general and administrative 27% 14%
Restructuring costs 3% 1%
------------ ------------
Loss from operations (22%) (20%)
Realized gain on sale of marketable equity securities 2% 6%
Interest expense 0% 0%
Interest income 1% 1%
Other income 0% 0%
------------ ------------
Loss before income taxes and loss from discontinued operations (19%) (13%)
Provision for income taxes 0% 0%
------------ ------------
Loss from continuing operations (19%) (13%)
Loss from discontinued operations (2%) 0%
------------ ------------
Net loss (21%) (13%)
============ ============
Net Sales
Net sales for the first quarter of fiscal 2003 were $76.0 million, down
$103.1 million from $179.1 million for the first quarter of fiscal 2002. The
decrease in net sales was due primarily to our exit from the magnetic storage
product line during the second quarter of fiscal 2002. Our net sales for the
first quarter of fiscal 2002 included $119.8 million from the magnetic storage
product line. This decrease in revenue was partially offset by the increase
Page 11
in sales from our ongoing operations of $16.7 million. Revenue from the Audio
product group increased $12.7 million, the Video product group increased $5.4
million and the Connectivity product group decreased $1.4 million from the first
fiscal quarter of the prior fiscal year.
Export sales, principally to Asia, including sales to U.S.-based customers
with manufacturing plants overseas, were 80% and 92% of net sales in the first
quarter of fiscal 2003 and fiscal 2002, respectively.
Our sales are denominated primarily in U.S. dollars. From time to time, we
enter into foreign currency forward exchange and option contracts to reduce the
foreign currency exposures related to sales and balance sheet accounts
denominated in yen. No contracts were outstanding as of June 29, 2002.
During the first fiscal quarter of 2003, sales to Thomson Multimedia S.A.
accounted for 15% of net sales. During the first quarter of fiscal 2002, sales
to Fujitsu and Western Digital represented 43% and 20% of net sales,
respectively.
Gross Margin
Gross margin as a percentage of net sales was 51% in the first quarter of
fiscal 2003, up from 12% in the first quarter of fiscal 2002. The increase in
gross margin percentage during the first quarter was primarily the result of
reduced inventory charges and improved product mix due to our exit from the
magnetic storage product line in fiscal 2002. During the first quarter of fiscal
2002, we recorded an inventory charge of $36.6 million related to exiting the
magnetic storage product line and $12.7 million mainly to reserve inventory that
was excess to short-term usage forecasts. During the first quarter of fiscal
2003, we recorded a net inventory charge of $1.5 million mainly to reserve
inventory that was excess to short-term usage forecasts.
Research and Development Expense
Research and development expense for the first quarter of fiscal 2003 of
$32.6 million increased $2.2 million from $30.4 million in the first quarter of
fiscal 2002. The increase in research and development costs was related to the
incremental expense from our three acquisitions in the third quarter of fiscal
2002 of $12.6 million partially offset by the impact of our fiscal 2002
workforce reductions and cost cutting measures. Furthermore, research and
development expense for the first quarter of fiscal 2002 included $1.9 million
related to the write-off of in-process research and development costs associated
with the acquisition of Peak Audio, Inc.
Selling, General and Administrative Expense
Selling, general and administrative expense in the first quarter of fiscal
2003 decreased $4.4 million to $20.5 million from $24.9 million in the first
quarter of fiscal 2002. The decrease was primarily related to our cost reduction
and expense control measures implemented in the prior fiscal year, partially
offset by the incremental expense of the companies we acquired in the third
quarter of fiscal 2002.
Restructuring Costs
During the first quarter of fiscal 2003, we announced intentions to further
reduce costs and align operating expenses with our current revenue model. We
plan to eliminate approximately 150 employee positions worldwide, or 13% of the
total workforce, from various business functions and job classes over the first
half of fiscal year 2003. During the first quarter of fiscal 2003, we recorded a
restructuring charge of $1.7 million to cover costs associated with a portion of
these workforce reductions and $0.4 million related to facility consolidations.
We will record an additional restructuring charge in the second quarter of
fiscal year 2003 for the remainder of the costs associated with the workforce
reduction.
During fiscal 2002, we announced a change to our business model that
de-emphasized our magnetic storage chip business and focused on
consumer-entertainment electronics. As a result of these strategic decisions and
in response to ongoing economic and industry conditions, we eliminated
approximately 420 employee positions worldwide from various business functions
and job classes over the course of fiscal 2002. We recorded a
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restructuring charge of $6.4 million in operating expenses to cover costs
associated with these workforce reductions. In addition, we recorded a $4.5
million restructuring charge in operating expenses for costs associated with
facility consolidations. As part of the fiscal 2002 restructuring, we reduced
our workforce by approximately 120 employees worldwide in the first quarter of
fiscal 2002 and recorded an associated restructuring charge of $1.9 million.
As of June 29, 2002, we have a remaining restructuring accrual of $5.8
million. We expect to discharge the remaining balance associated with severance
and related benefits of approximately $1.7 million through cash payments during
fiscal 2003. The balance of $4.1 million for facilities and other costs relates
to net lease expenses and other anticipated lease termination costs that will be
paid over the respective lease terms through fiscal 2013.
Realized Gain on the Sale of Marketable Equity Securities
During the first quarter of fiscal 2003, we realized a gain of $1.4 million
related to receipt of proceeds previously held back by Intel. During the first
quarter of fiscal 2002, we realized a gain of $9.8 million related to receipt of
proceeds previously held back by Intel. The holdback gains were related to the
fiscal 2001 sale of our holdings of approximately 1 million shares of Series A
preferred stock and 0.5 million shares of common stock in Basis Communications
to Intel for $91.8 million. The sale was part of a tender offer whereby Intel
purchased the outstanding preferred and common stock of Basis for $61.18 per
share. Intel withheld $11.2 million from the total consideration paid pursuant
to the indemnification provisions of the merger agreement between Intel and
Basis, all of which has now been received. During the first fiscal quarter of
2002, we also realized a gain of $1.2 million related to the sale of call
options in Openwave Systems, Inc. (formerly known as Phone.com) common stock.
Interest Income
Interest income was $0.8 million for the first quarter of fiscal 2003 and
$2.9 million for the first quarter of fiscal 2002. The decrease of $2.1 million
was primarily due to lower cash and cash equivalent balances, on which interest
was earned during fiscal 2003, and lower interest rates in fiscal 2003.
Income Taxes
We incurred income tax expense of $29 thousand for the first fiscal
quarter. The income tax expense consisted primarily of estimated withholdings
and income tax due in certain foreign jurisdictions.
SFAS 109, "Accounting for Income Taxes," provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. We
have provided a valuation allowance equal to our net deferred tax assets due to
uncertainties regarding their realization. We evaluate the realizability of our
deferred tax assets on a quarterly basis.
Loss from Discontinued Operations
In April 2002, the eMicro Board of Directors recommended the dissolution of
eMicro. In June 2002, the shareholders of eMicro voted to dissolve the joint
venture, and it ceased operations during the first quarter of fiscal 2003. We
anticipate we will be able to complete the disbursement of assets process
approximately 60 days from August 5, 2002, the date upon which we filed to
dissolve the venture. We currently consolidate the amounts of eMicro in our
financial statements. We recorded its results of operations as discontinued in
the quarter and reclassified the prior year results of operations to
discontinued operations for comparative purposes in accordance with SFAS 144.
Liquidity and Capital Resources
We used approximately $6.8 million of cash and cash equivalents in our
operating activities during the first quarter of fiscal 2003, primarily due to
the cash components of our net loss, a decline in accounts payable and accrued
liabilities, and an increase in gross inventory. These uses of cash were
partially offset by a decrease in accounts receivable. In the comparable period
of fiscal 2002, we used approximately $27.4 million primarily due to a decline
in accounts payable and accrued liabilities and the cash components of our net
loss.
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We used $3.1 million in cash in investing activities during the first
quarter of fiscal 2003, primarily for the purchase of property and equipment and
technology licenses, partially offset by the $1.4 million received from the sale
of stock in Basis Communications. Cash used in investing activities in the first
quarter of fiscal 2002 was $9.4 million, primarily for the purchase of Peak
Audio, Inc., property and equipment, and technology licenses, partially offset
by cash received from the sale of stock in Basis Communications.
We generated $1.3 million in cash from financing activities during the
first fiscal quarter of 2003 primarily related to the issuance of common stock.
For the first fiscal quarter of 2002, we used $64.9 million in cash in financing
activities primarily related to the repurchase of approximately 6.4 million
shares of stock for $68.5 million.
We have a $9 million letter of credit secured by $10 million in restricted
cash. The letter of credit was issued to secure certain of our obligations under
our lease agreement for a new headquarters and engineering facility in Austin,
Texas. Due to the acquisition of Stream Machine in fiscal 2002, we also have
$2.3 million in restricted cash securing a letter of credit related to Stream
Machine's office lease. We also have $0.5 million in restricted cash securing a
writ of attachment related to ongoing litigation.
Although we cannot assure that we will be able to generate cash in the
future, we anticipate that our existing capital resources and cash flow
generated from future operations will enable us to maintain our current level of
operations for the next 12 months.
Factors That May Affect Future Operating Results
Numerous factors affect our business and the results of our operations.
These factors include, but are not limited to, overall conditions in the
semiconductor market; the expansion of the consumer digital entertainment
electronics market; the ability of the Company to successfully integrate its
acquisitions into its operations and realize the anticipated synergies; the
ability of the Company to introduce new products on a timely basis and to
deliver products that perform as anticipated; risks associated with
international sales and international operations; customer cancellations of
orders, or the failure to place orders consistent with forecasts; savings from
cost reductions; the successful resolution of the Company's litigation with
Western Digital and Fujitsu; rival chip architectures; pricing pressures;
hardware or software deficiencies; a shortage of manufacturing capacity; the
ability of the Company to make continued substantial investments in research and
development; final determination of appropriate inventory write-downs based on
the outlook at the end of each quarter; actual operational spending; the ability
of the Company to increase revenue, gross margin and sequential growth rates;
the retention of key employees; and the effects of terrorist activities and
possible military action, which may cause disruptions to general economic,
market and political conditions throughout the world, as well as may disrupt our
receipt of shipments we need for our products or may disrupt our delivery of
products to customers. For a discussion of these and other factors affecting our
business, see "Item 1 - Business - Factors Affecting Our Business and Prospects"
in our Annual Report on Form 10-K for the year ended March 30, 2002.
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 fiscal year ended March 30, 2002.
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PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 7 to the financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of Cirrus Logic, Inc. on July 24,
2002, the stockholders voted on two proposals as reflected below:
[X] The first matter voted on was a proposal to elect seven directors for
one-year terms. All director nominees were elected. The following
table sets forth the votes in such election:
David D. French For: 73,837,694 Against: 1,636,186 Abstain: 0
D. James Guzy For: 74,223,380 Against: 1,250,500 Abstain: 0
Michael L. Hackworth For: 74,422,529 Against: 1,051,351 Abstain: 0
Suhas S. Patil For: 74,569,181 Against: 904,699 Abstain: 0
Walden C. Rhines For: 74,202,045 Against: 1,271,835 Abstain: 0
William D. Sherman For: 74,741,891 Against: 731,989 Abstain: 0
Robert H. Smith For: 74,130,745 Against: 1,343,135 Abstain: 0
There were no broker non-votes.
[X] The second matter voted on was a proposal to ratify the appointment of
Ernst & Young LLP as independent auditors. The following table sets
forth the votes in such election:
For: 72,613,570 Against: 1,894,249 Abstain: 966,061
There were no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certificate of the Chief Executive Officer pursuant to 18 U.S.C.
(S)1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
99.2 Certificate of the Chief Financial Officer pursuant to 18 U.S.C.
(S)1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
(b) Reports on Form 8-K:
None.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Steven D. Overly
-----------------------
Steven D. Overly
Senior Vice President, Chief Financial Officer,
General Counsel and Secretary
Date: August 13, 2002
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