1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTER PERIOD ENDED JUNE 30, 2001
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.)
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 June 30, 2001 was 73,821,514, excluding 6,443,900 treasury
shares.
================================================================================
2
CIRRUS LOGIC, INC.
FORM 10-Q QUARTERLY REPORT
QUARTERLY PERIOD ENDED JUNE 30, 2001
TABLE OF CONTENTS
<Table>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 24
</Table>
-2-
3
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, MARCH 31,
2001 2001
------------ ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 151,512 $ 253,136
Restricted cash 10,000 10,000
Marketable equity securities 11,356 6,581
Accounts receivable, net 139,795 136,102
Inventories, net 81,901 109,161
Other current assets 18,463 18,217
------------ ------------
413,027 533,197
Property and equipment, net 33,108 32,340
Deposits and other assets 42,208 32,468
------------ ------------
$ 488,343 $ 598,005
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 89,212 $ 115,254
Current maturities of long-term debt and capital lease obligations 2,040 3,133
Income taxes payable 40,672 41,053
------------ ------------
131,924 159,440
Long term obligations 3,766 4,319
Commitments and contingencies
Minority interest in eMicro 1,431 1,703
Stockholders' Equity
Capital stock 663,162 715,790
Accumulated other comprehensive income 9,477 4,578
Accumulated deficit (321,417) (287,825)
------------ ------------
351,222 432,543
------------ ------------
$ 488,343 $ 598,005
============ ============
</Table>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
-3-
4
CIRRUS LOGIC, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
QUARTER ENDED
-----------------------------
JUNE 30, JUNE 24,
2001 2000
------------ ------------
Net sales $ 179,673 $ 181,412
Costs and expenses:
Cost of sales 158,998 107,899
Research and development 30,827 31,039
Selling, general and administrative 25,448 26,268
Restructuring costs, gain on sale of assets and other, net 1,919 (12,514)
------------ ------------
Total costs and expenses 217,192 152,692
Income (loss) from operations (37,519) 28,720
Realized gain on sale of marketable equity securities 10,967 79,639
Interest expense (29) (4,981)
Interest income 2,886 4,805
Other income 426 514
------------ ------------
Income (loss) before provision for income taxes (23,269) 108,697
Provision for income taxes -- (10,711)
Minority interest in loss of eMicro 272 119
------------ ------------
Income (loss) before extraordinary gain and accounting change (22,997) 98,105
Extraordinary gain, net of income tax -- 2,482
Cumulative effect of change in accounting principle -- (1,707)
------------ ------------
Net income (loss) $ (22,997) $ 98,880
============ ============
Basic income (loss) per share:
Before extraordinary gain and accounting change $ (0.31) $ 1.50
Extraordinary gain, net of income tax -- 0.04
Cumulative effect of change in accounting principle -- (0.03)
------------ ------------
$ (0.31) $ 1.51
============ ============
Diluted income (loss) per share:
Before extraordinary gain and accounting change $ (0.31) $ 1.26
Extraordinary gain, net of income tax -- 0.03
Cumulative effect of change in accounting principle -- (0.02)
------------ ------------
$ (0.31) $ 1.27
============ ============
Weighted average common stock outstanding:
Basic 74,253 65,549
Diluted 74,253 80,684
</Table>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
-4-
5
CIRRUS LOGIC, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, JUNE 24,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (22,997) $ 98,880
Adjustments to reconcile net income (loss) to net
cash flows from operations:
Depreciation and amortization 7,266 7,642
Other non-cash charges 1,846 467
Extraordinary gain, net of income tax -- (2,482)
Gain on sale of short-term investments (10,967) (79,639)
Net change in operating assets and liabilities (2,637) (29,071)
------------ ------------
Net cash used in operations (27,489) (4,203)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of short-term investments 10,967 81,639
Purchase of property and equipment (4,624) (4,331)
Investments in technology (3,407) (4,416)
Acquisition of Peak Audio (10,533) --
Change in deposits and other assets (1,774) 96
Change in restricted cash -- (560)
------------ ------------
Net cash (used in) provided by investing activities (9,371) 72,428
------------ ------------
Cash flows from financing activities:
Repurchase of treasury stock (68,461) --
Repurchase of convertible subordinated notes -- (24,848)
Proceeds from issuance of common stock 4,831 2,409
Payments on long-term debt and capital lease obligations (1,258) (6,246)
Unrealized foreign currency translation 124 143
Cash contributions from minority partners -- 5,000
------------ ------------
Net cash used in financing activities (64,764) (23,542)
------------ ------------
Net (decrease) increase in cash and cash equivalents (101,624) 44,683
Cash and cash equivalents at beginning of period 253,136 144,034
------------ ------------
Cash and cash equivalents at end of period $ 151,512 $ 188,717
============ ============
</Table>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
-5-
6
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. ("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, 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
unaudited consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements, and notes thereto for
the year ended March 31, 2001, included in our 2001 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 2001 financial statements
to conform to the 2002 presentation. Such reclassifications had no effect on the
results of operations or stockholders' equity.
2. ACCOUNTING CHANGES AND EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
We adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective April
1, 2001. Adoption of SFAS No. 133 did not have a material impact on our results
of operations or financial position. At June 30, 2001, we had foreign currency
forward contracts to sell approximately 1.65 billion Japanese Yen at an average
rate of approximately 119.5 Japanese Yen per dollar. At June 30, 2001, the fair
value and unrealized gain on these contracts was $0.5 million.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed 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). The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, we are required to adopt SFAS No. 142 effective April 1,
2002. We are currently evaluating the effect that SFAS No. 142 will have on our
results of operations and financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." We
recorded a cumulative effect of a change in accounting principle in the first
quarter of fiscal 2001 to reflect our adoption of new revenue recognition
policies as a result of this guidance. Effective with the first quarter of
fiscal 2001, we have recognized revenue on international shipments based on
customer receipt and title passage of inventory rather than on the date of
shipment, which was our historical method. The cumulative effect of the change
for prior years resulted in a charge to income of $1.7 million. The effect of
the change for the fiscal year 2001 was to increase revenue $5.2 million,
increase cost of sales $3.5 million, increase income before extraordinary gain
and net income before the change in accounting principle $1.7 million, and
increase basic and diluted earnings per share by $.02 per share.
During the first quarter of fiscal 2001, we also changed our estimate of
the amount of revenue that is deferred on certain distributor transactions under
agreements with only limited rights of return. Results for the fiscal period
ended March 31, 2001 include revenue of $5.4 million, cost of sales of $2.0,
million and income of $3.4 million related to this change in estimate. The
effect of this estimate change increased basic and diluted earnings per share by
$0.03 for the fiscal year ended March 31, 2001.
-6-
7
3. INVENTORIES
Net inventories are comprised of the following:
<Table>
<Caption>
JUNE 30, MARCH 31,
2001 2001
------------ ------------
Work-in process $ 64,217 $ 81,272
Finished goods 17,684 27,889
------------ ------------
$ 81,901 $ 109,161
============ ============
</Table>
4. INCOME TAXES
We have accrued no income tax expense for the fiscal quarter ended June 30,
2001 because of the losses incurred for the quarter and forecasted for the year
ended March 30, 2002.
SFAS No. 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 net deferred tax assets due to
uncertainties regarding their realization. The realizability of the deferred tax
assets will be evaluated on a quarterly basis.
5. RESTRUCTURING CHARGES AND OTHER
On May 2, 2001, we announced a change to our business model, in which we
are de-emphasizing our magnetic storage chip business and are focusing on
consumer-entertainment electronics. On May 15, 2001, we announced cost-reduction
actions to align company resources and expenses with this new business model. In
connection with these strategic decisions, we reduced our workforce by
approximately 120 employees worldwide, or about nine percent of the total
workforce. During the first quarter of fiscal 2002, we recorded a special charge
of $1.9 million to cover costs associated with these workforce reductions.
During the first quarter of fiscal 2001, we recorded $12.5 million in income to
recognize the receipt of two previously-reserved notes from Intel Corporation on
behalf of Basis Communications Corporation.
-7-
8
6. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<Table>
<Caption>
BASIC EARNINGS PER SHARE
QUARTER ENDED
-----------------------------
JUNE 30, JUNE 24,
2001 2000
------------ ------------
Income (loss) before extraordinary gain and accounting change $ (22,997) $ 98,105
Extraordinary gain, net of income tax -- 2,482
Cumulative effect of change in accounting principle -- (1,707)
------------ ------------
Net income (loss) $ (22,997) $ 98,880
============ ============
Weighted average common stock outstanding 74,253 65,549
Basic net income (loss) per share:
Before extraordinary gain and accounting change $ (0.31) $ 1.50
Extraordinary gain, net of income tax -- 0.04
Cumulative effect of change in accounting principle -- (0.03)
------------ ------------
Basic net income (loss) per share $ (0.31) $ 1.51
============ ============
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary gain and accounting change $ (22,997) $ 98,105
Effect of convertible subordinated note conversion -- 3,657
------------ ------------
Income (loss) including assumed conversions before
extraordinary gain and accounting change (22,997) 101,762
Extraordinary gain, net of income tax -- 2,482
Cumulative effect of change in accounting principle -- (1,707)
------------ ------------
Net income (loss) $ (22,997) $ 102,537
============ ============
Weighted average common stock outstanding 74,253 65,549
Assumed conversion of convertible subordinated notes -- 11,184
Dilutive effect of stock options outstanding -- 3,833
Contingent shares issueable in connection with acquisition -- 118
------------ ------------
Diluted shares of common stock outstanding 74,253 80,684
============ ============
Diluted income (loss) per share:
Before extraordinary gain and accounting change $ (0.31) $ 1.26
Extraordinary gain, net of income tax -- 0.03
Cumulative effect of change in accounting principle -- (0.02)
------------ ------------
Diluted net income (loss) per share $ (0.31) $ 1.27
============ ============
</Table>
Incremental common shares attributable to the exercise of outstanding
options of 2,608,987 shares for the three months ended June 30, 2001 were
excluded from the computation of diluted net income per share because the effect
would be antidilutive.
Diluted earnings per share for June 24, 2000 of $1.27 includes an
adjustment to increase net income by $3.7 million and diluted shares by 11.3
million, which is the quarterly after-tax interest savings and shares which
would have been issued in connection with the convertible debt.
-8-
9
7. STOCK REPURCHASE
On April 11, 2001, we repurchased approximately 6.4 million shares of our
common stock from a former member of the Board of Directors for approximately
$68.5 million.
8. ACQUISITION OF PEAK AUDIO
On April 30, 2001, we completed the acquisition of the assets of Peak
Audio, Inc. ("Peak"), a Colorado-based company specializing in commercial audio
networking products. The acquisition was structured as a cash purchase of Peak's
assets for an initial consideration of $11 million. As part of the acquisition,
the shareholders of Peak can potentially earn up to an additional $16 million in
consideration based on the financial performance of the purchased assets over a
two-year period. The contingent consideration can be paid in cash or Cirrus
Logic common stock at our discretion. The acquisition was accounted for under
the purchase method of accounting. The purchase price was allocated to the
estimated fair value of assets acquired and liabilities assumed based on
independent appraisals and management estimates, resulting in goodwill of $0.8,
which is being amortized over 5 years. Approximately $1.9 million of the Peak
purchase price was allocated to in-process research and development based upon
an independent third-party appraisal and was expensed upon the closing of the
transaction. The results of operations of Peak have been included with those of
the Company subsequent to the acquisition date, which was April 30, 2001. Pro
forma financial information has been excluded, as the results of operations of
Peak are not material to our results of operations for the first fiscal quarters
of 2002 and 2001.
9. COMMITMENTS AND CONTINGENCIES
As of June 30, 2001, we had one volume purchase agreement. The agreement
was executed in August 2000 and expires on March 31, 2003. This agreement is
purchase-order based and does not have "take / pay" clauses. There are
cancellation fees of 50% once the vendor acknowledges a purchase order. There
are cancellation fees of 100% once the vendor begins manufacturing a purchase
order. Purchase order commitments as of June 30, 2001 were $22.3 million for
yielded wafers to be delivered through September 2001. Additionally, we had
non-cancelable assembly purchase orders with numerous vendors totaling $4.0
million.
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. The plaintiffs have alleged breach of
contract, breach of the covenant of good faith and fair dealing, promissory
estoppel, declaratory relief, unjust enrichment, restitution, unfair trade
practices and declaratory relief. The basis for this complaint relates to
negotiations regarding prices and commitments regarding the guaranteed purchase
of wafers. The plaintiffs seek damages in excess of $60 million and currently
owe us $27 million for products we have shipped, as well as $32 million in
additional non-cancelable orders placed with us that have been canceled. This
suit was filed shortly after we made demand upon the plaintiffs to fulfill their
purchase obligations with regard to the wafers in question. We are evaluating
various counterclaims. We believe the asserted claims are without merit and will
defend ourselves vigorously.
From time to time, various claims, charges, and litigation are asserted or
commenced against us arising from, or related to, contractual matters,
intellectual property, personal injury, insurance coverage and personnel and
employment disputes. 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.
We are involved in some litigation that, while the outcome of which cannot
be predicted with certainty, is not expected to have a material adverse effect
on us.
-9-
10
10. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
<Table>
<Caption>
QUARTER ENDED
-----------------------------
JUNE 30, JUNE 24,
2001 2000
------------ ------------
Net income (loss) $ (22,997) $ 98,880
Change in unrealized gain on
marketable equity securities 4,775 (24,617)
Change in unrealized loss on foreign
currency translation adjustments 124 143
------------ ------------
$ (18,098) $ 74,406
============ ============
</Table>
11. SEGMENT INFORMATION
We design and manufacture integrated circuits that employ precision linear
and advanced mixed-signal processing technologies. We are organized into three
principal businesses or operating segments: Analog Products Business Group,
Internet Solutions Business Group and the Magnetic Storage Business Group, with
the remaining products grouped as End of Life. Each of these business groups has
one or more general managers who report directly to the Chief Executive Officer
(CEO). The CEO has been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
Operating segments do not have material sales to other segments, and
accordingly, there are no inter-segment revenues to be reported. We also do not
allocate our restructuring charges, interest and other income, interest expense
or income taxes to operating segments. We do not identify or allocate assets by
operating segments, nor does the CEO evaluate the business groups based upon
these criteria.
Information on reportable segments is as follows (in thousands):
<Table>
<Caption>
QUARTER ENDED
---------------------------------
JUNE 30, JUNE 24,
2001 2000
-------------- ---------------
Revenues:
Analog 48,909 87,886
Internet 10,909 23,051
Magnetic Storage 119,827 53,614
End of Life 233 11,331
Corporate and all other (205) 5,530
-------------- ---------------
179,673 181,412
============== ===============
Operating profit (losses):
Analog (21,701) 17,097
Internet (11,399) (1,034)
Magnetic Storage (2,619) (1,984)
End of Life (20) 2,123
Corporate and all other (1,780) 12,518
-------------- ---------------
(37,519) 28,720
============== ===============
</Table>
-10-
11
12. SUBSEQUENT EVENTS
On July 19, 2001, we announced a definitive agreement to acquire LuxSonor
Semiconductors, Inc. ("LuxSonor") pursuant to an Agreement of Merger by and
among Cirrus Logic, LuxSonor, and Target Acquisition Corporation, dated as of
July 18, 2001. Under the terms of the Merger Agreement, we will exchange an
estimated $65 million of our stock for all outstanding shares and options of
LuxSonor.
In addition, on July 19, 2001, we announced a definitive agreement to
acquire ShareWave, Inc. ("ShareWave") pursuant to an Agreement of Merger by and
among Cirrus Logic, ShareWave, and Target I Acquisition Corporation, dated as of
July 19, 2001. Under the terms of the Merger Agreement, we will exchange an
estimated $92 million of our stock for all outstanding shares and options of
ShareWave.
On August 9, 2001, we announced a definitive agreement to acquire Stream
Machine Company ("Stream Machine") pursuant to an Agreement of Merger by and
among Cirrus Logic, Stream Machine, and Target Acquisition Corporation, dated as
of August 9, 2001. Under the terms of the Merger Agreement, we will exchange an
estimated $110 million of our stock for all outstanding shares and options of
Stream Machine.
-11-
12
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 31, 2001, contained in
the 2001 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 the 2001 Annual Report on Form
10-K. Certain reclassifications have been made to conform to the 2002
presentation. Such reclassifications had no effect on the results of operations
or stockholders' equity.
Cirrus Logic ("we, "our", "us", "the Company") is a leading supplier of
high-performance analog and DSP chip solutions for Internet entertainment
electronics, analog and magnetic markets. The Company designs and manufactures
integrated circuits, or chips, that use high-performance analog and digital
signal processing technologies. 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, sold under our own name and the Crystal(R), Maverick(R), and 3Ci(TM)
product brands, enable our customers to quickly deliver leading-edge technology
products that are in high demand from consumers.
RESULTS OF OPERATIONS
<Table>
<Caption>
PERCENTAGE OF NET SALES
QUARTER ENDED
--------------------------
JUNE 30, JUNE 24,
2001 2000
---------- ----------
Net sales 100% 100%
Gross margin 12% 41%
Research and development 17% 17%
Selling, general and administrative 14% 14%
Restructuring costs, gain on sale of assets and other, net 1% (7)%
---------- ----------
Income (loss) from operations (21)% 16%
Realized gain on sale of marketable equity securities 6% 44%
Interest expense 0% (3)%
Interest income 2% 3%
---------- ----------
Income (loss) before income taxes (13)% 60%
Provision (benefit) for income taxes 0% (6)%
---------- ----------
Income (loss) before extraordinary gain and
accounting change (13)% 54%
Extraordinary gain, net of tax 0% 1%
Cumulative effect of change in accounting principle 0% (1)%
---------- ----------
Net income (loss) (13)% 55%
========== ==========
</Table>
NET SALES
Net sales for the first quarter of fiscal 2002 decreased by $1.7 million,
or 1%, to $179.7 million from $181.4 million for the first quarter of fiscal
2001. Net sales from core businesses, consisting of Magnetic Storage, Analog,
Internet, Corporate and other business segments in the first quarter of fiscal
2002, increased 6% to $179.5 million, from $170.1 million in the first fiscal
quarter of 2001. The increase in core revenues in the first quarter of fiscal
2002 was primarily due to a substantial increase in net sales in the magnetic
storage business group. Magnetic Storage revenues increased $66.2 million to
$119.8 million in the first quarter of fiscal 2002 from $53.6 million in the
comparable period of fiscal 2001. Revenues in the Analog, Internet, and
Corporate and all other business groups decreased in the first fiscal quarter of
2002 as compared to the first fiscal quarter of 2001 by $39.0 million, $12.1
-12-
13
million, and $5.7 million, respectively. Revenues from businesses that have been
discontinued by us are included in our End of Life business segment. Revenues
from discontinued businesses in the first fiscal quarter of 2002 were $0.2
million compared to $11.3 million in the first fiscal quarter of 2001.
We expect that our revenues related to our magnetic storage business,
principally from Fujitsu, Western Digital and Hitachi, will decline
significantly in the second quarter of fiscal 2002 to approximately $10 million.
Effective with the first quarter of fiscal 2001, we have recognized revenue
on international shipments based on customer receipt and title passage of
inventory, instead of on the date of shipment, which was our historical method.
Results for fiscal 2001 include revenue of $5.2 million, cost of sales of $3.5
million, and a cumulative effect of change in accounting principle of $1.7
million as a result of this change. Also, during the first quarter of fiscal
2001, we changed our estimate of the amount of revenue that is deferred on
distributor transactions under agreements with only limited rights of return.
Results for fiscal 2001 include revenue of $5.4 million, cost of sales of $2.0
million, and income of $3.4 million related to this change in estimate. The
effect of this estimate change increased basic and diluted earnings per share by
$0.03 for fiscal 2001.
Export sales, principally to Asia, including sales to U.S.-based customers
with manufacturing plants overseas, were 78% and 76% of total sales in the first
quarter of fiscal 2002 and fiscal 2001, 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.
During the first fiscal quarter of 2002, sales to Fujitsu accounted for 43%
of net sales and sales to Western Digital accounted for 25% of net sales. As set
forth above, we anticipate a significant reduction in the sales made to both
Fujitsu and Western Digital in the second quarter of fiscal 2002. Sales to these
two customers comprised approximately 15% and 12% of sales in the first quarter
of fiscal 2001, respectively. The loss of a significant customer or a
significant reduction in such a customer's orders could have an adverse effect
on our sales.
GROSS MARGIN
Gross margin was 12% in the first quarter of fiscal 2002 and 41% in the
first quarter of fiscal 2001. The significant reduction in gross margin during
first fiscal quarter of 2002 is primarily the result of inventory charges
recorded during the period. During the first fiscal quarter of 2002, we recorded
an inventory charge of $36.6 million related to exiting the magnetic storage
business group, and $12.7 million, mainly to reserve inventory that is excess to
short-term usage forecasts.
RESEARCH AND DEVELOPMENT
Research and development expenditures for the first quarter of fiscal 2002
decreased $0.2 million, to $30.8 million from $31.0 million in the first quarter
of fiscal 2001. Included in research and development expense for the first
quarter of fiscal 2002 is $1.9 million related to the write-off of in-process
research and development associated with the acquisition of Peak Audio.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in the first quarter of fiscal
2002 decreased $0.9 million, or 3%, to $25.4 million from $26.3 million in the
first quarter of fiscal 2001. The decrease is primarily related to a reduction
in contract labor and temporary employees.
RESTRUCTURING COSTS, GAIN ON SALE OF ASSETS AND OTHER, NET
On May 2, 2001, we announced a change to our business model, in which we
are de-emphasizing our magnetic storage chip business and are focusing on
consumer-entertainment electronics. On May 15, 2001, we announced cost-reduction
actions to align company resources and expenses with this new business model. In
connection with these strategic decisions, we reduced our workforce by
approximately 120 employees worldwide, or about nine percent of the total
workforce. During the first quarter of fiscal 2002, we recorded a special charge
of $1.9 million to cover costs associated with these workforce reductions.
-13-
14
During the first fiscal quarter of 2001, we recorded $12.5 million in
income to recognize the receipt of two previously-reserved notes from Intel
Corporation on behalf of Basis Communications Corporation.
REALIZED GAINS ON THE SALE OF MARKETABLE EQUITY SECURITIES AND INVESTMENTS
During the first quarter of fiscal 2002 and 2001, we recorded a gain of
$1.1 million related to the sale of call options in Openwave Systems, Inc.
(formerly known as Phone.com). Also, during the first quarters of fiscal 2002
and 2001, we recognized gains on the sale of marketable equity securities of
$9.8 million and $78.5 million, respectively. These 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
Corporation ("Basis") to Intel Corporation ("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 from the total
consideration paid $11.2 million pursuant to the indemnification provisions of
the merger agreement between Intel and Basis, of which $9.8 million was received
in the first quarter of fiscal 2002.
INTEREST EXPENSE
Interest expense was less than $0.1 million for the first fiscal quarter of
2002 compared to $5.0 million for the first quarter of fiscal 2001. The decrease
in interest expense is primarily due to the repurchase and conversion of $299.0
million of our 6% convertible subordinated notes during fiscal 2001.
INTEREST INCOME
Interest income was $2.9 million for the first quarter of fiscal 2002 and
$4.8 million for the first quarter of fiscal 2001. The decrease is primarily due
to non-recurring interest income recorded in the first quarter of fiscal 2001 of
$1.4 million, in addition to $3.4 million of interest earned during the period.
The non-recurring interest income recorded in the first quarter of fiscal 2001
related to interest received on two outstanding notes receivable which had
previously been written off.
INCOME TAXES
We have accrued no income tax expense for the fiscal quarter ended June 30,
2001 because of the losses incurred for the quarter and forecasted for the
fiscal year ended March 30, 2002.
SFAS No. 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 net deferred tax assets due to
uncertainties regarding their realization. The realizability of the deferred tax
assets will be evaluated on a quarterly basis.
EXTRAORDINARY GAIN
During May 2000, we repurchased $28.1 million par value of our 6%
convertible subordinated notes on the open market and recognized an
extraordinary gain in the first quarter of fiscal 2001 of approximately $2.5
million (after income tax effect of $0.3 million) as a result of these
repurchases.
LIQUIDITY AND CAPITAL RESOURCES
We used approximately $27.5 million of cash and cash equivalents in our
operating activities during the first quarter of fiscal 2002 and used
approximately $4.2 million during the first quarter of fiscal 2001. The cash
used by operations in the first quarter of fiscal 2002 was primarily due to a
payments made on accounts payable and accrued liabilities. The cash used by
operations in the first quarter of fiscal 2001 was primarily due to increases in
inventory and accounts receivable and decreases in accounts payable.
We used $9.4 million in cash for investing activities during the first
quarter of fiscal 2002, primarily due to the acquisition of Peak Audio, compared
to cash provided by investing activities of $72.4 million during the comparable
period of fiscal 2001. The cash provided by investing activities for fiscal 2001
is primarily due to the sale of our interest in Basis.
-14-
15
We used $64.8 million in cash for financing activities during the first
fiscal quarter of 2002 primarily related to the repurchase of approximately 6.4
million shares of stock for $68.5 million offset by proceeds of $4.8 million
received for the issuance of common stock. During the first fiscal quarter of
2001, we used $23.5 million in cash for financing activities primarily related
to the repurchased $28.1 million par value of our 6% convertible subordinated
notes for $24.9 million. Also, during the first fiscal quarter of 2001, we paid
another $6.2 million of long-term debt and capital lease obligations. In
addition to this, we received $2.4 million in proceeds from the issuance of our
common stock and $5.0 million in equity contributions from joint venture
partners.
As of June 30, 2001, we had $161.5 million of cash, cash equivalents and
restricted cash. As of June 24, 2001, we have issued a $9 million letter of
credit secured by $10 million cash. The letter of credit was issued to secure
certain of our obligations under our lease agreement for a new headquarters
facility in Austin, Texas. The cash collateral for this letter of credit is
classified as restricted cash.
Although we can not 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 foreseeable future.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
WE HAVE HISTORICALLY EXPERIENCED FLUCTUATIONS IN OUR OPERATING RESULTS AND
EXPECT THESE FLUCTUATIONS TO CONTINUE IN FUTURE PERIODS.
Our quarterly and annual operating results are affected by a wide variety
of factors that could materially and adversely affect our net sales, gross
margins and operating income. These factors include:
o the volume and timing of orders received,
o changes in the mix of our products sold,
o market acceptance of our products and the products of our customers,
o competitive pricing pressures,
o our ability to expand manufacturing output to meet increasing demand,
o our ability to introduce new products on a timely basis,
o fixed costs associated with minimum purchase commitments under supply
contracts if demand decreases,
o the timing and extent of our research and development expenses,
o cyclical semiconductor industry conditions,
o the failure to anticipate changing customer product requirements,
o fluctuations in manufacturing costs,
o disruption in the supply of wafers or assembly services,
o the ability of customers to make payments to us,
o increases in material costs,
o certain production and other risks associated with using independent
manufacturers, and
o product obsolescence, price erosion and other competitive factors.
Historically in the integrated circuit industry, average selling prices of
products have decreased over time. If we are unable to introduce new products
with higher margins or reduce manufacturing costs to offset anticipated
-15-
16
decreases in the prices of our existing products, our operating results will be
adversely affected. Our business is characterized by short-term orders and
shipment schedules, and customer orders typically can be canceled or rescheduled
without penalty to the customer. In addition, because of fixed costs in the
integrated circuit industry, we are limited in our ability to reduce costs
quickly in response to any revenue shortfalls. As a result of the foregoing or
other factors, we may experience material adverse fluctuations in our future
operating results on a quarterly or annual basis.
OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS ON A TIMELY
BASIS.
Our success depends upon our ability to develop new precision linear and
mixed-signal circuits for new and existing markets, to introduce such products
in a timely manner, and to have such products gain market acceptance. The
development of new precision linear and mixed-signal circuits is highly complex
and from time to time we have experienced delays in developing and introducing
new products. Successful product development and introduction depends on a
number of factors, including:
o proper new product definition,
o timely completion of design and testing of new products,
o achievement of acceptable manufacturing yields, and
o market acceptance of our products and the products of our customers.
Although we seek to design products that have the potential to become
industry standard products, we cannot assure you that any products introduced by
us will be adopted by such market leaders, or that any products initially
accepted by our customers that are market leaders will become industry standard
products. Both revenues and margins may be materially affected if new product
introductions are delayed or if our products are not designed into successive
generations of our customers' products. We cannot assure you that we will be
able to meet these challenges or adjust to changing market conditions as quickly
and cost-effectively as necessary to compete successfully. Our failure to
develop and introduce new products successfully could harm our business and
operating results.
Successful product design and development is dependent on our ability to
attract, retain and motivate qualified design engineers, of which there is a
limited number. Due to the complexity and variety of precision linear and
mixed-signal circuits, the limited number of qualified circuit designers, and
the limited effectiveness of computer-aided design systems in the design of such
circuits, we cannot assure you that we will be able to successfully develop and
introduce new products on a timely basis.
OUR PRODUCTS ARE COMPLEX AND COULD CONTAIN DEFECTS, WHICH COULD REDUCE
SALES OF THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US.
Product development in the markets we serve is becoming more focused on the
integration of functionality on individual devices. There is a general trend
towards increasingly complex products. The greater integration of functions and
complexity of operations of our products increase the risk that latent defects
or subtle faults could be discovered by our customers or end users after volumes
of product have been shipped. This could result in:
o material recall and replacement costs for product warranty and support;
o adverse impact to our customer relationships by the recurrence of
significant defects;
o delay in recognition or loss of revenues, loss of market share or failure
to achieve market acceptance; and
o diversion of the attention of our engineering personnel from our product
development efforts.
The occurrence of any of these problems could result in the delay or loss
of market acceptance of our products and would likely harm our business. In
addition, any defects or other problems with our products could result in
financial or other damages to our customers who could seek damages from us for
their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
-16-
17
THE INTEGRATED CIRCUIT INDUSTRY IS VERY CYCLICAL AND AN INDUSTRY DOWNTURN
WOULD ADVERSELY AFFECT OUR BUSINESS.
The integrated circuit industry is characterized by:
o rapid technological change,
o cyclical market patterns,
o significant price erosion,
o periods of over-capacity and production shortages,
o variations in manufacturing costs and yields, and
o significant expenditures for capital equipment and product development.
The industry has from time to time experienced depressed business
conditions. We cannot assure you that any future downturn in the industry will
not be severe or that any such downturn will not have a material adverse effect
on our business and results of operations. We cannot assure you that we will not
experience substantial period-to-period fluctuations in operating costs due to
general semiconductor industry conditions or other factors.
If we fail to attract, hire and retain qualified personnel, we may not be
able to develop, market or sell our products or successfully manage our
business.
Competition for personnel in our industry is intense. The number of
technology companies in our geographic area is greater than it has been
historically, and we expect competition for qualified personnel to intensify.
There is only a limited number of people in the job market with the requisite
skills. Our human resources organization focuses significant efforts on
attracting and retaining individuals in key technology positions. Declining
stock market prices, however, make retention more difficult, as prior equity
grants contain less value and key employees pursue equity opportunities
elsewhere. In addition, start-up companies generally offer larger equity grants
to attract individuals from more established companies. The loss of the services
of any key personnel or our inability to hire new personnel with the requisite
skills could restrict our ability to develop new products or enhance existing
products in a timely manner, sell products to our customers or manage our
business effectively.
WE ANNOUNCED TWO RECENT PENDING ACQUISITIONS AND WE EXPECT TO MAKE FUTURE
ACQUISITIONS; ACQUISITIONS INVOLVE NUMEROUS RISKS.
Our business is highly competitive, and as a result, our growth is
dependent upon market growth, our ability to enhance our existing products and
our ability to introduce new products on a timely basis. One of the ways we are
addressing and will continue to address the need to develop new products is
through acquiring other companies and technologies. Acquisitions involve
numerous risks, including the following:
o difficulties in integrating the operations, technologies, and products of
the acquired companies;
o the risk of diverting management's attention from normal daily operations
of the business;
o potential difficulties in completing projects associated with in-process
research and development;
o risks of entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market
positions;
o initial dependence on unfamiliar supply chains or relatively small supply
partners;
o insufficient revenues to offset increased expenses associated with the
acquisitions; and
o the potential loss of key employees of the acquired companies.
-17-
18
Mergers and acquisitions of high-technology companies are inherently risky,
and no assurance can be given that our previous or future acquisitions will be
successful and will not materially adversely affect our business, operating
results, or financial condition. We must also manage any growth effectively.
Failure to manage growth effectively and successfully integrate acquisitions we
made could harm our business and operating results in a material way.
ANY DOWNTURN IN THE MARKETS WE SERVE WOULD HARM OUR BUSINESS.
Many of our products are incorporated into products such as personal
computers, magnetic storage, audio and industrial electronics, and embedded
processor products. These markets may from time to time experience cyclical,
depressed business conditions, often in connection with, or in anticipation of,
a decline in general economic conditions. Such industry downturns have resulted
in reduced product demand and declining average selling prices. Our business
would be harmed by any future downturns in the markets that we serve. The
sections below detail the risks associated with serving these various markets.
THE FOLLOWING RISKS ARE ASSOCIATED WITH SERVING THE AUDIO PRODUCTS MARKET:
o decreased average selling prices in the audio IC market due to competitive
pricing pressures;
o rapid integration of digital-to-analog converters into processors;
o our ability to respond effectively to the market trend of integrating audio
and video products;
o decreased average selling prices in the audio integrated circuit market due
to the PC industry's transition to the AC-link codecs attached to core
logic using the multimedia features of the processor and single chip
solution;
o in the PC audio products market, the transition to core logic connected
audio and by the introduction of cheaper, fully-integrated, single-chip
audio integrated circuits;
o aggressive competitive pricing pressures in the audio integrated circuits
market; and the inability of our audio products to meet cost or performance
requirements of the three-dimensional, spatial-effects audio market.
THE FOLLOWING RISKS ARE ASSOCIATED WITH SERVING THE EMBEDDED PROCESSOR
PRODUCTS MARKET:
o increased competition from other semiconductor manufacturers now entering
the market due to the increased popularity of consumer goods incorporating
embedded processor products, such as portable digital audio players, smart
cellular phones, set-top Internet and e-mail access boxes, and personal
digital appliances;
o our inability to meet embedded processor products requirements of an
industry that has yet to define product standards;
o customer delays in their product development and introductions; and
o price competition from over 30 other embedded processor products
manufacturers who have licensed ARM Ltd. central processing unit cores, the
same central processing unit core we license, and who will likely produce
products around these cores that are very similar to ours.
THE FOLLOWING RISKS ARE ASSOCIATED WITH SERVING THE PRECISION DATA
CONVERSION MARKET:
o our inability to establish broad sales channels and our failure to develop
and maintain a sufficiently broad competitive product line;
o customer delays in their product development and introductions;
o our inability to reach the marketplace due to the technical complexity of
our products and the time requirements for their development; and
o our inability to attract, hire, and retain scarce analog engineering talent
necessary for rapid product development in this market.
-18-
19
THE FOLLOWING RISKS ARE ASSOCIATED WITH OUR INVOLVEMENT IN THE PC MARKETS:
o greatly pronounced demand fluctuations characteristic of our role as a
component supplier to PC original equipment manufacturers, or OEMs, and to
peripheral device manufacturers;
o our involvement in the consumer PC market, the most volatile segment of the
PC market;
o increased competition from other integrated circuit makers, including Intel
Corporation, who plan to incorporate features into or with their
microprocessor products that replicate those of our products;
o loss of customer base as we refocus on non-PC markets; and
o as a supplier to manufacturers at different levels of the production chain,
our potential dependence on the success of a particular PC OEM due to our
inability to accurately identify end-users of our product.
THE FOLLOWING RISKS ARE ASSOCIATED WITH SERVING THE MAGNETIC STORAGE
MARKET:
o significantly reduced demand for our magnetic storage products, due to
recent efforts by certain of our customers to contract with our competitors
for these products, as well as to develop their own integrated circuits for
these products;
o historically dramatic supply and demand fluctuations in the magnetic disk
drive market, which is closely linked to growth in the PC market;
o direct correlation between the competitive nature of the disk drive
industry and the price of disk drive components;
o our dependence on the success of certain 3.5 inch magnetic disk drive
products that incorporate our products into their design;
o our dependence on the successful introduction by our customers of new disk
drive products that in turn can be impacted by the timing of customers'
transition to new disk drive products;
o our ability to respond effectively to the market trend of integrating hard
disk controllers with micro-controllers; and our ability to successfully
compete with other firms with greater resources to accomplish the technical
obstacles of integration and greater access to the advanced technologies
necessary to provide integrated HDD electronic components.
CHANGES IN INDUSTRY-WIDE CAPACITY, AS WELL AS CHANGES IN DEMAND, MAY CAUSE
OUR RESULTS TO FLUCTUATE; THESE CHANGES HAVE RESULTED AND COULD IN THE FUTURE
RESULT IN SIGNIFICANT INVENTORY WRITE-DOWNS.
Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in our quarterly
and annual operating results. We must order wafers and build inventory well in
advance of product shipments. Because the integrated circuit industry is highly
cyclical and is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence, there is a risk
that we will forecast inaccurately and produce excess or insufficient
inventories of particular products. This inventory risk is heightened because
many of our customers place orders with short lead times. Due to the product
manufacturing cycle characteristic of integrated circuit manufacturing and the
inherent imprecision by our customers to accurately forecast their demand,
product inventories may not always correspond to product demand, leading to
shortages or surpluses of certain products. As a result of such inventory
imbalances, future inventory write-downs may occur due to lower of cost or
market accounting, excess inventory or inventory obsolescence.
In addition, current negative trends in global economic conditions, in
addition to negative trends in the semiconductor industry, make it particularly
difficult to predict product demand. We believe that we have taken appropriate
reserves and that we will be able to sell our current inventory according to our
estimates; however, additional inventory write-downs may be necessary in the
event we cannot sell our inventory in the anticipated time frame.
-19-
20
BECAUSE FOUNDRY CAPACITY IS LIMITED, WE MAY BE REQUIRED TO ENTER INTO
COSTLY LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY.
We currently purchase all of our wafers from outside foundries. Market
conditions could result in wafers being in short supply and prevent us from
having adequate supply to meet our customer requirements. Any prolonged
inability to utilize our foundries as a result of fire, natural disaster or
otherwise would have a material adverse effect on our financial condition and
results of operations. If we are not able to obtain additional foundry capacity
as required, our business could be harmed in the following ways: (i) our
relationships with our customers would be harmed and consequently our sales
would likely be reduced; and (ii) we may be forced to purchase wafers or
packaging from higher cost suppliers or to pay expediting charges to obtain
additional supply
In order to secure additional foundry capacity, we have entered into
contracts that commit us to purchase specified quantities of silicon wafers over
extended periods. In fact, during fiscal 1999, the industry experienced an
excess in production capacity that we believe, in some cases, resulted in our
competitors paying wafer prices that were lower than our cost of production from
our manufacturing joint ventures. As a result, we experienced pressures on our
selling prices during fiscal years 1999 and 2000, which harmed our revenues and
reduced our margins. In the future, we may not be able to secure capacity with
foundries in a timely fashion or at all, and such arrangements, if any, may not
be on terms favorable to us. Moreover, if we are able to secure foundry
capacity, we may be obligated to utilize all of that capacity or incur
penalties. Such penalties may be expensive and could harm our financial results.
WE ARE DEPENDENT ON OUR SUBCONTRACTORS IN ASIA TO PERFORM KEY MANUFACTURING
FUNCTIONS FOR US.
We depend on third-party subcontractors in Asia for the supply and
packaging of our products. 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 we seek to reduce our dependence on our sole
and limited source suppliers, this concentration of suppliers and manufacturing
operations in Asia subjects us to the risks of conducting business
internationally, including political and economic conditions in Asia. Disruption
or termination of our supply or manufacturing could occur, and such disruptions
could harm our business and operating results.
WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS ASSOCIATED WITH THESE
SALES COULD HARM OUR OPERATING RESULTS.
Export sales, principally to Asia, include sales to U.S-based customers
with manufacturing plants overseas, and accounted for 76% and 74% of our net
sales during the first quarter fiscal 2002 and 2001, respectively. We expect
export sales to continue to represent a significant portion of product sales.
This reliance on sales internationally subjects us to the risks of conducting
business internationally, including political and economic conditions. For
example, the financial instability in a given region, such as Asia, 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 us or our
customers, which could also impact the ability of such customers to pay us.
While we expect to carefully evaluate the collection risk related to the
financial position of customers and potential customers in structuring the terms
of sale, in determining whether to accept sales orders, and in evaluating the
recognition of revenue, if a region's volatility harms the financial position of
our customers, our results of operations could be harmed. Our international
sales operations involve a number of other risks, including:
o unexpected changes in regulatory requirements;
o changes in diplomatic and trade relationships;
o delays resulting from difficulty in obtaining export licenses for
technology;
o tariffs and other barriers and restrictions; and
o the burdens of complying with a variety of foreign laws.
In addition, while we may buy hedging instruments to reduce our exposure to
currency exchange rate fluctuations, our competitive position can be affected by
the exchange rate of the U.S. dollar against other currencies, particularly the
Japanese yen. Consequently, increases in the value of the dollar would increase
the price
-20-
21
in local currencies of our products in foreign markets and make our products
relatively more expensive. We cannot assure you that regulatory, political and
other factors will not adversely affect our operations in the future or require
us to modify our current business practices.
POTENTIAL INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO
SIGNIFICANT LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS.
Our success depends on our ability to obtain patents and licenses and to
preserve our other intellectual property rights covering our manufacturing
processes, products and development and testing tools. We seek patent protection
for those inventions and technologies for which we believe such protection is
suitable and is likely to provide a competitive advantage to us. Notwithstanding
our attempts to protect our proprietary rights, we believe that our future
success will depend primarily upon the technical expertise, creative skills and
management abilities of our officers and key employees rather than on patent and
copyright ownership. We also rely substantially on trade secrets and proprietary
technology to protect our technology and manufacturing know-how, and work
actively to foster continuing technological innovation to maintain and protect
our competitive position.
The integrated circuit industry is characterized by frequent litigation
regarding patent and other intellectual property rights. We cannot assure you
that any patent owned by us will not be invalidated, circumvented or challenged,
that rights granted under the patent will provide competitive advantages to us
or that any of our pending or future patent applications will be issued with the
scope of the claims sought by us, if at all. In addition, effective copyright
and trade secret protection may be unavailable or limited in certain foreign
countries. We cannot assure you that steps taken by us to protect our
intellectual property will be adequate or that our competitors will not
independently develop or patent substantially equivalent or superior
technologies.
As is typical in the semiconductor industry, we and our customers have from
time to time received, and may in the future receive, communications from third
parties asserting patents, maskwork rights, or copyrights on certain of our
products and technologies. In the event a third party were to make a valid
intellectual property claim and a license was not available on commercially
reasonable terms, our operating results could be harmed. Litigation, which could
result in substantial cost to us and diversion of our resources, may also be
necessary to defend us against claimed infringement of the rights of others. An
unfavorable outcome in any such suit could have an adverse effect on our future
operations and/or liquidity.
STRONG COMPETITION IN THE HIGH-PERFORMANCE INTEGRATED CIRCUIT MARKET MAY
HARM OUR BUSINESS.
The high-performance integrated circuit industry is highly competitive and
subject to rapid technological change. Significant competitive factors in our
markets include:
o product features, reliability, performance and price;
o the diversity and timing of new product introductions;
o the emergence of new computer standards and other customer systems;
o product quality;
o efficiency of production; and
o customer support
Because of shortened product life cycles and even shorter design-in cycles,
our competitors have increasingly frequent opportunities to achieve design wins
in next generation systems. In the event that competitors succeed in supplanting
our products, our market share may not be sustainable and net sales, gross
margin, and results of operations would be adversely affected. Our principal
competitors include: Analog Devices, Advanced Micro Devices, Broadcom, Conexant,
Creative Technologies, ESS Technologies, Infineon, Intel, LSI Logic, Linear
Technology, Lucent Technologies, Motorola, Philips, Siemens, SigmaTel, ST
Microelectronics, Texas Instruments, Yamaha, and Zoran, many of whom have
substantially greater financial and other resources than we do with which to
pursue engineering, manufacturing, marketing and distribution of their products.
We expect intensified competition from emerging companies and from customers who
develop their own integrated circuit products. Increased competition could
adversely affect our business. We cannot assure you that we will be able to
compete
-21-
22
successfully in the future or that competitive pressures will not adversely
affect our financial condition and results of operations. Competitive pressures
could reduce market acceptance of our products and result in price reductions
and increases in expenses that could adversely affect our business and our
financial condition.
In addition, our future success depends, in part, on the continued service
of our key engineering, marketing, sales, manufacturing, support, and executive
personnel, and on our 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 our
business.
IF WE ARE UNABLE TO MAKE CONTINUED SUBSTANTIAL INVESTMENTS IN RESEARCH AND
DEVELOPMENT, WE MAY NOT BE ABLE TO SELL OUR PRODUCTS.
We must continue to make substantial investments in research and
development to develop new and enhanced products and solutions. If we fail to
make sufficient investments in research and development programs, new
technologies could render our current and planned products obsolete, resulting
in the need to change the focus of our research and development and product
strategies, and disrupting our business significantly.
WE ARE A PARTY TO LITIGATION WITH AN ENTITY FROM WHICH WE HAVE A
SIGNIFICANT ACCOUNT RECEIVABLE.
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. The plaintiffs have alleged breach of
contract, breach of the covenant of good faith and fair dealing, promissory
estoppel, declaratory relief, unjust enrichment, restitution, unfair trade
practices and declaratory relief. The basis for this complaint relates to
negotiations regarding prices and commitments regarding the guaranteed purchase
of wafers. The plaintiffs seek damages in excess of $60 million. This suit was
filed shortly after we made demand upon the plaintiffs to fulfill their purchase
obligations with regard to the wafers in question. The plaintiffs currently owe
us $27 million for products we have shipped, as well as $32 million in
additional non-cancelable orders placed with us that have been canceled. While
we believe the claims asserted against us are without merit and we plan to make
various counterclaims, these amounts due us may not be paid until the resolution
of this litigation, if at all.
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 31, 2001.
-22-
23
PART II
ITEM 1. LEGAL PROCEEDINGS
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. The plaintiffs have alleged breach of
contract, breach of the covenant of good faith and fair dealing, promissory
estoppel, declaratory relief, unjust enrichment, restitution, unfair trade
practices and declaratory relief. The basis for this complaint relates to
negotiations regarding prices and commitments regarding the guaranteed purchase
of wafers. The plaintiffs seek damages in excess of $60 million. This suit was
filed shortly after we made demand upon the plaintiffs to fulfill their purchase
obligations with regard to the wafers in question. We are evaluating various
counterclaims. We believe the asserted claims are without merit and will defend
ourselves vigorously.
From time to time, various claims, charges, and litigation are asserted or
commenced against us arising from, or related to, contractual matters,
intellectual property, personal injury, insurance coverage and personnel and
employment disputes. 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.
We are involved in some litigation that, while the outcome of which cannot
be predicted with certainty, is not expected to have a material adverse effect
on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of Cirrus Logic, Inc. on July 25,
2001, the stockholders voted on five proposals as reflected below:
o The first matter voted on was a proposal to elect six directors for
one-year terms. All director nominees were elected. The following table
sets forth the votes in such election:
<Table>
David French For: 67,307,728 Against: 974,643 Abstain: 0 Broker Non-Votes: 0
D. James Guzy For: 63,759,692 Against: 4,522,679 Abstain: 0 Broker Non-Votes: 0
Michael L. Hackworth For: 61,853,910 Against: 6,428,461 Abstain: 0 Broker Non-Votes: 0
Suhas S. Patil For: 67,185,417 Against: 1,096,954 Abstain: 0 Broker Non-Votes: 0
Walden C. Rhines For: 67,782,587 Against: 499,784 Abstain: 0 Broker Non-Votes: 0
Robert H. Smith For: 67,732,291 Against: 550,080 Abstain: 0 Broker Non-Votes: 0
</Table>
o The second matter voted on was a proposal to approve an amendment to the
1996 Stock Option Plan, increasing the number of shares of common stock
available for grant under the plan by 3,300,000 shares. The following table
sets forth the votes in such election:
<Table>
For: 39,340,470 Against: 28,744,886 Abstain: 197,015 Broker Non-Votes: 0
</Table>
o The third matter voted on was a proposal to approve an amendment to the
1990 Directors' Stock Option Plan, increasing the number of shares of
common stock available for grant under the plan by 150,000 shares. The
following table sets forth the votes in such election:
<Table>
For: 47,459,481 Against: 20,651,777 Abstain: 171,113 Broker Non-Votes: 0
</Table>
-23-
24
o The fourth matter voted on was a proposal to approve an amendment to the
Second Amended and Restated 1989 Employee Stock Purchase Plan, increasing
the number of shares of common stock available for grant under the plan by
150,000 shares. The following table sets forth the votes in such election:
<Table>
For: 66,854,502 Against: 1,290,437 Abstain: 137,432 Broker Non-Votes: 0
</Table>
o The fifth 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:
<Table>
For: 68,003,908 Against: 225,069 Abstain: 53,394 Broker Non-Votes: 0
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) Reports on Form 8-K:
We filed no reports on Form 8-K during the quarter ended June 30, 2001, but
filed one report subsequent to the end of the fiscal quarter. On July 20, 2001,
we filed a Form 8-K announcing definitive agreements to acquire LuxSonor
Semiconductors, Inc. and ShareWave, Inc.
SIGNATURES
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/ ROBERT W. FAY
Robert W. Fay
Vice President, Chief Financial Officer
Date: August 10, 2001
-24-