===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTER PERIOD ENDED SEPTEMBER 29, 2001
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 September 29, 2001 was 74,044,443.
================================================================================
CIRRUS LOGIC, INC.
FORM 10-Q QUARTERLY REPORT
QUARTERLY PERIOD ENDED SEPTEMBER 29, 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 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 17
INDEX TO EXHIBITS 18
</Table>
2
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 29, MARCH 31,
2001 2001
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 166,757 $ 253,136
Restricted cash 10,000 10,000
Marketable equity securities 4,097 6,581
Accounts receivable, net 107,522 136,102
Inventories, net 61,489 109,161
Other current assets 20,858 18,217
------------ ------------
370,723 533,197
Property and equipment, net 31,009 32,340
Deposits and other assets 38,275 32,468
------------ ------------
$ 440,007 $ 598,005
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 65,074 $ 115,254
Current maturities of long-term debt and capital
lease obligations -- 3,133
Income taxes payable 40,628 41,053
------------ ------------
105,702 159,440
Long-term obligations 3,198 4,319
Commitments and contingencies
Minority interest in eMicro 1,347 1,703
Stockholders' equity:
Capital stock 665,874 715,790
Accumulated other comprehensive income 2,423 4,578
Accumulated deficit (338,537) (287,825)
------------ ------------
329,760 432,543
------------ ------------
$ 440,007 $ 598,005
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 77,276 $ 189,537 $ 256,949 $ 370,949
Costs and expenses:
Cost of sales 46,584 110,513 205,582 218,412
Research and development 26,993 34,549 57,820 65,588
Selling, general and administrative 22,403 29,299 47,851 55,567
Restructuring costs and other, net -- (1,848) 1,919 (14,362)
------------ ------------ ------------ ------------
Total costs and expenses 95,980 172,513 313,172 325,205
Income (loss) from operations (18,704) 17,024 (56,223) 45,744
Realized gain on sale of marketable equity securities -- 1,905 10,967 81,544
Interest expense (30) (5,119) (59) (10,100)
Interest income 1,450 4,308 4,336 9,113
Other income 280 168 706 682
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes (17,004) 18,286 (40,273) 126,983
Provision for income taxes -- 1,924 -- 12,635
Minority interest in loss of eMicro 84 105 356 224
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain and accounting change (16,920) 16,467 (39,917) 114,572
Extraordinary gain, net of income tax -- -- -- 2,482
Cumulative effect of change in accounting principle -- -- -- (1,707)
------------ ------------ ------------ ------------
Net income (loss) $ (16,920) $ 16,467 $ (39,917) $ 115,347
============ ============ ============ ============
Basic income (loss) per share:
Before extraordinary gain and accounting change $ (0.23) $ 0.25 $ (0.54) $ 1.73
Extraordinary gain, net of income tax -- -- -- 0.04
Cumulative effect of change in accounting principle -- -- -- (0.03)
------------ ------------ ------------ ------------
$ (0.23) $ 0.25 $ (0.54) $ 1.75
============ ============ ============ ============
Diluted income (loss) per share:
Before extraordinary gain and accounting change $ (0.23) $ 0.23 $ (0.54) $ 1.49
Extraordinary gain, net of income tax -- -- -- 0.03
Cumulative effect of change in accounting principle -- -- -- (0.02)
------------ ------------ ------------ ------------
$ (0.23) $ 0.23 $ (0.54) $ 1.50
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 74,000 66,041 74,238 66,064
Diluted 74,000 70,918 74,238 81,674
</Table>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
-----------------------------
SEPT. 29, SEPT. 23,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (39,917) $ 115,347
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 15,080 15,419
Extraordinary gain, net of income tax -- (2,482)
Acquired in-process research and development expense 1,910 --
Gain on sale of marketable equity securities (10,967) (81,544)
Other non-cash charges 391 1,512
Net change in operating assets and liabilities 23,078 (44,298)
------------ ------------
Net cash (used in) provided by operating activities (10,425) 3,954
------------ ------------
Cash flows from investing activities:
Proceeds from sale of equity investments 10,967 83,544
Additions to property and equipment (6,435) (12,327)
Investments in technology (3,558) (4,416)
Acquisition of Peak Audio (10,844) --
Increase in deposits and other assets (1,686) (626)
Decrease in restricted cash -- 55,752
------------ ------------
Net cash (used in) provided by investing activities (11,556) 121,927
------------ ------------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations (3,469) (6,992)
Repurchase and retirement of common stock (68,662) --
Cash contributions from minority partners -- 5,000
Repurchase of convertible subordinated notes -- (24,848)
Unrealized foreign currency translation 329 (59)
Issuance of common stock, net of issuance costs 7,404 11,695
------------ ------------
Net cash used in financing activities (64,398) (15,204)
------------ ------------
Net (decrease) increase in cash and cash equivalents (86,379) 110,677
Cash and cash equivalents at beginning of period 253,136 144,034
------------ ------------
Cash and cash equivalents at end of period $ 166,757 $ 254,711
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
CIRRUS LOGIC, INC.
NOTES TO 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, 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. 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. At
September 29, 2001 we had foreign currency forward contracts to sell
approximately 500 million Japanese Yen at an average rate of approximately 119.5
Japanese Yen per dollar. At September 29, 2001 the fair value and unrealized
loss on these contracts was $0.1 million.
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 $0.02 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.
In July 2001, the Financial Accounting Standards Board 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 March 31, 2002.
6
We are currently evaluating the effect that SFAS No. 142 will have on our
results of operations and financial position.
3. INVENTORIES
Net inventories are comprised of the following (in thousands):
<Table>
<Caption>
SEPT. 29, MARCH 31,
2001 2001
------------ ------------
Work-in process $ 46,809 $ 81,272
Finished goods 14,680 27,889
------------ ------------
$ 61,489 $ 109,161
============ ============
</Table>
4. INCOME TAXES
We have accrued no income tax expense for the fiscal quarter and the two
fiscal quarters ended September 29, 2001 because of the losses incurred for
those time periods 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.
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 at that time. As of September 29, 2001, substantially all of the
affected employees had been separated from the Company and the liability related
to termination benefits had been paid. During the first quarter of fiscal 2002,
we recorded a charge of $1.9 million to cover costs associated with these
workforce reductions. In October 2001, we had an additional workforce reduction;
see Note 12 for discussion.
During the second quarter of fiscal 2001, we recorded $1.8 million in
income due to the final resolution of the MiCRUS restructuring agreement. 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
6. NET INCOME (LOSS) 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
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain and accounting change $ (16,920) $ 16,467 $ (39,917) $ 114,572
Extraordinary gain, net of income tax -- -- -- 2,482
Cumulative effect of change in accounting principle -- -- -- (1,707)
------------ ------------ ------------ ------------
Net income (loss) $ (16,920) $ 16,467 $ (39,917) $ 115,347
============ ============ ============ ============
Weighted average shares outstanding 74,000 66,041 74,238 66,064
Basic income (loss) per share:
Before extraordinary gain and accounting change $ (0.23) $ 0.25 $ (0.54) $ 1.73
Extraordinary gain, net of income tax -- -- -- 0.04
Cumulative effect of change in accounting principle -- -- -- (0.03)
------------ ------------ ------------ ------------
$ (0.23) $ 0.25 $ (0.54) $ 1.75
============ ============ ============ ============
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary gain and accounting change $ (16,920) $ 16,467 $ (39,917) $ 114,572
Effect of convertible subordinated note conversion -- -- -- 7,313
------------ ------------ ------------ ------------
Income (loss) including assumed conversion of subordinated
notes before extraordinary gain and accounting change (16,920) 16,467 (39,917) 121,885
Extraordinary gain, net of income tax -- -- -- 2,482
Cumulative effect of change in accounting principle -- -- -- (1,707)
------------ ------------ ------------ ------------
Net income (loss) $ (16,920) $ 16,467 $ (39,917) $ 122,660
============ ============ ============ ============
Weighted average shares outstanding 74,000 66,041 74,238 66,064
Assumed conversion of convertible subordinated notes -- -- -- 11,185
Dilutive effect of stock options outstanding -- 4,877 -- 4,425
------------ ------------ ------------ ------------
Weighted average diluted shares outstanding 74,000 70,918 74,238 81,674
============ ============ ============ ============
Diluted income (loss) per share:
Before extraordinary gain and accounting change $ (0.23) $ 0.23 $ (0.54) $ 1.49
Extraordinary gain, net of income tax -- -- -- 0.03
Cumulative effect of change in accounting principle -- -- -- (0.02)
------------ ------------ ------------ ------------
$ (0.23) $ 0.23 $ (0.54) $ 1.50
============ ============ ============ ============
</Table>
Incremental common shares attributable to the exercise of outstanding
options for the three and six months ended September 29, 2001 of 2,036,520
shares and 2,356,493 shares, respectively, were excluded from the computation of
diluted net income per share because the effect would be antidilutive.
Diluted earnings per share for September 23, 2000 of $1.50 includes an
adjustment to increase net income by $7.3 million and diluted shares by 11.2
million, which was the quarterly after-tax interest savings and shares that
would have been issued in connection with the convertible debt.
8
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
$68.7 million. The shares were subsequently retired with $57.9 million charged
to capital stock and $10.8 million charged to accumulated deficit.
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 receive 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 based on independent appraisals and
management estimates, resulting in goodwill of $1.1 million. The goodwill is
currently being amortized based on a five-year life; such amortization will
discontinue on March 31, 2002, in accordance with SFAS No. 142. 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. The results of operations of Peak were not material to our
results of operations for the first two fiscal quarters of 2002.
9. COMMITMENTS AND CONTINGENCIES
As of September 29, 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. We had no purchase order commitments as of September 29, 2001
under this agreement. Additionally, we had non-cancelable assembly purchase
orders with numerous vendors totaling $0.6 million.
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. Fujitsu has informed
us that it would not make payments due, and, instead, would set off
unsubstantiated losses that Fujitsu claims to have been caused by alleged
defects in our chips. We believe Fujitsu's stated reasons for not paying its
contractual obligation are without merit and, therefore, we continue to carry
this receivable on our balance sheet. We intend to 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. The plaintiffs alleged breach of
contract, breach of the covenant of good faith and fair dealing, promissory
estoppel, declaratory relief, unjust enrichment, restitution, and unfair trade
practices. The basis for this complaint related to negotiations regarding prices
and commitments for the guaranteed purchase of channel chips. The plaintiffs
sought damages in excess of $60 million and currently owe us amounts exceeding
$53 million for products we have shipped and for non-cancelable orders placed
with us. We have a receivable recorded on our balance sheet of $27 million for
the products we have shipped. This suit was filed shortly after we made demand
upon the plaintiffs to fulfill their purchase obligations with regard to the
chips in question. We believe the asserted claims were without merit and on
August 20, 2001, we filed a cross-complaint against Western Digital Corporation
and Western Digital (M) SDN.BHD in the Superior Court of the State of
California, Orange County, for breach of contract, fraud and negligent
misrepresentation for damages exceeding $53 million. 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 and allowed the
plaintiffs 30 days to file an amended complaint. The plaintiffs have notified us
that they will be amending their complaint.
9
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.
10. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net income (loss) $ (16,920) $ 16,467 $ (39,917) $ 115,347
Change in unrealized gain on marketable equity securities (7,259) 9,924 (2,484) (14,694)
Change in unrealized loss on foreign currency translation
adjustments 205 (202) 329 (59)
------------ ------------ ------------ ------------
$ (23,974) $ 26,189 $ (42,072) $ 100,594
============ ============ ============ ============
</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.
10
Information on reportable segments is as follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Analog $ 55,527 $ 86,658 $ 104,436 $ 170,301
Internet 12,103 26,118 23,012 49,120
Magnetic Storage 9,588 63,217 129,415 116,829
End of Life 58 12,404 86 23,733
Corporate and all other -- 1,140 -- 10,966
------------ ------------ ------------ ------------
$ 77,276 $ 189,537 $ 256,949 $ 370,949
============ ============ ============ ============
Operating profit (loss):
Analog $ (7,914) $ 24,393 $ (29,615) $ 54,973
Internet (8,447) 5,449 (19,846) 9,170
Magnetic Storage (3,123) 10,210 (5,742) 14,573
End of Life (149) 1,708 (169) 3,847
Corporate and all other 929 (24,736) (851) (36,819)
------------ ------------ ------------ ------------
$ (18,704) $ 17,024 $ (56,223) $ 45,744
============ ============ ============ ============
</Table>
The operating loss for the six months ended September 29, 2001 included
charges to reserve inventory in the Analog, Internet, Magnetic Storage and End
of Life segments of $9.2 million, $3.2 million, $36.2 million and $0.3 million,
respectively.
12. SUBSEQUENT EVENTS
On October 2, 2001, we acquired ShareWave, Inc. ("ShareWave"). Under the
terms of the Merger Agreement, we are exchanging approximately 3.4 million
shares of our common stock and options for all outstanding shares and options of
ShareWave.
On October 10, 2001, we acquired LuxSonor Semiconductors, Inc. ("LuxSonor")
by paying approximately $10 million in cash and exchanging approximately 2.1
millions shares of our common stock and options for all outstanding shares and
options of LuxSonor.
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
approximately 5.4 million shares of our common stock and options for all
outstanding shares and options of Stream Machine. This transaction is expected
to close during the third quarter of fiscal 2002.
See the Commitments and Contingencies footnote for a discussion of the
lawsuit we filed against Fujitsu, Ltd. on October 19, 2001.
During October 2001, we completed a worldwide workforce reduction of
approximately 300 employees, or about 26% of the total workforce at that time,
in response to the current market outlook. We expect to record a cash charge of
$4 million to $5 million to cover costs associated with these workforce
reductions. As a result of these workforce reductions, we also expect to record
a non-cash charge next quarter for costs associated with facilities closures and
lease abandonments.
11
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 in 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
------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales 100% 100% 100% 100%
Gross margin 40% 42% 20% 41%
Research and development 35% 18% 22% 18%
Selling, general and administrative 29% 15% 19% 15%
Restructuring costs and other, net 0% (1)% 1% (4)%
------------ ------------ ------------ ------------
Income (loss) from operations (24)% 9% (22)% 12%
Realized gain on sale of marketable equity securities 0% 1% 4% 22%
Interest expense 0% (3)% 0% (3)%
Interest income 2% 2% 2% 2%
Other income 0% 0% 0% 0%
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes (22)% 10% (16)% 34%
Provision for income taxes 0% 1% 0% 3%
Minority interest in loss of eMicro 0% 0% 0% 0%
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain and accounting change (22)% 9% (16)% 31%
Extraordinary gain, net of income tax 0% 0% 0% 1%
Cumulative effect of change in accounting principle 0% 0% 0% 0%
------------ ------------ ------------ ------------
Net income (loss) (22)% 9% (16)% 31%
============ ============ ============ ============
</Table>
NET SALES
Net sales for the second quarter of fiscal 2002 of $77.3 million decreased
by $112.2 million, or 59%, from $189.5 million for the second quarter of fiscal
2001. The decrease in net sales was due primarily to a decrease in Magnetic
Storage revenues of $53.6 million, or 85%, to $9.6 million in the second quarter
of fiscal 2002 in line with our previously announced decision to de-emphasize
our magnetic storage chip business. Revenues from our Analog business group
decreased $31.1 million or 36% in the second quarter of fiscal 2002 from the
comparable quarter of the prior year, mainly due to market conditions. Revenues
from our Internet business group decreased from $26.1 million in the second
quarter of fiscal 2001 to $12.1 million in the second quarter of fiscal 2002.
Net sales from
12
businesses that have been discontinued by us are included in our End of Life
business segment. Net sales from that group were essentially zero in the second
quarter of fiscal 2002, down from $12.4 million in the same quarter of the prior
year.
Net sales for the first two quarters of fiscal 2002 decreased by $114.0
million, or 31%, to $256.9 million from $370.9 million for the first two
quarters of fiscal 2001. Analog revenues decreased $65.9 million to $104.4
million in the first two quarters of fiscal 2002 primarily due to market
conditions. Internet revenues decreased $26.1 million, or 53%, in the first half
of fiscal 2002 as compared to the first half of fiscal 2001, mainly due to the
strong production ramp of Maverick(R) processors for MP3 players in advance of
last year's Christmas season. Revenues from discontinued businesses in the first
two quarters of fiscal 2002 were $0.1 million compared to $23.7 million in the
first two quarters of fiscal 2001. Corporate and all other net sales decreased
$11.0 million in the first six months of fiscal 2002 versus the comparable
period of the prior year while Magnetic Storage net sales increased $12.6
million during the same time period.
We do not expect to record any revenues related to our magnetic storage
business, comprised previously of sales mainly to Fujitsu, Western Digital and
Hitachi, Ltd., in the third or fourth quarters of fiscal 2002.
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 79% and 78% of total sales in the
second quarter of fiscal 2002 and fiscal 2001, respectively, and were 89% and
77% of total sales in the first two quarters 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 second fiscal quarter of 2002, sales to Thomson Mutimedia S.A.
and Fujitsu accounted for 12% and 11% of net sales, respectively. During the
first half of fiscal 2002, sales to Fujitsu and Western Digital represented 33%
and 14% of net sales, respectively. As set forth above, we do not anticipate any
sales to Fujitsu or Western Digital in the third or fourth quarters of fiscal
2002. Sales to Fujitsu comprised approximately 22% of sales in the second
quarter of fiscal 2001 and 19% of sales in the first half of fiscal 2001.
GROSS MARGIN
Gross margin as a percentage of net sales was 40% in the second quarter of
fiscal 2002, down slightly from 42% in the second quarter of fiscal 2001. Gross
margin as a percentage of net sales was 20% and 41% in the first half of fiscal
2002 and 2001, respectively. The significant reduction in gross margin during
first half of fiscal 2002 was primarily the result of inventory charges recorded
during the period. During the first half of fiscal 2002, we recorded a net
inventory charge of $36.2 million related to exiting the magnetic storage
business and a charge of $12.7 million, mainly to reserve inventory that was
excess to short-term usage forecasts.
As discussed more fully in Note 12 to the financial statements, the Company
acquired ShareWave and LuxSonor during October 2001 and also expects to complete
its acquisition of Stream Machine during the third quarter of fiscal 2002. In
conjunction with completing these acquisitions and the recent workforce
reductions and change in business model, the Company will be reviewing and
prioritizing its entire product portfolio during the third quarter of fiscal
2002 and may decide to discontinue selling certain products. The Company
currently believes all products are carried at amounts not exceeding net
realizable value less selling costs.
13
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense for the second quarter of fiscal 2002 of
$27.0 million decreased $7.5 million, or 22%, from $34.5 million in the second
quarter of fiscal 2001. During the first two quarters of fiscal 2002, research
and development expense decreased $7.8 million, or 12%, from the comparable
period of the prior year. The decrease for both the three and six month periods
was mainly due to the implementation of cost reduction and expense control
measures, including the workforce reduction in May 2001, and a reduction in mask
expense in fiscal 2002. Included in research and development expense for the
first half of fiscal 2002 was $1.9 million related to the write-off of
in-process research and development associated with the acquisition of Peak
Audio. Despite the decline in absolute dollar amounts, research and development
expense as a percentage of net sales increased from 18% to 35% in the second
quarter of fiscal 2001 and 2002, respectively, and from 18% to 22% in the first
two quarters of fiscal 2001 and 2002, respectively, primarily due to the
significant reduction in our net sales in the current fiscal year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense in the second quarter of fiscal
2002 decreased $6.9 million, or 24%, to $22.4 million from $29.3 million in the
second quarter of fiscal 2001. During the first two quarters of fiscal 2002,
selling, general and administrative expense decreased to $57.8 million from
$65.6 million in the comparable period of the prior year, a decline of 12%. The
decrease for both time periods was primarily related to cost reduction and
expense control measures implemented in the current year. As a percentage of net
sales, selling, general and administrative expense for the second quarter and
first six months of fiscal 2002 increased 14% and 4%, respectively, from the
same periods in fiscal 2001 due to the substantial reduction in the Company's
net sales in fiscal 2002.
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 at that time. During the first quarter of fiscal 2002, we recorded a
charge of $1.9 million to cover costs associated with these workforce
reductions.
During the second quarter of fiscal 2001, we recorded $1.8 million in
income due to the final resolution of the MiCRUS restructuring agreement. 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 ("Basis").
REALIZED GAINS ON THE SALE OF MARKETABLE EQUITY SECURITIES AND INVESTMENTS
During the first quarter of fiscal 2002 and the second and first quarters
of fiscal 2001, we recorded gains of $1.2 million, $1.9 million and $1.1
million, respectively, related to the sale of call options in Openwave Systems,
Inc. (formerly known as Phone.com) common stock. 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 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 essentially zero for the second fiscal quarter of 2002
compared to $5.1 million for the second quarter of fiscal 2001. Interest expense
was $0.1 million for the first two fiscal quarters of 2002 compared to
14
$10.1 million for the first two fiscal quarters of 2001. The decrease in
interest expense was 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 $1.5 million for the second quarter of fiscal 2002 and
$4.3 million for the second quarter of fiscal 2001. Interest income was $4.3
million for the first six months of fiscal 2002 and $9.1 million for the first
six months of fiscal 2001. The decrease for both the three-month and six-month
periods was primarily due to lower cash and cash equivalent balances, on which
interest was earned during fiscal 2002, and to lower interest rates in fiscal
2002. Additionally, we recorded non-recurring interest income in the first
quarter of fiscal 2001 of $1.4 million related to interest received on two
outstanding notes receivable that had previously been written off.
INCOME TAXES
We have accrued no income tax expense for the fiscal quarter and the two
fiscal quarters ended September 29, 2001 because of the losses incurred for
those time periods 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 $10.4 million of cash and cash equivalents in our
operating activities during the first six months of fiscal 2002 and generated
approximately $4.0 million of cash and cash equivalents during the first six
months of fiscal 2001. The cash used by operating activities in the first half
of fiscal 2002 was primarily due to a decline in accounts payable and accrued
liabilities, and the net loss recognized during the period. These uses of cash
were partially offset by non-cash charges related to inventory reserves and a
decrease in accounts receivable and gross inventory levels. The cash provided by
operations in the first half of fiscal 2001 was primarily the result of
operating profits, partially offset by increases in inventory and accounts
receivable.
We used $11.6 million in cash for investing activities during the first two
quarters of fiscal 2002, primarily due to the acquisition of Peak Audio,
compared to cash provided by investing activities of $121.9 million during the
comparable period of fiscal 2001. The cash provided by investing activities for
fiscal 2001 was primarily due to the sale of our interest in Basis.
We used $64.4 million in cash for financing activities during the first six
months of fiscal 2002 primarily related to the repurchase of approximately 6.4
million shares of stock for $68.7 million. During the first six months of fiscal
2001, we used $15.2 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.
As of September 29, 2001, we had $176.8 million of cash, cash equivalents
and restricted cash. We currently have 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.
15
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
There are numerous factors that affect our business and the results of our
operations. These factors include strong competition in the integrated circuit
market; general economic and business conditions, including a downturn in our
industry; our ability to introduce new products on a timely basis and market
acceptance of those new products; the level of demand for our existing products;
our ability to efficiently integrate acquired businesses; delays in product
development; customer demand for our products; defects in our products, which
could reduce the sales of those products or result in claims against us; risks
associated with our significant international sales; potential intellectual
property claims; our ability to effectively manage our operating costs
consistent with our reduced revenue forecasts; adverse results of current
litigation; continued investments in research and development, which is required
for us to develop new products; 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 disrupt our
receipt of shipments we need for our products or disrupt our delivery of
products to customers. For a discussion of these and other factors affecting our
business, see "Item 1 - Business - Factors That May Affect Future Operating
Results" in our Annual Report on Form 10-K for the year ended March 31, 2001.
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.
16
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 9 to the financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
A list of exhibits is set forth in the Exhibit Index found on page 18 of
this report.
(b) Reports on Form 8-K:
We filed two reports on Form 8-K during the quarter ended September 29,
2001. On July 20, 2001, we filed a Form 8-K announcing definitive agreements to
acquire LuxSonor Semiconductors, Inc. and ShareWave, Inc. On August 13, 2001, we
filed a Form 8-K announcing a definitive agreement to acquire Stream Machine
Company. We filed one report subsequent to the end of the fiscal quarter. On
October 4, 2001, we filed a Form 8-K regarding our October 1, 2001 press release
in which we provided earnings guidance for the second fiscal quarter of 2002 and
announced an upcoming workforce reduction.
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/ STEVEN D. OVERLY
Steven D. Overly
Senior Vice President of Administration, acting Chief
Financial Officer, and General Counsel
Date: November 13, 2001
17
EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
Exhibit 2.1 Agreement of Merger, dated July 18, 2001, by and among the
Company, Target Acquisition Corporation (a wholly owned
subsidiary of the Company), LuxSonor Semiconductors, Inc.
and Shareholders' Representative.
Exhibit 2.2 Agreement of Merger, dated July 18, 2001, by and among the
Company, Target I Acquisition Corporation (a wholly owned
subsidiary of the Company), ShareWave, Inc. and
Shareholders' Representative.
Exhibit 2.3 Amendment No. 1, dated September 27, 2001, to Agreement of
Merger, dated July 18, 2001, by and among the Company,
Target I Acquisition Corporation, ShareWave, Inc. and
Shareholders' Representative.
Exhibit 2.4 Agreement and Plan of Reorganization, dated August 9, 2001,
by and among the Company, Cirrus Logic SM Acquisition
Corporation (a wholly owned subsidiary of the Company),
Stream Machine Company and Shareholders' Agent.
</Table>
18