Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required) for the fiscal year ended March 28, 1998
Commission file Number 0-17795
CIRRUS LOGIC, INC.
(Exact name of registrant as specified in its charter.)
CALIFORNIA 77-0024818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Warren Avenue, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(510) 623-8300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of June 1, 1998 was approximately
$540,908,000 based upon the closing price reported for such date on the
Nasdaq National Market. For purposes of this disclosure, shares of
Common Stock held by persons who hold more than 5% of the outstanding
shares of Common Stock and shares held by officers and directors of the
Registrant have been excluded because such persons may be deemed to be
affiliates. This determination is not necessarily conclusive.
The number of outstanding shares of the registrant's common stock,
no par value, was 66,331,318 as of June 1, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual
Meeting of Shareholders to be held July 21, 1998 are incorporated by
reference into Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
Cirrus Logic, Inc., ("Cirrus Logic" or the "Company") was
incorporated in California on February 3, 1984, as the successor to a
research corporation which had been incorporated in Utah in 1981. The
Company commenced operations in November 1984. This Form 10-K contains
forward-looking statements within the meaning of the Private Securities
Reform Litigation Act of 1995. Such forward-looking statements are
subject to risks and uncertainties which could cause actual results to
differ materially from those projected. Such risks and uncertainties
include the timing and acceptance of new product introductions, the
actions of the Company's competitors and business partners, and those
discussed below in Management's Discussion & Analysis.
Cirrus Logic designs and manufactures advanced integrated circuits
that integrate algorithms and mixed-signal processing for mass storage,
communications, consumer electronics and industrial markets. The
Company's expertise in advanced mixed-signal processing, embedded
processors and application-specific algorithms add high value to major
brands worldwide in magnetic and optical storage; networking
communications; consumer/professional audio, video and imaging; and
ultra-precision data acquisition.
The Company serves a broad customer base in the markets of mass
storage, personal computers (PCs), communications, consumer electronics
and industrial electronics. Key customers among these include Western
Digital, Seagate, Fujitsu, Hewlett-Packard, Dell, Compaq, IBM, Apple,
Acer, NEC, Cisco Systems, Bay Networks, Motorola, Nokia, Sony, 3Com, Bose,
National Instruments, Rockwell Automation and Schlumberger.
Markets and Products
Cirrus Logic targets large existing markets, as well as emerging
markets that derive value from the Company's expertise in advanced
mixed-signal processing, embedded processors and application-specific
algorithms. The Company applies its analog, digital, mixed-signal
design capabilities, systems-level engineering and software expertise
to create highly integrated solutions that enable its customers to
differentiate their products and reduce their time to market. These
solutions are implemented primarily in ICs and related software, but
may also include subsystem modules or system equipment designs and
related software.
Within the major markets currently served, represented by mass
storage, communications, consumer electronics, industrial electronics
and personal computers, the Company's products address key system-level
applications including magnetic and optical mass storage, multimedia
(graphic, video, and audio), wide area and local area networking, hand-
held and portable computing, communication devices, consumer audio
and industrial measurement and control.
In the third quarter of fiscal 1998 the Company discontinued
certain product development efforts in the graphics product group of
its PC products division. Further, the Company's future direction is
to de-emphasize new product developments targeted primarily for the PC
motherboard and emphasize non-PC motherboard market opportunities in
mass storage, communications, consumer electronics and industrial
automation. However, sales of many of the Company's products will
continue to depend largely on the sales of PCs.
Mass Storage
The Company supplies integrated circuits that perform the key
electronics functions contained in advanced magnetic, optical and
removeable disk drives. Since pioneering the IDE (integrated drive
electronics) standard for embedded disk drive controllers in 1986, the
Company has helped engineer the development of higher capacity 3.5-inch
disk drives for desktop computers and workstations and 2.5-inch form
factor drives for portable computers. The Company continues to be a
merchant supplier of controllers to the disk drive market. In
fiscal 1995, the Company continued its strategy of expanding its
opportunity in the disk drive electronics market by pioneering
development of CMOS digital read channels. The Company's mass storage
customers include Western Digital, Fujitsu, Hitachi, Seagate and Sony.
The following mass storage products are expected to be the most important
in the near term:
Description Key Features Status
----------------- ------------------------------------- ------------------
Advanced Architecture Advanced data handling and error-detection/ In production
PC AT-UDMA33/66 correction capabilities for data integrity (UDMA33) and
Disk Controllers in high-performance hard disk drives. sampling (UDMA66)
Multiple products.
Digital PRML Single-chip digital read/write channel In production.
Read/Write Channels solutions. Advanced digital signal
processing algorithms allow more data
per disk. Multiple products.
Single-chip 1394 Single-chip IEEE 1394 (Firewire) CMOS disk Sampling.
Disk Controller controller incorporating the mixed-signal
PHY layer and Link layer.
Single-chip Drive Single-chip electronics solution Sampling.
Electronics Platform incorporating the PRML Read Channel,
PC AT UDMA66 Disk Controller, ARM 16-bit
RISC processor, micro-DSP, ROM, RAM
and Servo Logic.
Single-chip ATAPI High data rates (up to 45x speeds), and In production.
CD-ROM Controllers hardware error detection/correction
capabilities for simplified firmware
development. Multiple products.
SCSI and ATAPI High integration and performance (up to In production.
CD-R/RW 26x read and 8x recording). Handles
(Recordable/Readable both CD-R and CD-RW formats. Advanced
- -Writable) Controllers automation for simplified firmware
development. Multiple products.
Integrated DVD High integration DVD Drive Electronics, Sampling.
Drive Manager incorporating PRML Read Channel, servo
control and decoder functions for DVD-
ROM and DVD-Player applications.
The Company offers a broad family of magnetic storage controller
products for the AT IDE, UDMA and IEEE 1394 (Firewire) interface
standards. To achieve the high recording densities required by disk
drives, the Company has pioneered a number of controller innovations,
including 88-bit Reed-Solomon error correction, zone-bit recording and
split-data fields.
The Company began volume shipments of its magnetic storage read
channel products in fiscal 1995, and was the first merchant supplier to
provide key data-detection technology known as partial-response,
maximum-likelihood ("PRML") for 3.5-inch and small-form-factor drives.
Based on the Company's CMOS mixed-signal technology and its proprietary
SofTarget PRML technology, these devices substantially increase the
amount of data that can be stored on a disk platter using existing
industry-standard head and media technology. The Company has
recently introduced extended technology PRML (ERP4 and E2PR4) read
channels.
On March 30, 1998, the Company announced its entry into the DVD
market. The DVD Drive Manager integrates on one piece of silicon the
RF Amp circuitry, PRML read channel, full servo subsystem, ECC and
decoder for both DVD and CD-ROM drives and CSS decryption circuitry.
The DVD Drive Manager can be used for either DVD-ROM or DVD-Player
applications.
The Company entered the CD-ROM decoder market in fiscal 1995 and
is currently on its fourth generation of decoder product, supporting
speeds up to 45x. In fiscal 1997, the Company introduced its first
controller products for recordable/rewritable CD drives. The second
generation of CD-R/CD-RW products is currently in production,
supporting up to 8x write and 26x read speeds.
Communications
The Company develops and markets products that address the needs
of the Local Area Network (LAN), Wide Area Network (WAN), and internet
environments. The following communications products are expected to be
the most important in fiscal 1999:
Description Key Features Status
----------------- ------------------------------------- ------------------
x2 56K, V.90 Further developments within family x2 56K in
and ISDN FastPath roadmap to support voice and data, production, V.90
modems video conferencing, and high-speed in sampling and
lines. Multiple products. ISDN in develop
V.34+ FastPath Highly integrated voice/data/modem In production.
modem chipsets offering 33.6 Kbps
performance. Multiple products.
Multi-protocol Extensive family of intelligent multi- In production.
Serial I/O protocol input/output devices, reducing
Controllers processor overhead burden in communications
equipment. Multiple products.
Local Area Highest level of integration, simplified In production.
Network Controllers design of 10BASE-T and 10/100 local area
network controllers and single and multi-
channel analog front ends for motherboards,
interface cards and network equipment.
Two products.
T1/E1 Line Broad family of high-performance, mixed- In production.
Interface signal devices for interfacing network
Controllers equipment and end-user equipment to T1 and
E1 lines. Multiple products.
The Company provides products that meet the needs of both the host
or Internet Service Provider ("ISP") end of the information pipeline
(high-density, multichannel devices) as well as that of the client or
end user (single-channel devices and internet enabling systems-on-a-
chip). From a client application standpoint, the Company's products
are designed to support fax over internet, internet enabled screenphones,
and IP enabled cellular smartphones and palm form factor PDAs. Products
are plan to support the emerging xDSL/G-Lite standards.
Some of the industry firsts include: monolithic T1 line interface,
CMOS coax Ethernet Transceiver, low power system-on-a-chip for
internet enabled appliances, and HDLC controllers with embedded ARM
processor.
The Company's specific product offerings within each key market
environment include the following:
LAN - Physical layer interface ICs (PHYs), Ethernet 10/100
Transceivers, and Ethernet controllers provide the analog-to-
digital and digital-to-analog conversion and Media Access
Control (MAC) for Ethernet LAN connections.
WAN - Universal T1/E1 Line Interface Units (LIU) and framers,
serial and parallel I/O controllers, high-level data link
controllers (HDLC) and ATM controllers provide the analog-to-
digital and digital-to-analog conversion, packetizing, and data
formatting support at the WAN level.
Internet (IP) Connectivity - ARM processor based system-on-a-
chip solutions provide a foundation enabling access to the
internet via commonly used communications devices such as
cellular phones, screenphones, and connected PDAs.
The Company's customers for these products include Cisco Systems,
3COM, Bay Networks, Hewlett Packard, IBM, Motorola, Psion, Sony, and
Scientific Atlanta.
Advanced Mixed-Signal Applications
Cirrus Logic designs, manufactures and markets advanced analog and
digital integrated circuits for data acquisition, instrumentation and
imaging applications. The Company's Crystal brand is recognized for
providing high-performance mixed-signal and signal processing solutions
to these markets. The Company's broad line of analog-to-digital
converters consist of general-purpose and low-frequency measurement
devices. These circuits use a combination of self-calibrating digital
correct and delta sigma architectures to improve accuracy and eliminate
expensive discrete analog components.
In addition to supporting a discrete product family, the Company's
advanced mixed-signal expertise design techniques are applied to IC
solutions across the Company's product line. The Company is an
acknowledged leader in precision analog circuits and mixed-signal
applications and the exploitation of this expertise is an important
component of the Company's strategy.
Cirrus Logic's product family includes more than 100 products used
in industrial automation, instrumentation, medical, military and
geophysical applications. The Company's customers include National
Instruments, Rockwell Automation and Schlumberger.
Consumer Electronics Products
The Company currently offers over 60 products for the consumer
high-fidelity audio market. Product features include analog-to-digital
and digital-to-analog conversion and a family of DSP-based audio
decoders that support the major audio standards such as Dolby AC-3, DTS
and 5.1 Channel MPEG audio decoding. The products provide digital
high-fidelity audio record and playback for high-end professional
recordings audiophile-quality stereo systems, set-top audio decoders,
digital audio tape ("DAT"), CD players, Compact Disk Interactive
("CDI") and automotive stereo systems. Customers include Philips, Nokia
and Sony.
The Company also offers controller ICs to the consumer
electronics market which can output digital content such as internet
web content to standard televisions. These products are being used by
customers to develop products such as set-top boxes and Internet
appliances. During the year, the Company began volume production of a
highly integrated chip set for digital cameras. The products provide a
low-cost high-quality solution for industrial, security home video
conferencing and PC-based video conferencing.
The following are expected to be important consumer electronic
products in fiscal 1999:
Description Key Features Status
----------------- ------------------------------------- ------------------
Multi-standard, Simplify home entertainment systems In production.
Multi-channel by meeting multiple popular standards
Audio Decoders (Dolby, Digital Theatre Systems,
MPEG-2) with single-chip solutions.
CCD Video Camera Reduce the cost of digital cameras for In production.
Chipset security systems, pattern recognition,
home videoconferencing and PC
videoconferencing.
PC Audio
The Company offers a wide array of audio products for multimedia
PCs. These highly integrated chips and software bring CD-quality sound
and studio quality composition and mixing capabilities to PCs and
workstations.
The Company is a leading supplier of 16-bit stereo codecs for
PCs. These mixed-signal devices use the Company's delta sigma
technology to provide high-quality audio input and output functions
for PC audio products, including those that offer Dolby Digital (AC-3),
SoundBlaster, AdLib and Microsoft Sound compatibility. The Company's
audio chips also provide PCs with audio decompression and FM and wavetable
sound/music synthesis. The Company's leading audio product is now
a highly integrated single-chip audio product that integrates codec,
SoundBlaster and FM synthesis functions. The Company has recently begun
production of products which provide special effects audio technology,
allowing PC game players to perceive sound as coming from various
points around them in a 3-D space.
The following are expected to be the most important of the
Company's PC audio products in fiscal 1999.
Description Key Features Status
----------------- ------------------------------------- ------------------
Audio Codecs Digital-to-analog converters for PC and In production.
workstation audio. Multiple products.
ISA Audio High-integration ISA bus PC audio In production.
controllers. Highest audio quality,
Sound Blaster and FM synthesis with
option SRS or Qsound Spatial audio
effects. Multiple products.
PCI Audio High-integration PCI bus PC audio In production.
Controllers controllers. Range of low-cost to high-
performance DSP-based solutions.
DSP solutions offer advanced audio
processing such as Dolby AC-3 for
DVD content playback. Multiple
products.
PC Graphics and Video
The Company is a supplier of graphics accelerators and
integrated graphics/video accelerators for desktop and portable PCs.
The majority of graphics revenues come from the Company's 64-bit
graphics accelerators for cost-sensitive and mainstream desktop PCs.
These products are implemented in several pin-compatible families which
offer a range of price/performance solutions for OEMs and graphics
board makers. As a companion product to its graphics/video
accelerators, the Company also provides an NTSC video encoder for high-
quality digital display on a standard television monitor. While the
Company has discontinued any further product development efforts in the
PC graphics market, it plans to continue support of current products to
major OEMs and add-in card manufacturers.
Emerging Product Opportunities
The Company is also engaged in developing and is producing high-
integration system-on-a-chip solutions for dedicated Internet
appliances, Network Computers, handheld and ultra-portable computing
and communications appliances such as Personal Communicators. The Company
is currently manufacturing a family of system-on-a-chip products for the
handheld market. The Company's products in this market incorporate a CPU
core licensed from Advanced RISC Machines (ARM) Limited.
Manufacturing
Historically, the Company relied for its wafer manufacturing needs
upon merchant wafers manufactured by outside suppliers. In much of
1994 and 1995, the merchant market was unable to meet demand, and the
Company's merchant wafer suppliers sought to limit the proportion of
wafers they sold to any single customer, which further restricted the
Company's ability to buy wafers. Wafer shortages increased the
Company's supply costs and at times prevented the Company from meeting
the market demand for its own products. In response to its rapid
growth, and to historical and anticipated supply shortages, the Company
has pursued a strategy to expand its wafer supply sources by taking
direct ownership interests in wafer manufacturing joint ventures.
In 1994, the Company and IBM formed MiCRUS, a manufacturing joint
venture that produces wafers for both companies. MiCRUS began
operations in 1995. In July 1996, the Company and Lucent Technologies
formed Cirent Semiconductor, a manufacturing joint venture that
produces wafers for both companies. Cirent Semiconductor began
operations in 1997. The Company believes that it will also continue to
rely on merchant wafer suppliers for a portion of its wafer
requirements.
The Company's manufacturing strategy is intended to provide the
following benefits:
Assured Capacity. The first goal is to secure capacity to provide
improved control over wafer supplies, particularly during
periods of heightened industry-wide demand.
Advantageous Cost Structure. Wafers produced by joint ventures, such
as MiCRUS and Cirent, are potentially less expensive than merchant
wafers. Increasing its supply of wafers from such joint ventures
may help the Company achieve lower manufacturing costs than its
competitors.
Access to Leading Process Technologies. By partnering with world
class manufacturers such as IBM and Lucent Technologies, the
Company can access leading process technologies which allows it to
reduce product cost, increase performance and increase
functionality.
In addition to its wafer supply arrangements, the Company
currently contracts with third party assembly vendors to package the
wafer die into finished products. The Company qualifies and
monitors assembly vendors using procedures similar in scope to those
used for wafer procurement. Assembly vendors provide fixed-cost-per-
unit pricing, as is common in the semiconductor industry.
During fiscal 1998, the Company started outsourcing a substantial
portion of its production testing. As of May 23, 1998, the Company
had approximately 29% of its employees engaged in manufacturing related
activities. The Company's manufacturing division will continue to
qualify and monitor suppliers' production processes, participate in
process development, package development and process and product
characterization, perform mixed-signal production testing, support R&D
activities and maintain quality standards.
MiCRUS
IBM and Cirrus Logic own 52% and 48%, respectively, of MiCRUS, which
produces wafers using IBM's wafer processing technology (primarily CMOS
wafers with 0.35-, 0.5- and 0.6-micron technology, with 0.25-micron
technology set for production in fiscal 1999) and makes process
technology payments to IBM, which totaled $63.5 million as of March 28,
1998. MiCRUS leases an existing IBM facility in East Fishkill, New
York. Activities of the joint venture are focused on the manufacture
of semiconductor wafers, and do not encompass direct product licensing
or product exchanges between the Company and IBM. Unless extended by
the parties, the joint venture will expire on December 31, 2003.
MiCRUS is managed by a six-member governing board of whom three are
appointed by IBM, two are appointed by Cirrus Logic and one is the
chief executive officer of MiCRUS.
The Company is currently entitled to 55% of the MiCRUS output. If
either company does not purchase its full entitlement of the wafers,
that company will be liable to the joint venture for costs associated
with the underutilized capacity that results from the company's
shortfall in wafer purchases, unless the shortfall is purchased by the
other company or, under limited circumstances, offered to third
parties.
In connection with the formation and expansion of the MiCRUS joint
venture, the Company has incurred obligations to make equity
contributions to MiCRUS, to make payments to MiCRUS under a
manufacturing agreement and to guarantee equipment lease obligations
incurred by MiCRUS. To date, the Company has made equity investments
totaling $23.8 million. No additional equity investments are
scheduled. However, the expansion of the MiCRUS production facility
could require additional equity contributions by the Company.
Payments to IBM under the manufacturing agreement as of March 28, 1998
have totaled $63.5 million with the final payment of $7.5 million due
in fiscal 1999. The manufacturing agreement payments are being charged
to the Company's cost of sales over the life of the venture based upon
the ratio of current units of production to current and anticipated
future units of production over the remaining life of the venture.
Cirent Semiconductor
Cirent operates two wafer fabs in Orlando, Florida in a facility that
is leased from Lucent. Cirent uses Lucent's wafer processing
technology (primarily CMOS wafers with 0.35-micron technology) and
makes process technology payments to Lucent, which totaled $85.0
million as of March 28, 1998. Cirent is owned 60% by Lucent and 40% by
Cirrus Logic and is managed by a Board of Governors, of whom three are
appointed by Lucent and two are appointed by Cirrus Logic. The joint
venture has a term of ten years and unless the term is extended by the
parties, the joint venture will expire on August 9, 2006.
Initially, Lucent and the Company were each entitled to purchase one-
half of the output of the second fab. During the second quarter of
fiscal 1998, the Company amended its existing joint venture formation
agreement and reduced its entitlement to 25% of the output of the
second fab. If either company does not purchase its full entitlement
of the wafers, that company will be liable to the joint venture for
costs associated with the underutilized capacity that results from the
company's shortfall in wafer purchases, unless the shortfall is
purchased by the other company or, under limited circumstances, offered
to third parties.
In connection with the Cirent joint venture, the Company has committed
to make equity contributions to Cirent, make payments to Cirent under
a manufacturing agreement and to guarantee and/or become a co-lessee
under equipment lease obligations incurred by Cirent. To date, the
Company has made equity investments totaling $14.0 million. No
additional equity investments are scheduled.
Payments under the manufacturing agreement as of March 28, 1998 have
totaled $85.0 million. These payments will be charged to the Company's
cost of sales over the life of the venture based upon the ratio of
current units of production to current and anticipated future units of
production over the remaining life of the agreement.
Other Wafer Supply Arrangements
In fiscal 1996, the Company entered into a volume purchase
agreement amended with TSMC, which was amended in September 1997 and
expires in December 2000. Under the agreement, the Company will
purchase from TSMC 50% of its wafer needs that are not filled by MiCRUS
and Cirent, provided that TSMC can meet the technological and other
requirements of the Company's customers. TSMC is committed to supply
these wafer needs. The amendment removed the requirements contained in
the original agreement that the Company purchase a fixed minimum number
of wafers each year and that the Company make sizable advance payments.
In July of 1997, the Company terminated the joint venture and
foundry capacity agreement it had entered into with UMC, a Taiwanese
Company, in the fall of 1995 and recovered the cumulative costs of its
investment in the venture.
Patents, Licenses and Trademarks
To protect its products, the Company relies heavily on trade
secret, patent, copyright, mask work and trademark laws. The Company
applies for patents and copyrights arising from its research
and development activities and intends to continue this practice
in the future to protect its products and technologies. The
Company presently holds more than 350 U.S. patents, and in several
instances holds corresponding international patents, and has more than
400 U.S. patent applications pending. The Company has also licensed a
variety of technologies from outside parties to complement its own
research and development efforts. The Company is also receiving brand
recognition of its products. For example, the Crystal(R) name has
become a well recognized brand for high-quality audio DAC's (digital-to-
analog converters) and industrial ADC's (analog-to-digital converters).
Research and Development
Research and development efforts concentrate on the design and
development of new products for each market and on the continued
enhancement of the Company's design automation tools. Product-oriented
research and development efforts are organized along its Mass Storage
Products, Communication Products, Crystal Semiconductor Products and
Personal Computer Product Divisions. The Company also funds certain
advanced process technology development as well as other emerging
product opportunities. Expenditures for research and development in
fiscal 1998, 1997, and 1996 were $179.6 million, $230.8 million and
$238.8 million, respectively. As of May 23, 1998, the Company had
approximately 40% of its employees engaged in research and development
activities. The Company's future success is highly dependent upon its
ability to develop complex new products, to transfer new products to
production in a timely fashion, to introduce them to the marketplace
ahead of the competition and to have them selected for design into
products of leading systems manufacturers.
Competition
Markets for the Company's products are highly competitive, and
the Company expects that competition will increase. The Company
competes with other semiconductor suppliers who offer standard
semiconductors, application-specific integrated circuits and
fully customized integrated circuits, including both chip- and board-
level products. A few customers also develop integrated
circuits that compete with the Company's products. The Company's
competitive strategy has been to provide lower-cost versions of
existing products and new, more advanced products for customers' new
designs.
While no single company competes with the Company in all of the
Company's product lines, the Company faces significant competition in
each of its product lines. The Company expects to face additional
competition from new entrants in each of its markets, which may include
both large domestic and international semiconductor manufacturers
and smaller, emerging companies.
The principal competitive factors in the Company's markets
include time to market; quality of hardware/software design and end-
market systems expertise; price; product benefits that are
characterized by performance, features, quality and compatibility with
standards; access to advanced process and packaging technologies at
competitive prices; and sales and technical support.
Competition typically occurs at the design stage, where the
customer evaluates alternative design approaches that require
integrated circuits. Because its products have not been available
from second sources, the Company generally does not face direct
competition in selling its products to a customer once its integrated
circuits have been designed into that customer's system. Nevertheless,
because of shortened product life cycles and even shorter design-in
cycles, the Company's competitors have increasingly frequent
opportunities to achieve design wins in next generation systems.
In the event that competitors succeed in supplanting the Company's
products, the Company's market share may not be sustainable and net
sales, gross margin, and earnings would be adversely affected.
Sales, Marketing and Technical Support
The Company's products are sold worldwide, and historically 50-65%
of revenues have come from shipments to overseas destinations. The
Company maintains a worldwide sales force with a matrixed organization,
which is intended to provide centralized coordination of strategic accounts,
territory-based local support and coverage of smaller customers, and
specialized selling of product lines with unique customer bases.
The domestic sales force includes a network of regional direct sales
offices located in California, Florida, Illinois, Maryland,
Massachusetts, North Carolina, Oregon, and Texas. International sales
offices and organizations are located in Taiwan, Japan, Singapore,
Korea, Hong Kong, China, the United Kingdom, Germany, France and
Barbados. The Company supplements its direct sales force with sales
representative organizations and distributors. Technical support staff
are located at the sales offices and also at the Company's facilities
in Fremont, California; Broomfield, Colorado; Austin, Texas;
Greenville, South Carolina and Raleigh, North Carolina.
Two customers accounted for approximately 19% and 11%, respectively
of net sales in fiscal 1998. One customer accounted for approximately
10% of net sales in fiscal 1997. In fiscal 1996 no customer
represented 10% or more of net sales. The loss of a significant
customer or a significant reduction in such a customer's orders could
have an adverse effect on the Company's sales.
Export sales information is incorporated by reference from the
section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II hereof.
Backlog
Sales are made primarily pursuant to standard short-term purchase
orders for delivery of standard products. The quantity actually
ordered by the customer, as well as the shipment schedules, are frequently
revised to reflect changes in the customer's needs. Accordingly, the Company
believes that its backlog at any given time is not a meaningful indicator
of future revenues.
Employees
As of May 23, 1998, the Company had approximately 1,857 full-time
equivalent employees, of whom 40% were engaged in research and product
development, 31% in sales, marketing, general and administrative and
29% in manufacturing. The Company's future success will depend, in part,
on its ability to continue to attract, retain and motivate highly qualified
technical, marketing, engineering and management personnel. The Company
believes that its employee relations are good. None of the Company's
employees are represented by any collective bargaining agreements, although
Cirent Semiconductor is staffed by Lucent Technologies' employees who are
represented by a union.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with regard to
executive officers of Cirrus Logic, Inc. (ages are as of June 1, 1998):
Michael L. Hackworth (age 57), a founder of the Company, was
appointed Chairman of the Board, President and Chief Executive Officer
in July 1997. He served as President, Chief Executive Officer and a
director from January 1985 to July 1997. He is also a director of
Read-Rite Corporation. Previously he was employed by Signetics
Corporation for over thirteen years, most recently as Senior Vice
President of MOS and Linear Products.
Suhas S. Patil (age 53), a founder of the Company, was named
Chairman Emeritus in July 1997. He has served as a Director since the
Company was founded in 1984 and as Chairman of the Board from 1994 to
July 1997. He served as Vice President, Research and Development until
March 1990 and Executive Vice President, Products and Technology
through April 1997. He is also a director of CyberMedia, Inc.
George N. Alexy (age 49) has resumed the position of Senior
Vice President, Corporate Marketing. He was in the Office of the
President and also served as Chief Products and Marketing Officer from
April 1997 to March 1998, when that office was dissolved. He joined
the Company in 1987 as Vice President, Marketing and in May 1993, he
was promoted to Senior Vice President, Marketing. Previously, he was
employed by Intel Corporation for ten years, most recently as Product
Marketing Manager, High Performance Microprocessors.
Patrick V. Boudreau (age 57) joined the Company in October 1996
as Senior Vice President, Human Resources. He was Vice President,
Human Resources for Fujitsu Microelectronics from 1995 to 1996. From
1989 to 1995, he was President of P.V.B. Associates, a management
consulting and executive search firm, as well as Senior Vice President
of Lazer-Tron Corporation.
Eric C. Broockman (age 43) was appointed to the position of
Vice President and General Manager, Crystal Semiconductor Products
Division in April 1997. He joined the Company in February 1995 as Vice
President and General Manager, Network Broadcast Products Division.
Prior to joining the Company, he was employed by IBM for 16 years, most
recently as Product Line Manager, DSP Business Unit.
Henry M. Josefczyk (age 60) joined the Company in November 1997,
as Senior Vice President, Worldwide Sales. Prior to joining the
Company, he served as Vice President of Sales and Marketing for NKK
Micro Devices from September 1996 to November 1997 and Vice President
of Worldwide Sales for IC Works from June 1992 to September 1996.
Steven Dines (age 44) was appointed Vice President and General
Manager, Mass Storage Products Division in May 1997. He joined the
Company in May 1991 as Member, Corporate Strategic Staff and in
December 1991, he assumed the position of Director, Mass Storage
Products Marketing. In November 1993, he was promoted to Vice
President, Mass Storage. Prior to joining the Company he spent twelve
years at Advanced Micro Devices, most recently as Director, Strategic
Marketing for Europe and with IMP, Inc. as Director, Product Planning
and Applications.
Robert F. Donohue (age 55) joined the Company in May 1996 as
Vice President, Chief Legal Officer, General Counsel and Secretary.
Prior to joining the Company, he was Vice President, General Counsel
and Secretary of Frame Technology Corporation from 1993 to 1996 and
Vice President, General Counsel and Secretary of Cadence Design
Systems, Inc. from 1989 to 1993.
Michael D. Shealy (age 50) was appointed Vice President and
General Manager of the Communications Division in September 1997.
Prior to joining the Company, he served at Compaq Computer as the Vice
President of the Small and Medium Business Solutions Division from July
1996 and as Vice President of Emerging markets from August 1995 to July
1996. From April 1993 to August 1995, he was a senior executive at
AT&T Paradyne serving as the Vice President and General Manager of the
Personal Access Products business and Vice President of Strategic
Development. Prior to joining AT&T, he was the President and CEO of
Digital Technology, Inc.
Edward C. Ross (age 56), joined the Company in September 1995
as President, Worldwide Manufacturing Group. In April 1997, he became
President, Manufacturing and Technology. Prior to joining the Company,
he was President of Power Integrations, a manufacturer of high-voltage
integrated circuits, from January 1989 to January 1995.
Ronald K. Shelton (age 37) was appointed Vice President,
Finance, Chief Financial Officer and Treasurer in April 1997. He
joined the Company in September 1996 as Vice President, Finance and
Corporate Controller. From April 1992 to August 1996, he was Vice
President, Finance and Administration and Chief Financial Officer of
Alliance Semiconductor Corporation. Prior to joining Alliance
Semiconductor Corporation, he held management positions with Etec
Systems, Inc., a semiconductor equipment manufacturer, and Deloitte &
Touche.
Eric J. Swanson (age 41) was appointed Vice President and Chief
Technical Officer of the Company in March 1998. He joined Crystal
Semiconductor Corporation in 1985 as Telecom/Filter Design Manager and
in 1986 we was appointed to the position of Vice President of
Technology of Crystal. Crystal merged with the Company in October
1991. Prior to joining Crystal, he was with AT&T - Bell Laboratories
from 1980 to 1985.
ITEM 2. PROPERTIES
The Company's principal facilities, located in Fremont,
California, consist of approximately 340,000 square feet of office
space leased pursuant to agreements which expire from 2003 to 2007 plus
renewal options. This space is used for manufacturing, product
development, sales, marketing and administration.
The Company's Austin, Texas facilities consist of approximately
300,000 square feet of office space leased pursuant to agreements which
expire from 1999 to 2005 plus renewal options.
The Company also has facilities located in Tempe, Arizona;
Broomfield, Colorado; Raleigh, North Carolina; Greenville, South
Carolina; Bellevue, Washington; Pune, India; and Tokyo, Japan. The
Company also leases sales and sales support offices in the United
States in California, Colorado, Florida, Illinois, Maryland,
Massachusetts, Oregon, Pennsylvania and Texas and internationally in
Taiwan, Japan, Singapore, Korea, Hong Kong, China, the United Kingdom,
Germany, France and Barbados. The Company may add additional
manufacturing and sales offices to support its business needs.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its customers from time to time have been
notified that they may be infringing certain patents and other
intellectual property rights of others. Further, customers have been
named in suits alleging infringement of patents by the customer
products. Certain components of these products have been purchased
from the Company and may be subject to indemnification provisions made
by the Company to the customers. The Company has not been named in any
such suits. Although licenses are generally offered in such
situations, there can be no assurance that litigation will not be
commenced in the future regarding patents, mask works, copyrights,
trademarks, trade secrets, or indemnification liability, or that any
licenses or other rights can be obtained on acceptable terms.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National
Market under the symbol "CRUS." The following table shows for the
periods indicated the high and low closing prices for the Common
Stock.
High Low
------ ------
Fiscal year ended March 30, 1996
First quarter 33.69 17.06
Second quarter 59.63 31.00
Third quarter 55.50 19.75
Fourth quarter 26.38 17.13
Fiscal year ended March 29, 1997
First quarter 25.13 16.88
Second quarter 21.88 13.38
Third quarter 24.13 15.75
Fourth quarter 17.11 10.77
Fiscal year ended March 28, 1998
First quarter 13.00 8.50
Second quarter 17.56 10.31
Third quarter 17.44 10.38
Fourth quarter 11.38 9.69
At March 28, 1998, there were approximately 2,198 holders of
record of the Company's Common Stock.
The Company has not paid cash dividends on its Common Stock and
presently intends to continue a policy of retaining any earnings for
reinvestment in its business.
In December 1996, an offering of U.S. $300,000,000 in 6%
Convertible Subordinated Notes due December 15, 2003 ("Notes") was
made to qualified institutional buyers in reliance on Rule 144A under
the Securities Act of 1933, as amended, and to a limited number of
institutions that were accredited investors in a manner exempt from the
registration requirements of the Securities Act. The Notes were also
being offered by Goldman Sachs International, as selling agent for Goldman
Sachs & Co., Salomon Brothers International Limited, as selling agent for
Salomon Brothers Inc., J.P. Securities Ltd., as selling agent for J.P.
Morgan Securities, Inc., and Robertson, Stephens & Company LLC, outside
the United States to non-U.S. persons in reliance on Regulation S under
the Securities Act. These Notes will be convertible into shares of
Common Stock of the Registrant at any time on or after the 90th day
following the last original issue date of the Notes, and prior to the
close of business on the maturity date, unless previously redeemed or
repurchased, at a conversion rate of 41.2903 shares per $1,000
principal amount of Notes (equivalent to a conversion price of
approximately $24.219 per share).
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts, ratios and employees)
Fiscal years ended
---------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ---------- ---------- ----------
Net sales $954,270 $917,154 $1,146,945 $889,022 $557,299
Costs and expenses and gain on sale of assets and other, net:
Cost of sales 605,484 598,795 774,350 512,509 298,582
Research and development 179,552 230,786 238,791 165,622 126,632
Selling, general and administrative 117,273 126,722 165,267 126,666 91,887
Gain on sale of assets, net (20,781) (18,915) - - -
Restructuring costs and other, net 14,464 20,954 11,566 - -
Non-recurring costs - - 1,195 3,856 -
Merger costs - - - 2,418 -
---------- ---------- --------- --------- ---------
Income (loss) from operations 58,278 (41,188) (44,224) 77,951 40,198
Interest expense (27,374) (19,754) (5,151) (2,441) (2,196)
Interest income 19,893 8,053 7,759 9,129 4,280
Other income (expense), net 5,206 1,270 (107) 4,999 13,682
---------- ---------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change 56,003 (51,619) (41,723) 89,638 55,964
Provision (benefit) for income taxes 19,510 (5,463) (5,540) 28,236 18,146
---------- ---------- --------- --------- ---------
Income (loss) before cumulative effect of accounting change 36,493 (46,156) (36,183) 61,402 37,818
Cumulative effect of change in method of accounting for
income taxes - - - - 7,550
---------- ---------- --------- --------- ---------
Net income (loss) $36,493 ($46,156) ($36,183) $61,402 $45,368
========== ========== ========= ========= =========
Net income per common share - basic:
Income (loss) before accounting change $0.54 ($0.71) ($0.58) $1.03 $0.73
Cumulative effect of change in accounting principle - - - - 0.15
---------- ---------- --------- --------- ---------
Net income (loss) per common share - basic $0.54 ($0.71) ($0.58) $1.03 $0.88
========== ========== ========= ========= =========
Net income per common share - diluted:
Income (loss) before accounting change $0.52 ($0.71) ($0.58) $0.96 $0.67
Cumulative effect of change in accounting principle - - - - 0.13
---------- ---------- --------- --------- ---------
Net income (loss) per common share - diluted $0.52 ($0.71) ($0.58) $0.96 $0.80
========== ========== ========= ========= =========
Weighted average common shares outstanding:
Basic 67,333 65,007 62,761 59,707 51,838
Diluted 69,548 65,007 62,761 63,969 56,486
Financial position at year end:
Total assets $1,137,542 $1,136,821 $917,577 $673,534 $517,931
Working capital 476,154 428,670 182,643 251,619 273,527
Capital lease obligations, excluding current 5,475 9,848 6,258 9,602 7,753
Long-term debt, excluding current 32,559 51,248 65,571 16,603 11,392
Convertible subordinated notes 300,000 300,000 - - -
Total liabilities 681,199 732,624 488,911 254,518 173,616
Shareholders' equity 456,343 404,197 428,666 419,016 344,315
Current Ratio 2.40 2.17 1.44 2.10 2.77
Employees 1,774 2,557 3,151 2,331 1,854
In August 1994, the Company merged with PicoPower Technology, Inc. All
of the consolidated financial information reflects the combined
operations of the companies.
The net income (loss) per common share amounts prior to 1998 have been
restated as required to comply with Statement of Financial Accounting
Standards No. 128, Earnings Per Share. For further discussion of net
income (loss) per share and the impact of Statement No. 128, see the
notes to the consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANNUAL RESULTS OF OPERATIONS
Except for historical information contained herein, this
Discussion and Analysis contains forward-looking statements. The
forward-looking statements contained herein are subject to certain
risks and uncertainties, including, but not limited to those discussed
below, that could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly
release the results of any revision to these forward-looking
statements, which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Net Sales
Net sales for fiscal 1998 were $954.3 million, an increase of 4% from
$917.2 million in fiscal 1997. Revenues from divested businesses in
fiscal 1998 were $43.7 million compared to $100.8 million in fiscal
1997. Net sales from the core businesses in fiscal 1998 were
approximately $910.6 million compared to $816.4 million in fiscal 1997.
Excluding revenues from divested businesses, net sales in fiscal 1998
increased by $94.2 million from fiscal 1997 largely due to increased
sales in the Mass Storage Products division, primarily related to
increased unit sales of read channel devices and controllers, and $60.0
million of revenues from patent cross-license agreements which were
offset by decreased sales in the PC Products division, primarily
related to decreasing unit sales and declining average selling prices
of graphics products.
Net sales for fiscal 1997 decreased 20% from $1,146.9 million for
fiscal 1996. Sales of graphics, audio, and mass storage products
decreased in fiscal 1997 over fiscal 1996 while sales of fax/modem
products increased. The decline in net sales of graphics and audio
products in fiscal 1997 was the result of decreasing unit sales and
declining average selling prices. The decline in net sales of mass
storage products was the result of reduced sales of controller products
offset somewhat by an increase in sales of read-channel products. The
increase in net sales of fax/modem products was primarily the result of
increased sales of newer high-speed modem products.
Export sales, principally to Asia, include sales to U.S. - based
customers with manufacturing plants overseas and were approximately
$506 million in fiscal 1998 compared to approximately $568 million in
fiscal 1997 and approximately $647 million in fiscal 1996. Export
sales to the Pacific Rim (excluding Japan) were 31%, 32% and 34% of net
sales; to Japan were 15%, 22% and 17% of net sales; and to Europe and
the rest of the world were 7%, 7% and 6% of net sales, in fiscal 1998,
1997 and 1996, respectively.
The Company's sales are currently denominated primarily in U.S.
dollars. The Company currently enters into foreign currency forward
exchange and option contracts to hedge certain of its foreign currency
exposures related to sales and balance sheet accounts denominated in
yen. The Company has not experienced any significant losses related to
its foreign exchange activity.
In fiscal 1998, net sales to two customers were approximately 19% and
11%, respectively. Sales to one other customer in fiscal 1997 were
approximately 10% of net sales. In fiscal 1996, no single customer
accounted for 10% or more of net sales.
Gross Margin
The gross margin percentage was 36.6% in fiscal 1998, compared to
34.7% and 32.5% in fiscal 1997 and 1996, respectively. The gross margin
increase in fiscal 1998 was primarily a result of improved margins in
mass storage due to a change in mix within the Mass Storage Products
division towards read channel products, an overall change in product
mix within the Company towards mass storage products and $60.0 million
of patent cross-license revenues in the fourth quarter which had no
corresponding cost of sales. These improvements were offset by lower
margins in PC products and $53.0 million of charges recorded in the
fourth quarter related to wafer purchase commitments for MiCRUS and
Cirent, the Company's joint ventures. The lower margins in PC products
are primarily related to declining average selling prices on graphics
and modem products. Excluding the impact of the patent cross-license
revenues and the wafer purchase commitment charges for both fiscal 1998
and fiscal 1997, gross margins would have been 38% for both fiscal
years.
During fiscal 1997, the gross margin was adversely impacted by $34.5
million of charges that were recorded in the fourth quarter related to
wafer purchase commitments of $22.0 million and inventory write-downs
of $12.5 million. In fiscal 1996, the gross margin was adversely
impacted by $70.8 million of fourth quarter charges for inventory
write-downs, wafer purchase commitments and manufacturing variances.
Exclusive of these charges, the gross margin percentage would have been
39% in fiscal 1997 and fiscal 1996. While the gross margins in these
years were flat, they reflect reduced unit costs resulting from the
migration to larger wafers and more efficient processing technologies,
improved efficiencies at the Company's MiCRUS facility, and a decrease
in the cost of wafers and assembly services purchased from third-party
suppliers, all of which were offset by the impact of decreased average
selling prices for most of the Company's major products.
Research and Development Expenses
Research and development expenses expressed as a percentage of
net sales were 18.8%, 25.2%, and 20.8% in fiscal 1998, 1997 and 1996,
respectively. Research and development expenditures decreased in
fiscal 1998 both as a percentage of net sales and absolute dollars
primarily as a result of the divestiture of certain non-core businesses
and also as a result of the April 1997 headcount reductions which were
made in connection with the Company's realignment into four market-
focused divisions.
The absolute research and development spending decreased in fiscal
1997 over fiscal 1996 primarily due to divestitures.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses expressed as a percentage
of net sales represented approximately 12.3%, 13.8% and 14.4% in fiscal
1998, 1997 and 1996, respectively. The decreases as a percentage of net
sales and in absolute dollars were primarily a result of the divestiture
of certain non-core businesses in fiscal 1998 and to the April 1997
headcount reductions which were made in connection with the Company's
realignment into four market-focused divisions.
Both the percentage of net sales and the absolute spending decreased
in fiscal 1997 over fiscal 1996 were primarily a result of reductions
in compensation expenses, marketing expenses for promotions and advertising,
and administrative expenses, including the impact of divestitures.
Gain on Sale of Assets
During the third quarter of fiscal 1998, the Company sold its Nuera
Communications, Inc. subsidiary for cash proceeds of approximately
$21.5 million ($16.1 million net of $5.4 million of Nuera's own cash)
and recorded a gain of approximately $11.1 million. Gain on sale of
assets also includes the reversal of $9.7 million that had previously
been accrued for losses on facilities commitments in connection with
the sale and shut down of the operating divisions of Pacific
Communication Sciences, Inc. ("PCSI") in the fourth quarter of fiscal
1997.
During the fourth quarter of fiscal 1997, the Company completed
the sale of the assets of PCSI's Wireless Semiconductor Products to
Rockwell International for $18.1 million in cash and made the decision
to shut down PCSI's Subscriber Product Group. In connection with the
sale of the PCSI Wireless Semiconductor Product Group and the shut-down
of the Subscriber Group, the Company recorded a net gain of $0.3
million.
During the third quarter of fiscal 1997, the Company completed the
sale to ADC Telecommunications Inc. of the PCSI Infrastructure Product
Group. The Company received approximately $20.8 million in cash for
the group. In connection with the transaction, the Company recorded a
gain of approximately $12.0 million.
During the second quarter of fiscal 1997, the Company completed
the sale of its PicoPower product line to National Semiconductor
Corporation. The Company received approximately $17.6 million in cash
for the PicoPower product line. In connection with the transaction,
the Company recorded a gain of approximately $6.9 million.
Restructuring Costs and Other, net
The Company recorded restructuring costs of $11.8 million in the third
quarter of fiscal 1998 in connection with a discontinuation of certain
strategies and product development efforts in the graphics product
group of its PC products division. This resulted in a workforce
reduction of approximately 65 positions. The primary components of the
restructuring charge were $8.4 million related to excess assets and
facility leases and $1.8 million of severance payments that were made
during fiscal 1998. The total expected cash outlay related to this
charge is approximately $8.3 million, of which $2.6 million is expected
to be paid in fiscal 1999. Restructuring costs and other also includes
a $2.0 million reversal of amounts that had been previously accrued for
losses on facilities in connection with the April 1997 restructuring
and other costs of $4.7 million representing additional compensation
costs in connection with the same restructuring that were earned and
recorded in the third quarter of fiscal 1998.
In the fourth quarter of fiscal 1997, as a result of the Company's
strategy to focus on the markets for multimedia (graphics, video, and
audio), mass storage, and communications, the Company began divesting
its non-core business units and eliminating projects that do not fit
within its core markets. These actions resulted in a restructuring
charge of $21.0 million which included $5.1 million related to
workforce reductions and $15.9 million primarily related to excess
assets and facilities in connection with the reorganization into four
market-focused product divisions (Personal Computer Products,
Communications Products, Mass Storage Products, and Crystal
Semiconductor Products). This resulted in a workforce reduction of
approximately 400 people in April 1997, representing approximately 15
percent of its worldwide staff. As of March 28, 1998, activities
related to this restructuring were substantially complete.
In the fourth quarter of fiscal 1996, as a result of decreased
demand for the Company's products for use in personal computers, which
accounted for more than 80% of the Company's revenue, management
reviewed the various operating areas of the business and took certain
steps to bring operating expenses and capacity in line with demand.
These actions resulted in a pre-tax restructuring charge of
approximately $11.6 million. The principal actions in the restructuring
involved the consolidation of support infrastructure and the withdrawal
from an unprofitable product line and reduction of planned production
capacity. This resulted in the elimination of approximately 320
positions from the manufacturing, research and development, sales and
marketing, and administrative departments. As of March 28, 1998,
activities related to this restructuring were substantially complete.
Non-recurring and Merger Costs
In the third quarter of fiscal 1996, the Company incurred non-recurring
costs of approximately $1.2 million associated with the formation of
the Cirent Semiconductor joint venture with Lucent Technologies
(formerly AT&T Microelectronics).
Interest Expense
Interest expense was $27.4 million, $19.8 million and $5.2 million
in fiscal 1998, 1997 and 1996, respectively. The increase in interest
expense in fiscal 1998 is primarily due to the Company's convertible
subordinated notes being outstanding for the entire fiscal year as
compared with fiscal 1997, in which the convertible subordinated notes
were issued in the third quarter. The increase in interest expense in
fiscal 1997 as compared with fiscal 1996 was primarily the result of
the issuance of convertible subordinated notes in fiscal 1997 and
increased borrowings on short-term and long-term debt during fiscal
1997.
Interest Income
Interest income in fiscal 1998 was $19.9 million compared to $8.1
million in fiscal 1997 and $7.8 million in fiscal 1996. Interest
income increased in fiscal 1998 over fiscal 1997 as the funds raised by
the fiscal 1997 convertible subordinated notes offering were available
to be invested in cash equivalents and marketable securities for the
entire year. In addition, the Company generated cash from operations
during the year, which was also available for investment during the
year. Interest income increased in fiscal 1997 over fiscal 1996
because the funds raised by the fiscal 1997 convertible subordinated
notes offering were available to be invested in cash equivalents and
marketable securities for part of the year.
Other Income (Expense), net
In fiscal 1998, other income (expense), net, includes gains on the
disposal of certain equity investments and foreign currency transaction
gains, which were partially offset by certain legal settlements. In
fiscal 1997, other income (expense), net, primarily relates to foreign
currency transaction gains.
Income Taxes
The provision for income taxes was 34.8% in fiscal 1998 compared to
a benefit for income taxes of 10.6% in fiscal 1997 and 13.3% in fiscal
1996. The effective tax rate for fiscal 1998 is equal to the U.S.
federal statutory rate, after the addition of state income taxes offset
by federal and state research tax credits. The tax benefit rates in
1997 and 1996 were less than the federal statutory rate, primarily
because of foreign operating results which are taxed at rates other
than the U.S. statutory rate.
Realization of the Company's net deferred tax assets is dependent on
future U.S. taxable income. While the Company believes that it is more
likely than not that such assets will be realized, other factors,
including those mentioned in the discussion of Future Operating
Results, may impact the ultimate realization of such assets. The
deferred tax assets realizability is evaluated on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company generated $192.2 million of cash and
cash equivalents from its operating activities as compared to $2.6
million during fiscal 1997 and $7.7 million in fiscal 1996. The fiscal
1998 increase from fiscal 1997 was primarily due to improved accounts
receivable and inventory turnover, funding received for equipment and
leasehold advances to the joint ventures and the generation of income
from operations as opposed to a net loss in the prior year. Included
in the net income from operations in fiscal 1998 was $60.0 million of
patent cross-license revenues. These increases were partially offset
by a reduction in accounts payable. The fiscal 1997 decrease from
fiscal 1996 was primarily caused by the increase in the net loss from
operations, the non-cash effect of the gain on sale of assets offset
partially by the increase in the non-cash effect of depreciation and
amortization and the net change in operating assets and liabilities.
The Company generated $16.0 million in cash in investing activities
during fiscal 1998, as opposed to using $221.0 million during fiscal
1997 and $104.9 million during fiscal 1996. Part of the fiscal 1998
increase in cash was due to a higher percentage of the Company's
investments in securities with original maturities less than ninety
days than in the prior fiscal year. As a result, available for sale
investments generated a net cash flow of $62.8 million during fiscal
year 1998 while using a net cash flow of $168.9 million through
purchase of investments in fiscal 1997. In addition, during fiscal
1998 the Company received approximately $20.5 million from the
termination of the UMC agreements, and approximately $16.1 million from
the sale of Nuera (proceeds of $21.5 million less Nuera's own cash of
$5.4 million) as opposed to $56.5 million of proceeds from the sale of
assets in the prior year, which included proceeds from PCSI divestiture
activities. The decrease in cash from investing activities during
fiscal 1997 compared to fiscal 1996 was primarily the result of a
decrease in proceeds from short-term investments and increased short-
term investment purchases in fiscal 1997 over fiscal 1996 along with a
decrease in additions to property and equipment and the proceeds from
sale of assets.
Net cash used in financing activities was $12.3 million in fiscal 1998,
as opposed to generating $214.0 million and $186.4 million of cash in
fiscal 1997 and 1996, respectively. The cash used in fiscal 1998 was
primarily due to payments on the Company's outstanding lease
obligations and debt. The increase in cash from financing activities
in fiscal 1997 was primarily due to proceeds from the issuance of
$300.0 million of convertible subordinated notes offset by repayment of
short-term bank debt.
The semiconductor industry is extremely capital intensive. To
remain competitive, the Company believes it must continue to invest in
advanced wafer manufacturing and test equipment. Investments will
continue to be made in the various external manufacturing arrangements
and the Company's facilities. The Company intends to obtain most of
the necessary capital through direct or guaranteed equipment lease
financing and the balance through debt and/or equity financing, and
cash generated from operations.
As of March 28, 1998, the Company is contingently liable as guarantor
or co-guarantor for equipment leases of MiCRUS and Cirent which have
remaining payments of approximately $542.3 million due through 2004
compared to $526.0 million as of March 29, 1997. In addition, the
Company has other commitments related to its joint venture
relationships that total approximately $7.5 million at March 28, 1998.
As of March 28, 1998, the Company has a bank line of credit to provide
a commitment for letters of credit up to a maximum aggregate of $35.0
million, which expires on June 30, 1998 and are collateralized by cash
or securities with interest at the higher of: (a) .50% per annum above
the latest federal funds rate (as defined in the Second Amended Credit
Agreement); or (b) the rate of interest in effect for such day as
publicly announced from time to time by the bank. The Company is
currently in compliance with all covenants under the bank line of
credit. The Company expects to amend or replace the existing line of
credit facility in fiscal 1999. The Company does not believe the
amendment of its line of credit will have an impact on its financial
position or on its ability to finance its operations for the
foreseeable future. As of March 28, 1998, the Company had
approximately $30.8 million outstanding letters of credit and an
additional $4.2 million available under this line of credit.
The Company believes that its capital resources are adequate to
meet its needs for at least the next 12 months. However, if additional
financing is needed for any reason, there can be no assurance that
financing will be available or, if available, will be on satisfactory
terms. Failure to obtain adequate financing would restrict the
Company's ability to expand its manufacturing infrastructure, to make
other investments in capital equipment, and to pursue other
initiatives.
Future Operating Results
Quarterly Fluctuations
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from
quarter to quarter in the future. The Company's operating results are
affected by a wide variety of factors, many of which are outside of the
Company's control, including but not limited to, economic conditions
and overall market demand in the United States and worldwide, the
Company's ability to introduce new products and technologies on a
timely basis, the ability to retain and attract key technical and
management personnel, changes in product mix, fluctuations in
manufacturing costs which affect the Company's gross margins, declines
in market demand for the Company's and its customers' products, sales
timing, the level of orders that are received and can be shipped in a
quarter, the cyclical nature of both the semiconductor industry and the
markets addressed by the Company's products, product obsolescence,
price erosion, and competitive factors. The Company's operating
results in 1999 are likely to be affected by these factors as well as
others.
The Company must order wafers and build inventory well in advance
of product shipments. Because the Company's markets are volatile and
subject to rapid technology and price changes, there is a risk that the
Company will forecast inaccurately and produce excess or insufficient
inventories of particular products. This inventory risk is heightened
because many of the Company's customers place orders with short lead
times. Such inventory imbalances have occurred in the past and in fact
contributed significantly to the Company's operating losses in fiscal
1997 and 1996. These factors increase not only the inventory risk but
also the difficulty of forecasting quarterly operating results.
Moreover, as is common in the semiconductor industry, the Company
frequently ships more product in the third month of each quarter than
in either of the first two months of the quarter, and shipments in the
third month are higher at the end of that month. The concentration of
sales in the last month of the quarter contributes to difficulty in
predicting the Company's quarterly revenues and results of operations.
The Company's success is highly dependent upon its ability to develop
complex new products, to introduce them to the marketplace ahead of the
competition, and to have them selected for design into products of
leading system manufacturers. Both revenues and margins may be
affected quickly if new product introductions are delayed or if the
Company's products are not designed into successive generations of
products of the Company's customers. These factors have become
increasingly important to the Company's results of operations because
the rate of change in the markets served by the Company continues to
accelerate.
Issues Relating to Manufacturing and Manufacturing Investment
The Company participates in joint ventures with International Business
Machines Corp. ("IBM"), MiCRUS joint venture, and Lucent Technologies,
Cirent Semiconductor joint venture, under a series of agreements
intended to secure a committed supply of wafers from manufacturing
facilities operated by the joint ventures. The joint ventures are
controlled by IBM and Lucent Technologies, respectively, and are
dependent on the controlling partners' advanced proprietary
manufacturing process technologies and manufacturing expertise. These
agreements include wafer purchase agreements under which the Company is
committed to purchase a fixed percentage of the output of the joint
venture manufacturing facilities. As a result, the operating results
of the Company may be more sensitive to changing business conditions,
as anticipated decreases in revenues could cause the Company to decide
to not fulfill its wafer purchase obligations. This would result in
charges to the Company from the joint ventures in amounts intended to
cover the joint ventures fixed costs related to the shortfall in wafer
orders from the Company. The Company determines any estimated
shortfalls in such purchase commitments over the short-term (six-
months) and accrues such amounts to the extent they would result in
inventory losses were the Company to fulfill the commitment and take
delivery of the related inventory. The Company's gross margins and
earnings were adversely impacted by such charges in the amounts of
$53.0 million, $22.0 million, $12.1 million, $7.8 million and $6.2
million in the fourth quarter of fiscal 1998, the fourth and second
quarters of fiscal 1997 and the second and first quarter of fiscal
1996, respectively. With its other foundries, the Company becomes
committed upon placing orders and is subject to penalties for
cancellations.
Moreover, the Company will benefit from the MiCRUS and Cirent
Semiconductor joint ventures only if they are able to produce wafers at
or below prices generally prevalent in the market. If, however, either
of these ventures is not able to produce wafers at competitive prices,
the Company's results of operations could be materially adversely
affected. The process of beginning production and increasing volume
with the joint ventures inevitably involves risks, and there can be no
assurance that the manufacturing costs of such ventures will be
competitive. During fiscal 1998 and 1997, excess production capacity
in the industry lead to significant price competition between merchant
semiconductor foundries and the Company believes that in some cases
this resulted in pricing from certain foundries that was lower than the
Company's cost of production from its manufacturing joint ventures.
The Company experienced pressures on its selling prices during fiscal
1998 and fiscal 1997, which had a negative impact on its results of
operations and it believes that this was partially due to the fact that
certain of its competitors were able to obtain favorable pricing from
such foundries.
Certain provisions of the MiCRUS and Cirent Semiconductor agreements
may cause the termination of the joint venture in the event of a change
in control of the Company. Such provisions could have the effect of
delaying, deferring or preventing a change of control of the Company.
In connection with the financing of its operations, the Company has
borrowed money and entered into substantial equipment lease obligations
and is likely to expand such commitments in the future. Such
indebtedness could cause the Company's principal and interest
obligations to increase substantially. The degree to which the Company
is leveraged could adversely affect the Company's ability to obtain
additional financing for working capital, acquisitions or other
purposes and could make it more vulnerable to industry downturns and
competitive pressures. The Company's ability to meet its debt service
and other obligations will be dependent upon the Company's future
performance, which will be subject to financial, business, and other
factors affecting the operations of the Company, many of which are
beyond its control. An inability to obtain financing to meet these
obligations could cause the Company to become in default of such
obligations.
Although the Company has increased its future wafer supplies from
MiCRUS and Cirent Semiconductor, the Company expects to continue to
purchase portions of its wafers from, and to be reliant upon, outside
merchant wafer suppliers. The Company's current strategy is to fulfill
its wafer requirements using a balance of secured wafer supply from its
joint ventures and from outside merchant wafer suppliers. The Company
also uses other outside vendors to package the wafer die into
integrated circuits and to perform the majority of the Company's
product testing.
During the second quarter of fiscal 1998 the Company reduced its
purchase obligations at Cirent Semiconductor by 50 percent, pursuant to
an agreement under which the Company can reacquire, at no incremental
cost, an additional 10 percent of the total Cirent Semiconductor wafer
output and can sell any portion of its wafer purchase obligation to
third parties on a foundry basis. The agreement also provides the
Company with future access to certain Lucent advanced process
technologies including 0.18 micron process technology.
The Company's results of operations could be adversely affected
in the future, as they have been so affected in the past, if particular
suppliers are unable to provide a sufficient and timely supply of
product, whether because of raw material shortages, capacity
constraints, unexpected disruptions at the plants, delays in qualifying
new suppliers or other reasons, or if the Company is forced to purchase
wafers or packaging from higher cost suppliers or to pay expediting
charges to obtain additional supply, or if the Company's test
facilities are disrupted for an extended period of time. Because of
the concentration of sales at the end of each quarter, a disruption in
the Company's production or shipping near the end of a quarter could
materially reduce the Company's revenues for that quarter. Production
may be constrained even though capacity is available at one or more
wafer manufacturing facilities because of the difficulty of moving
production from one facility to another. Any supply shortage could
adversely affect sales and operating profits. The Company's reliance
upon outside vendors for assembly and test could also adversely impact
sales and operating profits if the Company was unable to secure
sufficient access to the services of these outside vendors.
Product development in the Company's markets is becoming more focused
on the integration of functionality on individual devices and there is
a general trend towards increasingly complex products. The greater
integration of functions and complexity of operations of the Company's
products increase the risk that latent defects or subtle faults could
be discovered by customers or end users after volumes of product have
been shipped. If such defects were significant, the Company could
incur material recall and replacement costs for product warranty. The
Company's relationship with customers could also be adversely impacted
by the recurrence of significant defects.
Dependence on PC Market
Although the Company's future direction is to emphasize non-PC market
opportunities in mass storage, communications, consumer electronics and
industrial automation, sales of many of the Company's products will
continue to depend largely on sales of personal computers (PCs).
Reduced growth in the PC market could affect the financial health of
the Company as well as its customers. Moreover, as a component
supplier to PC OEMs and to peripheral device manufacturers, the Company
is likely to experience a greater magnitude of fluctuations in demand
than the Company's customers themselves experience. In addition, many
of the Company's products are used in PCs for the consumer market, and
the consumer PC market is more volatile than other segments of the PC
market.
Other integrated circuit (IC) makers, including Intel Corporation,
have expressed their interest in integrating through hardware functions,
adding through special software functions, or kitting components to
provide some multimedia or communications features into or with their
microprocessor products. Successful integration of these functions
could substantially reduce the Company's opportunities for IC sales in
these areas. In addition, the Company's de-emphasis of PC products and
its focus on non-PC markets could have an adverse affect on the
Company's PC product sales as customers seek other supply sources with
greater commitments to the PC market.
A number of PC OEMs buy products directly from the Company and also
buy motherboards, add-in boards or modules from suppliers who in turn buy
products from the Company. Accordingly, a significant portion of the
Company's sales may depend directly or indirectly on the sales to a
particular PC OEM. Since the Company cannot track sales by
motherboard, add-in board or module manufacturer, the Company may not
be fully informed as to the extent or even the fact of its indirect
dependence on any particular PC OEM, and, therefore, may be unable to
assess the risks of such indirect dependence.
Issues Relating to Mass Storage Market
The disk drive market has historically been characterized by a
relatively small number of disk drive manufacturers and by periods of
rapid growth followed by periods of oversupply and contraction. Growth
in the mass storage market is directly affected by growth in the PC
market. Furthermore, the price competitive nature of the disk drive
industry continues to put pressure on the price of all disk drive
components. Recent market demands for sub-$1,000 PC's puts further
pressure on the price of disk drives and disk drive components. In
addition, consolidation in the disk drive industry has reduced the
number of customers for the Company's mass storage products and
increased the risk of large fluctuations in demand.
The Company believes that constraints in supply of certain read-head
components to the disk drive industry limited sales of its mass storage
products in the fourth quarter of fiscal 1997. In addition, the
Company believes that excess inventories held by its customers limited
sales of the Company's mass storage products in the second quarter of
fiscal 1997 and limited sales of the Company's optical disk drive products
in the third quarter of fiscal 1997. Revenues from mass storage products
in fiscal 1999 are likely to depend heavily on the success of certain 3.5
inch disk drive products selected for use by various customers, which
in turn depends upon obtaining timely customer qualification of the new
products and bringing the products into volume production timely and
cost effectively.
The Company's revenues from mass storage products are dependent on the
successful introduction by its customers of new disk drive products and
can be impacted by the timing of customers' transition to new disk
drive products. Recent efforts by certain of the Company's customers
to develop their own ICs for mass storage products could in the future
reduce demand for the Company's mass storage products, which could have
an adverse effect on the Company's revenues and gross margins from such
products. In addition, in response to the current market trend towards
integrating hard disk controllers with microcontrollers, the Company's
revenues and gross margins from its mass storage products will be
dependent on the Company's ability to introduce such integrated
products in a commercially competitive manner.
During the last half of fiscal 1998, major companies in the disk
drive industry, including certain of the Company's customers, have reported
declines in business. In addition, the Company's mass storage products
were not designed into a major customer's next generation product which
is expected to run fiscal 1999. Consequently, these factors will have
an adverse impact on the mass storage division's revenue through at
least the first half of fiscal 1999.
Issues Relating to Graphics Products
In November 1997, the Company changed its direction in graphics from
reliance on 2D and 3D stand alone products to a strategy of providing
future integrated multimedia products. Concurrently, the Company
realigned and reduced its graphics research and development and
marketing activities toward this new product direction, resulting in a
workforce reduction of approximately sixty-five employees. While the
Company continues to sell its line of existing 2D and 3D graphics
products, levels and duration of future revenues from these products is
uncertain. Further, if the new integrated function products are not
brought to market in a timely manner or do not address the market needs
or costs of performance requirements, then the Company's market share
and sales will be adversely affected.
Issues Relating to Consumer Electronics Products
Most of the Company's revenues in the consumer electronics arena are
in the multimedia audio market derive from the sales of audio codecs and
integrated 16-bit codec-plus-controller solutions for the PC market and
consumer electronics equipment. In the PC market, pricing pressures
have forced a transition from multi-chip solutions to products that
integrate the codec, controller and synthesis functions into a single
IC. The Company's revenues from the sale of PC audio products in
fiscal 1999 are likely to be significantly affected by the introduction
of cost reduced, fully-integrated, single-chip audio ICs. Moreover,
aggressive competitive pricing pressures have adversely affected and
may continue to adversely affect the Company's revenues and gross
margins from the sale of audio ICs. In addition, the introduction of
new audio products from the Company's competitors, the introduction of
mediaprocessors and the introduction of MMX processors with multimedia
features by Intel Corporation could adversely affect revenues and gross
margins from the sale of the Company's audio products.
Three-dimensional, spatial-effects audio became an important feature
in fiscal 1998, primarily in products for the consumer electronics
marketplace. If the Company's spatial-effects audio products do not
meet the cost or performance requirements of the market, revenues from
the sale of audio products could be adversely affected.
Issues Relating to Communications Products
The communications market for voice/data/fax modem chip sets is
intensely competitive, and competitive pricing pressures have affected
and are likely to continue to affect the average selling prices and
gross margins of this product line. As a relatively new entrant to this
market, the Company may be at a competitive disadvantage to suppliers
who have long-term customer relationships, have greater market share or
have greater financial resources. In addition, the introduction of new
modem products from the Company's competitors, the introduction of
media processors and the introduction of MMX processors with multimedia
features by Intel Corporation could adversely affect revenues and gross
margins from the sale of the Company's modem products.
Issues Relating to Industrial Products
Industrial Products is a very broad market with many well established
competitors. The Company's ability to compete in this market will be
adversely affected if it cannot establish broad sales channels or if it
does not develop and maintain a broad enough product line to compete
effectively. In addition, the customer product design in time is long.
Customer delays in product development and introductions creates risk
relative to the Company's revenue plans. Further, the Company's
products in this market are technically very complex. The complexity
of the products contributes to risks in getting products to market on a
timely basis, which could impact the Company's revenue plans. The
scarcity of analog engineering talent also contributes to risks related
to product development timing in this market.
Intellectual Property Matters
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company
and certain of its customers from time to time have been notified that
they may be infringing certain patents and other intellectual property
rights of others. In addition, customers have been named in suits
alleging infringement of patents or other intellectual property rights
by customer products. Certain components of these products have been
purchased from the Company and may be subject to indemnification
provisions made by the Company to its customers. Although licenses
are generally offered in situations where the Company or its customers
are named in suits alleging infringement of patents or other
intellectual property rights, there can be no assurance that any
licenses or other rights can be obtained on acceptable terms. An
unfavorable outcome occurring in any such suit could have an adverse
effect on the Company's future operations and/or liquidity.
Foreign Operations and Markets
Because many of the Company's subcontractors and several of the
Company's key customers, such customers collectively accounting for a
significant percentage of the Company's revenues, are located in Japan
and other Asian countries, the Company's business is subject to risks
associated with many factors beyond its control. International
operations and sales may be subject to political and economic risks,
including political instability, currency controls, exchange rate
fluctuations, and changes in import/export regulations, tariff and
freight rates. Although the Company buys hedging instruments to reduce
its exposure to currency exchange rate fluctuations, the Company's
competitive position can be affected by the exchange rate of the U.S.
dollar against other currencies, particularly the Japanese yen.
Further, to the extent that volatility in foreign financial markets was
to have an adverse impact on economic conditions in a country or
geographic region in which the Company does business, demand for and
supply of the Company's products could be adversely impacted, which
would have a negative impact on the Company's revenues and earnings.
A significant number of the Company's customers and suppliers are
in Asia. The recent turmoil in the Asian financial markets does not
appear to have had a material impact on the Company's sales orders or
bookings. However, the financial instability in these regions may have
an adverse impact on the financial position of end users in the region
which could impact future orders and/or the ability of such users to
pay the Company or the Company's customers, which could also impact the
ability of such customers to pay the Company. The Company performs
extensive financial due diligence on customers and potential customers
and generally required material sales to Asia to either be secured by
letters of credit or transacted on a cash on demand basis. Given the
current situation in Asia, the Company has begun to require the letters
of credit to be established through American banking institutions.
During this volatile period, the Company expects to carefully evaluate
the collection risk related to the financial position of customers and
potential customers. The results of such evaluations will be
considered in structuring the terms of sale, in determining whether to
accept sales orders, in evaluating the recognition of revenue on sales
in the area and in evaluating the collectability of outstanding
accounts receivable from the region. In situations where significant
collection risk exists, the Company will either not accept the sales
order, defer the recognition of related revenues, or, in the case of
previously transacted sales, establish appropriate bad debt reserves.
Despite these precautions, should the current volatility in Asia have a
material adverse impact on the financial position on end users of the
customers products in Asia, the Company could experience a material
adverse impact on its results of operations.
Competition
The Company's business is intensely competitive and is characterized
by new product cycles, price erosion, and rapid technological change.
Competition typically occurs at the design stage, where the customer
evaluates alternative design approaches that require integrated
circuits. Because of shortened product life cycles and even shorter
design-in cycles, the Company's competitors have increasingly frequent
opportunities to achieve design wins in next generation systems. In
the event that competitors succeed in supplanting the Company's
products, the Company's market share may not be sustainable and net
sales, gross margin, and results of operations would be adversely
affected. Competitors include major domestic and international
companies, many of which have substantially greater financial and other
resources than the Company with which to pursue engineering,
manufacturing, marketing and distribution of their products. Emerging
companies are also increasing their participation in the market, as
well as customers who develop their own integrated circuit products.
Competitors include manufacturers of standard semiconductors,
application-specific integrated circuits and fully customized
integrated circuits, including both chip and board-level products. The
ability of the Company to compete successfully in the rapidly evolving
area of high-performance integrated circuit technology depends
significantly on factors both within and outside of its control,
including, but not limited to, success in designing, manufacturing and
marketing new products, wafer supply, protection of Company products by
effective utilization of intellectual property laws, product quality,
reliability, ease of use, price, diversity of product line, efficiency
of production, the pace at which customers incorporate the Company's
integrated circuits into their products, success of the customers'
products, and general economic conditions. Also the Company's future
success depends, in part, upon the continued service of its key
engineering, marketing, sales, manufacturing, support, and executive
personnel, and on its ability to continue to attract, retain, and
motivate qualified personnel. The competition for such employees is
intense, and the loss of the services of one or more of these key
personnel could adversely affect the Company. Because of these and
other factors, past results may not be a useful predictor of future
results.
Impact of Year 2000
The "Year 2000 Issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. If
the Company's computer programs with date-sensitive functions are not
Year 2000 compliant, they may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company is currently in the process of modifying and/or replacing
significant portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and
thereafter. The Company presently believes that with modifications to
testing software and conversions to new software, the Year 2000 Issue
will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made,
or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company. The Company will use both
internal and external resources to reprogram or replace and test the
software for Year 2000 modifications.
In addition, the Year 2000 Issue creates risk for the Company from
unforeseen problems from third parties with whom the Company deals on
financial transactions. Such failures of the Company's third parties'
computer systems could have a material impact on the Company's ability
to conduct its business. The Company is also assessing the capability
of its products sold to customers over a period of years to handle the
Year 2000 Issue and has a plan in place to address product issues
during fiscal 1999. Management believes that the likelihood of a
material adverse impact due to problems with internal systems or
products sold to customers is remote and expects that the cost of these
projects over the next two years will not have a material effect on the
Company's financial position or overall trends in results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts)
Fiscal years ended
---------------------------------
March 28, March 29, March 30,
1998 1997 1996
---------- ----------- ----------
Net sales $954,270 $917,154 $1,146,945
Operating costs and expenses, gain on sale of assets
and other, net
Cost of sales 605,484 598,795 774,350
Research and development 179,552 230,786 238,791
Selling, general and administrative 117,273 126,722 165,267
Gain on sale of assets, net (20,781) (18,915) -
Restructuring costs and other, net 14,464 20,954 11,566
Non-recurring costs - - 1,195
---------- --------- ---------
Total operating costs and expenses, gain on sale of
assets and other, net 895,992 958,342 1,191,169
---------- --------- ---------
Income (loss) from operations 58,278 (41,188) (44,224)
Interest expense (27,374) (19,754) (5,151)
Interest income 19,893 8,053 7,759
Other income (expense), net 5,206 1,270 (107)
---------- --------- ---------
Income (loss) before provision (benefit) for income taxes 56,003 (51,619) (41,723)
---------- --------- ---------
Provision (benefit) for income taxes 19,510 (5,463) (5,540)
---------- --------- ---------
Net income (loss) $36,493 ($46,156) ($36,183)
========== ========= =========
Net income (loss) per share:
Basic $0.54 ($0.71) ($0.58)
========== ========= =========
Diluted $0.52 ($0.71) ($0.58)
========== ========= =========
Weighted average common shares outstanding:
Basic 67,333 65,007 62,761
Diluted 69,548 65,007 62,761
See accompanying notes.
CONSOLIDATED BALANCE SHEETS
(Thousands)
March 28, March 29,
1998 1997
------------ ------------
Assets
Current assets:
Cash and cash equivalents $347,421 $151,540
Short-term investments 125,378 188,215
Accounts receivable, less allowance for doubtful
accounts of $11,176 in 1998 and $12,770 in 1997 103,073 173,743
Inventories 103,703 127,252
Deferred tax assets 28,505 34,410
Equipment and leasehold improvement advances to
joint ventures 97,711 112,597
Other current assets 10,402 7,245
------------ -----------
Total current assets 816,193 795,002
Property and equipment, at cost:
Machinery and equipment 249,649 252,643
Furniture and fixtures 15,075 15,767
Leasehold improvements 23,458 23,112
------------ -----------
288,182 291,522
Less accumulated depreciation and amortization (188,818) (160,667)
------------ -----------
Property and equipment, net 99,364 130,855
Manufacturing agreements, net of accumulated
amortization of $19,409 in 1998 and $10,729 in 1997,
and investment in joint ventures 166,953 151,675
Deposits and other assets 55,032 59,289
------------ -----------
$1,137,542 $1,136,821
============ ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $110,761 $187,510
Accounts payable - joint venures 98,753 43,668
Accrued salaries and benefits 41,832 33,792
Current maturities of long-term debt and
capital lease obligations 26,554 30,999
Income taxes payable 38,053 31,259
Other accrued liabilities 24,086 39,104
------------ -----------
Total current liabilities 340,039 366,332
Capital lease obligations 5,475 9,848
Long-term debt 32,559 51,248
Other long-term 3,126 5,196
Convertible subordinated notes 300,000 300,000
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, no par value; 5,000
shares authorized, none issued - -
Common stock, no par value, 140,000 shares
authorized, 68,175 shares issued and
outstanding in 1998 and 66,156 in 1997 366,914 351,261
Retained earnings 89,429 52,936
------------ -----------
Total shareholders' equity 456,343 404,197
------------ -----------
$1,137,542 $1,136,821
============ ===========
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Fiscal Years Ended
--------------------------------
March 28, March 29, March 30,
1998 1997 1996
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $36,493 ($46,156) ($36,183)
Adjustments to reconcile net income (loss) to net
cash provided by operating activites:
Depreciation and amortization 71,869 87,960 64,301
Gain on sale of assets (11,082) (18,915) -
Provision for loss on property and equipment 3,505 10,278 -
Compensation related to the issuance of
certain employee stock options 493 494 820
Changes in operating assets and liabilities:
Accounts receivable 66,411 (42,438) 27,615
Inventories 21,574 2,367 (30,860)
Funds received for joint venture equipment leased 14,886 (17,914) (94,683)
Deferred tax and other current assets 2,566 14,659 (28,735)
Accounts payable (21,034) 16,879 73,854
Accrued salaries and benefits 11,449 (7,858) 9,337
Income taxes payable 6,794 11,968 15,209
Other accrued liabilities (11,685) (8,752) 7,045
--------- --------- ---------
Net cash provided by operations 192,239 2,572 7,720
--------- --------- ---------
Cash flows from investing activities:
Purchase of available for sale investments (370,794) (182,552) (175,139)
Proceeds from available for sale investments 433,631 13,616 228,092
Purchase of held to maturity investments - - (10,444)
Proceeds from held to maturity investments - - 57,144
Proceeds from sale of assets, net 16,142 56,526 -
Proceeds from termination of UMC agreement 20,543 - -
Manufacturing agreements and investment in joint venture (44,500) (54,000) (44,604)
Additions to property and equipment (27,639) (30,722) (127,802)
Increase in deposits and other assets (11,394) (23,903) (32,140)
--------- --------- ---------
Net cash provided by (used for) investing activities 15,989 (221,035) (104,893)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of convertible notes - 290,640 -
Borrowings on long-term debt 5,980 10,009 74,973
Payments on long-term debt (21,124) (21,154) (10,798)
Payments on capital lease obligations (12,363) (5,720) (4,051)
Borrowings on short-term debt - 172,000 121,000
Payments on short-term debt - (252,000) (41,000)
Proceeds from sale and leaseback of property and equipme - - 13,067
Increase in other long-term liabilities - 565 4,898
Issuance of common stock, net of issuance costs and
repurchases 15,160 19,684 28,345
--------- --------- ---------
Net cash (used for) provided by financing activies (12,347) 214,024 186,434
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 195,881 (4,439) 89,261
Cash and cash equivalents at beginning of year 151,540 155,979 66,718
--------- --------- ---------
Cash and cash equivalents at end of year $347,421 $151,540 $155,979
========= ========= =========
Non-cash investing and financing activities:
Equipment purchased under capital leases $ - $10,556 $594
Tax benefit of stock options exercises - 1,509 16,668
Cash payments (refunds) for:
Interest $26,878 $8,381 $4,358
Income taxes 7,022 (25,625) 17,612
See accompanying notes.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended March 28, 1998
(Thousands)
Common Stock
--------------------- Retained
Shares Amount Earnings Total
---------- ---------- ---------- ----------
Balance, April 1, 1995 60,594 $283,741 $135,275 $419,016
Issuance of stock under stock plans and other, net of repurchases 3,357 28,345 - 28,345
Compensation related to the issuance of certain employee options - 820 - 820
Net loss - - (36,183) (36,183)
Tax benefit of stock option exercises - 16,668 - 16,668
--------- --------- --------- ---------
Balance, March 30, 1996 63,951 329,574 99,092 428,666
Issuance of stock under stock plans and other, net of repurchases 2,205 19,684 - 19,684
Compensation related to the issuance of certain employee options - 494 - 494
Net loss - - (46,156) (46,156)
Tax benefit of stock option exercises - 1,509 - 1,509
--------- --------- --------- ---------
Balance, March 29, 1997 66,156 351,261 52,936 404,197
Issuance of stock under stock plans and other, net of repurchases 2,019 15,160 - 15,160
Compensation related to the issuance of certain employee options - 493 - 493
Net income - - 36,493 36,493
--------- --------- --------- ---------
Balance, March 28, 1998 68,175 $366,914 $89,429 $456,343
========= ========= ========= =========
See accompanying notes.
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Major Customer Information
Cirrus Logic, Inc. (the "Company") is a premier supplier of advanced
integrated circuits that integrate algorithms and mixed-signal
processing for mass storage, communications, consumer electronics and
industrial markets. The Company's application-specific algorithms,
systems expertise and precision analog techniques add high value to
major brands worldwide in magnetic and optical storage; networking
communications; consumer/professional audio; video and imaging; and
ultra-precision data acquisition.
In fiscal 1998, two customers comprised approximately 19% and 11% of
net sales. In fiscal 1997, one other customer accounted for 10% of net
sales, while in fiscal 1996, no customer accounted for 10% or more of
net sales.
Export sales include sales to overseas operations of domestic
corporations and represented 53%, 62% and 56% of net sales in fiscal
1998, 1997 and 1996, respectively. Export sales to the Pacific Rim
(excluding Japan) were 31%, 32% and 34% of net sales; to Japan were
15%, 22% and 17% of net sales and to Europe and the rest of the world
were 7%, 7% and 6% of net sales, in fiscal 1998, 1997 and 1996,
respectively. There are no restrictions on the transfer of funds in
international markets in which the Company does business.
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated. Accounts denominated
in foreign currencies have been remeasured in accordance with Statement
of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency
Translation," using the U.S. dollar as the functional currency.
Translation adjustments relating to Cirrus Logic K.K., whose functional
currency is the Japanese yen, have not been material.
Cash Equivalents and Short-term Investments
Cash equivalents consist primarily of over-night deposits, commercial
paper, U.S. Government Treasury and Agency instruments, and money
market funds with original maturities of three months or less at date
of purchase. Short-term debt investments have original maturities
greater than three months and consist of U.S. Government Treasury and
Agency instruments, municipal bonds, certificates of deposit and
commercial paper.
Short-term Investments: Held-to-Maturity and Available-for-Sale
Management determines the appropriate classification of certain debt
and equity securities at the time of purchase as either held-to-
maturity, trading or available-for-sale and reevaluates such
designation as of each balance sheet date.
Held-to-maturity debt securities are stated at cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization, as well as any interest on the securities, is included in
interest income. Held-to-maturity securities include only those
securities the Company has the positive intent and ability to hold to
maturity.
Securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair
value, with unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity, if material. Realized
gains and losses, declines in value judged to be other than temporary,
and interest on available-for-sale securities are included in interest
income.
Foreign Exchange Contracts
The Company may enter into foreign currency forward exchange and option
contracts to hedge certain of its foreign currency transaction,
translation and remeasurement exposures. The Company's accounting
policies for some of these instruments are based on the Company's
designation of such instruments as hedging transactions. Instruments
not designated as a hedge transaction will be "marked to market" at the
end of each accounting period. The criteria the Company uses for
designating an instrument as a hedge include effectiveness in exposure
reduction and one-to-one matching of the derivative financial
instrument to the underlying transaction being hedged. Gains and losses
on foreign currency exchange and option contracts that are designated
and effective as hedges of existing transactions are recognized in
income in the same period as losses and gains on the underlying
transactions are recognized and generally offset. Gains and losses on
currency option contracts that are designated and effective as hedges
of transactions, for which a firm commitment has been attained, are
deferred and recognized in income in the same period that the
underlying transactions are settled and were not material as of March
28, 1998.
During fiscal 1998, 1997 and 1996, the Company purchased foreign
currency option contracts to hedge certain yen denominated net balance
sheet accounts and sales.
As of March 28, 1998 and March 29, 1997, the Company had foreign
currency forward and/or option contracts outstanding denominated in
Japanese yen for approximately $15,602,000 and $74,460,000,
respectively. The fiscal 1998 contracts expire on various dates in the
first quarter of fiscal 1999. The fiscal 1997 contracts expired
through June 27, 1997.
While the contract amounts provide one measure of the volume of the
transactions outstanding at March 28, 1998 and March 29, 1997, they do
not represent the amount of the Company's exposure to credit risk. The
Company's exposure to credit risk (arising from the possible inability
of the counterparties to meet the terms of their contracts) is
generally limited to the amount, if any, by which the counterparty's
obligations exceed the obligations of the Company.
Transaction gains and losses were not material in fiscal 1998, 1997 and
1996.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents,
short-term investments and trade accounts receivable. The Company is
exposed to credit risk to the extent of the amounts recorded on the
balance sheet. By policy, the Company places its cash equivalents and
short term investments only with high credit quality financial
institutions and, other than U.S. Government Treasury instruments,
limits the amounts invested in any one institution or in any type of
instrument. The Company performs ongoing credit evaluations of its
customers' financial condition, limits its exposure to accounting
losses by limiting the amount of credit extended whenever deemed
necessary, utilizes letters of credit where appropriate and generally
does not require collateral. The Company expects to sell a significant
amount of products in the Pacific Rim and Japan. The Company's
exposure to risk with Asian customers has been largely mitigated
through the use of these letters of credit.
Inventories
The Company applies the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market principle to
value its inventories. One of the factors the Company consistently
evaluates in application of this principle is the extent to which
products are accepted into the marketplace. By policy, the Company
evaluates market acceptance based on known business factors and
conditions by comparing forecasted customer unit demand for the
Company's products over a specific future period or demand horizon to
quantities on hand at the end of each accounting period.
On a quarterly and annual basis, inventories are analyzed on a part-by-
part basis. Inventory quantities on hand in excess of forecasted
demand, as adjusted by management, are considered to have reduced
market value and, therefore, the cost basis is adjusted from standard
cost to the lower of cost or market. Typically, market value for
excess or obsolete inventories is considered to be zero. The short
product life cycles and the competitive nature of the industry are
factors considered in the estimation of customer unit demand at the end
of each quarterly accounting period.
Inventories are comprised of the following (in thousands):
March 28, March 29,
1998 1997
--------- ---------
Work-in-process $ 66,558 $ 79,276
Finished goods 37,145 47,976
--------- ---------
$ 103,703 $ 127,252
========= =========
Property and Equipment
Property and equipment is recorded at cost. Depreciation and
amortization is provided on a straight-line basis over estimated useful
lives ranging from three to five years, or over the life of the lease
for equipment under capitalized leases, if shorter. Leasehold
improvements are amortized over the term of the lease or their
estimated useful life, whichever is shorter. Depreciation expense for
fiscal years 1998, 1997 and 1996 was $48,328,000, $57,726,000 and
$46,243,000, respectively.
Wafer Purchase Commitments
The Company has firm commitments to purchase wafers from joint venture
partnerships in which it is a minority owner (MiCRUS and Cirent
Semiconductor) and from other third party suppliers. The Company
estimates its wafer needs on an ongoing basis and in certain cases may
reduce its wafer purchase commitments by selling its committed portion
of the joint ventures' wafer capacity to others or allowing third
parties to utilize the Company's available wafer starts under its wafer
purchase commitments. The Company's ability to adjust short-term
production mix and volume throughput in its joint ventures and at its
third party suppliers is limited by contract, and changes within six
months of manufacturing start dates are difficult to make given order
lead times, set-up times, design cycle times, manufacturing cycle
times, and customer and foundry qualification times. If the Company's
firm wafer purchase commitments exceed its wafer needs and it is unable
to sell the excess to others, losses on firm wafer purchase commitments
in excess of estimated wafer needs over the short-term (six months) are
accrued to the extent they would result in inventory losses were the
company to fulfill the commitment and take delivery of the inventory.
During fiscal 1998, 1997 and 1996, the Company accrued and expensed
estimated losses under wafer purchase commitments of $53.0 million,
$30.5 million and $14.0 million, respectively. As of March 28, 1998
and March 29, 1997, the company had accruals for charges incurred and
estimated losses under wafer purchase commitments of $63.8 million and
$30.2 million, respectively. The amount of this accrual is an estimate
and the liability for losses under wafer purchase commitments is
ultimately subject to actual shortfalls in purchase commitments in
future quarters.
Revenue Recognition
Revenue from product sales direct to customers is recognized upon
shipment. Certain of the Company's sales are made to distributors
under agreements allowing certain rights of return and price protection
on products unsold by distributors. Accordingly, the Company defers
revenue and gross profit on such sales until the product is sold by the
distributors.
Revenues in fiscal 1998 includes $60.0 million from two patent cross-
license agreements under which the Company has no ongoing obligations.
These revenues were recognized upon the execution of the agreements.
Non-recurring and Merger Costs
In fiscal 1996, non-recurring costs were approximately $1.2 million
associated with the formation of the Cirent Semiconductor joint venture
with Lucent Technologies.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising costs
were $4.9 million in fiscal 1998 and were not significant in fiscal
1997 and 1996.
Other Income (Expense), net
In fiscal 1998, other income (expense), net, includes gains on the
disposal of certain investments in common stock and foreign currency
transaction gains, which were somewhat offset by certain legal
settlements. In fiscal 1997, other income (expense), net, primarily
relates to foreign currency transaction gains.
Stock-based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, no compensation cost has been recognized for its fixed
cost stock option plans or its associated stock purchase plan when the
exercise price is equal to the fair value on the date of grant. The
Company provides additional pro forma disclosures as required under
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting
for Stock-Based Compensation." See Note 13.
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement
128 replaced the previously reported primary and fully diluted net
income (loss) per share with basic and diluted net income (loss) per
share. Unlike primary net income (loss) per share, basic net income
(loss) per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted net income (loss) per share is
very similar to the previously reported fully diluted net income (loss)
per share. All net income (loss) per share amounts for all periods
have been restated to conform to the Statement 128 requirement.
The following table sets forth the computation of basic and diluted net
income (loss) per share (In thousands, except per share amounts):
March 28, March 29, March 30,
1998 1997 1996
--------- --------- ---------
Numerator:
Net income (loss) $36,493 ($46,156) ($36,183)
========= ========= =========
Denominator:
Denominator for basic net income (loss) per share - weighted-
average shares 67,333 65,007 62,761
Dilutive common stock equivalents, using treasury stock method 2,215 - -
--------- --------- ---------
Denominator for diluted net income (loss) per share 69,548 $65,007 $62,761
========= ========= =========
Basic net income (loss) per share $0.54 ($0.71) ($0.58)
========= ========= =========
Diluted net income (loss) per share $0.52 ($0.71) ($0.58)
========= ========= =========
Options to purchase 1,546,000 shares of common stock were outstanding
as of March 28, 1998 but were not included in the computation of
diluted earnings per share, as the effect would be antidilutive.
As of March 28, 1998, the Company had outstanding convertible notes to
purchase 12,387,000 shares of common stock that were not included in
the computation of diluted net income (loss) per share because the
effect would be antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation. Such reclassifications
had no effect on the results of operations or shareholders' equity.
2. GAIN ON SALE OF ASSETS
During the second quarter of fiscal 1997, the Company completed the
sale of the PicoPower product line to National Semiconductor
Corporation. The Company received approximately $17.6 million in cash
for the PicoPower product line. In connection with the transaction,
the Company recorded a gain of approximately $6.9 million.
During the third quarter of fiscal 1997, the Company completed the sale
to ADC Telecommunications, Inc. of the PCSI's Infrastructure Product
Group. The Company received approximately $20.8 million in cash for
the group. In connection with the transaction, the Company recorded a
gain of approximately $12.0 million.
During the fourth quarter of fiscal 1997, the Company completed its
divestiture of PCSI by selling the assets of PCSI's Wireless
Semiconductor Products to Rockwell International for $18.1 million in
cash and made the decision to shut down PCSI's Subscriber Product
Group. In connection with the sale of the Wireless Semiconductor
Product Group and the shut-down of the Subscriber Group, the Company
recorded a net gain of $0.3 million in the fourth quarter. The shut-
down of the Subscriber Group resulted in severance costs of $2.2
million, the write-off of excess assets (primarily computer and related
equipment) of $1.1 million, accruals for excess facilities of $0.9
million and an estimated net cost to settle contracted and other
obligations of $3.2 million.
In December 1997, the Company sold its Nuera Communications, Inc.
subsidiary for cash proceeds of approximately $21.5 million ($16.1
million net of $5.4 million of Nuera's own cash) and recorded a gain of
approximately $11.1 million in the third quarter of fiscal 1998. Gain
on sale of assets also includes the reversal of $9.7 million that had
previously been accrued for losses on facilities commitments in
connection with the sale and shut down of the operating divisions of
PCSI in the fourth quarter of fiscal 1997.
Pending the resolution of certain matters, the Company may record up to
an additional gain on sale of $6.8 million in connection with these
transactions.
3. FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash: The carrying amount reported in the balance sheet for cash
approximates its fair value.
Investment securities: The fair values for marketable debt securities
are based on quoted market prices.
Foreign currency exchange and option contracts: The fair values of the
Company's foreign currency exchange forward and option contracts are
estimated based on quoted market prices of comparable contracts,
adjusted through interpolation where necessary for maturity
differences.
Long-term debt: The fair value of long-term debt is estimated based on
current interest rates available to the Company for debt instruments
with similar terms and remaining maturities.
The carrying amounts and fair values of the Company's financial
instruments at March 28, 1998 are as follows (in thousands):
Carrying Amount Fair Value
--------------- ----------
Cash $ 206,520 $ 206,520
Investment securities:
U.S. Government Treasury
instruments 220,357 219,782
U.S. Government Agency
instruments 14,904 14,904
Commercial paper 25,953 25,953
Other investments 5,065 5,065
Foreign currency forward
exhange and option contracts - 15,528
Long-term debt (354,871) (286,231)
The carrying amounts and fair values of the Company's financial
instruments at March 29, 1997 are as follows (in thousands):
Carrying Amount Fair Value
--------------- ----------
Cash $ 148,509 $ 148,509
Investment securities:
U.S. Government Treasury
instruments 179,395 180,183
U.S. Government Agency
instruments 11,111 11,184
Other investments 740 740
Foreign currency forward
exhange and option contracts - 74,316
Long-term debt (376,892) (307,655)
Investments
At March 28, 1998, all available-for-sale securities have contracted
maturities of less than one year. Gross realized and unrealized gains
and losses on all classes of securities were immaterial at and for the
periods ended March 28, 1998, March 29, 1997, and March 30, 1996.
The following is a reconciliation of the investment categories to the
balance sheet classification at March 28, 1998 (in thousands):
Cash and Cash Short-term
Equivalents Investments Total
----------- ----------- ---------
Cash $206,520 $ - $ 206,520
Available-for-sale
securities 140,901 125,378 266,279
----------- ----------- ---------
Total $ 347,421 $ 125,378 $ 472,799
=========== =========== =========
The following is a reconciliation of the investment categories to the
balance sheet classification at March 29, 1997 (in thousands):
Cash and Cash Short-term
Equivalents Investments Total
----------- ----------- ---------
Cash $ 148,509 $ - $ 148,509
Available-for-sale
securities 3,031 188,215 191,246
----------- ----------- ---------
Total $ 151,540 $ 188,215 $ 339,755
=========== =========== =========
4. USE OF ESTIMATES AND CONCENTRATIONS OF OTHER RISKS
The Company's financial statements are prepared in accordance with
generally accepted accounting principles that require the use of
management estimates. These estimates are impacted, in part, by the
following risks and uncertainties:
Inventories. The Company produces inventory based on orders received
and forecasted demand. The Company must order wafers and build
inventory well in advance of product shipments. Because the Company's
markets are volatile and subject to rapid technology and price changes,
there is a risk that the Company will forecast incorrectly and produce
excess or insufficient inventories of particular products. This
inventory risk is heightened because many of the Company's customers
place orders with short lead times. Demand will differ from forecasts
and such difference may have a material effect on actual results of
operations.
Wafer Purchase Commitments. The Company has firm commitments to
purchase wafers from its joint venture partnerships and other suppliers
and will accrue losses to the extent firm wafer purchase commitments
exceed its estimated wafer needs for the next six months. The Company
continuously forecasts its estimated wafer needs. However, there is a
risk that the Company's ultimate wafer purchases will differ from its
forecasted wafer needs. Accordingly, the amount of the accrual may
differ from the actual liability for losses under the wafer purchase
commitments and such differences may have a material effect on actual
results of operations.
5. JOINT VENTURES AND MANUFACTURING SUPPLY AGREEMENTS
In 1994, the Company and IBM formed MiCRUS, a manufacturing joint
venture that produces wafers for both companies. MiCRUS began
operations in 1995. In addition, in July 1996, the Company and Lucent
Technologies (Lucent) formed Cirent Semiconductor (Cirent), a
manufacturing joint venture that produces wafers for both companies.
Cirent began operations in the fourth quarter of fiscal 1997.
MiCRUS
IBM and Cirrus Logic own 52% and 48%, respectively, of MiCRUS, which
produces wafers using IBM's wafer processing technology and makes
process technology payments to IBM, which totaled $63.5 million as of
March 28, 1998. MiCRUS leases an existing IBM facility in East
Fishkill, New York. Activities of the joint venture are focused on the
manufacture of semiconductor wafers, and do not encompass direct
product licensing or product exchanges between the Company and IBM. The
joint venture has a remaining term of six years. MiCRUS is managed by
a six-member governing board of whom three are appointed by IBM, two
are appointed by Cirrus Logic and one is the chief executive officer of
MiCRUS.
The Company is currently entitled to 55% of the MiCRUS output. If
either company does not purchase its full entitlement of the wafers,
that company will be liable to the joint venture for costs associated
with the underutilized capacity that results from the company's
shortfall in wafer purchases, unless the shortfall is purchased by the
other company or, under limited circumstances, offered to third
parties.
In connection with the formation and expansion of the MiCRUS joint
venture, the Company has incurred obligations to make equity
contributions to MiCRUS, to make payments to MiCRUS under a
manufacturing agreement and to guarantee equipment lease obligations
incurred by MiCRUS. To date, the Company has made equity investments
totaling $23.8 million. No additional equity investments are
scheduled. However, the expansion of the MiCRUS production could
require additional equity contributions by the Company.
Payments under the manufacturing agreement as of March 28, 1998 have
totaled $63.5 million and the final $7.5 million is due in fiscal
1999. The manufacturing agreement payments are being charged to the
Company's cost of sales over the life of the venture based upon the
ratio of current units of production to current and anticipated future
units of production over the remaining life of the venture.
Cirent Semiconductor
Cirent operates two wafer fabs in Orlando, Florida in a facility that
is leased from Lucent. Cirent uses Lucent's wafer processing
technology and makes process technology payments to Lucent, which
totaled $85.0 million as of March 28, 1998. Cirent is owned 60% by
Lucent and 40% by Cirrus Logic and is managed by a Board of Governors,
of whom three are appointed by Lucent and two are appointed by Cirrus
Logic. The joint venture has a term of ten years.
Initially, Lucent and the Company were each entitled to purchase one-
half of the output of the second fab. During the second quarter of
fiscal 1998, the Company amended its existing joint venture formation
agreement and reduced its entitlement to 25% of the output of the
second fab. If either company does not purchase its full entitlement
of the wafers, that company will be liable to the joint venture for
costs associated with the underutilized capacity that results from the
company's shortfall in wafer purchases, unless the shortfall is
purchased by the other company or, under limited circumstances, offered
to third parties.
In connection with the Cirent joint venture, the Company has committed
to make equity contributions to Cirent, make payments to Cirent under
a manufacturing agreement and to guarantee and/or become a co-lessee
under equipment lease obligations incurred by Cirent. To date, the
Company has made equity investments totaling $14.0 million. No
additional equity investments are scheduled.
Payments under the manufacturing agreement as of March 28, 1998 have
totaled $85.0 million. These payments are being charged to the
Company's cost of sales over the life of the venture based upon the
ratio of current units of production to current and anticipated future
units of production over the remaining life of the agreement.
The Company purchased from its joint ventures manufactured wafers in
the following amounts for fiscal 1998, 1997 and 1996 (in thousands):
1998 1997 1996
----------- ----------- ----------
Joint venture wafer purchases
MiCRUS $157,300 $154,100 $77,100
Cirent 32,700 - -
----------- ----------- ----------
Total $190,000 $154,100 $77,100
=========== =========== ==========
The Company's accounts payable balances related to wafers purchased
from its joint ventures and for losses under wafer purchase agreements
are as follows (in thousands):
March 28, March 29,
1998 1997
----------- -----------
Joint venture accounts payable
MiCRUS $33,200 $13,500
Cirent 1,800 -
Wafer purchase commitments 63,800 30,200
----------- -----------
Total $98,800 $43,700
=========== ===========
The Company guarantees jointly and severally with IBM and Lucent
equipment financings of the joint ventures in the following amounts as
of March 28, 1998 (in thousands):
March 28,
1998 Maturity
----------- -------------------
Joint venture accounts payable
MiCRUS 291,500 1998 through 2002
Cirent 250,800 1998 through 2004
----------- -------------------
Total $542,300
===========
The Company purchased the following amount of manufacturing equipment
and facility improvements for its joint ventures that the Company
expects to sell to independent leasing companies that will in turn
lease the equipment and improvements to the respective joint ventures
(in thousands):
March 28, March 29,
1998 1997
----------- ----------
Equipment purchases for joint ventures
MiCRUS $68,600 $65,900
Cirent 29,100 46,700
----------- ----------
Total $97,700 $112,600
=========== ==========
Condensed combined financial information for MiCRUS and Cirent is as
follows (in thousands):
December 31,
1997 1996
--------- ---------
Current assets $190,000 $160,000
Non-current assets 233,000 150,000
--------- ---------
Total $423,000 $310,000
========= =========
Current liabilities $134,000 $175,000
Non-current liabilities 211,000 81,000
Partner's capital 78,000 54,000
--------- ---------
Total $423,000 $310,000
========= =========
Year Ended December 31,
1997 1996 1995
--------- --------- ---------
Revenue $365,000 $250,000 $139,000
Expenses (449,000) (310,000) (171,000)
--------- --------- ---------
Net loss ($84,000) ($60,000) ($32,000)
========= ========= =========
The Company accounts for the joint ventures under the equity method.
Under the terms of the joint venture agreements, the other joint
venture partners were responsible for the start-up costs of the joint
ventures. IBM funded MiCRUS through the year ended December 31, 1995,
while Cirent was funded by Lucent through the year ended December 31,
1997. Accordingly, the Company's equity in the earnings of the joint
ventures were not material in 1998, 1997 and 1996. In addition, the
Company's total amortization of the joint venture manufacturing
payments was $8,680,000, $6,789,000 and $3,407,000 for fiscal years
1998, 1997 and 1996, respectively.
Other Wafer Supply Arrangements
Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC").
In fiscal 1996, the Company entered into a volume purchase agreement
amended with TSMC, which was amended in September 1997 and expires in
December 2000. Under the agreement, the Company will purchase from
TSMC 50% of its wafer needs that are not filled by MiCRUS and Cirent,
provided that TSMC can meet the technological and other requirements of
the Company's customers. TSMC is committed to supply these wafer needs.
The amendment removed the requirements contained in the original
agreement that the Company purchase a fixed minimum number of wafers
each year and that the Company make sizable advance payments.
United Microelectronics Corporation ("UMC").
In July of 1997, the Company terminated the joint venture and foundry
capacity agreement it had entered into with UMC, a Taiwanese Company,
in the fall of 1995 and recovered the cumulative costs of its
investment in the venture.
6. OBLIGATIONS UNDER CAPITAL LEASES
The Company has capital lease agreements for machinery and equipment as
follows (in thousands):
March 28, March 29,
1998 1997
---------- ----------
Capitalized cost $ 31,173 $ 30,594
Accumulated amortization (21,419) (15,957)
---------- ----------
Total $ 9,754 $ 14,637
========== ==========
Amortization expense on assets capitalized under capital lease
obligations is included in depreciation and amortization. The lease
agreements are secured by the leased property.
Future minimum lease payments under capital leases for the following
fiscal years, together with the present value of the net minimum lease
payments as of March 28, 1998, are (in thousands):
1999 $ 4,933
2000 3,228
2001 2,549
2002 736
2003 -
---------
Total minimum lease payments 11,446
Less amount representing interest ( 1,729)
---------
Present value of net lease payments 9,717
Less current maturities ( 4,242)
---------
Capital lease obligations $ 5,475
=========
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
March 28, March 29,
1998 1997
---------- ----------
Installment notes with interest
rates ranging from 6.38% to 9.08% $ 54,871 $ 76,892
Less current maturities (22,312) (25,644)
--------- ----------
Long-term debt $ 32,559 $ 51,248
========= ==========
Principal payments for the following fiscal years are (in
thousands):
1999 $ 22,312
2000 19,345
2001 9,518
2002 3,357
2003 339
--------
Total $ 54,871
========
At March 28, 1998, installment notes are secured by machinery and
equipment with a net book value of $47,058,000 ($67,947,000 at March
29,1997).
8. CONVERTIBLE SUBORDINATED NOTES
During December 1996, the Company completed an offering of $300.0
million of convertible subordinated notes. The notes bear interest at
six percent, mature in December 2003, and are convertible into shares
of the Company's common stock at $24.219 per share. Expenses
associated with the offering of approximately $9.4 million are deferred
and included in deposits and other assets. Such expenses are being
amortized to interest expense over the term of the notes.
9. BANK ARRANGEMENTS
The Company has a bank line of credit to provide for letters of credit
for up to a maximum aggregate of $35.0 million, which expires on June
30, 1998 and are collateralized by cash or securities with interest at
the higher of: (a).50% per annum above the latest federal funds rate
(as defined in the Second Amended Credit Agreement ); or (b)the rate
of interest in effect for such day as publicly announced from time to
time by the Bank of America National Trust and Savings Association in
San Francisco, California. The Company is currently in compliance with
all covenants under the bank line of credit. As of March 28, 1998, the
Company had approximately $30.8 million outstanding of letters of
credit and an additional $4.2 million available under this line of
credit.
10. COMMITMENTS
Facilities and Equipment Under Operating Lease Agreements
The Company leases its facilities and certain equipment under operating
lease agreements, some of which have renewal options. Certain of these
arrangements provide for lease payment increases based upon future fair
market rates. The aggregate minimum future rental commitments under
all operating leases for the following fiscal years are (in thousands):
Net
Facilities Subleases Commitments
---------- ----------- -----------
1999 $10,324 $2,204 $8,120
2000 9,969 2,000 7,969
2001 9,067 2,080 6,987
2002 8,183 2,163 6,020
2003 7,648 2,249 5,399
Thereafter 23,197 10,085 13,112
---------- ----------- -----------
Total minimum lease payments $68,388 $20,781 $47,607
========== =========== ===========
Total rent expense was approximately $11,061,000, $12,580,000 and
$11,177,000 for fiscal 1998, 1997 and 1996, respectively. Rental
income was $1,116,000 for fiscal 1998 and immaterial for fiscal 1997
and 1996.
11. RESTRUCTURING CHARGES
The Company recorded restructuring costs of $11.8 million in the third
quarter of fiscal 1998 in connection with a discontinuation of certain
strategies and product development efforts in the graphics product
group of its PC Products division. This resulted in a workforce
reduction of approximately 65 positions. The primary components of the
restructuring charge were $3.5 million related to excess assets and
$4.9 million related to excess facilities and $1.8 million of severance
payments that were made during the quarter. The total expected cash
outlay related to this charge is approximately $8.3 million, of which
$2.6 million is expected to be paid in fiscal 1999.
The following sets forth the remaining balance of the Company's fiscal
1998 restructuring accrual as of March 28, 1998 (in thousands):
Severance Facilities
and related scale back and
benefits other costs Total
------------- --------------- ------------
Fiscal 1998 provision $1,833 $9,976 $11,809
Amount utilized (1,833) (1,553) ($3,386)
------------- --------------- ------------
Balance, March 28, 1998 $ - $8,423 $8,423
============= =============== ============
In the fourth quarter of fiscal 1997, the Company recorded a pre-tax
restructuring charge of $21.0 million in connection with a decision to
reorganize into four market focused divisions (Personal Computer
Products, Communications Products, Mass Storage Products and Crystal
Semiconductor Products), to outsource certain of its production testing
and to consolidate certain corporate functions. In connection with
these actions, the Company had effected a workforce reduction of
approximately 400 people, representing approximately 15 percent of the
worldwide staff, and consolidated certain corporate functions.
Approximately $5.1 million of the restructuring charge was attributable
to the workforce reduction. The remaining $15.9 million relates
primarily to the write-off of excess assets (primarily excess test
equipment and leasehold improvements totaling approximately $9.5
million) and facilities commitments (approximately $3.0 million), which
were determined using an expected future cash flows basis for
determining the impairment of the asset values and the amount of the
facilities accrual. In fiscal 1998, the Company reversed $2.0 million
that had been previously accrued for excess facilities commitments and
incurred and paid an additional $4.7 million of compensation costs in
connection with the same restructuring. Cash payments of approximately
$9.1 million, including the additional $4.7 million, were made in
fiscal 1998. As of March 28, 1998, activities related to this
restructuring were substantially complete.
The following sets forth the remaining balance of the Company's fiscal
1997 restructuring accrual as of March 28, 1998 (in thousands):
Severance Facilities
and related scale back and
benefits other costs Total
------------- --------------- ------------
Balance, March 29, 1997 $5,100 $15,854 $20,954
Amount utilized (5,063) (12,843) (17,906)
Adjustments - (2,000) (2,000)
------------- --------------- ------------
Balance, March 28, 1998 $ 37 $1,011 $1,048
============= =============== ============
In the fourth quarter of fiscal 1996, as a result of decreased demand
for the Company's products for use in personal computers, which
accounted for more than 80% of the Company's revenue, management
reviewed the various operating areas of the business and took certain
steps to bring operating expenses and capacity in line with demand.
These actions resulted in a pre-tax restructuring charge of
approximately $11.6 million. The principal actions in the
restructuring involved the consolidation of support infrastructure and
the withdrawal from an unprofitable product line and reduction of
planned production capacity. This resulted in the termination of
approximately 320 positions from the manufacturing, research and
development, sales and marketing, and administrative departments. As
of March 28, 1998, activities related to this restructuring were
substantially complete.
The following sets forth the remaining balance of the Company's fiscal
1996 restructuring accrual as of March 28, 1998 (in thousands):
Severance Capacity
and related scale back and
benefits other costs Total
------------- --------------- ------------
March 30, 1996 $7,536 $4,030 $11,566
Amount utilized (6,904) (1,691) (8,595)
------------- --------------- ------------
March 29, 1997 632 2,339 2,971
Amount utilized (632) (1,453) (2,085)
------------- --------------- ------------
March 28, 1998 $- $886 $886
============= =============== ============
12. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have adopted 401(k) Profit Sharing
Plans (the "Plans") covering substantially all of their qualifying
domestic employees. Under the Plans, employees may elect to reduce
their current compensation by up to 15%, subject to annual limitations,
and have the amount of such reduction contributed to the Plans. The
Plans permit, but do not require, additional discretionary
contributions by the Company on behalf of all participants. During
fiscal 1998, 1997 and 1996, the Company and its subsidiaries matched
employee contributions up to various maximums per plan for a total of
approximately $1,007,000, $2,046,000 and $2,111,000, respectively. The
Company intends to continue the contributions in fiscal 1999.
13. SHAREHOLDERS' EQUITY
Employee Stock Purchase Plan
In March 1989, the Company adopted the 1989 Employee Stock Purchase
Plan (ESPP). As of March 28, 1998, approximately 969,660 shares of
Common Stock are reserved for future issuance under this plan. During
fiscal 1998, 1997 and 1996, 640,501, 618,169 and 593,820 shares,
respectively, were issued under the ESPP.
Preferred Stock
The Preferred Stock is authorized but unissued. The Board of Directors
has the authority to issue the undesignated Preferred Stock in one or
more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued shares of
Preferred Stock and to fix the number of shares constituting any series
and the designations of such series, without any further vote or action
by the shareholders.
Stock Option Plans
The Company has various stock option plans (the "Option Plans") under
which officers, key employees, non-employee directors and consultants
may be granted qualified and non-qualified options to purchase shares
of the Company's authorized but unissued Common Stock. Options are
generally priced at the fair market value of the stock on the date of
grant. Options are either exercisable upon vesting or exercisable
immediately but unvested shares are held in escrow and are subject to
repurchase at the original issuance price. Options currently expire no
later than ten years from date of grant.
In previous years, the Company also has issued non-qualified stock
options to purchase a total of 664,156 shares at prices ranging from
$0.06 to $6.50 per share, subject to a vesting schedule of three and
one-half or four years and 23,000 shares as stock grants to employees
at no cost which vest over five years. During fiscal 1998, 9,200
shares of the stock grants were cancelled and retired. The Company
recognizes as compensation expense the excess of the fair market value
at the date of grant over the exercise price of such options and
grants. The compensation expense is amortized ratably over the vesting
period of the options and was $493,000, $494,000 and $820,000 in
fiscal 1998, 1997 and 1996, respectively.
Information relative to stock option activity is as follows (in
thousands):
Options Weighted
Available Average
for Number of Aggregate Exercise
Grant Shares Price Price
--------- ------- ---------- --------
Balance, April 1, 1995 1,486 13,388 $ 141,794 $ 10.59
Shares authorized for issuance 1,880 - - -
Options granted (3,086) 3,086 108,828 35.27
Options exercised - (2,704) (20,399) 7.54
Options cancelled 529 (575) (9,900) 17.22
--------- ------- ---------- --------
Balance, March 30, 1996 809 13,195 220,323 16.70
Shares authorized for issuance 3,500 - - -
Options granted (3,421) 3,421 67,089 19.61
Options exercised - (1,569) (12,418) 7.91
Options cancelled 2,465 (2,509) (55,648) 22.18
--------- ------- ---------- --------
Balance, March 29, 1997 3,353 12,538 219,346 17.49
Shares authorized for issuance 1,000 - - -
Options granted (10,304) 10,304 104,030 10.10
Options exercised - (1,387) (10,219) 7.37
Options cancelled 11,191 (11,191) (210,969) 18.85
Options expired (2,542) - - -
--------- ------- ---------- --------
Balance, March 28, 1998 2,698 10,264 $ 102,188 $ 9.96
========= ======= ========== ========
As of March 28, 1998, approximately 12,962,299 shares of Common Stock
were reserved for issuance under the Option Plans.
The following table summarizes information concerning currently
outstanding and exercisable options:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$0.06-$9.13 1,700,023 4.06 $7.37 1,692,955 $7.40
$9.13-$9.25 5,524,004 9.09 $9.19 19,769 $9.19
$9.25-$15.50 2,739,835 8.97 $12.09 300,639 $12.63
$15.50-$54.63 300,150 8.39 $19.29 38,981 $28.10
---------------------------------------- ---------------------
10,264,012 8.20 $9.96 2,052,344 $8.57
======================================== =====================
As of March 29, 1997 and March 30, 1996, the amount of options
exercisable were 5,569,000 and 5,109,000, respectively.
On April 30, 1997, the Company engaged in an option exchange program
under which 7,092,233 of options to purchase replacement options with
an exercise price of $9.1875 per share were granted to current
employees with outstanding options with exercise prices above $9.1875
per share and the old options were cancelled, unless the employee
elected not to participate in the exchange. In connection with this
program, replacement options have been issued with the same vesting
schedule as the old options, however, all replacement options were
subject to a one year blackout on exercise which expires on April 30,
1998. If an employee voluntarily terminates his or her employment
prior to the end of the blackout period, the replacement options would
be forfeited.
Shares Reserved for Future Issuance
The Company has a total of approximately 26,319,000 shares of common
stock reserved as of March 28, 1998 for issuance related to its
convertible subordinated notes, the Option Plans, and the ESPP.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
in accounting for its plans. Accordingly, no compensation expense has
been recognized for its stock-based compensation plans other than for
restricted stock and performance-based awards. Had compensation cost
for the Company's other stock option plans been determined based upon
the fair value at the grant date for awards under these plans
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
the Company's net income (loss) and net income (loss) per share would
have been reduced to the pro forma amounts indicated below:
1998 1997 1996
---------- ---------- ----------
Net income (loss) as reported $36,493 ($46,156) ($36,183)
Proforma net income (loss) $5,812 ($65,256) ($49,783)
Basic net income (loss) per share as reported $0.54 ($0.71) ($0.58)
Proforma basic net income (loss) per share $0.08 ($1.00) ($0.80)
Diluted net income (loss) per share as reported $0.52 ($0.71) ($0.58)
Proforma diluted net income (loss) per share $0.08 ($1.00) ($0.80)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period (for
options) and the six-month purchase period (for stock purchases under
the ESPP).
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's options
have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable
single measure of the fair value of its options.
The effects on pro forma disclosure of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of
future years. Because SFAS No. 123 is applicable only to options
granted subsequent to April 1, 1995, the pro forma effect will not be
fully reflected until 2000.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model using a dividend yield of
0% and the following additional weighted-average assumptions used for
grants:
1998 1997 1996
Employee Option Plans: ---------- ---------- ----------
Expected stock price volatility 69.46% 68.87% 68.87%
Risk-free interest rate 6.2% 6.1% 5.8%
Expected lives (in years) 5.0 5.0 5.0
Employee Stock Purchase Plan:
Expected stock price volatility 69.46% 74.47% 74.47%
Risk-free interest rate 5.8% 5.7% 5.3%
Expected lives (in years) 0.5 0.5 0.5
Using the Black-Scholes option valuation model, the weighted average
estimated fair value of employee stock options granted in fiscal 1998,
1997 and 1996 were $5.55, $11.05 and $20.53, respectively. The
weighted average estimated fair value for purchase rights granted under
the ESPP for fiscal 1998, 1997 and 1996 were $4.37, $6.79 and $8.43,
respectively.
14. INCOME TAXES
Income (loss) before provision (benefit) for income taxes consists of
(in thousands):
1998 1997 1996
--------- --------- ---------
United States $49,757 ($25,176) ($21,168)
Foreign 6,246 (26,443) (20,555)
--------- --------- ---------
Total $56,003 ($51,619) ($41,723)
========= ========= =========
The provision (benefit) for income taxes consists of (in thousands):
1998 1997 1996
--------- --------- ---------
Federal
Current $6,890 ($15,264) $25,303
Deferred 8,524 7,041 (28,182)
--------- --------- ---------
15,414 (8,223) (2,879)
State
Current 1,532 (1,077) 3,402
Deferred (146) 812 (10,110)
--------- --------- ---------
1,386 (265) (6,708)
Foreign
Current 2,710 3,025 4,047
--------- --------- ---------
$19,510 ($5,463) ($5,540)
========= ========= =========
The provision (benefit) for income taxes differs from the amount
computed by applying the statutory federal rate to pretax income as
follows:
1998 1997 1996
---------------------------
Expected income tax provison (benefit)
at the US federal statutory rate 35.0% (35.0%) (35.0%)
Provision (benefit) for state income
taxes, net of federal effect 1.6% (0.4%) (10.5%)
Foreign operating results taxed at
rates other than the US statutory rate 1.1% 27.9% 35.9%
Research and development credits
(Flow-through method) (3.6%) (5.0%) (3.1%)
Other 0.7% 1.9% (0.6%)
---------------------------
Provision (benefit) for income taxes 34.8% (10.6%) (13.3%)
===========================
Under Standard Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes", deferred income tax assets and
liabilities reflect the net tax effects of tax carryforwards and
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and the amounts used for income tax
purposes.
Significant components of the Company's deferred tax assets and
liabilities are (in thousands):
March 28, March 29,
1998 1997
-------------------
Deferred tax assets:
Inventory valuation $13,480 $21,129
Accrued expenses and allowances 20,433 21,457
Net operating loss carryforwards - 3,687
Research and development credit carryforwards 17,372 14,193
State investment tax credit carryforwards 2,959 4,442
Other 8,377 4,521
-------------------
Total deferred tax assets 62,621 69,429
-------------------
Deferred tax liabilities:
Depreciation 10,806 9,239
Other 5,117 5,114
-------------------
Total deferred tax liabilities 15,923 14,353
-------------------
Total net deferred tax assets $46,698 $55,076
===================
The tax credit carryforwards expire beginning in the fiscal year 2004
through 2012.
15. RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income", was issued and is effective for
fiscal years commencing after December 15, 1997.
In 1997, the Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures About Segments of an Enterprise and Related
Information", was issued and is effective for fiscal years commencing
after December 15, 1997.
The Company is required to adopt the provisions of SFAS 130 and 131 in
fiscal year 1999 and expects the adoption will not impact results of
operations or financial position but will require additional
disclosures.
16. LEGAL MATTERS
The Company and certain of its customers from time to time have been
notified that they may be infringing certain patents and other
intellectual property rights of others. Further, customers have been
named in suits alleging infringement of patents by the customer
products. Certain components of these products have been purchased
from the Company and may be subject to indemnification provisions made
by the Company to the customers. The Company has not been named in any
such suits. Although licenses are generally offered in such
situations, there can be no assurance that litigation will not be
commenced in the future regarding patents, mask works, copyrights,
trademarks, trade secrets, or indemnification liability, or that any
licenses or other rights can be obtained on acceptable terms.
17. SUBSEQUENT EVENTS (Unaudited)
On May 4, 1998, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock outstanding held on record as of May,
15, 1998. Each Right will entitle shareholders to purchase 1/100
share of the Company's Series A Participating Preferred Stock at an
exercise price of $60. The Rights only become exercisable in certain
limited circumstances following the tenth day after a person or group
announces acquisitions of or tender offers for 15% or more of the
Company's common stock. For a limited period of time following the
announcement of any such acquisition or offer, the Rights are
redeemable by the Company at a price of $0.01 per Right. If the Rights
are not redeemed, each Right will then entitle the holder to purchase
common stock having the value of twice the exercise price. For a
limited period of time after the exercisability of the Rights, each
Right, at the discretion of the Board, may be exchanged for one share
of common stock per Right. The Rights will expire in the fiscal year
2009.
18. SUBSEQUENT EVENTS
Subsequent to March 28, 1998 and through June 4, 1998, the Company has
repurchased approximately 3.2 million shares of its common stock at a
total cost of approximately $33.8 million. The repurchases were made
under a common stock repurchase program approved by the Board of Directors
for the repurchase of up to 10,000,000 shares of its Common Stock in
the open market from time to time, depending upon market conditions,
share price and other conditions.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cirrus Logic, Inc.
We have audited the accompanying consolidated balance sheets of Cirrus
Logic, Inc. as of March 28, 1998 and March 29, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended March 28, 1998.
Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Cirrus Logic, Inc. at March 28, 1998 and March 29, 1997, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended March 28, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/Ernst & Young LLP
San Jose, California
April 22, 1998, except
for Note 18, as to which
the date is June 4, 1998
CONSOLIDATED SUPPLEMENTARY FINANCIAL DATA
(Amounts in thousands except per share amounts)
(Unaudited)
Fiscal years by quarter
-----------------------------------------------------------------------------------
1998 1997
----------------------------------------- ----------------------------------------
4th ++ 3rd + 2nd 1st 4th ** 3rd * 2nd 1st
--------- --------- --------- --------- --------- --------- --------- --------
Operating summary:
Net sales $287,844 $240,843 $223,960 $201,623 $212,917 $253,309 $236,030 $214,898
Cost of sales 201,380 146,586 135,047 122,471 163,905 156,613 145,870 132,407
Loss (gain) on sale of assets, net (4,700) (16,081) - - 7 (12,009) (6,913) -
Restructuring costs and other, net - 14,464 - - 20,954 - - -
Income (loss) from operations 18,047 18,893 15,896 5,443 (56,943) 17,360 7,690 (9,295)
Income (loss) before income taxes 21,226 18,467 12,768 3,543 (59,596) 14,419 4,194 (10,636)
Net income (loss) 12,149 $12,926 $8,938 $2,480 ($51,859) $10,310 $2,998 ($7,605)
Net income (loss) per share:
Basic $0.18 $0.19 $0.13 $0.04 ($0.79) $0.16 $0.05 ($0.12)
Diluted $0.18 $0.18 $0.13 $0.04 ($0.79) $0.15 $0.04 ($0.12)
Weighted average common shares outstanding:
Basic 68,092 67,593 67,232 66,416 65,197 65,178 64,776 64,159
Diluted 69,241 70,561 70,549 67,849 65,197 68,441 67,221 64,159
Stock prices:
High $11.38 $17.44 $17.56 $13.00 $17.11 $24.13 $21.88 $25.13
Low 9.69 10.38 10.31 8.50 10.77 15.75 13.38 16.88
The per common share amounts prior to the third quarter of fiscal 1998
have been restated as required to comply with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. For further
discussion of net income (loss) per share and the impact of Statement
No. 128, see the notes to the consolidated financial statements.
* In the third quarter of fiscal 1997, other expenses increased as a
result of a charge of approximately $2.3 million for the settlement of
pending security claims against the Company.
** The fourth quarter of fiscal 1997 includes $34.5 million that was
charged to cost of sales for wafer purchase commitments, inventory write-
downs, and $21.0 million related to a workforce reduction, excess
assets and excess facilities commitments.
+ In the third quarter of fiscal 1998, restructuring expenses includes
$11.8 million charges related to workforce reductions, excess assets
and excess facility commitments related to strategic changes in the
graphic division.
++ The fourth quarter of fiscal 1998 includes $60.0 million of revenues
from license and patent royalties and $53.0 million that was charged to
cost of sales for wafer purchase commitments.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers - See the section entitled "Executive Officers
of the Registrant" in Part I, Item 1 hereof.
(b) Directors - The information required by this Item is incorporated
by reference to the section entitled "Election of Directors" in the
Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the sections entitled "Executive Compensation" and various stock
benefit plan proposals in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to
the sections entitled "Share Ownership of Directors, Executive Officers
and Certain Beneficial Owners" of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the section entitled "Employment Agreements and Certain Transactions"
in the Registrant's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The following consolidated financial statements of the Registrant and
Report of Ernst & Young LLP, Independent Auditors are included
herewith:
(i) Consolidated Balance Sheets as of March 28, 1998 and March 29,
1997.
(ii) Consolidated Statements of Operations for the years ended March
28, 1998, March 29, 1997 and March 30, 1996.
(iii) Consolidated Statements of Shareholders' Equity for the years
ended March 28, 1998, March 29, 1997 and March 30, 1996.
(iv) Consolidated Statements of Cash Flows for the years ended March
28, 1998, March 29, 1997 and March 30, 1996.
(v) Notes to Consolidated Financial Statements.
(vi) Report of Ernst & Young LLP, Independent Auditors.
2. Financial Statement Schedule
The following consolidated financial statement schedule is filed as
part of this report and should be read in conjunction with the
consolidated financial statements:
Schedule
II Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission
of the schedule or because the information required is included in the
consolidated financial statements or notes thereto.
CIRRUS LOGIC INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Charged to Balance
at Beginning Costs and Payments/ at Close
Item of Period Expenses Deductions of Period
- ----------------------- ------------- ----------- ------------ ------------
(Amounts in thousands)
1996
Accrued wafer purchase
commitments $ - $ 14,000 $ - $ 14,000
Allowance for doubtful
accounts $ 9,439 $ 4,094 ($ 359) (1) $ 13,174
1997
Accrued wafer purchase
commitments $ 14,000 $ 31,700 ($15,500) $30,200
Allowance for doubtful
accounts $ 13,174 $ 518 ($ 922)(1) $ 12,770
1997
Accrued wafer purchase
commitments $ 30,200 $ 53,000 ($19,400) $63,800
Allowance for doubtful
accounts $ 12,770 $ 630 ($ 2,224) (1) $ 11,176
(1) Uncollectible accounts written off, net of recoveries and sale of assets.
3. Exhibits
The following exhibits are filed as part of or incorporated by
reference into this Report:
3.1 (8) Restated Articles of Incorporation of Registrant, as
amended.
3.2 (1) Form of Restated Articles of Incorporation of Registrant.
3.3 (1) By-laws of Registrant, as amended.
4.1 (1) Article III of Restated Articles of Incorporation of
Registrant (See Exhibits 3.1 and 3.2).
10.1 (9) Amended 1987 Stock Option Plan.
10.2 (9) Amended 1989 Employee Stock Purchase Plan.
10.3 (1) Fourth Amendment to Preferred Shares Purchase Agreements,
Founders Registration Rights Agreements, and Warrant Agreements and
Consent between the Registrant and certain shareholders of the
Registrant dated May 15, 1987, as amended April 28, 1989.
10.4 (1) Form of Indemnification Agreement.
10.5 (1) Agreement for Foreign Exchange Contract Facility between
Bank of America National Trust and Savings Association and Registrant,
dated April 24, 1989.
10.6 (2) 1990 Directors Stock Option Plan and forms of Stock Option
Agreement.
10.7 (2) Lease between Renco Investment Company and Registrant dated
December 29, 1989.
10.8 (2) Loan agreement between USX Credit Corporation and Registrant
dated December 28, 1989.
10.9 (3) Loan agreement between Household Bank and Registrant dated
September 24, 1990.
10.10 (4) Equipment lease agreement between AT&T Systems Leasing
Corporation and Registrant dated December 2, 1991.
10.11 (4) Lease between Renco Investment Company and Registrant dated
May 21, 1992.
10.12 (5) Loan agreement between Deutsche Credit Corporation and
Registrant dated March 30, 1993.
10.13 (5) Lease between Renco Investment Company and Registrant dated
February 28, 1993.
10.14 (6) Lease between Renco Investment Company and Registrant dated
May 4, 1994.
10.15 (7) Participation Agreement dated as of September 1, 1994 among
Registrant, International Business Machines Corporation, Cirel Inc. and
MiCRUS Holdings Inc.
10.16 (7) Partnership Agreement dated as of September 30, 1994 between
Cirel Inc. and MiCRUS Holdings Inc.
10.17 (8) General Partnership Agreement dated as of October 23, 1995
between the Company and AT&T.
10.18 (8) Joint Venture Formation Agreement dated as of October 23,
1995 between the Company and AT&T.
10.19 (10) Second Amended and Restated Multicurrency Credit Agreement
between Registrant and Bank of America dated June 30, 1997.
10.20 (11) Third Amendment to the Joint Venture Formation Agreement
with Cirent dated August 21, 1997.
19.1 Proxy Statement to the 1998 Annual Meeting of Shareholders.
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Article 5 Financial Data Schedule (March 28, 1998)
27.2 Article 5 Financial Data Schedule (March 29, 1997)
27.3 Article 5 Financial Data Schedule (March 30, 1996)
27.4 Article 5 Financial Data Schedule (December 27, 1997)
27.5 Article 5 Financial Data Schedule (September 27, 1997)
27.6 Article 5 Financial Data Schedule (June 28, 1997)
27.7 Article 5 Financial Data Schedule (December 28, 1996)
27.8 Article 5 Financial Data Schedule (September 28, 1996)
27.9 Article 5 Financial Data Schedule (June 29, 1996)
(1) Incorporated by reference to Registration Statement No. 33-28583.
(2) Incorporated by reference to Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1990.
(3) Incorporated by reference to Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1991.
(4) Incorporated by reference to Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1992.
(5) Incorporated by reference to Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1993.
(6) Incorporated by reference to Registrant's Report on Form 10-K for
the fiscal year ended April 2, 1994.
(7) Incorporated by reference to Registrant's Report on Form 10-Q/A for
the quarterly period ended October 1, 1994.
(8) Incorporated by reference to Registrant's Report on Form 10-Q/A for
the quarterly period ended September 30, 1995.
(9) Incorporated by reference to Registrant's Report on Form 10-K for
the fiscal year ended March 30, 1996.
(10) Previously filed.
(11) Incorporated by reference to Registrant's Report on Form 10-Q/A
for the quarterly period ended September 27, 1997.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CIRRUS LOGIC, INC.
By: /s/ Ronald K. Shelton
Ronald K. Shelton
Vice President, Finance, Chief Financial Officer,
Principal Accounting Officer, and Treasurer.
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Ronald K. Shelton,
his attorney-in-fact, with the power of substitution,
for him in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits thereto
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated:
/s/ Michael L. Hackworth /s/ C. Gordon Bell
Michael L. Hackworth C. Gordon Bell
President, Chief Executive Director, June 19, 1998
Officer, Chairman of
the Board and Director
June 19, 1998
/s/ Suhas S. Patil /s/ D. James Guzy
Suhas S. Patil D. James Guzy
Chairman Emeritus and Director, June 19, 1998
Director
June 19, 1998
/s/ Ronald K. Shelton /s/ Walden C. Rhines
Ronald K. Shelton Walden C. Rhines
Vice President, Finance Director, June 19, 1998
Chief Financial Officer,
Principal Accounting Officer,
and Treasurer
June 19, 1998
/s/ Robert H. Smith
Robert H. Smith
Director, June 19, 1998