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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended March 30, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
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Commission File Number 0-17795
CIRRUS LOGIC, INC.
DELAWARE
77-0024818
(State of incorporation)
(I.R.S. ID)
4210 South Industrial Drive, Austin, TX 78744
(512) 445-7222
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
Preferred Stock Purchase Rights
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. [_]
Aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of May 31, 2002, was approximately $643
million 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.
As of May 31, 2002, the number of outstanding shares of the registrant's
Common Stock, $0.001 par value, was 83,029,195.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on Form
10-K certain information contained in the registrant's proxy statement for its
annual meeting of stockholders to be held July 24, 2002, which will be filed by
the registrant within 120 days after March 30, 2002.
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CIRRUS LOGIC, INC.
FORM 10-K
For The Fiscal Year Ended March 30, 2002
INDEX
PART I
Item 1. Business............................................................................. 3
Item 2. Properties........................................................................... 16
Item 3. Legal Proceedings.................................................................... 16
Item 4. Submission of Matters to a Vote of Securities Holders................................ 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 17
Item 6. Selected Consolidated Financial Data................................................. 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7a. Quantitative and Qualitative Disclosures About Market Risks.......................... 27
Item 8. Financial Statements and Supplementary Data.......................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 60
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 60
Item 11. Executive Compensation............................................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 60
Item 13. Certain Relationships and Related Transactions....................................... 60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 61
Signatures........................................................................... 63
Exhibit Index........................................................................ 64
PART I
ITEM 1. Business
Cirrus Logic ("we", "us", "our", "the Company") is a leading supplier of
high-performance analog and digital signal processing ("DSP") chip solutions
for consumer entertainment electronics that allow people to see, hear, connect,
and enjoy digital entertainment. Our chip solutions or integrated circuits
("ICs"), employ high-performance analog and DSP technologies to manipulate and
improve the quality of audio, video, and connectivity signals. Our ICs also
convert signals from digital-to-analog and analog-to-digital, as is frequently
required in electronic equipment. An audio chip solution that can perform both
of these conversion functions is referred to as a coder-decoder or codec.
Codecs and other devices that process both digital and analog signals are
referred to as mixed-signal devices. Our mixed-signal devices are designed for
specific markets that derive value from our expertise in advanced mixed-signal
design processing, systems-level engineering, and software knowledge. Our chip
solutions enable original equipment manufacturers ("OEMs") to accelerate
development of leading-edge digital entertainment products that are in high
consumer demand.
We were founded in 1984 and were reincorporated in the State of Delaware in
February 1999. With headquarters in Austin, Texas and major sites in California
(Fremont and El Dorado Hills) and Colorado (Broomfield and Boulder), we also
serve customers from international offices in Japan, Asia and Europe. Our
common stock, which has been publicly traded since 1989, is listed on the
NASDAQ National Market under the symbol CRUS.
During fiscal 2002, we acquired the assets of Peak Audio, Inc. and 100% of
the voting shares of ShareWave, Inc., LuxSonor Semiconductors, Inc. and Stream
Machine Company. These acquisitions provided us with additional technology and
products in our three product groups explained below.
Markets and Products
Our products are currently used in the consumer electronics, personal
computer, telecommunications, and data acquisition markets. During the last
several years and most of fiscal 2002, we organized our products into the
following three principal product groups:
Analog Products: consumer audio, industrial automation and control, data
acquisition, personal computer, and communication applications
Internet Solutions: optical storage and embedded processor applications
Magnetic Storage: hard disk drive and read/write applications
During fiscal 2002, we exited the magnetic storage chip business, completed
four acquisitions and changed our business model to focus on consumer
entertainment electronics. As a result of these events, we began reporting on
our products using three new product groups effective with the fourth quarter
of fiscal 2002. The new product groups are:
Audio Products: consumer audio analog converters, consumer audio DSP, embedded
audio processors, personal computer audio, and data acquisition
Video Products: DVD optical servo controllers, DVD video decoders, and MPEG-2
video recording
Connectivity Products: embedded Ethernet, wireless networking, and
communications
We offer more than 200 products to over 4,000 customers worldwide, through
both direct and indirect sales channels. Our major customers are among the
world's leading electronics manufacturers and include Apple, Bose, Creative
Technologies, Dell, Denon, Harman Kardon, Hitachi, IBM, Kenwood, Pace,
Panasonic, Philips, Pioneer, Samsung, Schlumberger, SONICblue (formerly
S3/Diamond Multimedia), Sony, and Thomson Multimedia.
We target both large existing and emerging growth consumer entertainment
markets that derive value from our expertise in advanced mixed-signal design
processing, systems-level engineering, and software expertise. This expertise
is most evident in our ICs and related operating systems as well as subsystem
modules or system equipment designs and related software.
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Audio Products
Our audio group of products is utilized in consumer audio, embedded audio
processor, and PC audio products, as well as in industrial data acquisition and
measurement products. Our industrial products serve as technology drivers for
advanced mixed-signal techniques that have potential use in our broader
consumer product line.
Consumer Audio
We currently offer more than 100 products for the consumer, professional,
and automotive audio markets in our consumer audio product line.
Our consumer products are incorporated into a wide range of audio equipment
in the high-fidelity audio market, including audio/video receivers and
amplifiers, home-theater systems, cable and satellite set-top boxes, digital
audio tape recorders, audio and video compact disc players and recorders,
powered speakers, DVD players, DVD receivers, DVD recorders and MP3/WMA
("Windows Media Audio") compressed audio players. DVD players use an optical
disc technology that is expected to replace the audio and video compact disc
("CD"), as well as the computer CD-ROM, over the next few years due to its
significantly greater storage capacity. MP3 technology typically provides a
greater than ten-to-one file size reduction for digital audio content. By using
MP3 compression, approximately 30 minutes of audio content can be loaded into a
small form factor, 32 MB solid-state portable music player versus an hour using
WMA compression. Additionally, approximately 11 hours of audio content can be
loaded onto a standard CD disc by using MP3 compression versus approximately 22
hours of audio content using WMA compression. Our processor and mixed-signal
products convert the player's internal digital sound output into an analog
audio signal.
Our products include audio analog-to-digital converters, audio
digital-to-analog converters, audio codecs that combine analog-to-digital and
digital-to-analog converters in a single package, Pulse Width Modulation
("PWM") audio amplifiers, audio digital interface components, TV encoders, and
a family of audio decoders that use DSP technology and that support the
principal standards in the audio industry, such as Dolby Digital(R) (AC-3),
Advanced Audio Codec(R) ("AAC"), Digital Theater System(R) ("DTS"), including
support for the new DTS 96/24 standard, Moving Picture Experts Group ("MPEG")
audio decoding, Prologic/Prologic II, THX, and other special sound effects
processing. Our customers include Aiwa, Bose, Harman Kardon, Kenwood, LG,
Marantz, Onkyo, Panasonic, Pioneer, RCA/Thomson, Sony, and Yamaha. We are a
leading supplier of digital audio devices for both the MP3 player market and
the audio/video receiver markets.
Our professional and automotive products include audio analog-to-digital
converters, audio digital-to-analog converters, audio digital interface
products, audio sample rate converters, and products that enhance audio signal
quality using DSP technology. Our professional and automotive products are
incorporated in high-end professional recording equipment, high performance
digital mixing consoles, special effects processors, musical instrument
amplifiers, and automotive stereo systems.
Computer Audio
We currently offer more than 15 computer audio products for use in personal
computers and workstations. A workstation is a computer intended for individual
use, which is faster and more capable than a personal computer. Our chips are
incorporated into the motherboards of desktop and notebook computers and
workstations, as well as in external cards that plug into computers and
workstations that enable audio functions on those machines. We are one of the
leading suppliers of stereo audio chips for the personal computer and
workstation markets. Our chips provide a cost-effective solution for
multi-channel upgradability. Our chips provide high quality audio signals for
the input and output functions of personal computer and workstation audio
products. Our chips support a range of personal computer and workstation audio
systems, including those that offer three dimensional sound effects and music
synthesis, such as sound processing and mixing capabilities, as
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well as compatibility with standard audio software packages, such as
SoundBlaster(R) and Microsoft DirectSound(R). Our computer audio products
enhance the sound quality and audio capabilities of personal computers and
workstations. These products include personal computer interface digital signal
processors, which enable advanced audio functions. These advanced audio
functions include music synthesis, including sound processing and mixing
capabilities for gaming, MP3 encode and decode Dolby Digital(R) and DTS(R)
add-in cards to enhance the home theater listening experience. Our other
products that enhance the sound quality and audio capabilities of personal
computers and workstations include controller products, which enable special
sound effects processing in personal computers and workstations and allow
personal computer gamers to perceive sound as coming from various points around
them in a three-dimensional space, sound equalizers, acoustic echo cancellation
for high quality Internet audio, acceleration for Microsoft DirectSound(R), and
other standard industry interfaces such as Aerial 3D ("A3D") and Environmental
Audio Extension ("EAX"). Our principal customers include Creative Technologies,
Dell, Hewlett Packard, Intel, and IBM.
Market Specific Processors
We develop and market highly integrated, system-on-chip ("SOC") products for
emerging consumer applications. SOC products integrate a number of different
functions or systems onto a single chip. In the past, most electronic products
required multiple chips to perform different functions; reducing the number of
chips in a design allows space and cost savings for consumers. Our current SOC
designs are based on processor cores licensed from ARM Ltd. and are marketed as
market-specific processors. These products are designed for use in digital
audio devices, handheld information appliances and Internet computing devices.
Currently, we are the leading supplier of chips in the portable digital audio
market, with customers including SONICblue, Creative Technologies,
Hewlett-Packard, Samsung and iRiver. We expect our next generation of chips to
enable further growth of the digital audio market via a new home entertainment
appliance called the Digital Audio Jukebox. This product compresses music
acquired over the Internet or from personal collections, stores the music on a
local hard disk drive, and allows the music to be played over a home
entertainment system. Other chips specifically target applications such as
personal digital assistants ("PDAs") and Internet information appliances, such
as electronic books and low-cost Internet terminals.
Data Acquisition
We design and market analog, digital and mixed-signal chips for data
acquisition, instrumentation and process control applications. In addition to
supporting the data acquisition product line, the advanced mixed-signal
technologies developed for this product line have potential use across our
broader line of consumer entertainment products. Our data acquisition product
line includes more than 100 products used in industrial automation,
instrumentation, medical, military and geophysical applications. Types of
applications include the measurement of energy usage in power meters and
fluorescent light fixtures, temperature gauges for industrial and medical use,
seismic devices for oil field and seismology applications and high-precision
weigh scales for commercial and scientific use. Our broad line of
analog-to-digital converters consists of general purpose and low frequency
measurement devices. These devices use patented self-calibration techniques
that improve accuracy and reduce system-level cost. Our customers include
National Instruments, Rockwell Automation and Schlumberger.
Video Products
Our video group of products consists of chip solutions for DVD optical servo
controllers, DVD video decoders and MPEG-2 video recording.
Optical Storage
For several years, we have supplied CD-ROM and CD-RW products, which are
principally targeted at PC-based markets. CD-ROM drives do not allow writing to
the compact disc. CD-ROM drives have been developed
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that permit users of personal computers and workstations to record on CD-ROMs
either one time, referred to as CD-R drives, or numerous times, referred to as
CD-RW drives. The information stored on a CD is transmitted to the computer or
workstation through a device referred to as a decoder and is written to CD-R or
CD-RW through a device referred to as an encoder. In fiscal 2001, we
discontinued our CD-ROM decoder products. In fiscal 2002, we decided to
discontinue our CD-RW products. We expect to make our final shipment of CD-RW
parts in the first half of fiscal 2003.
We also provide chips for the DVD drive electronics market. We completed
development of a DVD drive manager (CL3710) in fiscal 2001. This highly
integrated, high performance chip solution was designed to serve a variety of
DVD applications, including PC-based DVD-ROM drives, consumer DVD players, and
DVD-based game consoles. We began making production shipments of this device at
the end of fiscal 2001 and are now shipping in significant volumes.
We currently sell a large volume of CL3710 products to Thomson Multimedia
S.A. for inclusion in Microsoft's Xbox. In addition, we are leveraging the
technologies acquired in the acquisition of LuxSonor in fiscal 2002 by
combining both drive electronics with MPEG decoder on a single board to provide
a complete DVD player solution on a single board. This product is being
aggressively marketed in Asia.
Looking forward, we expect to take further advantage of the combined
technologies of DVD drive and MPEG decoder to provide cost effective volume
products for the DVD player market.
DVD Processors
This product line, which resulted from the acquisition of LuxSonor, provides
chips and software for controlling the functionality of DVD disc navigation
along with digital audio and video decompression within consumer DVD players.
Currently we are shipping a first-generation device called the CS98000 and a
second-generation product, called the CS98100, which also includes the video
digital-to-analog converters to provide additional system cost reduction.
Video Recording
As a result of our acquisition of Stream Machine during fiscal 2002, we
acquired MPEG-2 video recording technology with expertise in digital audio and
video, including architecture, algorithms, and compression technology. We have
assimilated this technology and expertise, and are now developing and marketing
video codecs and audio/video codecs for use in consumer electronics, including
desktop video editing, personal video recorders ("PVR") and DVD recording. We
are currently shipping these products in volume.
Connectivity
Our connectivity group of products includes chips for embedded Ethernet,
wireless networking, and communications products.
Communications
We design and market embedded Ethernet chips for use in broadband access
customer premises equipment, such as digital cable set-top boxes, cable modems,
and DSL modems. These broadband access devices, also known as "residential
gateways," enable home users to access voice, video and data content, typically
using the Internet, over a single communications connection. The same Ethernet
chips are commonly used in other embedded applications, such as Voice Over
Internet Protocol ("VoIP") telephones, industrial controllers, and wireless
access points. In addition, we develop and market telephony ICs, primarily
T1/E1/J1 Line Interface Units, which provide switched interface solutions for
telecommunications and data communications equipment.
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Wireless Networking
As a result of the acquisition of ShareWave, we now provide one of the
industry's best wireless LAN technologies for meeting the unique needs of the
home, including multimedia support, reduced interference from common household
devices, and ease of use. We deliver a solution for seamlessly transmitting
high-fidelity entertainment content, including MPEG-2 video and CD-quality
audio, wirelessly throughout the home. Our technology is capable of
transmitting the full range of multimedia content, including video, audio,
voice, and data within the home environment. Accordingly, common household
interferers such as microwave ovens and cordless phones do not adversely affect
our wireless technology.
Our technology portfolio includes wireless network controllers that support
IEEE 802.11b standards, Whitecap(TM) network protocols, including 802.11 media
access controller ("MAC") technology, plus multimedia and quality of service
("QoS") extensions and a broad range of radio and system reference designs.
Whitecap technology delivers a wireless local area network ("WLAN") solution
capable of seamlessly transmitting high-quality audio and video entertainment
throughout the home. Our technology enables a new range of wireless consumer
devices, such as networked set-top boxes, residential gateways, personal video
recorders, DVD players, wireless MP3 players, mobile web pads, and digital
audio and video jukeboxes. It also facilitates the deployment of a broad range
of new digital content and services, including video-on-demand,
audio-on-demand, VoIP, and streaming media.
Our products capitalize on the rapidly growing broadband access, digital
media, and home networking markets. The current wave of home networking
applications centers on broadband Internet deployment to the home. Home
networks enable consumers to extend their broadband connection (and the content
and services delivered through this connection) from the initial point of
termination in the home to a variety of PCs and non-PC devices located
throughout the household. The next wave of applications centers on digital
entertainment distribution, both over the broadband connection and among
devices within the home. Home networks will enable consumers to connect these
disparate devices and content sources for access to any digital content. We
expect that this wave of applications will drive home networking adoption
beyond early adopter market segments and into the mainstream consumer market.
Magnetic Storage Business Group
For more than 15 years, we supplied chips that performed the key electronics
functions contained in advanced magnetic and removable disk drives for personal
computers and workstations. During the first quarter of fiscal 2002, we
announced that we were de-emphasizing our magnetic storage chip business and
focusing on consumer entertainment electronics. We completed our exit from the
magnetic storage chip business during the second quarter of fiscal 2002. Our
magnetic storage customers during fiscal 2002 included Fujitsu, Hitachi, and
Western Digital. As discussed in Note 8 in the Notes to our Consolidated
Financial Statements contained in "Item 8 - Financial Statements and
Supplementary Data," we are currently involved in lawsuits with Fujitsu and
Western Digital.
Manufacturing
We contract with third parties for all of our wafer fabrication and
assembly, as well as a portion of our testing. Our fabless manufacturing
strategy allows us to concentrate on our design strengths, minimize fixed costs
and capital expenditures, and access advanced manufacturing facilities. After
wafer fabrication by the foundry, third-party assembly vendors package the
wafer die. The finished products are then sent for testing, either to
third-party testers or to our internal test facility, before shipment to our
customers. Our manufacturing organization qualifies each product, participates
in process and package development, defines and controls the manufacturing
process at our suppliers, develops test programs, and performs production
testing of products in accordance with our ISO-certified quality management
system. We use multiple foundries, assembly houses, and test houses.
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Patents, Licenses and Trademarks
To protect our products and technology, we rely on trade secret, patent,
copyright, and trademark laws. We apply for patents arising from our research
and development activities and intend to continue this practice in the future
to protect our products and technologies. As of March 30, 2002, we held 850
U.S. patents, 313 U.S. patent applications pending, and various corresponding
international patents and applications. Our U.S. patents expire in years 2005
through 2021.
We have obtained U.S. federal registrations for the CIRRUS LOGIC(R) and
CIRRUS(R) trademarks, and our Cirrus Logic logo trademark. These U.S.
registrations may be renewed as long as the marks continue to be used in
interstate commerce. We have also filed or obtained foreign registration for
these marks in other countries or jurisdictions where we conduct, or anticipate
conducting international business.
To complement our own research and development efforts, we have also
licensed, and expect to continue to license, a variety of intellectual property
and technologies important to our business from outside parties.
Research and Development
We concentrate our research and development efforts on the design and
development of new products for each of our principal markets and on the
continued enhancement of our design automation tools. We also fund certain
advanced process technology development, as well as other emerging product
opportunities. Expenditures for research and development in fiscal 2002, 2001
and 2000 were $121.6 million, $127.6 million, $121.4 million, respectively.
These amounts exclude acquired in-process research and development expenses of
$31.3 million and $8.0 million in fiscal years 2002 and 2000, respectively. Our
future success is highly dependent upon our 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 our products are highly competitive, and we expect that
competition will increase. We compete with other semiconductor suppliers that
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
our products. Our 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 us in all of our product lines, we
face significant competition in each of our product lines. We expect to face
additional competition from new entrants in each of our markets, which may
include both large domestic and international semiconductor manufacturers and
smaller, emerging companies.
The principal competitive factors in our 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 our products have not been available from second sources, we generally
do not face direct competition in selling our products to a customer once our
integrated circuits have been designed into that customer's system.
Nevertheless, because of shortened product life cycles and even shorter
design-in cycles, our competitors have increasingly frequent opportunities to
achieve design wins in next-generation systems. In the event that competitors
succeed in supplanting our products, our market share may not be sustainable
and net sales, gross margin and earnings would be adversely affected.
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Sales, Marketing and Technical Support
Our products are sold worldwide; however, we sell principally to Asia.
Export sales, which include sales to U.S.-based customers with manufacturing
plants overseas, were 85% in fiscal 2002, 82% in fiscal 2001, and 75% in fiscal
2000. We maintain a worldwide sales force, which is intended to provide
geographically specific selling support to our 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, Colorado, Florida, Illinois, Maryland, Massachusetts,
Oregon, Texas, and Virginia. International sales offices and organizations are
located in China, Germany, Hong Kong, Japan, Korea, Singapore, Taiwan, and the
United Kingdom. We supplement our direct sales force with sales representative
organizations and distributors. Technical support staff is located at the sales
offices and at our facilities in California, Colorado, Texas, India, Japan, and
several locations in China.
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. As a result, we believe that our backlog at any given
time is not a meaningful indicator of future revenues.
Employees
As of March 30, 2002, we had approximately 1,203 full-time equivalent
employees, of whom 49% were engaged in research and product development
activities, 33% in sales, marketing, general and administrative activities, and
18% in manufacturing activities. Our future success will depend, in part, on
our ability to continue to attract, retain and motivate highly qualified
technical, marketing, engineering, and management personnel.
Due to the highly competitive nature of the marketplace that we operate in,
we may from time to time lose key employees to certain of our competitors. We
have been able to hire qualified personnel in the past to fill open positions
created by such occurrences, although there can be no assurance that we will be
able to do this in the future. None of our employees is represented by any
collective bargaining agreements.
Factors Affecting Our Business and Prospects
Our business faces significant risks. The risk factors set forth below may
not be the only ones that we face. Additional risks that we are not aware of
yet or that currently are not material may adversely affect our business
operations.
THE HIGHLY CYCLICAL SEMICONDUCTOR EQUIPMENT INDUSTRY IS EXPERIENCING A
SIGNIFICANT DOWNTURN.
We are subject to cyclical business cycles, and it is difficult to predict
the timing, length, or volatility of these cycles. We believe that the current
industry downturn, which began in the third calendar quarter of 2000, may be
the most serious and prolonged decline in history. During these downturns,
customers usually reduce purchases, delay delivery of products, and/or cancel
orders. These downturns create pressure on our net sales, gross margin, and
operating income. In addition, these downturns may result in retention issues
with our employees, who are vital to our success.
During each downturn, we must quickly align our cost structure with
prevailing market conditions, as well as motivate and retain key employees. We
cannot assure you that this downtown, as well as any future downturn, in the
industry will not be severe, or that any such downturn will not have a material
adverse effect on our
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business and results of operations. We cannot assure you that we will not
experience substantial period-to-period fluctuations in operating costs due to
general semiconductor industry conditions or other factors.
OUR BUSINESS IS HIGHLY DEPENDENT ON THE EXPANSION OF THE CONSUMER DIGITAL
ENTERTAINMENT ELECTRONICS MARKET.
We have changed the focus of our business to consumer digital entertainment
electronics. We are focusing on DVD players and recorders, A/V receivers,
personal audio players, home media servers, set-top boxes, and personal video
recorders. We expect the consumer digital market to expand; however, our
strategy may not be successful. Given the current economic environment and the
large installed base of VCRs and other consumer electronics products, consumer
spending on DVD players and other home electronic products may not increase as
expected. In addition, the potential decline in consumer confidence and
consumer spending relating to future terrorist attacks or war could have a
material adverse effect on our business.
WE HAVE HISTORICALLY EXPERIENCED FLUCTUATIONS IN OUR OPERATING RESULTS AND
EXPECT THESE FLUCTUATIONS TO CONTINUE IN FUTURE PERIODS.
Our quarterly and annual operating results are affected by a wide variety of
factors that could materially and adversely affect our net sales, gross margins
and operating income. These factors include:
. the volume and timing of orders received,
. changes in the mix of our products sold,
. market acceptance of our products and the products of our customers,
. the successful integration of companies we have acquired,
. competitive pricing pressures,
. our ability to introduce new products on a timely basis,
. fixed costs associated with minimum purchase commitments under supply
contracts if demand decreases,
. the timing and extent of our research and development expenses,
. cyclical semiconductor industry conditions,
. the failure to anticipate changing customer product requirements,
. fluctuations in manufacturing costs,
. disruption in the supply of wafers or assembly services,
. the ability of customers to pay us,
. increases in material costs,
. certain production and other risks associated with using independent
manufacturers, and
. product obsolescence, price erosion, competitive developments, and other
competitive factors.
Historically in the integrated circuit industry, average selling prices of
products have decreased over time. If we are unable to introduce new products
with higher margins or reduce manufacturing costs to offset anticipated
decreases in the prices of our existing products, our operating results will be
adversely affected. Our business is characterized by short-term orders and
shipment schedules, and customer orders typically can be canceled or
rescheduled without penalty to the customer. In addition, because of fixed
costs in the integrated circuit industry, we are limited in our ability to
reduce costs quickly in response to any revenue shortfalls. Because of the
foregoing or other factors, we may experience material adverse fluctuations in
our future operating results on a quarterly or annual basis.
In fiscal 2002, sales to Thomson Multimedia accounted for approximately 16%
of net sales, a significant portion of which was attributable to Microsoft's
Xbox. As a result, a significant decrease in Xbox-related orders from Thomson
could have a material adverse effect on our business.
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OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS ON A TIMELY BASIS.
Our success depends upon our ability to develop new products for new and
existing markets, to introduce such products in a timely manner, and to have
such products gain market acceptance. The development of new products is highly
complex and from time to time, we have experienced delays in developing and
introducing them. Successful product development and introduction depends on a
number of factors, including:
. proper new product definition,
. timely completion of design and testing of new products,
. achievement of acceptable manufacturing yields, and
. market acceptance of our products and the products of our customers.
Although we seek to design products that have the potential to become
industry standard products, we cannot assure you that the market leaders will
adopt any products introduced by us, or that any products initially accepted by
our customers that are market leaders will become industry standard products.
Both revenues and margins may be materially affected if new product
introductions are delayed, or if our products are not designed into successive
generations of our customers' products. We cannot assure you that we will be
able to meet these challenges, or adjust to changing market conditions as
quickly and cost-effectively as necessary to compete successfully. Our failure
to develop and introduce new products successfully could harm our business and
operating results.
Successful product design and development is dependent on our ability to
attract, retain, and motivate qualified design engineers, of which there is a
limited number. Due to the complexity and variety of precision linear and
mixed-signal circuits, the limited number of qualified circuit designers, and
the limited effectiveness of computer-aided design systems in the design of
such circuits, we cannot assure you that we will be able to successfully
develop and introduce new products on a timely basis.
WE MAY FACE DIFFICULTIES INTEGRATING AND MAY INCUR COSTS ASSOCIATED WITH OUR
PAST ACQUISITIONS AND ANY FUTURE ACQUISITIONS.
We acquired LuxSonor Semiconductors, Inc., ShareWave, Inc. and Stream
Machine Company, as well as the assets of Peak Audio, Inc., in fiscal 2002. We
could experience difficulties in integrating the personnel, products,
technologies, and operations of these companies. Integrating acquired
businesses involves a number of other risks, including, but not limited to:
. the potential disruption of our ongoing business,
. unexpected costs or incurring unknown liabilities,
. the diversion of management's resources from other business concerns
involved in identifying, completing, and integrating acquisitions,
. the inability to retain the employees of the acquired businesses,
. difficulties relating to integrating the operations and personnel of the
acquired businesses,
. adverse effects on the existing customer relationships of acquired
companies,
. the potential incompatibility of business cultures,
. entering into markets and acquiring technologies in areas in which we have
little experience, and
. acquired intangible assets becoming impaired as a result of technological
advancements, or worse-than-expected performance of the acquired company.
If we are unable to successfully address any of these risks, our business
could be harmed.
11
WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS ASSOCIATED WITH THESE SALES
THAT COULD HARM OUR OPERATING RESULTS.
Export sales, principally to Asia, include sales to U.S-based customers with
manufacturing plants overseas, and accounted for 85%, 82%, and 75% of our net
sales in fiscal 2002, 2001, and 2000, respectively. We expect export sales to
continue to represent a significant portion of product sales. This reliance on
sales internationally subjects us to the risks of conducting business
internationally, including political and economic conditions. For example, the
financial instability in a given region, such as Asia, may have an adverse
impact on the financial position of end users in the region, which could impact
future orders and/or the ability of such users to pay us, or our customers,
which could also impact the ability of such customers to pay us. While we
expect to carefully evaluate the collection risk related to the financial
position of customers and potential customers in structuring the terms of sale,
in determining whether to accept sales orders, and in evaluating the
recognition of revenue, if a region's volatility harms the financial position
of our customers, our results of operations could be harmed. Our international
sales operations involve a number of other risks, including:
. unexpected changes in regulatory requirements,
. changes in diplomatic and trade relationships,
. delays resulting from difficulty in obtaining export licenses for
technology,
. tariffs and other barriers and restrictions,
. competition with foreign companies or other domestic companies entering
the foreign markets in which we operate,
. longer sales and payment cycles,
. problems in collecting accounts receivable,
. political instability, and
. the burdens of complying with a variety of foreign laws.
In addition, while we may buy hedging instruments to reduce our exposure to
currency exchange rate fluctuations, our competitive position can be affected
by the exchange rate of the U.S. dollar against other currencies, particularly
the Japanese yen. Consequently, increases in the value of the dollar would
increase the price in local currencies of our products in foreign markets and
make our products relatively more expensive. We cannot assure you that
regulatory, political, and other factors will not adversely affect our
operations in the future or require us to modify our current business practices.
THE EXPANSION OF OUR INTERNATIONAL OPERATIONS SUBJECTS OUR BUSINESS TO
ADDITIONAL ECONOMIC RISKS THAT COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
In addition to export sales constituting a majority of our net sales, we are
expanding our international operations. Specifically, we have recently focused
our efforts on expanding in the People's Republic of China. Expansion into this
region has required and will continue to require significant management
attention and resources. We have limited experience in the Chinese culture and
may not succeed in expanding our presence into this market or other
international markets. Failure to do so could harm our business. In addition,
there are risks inherent in expanding our presence into foreign regions,
including, but not limited to:
. difficulties in staffing and managing foreign operations,
. failure of foreign laws to protect our U.S. proprietary rights adequately,
. additional vulnerability from terrorist groups targeting American
interests abroad,
. legal uncertainty regarding liability and compliance with foreign laws, and
. regulatory requirements.
12
OUR PRODUCTS ARE COMPLEX AND COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF
THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US.
Product development in the markets we serve is becoming more focused on the
integration of functionality on individual devices. There is a general trend
towards increasingly complex products. The greater integration of functions and
complexity of operations of our products increase the risk that our customers
or end users could discover latent defects or subtle faults after volumes of
product have been shipped. This could result in:
. material recall and replacement costs for product warranty and support,
. adverse impact to our customer relationships by the recurrence of
significant defects,
. delay in recognition or loss of revenues, loss of market share, or failure
to achieve market acceptance, and
. diversion of the attention of our engineering personnel from our product
development efforts.
The occurrence of any of these problems could result in the delay or loss of
market acceptance of our products and would likely harm our business. In
addition, any defects or other problems with our products could result in
financial or other damages to our customers who could seek damages from us for
their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
OUR SALES MAY FLUCTUATE DUE TO SEASONALITY OF CUSTOMER DEMAND.
As we focus more on the consumer entertainment market, we are more likely to
be affected by seasonality in the sales of our products. Approximately half of
consumer electronics products are sold during the holiday season. As a result,
we expect a disproportionate amount of our sales to occur in the second and
third fiscal quarters in anticipation of the holiday season.
IF WE FAIL TO ATTRACT, HIRE, AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE
TO DEVELOP, MARKET, OR SELL OUR PRODUCTS OR SUCCESSFULLY MANAGE OUR BUSINESS.
Competition for personnel in our industry is intense. The number of
technology companies in our geographic area is greater than it has been
historically, and we expect competition for qualified personnel to intensify.
There are only a limited number of people in the job market with the requisite
skills. Our human resources organization focuses significant efforts on
attracting and retaining individuals in key technology positions. Declining
stock market prices, however, make retention more difficult, as prior equity
grants contain less value and key employees pursue equity opportunities
elsewhere. In addition, start-up companies generally offer larger equity grants
to attract individuals from more established companies. The loss of the
services of any key personnel or our inability to hire new personnel with the
requisite skills could restrict our ability to develop new products or enhance
existing products in a timely manner, sell products to our customers, or manage
our business effectively.
SHIFTS IN INDUSTRY-WIDE CAPACITY MAY CAUSE OUR RESULTS TO FLUCTUATE, SUCH
SHIFTS HAVE RESULTED, AND COULD IN THE FUTURE RESULT IN SIGNIFICANT INVENTORY
WRITE-DOWNS.
Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages, may result in significant fluctuations in our
quarterly and annual operating results. We must order wafers and build
inventory well in advance of product shipments. Because the integrated circuit
industry is highly cyclical and is subject to significant downturns resulting
from excess capacity, overproduction, reduced demand, or technological
obsolescence, there is a risk that we will forecast inaccurately and produce
excess or insufficient inventories of particular products. This inventory risk
is heightened because many of our customers place orders with short lead times.
Due to the product manufacturing cycle characteristic of integrated circuit
manufacturing and the inherent imprecision by our customers to accurately
forecast their demand, product inventories may not always
13
correspond to product demand, leading to shortages or surpluses of certain
products. As a result of such inventory imbalances, future inventory
write-downs may occur due to lower of cost or market accounting, excess
inventory, or inventory obsolescence.
BECAUSE FOUNDRY CAPACITY IS LIMITED, WE MAY BE REQUIRED TO ENTER INTO COSTLY
LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY.
We currently purchase all of our wafers from outside foundries. Market
conditions could result in wafers being in short supply and prevent us from
having adequate supply to meet our customer requirements. Any prolonged
inability to utilize our foundries because of fire, natural disaster, or
otherwise would have a material adverse effect on our financial condition and
results of operations. If we are not able to obtain additional foundry capacity
as required, our business could be harmed in the following ways: (i) our
relationships with our customers would be harmed and, consequently, our sales
would likely be reduced; and (ii) we may be forced to purchase wafers or
packaging from higher cost suppliers or to pay expediting charges to obtain
additional supply.
In order to secure additional foundry capacity, we may enter into contracts
that commit us to purchase specified quantities of silicon wafers over extended
periods. In the future, we may not be able to secure capacity with foundries in
a timely fashion or at all, and such arrangements, if any, may not be on terms
favorable to us. Moreover, if we are able to secure foundry capacity, we may be
obligated to utilize all of that capacity or incur penalties. Such penalties
may be expensive and could harm our financial results.
WE ARE DEPENDENT ON OUR SUBCONTRACTORS IN ASIA TO PERFORM KEY MANUFACTURING
FUNCTIONS FOR US.
We depend on third party subcontractors in Asia for the supply and packaging
of our products. International operations and sales may be subject to political
and economic risks, including political instability, currency controls,
exchange rate fluctuations, and changes in import/export regulations, tariff,
and freight rates. Although we seek to reduce our dependence on our sole and
limited source suppliers, this concentration of suppliers and manufacturing
operations in Asia subjects us to the risks of conducting business
internationally, including political and economic conditions in Asia.
Disruption or termination of our supply or manufacturing could occur, and such
disruptions could harm our business and operating results.
POTENTIAL INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO
SIGNIFICANT LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS.
Our success depends on our ability to obtain patents and licenses and to
preserve our other intellectual property rights covering our manufacturing
processes, products, and development and testing tools. We seek patent
protection for those inventions and technologies for which we believe such
protection is suitable and is likely to provide a competitive advantage to us.
Notwithstanding our attempts to protect our proprietary rights, we believe that
our future success will depend primarily upon the technical expertise, creative
skills, and management abilities of our officers and key employees rather than
on patent and copyright ownership. We also rely substantially on trade secrets
and proprietary technology to protect our technology and manufacturing
know-how, and work actively to foster continuing technological innovation to
maintain and protect our competitive position.
The integrated circuit industry is characterized by frequent litigation
regarding patent and other intellectual property rights. We cannot assure you
that any patent owned by us will not be invalidated, circumvented, or
challenged, that rights granted under the patent will provide competitive
advantages to us, or that any of our pending or future patent applications will
be issued with the scope of the claims sought by us, if at all. In addition,
effective copyright and trade secret protection may be unavailable or limited
in certain foreign countries. We cannot assure you that steps taken by us to
protect our intellectual property will be adequate or that our competitors will
not independently develop or patent substantially equivalent or superior
technologies.
14
As is typical in the semiconductor industry, we and our customers have from
time to time received, and may in the future receive, communications from third
parties asserting patents, mask work rights, or copyrights on certain of our
products and technologies. In the event third parties were to make a valid
intellectual property claim and a license was not available on commercially
reasonable terms, our operating results could be harmed. Litigation, which
could result in substantial cost to us and diversion of our resources, may also
be necessary to defend us against claimed infringement of the rights of others.
An unfavorable outcome in any such suit could have an adverse effect on our
future operations and/or liquidity.
STRONG COMPETITION IN THE HIGH-PERFORMANCE INTEGRATED CIRCUIT MARKET MAY HARM
OUR BUSINESS.
The high-performance integrated circuit industry is highly competitive and
subject to rapid technological change. Significant competitive factors in our
markets include:
. product features, reliability, performance, and price,
. the diversity and timing of new product introductions,
. the emergence of new computer standards and other customer systems,
. product quality,
. efficiency of production, and
. customer support.
Because of shortened product life cycles and even shorter design-in cycles,
our competitors have increasingly frequent opportunities to achieve design wins
in next generation systems. In the event that competitors succeed in
supplanting our products, our market share may not be sustainable and net
sales, gross margin, and results of operations would be adversely affected. Our
principal competitors include: Agere, AKM Semiconductors, Acer Labs Inc.,
Analog Devices, Broadcom, Conexant, Creative Technologies, ESS Technologies,
Fujitsu DSP, Infineon, Intel, Intersil, LSI Logic, Linear Technology, Mediatek,
Motorola, Philips, SigmaTel, ST Microelectronics, Sunplus, Texas Instruments,
Tripath, Yamaha, and Zoran, many of whom have substantially greater financial
and other resources than we do with which to pursue engineering, manufacturing,
marketing, and distribution of their products. We expect intensified
competition from emerging companies and from customers who develop their own
integrated circuit products. Increased competition could adversely affect our
business. We cannot assure you that we will be able to compete successfully in
the future or that competitive pressures will not adversely affect our
financial condition and results of operations. Competitive pressures could
reduce market acceptance of our products and result in price reductions and
increases in expenses that could adversely affect our business and our
financial condition.
In addition, our future success depends, in part, on the continued service
of our key engineering, marketing, sales, manufacturing, support, and executive
personnel, and on our ability to continue to attract, retain, and motivate
qualified personnel. The competition for such employees is intense, and the
loss of the services of one or more of these key personnel could adversely
affect our business.
IF WE ARE UNABLE TO MAKE CONTINUED SUBSTANTIAL INVESTMENTS IN RESEARCH AND
DEVELOPMENT, WE MAY NOT BE ABLE TO SELL OUR PRODUCTS.
We must continue to make substantial investments in research and development
to develop new and enhanced products and solutions. If we fail to make
sufficient investments in research and development programs, new technologies
could render our current and planned products obsolete, resulting in the need
to change the focus of our research and development and product strategies, and
disrupting our business significantly.
15
ITEM 2. Properties
As of May 1, 2002, our principal facilities, located in Austin, Texas,
consisted of approximately 215,000 square feet of leased office and test space,
which have leases that expire from 2002 to 2006, plus renewal options. This
space is used for product development and testing, sales, marketing, and
administration. During fiscal 2001, we entered into an operating lease for
approximately 192,000 square feet of office space in Austin, Texas. This space
is currently under construction and is excluded from our Austin square footage
total. We plan to relocate our headquarters and engineering facility to this
space during fall 2002. In conjunction with that move, we plan to vacate
roughly 157,000 square feet of existing Austin leased office space.
We have facilities in El Dorado Hills, Fremont, and Milpitas, California.
These facilities consist of approximately 556,000 square feet of leased office
space, which have leases that expire from 2004 to 2009, plus renewal options.
In connection with our facilities consolidation activities begun in fiscal
1999, we have subleased approximately 408,000 square feet of this office space.
Our California facilities include space we obtained as a result of our
acquisitions in fiscal 2002. We relocated some of the employees from the
acquired space and now have 48,000 square feet of vacant space, which we are
trying to sublet.
We also have the following design centers and sales and support offices in
the United States and International locations:
Sales and Support
Sales and Support Offices--
Design Centers Offices--USA International
-------------- ------------------------- -----------------
Boulder, Colorado Los Angeles, California China
Broomfield, Colorado Broomfield, Colorado Germany
Boca Raton, Florida Boca Raton, Florida Hong Kong
Ft. Wayne, Indiana Tarpon Springs, Florida Japan
India Chicago, Illinois Korea
Japan Columbia, Maryland Singapore
Singapore Burlington, Massachusetts Taiwan
China Portland, Oregon United Kingdom
Chesapeake, Virginia
ITEM 3. Legal Proceedings
The information required by this item is set forth in Note 8 in the Notes to
our Consolidated Financial Statements contained in "Item 8--Financial
Statements and Supplementary Data" of this Annual Report on Form 10-K.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
16
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our 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 31, 2001
First quarter................ $19.83 $13.19
Second quarter............... 40.19 14.56
Third quarter................ 46.56 16.50
Fourth quarter............... 34.81 14.94
Fiscal year ended March 30, 2002
First quarter................ $25.76 $ 9.25
Second quarter............... 29.28 6.00
Third quarter................ 16.25 6.11
Fourth quarter............... 20.45 13.05
As of May 31, 2002, there were approximately 1,272 holders of record of our
Common Stock.
We have not paid cash dividends on our Common Stock and currently intend to
continue a policy of retaining any earnings for reinvestment in our business.
During May 2000, we repurchased in the open market $28.1 million aggregate
principal amount of our 6% Convertible Subordinated Notes. We recognized a $2.5
million extraordinary gain, net of tax, as a result of these repurchases. On
September 25, 2000, we entered into an agreement to issue approximately 1.0
million shares of Common Stock and to pay $0.1 million to holders of $24
million aggregate principal amount of our 6% Convertible Subordinated Notes. In
October and November 2000, a total of $246.9 million aggregate principal amount
of our 6% Convertible Subordinated Notes were converted into approximately 10.2
million shares of our Common Stock by the holders of the notes. As a result of
these conversions, $299 million of long-term debt was retired and stockholders'
equity increased $272.6 million.
Equity Compensation Plan Information
The following table provides information as of March 30, 2002 for
compensation plans under which equity securities may be issued (in thousands,
except per share amounts):
(A) (B) (C)
Securities to be issued Weighted-average Securities remaining available
upon exercise of exercise price of for future issuance under equity
outstanding options, outstanding options, compensation plans (except
warrants, and rights warrants, and rights securities in column (A))
----------------------- -------------------- --------------------------------
Equity compensation
plans approved by
security holders... 12,782(1) $17.19 3,104
Equity compensation
plans not approved
by security holders None N/A None
------ ------ -----
Total............. 12,782 $17.19 3,104
- --------
(1)Excludes options assumed upon the acquisition of certain assets of Peak
Audio, Inc. on April 30, 2001, as well as all of the outstanding shares of
ShareWave, Inc. on October 2, 2001, LuxSonor Semiconductors, Inc. on October
10, 2001, and Stream Machine Company on December 7, 2001, as follows:
17
(A) (B)
Securities to be issued Weighted-average
upon exercise of exercise price of
outstanding options, outstanding options,
warrants, and rights warrants, and rights
----------------------- --------------------
Peak Audio, Inc........................ 53 $ 0.72
ShareWave, Inc......................... 405 11.84
LuxSonor Semiconductors, Inc........... 180 5.43
Stream Machine Company 2001 Plan....... 373 13.40
Stream Machine Company 1996 Plan....... 507 2.33
Stream Machine Company options approved 5 3.02
-----
Total............................... 1,523
ITEM 6. Consolidated Selected Financial Data
(Amounts in thousands, except per share amounts)
The information contained below should be read in conjunction with "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8--Financial Statements and Supplementary Data." Certain
reclassifications have been made to conform to the 2002 presentation. These
reclassifications had no effect on the results of operations or stockholders'
equity.
Fiscal Years Ended
----------------------------------------------------
2002 2001 2000 1999 1998
--------- -------- --------- --------- ----------
Net sales............................................................... $ 417,529 $778,673 $ 564,400 $ 628,105 $ 954,270
Income (loss) from operations........................................... (235,071) 69,452 (132,850) (380,063) 58,278
Basic earnings (loss) per share before extraordinary gain and accounting
change................................................................. $ (2.66) $ 1.99 $ (0.77) $ (6.77) $ 0.54
Financial position at year end:
Total assets............................................................ $ 481,630 $598,005 $ 504,832 $ 532,630 $1,137,542
Working capital......................................................... 126,985 373,757 237,076 164,012 476,154
Capital lease obligations, excluding current portion.................... 51 -- 321 1,457 5,475
Long-term debt, excluding current portion............................... -- 336 3,147 12,960 32,559
Convertible subordinated notes.......................................... -- -- 299,000 300,000 300,000
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements, including the related notes. Statements contained herein
may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve a number of
risks, uncertainties, and other factors that could cause actual results to
differ materially. For a discussion of factors affecting our business and
prospects, see "Item 1--Business--Factors Affecting Our Business and
Prospects." Certain reclassifications have been made to conform to the 2002
presentation. These reclassifications had no effect on the results of
operations or stockholders' equity.
Cirrus Logic is a leading supplier of high-performance analog and DSP chip
solutions for consumer entertainment electronics, marketed under the Cirrus(R)
brand name, that allow people to see, hear, connect, and enjoy digital
entertainment. Our mixed-signal devices are designed for specific markets that
derive value from our expertise in advanced mixed-signal design processing,
systems-level engineering, and software knowledge. Our products enable OEMs to
accelerate development of leading-edge digital entertainment products that are
in high consumer demand.
18
Result of Operations
The following table summarizes the results of our operations for each of the
past three fiscal years as a percentage of net sales. All percentage amounts
were calculated using the underlying data in thousands:
Fiscal Years Ended
----------------------------
March 30, March 31, March 25,
2002 2001 2000
--------- --------- ---------
Net sales.................................................... 100% 100% 100%
Gross margin.............................................. 24% 37% 40%
Research and development.................................. 29% 16% 22%
Selling, general and administrative....................... 23% 14% 17%
Provision (benefit) for doubtful accounts................. 18% --% (1%)
Restructuring costs and other, net........................ 3% (2%) 22%
Abandonment of assets charge.............................. --% --% 2%
Acquired in-process research and development expenses..... 7% --% 1%
---- ---- ----
Income (loss) from operations................................ (56%) 9% (23%)
Realized gain on the sale of marketable equity securities.... 3% 11% 16%
Interest expense............................................. --% (1%) (4%)
Interest income.............................................. 2% 2% 1%
Other income (expense)....................................... --% (1%) 2%
---- ---- ----
Income (loss) before provision for income taxes.............. (51%) 20% (8%)
Provision (benefit) for income taxes......................... (2%) 2% --%
Minority interest in loss of eMicro.......................... -- % --% --%
---- ---- ----
Income (loss) before extraordinary gain and accounting change (49%) 18% (8%)
Extraordinary gain, net of income taxes...................... --% --% --%
Cumulative effect of change in accounting principle.......... --% --% -- %
---- ---- ----
Net income (loss)............................................ (49%) 18% (8%)
==== ==== ====
Net Sales
Net sales for fiscal 2002 decreased $361.2 million, or 46%, to $417.5
million from $778.7 million in fiscal 2001. The decrease in net sales from
fiscal 2002 to 2001 was driven primarily by a $200.1 million decrease in sales
of magnetic storage products due to our exit from that product line during the
second quarter of fiscal 2002. Additionally, sales of computer audio products
decreased $61.7 million and sales of communications products decreased $31.0
million in fiscal year 2002 compared with fiscal 2001, mainly due to poor
market conditions. Sales of end of life products decreased $37.6 million year
over year. Sales of market specific processors decreased $24.7 million in
fiscal year 2002, primarily due to the strong production ramp of embedded
processors for MP3 players in advance of fiscal year 2001's Christmas season.
Net sales for fiscal 2001 increased to $778.7 million, an increase of $214.3
million, or 38%, from $564.4 million in fiscal 2000. Magnetic storage revenues
increased $196.4 million, or 148%, in fiscal 2001. Additionally, net sales for
our market specific processors product line increased $25.8 million in fiscal
2001, primarily due to the strong production ramp of embedded processors for
MP3 players. Net sales for our Optical product line grew $14.1 million as a
result of strong CD-RW sales. Revenues from product lines that have been
discontinued by us were $36.2 million compared to $75.9 million in fiscal 2000.
Effective with the first quarter of fiscal 2001, we changed our revenue
recognition policy in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," resulting in a change in the basis for recognizing
revenue on all shipments from date of shipment to date of passage of title.
Results for fiscal 2001 include revenue of $5.2 million, cost of
19
sales of $3.5 million, and a cumulative effect of change in accounting
principle on prior years' accumulated deficit of $1.7 million as a result of
this change.
During the first quarter of fiscal 2001, we also changed our estimate of the
amount of revenue that is deferred on distributor transactions under agreements
with only limited rights of return. Results for the fiscal year ended March 31,
2001 included revenue of $5.4 million, cost of sales of $2.0 million and income
of $3.4 million related to this change in estimate. The effect of this estimate
change increased basic and diluted earnings per share by $0.03 for the fiscal
year ended March 31, 2001.
Export sales, principally to Asia, including sales to U.S.-based customers
with manufacturing plants overseas, were approximately $356.2 million in fiscal
2002, $636.2 million in fiscal 2001, and $421.0 million in fiscal 2000. Export
sales to customers located in the Pacific Rim (excluding Japan) were 52%, 36%,
and 47% of net sales in fiscal 2002, 2001, and 2000, respectively. Export sales
to customers located in Japan were 27%, 39%, and 19% of net sales in fiscal
2002, 2001, and 2000, respectively. All other export sales were 7%, 7%, and 8%
of net sales, in fiscal 2002, 2001, and 2000, respectively.
Our sales are denominated primarily in U.S. dollars. From time to time, we
enter into foreign currency forward exchange and option contracts to reduce the
foreign currency exposures related to sales and balance sheet accounts
denominated in yen.
In fiscal 2002, sales to three customers, Fujitsu, Thomson Multimedia, and
Western Digital accounted for approximately 20%, 16%, and 11%, respectively, of
net sales. In fiscal 2001, sales to Fujitsu and Western Digital accounted for
approximately 24% and 13%, respectively, of net sales. Sales to Western Digital
accounted for approximately 12% of net sales in fiscal 2000. No other customers
accounted for 10% or more of net sales in fiscal 2002, 2001, or 2000. The loss
of a significant customer or a significant reduction in such a customer's
orders could have an adverse effect on our sales. As a result of our planned
exit from the mass storage chip business in the second quarter of fiscal 2002,
we are not currently selling to Fujitsu or Western Digital. Our sales to
Thomson primarily consisted of DVD drive manager devices that are included in
Microsoft's Xbox. We continue to see forecasts of revenue in the first two
quarters of fiscal 2003 for these devices although at a lower level.
Gross Margin
Gross margin was 24% for fiscal 2002, down from 37% in fiscal 2001. The
decrease in gross margin from fiscal 2001 was primarily the result of inventory
charges recorded during fiscal 2002. In conjunction with the workforce
reduction during the third quarter of fiscal 2002, we went through a detailed
market and product review and, as a result, decided to de-emphasize certain
products. We recorded a net inventory charge of $55.1 million related to our
restructuring efforts and the exit from our magnetic storage business, and
$14.3 million, mainly to reserve inventory that was excess to short-term usage
forecasts.
Gross margin was 37% in fiscal 2001, down from 40% in fiscal 2000. Gross
margin decreased during fiscal 2001, primarily due to lower margins on sales of
magnetic storage products. In addition, we recognized an inventory charge of
$17.4 million during the fourth quarter of fiscal 2001, mainly to reserve
inventory that was excess to short-term usage forecasts.
Research and Development Expenses
Research and development expenditures decreased by $6.0 million in fiscal
2002. This decrease was primarily the result of reduced costs due to the
implementation during fiscal 2002 of cost reduction and expense control
measures, including our workforce reductions in May 2001 and October 2001.
Despite the decline in absolute dollar amounts, research and development
expenses increased as a percentage of net sales from 16% in fiscal 2001 to 29%
in fiscal 2002 due to the decline in net sales year over year.
20
Research and development expenditures increased by $6.2 million in fiscal
2001, primarily due to an increase in total employees and the change in
employee mix from fiscal 2000. At the end of fiscal 2001, approximately 43% of
employees were engaged in research and development, compared to 36% at the end
of fiscal 2000. Although these expenses increased in total dollars in fiscal
2001, as a percentage of net sales they decreased from 22% in fiscal 2000 to
16% in fiscal 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $16.6 million in
fiscal 2002, primarily due to decreased costs resulting from the implementation
of cost reduction and expense control measures in fiscal 2002. Selling, general
and administrative expenses increased as a percentage of net sales from 14% in
fiscal 2001 to 23% in fiscal 2002 despite the decrease in the absolute dollar
amounts due to the decrease in net sales year over year.
Selling, general and administrative expenses increased by $16.3 million in
fiscal 2001, mainly due to an increase in headcount of 8% over last year and
compensation expense recognized in connection with the acquisition of
AudioLogic, Inc. Although these expenses increased in total dollars in fiscal
2001, as a percentage of net sales they decreased from 17% in fiscal 2000 to
14% in fiscal 2001.
Provision (Benefit) for Doubtful Accounts
During fiscal 2002, we recorded a $73.3 million charge to reserve disputed
magnetic storage receivables from Western Digital and Fujitsu, with whom we are
currently involved in litigation. If we are successful in collecting these
receivables through the ongoing litigation, we will record an equivalent
benefit for doubtful accounts. During fiscal 2001 and 2000, we recorded a
benefit for doubtful accounts of $1.4 million and $3.0 million, respectively,
primarily due to the release of excess bad debt reserves.
Restructuring Costs and Other, Net
During fiscal 2002, we announced a change to our business model that
de-emphasized our magnetic storage chip business and focused on
consumer-entertainment electronics. As a result of these strategic decisions
and in response to ongoing economic and industry conditions, we eliminated
approximately 420 employee positions worldwide from various business functions
and job classes over the course of fiscal 2002. We recorded a restructuring
charge of $6.4 million in operating expenses to cover costs associated with
these workforce reductions. In addition, we recorded a $4.5 million
restructuring charge in operating expenses for costs associated with facility
consolidations. As of March 30, 2002, we have a remaining restructuring accrual
of $4.6 million primarily related to net lease expenses that will be paid over
the respective lease terms through fiscal 2013 and other anticipated lease
termination costs.
In fiscal 2001, we recorded $12.5 million in income to recognize the receipt
of two previously reserved notes from Intel Corporation on behalf of Basis
Communications Corporation. We also recorded $1.8 million in income, related to
the final resolution of the MiCRUS restructuring agreement.
During fiscal 2000, we substantially completed the restructuring activities
that were initiated in fiscal 1999. We restructured the relationships with our
manufacturing joint ventures and returned to a fabless business model. In
fiscal 2000, we recorded restructuring charges of $126.6 million, $1.0 million
of which was in cost of sales. These restructuring charges included a $135.0
million direct cash payment to one of the joint venture partners, $36.8 million
related to certain Cirrus Logic common stock that we issued to one of the joint
venture partners, $9.3 million of lease buyout costs, and $16.4 million of
equipment write-offs. These charges were partially offset by the reversal of
approximately $71.9 million of previously accrued wafer purchase commitment
charges due to the renegotiated terms of our purchase commitments with our
former partners.
21
Abandonment of Assets Charge
During fiscal 2002, we wrote off a module of our enterprise resource
planning software that we no longer plan to use. As a result of this decision,
we recorded a charge of approximately $1.9 million.
During fiscal 2000, we discontinued development efforts previously
undertaken on the manufacturing component of our enterprise resource planning
software. In connection with this decision, we recorded a charge of
approximately $11.3 million.
Acquired In-Process Research and Development Expenses
During fiscal 2002, we recorded $31.3 million of acquired in-process
research and development expenses, resulting from our acquisitions of Peak
Audio, ShareWave, LuxSonor Semiconductors and Stream Machine. We expensed these
amounts on the acquisition date because the acquired technology had not yet
reached technological feasibility and had no future alternative uses. Future
acquisitions of businesses, products or technologies by us might also result in
charges for acquired in-process research and development that may cause
fluctuations in our quarterly or annual operating results.
The acquired in-process research and development from these four
acquisitions pertains to different technologies and products. We periodically
review the stage of completion and likelihood of success of each of the
in-process research and development projects. The status of these projects as
of March 30, 2002 is as follows:
Peak Audio, Inc.
The in-process research and development technology from the Peak Audio
acquisition pertains to a signal-processing product targeted at the
professional installed sound system market. The product receives audio from
sources such as microphones and then, through the use of digital signal
processors, modifies the audio and sends it out to power amplifiers. The
processing includes equalization, mixing, and dynamics processing. The product
is designed to be easy to manufacture and can be customized for each particular
application. We estimate that the development cycle for this product will
continue for approximately four months. The estimated cost to complete the
development of this technology is expected to be approximately $0.2 million.
ShareWave, Inc.
The in-process research and development technology from the ShareWave
acquisition relates to the development of two different wireless network
controller platforms, Project A and Project B. Project A uses the Whitecap(TM)
2.0 protocol and will comply with the 802.11b industry standard. The remaining
development effort is focused on incorporating a radio controller that
functions properly with the MAC and on developing several different controller
interfaces. We estimate that the development cycle for this product will
continue for approximately six months. The estimated cost to complete the
development of this technology is expected to be approximately $0.2 million.
Project B uses the Whitecap(TM) 5.0 protocol and was originally intended to
comply with the 802.11a industry standard. We have expanded the scope to
include compliance with 802.11b and 802.11g industry standards. The remaining
development effort is focused on both hardware and software functionality. We
estimate that the development cycle for this product will continue for
approximately 18 months. The estimated cost to complete the development of this
technology is expected to be approximately $0.8 million.
LuxSonor Semiconductors, Inc.
The in-process research and development technology from the LuxSonor
acquisition pertains to the development of an enhanced chip for DVD players. In
addition to the standard DVD player functionality such as MPEG video decoding,
audio DSP, a RISC controller, and a video processor, this product will support
video
22
capture with picture in picture, a second RISC processor, and improved
graphics. The main application for this product is high-end DVD players. We
estimate that the development cycle for this product will continue for
approximately four months. The estimated cost to complete development of this
technology is expected to be approximately $0.1 million.
Stream Machine Company
The in-process research and development technology from the Stream Machine
acquisition relates to the development of a 32-bit audio/video codec. The
remaining development effort is focused on delivering the chip for first
tape-out. Once that milestone has been achieved, engineering efforts will focus
on debugging and performance testing as well as modifications to fit future
reference designs. We estimate that the development cycle for this product will
continue for approximately three months. The estimated cost to complete the
development of this technology is expected to be approximately $0.2 million.
Value Assigned to In-Process Research and Development
We assigned value to the in-process research and development projects by
calculating the estimated percentage of completion (calculated by averaging the
time-based percentage completed with the cost-based percentage completed) for
each project, applying the percentage to the expected net cash flows for each
project, and discounting the net cash flows back to their present value. The
revenue estimates used to value the purchased in-process research and
development were based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of
new product introductions by us. The rates we utilized to discount the net cash
flows to their present value are risk adjusted to reflect the estimated stage
of completion for each project. The estimates used in valuing in-process
research and development were based upon assumptions we believe to be
reasonable but which are inherently uncertain and unpredictable. Our
assumptions may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variance may result in a
material adverse effect on our financial condition and results of operations.
With respect to the acquired in-process technologies, the calculations of value
were adjusted to reflect the value creation efforts of each project before the
acquisition.
The estimated percentage of completion and technology lives for the
in-process research and development projects as of March 30, 2002 are as
follows:
Estimated
Percentage Expected
of Useful
Product Completion Life
------- ---------- --------
Peak Audio......... 95% 9 years
ShareWave Project A 95% 4 years
ShareWave Project B 70% 6 years
LuxSonor........... 80% 4 years
Stream Machine..... 86% 4 years
The value assigned to each acquired in-process research and development
project as of the acquisition date was as follows (in thousands):
Value
Product Assigned
------- --------
Peak Audio signal processing product $ 1,860
Other Peak Audio product............ 50
ShareWave Project A................. 8,500
ShareWave Project B................. 5,900
LuxSonor............................ 8,600
Stream Machine...................... 6,400
-------
$31,310
=======
23
During fiscal 2000, we recorded $8.0 million of acquired in-process research
and development expenses, resulting from our acquisition of AudioLogic, Inc. We
expensed these amounts on the acquisition date because the acquired technology
had not yet reached technological feasibility and had no future alternative
uses.
Realized Gain on the Sale of Marketable Equity Securities
We realized gains of $9.8 million related to the sale of marketable equity
securities and $1.2 million related to the sale of call options in Openwave
Systems, Inc. (formerly known as Phone.com) common stock during fiscal 2002. We
realized net gains of $86.9 million related to the sale of investments in
fiscal 2001, primarily from the sale of our interest in Basis Communications to
Intel Corporation, resulting in a gain of $79.5 million. We realized gains of
$76.8 million in fiscal 2000 due to our sale of stock and associated options in
Openwave Systems, Inc. common stock. We also realized a gain of $15.7 million
in the fourth quarter of fiscal 2000 due to the sale of our interest in Ambient
Technologies to Intel Corporation.
Interest Expense
Interest expense was $0.2 million, $11.8 million, and $23.8 million in
fiscal 2002, 2001, and 2000, respectively. The decrease in interest expense in
both fiscal 2002 compared to fiscal 2001, and fiscal 2001 versus fiscal 2000,
was mainly due to the repurchase and conversion of $299.0 million of our 6%
convertible subordinated notes in fiscal 2001.
Interest Income
Interest income in fiscal 2002, 2001, and 2000 was $8.4 million, $18.2
million, and $8.1 million, respectively. The decrease in interest income in
fiscal 2002, compared with fiscal 2001, was primarily due to lower cash and
cash equivalent balances, on which interest was earned during fiscal 2002, and
to lower interest rates in fiscal 2002. The increase in interest income in
fiscal 2001 was primarily the result of interest earned on the increased cash
and cash equivalent balances at March 31, 2001, compared to March 25, 2000.
Other Income (Expense)
Other expense in fiscal 2002 includes a charge of $1.0 million related to
write-offs and write-downs of investments in private companies and $0.1 million
related to expenses associated with our foreign subsidiaries.
Other expense in fiscal 2001 includes a charge of $2.0 million related to
the settlement of a litigation dispute, $0.5 million write-off of an investment
in a private company and foreign currency translation losses of $2.4 million.
Other income for fiscal 2000 includes $5.6 million from the release of a
wafer purchase accrual previously established in connection with the sale of a
technology license due to lower wafer demand than was previously forecasted.
Also included in other income is a $3.1 million reduction of a liability
associated with our stock issued as part of the divestiture of the MiCRUS
manufacturing joint venture.
Income Taxes
We recorded an income tax benefit of $10.4 million for fiscal 2002 on a
pre-tax loss of $217.1 million. This benefit generated an effective income tax
rate of 4.8%, which was lower than the U.S. statutory rate of 35%. The primary
reasons our benefit was lower than the statutory rate were that we were not
able to take advantage of the current year's net operating loss and there were
expenses associated with the four acquisitions that closed during fiscal 2002
that were not deductible for tax purposes. The effective tax rate was also
affected by nonrecurring tax benefits recorded during the year, most of which
pertained to the settlement of examinations by the Internal Revenue Service for
fiscal years 1994 through 1997.
24
In fiscal years 2002, 2001, and 2000, we provided a valuation allowance
equal to our net deferred tax assets due to uncertainties regarding whether
these assets will be realized. We evaluate the realizability of the deferred
tax assets on a quarterly basis. In order to recognize these assets, we must be
able to determine that it is more likely than not that these assets will be
realized.
In fiscal year 2001, we recorded income tax expense of $15.7 million on
income before provision for income taxes of $157.8 million. Our effective
income tax rate of approximately 10% in that year was lower than the U.S.
statutory rate of 35% primarily because of the utilization of previously
reserved net operating loss carryforwards and tax credits.
In fiscal year 2000, we recorded no income tax expense or benefit, as we
were unable to recognize any benefit from the losses incurred in that year.
Liquidity and Capital Resources
During fiscal 2002, we used $29 million in cash from operating activities as
opposed to generating $0.4 million in cash in fiscal 2001 and using $179.4
million in fiscal 2000. The cash used in operations in fiscal 2002 was a result
of our net loss of $206.1 million, substantially offset by decreases in
accounts receivable and inventory of $176.7 million. The cash generated by
operations in fiscal 2001 was primarily the result of operating profits offset
by increases in accounts receivable and inventory of $43.4 million and $55.9
million, respectively. The cash used in fiscal 2000 was primarily due to a net
loss of $139.6 million (excluding gains from the sale of securities of $92.5
million), combined with a $79.4 million reduction in accounts payable.
We used $24.7 million in cash from investing activities in fiscal 2002. This
use was primarily the result of purchases of technology licenses and property
and equipment of $16.7 million, $16.1 million for our four acquisitions and an
increase in restricted cash of $2.8 million. These uses of cash were partially
offset by $11 million in cash proceeds from the sale of marketable equity
securities. We generated $114.4 million and $184.5 million in cash from
investing activities in fiscal 2001 and fiscal 2000, respectively. During
fiscal 2001, we sold $89.4 million of common stock investments. In addition,
the release of $47.2 million of restricted cash due to reduced lease
commitments provided additional funding in fiscal 2001. These increases were
partially offset by investments of $22.9 million in new equipment and
technology licenses. During fiscal 2000, we sold $74.6 million of short-term
investments. We also sold approximately two-thirds of our holdings in the
common stock of Phone.com and our interest in Ambient Technologies, for a
combined $92.5 million. In addition, we sold our interest in the Cirent
manufacturing facility for $14 million. Additionally, the release of $29.1
million of restricted cash due to reduced lease commitments provided additional
funding. These increases were partially offset by investments of $27.0 million
in new equipment, software, and an ERP system.
Net cash used in financing activities was $58.9 million, $5.7 million, and
$5.6 million in fiscal 2002, 2001, and 2000, respectively. We used cash in
financing activities in fiscal 2002 primarily for the repurchase of 6.4 million
shares of stock for $68.7 million and payments on long-term debt and capital
lease obligations of $5 million. These uses were partially offset by $14.7
million received for the issuance of common stock in connection with the
exercise of stock options. We used cash in financing activities in fiscal 2001
for the repurchase of convertible subordinated notes and payments on long-term
debt and capital lease obligations. These uses of cash were partially offset in
fiscal 2001 by cash provided from employee stock option exercises. We used cash
in financing activities in fiscal 2000 for payments on long-term debt and
capital lease obligations, which were partially offset by cash provided from
employee stock option exercises.
As of March 30, 2002, we have a $9 million letter of credit secured by $10
million in restricted cash. The letter of credit was issued to secure certain
obligations under our lease agreement for a new headquarters facility in
Austin, Texas. As a result of the acquisition of Stream Machine, we have $2.3
million in restricted cash securing a letter of credit related to Stream
Machine's office lease. We also have $0.5 million in restricted cash securing a
writ of attachment related to ongoing litigation.
25
The following table summarizes our contractual payment obligations and
commitments as of March 30, 2002:
Payment Obligations by Year (in thousands)
-----------------------------------------------------
2003 2004 2005 2006 2007 Beyond Total
------- ------- ------- ------ ------ ------- -------
Facilities leases, net....... $ 9,415 $10,555 $10,463 $9,150 $8,105 $33,360 $81,048
Equipment leases............. 146 70 32 14 8 -- 270
Capital leases............... 566 51 -- -- -- -- 617
Wafer purchase commitments... 13,257 -- -- -- -- -- 13,257
Assembly purchase commitments 1,036 -- -- -- -- -- 1,036
------- ------- ------- ------ ------ ------- -------
Total...................... $24,420 $10,676 $10,495 $9,164 $8,113 $33,360 $96,228
======= ======= ======= ====== ====== ======= =======
Although we cannot assure that we will be able to generate cash in the
future, we anticipate that our existing capital resources and cash flow
generated from future operations will enable us to maintain our current level
of operations for the next twelve months.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS 141 also
defines the criteria for recognizing and reporting intangible assets acquired
in a business combination as assets apart from goodwill. We followed SFAS 141
for our three acquisitions in fiscal 2002 that were completed after
June 30, 2001.
In June 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible
Assets." Under SFAS 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are tested annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over
their useful lives (but with no maximum life) and tested for impairment in
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
to be Disposed of." The amortization provisions of SFAS 142 applied immediately
to goodwill and intangible assets acquired after June 30, 2001. Consequently,
goodwill totaling $122.9 million from the three business combinations initiated
after June 30, 2001 was not amortized during fiscal year 2002. During fiscal
2002, we continued to amortize goodwill and assembled workforce totaling $2.7
million, acquired prior to July 1, 2001, based on a weighted-average useful
life of 3.9 years. We adopted SFAS 142 on March 31, 2002, the beginning of
fiscal 2003. In conjunction with our adoption of SFAS 142, we ceased amortizing
goodwill and are required to perform a transitional impairment test on all
goodwill, totaling $125.6 million as of March 31, 2002, during the first six
months of fiscal year 2003. Any impairment charges resulting from the initial
application of the new rules will be classified as a cumulative effect of
change in accounting principle. Adoption of SFAS 142 is not expected to have a
material impact on our financial position or results of operation.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes prior accounting standards
concerning the financial accounting and reporting for the impairment or the
disposal of long-lived assets and for the disposal of a segment of a business.
SFAS 144 is effective for fiscal years beginning after December 15, 2001; we
adopted SFAS 144 on March 31, 2002. The adoption of SFAS 144 will have an
effect on the presentation of our results of operations in fiscal 2003 as we
expect to complete the dissolution of eMicro Corporation during fiscal 2003.
See Note 5 to the Consolidated Financial Statements for further discussion.
Critical Accounting Policies
Our discussion and analysis of the financial condition and results of
operations is based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally
26
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate the
estimates, including bad debts, inventories, investments, long-term assets, and
income taxes. We base these estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions and conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of the consolidated
financial statements:
. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances
may be required. Additionally, we may maintain and currently do maintain
an allowance for doubtful accounts for estimated losses on receivables
from customers with whom we are involved in lengthy litigation.
. Inventories are recorded at the lower of cost or market, with cost being
determined on a first-in, first-out ("FIFO") basis. We write down
inventories to net realizable value based on forecasted demand and market
conditions. Actual demand and market conditions may be different from
those projected by management. This could have a material effect on our
operating results and financial position.
. We evaluate the recoverability of property and equipment and intangible
assets in accordance with SFAS 121. This standard requires recognition of
impairment of long-lived assets in the event the carrying value of such
assets exceeds the future undiscounted cash flows attributable to such
assets. Impairment evaluations involve management estimates of asset
useful lives and future cash flows. Actual useful lives and cash flows
could be different from those estimated by management. This could have a
material effect on our operating results and financial position. We
adopted SFAS 142 and 144 on March 31, 2002, the first day of fiscal 2003.
. We recognize revenue from products sold directly to customers and to
international distributors upon title passage of inventory. For sales made
directly to domestic customers, title generally passes upon shipment. For
sales made directly to international customers and to international
distributors, title generally passes at the port of destination. Sales
made to domestic distributors are recorded as deferred revenue until the
final sale to the end customer has occurred, since the distributor
agreements allow certain rights of return and price protection on products
unsold by distributors. License and royalty revenue is recognized as it is
earned per unit shipped or when a milestone is reached.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks associated with interest rates on our debt
investment securities, equity price risk on investment securities, and currency
movements on non-U.S. dollar denominated assets and liabilities. We assess
these risks on a regular basis and have established policies to protect against
the adverse effects of these and other potential exposures. All of the
potential changes noted below are based on sensitivity analyses at March 30,
2002. Actual results may differ materially.
Interest Rate Risk
At March 30, 2002, our cash, cash equivalents, and restricted cash included
short-term, fixed rate securities. An immediate 10% change in interest rates
would not have a material effect on either the fair value of our investments or
our results of operations.
27
Equity Price Risk
We are exposed to price risk on publicly traded equity investment
securities. A 10% change in the value of the related securities would not have
a material effect on our financial position or results of operations.
Foreign Currency Exchange Risk
A majority of our revenue and spending is transacted in U.S. dollars;
however, we do enter into transactions in other currencies, primarily Japanese
yen through our Japanese subsidiary. We repatriate these amounts on a quarterly
or monthly basis, depending on underlying accounts receivable collections. We
attempt to limit our exposure to changing foreign exchange rates through
financial market instruments, principally through foreign exchange forward
contracts. The foreign exchange contracts are "marked to market" on a monthly
basis based upon fluctuations of the underlying currency in relation to the
U.S. dollar, and the gains or losses are reflected in operations.
During fiscal 2002 and 2001, we entered into various foreign currencies
forward contracts to mitigate the foreign exchange risk of certain
yen-denominated net balance sheet accounts and sales. As of March 30, 2002, we
did not have any foreign exchange contracts outstanding. As of March 31, 2001,
we had 10 foreign currency forward exchange contracts outstanding to purchase
$22.1 million at an average exchange rate of 118 Japanese yen per dollar.
In addition to the direct effects of changes in exchange rates on the value
of open exchange contracts we may have from time to time, changes in exchange
rates can also affect the volume of sales or the foreign currency sales prices
of our products.
ITEM 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Auditors..................................................................... 29
Consolidated Balance Sheet as of March 30, 2002 and March 31, 2001................................. 30
Consolidated Statement of Operations for the fiscal years ended March 30, 2002, March 31, 2001, and
March 25, 2000................................................................................... 31
Consolidated Statement of Cash Flows for the fiscal years ended March 30, 2002, March 31, 2001, and
March 25, 2000................................................................................... 32
Consolidated Statement of Stockholders' Equity (Net Capital Deficiency) for the fiscal years ended
March 30, 2002, March 31, 2001, and March 25, 2000............................................... 33
Notes to Consolidated Financial Statements......................................................... 34
28
Report of Independent Auditors
The Board of Directors and Stockholders
Cirrus Logic, Inc.
We have audited the accompanying consolidated balance sheets of Cirrus
Logic, Inc. as of March 30, 2002 and March 31, 2001, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency), and cash flows for each of the three fiscal years in the period
ended March 30, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 30, 2002 and March 31, 2001, and the consolidated results of its
operations and its cash flows for each of the three fiscal years in the period
ended March 30, 2002, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Austin, Texas
April 26, 2002
29
CIRRUS LOGIC, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
March 30, March 31,
2002 2001
--------- ---------
Assets
Current assets:
Cash and cash equivalents............................................... $ 140,529 $ 253,136
Restricted cash......................................................... 12,807 10,000
Marketable equity securities............................................ 2,258 6,581
Accounts receivable, net................................................ 42,158 136,102
Inventories, net........................................................ 27,985 109,161
Prepaid expenses........................................................ 14,205 6,816
Other current assets.................................................... 5,723 11,401
--------- ---------
Total current assets................................................ 245,665 533,197
Property and equipment, net................................................ 36,549 47,557
Goodwill and intangibles, net.............................................. 194,660 12,062
Other assets............................................................... 4,756 5,189
--------- ---------
$ 481,630 $ 598,005
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................................ $ 35,465 $ 77,899
Accrued salaries and benefits........................................... 10,873 15,519
Current maturities of long-term debt and capital lease obligations...... 566 3,133
Income taxes payable.................................................... 42,178 41,053
Deferred revenues....................................................... 4,814 9,765
Other accrued liabilities............................................... 24,784 12,071
--------- ---------
Total current liabilities........................................... 118,680 159,440
Long-term debt and capital lease obligations............................... 51 336
Other long-term liabilities................................................ 3,658 3,983
Minority interest in eMicro................................................ 1,092 1,703
Stockholders' Equity:......................................................
Series A Participating Preferred Stock, $0.001 par value; 1,500
shares authorized, zero issued........................................ -- --
Common stock, $0.001 par value, 280,000 shares authorized, 82,979
shares and 79,704 shares issued and outstanding at March 30, 2002 and
March 31, 2001, respectively.......................................... 83 80
Additional paid-in capital.............................................. 862,646 715,710
Accumulated deficit..................................................... (504,699) (287,825)
Accumulated other comprehensive income.................................. 119 4,578
--------- ---------
Total stockholders' equity.......................................... 358,149 432,543
--------- ---------
$ 481,630 $ 598,005
========= =========
The accompanying notes are an integral part of these financial statements.
30
CIRRUS LOGIC, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Fiscal Years Ended
------------------------------
March 30, March 31, March 25,
2002 2001 2000
--------- --------- ---------
Net sales.................................................... $ 417,529 $778,673 $ 564,400
Costs and expenses:
Cost of sales............................................. 319,280 486,355 338,308
Research and development.................................. 121,648 127,599 121,410
Selling, general and administrative....................... 94,467 111,037 94,737
Provision (benefit) for doubtful accounts................. 73,074 (1,408) (3,031)
Restructuring costs and other, net........................ 10,923 (14,362) 125,612
Abandonment of assets charge.............................. 1,898 -- 12,201
Acquired in-process research and development expenses..... 31,310 -- 8,013
--------- -------- ---------
Total costs and expenses.............................. 652,600 709,221 697,250
--------- -------- ---------
Income (loss) from operations................................ (235,071) 69,452 (132,850)
Realized gain on the sale of marketable equity securities.... 10,967 86,886 92,463
Interest expense............................................. (239) (11,759) (23,754)
Interest income.............................................. 8,413 18,168 8,096
Other income (expense)....................................... (1,130) (4,928) 8,949
--------- -------- ---------
Income (loss) before provision for income taxes.............. (217,060) 157,819 (47,096)
Provision (benefit) for income taxes......................... (10,370) 15,715 --
Minority interest in loss of eMicro.......................... 611 297 --
--------- -------- ---------
Income (loss) before extraordinary gain and accounting change (206,079) 142,401 (47,096)
Extraordinary gain, net of income taxes of $276.............. -- 2,482 --
Cumulative effect of change in accounting principle.......... -- (1,707) --
--------- -------- ---------
Net income (loss)............................................ $(206,079) $143,176 $ (47,096)
========= ======== =========
Basic earnings (loss) per share:.............................
Before extraordinary gain and accounting change........... $ (2.66) $ 1.99 $ (0.77)
Extraordinary gain, net of income tax..................... -- 0.03 --
Cumulative effect of change in accounting principle....... -- (0.02) --
--------- -------- ---------
$ (2.66) $ 2.00 $ (0.77)
========= ======== =========
Diluted earnings (loss) per share:
Before extraordinary gain and accounting change........... $ (2.66) $ 1.85 $ (0.77)
Extraordinary gain, net of income tax..................... -- 0.03 --
Cumulative effect of change in accounting principle....... -- (0.02) --
--------- -------- ---------
$ (2.66) $ 1.86 $ (0.77)
========= ======== =========
Weighted average common shares outstanding:
Basic..................................................... 77,552 71,678 61,554
Diluted................................................... 77,552 82,654 61,554
The accompanying notes are an integral part of these financial statements.
31
CIRRUS LOGIC, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
March 30, March 31, March 25,
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................................................................ $(206,079) $143,176 $ (47,096)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating
activities:
Depreciation and amortization............................................................. 35,408 29,127 32,218
Non-cash portion of restructuring charges................................................. -- -- 30,768
Loss on retirement or write-off of property and equipment................................. 2,893 825 12,201
Write-off of investment in technology..................................................... -- 1,500 --
Acquired in-process research and development expenses..................................... 31,310 -- 8,013
Gain on sale of marketable equity securities.............................................. (10,967) (86,886) (92,463)
Compensation related to the issuance of certain employee stock options and restricted
stock.................................................................................... 1,686 347 4,008
Extraordinary gain, net of income tax..................................................... -- (2,482) --
Minority interest in loss of eMicro....................................................... (611) (297) --
Changes in operating assets and liabilities:
Accounts receivable, net............................................................... 94,837 (43,397) (28,338)
Inventories, net....................................................................... 81,891 (55,873) (12,856)
Other assets........................................................................... 3,245 9,485 (4,062)
Accounts payable....................................................................... (53,778) (10,071) (79,418)
Accrued salaries and benefits.......................................................... (5,420) 2,941 (4,128)
Income taxes payable................................................................... 1,125 12,830 3,600
Other accrued liabilities.............................................................. (4,538) (863) (1,837)
--------- -------- ---------
Net cash (used in) provided by operating activities............................................. (28,998) 362 (179,390)
--------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of short term investments................................................. -- -- 74,616
Proceeds from sale of equity investments..................................................... 10,967 89,354 92,956
Decrease in manufacturing agreements and investment in joint venture......................... -- -- 14,000
Additions to property and equipment.......................................................... (8,589) (18,461) (8,412)
Investments in technology.................................................................... (8,152) (4,395) --
Decrease (increase) in deposits and other assets............................................. 29 773 (18,558)
Acquisition of companies, net of cash acquired............................................... (16,110) -- 841
Decrease (increase) in restricted cash....................................................... (2,807) 47,173 29,104
--------- -------- ---------
Net cash (used in) provided by investing activities............................................. (24,662) 114,444 184,547
--------- -------- ---------
Cash flows from financing activities:
Repurchase of convertible subordinated notes................................................. -- (25,811) --
Payments on long-term debt................................................................... (4,334) (11,610) (20,854)
Payments on capital lease obligations........................................................ (625) (1,136) (1,542)
Borrowings on short-term debt................................................................ -- -- 200
Issuance of common stock, net of issuance costs.............................................. 14,673 27,853 16,616
Repurchase and retirement of common stock.................................................... (68,661) -- --
Cash contributions from minority partners.................................................... -- 5,000 --
--------- -------- ---------
Net cash used in financing activities........................................................... (58,947) (5,704) (5,580)
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents............................................ (112,607) 109,102 (423)
Cash and cash equivalents at beginning of year.................................................. 253,136 144,034 144,457
--------- -------- ---------
Cash and cash equivalents at end of year........................................................ $ 140,529 $253,136 $ 144,034
========= ======== =========
Supplemental disclosures of cash flow information
Cash payments (refunds) during the year for:
Interest..................................................................................... $ 239 $ 10,491 $ 22,641
Income taxes................................................................................. (10,544) 2,801 (3,600)
Supplemental disclosures of non-cash investing and financing activities
Issuance of common stock for acquisitions....................................................... $ 188,458 $ -- $ 22,712
The accompanying notes are an integral part of these financial statements.
32
CIRRUS LOGIC, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(in thousands)
Accumulated
Common Stock Additional Other
------------- Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income (loss) Total
------ ------ ---------- ----------- ------------- ---------
Balance, March 27, 1999............................. 60,103 $60 $327,601 $(383,905) $ (1,476) $ (57,720)
Components of comprehensive income (loss):
Net loss.......................................... -- -- -- (47,096) -- (47,096)
Unrealized gain on marketable equity securities... -- -- -- -- 47,820 47,820
Change in unrealized loss on foreign currency
translation adjustments.......................... -- -- -- -- 940 940
------ --- -------- --------- -------- ---------
Total comprehensive income....................... -- -- -- -- -- 1,664
------ --- -------- --------- -------- ---------
Issuance of stock under stock plans................. 1,993 2 16,614 -- -- 16,616
Issuance of stock for acquisition of AudioLogic, Inc 1,210 1 22,711 -- -- 22,712
Compensation related to the issuance of certain
employee options................................... -- -- 1,026 -- -- 1,026
------ --- -------- --------- -------- ---------
Balance, March 25, 2000............................. 63,306 63 367,952 (431,001) 47,284 (15,702)
Components of comprehensive income (loss):
Net income........................................ -- -- -- 143,176 -- 143,176
Change in unrealized gain on marketable equity
securities....................................... -- -- -- -- (41,987) (41,987)
Change in unrealized loss on foreign currency
translation adjustments.......................... -- -- -- -- (719) (719)
------ --- -------- --------- -------- ---------
Total comprehensive income....................... -- -- -- -- -- 100,470
------ --- -------- --------- -------- ---------
Issuance of stock under stock plans................. 2,835 4 27,849 -- -- 27,853
Tax benefit of stock option exercises............... -- -- 11,970 -- -- 11,970
Interest in cash contributed to eMicro by minority
partners........................................... -- -- 3,000 -- -- 3,000
Stock issued under the restructuring agreement with
IBM................................................ 2,382 2 31,998 -- -- 32,000
Conversion of convertible debt...................... 11,181 11 272,594 -- -- 272,605
Compensation related to the issuance of certain
employee options................................... -- -- 347 -- -- 347
------ --- -------- --------- -------- ---------
Balance, March 31, 2001............................. 79,704 80 715,710 (287,825) 4,578 432,543
Components of comprehensive income (loss):
Net loss.......................................... -- -- -- (206,079) -- (206,079)
Change in unrealized gain on marketable equity
securities....................................... -- -- -- -- (4,324) (4,324)
Change in unrealized loss on foreign currency
translation adjustments.......................... -- -- -- -- (135) (135)
------ --- -------- --------- -------- ---------
Total comprehensive loss......................... -- -- -- -- -- (210,538)
------ --- -------- --------- -------- ---------
Retirement of treasury shares....................... (6,444) (6) (57,860) (10,795) -- (68,661)
Issuance of stock under stock plans................. 1,468 1 14,660 -- -- 14,661
Issuance of stock related to acquisitions........... 8,251 8 188,450 -- -- 188,458
Amortization of deferred compensation............... -- -- 1,686 -- -- 1,686
------ --- -------- --------- -------- ---------
Balance, March 30, 2002............................. 82,979 $83 $862,646 $(504,699) $ 119 $ 358,149
====== === ======== ========= ======== =========
The accompanying notes are an integral part of these financial statements.
33
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Founded in 1984 in Silicon Valley, Cirrus Logic is a leading supplier of
high-performance analog and digital signal processing ("DSP") chip solutions
for consumer entertainment electronics that allow people to see, hear, connect,
and enjoy digital entertainment. Our mixed-signal devices are designed for
specific markets that derive value from our expertise in advanced mixed-signal
design processing, systems-level engineering, and software knowledge. Our
products, marketed under the Cirrus(R) brand name, enable original equipment
manufacturers ("OEMs") to accelerate development of leading-edge digital
entertainment products that are in high consumer demand.
Basis of Presentation
We prepare financial statements on a 52- or 53-week year that ends on the
Saturday closest to March 31. Fiscal 2002 and 2000 included 52 weeks, whereas
fiscal 2001 included 53 weeks.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and include the accounts of the Company and its wholly and majority-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires the use of
management estimates. These estimates are subjective in nature and involve
judgments that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at fiscal year end, and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates.
Cash, Cash Equivalents and Restricted Cash
Cash, restricted cash, and cash equivalents consist primarily of overnight
deposits, commercial paper, U.S. Government Treasury and Agency instruments
with original maturities of three months or less at the date of purchase, and
money market funds.
Marketable Equity Securities
We determine the appropriate classification of marketable debt and equity
securities at the time of purchase as held-to-maturity, trading, or
available-for-sale in accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities." We reevaluate such designation as of each balance sheet
date. All marketable securities for fiscal 2002 and 2001 were classified as
available-for-sale securities.
Available-for-sale securities, which include investments in marketable
equity securities, are carried at fair value, with unrealized gains and losses
included as a component of stockholders' equity and comprehensive income
(loss). Realized gains and losses, declines in value judged to be other than
temporary, and interest on available-for-sale securities are included in net
income.
34
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
We use the lower of cost or market method to value our inventories, with
cost being determined on a first-in, first-out (FIFO) basis. One of the factors
we consistently evaluate in application of this method is the extent to which
products are accepted into the marketplace. By policy, we evaluate market
acceptance based on known business factors and conditions by comparing
forecasted customer unit demand for our 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, we analyze inventories 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 to the lower of cost or market. Typically, market value
for excess or obsolete inventories is considered 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.
Net inventories are comprised of the following (in thousands):
March 30, March 31,
2002 2001
--------- ---------
Work-in process.... $23,400 $ 81,272
Finished goods..... 4,585 27,889
------- --------
Net Inventories. $27,985 $109,161
======= ========
Before the third quarter of fiscal 2001, we recognized inventory being
manufactured by third-party wafer fabricators, but not received, as a liability
before our acceptance of the inventory. This liability was recognized because
of our joint venture relationships and other contractual obligations with
certain suppliers. The agreements with those suppliers expired during fiscal
2001; therefore, the inventory and liability are no longer included in the
balance sheet.
Property and Equipment
Property and equipment are recorded at cost, net of depreciation and
amortization. Depreciation and amortization is calculated on a straight-line
basis over estimated economic lives, ranging from three to ten years, or over
the life of the lease for equipment under capitalized leases, if shorter.
Leasehold improvements are depreciated over the shorter of the term of the
lease or the estimated useful life. Gains or losses related to retirements or
dispositions of fixed assets are recognized in the period incurred.
Property and equipment are comprised of the following (in thousands):
March 30, March 31,
2002 2001
--------- ---------
Furniture and fixtures......................... $ 13,304 $ 12,405
Leasehold improvements......................... 20,893 20,593
Machinery and equipment........................ 177,032 171,899
Capitalized software........................... 64,259 67,398
--------- ---------
Total property and equipment................... 275,488 272,295
Less: Accumulated depreciation and amortization (238,939) (224,738)
--------- ---------
Net Property and Equipment.................. $ 36,549 $ 47,557
========= =========
35
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization expense for fiscal 2002, 2001, and 2000 was
$18.5 million, $24.3 million, and $29.8 million, respectively.
Goodwill and Intangible Assets
In acquisitions accounted for using the purchase method of accounting,
goodwill is recorded as the difference, if any, between the aggregate
consideration paid for an acquisition and the fair value of the net tangible
and intangible assets acquired. Goodwill associated with acquisitions completed
prior to June 30, 2001 is being amortized on a straight-line basis over its
estimated useful life of five years. In accordance with SFAS 142, "Goodwill and
Other Intangible Assets," goodwill associated with acquisitions consummated
after June 30, 2001 is not being amortized. See "Recently Issued Accounting
Pronouncements" below for further discussion regarding SFAS 142.
Intangible assets include technology licenses that are amortized on a
straight-line basis over two to five years. Acquired intangibles, recorded in
connection with our acquisitions, include existing technology, core
technology/patents, license agreements, customer agreements, and, for
acquisitions prior to June 30, 2002, assembled workforce. These assets are
being amortized on a straight-line basis over lives ranging from one to nine
years.
Goodwill and intangible assets are comprised of the following (in thousands):
March 30, March 31,
2002 2001
--------- ---------
Goodwill.............................. $124,085 $ --
Acquired intangibles.................. 80,548 13,653
Technology licenses................... 14,451 6,013
-------- -------
Total goodwill and intangible assets.. 219,084 19,666
Less: Accumulated amortization........ (24,424) (7,605)
-------- -------
Net Goodwill and Intangible Assets. $194,660 $12,062
======== =======
Amortization expense for fiscal 2002, 2001, and 2000 was $16.8 million, $4.8
million, and $2.4 million, respectively.
Long-Lived Assets
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," we recognize impairment
losses on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. We measure any impairment
loss by comparing the fair value of the asset to its carrying amount. We
estimate fair value based on discounted future cash flows, quoted market
prices, or independent appraisals. As discussed in "Recently Issued Accounting
Pronouncements" below, we adopted SFAS 144 on March 31, 2002.
Foreign Currency Translation
Local currency transactions of international subsidiaries that have the U.S.
dollar as the functional currency are remeasured into U.S. dollars using
current rates of exchange for assets and liabilities. Gains and losses from
remeasurement are included in other income (expense). Our subsidiaries that do
not have the U.S. dollar as their
36
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
functional currency translate assets and liabilities at current rates of
exchange in effect at the balance sheet date; certain balances are translated
at historical rates of exchange. The resulting gains and losses from
translation are included as a component of stockholders' equity. Revenue and
expenses from our international subsidiaries are translated using the monthly
average exchange rates in effect for the period in which the items occur.
Foreign Exchange Contracts
We enter into foreign currency forward exchange and option contracts to
mitigate certain currency exposures, primarily expected cash flows of our
Japanese subsidiary. Foreign currency contracts are typically entered into for
a period of four months. The transactions are marked to market monthly and the
cumulative gains or losses are recognized in net income.
Effective April 1, 2001, we adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
133 requires that we recognize all derivatives as either assets or liabilities
in our consolidated balance sheet and measure those instruments at fair value.
The adoption of SFAS 133 did not have a material impact on our results of
operations or financial position.
During fiscal 2002, 2001, and 2000, we entered into various foreign
currencies forward contracts to mitigate the foreign exchange risk of certain
yen-denominated net balance sheet accounts and sales. As of March 30, 2002, we
did not have any foreign exchange contracts outstanding. As of March 31, 2001,
we had 10 foreign currency forward exchange contracts outstanding to purchase
$22.1 million at an average exchange rate of 118 Japanese yen per dollar. The
fair value of the open contracts as of March 31, 2001 was $1.2 million.
Transaction gains and losses were not material in fiscal 2002 and 2000. We
realized transaction gains on yen option contracts of $0.4 million in fiscal
2001.
Risks and Uncertainties
Financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash equivalents, foreign currency exchange
contracts, and trade accounts receivable. We are exposed to credit risk to the
extent of the amounts recorded on the balance sheet. By policy, we place our
cash equivalents and foreign currency exchange contracts only with high credit
quality financial institutions and, other than U.S. Government Treasury
instruments, limit the amounts invested in any one institution or in any type
of instrument. We perform ongoing credit evaluations of our customers'
financial condition, limit our exposure to accounting losses by limiting the
amount of credit extended whenever deemed necessary and utilize letters of
credit where appropriate and available. However, we generally do not require
collateral from our customers. We sell a significant amount of products in the
Pacific Rim and Japan. Our exposure to risk with Asian customers has been
largely mitigated using letters of credit.
Revenue Recognition
Revenue from product sold directly to customers and to international
distributors is recognized upon title passage of inventory. For sales made
directly to domestic customers, title generally passes upon shipment. For sales
made directly to international customers and to international distributors,
title generally passes at the port of destination. Sales made to domestic
distributors are recorded as deferred revenue until the final sale to the end
customer has occurred as the distributor agreements allow certain rights of
return and price protection on products unsold by distributors. License and
royalty revenue is recognized as it is earned per unit shipped or when a
milestone is reached.
37
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective with the first quarter of fiscal 2001, we changed our revenue
recognition policy in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," resulting in a change in the basis for recognizing
revenue on all shipments from date of shipment to date of passage of title. The
cumulative effect of the change on prior years' accumulated deficit resulted in
a charge to fiscal 2001 income of $1.7 million.
During the first quarter of fiscal 2001, we also changed our estimate of the
amount of revenue that is deferred on distributor transactions under agreements
with only limited rights of return. Results for the fiscal year ended March 31,
2001 include revenue of $5.4 million, cost of sales of $2.0 million and income
of $3.4 million related to this change in estimate. The effect of this estimate
change increased basic and diluted earnings per share by $0.03 for the fiscal
year ended March 31, 2001.
Shipping Costs
Our shipping and handling costs are included in cost of sales for all
periods presented.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were $3.2
million, $2.3 million, and $2.2 million, in fiscal years 2002, 2001, and 2000,
respectively.
Stock-Based Compensation
We apply the intrinsic value method in accounting for our stock option and
stock purchase plans in accordance with Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized for options granted with an exercise
price equal to market value at the date of grant or in connection with the
employee stock purchase plan. See Note 11 for the pro forma disclosure of the
effect on net income and earnings per share as if the fair value based method
had been applied in measuring compensation expense as required under SFAS 123,
"Accounting for Stock-Based Compensation."
On March 31, 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, which is an interpretation of APB 25, governing
accounting principles applicable to equity incentive plans. The interpretation
did not have a material impact on our results of operations or financial
position.
Income Taxes
SFAS 109, "Accounting for Income Taxes," provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. We
have provided a valuation allowance equal to our net deferred tax assets due to
uncertainties regarding their realization. We evaluate the realizability of our
deferred tax assets on a quarterly basis.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share is based on the weighted effect of common
shares issued and outstanding, and is calculated by dividing net income (loss)
by the weighted average shares outstanding during the period. Diluted earnings
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of common shares used in the basic earnings (loss) per share
calculation plus the number of common shares that
38
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
would be issued assuming exercise or conversion of all potentially dilutive
common shares outstanding. The following table sets forth the computation of
basic and diluted earnings (loss) per share for the last three fiscal years (in
thousands, except per share amounts):
March 30, March 31, March 25,
2002 2001 2000
--------- --------- ---------
Income (loss) before extraordinary gain and accounting change....... $(206,079) $142,401 $(47,096)
Extraordinary gain, net of tax...................................... -- 2,482 --
Cumulative effect of change in accounting principle................. -- (1,707) --
--------- -------- --------
Net income (loss)................................................... (206,079) 143,176 (47,096)
Effect of convertible subordinated notes............................ -- 10,806 --
--------- -------- --------
Net income (loss) including assumed conversion of subordinated notes $(206,079) $153,982 $(47,096)
========= ======== ========
Weighted average shares outstanding
Basic............................................................ 77,552 71,678 61,554
Assumed conversion of convertible subordinated notes............. -- 6,410 --
Dilutive effect of stock options outstanding..................... -- 4,566 --
--------- -------- --------
Diluted.......................................................... 77,552 82,654 61,554
========= ======== ========
Basic earnings (loss) per share:
Before extraordinary gain and accounting change.................. $ (2.66) $ 1.99 $ (0.77)
Extraordinary gain............................................... -- 0.03 --
Cumulative effect of change in accounting principle.............. -- (0.02) --
--------- -------- --------
Basic earnings (loss) per share..................................... $ (2.66) $ 2.00 $ (0.77)
========= ======== ========
Diluted earnings (loss) per share:
Before extraordinary gain and accounting change.................. $ (2.66) $ 1.85 $ (0.77)
Extraordinary gain............................................... -- 0.03 --
Cumulative effect of change in accounting principle.............. -- (0.02) --
--------- -------- --------
Diluted earnings (loss) per share................................... $ (2.66) $ 1.86 $ (0.77)
========= ======== ========
Incremental common shares attributable to the exercise of outstanding
options of 2,759,000 and 2,298,000 shares as of March 30, 2002 and March 25,
2000, respectively, were excluded from the computation of diluted earnings
(loss) per share because the effect would be antidilutive. Included in diluted
earnings (loss) per share calculation for fiscal 2001 was an adjustment to
increase net income by $10.8 million and diluted shares by 6,410,000, which was
the after-tax interest savings and shares that were issued in connection with
the convertible debt.
As of March 25, 2000, we had outstanding convertible notes to purchase
approximately 12,387,000 shares of common stock that were not included in the
computation of diluted earnings (loss) per share because the effect would have
been antidilutive. These notes converted to common stock during fiscal 2001.
See Note 6 for further discussion.
Additionally, approximately 2.3 million shares issued as part of the
divestiture of the MiCRUS manufacturing joint venture (see Note 9) were
excluded from the computation of diluted earnings (loss) per share for the year
ended March 25, 2000 because the effect would have been antidilutive.
39
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
The Company applies SFAS 130, "Reporting Comprehensive Income." Our
comprehensive income is comprised of foreign currency translation adjustments
and unrealized gains and losses on investments classified as available-for-sale.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
141, "Business Combinations." SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS 141 also defines the criteria for recognizing and reporting intangible
assets acquired in a business combination as assets apart from goodwill. We
followed SFAS 141 for our three acquisitions in fiscal 2002 that were completed
after June 30, 2001.
In June 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible
Assets." Under SFAS 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are tested annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over
their useful lives (but with no maximum life) and tested for impairment in
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
to be Disposed of." The amortization provisions of SFAS 142 applied immediately
to goodwill and intangible assets acquired after June 30, 2001. Consequently,
goodwill totaling $122.9 million from the three business combinations initiated
after June 30, 2001 was not amortized during fiscal year 2002. During fiscal
2002, we continued to amortize goodwill and assembled workforce totaling $2.7
million, acquired prior to July 1, 2001, based on a weighted-average useful
life of 3.9 years. We adopted SFAS 142 on March 31, 2002, the beginning of
fiscal 2003. In conjunction with our adoption of SFAS 142, we ceased amortizing
goodwill and are required to perform a transitional impairment test on all
goodwill, totaling $125.6 million as of March 31, 2002, during the first six
months of fiscal year 2003. Any impairment charges resulting from the initial
application of the new rules will be classified as a cumulative effect of
change in accounting principle. Adoption of SFAS 142 is not expected to have a
material impact on our financial position or results of operation.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes prior accounting standards
concerning the financial accounting and reporting for the impairment or the
disposal of long-lived assets and for the disposal of a segment of a business.
SFAS 144 is effective for fiscal years beginning after December 15, 2001; we
adopted SFAS 144 on March 31, 2002. The adoption of SFAS 144 will have an
effect on the presentation of our results of operations in fiscal 2003 as we
expect to complete the dissolution of eMicro Corporation during fiscal 2003.
See Note 5 for further discussion.
Reclassifications
Certain reclassifications have been made to the 2001 and 2000 financial
statements to conform to the 2002 presentation. These reclassifications had no
effect on the results of operations or stockholders' equity.
2. Financial Instruments
Disclosures About Fair Values of Financial Instruments
We used the following methods and assumptions to estimate our fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
40
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marketable equity securities: The fair values for marketable debt and equity
securities are based on quoted market prices.
Foreign currency exchange and option contracts: We estimated the fair values
of our foreign currency exchange forward and option contracts based on quoted
market prices of comparable contracts, adjusted through interpolation where
necessary for maturity differences.
Long-term debt: We estimated the fair value of long-term debt based on
estimated current market rates for debt instruments with similar terms and
remaining maturities.
The carrying amounts and fair values of our financial instruments are as
follows (in thousands):
March 30, 2002 March 31, 2001
------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Cash............................ $ 9,719 $ 9,719 $222,048 $222,048
Marketable securities:
Commercial paper............. 4,500 4,500 41,088 41,266
U.S. Government Agency
instruments................ -- -- 6,581 6,581
Marketable equity securities. 139,117 139,117 1,178 1,178
Long-term debt and capital lease
obligations................... 617 617 3,469 3,469
At March 30, 2002, all available-for-sale debt securities have contractual
maturities of less than one year. Gross realized and unrealized gains and
losses on all classes of debt securities were immaterial at and for the periods
ended March 30, 2002 and March 31, 2001. Unrealized gains on marketable equity
securities were $1.5 million at March 30, 2002 and $5.8 million at March 31,
2001.
3. Accounts Receivable
The following are the components of accounts receivable (in thousands):
March 30, March 31,
2002 2001
--------- ---------
Gross accounts receivable............ $44,123 $138,302
Less: Allowance for doubtful accounts (1,965) (2,200)
------- --------
Net Accounts Receivable........... $42,158 $136,102
======= ========
The following table summarizes the changes in the allowance for doubtful
accounts (in thousands):
Balance, March 27, 1999................................... $ 9,296
Release charged to costs and expenses.................. (3,031)
Write-off of uncollectible accounts, net of recoveries. (2,395)
--------
Balance, March 25, 2000................................... 3,870
Release charged to costs and expenses.................. (1,408)
Write-off of uncollectible accounts, net of recoveries. (262)
--------
Balance, March 31, 2001................................... 2,200
Additions charged to costs and expenses................ 73,074
Write-off of uncollectible accounts, net of recoveries. (7)
Transfer of allowance to long-term receivables......... (73,302)
--------
Balance, March 30, 2002................................... $ 1,965
========
41
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions
Peak Audio, Inc. On April 30, 2001, we completed the acquisition of the
assets of Peak Audio, Inc. ("Peak"), a Colorado-based company specializing in
commercial audio networking products. The results of Peak's operations have
been included in our consolidated financial statements since that date.
The aggregate purchase price of $9.8 million was comprised of the following
components (in thousands):
Cash paid................... $8,117
Fair value of options issued 998
Direct acquisition costs.... 717
------
Total.................... $9,832
======
The fair value of the approximately 61,000 options issued in exchange for
the outstanding options of Peak was determined using the Black-Scholes option
valuation model. The purchase price excludes $2.0 million paid to certain key
employees for a portion of their stock as this payment vests over three years'
employment with us. We have recorded an asset, split between current and
long-term, for the associated deferred compensation and are amortizing it on a
straight-line basis over the three-year period. As part of the acquisition, the
shareholders of Peak potentially can receive up to an additional $16 million in
consideration based on the financial performance of the purchased assets over a
two-year period. The contingent consideration can be paid in cash or Cirrus
Logic common stock at our discretion and would be treated as additional
purchase price. Peak did not meet the required financial milestones for the
first annual period; consequently, we have not yet made a payout associated
with this contingent consideration. The acquisition was accounted for under the
purchase method of accounting. The purchase price was allocated to the
estimated fair value of assets acquired based on independent appraisals and
management estimates as follows (in thousands):
Assets acquired..................................................... $ 191
In-process research and development................................. 1,910
Goodwill (5 year useful life)....................................... 1,216
Intangible assets subject to amortization (4.9 year weighted-average
useful life):.....................................................
Existing technology (5 year useful life)......................... $2,730
Core technology/patents (5 year useful life)..................... 1,390
Assembled workforce (3 year useful life)......................... 920
License agreements (9 year useful life).......................... 440
Trade name/trademarks (4 year useful life)....................... 320
------
Total intangible assets...................................... 5,800
Deferred compensation--unvested options............................. 715
------
Net assets acquired.......................................... $9,832
======
The acquired in-process research and development of $1.9 million was
expensed upon completion of the acquisition. In accordance with SFAS 141 and
142, assembled workforce will be reclassified to goodwill effective March 31,
2002 and we will cease amortizing goodwill. The goodwill was deductible for tax
purposes.
ShareWave, Inc. On October 2, 2001, we acquired 100% of the outstanding
stock of ShareWave, Inc. ("ShareWave"). The results of ShareWave's operations
have been included in our consolidated financial statements since that date.
ShareWave developed a wireless LAN semiconductor solution, based on IEEE 802.11
standards, capable of seamlessly sharing high-quality audio and video
entertainment throughout the home. The
42
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisition strengthens the connectivity portion of our vision, which is to
provide semiconductor solutions that allow people to hear, see, connect, and
enjoy digital entertainment.
The aggregate purchase price of $76.6 million was comprised of the following
components (in thousands):
Fair value of common shares issued.. $72,411
Cash paid to dissenting shareholders 2,716
Fair value of options issued........ 999
Direct acquisition costs............ 500
Cash paid for fractional shares..... 4
-------
Total............................ $76,630
=======
The fair value of the 2.8 million common shares issued was determined based
on the average closing price of our common shares over the period beginning two
days before and ending two days after the announcement of the acquisition. Of
the 2.8 million common shares issued, approximately 435,000 were placed into an
escrow account to cover representations and warranties made by ShareWave in the
merger agreement. The escrow agreement terminates in December 2002. The fair
value of the approximately 452,000 options issued in exchange for the
outstanding options of ShareWave was determined using the Black-Scholes option
valuation model.
The purchase price excludes the fair value of approximately 69,000 shares
that would otherwise have been issued to certain key employees as part of the
acquisition. These shares vest and will be issued ratably on an annual basis
over a three-year period, assuming continued employment with us. We have
recorded deferred compensation as a component of stockholders' equity for the
fair value of these shares, based on the closing price of Cirrus stock on the
date the acquisition was effective, and are amortizing the deferred
compensation on a straight-line basis over three years.
The purchase price was allocated to the estimated fair value of assets
acquired and liabilities assumed based on independent appraisals and management
estimates as follows (in thousands):
Net liabilities assumed............................................. $(5,944)
In-process research and development................................. 14,400
Goodwill............................................................ 56,251
Intangible assets subject to amortization (6.9 year weighted-average
useful life):.....................................................
Customer agreements (7 year useful life)......................... $8,200
Core technology/patents (7 year useful life)..................... 3,400
Trademark (7 year weighted-average useful life).................. 200
Other intangible assets (1 year weighted-average useful life).... 195
------
Total intangible assets...................................... 11,995
Deferred compensation--unvested options............................. 12
Facilities abandonment accrual...................................... (84)
-------
Net assets acquired.......................................... $76,630
=======
The acquired in-process research and development of $14.4 million was
expensed upon completion of the acquisition. The goodwill was not deductible
for tax purposes.
LuxSonor Semiconductors, Inc. On October 10, 2001, we acquired 100% of the
outstanding stock of LuxSonor Semiconductors, Inc. ("LuxSonor"). The results of
LuxSonor's operations have been included in our
43
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consolidated financial statements since that date. LuxSonor has developed a
family of DVD video processors and audio/video semiconductor solutions. This
acquisition strengthens our silicon content and ability to provide Total
Entertainment (Total-E(TM)) solutions for current DVD systems as well as
next-generation, Internet-ready DVD players.
The estimated aggregate purchase price of $50.0 million was comprised of the
following components (in thousands):
Fair value of common shares issued $45,936
Cash.............................. 1,925
Fair value of options issued...... 1,200
Direct acquisition costs.......... 900
-------
Total.......................... $49,961
=======
The fair value of the 1.8 million common shares issued was determined based
on the average closing price of our common shares over the period beginning two
days before and ending two days after the announcement of the acquisition. The
fair value of the approximately 203,000 options issued in exchange for the
outstanding options of LuxSonor was determined using the Black-Scholes option
valuation model. In conjunction with the acquisition, $9.75 million of the
purchase price was placed into an escrow account to cover representations and
warranties made by LuxSonor in the merger agreement. The escrow agreement
terminates in April 2003. During fiscal 2002, we filed a claim to recover
approximately $7.8 million from the escrow account under the terms of the
merger agreement; this amount is included in other current assets on the
balance sheet. The difference between the amount paid into and the claim filed
against the escrow account was included in the purchase price. Our escrow claim
is currently being disputed in arbitration, so the purchase price may change.
The purchase price excludes the fair value of approximately 125,000 shares
that would otherwise have been issued to certain key employees as part of the
acquisition. These shares vest and will be issued ratably on an annual basis
over a two-year period, assuming continued employment with us. We have recorded
deferred compensation as a component of stockholders' equity for the fair value
of these shares, based on the closing price of Cirrus stock on the date the
acquisition was effective, and are amortizing the deferred compensation on a
straight-line basis over two years.
The purchase price was allocated to the estimated fair value of assets
acquired and liabilities assumed based on independent appraisals and management
estimates as follows (in thousands):
Net liabilities assumed............................................. $(4,142)
In-process research and development................................. 8,600
Goodwill............................................................ 24,197
Intangible assets subject to amortization (3.6 year weighted-average
useful life):.....................................................
Existing technology (3.5 year weighted-average useful life)...... $16,000
Core technology/patents (4 year useful life)..................... 4,000
License agreements (4 year useful life).......................... 1,500
-------
Total intangible assets...................................... 21,500
Deferred compensation--unvested options............................. 193
Facilities abandonment accrual...................................... (237)
Previous equity investment in LuxSonor.............................. (150)
-------
Net assets acquired.......................................... $49,961
=======
44
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquired in-process research and development of $8.6 million was
expensed upon completion of the acquisition. The goodwill was not deductible
for tax purposes.
Stream Machine Company. On December 7, 2001, we acquired 100% of the
outstanding stock of Stream Machine Company ("Stream Machine"). The results of
Stream Machine's operations have been included in our consolidated financial
statements since that date. Stream Machine has advanced silicon and video
algorithm technology for MPEG-2 video recording applications. This acquisition
strengthens our ability to provide Total Entertainment (Total-E(TM)) solutions
for next-generation, networked home entertainment applications. Stream
Machine's proprietary video compression technology provides high quality video
for multiple home entertainment applications, such as DVD recorders, personal
video recorders, digital camcorders, and PC video peripherals.
The estimated aggregate purchase price of approximately $72.1 million was
comprised of the following components (in thousands):
Fair value of common shares issued $61,380
Fair value of options issued...... 10,188
Direct acquisition costs.......... 500
Cash paid for fractional shares... 3
-------
Total.......................... $72,071
=======
The fair value of the 3.6 million common shares issued was determined based
on the average closing price of our common shares over the period beginning two
days before and ending two days after the announcement of the acquisition. The
fair value of the approximately 958,000 options issued in exchange for the
outstanding options of Stream Machine was determined using the Black-Scholes
option valuation model. In connection with the acquisition, approximately
740,000 shares were placed into an escrow account to cover representations and
warranties, as well as certain revenue commitments, made by Stream Machine in
the merger agreement. The escrow agreement terminates in March 2003. Given the
uncertainty around the ultimate issuance of the shares placed in escrow due to
Stream Machine's revenue commitments, they were not included in determining the
estimated aggregate purchase price nor were they considered to be outstanding
for purposes of share count and calculation of weighted average shares
outstanding.
The purchase price excludes the fair value of approximately 42,000 shares
that would otherwise have been issued to certain key employees as part of the
acquisition. These shares vest and will be issued ratably on an annual basis
over a two-year period, assuming continued employment with us. We have recorded
deferred compensation as a component of stockholders' equity for the fair value
of these shares, based on the closing price of Cirrus stock on the date the
acquisition was effective, and are amortizing the deferred compensation on a
straight-line basis over two years.
45
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price was allocated to the estimated fair value of assets
acquired and liabilities assumed based on independent appraisals and management
estimates as follows (in thousands):
Net liabilities assumed........................................... $(2,218)
In-process research and development............................... 6,400
Goodwill.......................................................... 42,421
Intangible assets subject to amortization (4 year weighted-average
useful life):
Existing technology (4 year useful life)....................... $24,700
Core technology/patents (4 year useful life)................... 2,900
-------
Total intangible assets.................................... 27,600
Deferred compensation--unvested options........................... 3,749
Facilities abandonment accrual.................................... (5,837)
Liability for shares subject to repurchase........................ (44)
-------
Net assets acquired........................................ $72,071
=======
The acquired in-process research and development of $6.4 million was
expensed upon completion of the acquisition. The goodwill was not deductible
for tax purposes.
Pro Forma Results. The following unaudited pro forma information presents
the combined results of operations of the Company, ShareWave, LuxSonor and
Stream Machine for the years ended March 30, 2002 and March 31, 2001 as if the
mergers had been consummated at the beginning of the respective fiscal years.
Peak was not included in the pro forma disclosure as the impact of its
operations was not significant. The pro forma information includes the impact
of certain pro forma adjustments, including the amortization of intangibles and
non-cash deferred stock compensation. Additionally, the total in-process
research and development charge of $29.4 million recorded for the three
acquisitions has been excluded from the periods presented. The information is
provided for illustrative purposes only and is not necessarily indicative of
the consolidated results of operations that actually would have occurred if the
mergers had been consummated at the beginning of the respective fiscal years,
nor is it necessarily indicative of future operating results of the Company.
The following table sets forth the required pro forma information (in
thousands, except per share amounts):
Fiscal Years Ended
--------------------
March 30, March 31,
2002 2001
--------- ---------
Net sales.................................................... $ 421,434 $788,325
Income (loss) before extraordinary gain and accounting change (210,799) 103,534
Net income (loss)............................................ (210,799) 104,502
Diluted income (loss) per share.............................. $ (2.56) $ 1.26
AudioLogic, Inc. On July 27, 1999, we acquired AudioLogic, Inc.
("AudioLogic"), a Colorado-based company specializing in low power mixed-signal
integrated circuit design for approximately 1.2 million shares of Cirrus Logic
common stock. In addition, each outstanding, unexercised option in AudioLogic
granted under the AudioLogic 1992 Stock Option Plan was exchanged for an option
to purchase the common stock of Cirrus Logic.
The aggregate initial purchase price of $22.7 million was allocated
primarily to various intangible assets. Based on independent appraisals, $8.0
million of the purchase price was allocated to in-process research and
development. We expensed this amount on the acquisition date because the
acquired technology had not yet reached technological feasibility and had no
future alternative uses.
46
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As part of the stock transaction, we guaranteed the value of the shares and
unexercised options would be at least $25 million on the one-year anniversary
of the closing. We valued the per share consideration paid for AudioLogic based
on the price of our stock on the closing date of the transaction, combined with
the discounted difference between the guaranteed price per share and the price
per share on the closing date. Based on the value of our stock on the one-year
anniversary date of the completion of the transaction, we issued an additional
66,185 shares in fiscal 2001.
5. Joint Venture
During fiscal 2001, we signed a definitive agreement with Creative
Technology Ltd. ("Creative") and Vertex Technology Fund (II) Ltd. ("Vertex"),
whereby Creative and Vertex made investments in eMicro Corporation ("eMicro"),
a fabless joint manufacturing venture based in Singapore in which we have a 75%
interest. We currently hold 12 million shares of preferred stock in this joint
venture. There have been no dividends paid from this joint venture. Under the
terms of the agreement, eMicro is a licensee of our proprietary circuits and a
strategic supplier of audio codecs and other mixed-signal chip solutions to
Creative. In April 2002, the eMicro Board of Directors recommended the
dissolution of eMicro, which we anticipate will be completed in early 2003. We
currently consolidate the amounts of eMicro in our financial statements. As of
March 30, 2002, eMicro represented approximately 1% of our consolidated total
assets.
6. Long-term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consisted of the following (in
thousands):
March 30, March 31,
2002 2001
--------- ---------
Installment notes with average interest rates of 8.4%, due 2002 $ -- $ 3,148
Capital lease obligations...................................... 617 321
----- -------
Total debt and capital lease obligations.................... 617 3,469
Less: current maturities.................................... (566) (3,133)
----- -------
Total long-term debt and capital lease obligations...... $ 51 $ 336
===== =======
The long-term portion of the capital lease commitment will be completely
paid in fiscal 2004. The capital lease obligations for purchased equipment are
payable in varying monthly installments at rates from 11.3% to 13.5%.
During May 2000, we repurchased in the open market $28.1 million aggregate
principal amount of our 6% Convertible Subordinated Notes. We recognized a $2.5
million extraordinary gain, net of tax, as a result of these repurchases. On
September 25, 2000, we entered into an agreement to issue 990,967 shares of
common stock and to pay $0.1 million to holders of $24 million aggregate
principal amount of our 6% Convertible Subordinated Notes. In October and
November 2000, a total of $246.9 million aggregate principal amount of our 6%
Convertible Subordinated Notes and accrued interest were converted into
10,189,703 shares of our common stock by the holders of the notes. As a result
of these conversions, stockholders' equity increased $272.6 million.
7. Bank Arrangements
As of March 30, 2002, we have a $9 million letter of credit secured by $10
million restricted cash. The letter of credit was issued to secure certain
obligations under our lease agreement for a new headquarters facility in
Austin, Texas. As a result of the acquisition of Stream Machine, we have $2.3
million in restricted cash securing
47
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a letter of credit related to Stream Machine's office lease. We also have $0.5
million in restricted cash securing a writ of attachment related to ongoing
litigation.
8. Commitments and Contingencies
Facilities and Equipment Under Operating Lease Agreements
We lease our 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. During
fiscal 2001, we entered into an operating lease for approximately 192,000
square feet of office space in Austin, Texas. This space is currently under
construction. We plan to relocate our headquarters and engineering facility to
this space during the fall of 2002.
The aggregate minimum future rental commitments under all operating leases
for the following fiscal years are (in thousands):
Net Facilities Equipment Total
Facilities Subleases Commitments Commitments Commitments
---------- --------- -------------- ----------- -----------
2003............................ $ 16,297 $ 6,882 $ 9,415 $146 $ 9,561
2004............................ 17,580 7,025 10,555 70 10,625
2005............................ 16,607 6,144 10,463 32 10,495
2006............................ 15,448 6,298 9,150 14 9,164
2007............................ 13,043 4,938 8,105 8 8,113
Thereafter...................... 40,907 7,547 33,360 -- 33,360
-------- ------- ------- ---- -------
Total minimum lease payments. $119,882 $38,834 $81,048 $270 $81,318
======== ======= ======= ==== =======
The facilities commitment numbers include amounts for our new headquarters
and engineering facility, which is currently under construction. We have the
option to purchase the building in lieu of leasing. Total rent expense was
approximately $11.7 million, $10.4 million, and $9.0 million for fiscal 2002,
2001, and 2000, respectively. Sublease rental income was $6.4 million, $5.6
million, and $3.9 million for fiscal 2002, 2001, and 2000, respectively.
Wafer Purchase Commitments
We rely on third-party wafer fabricators for our wafer manufacturing needs.
As of March 30, 2002, we had agreements with multiple foundries for the
manufacture of wafers. None of these agreements has volume purchase commitments
or "take or pay" clauses. The agreements provide for purchase commitments based
on purchase orders or, in some cases, binding forecasts. Cancellation fees or
other charges may apply and are generally dependent upon whether wafers have
been started or the stage of the manufacturing process at which the notice of
cancellation is given. As of March 30, 2002, we had foundry commitments of
$13.3 million.
During the 1990s, we formed two joint ventures to expand our wafer supply
sources by taking direct ownership interests in wafer manufacturing entities.
In fiscal 2000 and 1999, we terminated these ventures and returned to the
fabless business model.
During fiscal 2001 and 2000, we had firm commitments to purchase wafers from
third-party suppliers. When our firm wafer purchase commitments exceeded our
wafer needs, we accrued losses on firm wafer purchase commitments in excess of
estimated wafer needs over the short-term (six months) to the extent they
48
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
would result in inventory losses were we to fulfill the commitment and take
delivery of the inventory. The following table summarizes our accrued wafer
purchase commitments (in thousands):
Balance, March 27, 1999.................... $ 74,500
Additions charged to costs and expenses. --
Payments/deductions..................... (73,824)
--------
Balance, March 25, 2000.................... 676
Additions charged to costs and expenses. --
Payments/deductions..................... (676)
--------
Balance, March 31, 2001 and March 30, 2002. $ --
--------
In addition to our wafer supply arrangements, we currently contract with
third-party assembly vendors to package the wafer die into finished products.
Assembly vendors provide fixed-cost-per-unit pricing, as is common in the
semiconductor industry. We had non-cancelable assembly purchase orders with
numerous vendors totaling $1.0 million at March 30, 2002.
Legal Matters
On October 19, 2001, we filed a lawsuit against Fujitsu, Ltd. in the United
States District Court for the Northern District of California. We are alleging
claims for breach of contract and anticipatory breach of contract, and seek
damages in excess of $46 million. The basis for our complaint is Fujitsu's
refusal to pay for chips delivered to and accepted by it. On December 17, 2001,
Fujitsu filed an answer and a counterclaim. Fujitsu alleges claims for breach
of contract, breach of warranty, quantum meruit/equitable indemnity, and
declaratory relief. The basis for the claims is our sale of allegedly defective
chips to Fujitsu, which chips allegedly caused Fujitsu's hard disk drives to
fail. The counterclaim does not specify the damages Fujitsu seeks, other than
to allege it has sustained "tens of millions" of dollars in damages. Our claim
is based on chips that are not included in Fujitsu's counterclaim but for which
Fujitsu has not paid. We believe that any potential liability in connection
with Fujitsu's counterclaim is covered by insurance coverage and claims we have
against third parties. To facilitate the resolution of all claims in one
lawsuit, including our claims against potentially responsible third parties, we
and Fujitsu agreed to realign our claims with Fujitsu as the plaintiff and us
as the defendant and counterclaimant. This realignment allowed us to file in
the same lawsuit a third-party claim alleging breach of contract and warranty
against Amkor Technology, Inc., the company that recommended and sold us the
goods that allegedly caused Fujitsu's hard disk drives to fail. Amkor filed an
answer to our third-party claim and a third-party complaint for implied
contractual indemnity against Sumitomo Bakelite Co., Ltd., the company that
sold the allegedly defective goods to Amkor. We intend to defend and prosecute
our lawsuit vigorously.
On July 5, 2001, Western Digital Corporation and its Malaysian subsidiary,
Western Digital (M) SDN.BHD, filed a lawsuit against us in the Superior Court
of the State of California, Orange County, in connection with the purchase of
"read channel" chips from us, as explained in more detail below. On August 20,
2001, we filed a cross-complaint against the plaintiffs, and on October 9,
2001, the Court granted our motion for judgment on the pleadings that resulted
in the dismissal of the plaintiffs' entire original complaint.
The plaintiffs filed an amended complaint, in which they alleged that they
entered into an oral supply contract for "read channel" chips with us, and that
we breached the contract and our duty of good faith and fair dealing. This
amended complaint seeks, among other things, unspecified damages, which appear
to be in excess of $60 million, and declaratory relief. We filed a
cross-complaint against the plaintiffs, alleging causes of action for breach of
contract, fraud and negligent misrepresentation. We are seeking damages in
excess of $53 million,
49
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as well as punitive damages. The plaintiffs currently owe us amounts exceeding
$53 million for products we have shipped and for non-cancelable orders placed
with us.
On December 24, 2001, the court granted our application for writs of
attachment against the plaintiffs in the amount of approximately $25 million.
The court issued its order granting the application on March 11, 2002. The
plaintiffs appealed the order, and the appeal is pending. Pursuant to an
agreement we entered into, the plaintiffs have delivered to us a letter of
credit in the amount of approximately $25 million in substitution for an
attachment of their property. We will have the right to draw under the letter
of credit in the event we prevail in the litigation. We intend to defend and
prosecute the claims asserted by the plaintiffs and collect all amounts owed to
us.
During the fourth quarter of fiscal 2002, we recorded a $73.3 million charge
to reserve disputed receivables associated with the ongoing litigation with
Fujitsu and Western Digital. If we are successful in collecting these
receivables through the ongoing litigation, we will record an equivalent
reduction in operating expense. These receivables and the related allowances
have been reclassified from short-term to long-term as of March 30, 2002 to
reflect our current expectation regarding the timing of cash collection.
From time to time, various claims, charges, and litigation are asserted or
commenced against us arising from, or related to, contractual matters,
intellectual property, personnel and employment disputes, as well as other
issues. Frequent claims and litigation involving patent and other intellectual
property rights are not uncommon in the semiconductor industry. As to any such
claims or litigation, we cannot predict the ultimate outcome with certainty. In
the event a third party makes a valid intellectual property claim and a license
is not available on commercially reasonable terms, we would be forced either to
redesign or to stop production of products incorporating that intellectual
property, and our operating results could be materially and adversely affected.
Litigation may also be necessary to enforce our intellectual property rights or
to defend us against claims of infringement, and this litigation may be costly
and divert the attention of key personnel.
9. Restructuring Charges and Other
During fiscal 2002, we announced a change to our business model that
de-emphasized our magnetic storage chip business and focused on
consumer-entertainment electronics. As a result of these strategic decisions
and in response to ongoing economic and industry conditions, we eliminated
approximately 420 employee positions worldwide from various business functions
and job classes over the course of fiscal 2002. We recorded a restructuring
charge of $6.4 million in operating expenses to cover costs associated with
these workforce reductions. In addition, we recorded a $4.5 million
restructuring charge in operating expenses for costs associated with facility
consolidations. As of March 30, 2002, we have a remaining restructuring accrual
of $4.6 million. We expect to discharge the remaining balance associated with
severance and related benefits of approximately $0.1 million through cash
payments during fiscal 2003. The balance of $4.5 million for facilities and
other costs relates to net lease expenses that will be paid over the respective
lease terms through fiscal 2013 and other anticipated lease termination costs.
During fiscal 2001, we recorded $12.5 million in income to recognize the
receipt of two previously reserved notes from Intel Corporation on behalf of
Basis Communications Corporation. In addition, we recognized gains on the sale
to Intel of stock we held in Basis Communications of $79.5 million. We also
recorded $1.8 million in income due to the final resolution of the MiCRUS
restructuring agreement.
During fiscal 2000, we substantially completed the restructuring activities
that were initiated in fiscal 1999. We restructured our relationships with our
manufacturing joint ventures and returned to a fabless business model.
50
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In fiscal 2000, we recorded restructuring charges of $126.6 million, $1.0
million of which was in cost of sales. These restructuring charges included a
$135.0 million direct cash payment to one of the joint venture partners, $36.8
million related to certain Cirrus common stock that we issued to one of the
joint venture partners, $9.3 million of lease buyout costs, and $16.4 million
of equipment write-offs. These charges were partially offset by the reversal of
approximately $71.9 million of previously accrued wafer purchase commitment
charges due to the renegotiated terms of our purchase commitments with our
former partners.
The terms of the MiCRUS restructuring agreement, entered into during fiscal
2000, required us to pay $135 million in cash to IBM and issue into an escrow
account shares of our common stock with a fair value (based on the average
closing price of our common stock for the 20 days prior to closing) of $32
million. Under the escrow arrangement, the escrow period ended on April 3,
2000. On that date, 2.4 million shares were released to IBM and the remaining
shares were returned to us due to contractual limitations on the value to be
realized by IBM. During the six-month period following April 3, 2000, IBM could
sell on the open market our stock it received. If at the end of the six-month
period on September 30, 2000, IBM had sold at least 15% of our stock, it could
require us to purchase the remaining shares for cash such that the total
received by IBM, including the amounts IBM received in open market sales was
$32 million. IBM could keep all proceeds from the sale of the stock in excess
of $32 million up to a maximum of $48 million. Amounts received by IBM in
excess of $48 million had to be returned to us. As of September 23, 2000, IBM
had sold all of the shares of our common stock issued under the MiCRUS
restructuring agreement. The proceeds from these sales were approximately $48
million. As a result, at September 23, 2000, we reclassified $32 million of
temporary equity to permanent equity, since our obligation under the
restructuring agreement had ceased.
The following table sets forth the activity in our fiscal 2002, 2001, and
2000 restructuring accruals as of March 30, 2002 (in thousands):
Severance and Facilities
Related Benefits and Other Costs Total
---------------- --------------- ---------
Balance, March 27, 1999.. $ 809 $ 12,773 $ 13,582
Fiscal 2000 provision. 8 195,900 195,908
Amount utilized....... (605) (203,150) (203,755)
Adjustments........... (212) 1,256 1,044
------- --------- ---------
Balance, March 25, 2000.. -- 6,779 6,779
------- --------- ---------
Amount utilized....... -- (3,617) (3,617)
Adjustments........... -- (2,670) (2,670)
------- --------- ---------
Balance, March 31, 2001.. -- 492 492
------- --------- ---------
Fiscal 2002 provision. 6,449 4,474 10,923
Amount utilized....... (6,297) (485) (6,782)
------- --------- ---------
Balance, March 30, 2002.. $ 152 $ 4,481 $ 4,633
======= ========= =========
10. Employee Benefit Plans
We have adopted a 401(k) Profit Sharing Plan (the "Plan") covering
substantially all of our qualifying domestic employees. Under the Plan,
employees may elect to contribute up to 20% of their annual compensation,
subject to annual IRS limitations. The Plan requires that we match 50% of the
first 6% of the employees' annual contribution to the plan. During fiscal 2002,
2001, and 2000, we matched employee contributions up to various maximums per
plan for a total of approximately $1,558,000, $331,000, and $478,000,
respectively. We expect to continue the contributions in fiscal 2003.
51
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Stockholders' Equity
Employee Stock Purchase Plan
In March 1989, we adopted the 1989 Employee Stock Purchase Plan (the
"ESPP"). As of March 30, 2002, 949,743 shares of common stock are reserved for
future issuance under this plan. During fiscal 2002, 2001, and 2000, we issued
234,584, 248,746, and 409,666 shares, respectively, under the ESPP.
Preferred Stock
We have not issued any of the authorized 1.5 million shares of Series A
Participating Preferred Stock.
Stock Option Plans
We have various stock option plans (the "Option Plans") under which
officers, employees, non-employee directors and consultants may be granted
qualified and non-qualified options to purchase shares of our authorized but
not issued common stock. Options are generally priced at the fair market value
of the stock on the date of grant. Options granted to employees are exercisable
upon vesting, and certain options granted to non-employee directors are
exercisable upon grant. Options expire no later than ten years from the date of
grant.
We did not issue any restricted stock in fiscal 2002. In fiscal 2001 and
2000, we issued 32,000 and 70,000 shares of restricted stock, respectively, to
certain employees at no cost that vest over one to four years. The non-vested
portion of these shares has been excluded from earnings per share number in
accordance with SFAS 128, "Earnings per Share." We recognize the excess of the
grant date fair market value over the exercise price as compensation expense
ratably over the vesting period. The weighted average fair value of shares
granted in fiscal 2001 and 2000 was $32.56 and $8.93, respectively. We recorded
compensation expense of $348,000, $347,000, and $1,026,000, in fiscal 2002,
2001, and 2000, respectively, relating to restricted stock.
52
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information relative to stock option activity is as follows (in thousands,
except per share amounts):
Outstanding Options
----------------------
Weighted
Options Available Average
for Grant Shares Exercise Price
----------------- ------ --------------
Balance, March 27, 1999........... 3,196 8,839 $ 9.47
Shares authorized for issuance. 2,000 -- --
Options granted................ (4,154) 4,154 8.79
Options exercised.............. -- (1,588) 8.80
Options cancelled.............. 2,854 (2,854) 9.40
Options expired................ (679) -- --
------ ------ ------
Balance, March 25, 2000........... 3,217 8,551 9.29
Shares authorized for issuance. 3,500 -- --
Options granted................ (6,743) 6,743 26.38
Options exercised.............. -- (2,519) 9.26
Options cancelled.............. 1,747 (1,747) 16.00
Options expired................ (52) -- --
------ ------ ------
Balance, March 31, 2001........... 1,669 11,028 18.68
Shares authorized for issuance. 5,115 -- --
Options granted................ (7,210) 7,210 14.45
Options exercised.............. -- (1,215) 10.07
Options cancelled.............. 2,718 (2,718) 21.37
Options expired................ (138) -- --
------ ------ ------
Balance, March 30, 2002........... 2,154 14,305 $16.20
====== ====== ======
As of March 30, 2002, approximately 16.5 million shares of common stock were
reserved for issuance under the Option Plans.
The following table summarizes information concerning currently outstanding
and exercisable options (in thousands, except per share amounts):
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices (in thousands) Life Price (in thousands) Price
- ------------------------ -------------- ----------- -------- -------------- --------
$ 0.00-$ 9.19...... 3,191 6.41 $ 6.60 1,830 $ 7.20
$ 9.44-$16.80...... 7,713 8.98 14.42 1,619 13.10
$17.43-$31.75...... 1,201 8.52 21.48 396 20.16
$32.56-$44.50...... 2,200 8.48 33.45 501 34.45
------ ---- ------ ----- ------
14,305 8.29 $16.20 4,346 $13.72
====== ==== ====== ===== ======
As of March 31, 2001 and March 25, 2000, the number of options exercisable
was 2,507,000 and 3,622,000, respectively.
53
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
If we had calculated compensation cost for our stock option plans based upon
the fair value at the grant date for awards under the Option Plans consistent
with the optional methodology prescribed under SFAS 123, "Accounting for
Stock-Based Compensation," the net income (loss) and earnings per share would
have been as shown below (in thousands, except per share data):
2002 2001 2000
--------- -------- --------
Net income (loss) as reported......... $(206,079) $143,176 $(47,096)
Pro forma net income (loss)........... (264,408) 82,471 (81,763)
Basic earnings per share as reported.. (2.66) 2.00 (0.77)
Pro forma basic earnings per share.... (3.41) 1.15 (1.33)
Diluted earnings per share as reported (2.66) 1.86 (0.77)
Pro forma diluted earnings per share.. (3.41) 1.13 (1.33)
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 our 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
123 are not likely to be representative of the effects on pro forma disclosures
of future years.
We estimated the fair value of each option grant 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:
2002 2001 2000
----- ----- -----
Employee Option Plans:
Expected stock price volatility. 83.41% 76.26% 68.52%
Risk-free interest rate......... 5.0% 6.0% 6.1%
Expected lives (in years)....... 4.3 5.3 5.2
Employee Stock Purchase Plan:
Expected stock price volatility. 83.41% 76.26% 68.52%
Risk-free interest rate......... 4.5% 5.7% 5.7%
Expected lives (in years)....... 0.5 0.5 0.5
During fiscal 2002, 2001, and 2000, all options were granted at an exercise
price equal to the closing market price on the grant date. Using the
Black-Scholes option valuation model, the weighted average estimated fair
values of employee stock options granted in fiscal 2002, 2001, and 2000 were
$7.59, $20.90, and $6.51, respectively. The weighted average estimated fair
values for purchase rights granted under the ESPP for fiscal 2002, 2001, and
2000 were $6.71, $5.90, and $2.99, respectively.
Rights Plan
In May 1998, the Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each share of common stock outstanding
held as of May 15, 1998. Each Right will entitle stockholders to
54
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase one one-hundredth of a share of our 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 our common stock.
For a limited period following the announcement of any such acquisition or
offer, the Rights are redeemable by us 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
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.
Stock Repurchase
On April 11, 2001, we repurchased approximately 6.4 million shares of our
common stock from a former member of the Board of Directors for approximately
$68.7 million. The shares were subsequently retired with $57.9 million charged
to common stock and additional paid-in capital and $10.8 million charged to
accumulated deficit.
12. Comprehensive Income
Our comprehensive income is comprised of foreign currency translation
adjustments and unrealized gains and losses on investments classified as
available-for-sale.
Foreign Unrealized Gains (Losses)
Currency on Securities Total
-------- ------------------------- --------
Balance, March 27, 1999.... $(1,476) $ -- $ (1,476)
Current-period activity. 940 47,820 48,760
------- -------- --------
Balance, March 25, 2000.... (536) 47,820 47,284
Current-period activity. (719) (41,987) (42,706)
------- -------- --------
Balance, March 31, 2001.... (1,255) 5,833 4,578
Current-period activity. (135) (4,324) (4,459)
------- -------- --------
Balance, March 30, 2002.... $(1,390) $ 1,509 $ 119
======= ======== ========
13. Income Taxes
Income (loss) before provision (benefit) for income taxes consists of (in
thousands):
2002 2001 2000
--------- -------- --------
United States $(214,345) $176,507 $ 33,304
Foreign...... (2,715) (18,688) (80,400)
--------- -------- --------
Total..... $(217,060) $157,819 $(47,096)
========= ======== ========
The provision (benefit) for income taxes consists of (in thousands):
2002 2001 2000
-------- ------- ------
Current
Federal. $(10,440) $12,092 $ --
State... -- 2,880 --
Foreign. 70 743 --
-------- ------- -----
$(10,370) $15,715 $ --
======== ======= =====
55
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory federal rate to pretax income as follows (in
percentages):
2002 2001 2000
----- ----- -----
Expected income tax provision (benefit) at the US federal
statutory rate......................................... (35.0) 35.0 (35.0)
Provision for state income taxes, net of federal effect.. -- 1.2 --
In-process research and development expenses............. 5.0 -- 6.0
Net change in valuation allowance........................ 29.5 (34.2) (30.9)
Tax settlements and refunds.............................. (4.9) -- --
Unbenefited foreign losses............................... 0.6 7.9 59.7
Other.................................................... -- 0.1 0.2
----- ----- -----
Provision (benefit) for income taxes.................. (4.8) 10.0 --
===== ===== =====
Significant components of our deferred tax assets and liabilities are (in
thousands):
March 30, March 31,
2002 2001
--------- ---------
Deferred tax assets:
Inventory valuation............................... $ 21,579 $ 8,505
Accrued expenses and allowances................... 38,602 2,419
Net operating loss carryforwards.................. 43,615 --
Research and development tax credit carryforwards. 34,431 19,221
State investment tax credit carryforwards......... 4,026 4,026
Capitalized research and development.............. 37,638 18,848
Deferred royalty income........................... 25,900 12,950
Other............................................. 2,333 5,450
--------- --------
Total deferred tax assets............................ 208,124 71,419
Valuation allowance for deferred tax assets....... (182,112) (61,740)
--------- --------
Net deferred tax assets.............................. 26,012 9,679
--------- --------
Deferred tax liabilities:
Unrealized gains.................................. 558 2,158
Depreciation and amortization..................... 23,344 6,594
Other............................................. 2,110 927
--------- --------
Total deferred tax liabilities....................... 26,012 9,679
--------- --------
Total net deferred tax assets........................ $ -- $ --
========= ========
SFAS 109, "Accounting for Income Taxes," provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. We
have provided a valuation allowance equal to our net deferred tax assets due to
uncertainties regarding their realization. We evaluate the realizability of our
deferred tax assets on a quarterly basis.
The valuation allowance increased by $120.4 million in fiscal year 2002 and
decreased by $37.8 million in fiscal year 2001.
During fiscal year 2002, we recorded a nonrecurring tax benefit totaling
$10.5 million. Of that amount, $8.8 million was the result of the settlement of
examinations by the Internal Reserve Service for fiscal years 1994
56
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through 1997. The remaining $1.7 million was generated by an anticipated refund
of alternative minimum tax paid for fiscal year 2001. At March 30, 2002, we had
federal net operating loss carryforwards of $117.9 million. Of this amount,
$72.4 million relates to companies we acquired during fiscal year 2002 and are,
therefore, subject to certain limitations under Section 382 of the Internal
Revenue Code. In addition, approximately $11.2 million of the federal net
operating loss is attributable to employee stock option deductions, the benefit
from which will be allocated to additional paid-in capital rather than current
earnings if subsequently realized. The net operating loss carryforwards expire
in fiscal years 2011 through 2022. There are federal research and development
tax credit carryforwards of $24.9 million that expire in fiscal years 2006
through 2022. We also had state tax credit carryforwards of approximately $13.6
million, $4.0 million of which expire in fiscal years 2003 through 2008. The
remaining $9.6 million of state tax credit carryforwards are not subject to
expiration.
14. Segment Information
We design and market high-performance analog and DSP chip solutions for
consumer entertainment electronics that allow people to see, hear, connect, and
enjoy digital entertainment. We determine our operating segments in accordance
with SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information." Our chief executive office ("CEO") has been identified as the
chief operating decision maker as defined by SFAS 131.
During fiscal years 2001 and 2000, we had three principal product groups,
which were considered to be operating segments: Analog Products Business Group,
Internet Solutions Business Group and the Magnetic Storage Business Group. The
remaining products, which had either been discontinued or subsequently sold,
were grouped as End of Life. We reported net revenue and operating profit for
those three business segments during fiscal 2001 and 2000.
During the first quarter of fiscal year 2002, we announced our intention to
focus on consumer entertainment electronics and de-emphasize our magnetic
storage chip business. During the second quarter, we exited the magnetic
storage chip business entirely. Additionally, we reduced our workforce by
approximately 420 employee positions worldwide to align company resources and
expense with our new strategy as well as in response to ongoing economic and
industry conditions. See Note 9 for further discussion regarding our
restructuring activities. During the third quarter of fiscal 2002, we completed
the acquisitions of ShareWave, LuxSonor and Stream Machine. See Note 4 for
further discussion regarding these acquisitions.
As a result of the changes discussed above, our CEO now receives and uses
enterprise-wide financial information to assess financial performance and
allocate resources rather than information at a product group level.
Additionally, our product groups have similar characteristics and customers.
They share operations support functions such as sales, public relations,
production, and logistics in addition to the general and administrative
functions of human resources, legal, finance, and information technology.
Accordingly, effective with the fourth quarter of fiscal 2002, we operate in
one operating segment--consumer entertainment electronics. We have restated the
disclosure for prior years to conform to the current-year presentation.
57
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information on reportable segments for fiscal 2002, 2001 and 2000 are as
follows (in thousands):
Business Segment Net Revenues: 2002 2001 2000
- ------------------------------ -------- -------- --------
Consumer Entertainment Electronics $288,114 $449,196 $431,342
Magnetic Storage.................. 129,415 329,477 133,058
-------- -------- --------
Total.......................... $417,529 $778,673 $564,400
======== ======== ========
Business Segment Operating Profit (Loss): 2002 2001 2000
- ----------------------------------------- --------- -------- ---------
Consumer Entertainment Electronics........... $(135,891) $ 21,513 $ (4,196)
Magnetic Storage............................. (88,257) 33,577 (3,042)
--------- -------- ---------
Total..................................... (224,148) 55,090 (7,238)
Restructuring................................ (10,923) 14,362 (125,612)
Interest income (expense), net............... 8,174 6,409 (15,658)
Other income (expense), net.................. 9,837 81,958 101,412
--------- -------- ---------
Income (loss) before provision for income
taxes................................... $(217,060) $157,819 $ (47,096)
========= ======== =========
Geographic Area
The following illustrates revenues by geographic locations based on product
shipment destination and royalty payer location (in thousands):
2002 2001 2000
-------- -------- --------
United States.................. $ 61,341 $142,484 $143,358
Pacific Rim.................... 215,526 279,574 265,268
Japan.......................... 111,529 304,188 107,800
Other foreign countries........ 29,133 52,427 47,974
-------- -------- --------
Total consolidated revenues. $417,529 $778,673 $564,400
======== ======== ========
The following illustrates property and equipment, net by geographic
locations, based on physical location (in thousands):
2002 2001
------- -------
United States...................................... $33,988 $45,265
Singapore.......................................... 1,052 1,220
Pacific Rim (including Japan)...................... 1,458 985
Other foreign countries............................ 51 87
------- -------
Total consolidated property and equipment, net.. $36,549 $47,557
======= =======
Significant Customers
The following table summarizes sales to customers that represent more than
10% of our net sales:
2002 2001 2000
---- ---- ----
Fujitsu........... 20% 24% --
Thomson Multimedia 16% -- --
Western Digital... 11% 13% 12%
As a result of our planned exit from the mass storage chip business in the
second quarter of fiscal 2002, we are not currently selling to Fujitsu or
Western Digital. The loss of a significant customer or a significant reduction
in a customer's orders could have an adverse effect on our sales.
58
CIRRUS LOGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Quarterly Results (Unaudited)
The following quarterly results have been derived from our unaudited
consolidated financial statements. In the opinion of management, this unaudited
information has been prepared on the same basis as the annual consolidated
financial statements and includes all adjustments, including normal recurring
adjustments, necessary for a fair presentation of this quarterly information.
This information should be read in conjunction with the financial statements
and related notes. The operating results for any quarter are not necessarily
indicative of results to be expected for any future period. The unaudited
quarterly statement of operations data for each quarter of fiscal years 2002
and 2001 are as follows (in thousands, except per share data):
Fiscal Year 2002
--------------------------------------
4/th/ 3/rd/ 2/nd/ 1/st/
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Operating summary:
Net sales................................ $ 83,610 $ 76,970 $ 77,276 $179,673
Gross margin............................. 40,568 6,314 30,692 20,675
Income (loss) before extraordinary items
and accounting change.................. (80,795) (85,367) (16,920) (22,997)
Net income (loss)........................ (80,795) (85,367) (16,920) (22,997)
Basic earnings before extraordinary items
and accounting change per share........ $ (0.98) $ (1.08) $ (0.23) $ (0.31)
Diluted earnings before extraordinary
items and accounting change per share.. (0.98) (1.08) (0.23) (0.31)
Fiscal Year 2001
-----------------------------------
4/th/ 3/rd/ 2/nd/ 1/st/
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Operating summary:
Net sales................................ $199,725 $207,998 $189,537 $181,412
Gross margin............................. 56,542 83,238 79,024 73,513
Income (loss) before extraordinary items
and accounting change.................. 3,952 23,877 16,468 98,105
Net income (loss)........................ 3,952 23,877 16,468 98,880
Basic earnings before extraordinary items
and accounting change per share........ $ 0.05 $ 0.32 $ 0.25 $ 1.50
Diluted earnings before extraordinary
items and accounting change per share.. 0.05 0.30 0.23 1.26
59
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information set forth in the Proxy Statement to be delivered to
stockholders in connection with our Annual Meeting of Stockholders to be held
on July 24, 2002 under the headings "Proposal for Election of Directors" and
"Executive Officers," is incorporated herein by reference.
ITEM 11. Executive Compensation
The information set forth in the Proxy Statement under the heading
"Executive Compensation and Other Information," is incorporated herein by
reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth in the Proxy Statement under the heading "Stock
Ownership," is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The information set forth in the Proxy Statement under the heading "Certain
Relationships and Related Transactions," is incorporated herein by reference.
60
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. Consolidated Financial Statements
. Report of Ernst & Young LLP, Independent Auditors.
. Consolidated Balance Sheet as of March 30, 2002 and March 31, 2001.
. Consolidated Statement of Operations for the fiscal years ended March
30, 2002, March 31, 2001, and March 25, 2000.
. Consolidated Statement of Cash Flows for the fiscal years ended March
30, 2002, March 31, 2001, and March 25, 2000.
. Consolidated Statement of Stockholders' Equity (Net Capital
Deficiency) for the fiscal years ended March 30, 2002, March 31,
2001, and March 25, 2000.
. Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All 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.
3. Exhibits
The following exhibits are filed as part of or incorporated by reference
into this Report:
Number Description
- ------ -----------
2.1 Agreement of Merger, dated July 18, 2001, by and among Registrant, Target Acquisition Corporation
(a wholly owned subsidiary of Registrant), LuxSonor Semiconductors, Inc. and Shareholders'
Representative. (1)
2.2 Agreement of Merger dated July 18, 2001, by and among Registrant, Target I Acquisition
Corporation (a wholly owned subsidiary of Registrant), ShareWave, Inc. and Shareholders'
Representative. (1)
2.3 Agreement and Plan of Reorganization dated August 9, 2001, by and among Registrant, Cirrus Logic
SM Acquisition Corporation (a wholly owned subsidiary of Registrant), Stream Machine Company
and Shareholders' Agent. (1)
3.1 Certificate of Incorporation of Registrant, filed with the Delaware Secretary of State on August 26,
1998. (2)
3.2 Agreement and Plan of Merger, filed with the Delaware Secretary of State on February 17, 1999. (2)
3.3 Certificate of Designation of Rights, Preferences and Privileges of Series A Preferred Stock, filed
with the Delaware Secretary of State on March 30, 1999. (2)
3.4 By-laws of Registrant. (2)
10.1+ Amended 1987 Stock Option Plan. (3)
10.2+ 1989 Employee Stock Purchase Plan, as amended. (4)
10.3+ 1990 Directors' Stock Option Plan, as amended. (4)
10.4+ 1996 Stock Plan, as amended. (4)
61
Number Description
- ------ -----------
10.5+ Peak Audio 2001 Stock Plan, assumed by Registrant. (5)
10.6+ ShareWave, Inc. 1996 Flexible Stock Incentive Plan, assumed by Registrant. (6)
10.7+ LuxSonor Semiconductors, Inc. 1995 Stock Option Plan, dated November 4, 1995, assumed by
Registrant. (7)
10.8+ Stream Machine Company 1996 Stock Plan and 2001 Stock Plan, assumed by Registrant. (8)
10.9 Form of Indemnification Agreement. (2)
10.10+* Employment Agreement by and between Registrant and David D. French dated February 7, 2002.
10.11+* Executive Incentive Plan.
10.12 Lease between TPLP Office and Registrant, dated April 1, 2000 for 54,385 square feet located at
4210 S. Industrial Drive Austin, Texas. (2)
10.13 Lease between ProLogis Trust and Registrant, dated March 31, 1995 for 176,000 square feet located
at 4129 Commercial Center Drive and 4209 S. Industrial Austin, Texas, as amended through
December 20, 1996. (2)
10.14 Lease between American Industrial Properties and Registrant, dated September 15, 1999 for 18,056
square feet located at 4120 Commercial Drive Austin, Texas. (2)
10.15 Lease Agreement by and between Desta Five Partnership, Ltd. and Registrant, dated November 10,
2000 for 192,000 square feet located at 2901 Via Fortuna, Austin, Texas. (2)
10.16* Amendment No. 1 to Lease Agreement by and between Desta Five Partnership, Ltd. and Registrant
dated November 10, 2001.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
24.1* Power of Attorney (see signature page).
- --------
+ Indicates a management contract or compensatory plan or arrangement.
* Filed with this Form 10-K.
(1)Incorporated by reference to Registrant's Report on Form 10-Q filed with the
Commission on November 13, 2001.
(2)Incorporated by reference to Registrant's Report on Form 10-K for the fiscal
year ended March 31, 2001.
(3)Incorporated by reference to Registrant's Report on Form 10-K for the fiscal
year ended March 30, 1996.
(4)Incorporated by reference to Registrant's Registration Statement on Form S-8
filed with the Commission on August 8, 2001 (Registration No. 333-67322).
(5)Incorporated by reference to Registrant's Registration Statement on Form S-8
filed with the Commission on June 22, 2001 (Registration No. 333-63674).
(6)Incorporated by reference to Registrant's Registration Statement on Form S-8
filed with the Commission on October 5, 2001 (Registration No. 333-71046).
(7)Incorporated by reference to Registrant's Registration Statement on Form S-8
filed with the Commission on October 10, 2001 (Registration No. 333-71366).
(8)Incorporated by reference to Registrant's Registration Statement on Form S-8
filed with the Commission on December 7, 2001 and as amended on February 13,
2002 (Registration No. 333-74804).
(b) Reports on Form 8-K:
None
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned; thereunto duly authorized.
CIRRUS LOGIC, INC.
By: /S/ STEVEN D. OVERLY
-----------------------------
Steven D. Overly
Senior Vice President, Chief
Financial Officer,
General Counsel and Secretary
KNOW BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints each of Steven D. Overly and Kirk Patterson, 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 and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that each of the 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, the
following persons on behalf of the Registrant, in the capacities, and on the
dates indicated have signed this report below:
Signature Title Date
--------- ----- ----
/S/ MICHAEL L. HACKWORTH Chairman of the Board and June 14, 2002
- ----------------------------- Director
Michael L. Hackworth
/S/ DAVID D. FRENCH President, Chief Executive June 14, 2002
- ----------------------------- Officer and Director
David D. French
/S/ STEVEN D. OVERLY Senior Vice President, Chief June 14, 2002
- ----------------------------- Financial Officer, General
Steven D. Overly Counsel and Secretary
/S/ KIRK PATTERSON Vice President, Corporate June 14, 2002
- ----------------------------- Controller and Chief
Kirk Patterson Accounting Officer
/S/ D. JAMES GUZY Director June 14, 2002
- -----------------------------
D. James Guzy
/S/ SUHAS S. PATIL Chairman Emeritus and Director June 14, 2002
- -----------------------------
Suhas S. Patil
/S/ WALDEN C. RHINES Director June 14, 2002
- -----------------------------
Walden C. Rhines
/S/ WILLIAM D. SHERMAN Director June 14, 2002
- -----------------------------
William D. Sherman
/S/ ROBERT H. SMITH Director June 14, 2002
- -----------------------------
Robert H. Smith
63
EXHIBIT INDEX
(a)The following exhibits are filed as part of or incorporated by reference
into this Report:
Number Description
- ------ ---------------------------------------------------------------------------------------------
10.10 Employment Agreement by and between Registrant and David D. French dated February 7, 2002.
10.11 Executive Incentive Plan.
10.16 Amendment No. 1 to Lease Agreement by and between Desta Five Partnership, Ltd. and Registrant
dated November 10, 2001.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see signature page).
64