-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C8Xj4nmul95zliTsYaoudDZGtRXP64LOClVeolWcEWv2Oxxxj8Z0bpdtIpeGF3S1 4yBr80YvhmoXDFbUH5XnYg== /in/edgar/work/0000772406-00-000038/0000772406-00-000038.txt : 20001108 0000772406-00-000038.hdr.sgml : 20001108 ACCESSION NUMBER: 0000772406-00-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000923 FILED AS OF DATE: 20001107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRRUS LOGIC INC CENTRAL INDEX KEY: 0000772406 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 770024818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0327 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17795 FILM NUMBER: 754382 BUSINESS ADDRESS: STREET 1: 4210 SOUTH INDUSTRIAL DR CITY: AUSTIN STATE: TX ZIP: 78744 BUSINESS PHONE: 5106238300 MAIL ADDRESS: STREET 1: 3100 W WARREN AVE CITY: FREMONT STATE: CA ZIP: 94538 10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 23, 2000 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to COMMISSION FILE NUMBER 0-17795 CIRRUS LOGIC, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0024818 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4210 S. Industrial Drive Austin, TX 78744 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 445-7222 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares of the registrant's common stock, $0.001 par value, was 67,088,019 as of September 23, 2000 1
CIRRUS LOGIC, INC. INDEX PART I: FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Condensed Statements of Operations Quarter and Two Quarters Ended September 23, 2000 and September 25, 1999 3 Consolidated Condensed Balance Sheets - September 23, 2000 and March 25, 2000 4 Consolidated Condensed Statements of Cash Flows Two Quarters ended September 23, 2000 and September 25, 1999 5 Notes to the Unaudited Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 25 PART II: OTHER INFORMATION Item 1. Legal Proceedings 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 29
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Part 1. Financial Information Item 1. Financial Statements CIRRUS LOGIC, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Quarter Ended Two Quarters Ended ------------------------ ------------------------ Sept. 23, Sept. 25, Sept. 23, Sept. 25, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net sales $ 189,537 $ 132,842 $ 370,949 $ 253,395 Costs and expenses: Cost of sales 110,513 77,075 218,412 145,364 Research and development 34,549 30,068 65,588 59,454 Selling, general and administrative 29,299 23,081 55,567 46,149 Restructuring costs, gain on sale of assets and other, net (1,848) - (14,362) 127,210 Acquired in-process research and development - 8,013 - 8,013 ----------- ----------- ----------- ----------- Total costs and expenses 172,513 138,237 325,205 386,190 ----------- ----------- ----------- ----------- Income (loss) from operations 17,024 (5,395) 45,744 (132,795) Realized gain on sale of marketable equity securities 1,905 - 81,544 - Interest expense (5,119) (6,489) (10,100) (13,223) Interest income 4,308 1,841 9,113 4,834 Other income 169 689 682 4,084 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes 18,287 (9,354) 126,983 (137,100) Provision for income taxes 1,924 - 12,635 - Minority interest in (income) loss 105 - 224 - ----------- ----------- ----------- ----------- Income (loss) before extraordinary gain and accounting change 16,468 (9,354) 114,572 (137,100) Extraordinary gain, net of income tax - - 2,482 - Cumulative effect of change in accounting principle - - (1,707) - ----------- ----------- ----------- ----------- Net income (loss) $ 16,468 $ (9,354) $ 115,347 $ (137,100) =========== =========== =========== =========== Basic income (loss) per share: Before extraordinary gain and accounting change $ 0.25 $ (0.15) $ 1.73 $ (2.26) Extraordinary gain, net of income tax - - 0.04 - Cumulative effect of change in accounting principle - - (0.03) - ----------- ----------- ----------- ----------- $ 0.25 $ (0.15) $ 1.75 $ (2.26) =========== =========== =========== =========== Diluted income (loss) per share: Before extraordinary gain and accounting change $ 0.23 $ (0.15) $ 1.49 $ (2.26) Extraordinary gain, net of income tax - - 0.03 - Cumulative effect of change in accounting principle - - (0.02) - ----------- ----------- ----------- ----------- $ 0.23 $ (0.15) $ 1.50 $ (2.26) =========== =========== =========== =========== Weighted average common shares outstanding: Basic 66,041 61,353 66,064 60,762 Diluted 70,918 61,353 81,674 60,762
See Notes to the Unaudited Consolidated Condensed Financial Statements 3
CIRRUS LOGIC, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) (Unaudited) September 23, March 25, 2000 2000 --------------- ----------- Assets Current assets Cash and cash equivalents $ 254,711 $ 144,034 Restricted cash 1,421 57,173 Marketable equity securities 33,875 48,077 Accounts receivable, net 129,654 94,672 Inventories, net 86,479 53,288 Other current assets 26,979 23,421 --------------- ----------- 533,119 420,665 Property and equipment, net 36,902 34,730 Deposits and other assets 45,289 49,437 --------------- ----------- $ 615,310 $ 504,832 =============== =========== Liabilities and Shareholders' Equity (Net Capital Deficiency) Current liabilities Accounts payable and accrued liabilities $ 141,303 $ 130,567 Current maturities of long-term debt and 7,948 12,829 capital lease obligations Income taxes payable 53,706 40,193 --------------- ----------- 202,957 183,589 Long term obligations and convertible subordinated notes 277,304 304,945 Commitments and contingencies Stock issued under restructuring agreement - 32,000 Minority interest 1,776 - Shareholders' Equity (Net Capital Deficiency) Capital stock 416,395 368,015 Accumulated deficit (315,653) (431,001) Accumulated other comprehensive income 32,531 47,284 --------------- ----------- 133,273 (15,702) --------------- ----------- $ 615,310 $ 504,832 =============== =========== See Notes to the Unaudited Consolidated Condensed Financial Statements
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CIRRUS LOGIC, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Two Quarters Ended -------------------- Sept. 23, Sept. 25, 2000 1999 -------------------- ----------- Cash flows from operating activities: Net income (loss) $ 115,348 $ (137,100) Adjustments to reconcile net income (loss) to net cash flows from operations: Depreciation and amortization 15,419 15,616 Non-cash portion of restructuring and other charges 1,512 40,417 Extraordinary gain, net of income tax (2,482) - Gain on sale of short-term investments (81,544) - Net change in operating assets and liabilities (44,358) (118,019) -------------------- ----------- Net cash provided by (used in) operations 3,895 (199,086) -------------------- ----------- Cash flows from investing activities: Proceeds from sale of short-term investments 83,544 74,616 Proceeds from restruturing of joint venture - 14,000 Increase in property and equipment (12,327) (2,846) Investments in technology (4,416) - Increase in cash from AudioLogic, Inc. acquisition - 1,010 Increase in deposits and other assets (626) (11,630) Decrease in restricted cash 55,752 27,544 -------------------- ----------- Net cash provided by investing activities 121,927 102,694 -------------------- ----------- Cash flows from financing activities: Repurchase of convertible subordinated notes (24,848) - Proceeds from issuance of common stock 11,695 6,532 Payments on long-term debt and capital lease obligations (6,992) (13,076) Cash contributions from minority partners 5,000 - -------------------- ----------- Net cash used in financing activies (15,145) (6,544) -------------------- ----------- Net increase (decrease) in cash and cash equivalents 110,677 (102,936) Cash and cash equivalents at beginning of period 144,034 144,457 -------------------- ----------- Cash and cash equivalents at end of period $ 254,711 $ 41,521 ==================== =========== See Notes to the Unaudited Consolidated Condensed Financial Statements
5 CIRRUS LOGIC, INC. NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated condensed financial statements have been prepared by Cirrus Logic, Inc. ("we"',"our", "us") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In our opinion, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements, and notes thereto for the year ended March 25, 2000, included in our 2000 Annual Report on Form 10-K. The results of operations for the interim period presented are not necessarily indicative of the results that may be expected for the entire year. Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation. Such reclassifications had no effect on the results of operations or net capital deficiency. The consolidated condensed statement of operations for the fiscal quarter and two fiscal quarters ended September 25, 1999 have been reclassified in order to present comparable statements for the two periods. Beginning with the first quarter of fiscal 2001, we have changed the method in which certain costs are allocated to research and development expenses, selling, general and administrative expenses and cost of sales. We believe that the current allocation method more accurately presents these expenses. The reclassification has no effect on operating income or net income. 2. Accounting Changes and Effect of Recently Issued Accounting Standards In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements". We recorded a cumulative effect of a change in accounting principle in the first quarter of fiscal 2001 to reflect our adoption of new revenue recognition policies as a result of this guidance. Effective with the first quarter of fiscal 2001, we have recognized revenue on international shipments based on customer receipt of inventory rather than on the date of shipment, which was our historical method. Results for the first two fiscal quarters of fiscal 2001 include revenue of $5.4 million, cost of sales of $3.5 million and a cumulative effect of change in accounting principle of $1.7 million. Had we adopted the principle in the first quarter of fiscal 2000, results for the two quarters ended September 25, 1999 would have included revenue of $2.1 million and cost of sales of $1.0 million and a cumulative effect of change in accounting principle of $1.1 million. During the first quarter of fiscal 2001, we also changed our estimate of the amount of revenue which is deferred on distributor transactions for products which are released for sale. Results for the two fiscal quarters ended September 23, 2000 include revenue of $5.4 million, cost of sales of $2.0 million and income of $3.4 million. The after tax effect of this estimate change increased basic and diluted earnings per share by $0.06 and $0.04 for the two quarters ended September 23, 2000. On March 31, 2000, the Financial Accounting Standards Board issued Interpretation No. 44, which is an interpretation of APB Opinion No. 25 governing the accounting principles applicable to equity incentive plans. The interpretation did not have a material impact on our results of operations or financial condition. 6 3. Inventories Net inventories are comprised of the following (in thousands):
Sept. 23, March 25, 2000 2000 ---------- ---------- Work-in process $ 66,386 $ 44,539 Finished goods 20,093 8,749 ---------- ---------- $ 86,479 $ 53,288 ========== ==========
4. Income Taxes We have accrued a provision of $1.9 million and $12.9 million for the fiscal quarter and the two fiscal quarters ended September 23, 2000, respectively. Our effective income tax rate was approximately 10% for the quarter and two quarters. Excluding the tax benefit of net operating loss carryforwards our effective income tax rate was approximately 30%. Statement of Financial Accounting Standards 109 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 its net deferred tax assets due to uncertainties regarding their realization. The realizability of the deferred tax assets will be evaluated on a quarterly basis. 5. Restructuring Costs, Gain on Sale of Assets and Other During the second quarter of fiscal 2001, we recorded restructuring and other gains of $1.8 million primarily related to the final resolution of the MiCRUS restructuring agreement. During the first two quarters of fiscal 2001, we recorded restructuring and other gains of $14.4 million. Included in this amount is $12.0 million received during the first quarter of fiscal 2001 from Intel Corporation ("Intel") on behalf of Basis Communications Corporation ("Basis") for the payment of two outstanding notes receivable which had previously been written off. 7 6. Acquisition of AudioLogic, Inc. On July 27, 1999 we completed our acquisition of AudioLogic, Inc. ("AudioLogic"), a Colorado-based company specializing in low power mixed-signal integrated circuit design. The acquisition was completed through a stock-for-stock transaction whereby each share of AudioLogic was exchanged for .3006 shares of Cirrus Logic, Inc. common stock. Using the same ratio, each outstanding, unexercised option in AudioLogic granted under the AudioLogic, Inc. 1992 Stock Option Plan was exchanged for an option to purchase the common stock of Cirrus Logic, Inc. As part of the stock transaction, we guaranteed that the contractual value of the converted shares and unexercised options would be at least $25 million at the one-year anniversary of the closing, July 27, 2000. At the closing date, the contractual value of the converted shares was $23.7 million. As a result, we issued an additional 66,200 shares of common stock. Management estimated that $8.0 million of the purchase price represented purchased in-process technology that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was expensed in the second quarter of fiscal year 2000 following consummation of the acquisition. In addition, due to the terms of the acquisition agreement, during September of 2000, we paid additional compensation of $2.5 million to certain employees of AudioLogic. This compensation is included in research and development expenses and selling, general and administrative expenses. 7. Realized Gain on Sale of Marketable Equity Securities During the second quarter of fiscal 2001 we recognized a gain on sale of marketable equity securities of $1.9 million related to the sale of Phone.com options. During the first two quarters of fiscal 2001 we recognized gains on sale of marketable equity securities of $81.6 million. These gains were primarily related to the sale of our holdings of approximately 1 million shares of Series A preferred stock and 0.5 million shares of common stock in Basis to Intel for $91.8 million. The sale was part of a tender offer whereby Intel purchased the outstanding preferred and common stock of Basis for $61.18 per share. Intel withheld from the total consideration $11.2 million pursuant to the indemnification provisions of the merger agreement between Intel and Basis. 8. Interest income In addition to $7.7 million of interest earned during the first two quarters of fiscal 2001, we also recorded interest income of $1.4 million for interest received on two outstanding notes receivable which had previously been written off. 9. Extraordinary Gain, net of income tax During the first quarter of fiscal 2001, we repurchased $28.1 million par value of our 6% convertible notes on the open market and recognized an extraordinary gain in the first quarter of fiscal 2001 of approximately $2.5 million (after income tax effect of $0.3 million) as a result of these repurchases. 8 10. Net Income Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
BASIC EARNINGS PER SHARE Quarter Ended Two Quarters Ended ----------------------- ------------------------ Sept. 23, Sept. 25, Sept. 23, Sept. 25, 2000 1999 2000 1999 ---------- ----------- ----------- ----------- Income (loss) before extraordinary gain and accounting change $ 16,468 $ (9,354) $ 114,572 $ (137,100) Extraordinary gain, net of income tax - - 2,482 - Cumulative effect of change in accounting principle - - (1,707) - ---------- ----------- ----------- ----------- Net income (loss) $ 16,468 $ (9,354) $ 115,347 $ (137,100) ========== =========== =========== =========== Weighted average common stock outstanding 66,041 61,353 66,064 60,762 Basic net income (loss) per share: Before extraordinary gain and accounting change $ 0.25 $ (0.15) $ 1.73 $ (2.26) Extraordinary gain, net of income tax - - 0.04 - Cumulative effect of change in accounting principle - - (0.03) - ---------- ----------- ----------- ----------- Basic net income (loss) per share $ 0.25 $ (0.15) $ 1.75 $ (2.26) ========== =========== =========== =========== DILUTED EARNINGS PER SHARE Income (loss) before extraordinary gain and accounting change $ 16,468 $ (9,354) $ 114,572 $ (137,100) Effect of convertible subordinated note conversion - - 7,313 - Income (loss) including assumed conversions before extraordinary gain and accounting change 16,468 (9,354) 121,885 (137,100) Extraordinary gain, net of income tax - - 2,482 - Cumulative effect of change in accounting principle - - (1,707) - ---------- ----------- ----------- ----------- Net income (loss) $ 16,468 $ (9,354) $ 122,660 $ (137,100) ========== =========== =========== =========== Weighted average common stock outstanding 66,041 61,353 66,064 60,762 Assumed conversion of convertible subordinated notes - - 11,185 - Dilutive effect of stock options outstanding 4,877 - 4,425 - ---------- ----------- ----------- ----------- Weighted average diluted shares of common stock outstanding 70,918 61,353 81,674 60,762 ========== =========== =========== =========== Diluted income (loss) per share: Before extraordinary gain and accounting change $ 0.23 $ (0.15) $ 1.49 $ (2.26) Extraordinary gain, net of income tax - - 0.03 - Cumulative effect of change in accounting principle - - (0.02) - ---------- ----------- ----------- ----------- Diluted net income (loss) per share $ 0.23 $ (0.15) $ 1.50 $ (2.26) ========== =========== =========== ===========
9 As of September 23, 2000, we had outstanding subordinated notes convertible into 11,184,923 shares of common stock that were not included in the computation of diluted net income per share for the three-month period because the effect would have been antidilutive. Incremental common shares attributable to the exercise of outstanding options of 1,317,875 and 662,297 shares, respectively, for the three and six months ended September 25, 1999 were excluded from the computation of diluted net loss per share because the effect would be antidilutive. 11. MiCRUS The terms of the MiCRUS restructuring agreement, entered into during the first quarter of 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 the Company 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 to them under the MiCRUS restructuring agreement. The proceeds from these sales were approximately $48 million. As a result, at September 23, 2000, we have reclassified $32 million of temporary equity to permanent equity, since our obligation under the restructuring agreement had ceased. 12. Commitments and Contingencies As of September 23, 2000, we had forward exchange contracts requiring us to deliver approximately 750 million Yen at an average exchange rate of 104.76 Yen : $1.00. These contracts expire at various dates from October 20, 2000 to December 22, 2000. Due to the terms of the MiCRUS restructuring agreement (as discussed in Note 11), as of September 23, 2000 we remained contingently liable for MiCRUS equipment leases with remaining payments of approximately $132.0 million payable through 2004. During July 2000, cash equivalents of $56 million became unrestricted following the release of our guarantees relating to equipment leases at MiCRUS 10 13. Comprehensive Income The components of comprehensive income, net of tax, are as follows (in thousands):
Quarter Ended Two Quarters Ended --------------- -------------------- Sept. 23, Sept. 25, Sept. 23, Sept. 25, 2000 1999 2000 1999 --------------- ----------- -------------------- ----------- Net income (loss) $ 16,468 $ (9,354) $ 115,347 $ (137,100) Change in unrealized gain on marketable equity securities 9,924 81,190 (14,694) 81,190 Change in unrealized loss on foreign currency translation adjustments (202) 1,192 (59) 1,092 --------------- ----------- -------------------- ----------- $ 26,190 $ 73,028 $ 100,594 $ (54,818) =============== =========== ==================== ===========
14. Segment information Information on reportable segments is as follows (in thousands):
Quarter Ended Two Quarters Ended ------------- ------------------ Sept. 23, Sept. 25, Sept. 23, Sept. 25, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Revenues: Analog $ 86,658 $ 80,701 $ 170,301 $ 148,430 Internet 26,118 8,044 49,120 17,625 Magnetic Storage 63,217 26,346 116,829 56,464 End of Life 12,404 17,317 23,733 30,298 Corporate and all other 1,140 434 10,966 578 ----------- ----------- ----------- ----------- $ 189,537 $ 132,842 $ 370,949 $ 253,395 =========== =========== =========== =========== Operating profit (losses): Analog $ 24,393 $ 16,714 $ 54,973 $ 26,255 Internet 5,449 (2,962) 9,170 (4,495) Magnetic Storage 10,210 3,066 14,573 7,879 End of Life 1,708 3,786 3,847 9,455 Corporate and all other (24,736) (25,999) (36,819) (171,889) ----------- ----------- ----------- ----------- $ 17,024 $ (5,395) $ 45,744 $ (132,795) =========== =========== =========== ===========
15. Subsequent Events On September 25, 2000 we entered into an agreement whereby we issued 990,967 shares of common stock and paid $96,000 to holders of $24 million aggregate principal amount of our 6% Convertible Subordinated Notes, due December 15, 2003. In return we received the notes and were forgiven any and all obligations related to the notes and their accrued interest. 11 On September 28, 2000 we announced that we had called for an October 16, 2000 redemption of $135 million aggregate principal amount of our 6% Convertible Subordinated Notes, due December 15, 2003. The holders of 134,928 notes elected to exercise their conversion rights and to receive a total of 5,571,218 shares of common stock. The holders of 72 notes received cash totaling $76,000 as payment for principal, redemption premium and interest accrued from June 15, 2000, the last interest payment date. On September 28, 2000 we announced that we had called for an October 16, 2000 redemption of $135 million aggregate principal amount of our 6% Convertible Subordinated Notes, due December 15, 2003. The holders of 134,928 notes elected to exercise their conversion rights and to receive a total of approximately 5,571,218 shares of common stock. The holders of 72 notes received cash totaling approximately $76,000 as payment for principal, redemption premium and interest accrued from June 15, 2000, the last interest payment date. On October 18, 2000 we announced that we had called for a November 7, 2000 redemption of the remaining $111.9 million aggregate principal amount of our 6% Convertible Subordinated Notes, due December 15, 2003. The holders of 111,854 notes elected to exercise their conversion rights and to receive a total of approximately 4,618,485 shares of common stock. The holders of 21 notes received cash totaling approximately $22,000 as payment for principal, redemption premium and interest accrued from June 15, 2000, the last interest payment date. 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information should be read along with the unaudited consolidated condensed financial statements and the notes thereto included in Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended March 25, 2000, contained in the 2000 Annual Report on Form 10-K (the "2000 Form 10-K"). This Discussion and Analysis contains forward-looking statements. Such statements are subject to certain risks and uncertainties, including those discussed below or in the 2000 Form 10-K that could cause actual results to differ materially from the Company's expectations. Readers are cautioned not to place undue reliance on any forward-looking statements, as they reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS The following table discloses the percentages that income statement items are of net sales.
Percentage of Net Sales Quarter Ended Two Quarters Ended ------------- ------------------ Sept. 23 Sept. 25 Sept. 23 Sept. 25 2000 1999 2000 1999 --------- --------- --------- --------- Net sales 100% 100% 100% 100% Gross margin 42% 42% 41% 43% Research and development 18% 23% 18% 23% Selling, general and administrative 15% 17% 15% 18% Restructuring costs, gain on sale of assets and other, net -1% 0% -4% 50% Acquired in-process research and development 0% 6% 0% 3% --------- --------- --------- --------- Income (loss) from operations 9% -4% 12% -52% Realized gain on sale of marketable equity securities 1% 0% 22% 0% Interest expense -3% -5% -3% -5% Interest income 2% 1% 2% 2% Other income 0% 1% 0% 2% --------- --------- --------- --------- Income (loss) before income taxes 10% -7% 34% -54% Provision for income taxes 1% 0% 3% 0% --------- --------- --------- --------- Income (loss) before extraordinary gain and accounting change 9% -7% 31% -54% Extraordinary gain, net of tax 0% 0% 1% 0% Cumulative effect of change in accounting principle 0% 0% 0% 0% --------- --------- --------- --------- Net income (loss) 9% -7% 31% -54% ========= ========= ========= =========
13 NET SALES Net sales for the second quarter of fiscal 2001 increased by $56.7 million, or 42.7%, to $189.5 million from $132.8 million for the second quarter of fiscal 2000. Revenues from non-core businesses in the second quarter of fiscal 2001 were $12.4 million compared to $17.3 million in the second quarter of fiscal 2000. Also included in revenues for the second quarter of fiscal 2001 are $2.0 million of royalty revenue. Excluding revenues from non-core businesses, revenues from core businesses consisting of analog, Internet and magnetic storage increased approximately $60.9 million due to increases of $6.0 million, $18.1 million and $36.9 million in the analog, Internet and magnetic storage segments respectively. Net sales for the first two quarters of fiscal 2001 increased by $117.6 million, or 46.4%, to $370.9 million from $253.4 million for the first two quarters of fiscal 2000. Included in revenues in the first two quarters of fiscal 2001 are $5.2 million resulting from an accounting principle change pertaining to the time at which we recognize revenue on international shipments, $5.4 million resulting from a change in accounting estimate pertaining to our method of estimating the amount of revenue which is deferred on distributor transactions for products which are released for sale and $5.0 million of royalty revenue. In addition, revenues from non-core businesses were $23.7 million in the first two quarters of fiscal 2001 compared to $30.3 million in the first two quarters of fiscal 2000. Excluding revenues from non-core businesses and one time accounting changes, net sales from core businesses, consisting of analog, Internet and magnetic storage increased approximately $113.7 million due to increases of $21.9 million, $31.5 million and $60.4 million in the analog, Internet and magnetic storage segments, respectively. Export sales (including sales to U.S.-based customers with manufacturing plants overseas) were 78% and 73% of total sales in the second quarter of fiscal 2001 and fiscal 2000, respectively, and were 77% and 73% of total sales in the first two quarters of fiscal 2001 and fiscal 2000, respectively. Our sales are currently denominated primarily in U.S. dollars. We currently enter into foreign currency forward exchange and option contracts to hedge certain of our foreign currency exposures. Sales to one customer comprised approximately 22% and 19% in the fiscal quarter and two fiscal quarters ended September 23, 2000, respectively. Sales to this customer were approximately 5% of sales in the fiscal quarter and two fiscal quarters ended September 25, 1999. GROSS MARGIN Gross margin was 42% in the second quarters of fiscal 2001 and 2000. Gross margin was 41% in the first two quarters of fiscal 2001 compared to 43% for the first two quarters of fiscal 2000. Gross margin has decreased during fiscal 2001 primarily due to an increase in the inventory reserve and increased sales of magnetic storage products, which have lower margins. RESEARCH AND DEVELOPMENT Research and development expenses for the second quarter of fiscal 2001 increased by $4.5 million, or 14.9%, to $34.5 million from $30.1 million in the second quarter of fiscal 2000. Research and development expenses for the first two quarters of fiscal 2001 increased by $6.1 million, or 10% to $65.6 million from $59.5 million in the first two quarters of fiscal 2000. Although these expenses have increased in total dollars, as a percentage of sales the amounts have decreased to 18% from 23% for the first two quarters of fiscal 2001 and 2000, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses in the second quarter of fiscal 2001 increased $6.2 million, or 27% to $29.3 million from $23.1 million in the second quarter of fiscal 2000. Selling, general and administrative expenses in the first two quarters of fiscal 2001 increased $9.4 million, or 20% to $55.6 million from $46.1 million in the first two quarters of fiscal 2000. Although these expenses have increased in total dollars, as a percentage of sales the amounts have decreased to 15% from 18% for the first two quarters of fiscal 2001 and 2000, respectively. RESTRUCTURING COSTS, GAIN ON SALE OF ASSETS AND OTHER, NET During the second quarter of fiscal 2001, we recorded restructuring and other gains of $1.8 million primarily related to the final resolution of the MiCRUS restructuring agreement. During the first two quarters of fiscal 2001, we recorded restructuring and other gains of $14.4 million. Included in this amount is $12.0 million received from Intel Corporation ("Intel") on behalf of Basis Communications Corporation ("Basis") for the payment of two outstanding notes receivable which had previously been written off. During the first quarter of fiscal 2000, we recorded restructuring and other charges of $128.2 million relating to the termination of our interests in two manufacturing joint ventures, MiCRUS and Cirent, $1 million of which is included is cost of sales. The restructuring charge includes $135 million in direct payments, $32 million worth of our contributed common stock, $4.8 million fair value of the related embedded stock derivative, $9.3 million of lease buyout costs and $16.4 million of equipment write-offs. These charges were 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 its former partners. ACQUIRED IN-PROCESS RESEARCH & DEVELOPMENT EXPENSES During the second quarter of fiscal 2000, we recorded $8.0 million or 6% of net sales of acquired research and development expenses resulting from Cirrus' acquisition of AudioLogic, Inc. (See Note 6 to the Condensed Consolidated Financial Statements). These amounts were expensed on the acquisition date because the acquired technology had not yet reached technological feasibility and had no future alternative uses. There can be no assurance that acquisitions of businesses, products or technologies by us in the future will not result in substantial charges for acquired in-process research and development that may cause fluctuations in our quarterly or annual operating results. REALIZED GAIN ON SALE OF MARKETABLE EQUITY SECURITIES During the second quarter of fiscal 2001 we recognized a gain on sale of marketable equity securities of $1.9 million related to the sale of Phone.com options. During first two quarters of fiscal 2001 we recognized gains on sale of marketable equity securities of $81.6 million. These gains were primarily related to the sale of our holdings of approximately 1 million shares of Series A preferred stock and 0.5 million shares of common stock in Basis to Intel for $91.8 million. The sale was part of a tender offer whereby Intel purchased the outstanding preferred & common stock of Basis for $61.18 per share. Intel withheld from the total consideration $11.2 million pursuant to the indemnification provisions of the merger agreement between Intel and Basis. INTEREST EXPENSE Interest expense was $5.0 million for the second quarter of fiscal 2001 and $6.5 million for the second quarter of fiscal 2000. The decrease is primarily due to the repurchase of $28.1 million of our 6% convertible subordinated notes. Interest expense was $10.1 million for the first two quarters of fiscal 2001 and $13.2 million for the first two quarters of fiscal 2000. The decrease was also primarily due to the repurchase of $28.1 million of our 6% convertible subordinated notes. INTEREST INCOME Interest income was $4.8 million for the second quarter of fiscal 2001 and $1.8 million for the second quarter of fiscal 2000. The increase is primarily due to the interest earned on the increased cash and cash equivalents balance. Interest income was $9.1 million for the first two quarters of fiscal 2001 and $4.8 million for the first two quarters of fiscal 2000. The increase is primarily due to interest earned on the increased cash and cash equivalents balance and a $1.4 million interest payment received on the two outstanding notes receivable which had previously been written off. INCOME TAXES We have accrued a provision of $1.9 million and $12.9 million for the fiscal quarter and the two fiscal quarters ended September 23, 2000, respectively. Our effective income tax rate was approximately 10% for the quarter and two quarters. Excluding the tax benefit of net operating loss carryforwards our effective income tax rate was approximately 30%. We did not provide for any income taxes in the first two quarters of fiscal 2000 due to the magnitude of the losses in those quarters. EXTRAORDINARY GAIN During May 2000, we repurchased $28.1 million par value of our 6% convertible subordinated notes on the open market and recognized an extraordinary gain in the first quarter of fiscal 2001 of approximately $2.5 million (after income tax effect of $0.3 million) as a result of these repurchases. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements". We recorded a cumulative effect of a change in accounting principle in the first quarter of fiscal 2001 to reflect our adoption of new revenue recognition policies as a result of this guidance. Effective with the first quarter of fiscal 2001, we have recognized revenue on international shipments based on passage of title rather than on the date of shipment, which was our historical method. On March 31, 2000, the Financial Accounting Standards Board issued Interpretation No. 44, which is an interpretation of APB Opinion No. 25 governing the accounting principles applicable to equity incentive plans. The interpretation did not have a material impact on our results of operations or financial condition. LIQUIDITY AND CAPITAL RESOURCES WE PROVIDED $3.9 MILLION OF CASH FROM OPERATING ACTIVITIES DURING THE FIRST TWO QUARTERS OF FISCAL 2001 AND USED $199.1 MILLION OF CASH AND CASH EQUIVALENTS IN OUR OPERATING ACTIVITIES DURING THE FIRST TWO QUARTERS OF FISCAL 2000. THE CASH PROVIDED BY OPERATIONS IN THE FIRST TWO QUARTERS OF FISCAL 2001 WAS PRIMARILY DUE TO NET INCOME AND THE ADD-BACK OF DEPRECIATION AND AMORTIZATION WHICH ARE NON CASH EXPENSES, OFFSET BY INCREASES IN OPERATING ASSETS AND GAINS ON SALE OF MARKETABLE EQUITY SECURITIES. THE CASH USED BY OPERATIONS IN THE FIRST TWO QUARTERS OF FISCAL 2000 WAS PRIMARILY DUE TO PAYMENTS REQUIRED FOR THE TERMINATION OF THE COMPANY'S JOINT VENTURE OPERATIONS WITH IBM AND LUCENT. We provided $121.9 million in cash from investing activities during the first two quarters of fiscal 2001 compared to cash provided by investing activities of $102.7 million in cash from investing activities during the comparable period of fiscal 2000. The cash provided by investing activities for fiscal 2001 was primarily related to proceeds from sales of short term investments and decreases in the amount of restricted cash. These increases were offset mainly by capital expenditures and investments in technology. For the comparable period of fiscal 2000, cash provided by investing activities was primarily related from proceeds from sales of short-term investments, restructuring of a joint venture, cash acquired in the AudioLogic acquisition and decreases in the amount of restricted cash. These increases were offset by increases on deposits and other long term assets as well as capital expenditures. We used $15.1 million in cash for financing activities during the first two quarters of fiscal 2001 while using $6.5 million in cash for financing activities during the comparable period of fiscal 2000. During first two quarters of fiscal 2001, we used cash to repurchase $28.1 million par value of our 6% convertible subordinated notes for $24.9 million, and paid another $6.9 million of long-term debt and capital lease obligations. In addition to this, we received $11.7 million in proceeds from the issuance of our common stock and $5.0 million in equity contributions from joint venture partners. Cash used in financing activities for fiscal 2000 was due to payments on our outstanding debt partially offset by new issuances of stock relating to the exercise of stock options. At September 23, 2000, we had $256.1 million of cash, cash equivalents of which $1.4 million is restricted cash. The restrictions on cash are due to outstanding letters of credit required for certain leases agreements. We do not expect the amount of restricted cash to change significantly during the third quarter of fiscal 2001. Historically, we have generated cash in an amount sufficient to fund our operations. We anticipate that our existing capital resources and cash flow generated from future operations will enable us to maintain our current level of operations for the foreseeable future. We may revise our operating plans in response to future changes in the semiconductor industry in general and the demand for our products in particular. We believe that significant changes in the economic environment, which may affect worldwide demand for technology products, could materially and adversely impact us, including with respect to such matters as our ability to fund its future operations. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS WE HAVE HISTORICALLY EXPERIENCED FLUCTUATIONS IN OUR OPERATING RESULTS AND EXPECT THESE FLUCTUATIONS MAY 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; competitive pricing pressures; our ability to expand manufacturing output to meet increasing demand; 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 make payments to us; increases in material costs; certain production and other risks associated with using independent manufacturers; and product obsolescence, price erosion and other competitive factors. Historically in the integrated circuit industry, average selling prices of products have decreased over time. If we are unable to introduce new products with higher margins or reduce manufacturing costs to offset anticipated decreases in the prices of our existing products, our operating results will be adversely affected. Our business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without penalty to the customer. In addition, because of fixed costs in the integrated circuit industry, we are limited in our ability to reduce costs quickly in response to any revenue shortfalls. As a result of the foregoing or other factors, we may experience material adverse fluctuations in our future operating results on a quarterly or annual basis. OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS ON A TIMELY BASIS. Our success depends upon our ability to develop new precision linear and mixed-signal circuits for new and existing markets, to introduce such products in a timely manner, and to have such products gain market acceptance. The development of new precision linear and mixed-signal circuits is highly complex and from time to time we have experienced delays in developing and introducing new products. Successful product development and introduction depends on a number of factors, including: 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 any products introduced by us will be adopted by such market leaders, or that any products initially accepted by our customers that are market leaders will become industry standard products. Both revenues and margins may be materially affected if new product introductions are delayed or if our products are not designed into successive generations of our customers' products. We cannot assure you that we will be able to meet these challenges or adjust to changing market conditions as quickly and cost-effectively as necessary to compete successfully. Our failure to develop and introduce new products successfully could harm our business and operating results. Successful product design and development is dependent on our ability to attract, retain and motivate qualified design engineers, of which there is a limited number. Due to the complexity and variety of precision linear and mixed-signal circuits, the limited number of qualified circuit designers and the limited effectiveness of computer-aided design systems in the design of such circuits, we cannot assure you that we will be able to successfully develop and introduce new products on a timely basis. OUR PRODUCTS ARE COMPLEX AND COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US. Product development in the markets we serve is becoming more focused on the integration of functionality on individual devices. There is a general trend towards increasingly complex products. The greater integration of functions and complexity of operations of our products increase the risk that latent defects or subtle faults could be discovered by our customers or end users after volumes of product have been shipped. This could result in: material recall and replacement costs for product warranty and support; our customer relationships could also be adversely impacted 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. THE INTEGRATED CIRCUIT INDUSTRY IS VERY CYCLICAL AND AN INDUSTRY DOWNTURN WOULD ADVERSELY AFFECT OUR BUSINESS. The integrated circuit industry is characterized by: rapid technological change; cyclical market patterns; significant price erosion; periods of over-capacity and production shortages; variations in manufacturing costs and yields; and significant expenditures for capital equipment and product development. The industry has from time to time experienced depressed business conditions. Although the semiconductor industry in recent periods has experienced increased demand and production capacity constraints, we cannot assure you that these conditions will continue. In addition, we cannot assure you that any future downturn in the industry will not be severe or that any such downturn will not have a material adverse effect on our business and results of operations. We cannot assure you that we will not experience substantial period-to-period fluctuations in operating costs due to general semiconductor industry conditions or other factors. ANY DOWNTURN IN THE MARKETS WE SERVE WOULD HARM OUR BUSINESS. A majority of our products are incorporated into products such as personal computers, mass storage, audio and industrial electronics, and embedded processor products. These markets may from time to time experience cyclical, depressed business conditions, often in connection with, or in anticipation of, a decline in general economic conditions. Such industry downturns have resulted in reduced product demand and declining average selling prices. Our business would be harmed by any future downturns in the markets that we serve. The following sections detail the risks associated with serving these various markets THERE ARE RISKS ASSOCIATED WITH OUR DEPENDENCE ON THE PC MARKET. The following are risks associated with our involvement in the PC markets: greatly pronounced demand fluctuations characteristic of our role as a component supplier to PC original equipment manufacturers, or OEMs, and to peripheral device manufacturers; our involvement in the consumer PC market, the most volatile segment of the PC market; increased competition from other IC makers, including Intel Corporation, who plan to incorporate features into or with their microprocessor products which replicate those of our products; loss of customer base as we refocus on non-PC markets; and as a supplier to manufacturers at different levels of the production chain, our potential dependence on the success of a particular PC OEM due to our inability to accurately identify end-users of our product. THERE ARE RISKS ASSOCIATED WITH SERVING THE MAGNETIC AND OPTICAL STORAGE MARKETS. The following are risks associated with serving the mass storage market: historically dramatic supply and demand fluctuations in the magnetic disk drive market, which is closely linked to growth in the PC market; direct correlation between the competitive nature of the disk drive industry and the price of disk drive components; our dependence on the success of certain 3.5 inch magnetic disk drive products that incorporate our products into their design; our dependence on the successful introduction by our customers of new disk drive products that in turn can be impacted by the timing of customers' transition to new disk drive products; reduced demand for our mass storage products due to recent efforts by certain of our customers to develop their own ICs for mass storage products; our ability to respond effectively to the market trend of integrating hard disk controllers with micro-controllers; and our ability to successfully compete with other firms with greater resources to accomplish the technical obstacles of integration and greater access to the advanced technologies necessary to provide integrated HDD electronic components. THERE ARE RISKS RELATED TO SERVING THE AUDIO PRODUCTS MARKETS. In the audio products market, we have the potential to experience decreased revenues due to decreased average selling prices in the audio IC market due to the PC industry's transition to the AC-link codecs attached to core logic using the multimedia features of the processor and single chip solution; in the PC audio products market, the transition to core logic connected audio and by the introduction of cheaper, fully-integrated, single-chip audio ICs; aggressive competitive pricing pressures in the audio ICs market; and the inability of our audio products to meet cost or performance requirements of the three-dimensional, spatial-effects audio market. THERE ARE RISKS RELATED TO SERVING THE PRECISION DATA CONVERSION MARKET. Decreased revenues from sales to the precision mixed-signal products market could be caused by the following: our inability to establish broad sales channels and our failure to develop and maintain a sufficiently broad competitive product line; customer delays in their product development and introductions ; our inability to reach the marketplace due to the technical complexity of our products and the time requirements for their development; and our inability to attract, hire, and retain scarce analog engineering talent necessary for rapid product development in this market. 14 THERE ARE RISKS RELATED TO SERVING THE EMBEDDED PROCESSOR PRODUCTS MARKET. We could experience decreased revenues from sales of our embedded processor products due to the following factors: increased competition from other semiconductor manufacturers now entering the market due to the increased popularity of consumer goods incorporating embedded processor products, such as portable digital audio players, smart cellular phones, set-top Internet and e-mail access boxes, and personal digital appliances; our inability to meet embedded processor products requirements of an industry that has yet to define product standards; customer delays in their product development and introductions; and price competition from over 30 other embedded processor products manufacturers who have licensed ARM Ltd. CPU cores, the same CPU core we license, and who will likely produce products around these cores which are very similar to ours. SHIFTS IN INDUSTRY-WIDE CAPACITY MAY CAUSE OUR RESULTS TO FLUCTUATE AND 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 or annual operating results. We must order wafers and build inventory well in advance of product shipments. Because the integrated circuit industry is highly cyclical and is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or technological obsolescence, there is a risk that we will forecast inaccurately and produce excess or insufficient inventories of particular products. This inventory risk is heightened because many of our customers place orders with short lead times. Due to the product manufacturing cycle characteristic of integrated circuit manufacturing and the inherent imprecision by our customers to accurately forecast their demand, product inventories may not always correspond to product demand, leading to shortages or surpluses of certain products. As a result of such inventory imbalances, future inventory write-downs may occur due to lower of cost or market accounting, excess inventory or inventory obsolescence. BECAUSE FOUNDRY CAPACITY IS LIMITED WE MAY BE REQUIRED TO ENTER INTO COSTLY LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY. We currently purchase all of our wafers from outside foundries. Market conditions could result in wafers being in short supply and prevent us from having adequate supply to meet our customer requirements. Any prolonged inability to utilize our foundries as a result of fire, natural disaster or otherwise would have a material adverse effect on our financial condition and results of operations. If we are not able to obtain additional foundry capacity as required, our business could be harmed in the following ways: our relationships with our customers would be harmed and consequently our sales would likely be reduced; and we may be forced to purchase wafers or packaging from higher cost suppliers or to pay expediting charges to obtain additional supply In order to secure additional foundry capacity, we have entered into contracts that commit us to purchase specified quantities of silicon wafers over extended periods. In fact, during fiscal 1998 and fiscal 1999, the industry experienced an excess in production capacity that we believe, in some cases, resulted in our competitors paying wafer prices which were lower than our cost of production from our manufacturing joint ventures. Consequently, we experienced pressures on our selling prices during fiscal years 1998, 1999 and 2000, which harmed our revenues and reduced our margins. In the future, we may not be able to secure capacity with foundries in a timely fashion or at all, and such arrangements, if any, may not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to utilize all of that capacity or incur penalties. Such penalties may be expensive and could harm our financial results. WE ARE DEPENDENT ON OUR SUBCONTRACTORS IN ASIA TO PERFORM KEY MANUFACTURING FUNCTIONS FOR US. We depend on third party subcontractors in Asia for the supply and packaging of our products. International operations and sales may be subject to political and economic risks, including political instability, currency controls, exchange rate fluctuations, and changes in import/export regulations, tariff and freight rates. Although we seek to reduce our dependence on our sole and limited source suppliers, this concentration of suppliers and manufacturing operations in Asia subjects us to the risks of conducting business internationally, including political and economic conditions in Asia. Any disruption or termination of any of our supply or manufacturing could occur, and such disruptions could harm our business and operating results. WE HAVE SIGNIFICANT INTERNATIONAL SALES AND RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES COULD HARM OUR OPERATING RESULTS. Export sales, principally to Asia, include sales to U.S-based customers with manufacturing plants overseas, and accounted for approximately 75%, 74% and 53% of our net sales in 2000, 1999 and 1998, 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; 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. 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 thereunder will provide competitive advantages to us or that any of our pending or future patent applications will be issued with the scope of the claims sought by us, if at all. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. We cannot assure you that steps taken by us to protect our intellectual property will be adequate or that our competitors will not independently develop or patent substantially equivalent or superior technologies. As is typical in the semiconductor industry, we and our customers have from time to time received, and may in the future receive, communications from third parties asserting patents, maskwork rights, or copyrights on certain of our products and technologies. In the event a third party were to make a valid intellectual property claim and a license was not available on commercially reasonable terms, our operating results could be harmed. Litigation, which could result in substantial cost to us and diversion of our resources, may also be necessary to defend us against claimed infringement of the rights of others. An unfavorable outcome in any such suit could have an adverse effect on our future operations and/or liquidity. STRONG COMPETITION IN THE HIGH-PERFORMANCE INTEGRATED CIRCUIT MARKET MAY HARM OUR BUSINESS. The high-performance integrated circuit industry is highly competitive and subject to rapid technological change. Significant competitive factors in our markets include: 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: Analog Devices, Applied Micro Devices, Atmel, Burr-Brown, Creative Technologies, ESS Technologies, Intel, Linear Technology, Lucent Technologies, Motorola, ST Microelectronics, Texas Instruments and Yamaha; 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, upon 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. YEAR 2000 UPDATE To date there has been no negative impact to our business as a result of the Year 2000 date change. We will continue to monitor date issues going forward but do not anticipate that such issues will affect our business in the future. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K for the Year Ended March 25, 2000. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings We and certain of our customers from time to time have been notified that they may be infringing certain patents and other intellectual property rights of others. Further, customers have been named in suits alleging infringement of patents by the customer products. Certain components of these products have been purchased from us and may be subject to indemnification provisions made by us to the customers. Although licenses are generally offered in such situations, there can be no assurance that litigation will not be commenced in the future regarding patents, mask works, copyrights, trademarks, trade secrets, or indemnification liability, or that any licenses or other rights can be obtained on acceptable terms. Currently, we are a plaintiff/counter defendant in one patent infringement suit and one of multiple defendants in another, unrelated patent infringement suit. While the ultimate outcome cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our consolidated financial position. Occasionally, suits arise from prior business relationships. We have been named in three such matters, one filed by a prior distributor, another unrelated matter by a former employee and another unrelated matter where we are named as a shareholder. While the ultimate outcome cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our consolidated financial position. Item 4. Submission of Matters to a Vote of Security Holders On September 28, 2000, we held our Annual Meeting of Shareholders. The matters voted upon at the meeting and the results of those votes were as follows:
1. Election of Directors Votes Votes For Against ---------- ---------- David D. French 59,433,226 1,207,100 D. James Guzy 59,324,157 1,316,169 Michael L. Hackworth 58,812,600 1,827,726 Suhas S. Patil 59,300,127 1,340,199 Walden C. Rhines 59,340,290 1,300,036 Robert H. Smith 59,261,679 1,378,647 Alfred S. Teo 59,403,095 1,237,231 2. Ratification of Ernst & Young LLP as Independent Auditors For Against Abstain ---------- ---------- ------- 60,483,717 79,229 77,380 3. Approve amendment to the 1996 Stock Plan For Against Abstain Broker Non-Vote ---------- ---------- ------- --------------- 31,600,484 12,387,778 212,277 16,439,787
Item 6. Exhibits and Reports on Form 8-K a. Exhibits The following exhibits are filed as part of or incorporated by reference into this Report: NUMBER DESCRIPTION - ------ ----------- 12.0 Statement Regarding Computation of Ratios of Earnings to Fixed Charges 27 Article 5 Financial Data Schedule (September 23, 2000) _______ b. Reports on Form 8-K None. 16 Part II. Other information, item 6a Exhibit 12.0 CIRRUS LOGIC, INC. STATEMENT REGARDING COMPUTATION OF EARNINGS TO FIXED CHARGES (in thousands, except ratio of earnings to fixed charges)
Two Quarters Ended ------------------- Sept. 23 Sept. 25 2000 1999 ------------------- ---------- Income (loss) before income taxes $ 126,983 $(137,100) Fixed Charges (1) 10,849 13,958 ------------------- ---------- Total earnings and fixed charges 137,832 (123,142) Fixed Charges (1) 10,849 13,958 Ratio of earnings to fixed charges (2) 12.7 N/A =================== ==========
(1) Fixed charges consist of interest expense incurred, including capital leases, amortization of interest costs and the portion of rental expense under operating leases deemed by the Company to be representative of the interest factor. (2) Earnings were inadequate to cover fixed charges for the two quarters ended September 25, 1999. CIRRUS LOGIC, INC. SIGNATURES Pursuant to the requirements 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. (Registrant) November 7, 2000 /S/ROBERT W. FAY ------------------ Date Robert W. Fay Vice President, Chief Financial Officer, and Secretary EX-27 2 0002.txt
5 1000 6-MOS MAR-31-2001 MAR-26-2000 SEP-23-2000 256,132 33,875 129,654 0 86,479 26,979 36,902 0 615,310 202,957 277,304 0 0 416,395 (283,122) 615,310 370,949 370,949 218,412 218,412 106,793 0 10,100 126,983 12,635 114,572 0 2,482 (1,707) 115,347 1.750 1.500
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