-----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, KrIpMKhtwdOcQY9Lmi0qYz6gl5gqGjldSxh99HZzfJHkhOgnJxWAGkntxQ5sNHZB wo2jaiBJ619mPFwp9sULBg== 0000930661-02-002102.txt : 20020619 0000930661-02-002102.hdr.sgml : 20020619 20020618203308 ACCESSION NUMBER: 0000930661-02-002102 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020330 FILED AS OF DATE: 20020619 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRRUS LOGIC INC CENTRAL INDEX KEY: 0000772406 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770024818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0330 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17795 FILM NUMBER: 02681864 BUSINESS ADDRESS: STREET 1: 4210 SOUTH INDUSTRIAL DR CITY: AUSTIN STATE: TX ZIP: 78744 BUSINESS PHONE: 512-445-7222 MAIL ADDRESS: STREET 1: 4210 SOUTH INDUSTRIAL DR CITY: AUSTIN STATE: TX ZIP: 78744 10-K 1 d10k.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- 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 __________ ----------------- 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. ================================================================================ 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. 3 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 4 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 5 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. 6 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. 7 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. 8 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 9 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. 10 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 EX-10.10 3 dex1010.txt DAVID D. FRENCH EMPLOYMENT AGREEMENT EXHIBIT 10.10 CIRRUS LOGIC, INC. EMPLOYMENT AGREEMENT This Agreement is entered into effective as of February 27, 2002, (the "Effective Date") by and between Cirrus Logic, Inc., a Delaware corporation (the "Company") and David French (the "Employee"). WHEREAS, the Company desires to employ the Employee on a full-time basis in the capacity of President and Chief Executive Officer of the Company, and the Employee desires to accept such employment; and WHEREAS, the parties desire and agree to enter into an employment relationship by means of this Agreement; NOW THEREFORE in consideration of the promises and mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is mutually covenanted and agreed by and among the parties as follows: 1. Position and Duties. The Employee shall be employed as President and ------------------- Chief Executive Officer of the Company, reporting to the Company's Board of Directors and assuming and discharging such responsibilities as are commensurate with the Employee's position. In performing his basic duties, the Employee shall work at the Company's principal business office located in Austin, Texas. The Employee acknowledges that frequent travel will be necessary in carrying out his duties hereunder. The Employee shall perform his duties faithfully and to the best of his ability and shall devote his full business time and effort to the performance of his duties hereunder. 2. Compensation. ------------ (a) Base Salary. For all services to be rendered by the Employee to ----------- the Company while this Agreement is in effect, the Employee shall receive an annual base salary equal to $450,000 (the "Base Salary"), payable bi-weekly in accordance with the Company's normal payroll practices. (b) Executive Variable Compensation Program. The Employee shall be --------------------------------------- eligible to participate in the Company's Executive Variable Compensation Program ("VCP"). The Employee's target payout under the VCP shall be one hundred fifty percent (150%) of his Base Salary. (c) Restricted Stock. The outstanding $750,000 loan secured by ---------------- Employee's 90,000 shares of the Company's common stock will become due and payable 180 days following the Employee's termination of employment with the Company for any reason. (d) Relocation: Moving Expenses. Upon termination of the Employee's --------------------------- employment with the Company for any reason, the unpaid principal amount of the outstanding $721,899 relocation loan shall bear interest at the then "applicable federal rate" (as defined in Section 1274(d) of the Internal Revenue Code (or any successor provision). The relocation loan will become due and payable 180 days following the Employee's termination of employment with the Company for any reason. (e) Termination by Reason of Death or Disability. In the event of -------------------------------------------- Employee's death during the term of this Agreement, the Company shall pay the Employee's estate all salary, bonuses and unpaid vacation accrued as of the date of Employee's death and any other benefits payable under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of death and in accordance with applicable law. In the event that, during the term of this Agreement, Employee is unable to perform his job due to death or disability (as determined under the Company's long-term disability insurance program) for six months in any 12-month period, the Company may, at its option, terminate the Employee's employment with the Company, pursuant to Section 5 below, and such termination shall entitle the Employee to all salary, bonuses and unpaid vacation accrued as of the date of such termination and any other benefits payable under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of such termination and in accordance with applicable law. Notwithstanding Section 2(d) above, in the event Employee's employment is terminated as a result of his death or disability, the Company will forgive his relocation loan, subject to his or his estate's prompt payment to the Company of any applicable income and withholding taxes. 3. Other Benefits. The Employee and his legal dependents shall be -------------- entitled to participate in the employee benefit plans and programs of the Company, if any, to the extent that his position, tenure, salary, age health and other qualifications make the Employee and his legal dependents eligible to participate in such plans or programs, subject to the rules and regulations applicable thereto. The Company reserves the right to cancel or change the benefit plans and programs it offers to its employees at any time. Employee will be eligible for vacation and sick leave in accordance with the policies in effect during the term of this Agreement and will receive such other benefits as the Company generally provides to its other employee of comparable position and experience. 4. Expenses. The Company shall reimburse the Employee for reasonable -------- travel, entertainment or other expenses incurred by the Employee in the furtherance of or in connection with the performance of the Employee's duties hereunder, in accordance with the Company's expense reimbursement policy as in effect from time to time. 5. Termination. In the event (i) the Company terminates the Employee's ----------- employment other than for Cause, or (ii) any successor to the Company fails or refuses to assume this Agreement in accordance with Section 7 below, the Employee shall be entitled to receive a single, lump-sum severance payment within fifteen (15) days of termination equal to the Employee's then current annual base salary. In addition, the Company shall pay to the Employee a lump-sum payment in an amount equivalent to the reasonably estimated costs the Employee may incur to extend for a period of twelve (12) months under the COBRA continuation laws the Employee's group medical and dental plans coverage in effect on the date of such termination. In addition, in the event the Company terminates the Employee's employment other than for Cause, the Employee's outstanding stock options will remain exercisable for a 180-day period following such termination and will vest as follows: (i) all of the Employee's outstanding and unvested options that were granted prior to February 27, 2002 will fully vest, and (ii) fifty percent (50%) of the Employee's outstanding and unvested options that were granted on or after February 27, 2002, will fully vest, except that, in the event the Employee's employment is terminated by the Company other than for Cause or the Employee terminates his employment for Good Reason in each case within one year following a Change in Control, all of the Employee's outstanding and unvested options that were granted on or after February 27, 2002, will fully vest. In the event the Company decides to terminate the Employee's employment other than for Cause, the Company will provide employee with six (6) months prior written notice of such decision. For purposes of this Agreement only, a "Change in Control" of the Company will be deemed to occur when the Company stockholders approve a transaction (e.g., an acquisition, merger or consolidation) the result of which is that the voting securities of the Company immediately prior to such a transaction represent less than 80% of the combined voting power of the resulting entity, or the liquidation/dissolution/sale of all or substantially all of the assets or business of the Company. For purposes of this Agreement only, "Good Reason" shall mean any act of the Company that materially and adversely diminishes the Employee's duties or responsibilities, provided that in the event of any such act that the Employee shall notify the Company in writing of such act and the Company shall have thirty (30) days to remedy such act from its receipt of such notice. For purposes of this Agreement only, the term "Cause" shall mean (i) gross negligence or willful misconduct in the performance of duties to the Company after one written warning detailing the concerns and offering the Employee opportunities to cure; (ii) material and willful violation of any federal or state law; (iii) commission of any act of fraud with respect to the Company; (iv) conviction of a felony or any crime causing material harm to the standing and reputation of the Company; or (v) intentional and improper disclosure of the Company's confidential or proprietary information. For purposes of this Agreement, the determination of Cause shall be determined by the Board in its sole and absolute discretion. 6. Right of Advice of Counsel. The Employee acknowledges that he has -------------------------- consulted with counsel and is fully aware of his rights and obligations under this Agreement and of the tax consequences thereof. 7. Successors. ---------- (a) Company's Successors. Any successor to the Company (whether -------------------- direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under the Agreement, the term "Company", shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) Employee's Successors. Without the written consent of the --------------------- Company, the Employee shall not assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity. Notwithstanding the foregoing, the terms of this Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs distributees, devisees and legatees. 8. Notice Clause. ------------- (a) Manner. Any notice hereby required or permitted to be given shall ------ be sufficiently given if in writing and upon mailing by registered or certified mail, postage prepaid, to either party at the address of such party or such other address as shall have been designated by written notice by such party to other party. (b) Effectiveness. Any notice of other communication required or ------------- permitted to be given under this Agreement will be deemed given on the day when delivered in person, or the third business day after the day on which such notice was mailed in accordance with Section 8(a). 9. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the internal substantive laws, but not the choice of law rules, of the State of Texas. 10. Severability. The invalidity or unenforceability of any provision of ------------ this Agreement, or any terms hereof, shall not affect the validity or enforceability of any other provision or term of this Agreement. 11. Integration. Execept as otherwise expressly provided other wise ----------- herein, this Agreement represents the entire agreement and understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements, whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement shall be binding unless in writing and signed by duly authorized representatives of the parties hereto. 12. Taxes. All payments made pursuant to this Agreement shall be subject ----- to withholding of applicable income and employment taxes. 13. Indemnificaiton. In the event Employee is made, or threatened to be --------------- made, a party to any legal action or proceeding, whether civil or criminal, by reason of the fact that Employee is or was a director or officer of the Company or serves or served any other corporation fifty percent (50%) or more owned or controlled by the Company in any capacity at the Company's request, Employee shall be indemnified by the Company, and the Company shall pay Employee's related expenses when and as incurred, all to the fullest extent permitted by law. 14. Arbitration. Except for proceedings seeking injunctive relief, ----------- including, without limitation, allegations of misappropriation of trade secrets, copyright or patent infringements, or breach of any anti-competition provisions of the Agreement, any controversy or claim arising out of or in relation to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the commercial arbitration rules of the American Arbitration Association ("AAA"), and judgement upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Arbitration of this Agreement shall include all claims, regardless of whether the dispute arises during the term of the Agreement, at the time of termination or thereafter. Either party may initiate the arbitration proceedings, for which the provision is herein made, by notifying the opposing party, in writing, of its demand to arbitrate. In any such arbitration there shall be appointed one arbitrator who shall be selected in accordance with the AAA Commercial Arbitration Rules. The place of arbitration shall be Austin, Texas. The parties agree that the award of the arbitrator shall be the sole and exclusive remedy between them regarding any claims, counterclaims, issues or accountings presented or plead to the arbitrator; that the arbitrator shall be the final judge of both law and fact in arbitration of disputes arising out of or relating to this Agreement, including the interpretation of the terms of this Agreement. The parties further agree it shall be the sole and exclusive duty of the arbitrator to determine the arbitrability of issues in dispute and that neither party shall have recourse to the court of such a determination. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by a duly authorized officer, as of the day and year first above written. CIRRUS LOGIC, INC. By: /s/ Steven D. Overly ------------------------------------------- Title: Sr. VP, Administration & General Counsel ---------------------------------------- DAVID FRENCH /s/ David French ----------------------------------------------- EX-10.11 4 dex1011.txt EXECUTIVE INCENTIVE PLAN EXHIBIT 10.11 CIRRUS LOGIC, INC. EXECUTIVE INCENTIVE PLAN Effective April 1, 2001 1. Purpose. ------- The purpose of the Cirrus Logic, Inc. Executive Incentive Plan (the "EIP") is to provide eligible executive employees of Cirrus Logic, Inc., a Delaware corporation ("Cirrus Logic") with incentives to increase shareholder value through the achievement of annual goals relating to the Company's Return On Capital and Operating Profit Per Share Growth. 2. Definitions. ----------- As used herein, the following definitions shall apply: (A) "Base Salary" means an Employee's annual rate of base salary, ----------- exclusive of bonuses, incentive pay, commissions, and all other forms of compensation. Base Salary for a given Plan Cycle shall be calculated based on Participants' Base Salary in effect on the first day of a Plan Cycle, except that, for the first Plan Cycle, Base Salary shall be the Participant's Base Salary in effect on April 1, 2001. (B) "Board" means the Board of Directors of Cirrus Logic. ----- (C) "Cause" means (i) gross negligence or willful misconduct in the ----- performance of duties to the Company after one written warning detailing the concerns and offering the Employee opportunities to cure; (ii) material and willful violation of any federal or state law; (iii) commission of any act of fraud with respect to the Company; (iv) conviction of a felony or any crime causing material harm to the standing and reputation of the Company; or (v) intentional and improper disclosure of the Company's confidential or proprietary information. (D) "Change in Control" means (i) the sale, lease, conveyance or other ----------------- disposition of all or substantially all of the Company's assets as an entirety or substantially as an entirety to any person, entity or group or persons acting in concert; (ii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company's then outstanding voting securities; or (iii) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least 50% of the voting power Cirrus Logic Inc. Executive Incentive Plan April 1, 2001 represented by the voting securities of the Company or such surviving entity (or parent) outstanding immediately after such merger or consolidation. (E) "Committee" means the Compensation Committee of the Board. --------- (F) "Company" means Cirrus Logic and its wholly owned subsidiaries and ------- affiliates, and each of their respective successors. (G) "Continuously Employed" or "Continuous Employment" means the --------------------- --------------------- Employee's continuous and uninterrupted full-time employment with the Company except for approved absences and other interruptions approved by the Committee or pursuant to a formal written Company policy. (H) "Disability" means total and permanent disability as defined in ---------- accordance with the Company's Long-Term Disability Plan. (I) "Effective Date" means April 1, 2001, the effective date of the EIP. -------------- The Board of Directors approved the EIP on April 25, 2001. (J) "Employee" means a natural person who is employed by the Company and -------- who is treated as an employee by the Company for tax purposes. (K) "EIP Multiplier" means the multiplier derived from the calculation set -------------- forth in Schedule B to this EIP. (L) "Individual Incentive Payment" means the amount calculated for each ---------------------------- Participant in Section 5 for each Plan Cycle. (M) "Operating Profit" will be measured as the Company's consolidated GAAP ---------------- operating income (revenue minus cost of goods sold (COGS) minus research and development (R&D) minus selling, general and administrative (SG&A), excluding VCP and EIP accruals and any non-recurring items). Non-recurring items include any unusual or infrequent accounting items included in GAAP operating profits such as: (i) gains on sales of assets not otherwise included in revenue (ii) losses on sales of assets, restructuring charges, merger-related costs including amortization or impairment of acquisition-related intangible assets, asset write-offs, write-downs, and impairments whether or not included in COGS, SG&A or R&D expenses. Cirrus Logic Inc. Executive Incentive Plan April 1, 2001 The Committee will determine whether to include or exclude unusual/non-recurring items as part of Operating Profit. These items will be resolved by the Committee at the time of the relevant event. (N) "Operating Profit Per Share Growth" or "OPPS Growth" means the --------------------------------- ----------- percentage increase calculated by taking the operating profit per share of common stock of Cirrus Logic in a fiscal year and dividing it by the "Operating Profit Per Share" in the previous fiscal year. "Operating Profit Per Share" for a given year will be measured by dividing Operating Profit by the weighted average diluted shares of common stock of Cirrus Logic outstanding for that year. The calculation of OPPS Growth will be exclusive of Magnetic Storage operating profit. (O) "Participant" means the Employees identified on Schedule C. ----------- (P) "Plan Cycle" means a three-year period beginning on April 1 of each ---------- year. The first Plan Cycle shall be deemed to have begun on April 1, 2000. (Q) "Return On Capital" means Operating Profit divided by the "Average ----------------- Capital Employed" for that year. "Capital Employed" is defined as Total Assets less Current Liabilities as determined in accordance with GAAP. "Average Capital Employed" is determined by taking the beginning capital employed for a year, adding the ending capital employed, and dividing the resulting sum by two. (R) "Target Incentive Amount" means, for each Participant, the product of ----------------------- (a) the Participant's Base Salary times (b) the Participant's Target Incentive Factor. (S) "Target Incentive Factor" means the applicable Target Incentive Factor ----------------------- set forth in Schedule A to this EIP. 3. Administration of the EIP. ------------------------- (A) Administration. The Program shall be administered by the Committee. -------------- (B) Powers of the Committee. Subject to the provisions of the EIP and to ----------------------- the specific duties, if any, delegated by the Board, the Committee shall have the authority, in its discretion, to construe and interpret the terms of the EIP and to make all other determinations deemed necessary or advisable for administering the EIP. (B) Effect of Committee's Decisions. The Committee's decisions, ------------------------------- determinations and interpretations shall be final and binding on all Participants. Cirrus Logic Inc. Executive Incentive Plan April 1, 2001 4. Eligibility. ----------- Except as set forth in Section 7 below, Participants must be Continuously Employed by the Company beginning on the first day and continuing through the last day of each Plan Cycle in order to participate in the EIP for that Plan Cycle, except that Participants employed by the Company on April 1, 2001 shall be entitled to participate fully in the first Plan Cycle regardless of whether they were employed by the Company on April 1, 2000. 5. Determination of Payments. ------------------------- The amount payable to each Participant for each Plan Cycle shall be calculated by multiplying the Participant's Target Incentive Amount by the EIP Multiplier for that Plan Cycle. 6. Payout Schedule. --------------- (A) Payout Timing. Individual Incentive Payments shall become payable and ------------- be paid in full as soon as practicable after the end of each Plan Cycle. (B) Continuous Status. Notwithstanding anything in the EIP to the ----------------- contrary, except as provided in Section 7(A) below in the case of death, Disability or termination by the Company for other than Cause, a Participant must be Continuously Employed as of the last day of a Plan Cycle in order to receive an Individual Incentive Payment for a given Plan Cycle. In the event a Participant's Continuous Employment with the Company terminates for any reason other than death, Disability or termination by the Company for other than Cause, any unpaid portion of the Participant's Individual Incentive Payment shall be forfeited. (C) Withholding. Any amounts payable hereunder shall be subject to ----------- applicable tax and other payroll withholding in accordance with the Company's policies and programs and applicable law. 7. Miscellaneous Provisions. ------------------------ (A) Terminations. In the event of a Participant's death, Disability or ------------ termination by the Company for other than Cause, the Participant or his or her estate (as applicable) will receive a pro rata Individual Incentive Payment, based upon the number of calendar months completed in respect of each then outstanding Plan Cycle multiplied by an EIP Multiplier of 1.0, for all then outstanding Plan Cycles in which the Employee was Cirrus Logic Inc. Executive Incentive Plan April 1, 2001 a Participant. Any such payment shall be made within ten (10) days of the Participant's death, Disability or termination by the Company for other than Cause. (B) Unsecured Creditor. It is understood and agreed that the Company has ------------------ only a contractual obligation to make payments of Individual Incentive Payments under this EIP; that such payments are to be satisfied out of general corporate funds that are subject to the claims of the Company's creditors. (C) Change in Control. In the event of a Change in Control, the EIP will ----------------- be assumed or comparably replaced by the Company's successor. If the successor fails or refuses to assume or comparably replace the EIP, each Participant will receive a pro rata Individual Incentive Payment, based upon the number of calendar months completed in respect of each then outstanding Plan Cycle multiplied by an EIP Multiplier of 1.0, for all then outstanding Plan Cycles in which the Employee was a Participant. Any such payment shall be made within ten (10) days of a Change in Control. (D) New Participants. Upon approval of the Committee, new Participants may ---------------- be eligible to participate on a pro rata basis in any Plan Cycle in which the first year of the three year cycle has not been completed and fully in subsequent Plan Cycles the first day of which begins after the date the Committee approves his or her participation. New Participants are ineligible to participate in prior Plan Cycles that began prior to the fiscal year of Cirrus Logic in which the Employee first becomes a Participant. (E) Reclassification. In the event that an Employee who is a Participant ---------------- is reclassified or demoted (for reasons other than Cause) to a position which would not then qualify such individual as a Participant, the Employee will nevertheless remain eligible to participate in all Plan Cycles in which the Employee was originally a Participant, provided that he or she remains in Continuous Employment. The Employee shall be ineligible, however, to participate in any new Plan Cycles, unless the Committee determines otherwise in its sole discretion. 8. Limitations. ----------- Neither the EIP nor any Individual Incentive Payment shall confer upon a Participant any right with respect to continuing the Participant's employment relationship with the Company, nor shall it interfere in any way with the Participant's right or the Company's right to terminate such employment at any time, with or without Cause. Cirrus Logic Inc. Executive Incentive Plan April 1, 2001 9. Amendment and Termination. ------------------------- The Committee shall have the power to amend, suspend or terminate the EIP at any time, provided that no such amendment or termination shall adversely impair a Participant's rights with respect to the any Plan Cycles that have already commenced. 10. Governing Law. ------------- The Program shall be governed by the internal substantive laws, and not the choice of law rules, of the State of Texas. 11. No Right of Assignment. ---------------------- No Participant shall have any right to assign, alienate, or otherwise transfer his or her rights, if any, under the EIP. Any purported assignment, alienation or transfer by a Participant of his or her rights under the EIP shall be null and void ab initio and of no force or effect. EX-10.16 5 dex1016.txt AMENDMENT NO. 1 TO LEASE AGREEMENT EXHIBIT 10.16 ________________ AMENDMENT NO. 1 TO LEASE AGREEMENT BY AND BETWEEN DESTA FIVE PARTNERSHIP, LTD. AS LANDLORD, AND CIRRUS LOGIC, INC. AS TENANT ________________ FIRST AMENDMENT TO LEASE AGREEMENT This is a First Amendment to the Lease Agreement by and between Desta Five Partnership, Ltd., as Landlord, and Cirrus Logic, Inc., as Tenant, effective November 10, 2000 for space in the Terrace V Building (the "Lease"). Since the execution of the Lease, Landlord and Tenant have agreed to make certain amendments to the Lease as follows: 1. Base Building Design Criteria Additions. Tenant has requested certain --------------------------------------- items be included in the Base Building Plans which were not included in the Base Building Design Criteria set forth on Exhibit C. Landlord has agreed to --------- include the items (the "Base Building Design Criteria Additions") which are set forth on Exhibit C-1 in the construction of the Base Building. Landlord and ----------- Tenant have agreed that the additional costs to Landlord for the Base Building Design Criteria Additions is $392,543. Landlord and Tenant have agreed the $392,543 shall be paid for out of the Allowance as defined in the Tenant's Work Letter attached as Exhibit M to the Lease. --------- 2. Construction Allowance. Landlord and Tenant agree to amend Exhibit M ---------------------- --------- Tenant's Work Letter by deleting the first sentence of Section 3.6 and substituting the following in lieu thereof: "Landlord will provide Tenant a construction allowance ("Allowance"): (a) first, to pay for the cost of preparing the Space Plans and the Working Drawings for the Tenant Finish Work, along with all architectural and engineering costs incurred in connection with the Tenant 1 Finish Work; (b) second to pay for the Base Building Design Criteria Additions; (c) third, to pay for the cost of constructing the Tenant Finish Work in accordance with the Working Drawings; (d) fourth, to pay costs for the purchase and installation of modular furniture, signage, phone and computer cabling and; (e) fifth, to pay moving costs of up to $1.50 per square foot of Rentable Area in the Leased Premises." 3. Ratification of Lease. Excepted as amended herein, the Lease is ratified --------------------- and confirmed by Landlord and Tenant. LANDLORD: TENANT: DESTA FIVE PARTNERSHIP, LTD. CIRRUS LOGIC, INC. BY: Desta Five Development Corp., By: /s/ Craig Ensley ------------------ its general partner Name: CRAIG ENSLEY ---------------- Title: VP, MARKETING --------------- By: /s/ L. Paul Latham ------------------ L. Paul Latham, President 2 EXHIBIT C-1 BASE BUILDING DESIGN CRITERIA ADDITIONS - ---------------------------------------------------------------------------- DESCRIPTION COST W/FEE - ---------------------------------------------------------------------------- Data Center and Associated Conduit $ 66,622 - ---------------------------------------------------------------------------- Duplicate Electrical Service $ 0.00 - ---------------------------------------------------------------------------- Dropped Slab Area $ 10,034 - ---------------------------------------------------------------------------- Piggy Back Generator $ 61,242 - ---------------------------------------------------------------------------- Patio Structures and Finishes $160,482 - ---------------------------------------------------------------------------- Garage Elevator Vestibule $ 18,763 - ---------------------------------------------------------------------------- Grease Trap and all Associated Piping $ 15,457 - ---------------------------------------------------------------------------- Concrete Encased Conduit $ 8,244 - ---------------------------------------------------------------------------- Enhancement of Slab Strength $ 51,700 - ---------------------------------------------------------------------------- TOTAL COST $392,543 3 EX-21.1 6 dex211.txt LIST OF REGISTRANT'S SUBSIDIARIES Exhibit 21.1 LIST OF REGISTRANT'S SUBSIDIARIES
ENTITY STATE/COUNTRY OF INCORPORATION ------ ------------------------------ Cirrus Logic International Ltd........ Bermuda Cirrus International Holdings, Inc.... Delaware Cirrus Logic KK....................... Japan Cirrus Logic GmbH..................... Germany Cirrus Logic Korea Co. Ltd............ Korea Cirrus Logic (UK) Ltd................. United Kingdom Cirrus Logic Software India, Pvt. Ltd. India eMicro Corporation.................... Delaware Crystal Semiconductor Corporation..... Delaware LuxSonor Semiconductors, Inc.......... California Pacific Communication Sciences, Inc... Delaware ShareWave, Inc........................ Delaware Stream Machine Company................ California
EX-23.1 7 dex231.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-31697, 33-37409, 33-43914, 33-47453, 33-53990, 33-60464, 33-71862, 33-83148, 33-65495, 333-16417, 333-42693, 333-72573, 333-88347, 333- 88345, 333-89243, 333-48490, 333-63674, 333-67322, 333-71046, 333-71366, and 333-74804) pertaining to the following: the Cirrus Logic, Inc. Amended 1987 Stock Option Plan; the Cirrus Logic, Inc. Second Amended and Restated 1989 Employee Stock Purchase Plan; the Cirrus Logic, Inc. Amended 1990 Directors' Stock Option Plan; the DST Stock Option Plan; the Cirrus Logic, Inc. Amended 1991 Non-qualified Stock Option Plan; the Cirrus Logic, Inc. Amended 1996 Stock Plan; the Crystal Semiconductor Corporation 1987 Incentive Stock Option Plan; the Acumos Incorporated 1989 Stock Option Plan; the Pacific Communications Sciences, Inc. 1987 Stock Option Plan; the PicoPower Technology Inc. Amended 1992 Stock Option Plan; AudioLogic, Inc. 1992 Stock Option Plan; the Peak Audio, Inc. 2001 Stock Plan; the ShareWave, Inc. 1996 Flexible Stock Incentive Plan; the LuxSonor Semiconductors, Inc. 1995 Stock Option Plan; and the Stream Machine Company 1996 Stock Option Plan, 2001 Stock Plan, and Nonstatutory Stock Option Grants; and in the Registration Statements (Form S-3 No. 333-32964 and 333-86561) of Cirrus Logic, Inc. and in the related Prospectuses of our report dated April 26, 2002, with respect to the consolidated financial statements of Cirrus Logic, Inc. included in this Annual Report (Form 10-K) for the year ended March 30, 2002. /s/ Ernst & Young LLP Austin, Texas June 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----