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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 29, 1997 or
[ ] 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 1-10079
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CYPRESS SEMICONDUCTOR CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2885898
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(State or other jurisdiction (I.R.S.employer
of incorporation or identification No.)
organization)
3901 North First Street, San Jose, California 95134-1599
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(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-2600
---------------
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since
last report)
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 at least the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
September 29, 1997 (all one class): 90,921,000
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CYPRESS SEMICONDUCTOR CORPORATION
FORM 10-Q
Quarter Ended September 29, 1997
Index
Part I - Financial Information
- --------------------------------
Item 1. Condensed Consolidated Financial Statements Pages 3 - 11
Item 2. Management's Discussion and Analysis Pages 12 - 20
Part II - Other Information
- --------------------------------
Item 1. Legal Proceedings Page 21
Item 6. Exhibits and Reports on Form 8-K Pages 21 - 23
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Part 1 - Item 1:
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
<CAPTION>
Sep. 29, Dec. 30,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,110 $ 20,119
Short-term investments 290,287 73,667
---------- ----------
Total cash, cash equivalents and
short-term investments 302,397 93,786
Accounts receivable, net of allowances of
$4,677 at September 29, 1997 and $3,887 at
December 30, 1996 77,027 71,440
Inventories 70,671 53,107
Other current assets 46,437 63,079
---------- ----------
Total current assets 496,532 281,412
Property, plant and equipment (net) 442,210 437,566
Other assets 74,259 75,069
---------- ----------
Total assets $1,013,001 $ 794,047
========== ==========
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CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except per share data)
(Unaudited)
Sep. 29, Dec. 30,
1997 1996
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 62,727 $ 72,309
Accrued liabilities 20,489 19,195
Line of credit 49,000 49,000
Deferred income on sales to distributors 15,347 14,902
Income taxes payable 20,241 --
---------- ----------
Total current liabilities 167,804 155,406
Convertible subordinated notes (Note 4) 175,000 98,241
Deferred income taxes 24,224 21,288
Other long-term liabilities, including minority
interest 8,728 8,366
---------- ----------
Total liabilities 375,756 283,301
---------- ----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; none issued and
outstanding -- --
Common stock, $.01 par value, 250,000,000
shares authorized; 101,181,000 and
91,358,000 issued; 90,921,000 and
81,098,000 outstanding 1,012 914
Additional paid-in capital 419,271 311,184
Retained earnings 333,805 315,491
---------- ----------
754,088 627,589
Less shares of common stock held in
treasury, at cost: 10,260,000 at
September 29, 1997 and December 30, 1996 (116,843) (116,843)
---------- ----------
Total stockholders' equity 637,245 510,746
---------- ----------
Total liabilities and stockholders'
equity $1,013,001 $ 794,047
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sep. 29, Sep. 30, Sep. 29, Sep. 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 146,081 $ 109,647 $ 410,222 $ 415,282
---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues 93,345 81,075 262,381 229,950
Research and development 24,560 19,826 70,009 63,231
Selling, general and
administrative 18,977 14,998 55,676 48,640
Restructuring and other
non-recurring (benefits) -- (7,018) -- (7,018)
---------- ---------- ---------- ----------
Total operating costs
and expenses 136,882 108,881 388,066 334,803
---------- ---------- ---------- ----------
Operating income 9,199 766 22,156 80,479
Interest expense (948) (1,617) (4,043) (4,545)
Interest and other income 2,756 1,769 9,821 5,514
---------- ---------- ---------- ----------
Income before income taxes 11,007 918 27,934 81,448
Provision for income taxes (3,797) (335) (9,623) (29,724)
---------- ---------- ---------- ----------
Net income $ 7,210 $ 583 $ 18,311 $ 51,724
========== ========== ========== ==========
Net income per share:
Primary $ 0.08 $ 0.01 $ 0.20 $ 0.62
Fully diluted $ 0.08 $ 0.01 $ 0.20 $ 0.60
Weighted average common and
common equivalent shares
outstanding:
Primary 96,020 83,028 92,404 83,244
Fully diluted 96,020 83,028 92,404 91,211
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
----------------------
Sep. 29, Sep. 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,311 $ 51,724
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 82,557 70,349
Provision for restructuring and other
non-recurring benefit -- (7,018)
Non-cash interest and amortization of debt
issuance costs 872 2,063
Changes in operating assets and liabilities:
Receivables 886 28,048
Inventories (17,564) (14,752)
Other assets 10,889 (4,107)
Accounts payable and accrued liabilities (8,432) (14,367)
Deferred income 445 1,947
Income taxes payable and deferred income taxes 23,177 (13,346)
---------- ----------
Net cash generated by operations 111,141 100,541
---------- ----------
Cash flows from investing activities:
Decrease (Increase) in short-term investments (net) (216,620) 56,775
Sale of capital equipment to Fleet Capital Leasing 25,764 --
Acquisition of property, plant and equipment (net) (110,751) (175,748)
---------- ----------
Net cash used for investing activities (301,607) (118,973)
---------- ----------
Cash flows from financing activities:
Issuance of convertible subordinated notes, net
of issuance costs 170,187 --
Repurchase of common stock -- (32,878)
Borrowing from line of credit -- 49,000
Redemption of convertible debt (14,331) --
Issuance of common stock 25,082 11,285
Restricted investments related to building lease
agreements -- (22,761)
Other long-term liabilities, including minority
interest 1,519 4,500
---------- ----------
Net cash generated by financing activities 182,457 9,146
---------- ----------
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CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
----------------------
Sep. 29, Sep. 30,
1997 1996
---------- ----------
<S> <C> <C>
Net decrease in cash and cash equivalents (8,009) (9,286)
Cash and cash equivalents, beginning of year 20,119 9,487
---------- ----------
Cash and cash equivalents, end of quarter $ 12,110 $ 201
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CYPRESS SEMICONDUCTOR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Interim Statements
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting solely of
normal recurring adjustments) necessary to present fairly the financial
information included therein. While the Company believes that the disclosures
are adequate to make the information not misleading, this financial data should
be read in conjunction with the audited financial statements and notes thereto
for the year ended December 30, 1996 included in the Company's 1996 Annual
Report on Form 10-K.
For interim financial reporting purposes, the Company reports on a 13-week
quarter. The results of operations for the three and nine month periods ended
September 29, 1997 are not necessarily indicative of the results to be expected
for the full year.
2. Balance Sheet Components
(In thousands)
September 29, December 30,
1997 1996
------------- -------------
Inventories:
Raw materials $ 16,673 $ 12,214
Work in process 29,912 27,765
Finished goods 24,086 13,128
------------- -------------
$ 70,671 $ 53,107
============= =============
3. Net Income Per Share
Net income per share is computed using the weighted average number of shares of
outstanding common stock and common equivalent shares, when dilutive. Common
equivalent shares include shares issuable under the Company's stock option
plans as determined by the treasury stock method. Fully diluted earnings per
share assumes full conversion of the convertible subordinated notes into common
shares and the elimination of the related interest requirements (net of income
taxes). In the first quarter of 1997, the Company's 3.15% convertible
subordinated notes due 2001, were redeemed/converted as described in note 4.
In the third quarter of 1997, the Company completed a $175.0 million private
placement of 5-year convertible subordinated notes (See Note 4). The effect
of assuming the conversion of the notes and elimination of related interest
while the notes were outstanding was anti-dilutive to fully diluted earnings
per share for the three and nine month periods ended September 29, 1997 and the
three month period ended September 30, 1996, as a result, only primary earnings
per share are presented.
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4. Convertible Subordinated Notes
In February 1997, the Company called for redemption of all of the 3.15%
Convertible Subordinated Notes due 2001. The redemption was effective
March 26, 1997. Approximately $110.0 million aggregate principal amount at
maturity of the notes was outstanding at the time the notes were called for
redemption with an aggregate redemption price of approximately $99.0 million.
Prior to 5:00 P.M. EST, on March 25, 1997, holders had the option to convert
their notes into shares of the Company's common stock at a conversion rate of
72.1746 shares of stock per $1,000 principal amount at maturity of the notes.
Alternatively, holders could have redeemed their notes at a total redemption
price of $900.25 per $1,000 amount at maturity of the notes. The redemption
price consisted of:(a) an issue price of $839.03, plus (b) $60.26 of accrued
original issued discount, plus, (c) accrued interest of $0.96, per $1,000
principal amount at maturity of the notes. Any note not converted on or before
5:00 P.M. EST, March 25, 1997 was automatically redeemed on March 26, 1997. At
the time of conversion, approximately 85% of the holders elected to convert
their notes into the Company's common stock, increasing the amount of common
stock outstanding by 6,789,013 shares. As a result of holders electing the
cash settlement, the Company paid $14.3 million.
On September 24, 1997, the Company completed a $175.0 million private placement
of 5-year convertible subordinated notes. The notes are due in the year 2002,
with a coupon rate of 6.00% and an initial conversion premium of 48.2%. The
notes are convertible into approximately 7,408,000 shares of common stock and
are callable by the Company three years after the date of issuance. Net
proceeds were $170.2 million, after issuance costs of $4.8 million.
5. QuickLogic
On March 29, 1997, the Company signed a definitive agreement with QuickLogic
Corporation ("QuickLogic") involving termination of an existing joint
development, licensing and foundry agreement for antifuse Field Programmable
Gate Array ("FPGA") products and the execution of a new foundry agreement.
Under the new agreement, the Company will cease to develop, market and sell
antifuse-based FPGA products. In return, the Company's equity position in the
privately-held QuickLogic increased to greater than 20%. The Company also
entered into a five-year wafer-supply agreement to provide FPGA products to
QuickLogic. Revenues and net income contributed by the FPGA product line
during fiscal year 1996 and the first nine months of 1997 were not significant.
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6. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("FAS 128"), "Earnings Per Share"
("EPS"). Under FAS 128, the Company will be required to disclose basic EPS
(which excludes the effects of stocks options) and dilutive EPS for all periods
for which an income statement is presented. Such disclosure will replace
disclosure currently being made for primary EPS and fully-diluted EPS. FAS 128
requires adoption for fiscal periods ending after December 15, 1997, including
interim periods. Pro forma disclosure of basic EPS and dilutive EPS for the
current reporting and comparable periods in the prior year is as follows:
Three months ended Nine months ended
-------------------------- --------------------------
Sep. 29, Sep. 30, Sep. 29, Sep. 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Earnings Per Share:
Basic $ 0.08 $ 0.01 $ 0.21 $ 0.65
Dilutive $ 0.08 $ 0.01 $ 0.20 $ 0.60
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive
Income". FAS 130 establishes standards for the reporting of comprehensive
income and its components in a full set of general-purpose financial statements
for periods beginning after December 15, 1997. Comprehensive income as defined
includes all changes in equity (net assets) during the period from non-owner
sources. Reclassification of financial statements for earlier periods for
comparative purposes is required. The Company will adopt FAS 130 in its 1998
annual report.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("FAS 131"), "Disclosure About Segments
of An Enterprise and Related Information". FAS 131 revises information
regarding the reporting of certain operating segments for periods beginning
after December 15, 1997. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
will adopt FAS 131 in its 1998 annual report.
7. Impact of Litigation
The semiconductor industry has experienced a substantial amount of litigation
regarding patent and other intellectual property rights. The Company is
currently and may in the future be involved in litigation with respect to
alleged infringement by the Company of another party's patents, or may in the
future be involved in litigation to enforce its patents or other intellectual
property rights, to protect its trade secrets and know-how, to determine the
validity or scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation has in the past and
could in the future result in substantial costs and diversion of management
resources and payment of substantial damages and/or royalties or prohibitions
against utilization of essential technologies, and could have a material
adverse effect on the Company's business, financial condition and results of
operations. From time to time the Company has received, and may receive in the
future, communications alleging that its products or its processes may infringe
on product or process technology rights held by others.
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In June 1997, the Company commenced a declaratory judgement action in the
United States District Court for the District of Nevada against the Li Second
Family Trust (the "Trust") asking for declaratory relief to the effect that a
U.S. patent relating to a portion of the process for manufacturing
semiconductors is unenforceable, invalid and not infringed by the Company. The
Trust has counterclaimed for patent infringement on the same patent alleging
such patent covers oxide-isolated integrated circuits. In correspondence,
attorneys for the Trust have argued that such patent "is applicable to NMOS,
CMOS, Bipolar, BiCMOS and other technologies". The Company believes it has
meritorious defenses to the counterclaim and intends to defend itself
vigorously. However, should the outcome of this action be unfavorable, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
In May 1995, in a case before the U.S. District Court in Dallas, Texas, a jury
delivered a verdict of $17.8 million against the Company in a patent
infringement lawsuit filed by Texas Instruments ("TI"). In August 1995, the
judge reversed the decision, stating TI failed to prove that the Company
infringed on TI's patents covering the plastic encapsulation process used to
package semiconductor devices. In July 1996, the Federal Circuit Court of
Appeals affirmed the decision of the trial court that the Company did not
infringe on either of the patents in suit. In September 1996, the Court denied
TI's motion for reconsideration, and as a result of that ruling, the Company
reversed the $17.8 million reserve recorded in March 1995 with respect to this
lawsuit. In December 1996, TI filed a petition of certiorari with the United
States Supreme Court. In June 1997, the United States Supreme Court denied
TI's petition of Certiorari. Accordingly, adjudication of the case is now
final.
In June 1995, Advanced Micro Devices ("AMD") charged the Company with patent
infringement and filed suit in the U.S. District Court in Delaware. The suit
claimed that the Company infringed on several of AMD's Programmable Logic
patents. In November 1995, the Company filed a patent infringement action
against AMD in the U.S. District Court for the District of Minnesota. The
Company alleged infringement by AMD of a number of the Company's patents in
this action. In April 1996, the Company and AMD signed a cross-licensing
agreement terminating the patent litigation between the two companies. This
agreement allows each company to continue to produce its own products with no
threat of future patent lawsuits by the other company.
In June 1995, the U.S. District Court of Northern California granted summary
judgement in favor of the Company and the other defendants in a class-action
lawsuit filed against the Company and certain of its officers. The suit filed
alleged violations of the Securities Exchange Act of 1934 and certain
provisions of state law regarding disclosure of short-term business prospects.
The plaintiffs filed an appeal. In April 1997, the U.S. Court of Appeals for
the Ninth Circuit affirmed the ruling of the U.S. District Court of Northern
California. The plaintiffs had until July 28, 1997 to request a rehearing by
the Court of Appeals, or seek review by the United States Supreme Court. No
such request was made. Accordingly, adjudication of the case is now final.
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6. Subsequent Events
In October 1997, the Board of Directors approved a stock repurchase program
whereby up to 2 million shares of the Company's common stock may be purchased
in the open market from time-to-time. As of the date of this filing,
approximately 314,000 shares have been repurchased.
In October 1997, in conjunction with its authorized stock repurchase program,
the Company sold put warrants through private placements. The Company has a
maximum potential obligation to buy 2.0 million shares of its common stock at
an aggregate price of $22.0 million. The put warrants have various expiration
periods from January 1998 through April 1998. The Company has the right to
settle the put warrants with cash or settle the difference between the
exercise price and the fair market value at the exercise date with stock or
cash.
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Part I - Item II:
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ from
those projected in the forward-looking statements as a result of the factors
set forth in "Factors Affecting Future Results" and elsewhere in this report,
as well as factors set forth in the Company's Annual Report on Form 10-K.
RESULTS OF OPERATIONS:
- --------------------------
Revenues for the quarter ended September 29, 1997 increased 33.2% over the
comparable period a year ago, increasing to $146.1 million compared to the
$109.6 million, however, revenues for the nine month period ended September 29,
1997 decreased 1.2% dropping to $410.2 million in 1997 compared to $415.3
million in the comparable period in 1996. Revenues for the nine month period
ended September 29, 1997 includes $4.5 million in non-recurring engineering
revenue related to the sale of the FPGA product line to Quicklogic in the first
quarter of 1997. Revenues in the Company's highest revenue producing product
line, the Memory Products Division ("MPD"), increased 32.2% comparing the third
quarter of 1997 to the comparable quarter in 1996, despite the continuing
decline in the average selling price ("ASP") of Static Random Access Memory
("SRAM") products. Unit sales volume for SRAM products in the third quarter of
1997 increased 84.0% compared to the third quarter of 1996 which more than
offset the effects of lower ASPs. The decline in ASPs was experienced in a
number of SRAM products, particularly in the 256K and 1 Meg density products.
The Company expects SRAM prices to continue to decline in the future, but at a
reduced rate from that experienced in 1996.
Revenues in the Datacommunication Division ("DCD") increased 40.6% in the third
quarter of 1997 compared to the comparable quarter in 1996. Although DCD's
ASPs in the third quarter of 1997 decreased 4.4% in comparison to the same
quarter last year, unit sales volume of DCD products grew 23.9%. A majority of
the revenue growth attributable to increased unit sales volume was concentrated
in the Channel line of products, where revenues increased 78.7% in the third
quarter of 1997 compared to the third quarter in 1996. Increased sales volume
for the product line's Programmable Skew Clock Buffers and Point-to-point
Communication Devices more than offset declining ASPs. DCD also experienced
revenue growth in its Specialty Memory line of products recording an increase
of 21.0% comparing the third quarter of 1997 to the same quarter in 1996 as
unit sales volume for the sale of First-in, First-out ("FIFO") and Dual Port
products increased significantly.
Revenues in the Programmable Products Division ("PPD") remained relatively
constant comparing the third quarter of 1997 to the same quarter in 1996 in
part due to revenues in the third quarter of 1996 being inclusive of sales
generated from the FPGA product family that was sold to Quicklogic Corporation
in the first quarter of 1997. Revenue growth in the Division's Programmable
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<PAGE>14
Logic Devices ("PLD") line of products offset declining revenues from the sale
of Non-volatile Memory products. Revenues increased in a majority of PLD's
product lines led by its Complex Programmable Logic Device ("CPLD") line of
products for which revenues increased by 45.4% comparing the third quarter of
1997 to the third quarter in 1996. Revenues generated from the sale of CPLD
products now represent over 50% of PLD's revenues. The revenue growth in Small
Programmable Logic Devices ("SPLD") resulted from a 71.2% increase in unit
sales volume which more than offset a 32.1% decreased in ASPs. Revenues for
Non-Volatile Memory products continue to decline as a result of a significant
drop in ASPs, particularly for Erasable Programmable Read Only Memory ("EPROM")
products, and management's decision to de-emphasize those products. Revenues
for the sale of Non-Volatile Memory products in third quarter of 1997 decreased
14.1% compared to the comparable quarter in 1996.
Revenues for the Company's Computer Products Division ("CPD") increased
significantly, growing by 55.1% comparing the third quarter of 1997 to the
comparable quarter a year ago. Revenue growth was experienced across all of
CPD's product lines, particularly in the Division's Clock line of products.
Revenues for the sale of Clock products increased 49.1% in the third quarter of
1997 compared to the third quarter of 1996, primarily as a result of increased
revenues from the sale of its 227X family of Clocks which service Intel
Corporation. The Company has become one of the world's leading clock
suppliers.
As noted above, the Company continued to experience reductions in ASPs,
particularly in its SRAM products. The decrease in ASPs continues to be caused
by overall market demand softness, mainly attributable to over-supply in the
industry and the resulting inventory corrections by end user customers,
particularly in the telecommunication and datacommunication markets which the
Company principally serves. Even though ASPs in several markets served by the
Company continued to decline in the first nine months of 1997, the rate of
decline has in most part been less than the rate of decline experienced
throughout 1996. The Company expects that ASPs will continue to decline
throughout the remainder of 1997 and into 1998, but at a reduced rate from that
experienced in 1996.
The Company's cost of revenues as a percentage of revenues for the three month
period ended September 29, 1997 decreased to 63.9% compared to the 73.9%
recorded in the comparable period in 1996. Cost of revenues as a percentage of
revenues for the nine month period ended September 29, 1997 increased to 64.0%
compared to the 55.4% recorded in the comparable period in 1997. During the
third quarter of 1997, cost of revenues benefited from certain changes in
accounting estimates, primarily related to excess inventory reserves no longer
required. In the third quarter of 1996, the Company recorded an additional
$16.0 million inventory reserve for inventory built in excess of near-term
demand, which increased cost of revenues. Without this increase in inventory
reserves, cost of revenues as a percentage of revenues for the three month and
nine month periods ended September 30, 1996 would have been 59.3% and 51.5%,
respectively. Although ASPs continue to decline, particularly in the SRAM
market, revenues increased comparing the third quarter of 1997 to the third
quarter of 1996 due to a significant increase in unit sales volume. As a result
of lower ASPs, cost of revenues as a percentage of revenues continued to grow.
Should ASPs in the future continue to erode at a rate greater than anticipated,
this could have a material adverse effect on the Company's cost of revenues as a
percentage of revenues. The Company continues to work on methods of reducing
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manufacturing costs in order to mitigate the effects of declining ASPs. The
Company began production in its new Philippines assembly and test plant in the
fourth quarter of 1996. Although under-utilization of the facility caused
operations from the Philippines plant to adversely impact cost of revenues
through the first half of 1997, in the third quarter of 1997, the Company began
realizing cost savings from the Philippines plant due to an increase in plant
utilization. In the third quarter of 1997, the Philippines plant represented
approximately 49% of the Company's backend manufacturing production compared to
approximately 39% in the prior quarter. The Company plans to continue to ramp
up production at the Philippines plant throughout 1997 in order to lower its
fixed cost per unit and take further advantage of potential cost savings.
During the second quarter of 1997, Alphatec Electronics Pcl ("Alphatec"), one
of the Company's primary backend manufacturing subcontract vendors, missed its
deadline to repay $43.7 million of third party international bonds. Although
Alphatec has experienced recent financial difficulties, the assembly and test
operations, with which the Company currently does business, continue to operate
under normal operating conditions. At September 29. 1997, the Company has
consigned approximately $15.3 million, net book value, of capital assets to
Alphatec and Alphatec's production represents approximately 24% of the
Company's backend manufacturing capacity (down from approximately 25% to 30% in
the second quarter of 1997). The Company is evaluating alternative options and
has commenced qualification of products and processes at other subcontract
vendors. However, should Alphatec cease operations or be forced to reduce its
manufacturing capacity, the Company's ability to manufacture a material portion
of its products in the future and ability to recover its assets could be
impaired. Cypress management believes that Alphatec's financial difficulties
have not negatively impacted Alphatec's ability to manufacture the Company's
products to date.
Research and development ("R & D") expenditures were 16.8% of revenues in the
three month period ended September 29, 1997, versus 18.1% in the comparable
period in 1996. The decrease in R & D expenses as a percent of revenues was
primarily a result of the relatively higher rate of increase in revenues.
Although actual R & D spending increased 23.9% comparing the third quarter of
1997 to the comparable quarter in 1996, the growth in R & D spending was
significantly less than the 33.2% growth in revenues comparing the same time
periods. R & D expenditures for the nine month period ended September 29, 1997
were 17.1% of revenues compared to 15.2% in the comparable period in 1996.
Although revenues for the nine month period ended September 29, 1997 were
comparable to the revenues recorded over the nine month period ended September
30, 1996, actual R & D spending increased 10.7% comparing the same time
periods. The Company expects to continue to allocate resources to R & D in an
effort to accelerate the development of new products and the development of its
0.35 and 0.25 micron process technologies. With the Company's commitment to
increase design capabilities in its design centers and the transformation of
the San Jose wafer manufacturing facility into a research and development wafer
facility, actual R & D spending is projected to grow in the future as the
Company explores new markets and improves its design and process technologies
in an effort to increase revenue and lower costs.
Selling, general and administrative ("SG&A") expenses for the quarter ended
September 29, 1997 decreased to 13.0% of revenues compared to 13.7% in the
comparable period a year ago. Although actual SG&A expenses increased 26.5%
comparing the two time periods, the increase was less than the increase in
15
<PAGE>16
revenues. SG&A expenses for the nine month period ended September 29, 1997
were 13.6% of revenues compared to 11.7% in the comparable period in 1996.
Actual sales and marketing expenditures increased 14.5% comparing the first
nine months of 1997 to the same period in 1996, primarily a result of increased
headcount, particularly additional Field Application Engineers, as the Company
continues its efforts to expand its market share in existing markets and
explore other opportunities in new markets. Absolute spending for general and
administrative costs grew 14.2% comparing the same time periods as
a result of increased headcount and the implementation of systems enhancements.
During the quarter, the Company implemented measures designed to hold constant
or reduce general and administrative expenditures as a percentage of revenues,
and as a result, general and administrative expenses decreased 9.5% from the
second quarter of 1997. The Company plans to continue its efforts to control
general and administrative expenditures in the future.
In the third quarter of 1996, the Company recorded a pre-tax restructuring and
other non-recurring benefit of $7.0 million, primarily due to the reversal of
the $17.8 million reserve related to the Texas Instruments patent infringement
lawsuit. In July 1996, the Federal Circuit Court of Appeals affirmed the
decision of the trial court that the Company did not infringe on patents filed
by Texas Instruments. As a result of this decision, the Company reversed the
$17.8 million reserve established in March 1995 (See Note 7) in the third
quarter of 1996. Also in the third quarter of 1996, the Company announced a
restructuring of its San Jose wafer fabrication facility. The Company recorded
a pre-tax charge of $9.1 million principally related to the write-down of
certain excess equipment and the transfer of certain other equipment to its
Texas and Minnesota production wafer fabrication plants. The Company also
recorded a pre-tax credit of $3.3 million related to the reimbursement of
defense costs incurred in conjunction with the securities class-action lawsuit.
This credit was approximately offset by other non-recurring charges related to
agreements with certain companies regarding cross-licensing and other matters.
There were no restructuring or other non-recurring costs recorded in the third
quarter of 1997.
Operating income for the quarter and nine month periods ended September 29,
1997 was $9.2 million and $22.2 million, respectively, or 6.3% and 5.4% of
revenues, respectively. This was a increase from the three month period ended
September 30, 1996, in which operating income was $0.8 million, or 0.01% of
revenues, but a decrease from the nine month period ended September 30, 1996,
in which operating income was $80.5 million, or 19.4% of revenues. The
increase in operating income comparing the third quarter of 1997 to the
comparable quarter in 1996 was primarily a result of the 33.2% increase in
revenues. The decrease in operating income for the first nine months of 1997
compared to the same time period in 1996 was primarily a result of lower gross
margins, primarily due to the significant decline in the Company's ASPs
throughout 1997. The Company is continuing its efforts to develop new products
that normally command higher margins and to reduce manufacturing costs through
the development of new manufacturing processes and the redesign of existing
products in order to improve gross margin and operating income.
Net interest and other income for the quarter ended September 29, 1997 was $1.8
million compared to $0.2 million in the comparable period in 1996. The
increase was primarily a result of higher interest income resulting from a
higher cash balance and a greater return on investments. Interest expense
recorded in the third quarter of 1997 was also lower than that recorded in the
16
<PAGE>17
same period last year. Interest expense related to the 1994 convertible
subordinated debenture was recorded in the third quarter of 1996, however, due
to the conversion of the bond in March 1997, no interest expense related to the
1994 bond was recorded in the third quarter of 1997. Net interest and other
income for the nine month period ended September 29, 1997 was $5.8 million
compared to the $1.0 million recorded in the comparable period in 1996. A
majority of the increase was related to the $3.8 million gain recorded from the
sale of its remaining investment in Vitesse Corporation during the first
quarter of 1997.
FACTORS AFFECTING FUTURE RESULTS:
- -----------------------------------
The Company believes that, notwithstanding the various objectives, projections,
estimates, and other forward-looking statements set forth in this quarterly
report filed on Form 10-Q, its future operating results will continue to be
subject to variations based on a wide variety of factors, which could lead the
Company's operating results to be materially different from those projected in
such forward-looking statements. Such factors include, but are not limited to:
demand for the Company's products; changes in product mix; competitive pricing
pressures, particularly in the static RAM market; fluctuation in manufacturing
yields; the cost and availability of raw materials; unanticipated delays or
problems in the introduction or performance of the Company's new products; the
Company's ability to introduce new products that meet customer requirements;
market acceptance of the Company's products; product introductions by
competitors; slower than expected growth in demand for semiconductor products;
the availability and extent of utilization of manufacturing capacity; product
obsolescence; the successful ramp up of the Company's Philippines backend
manufacturing plant; the resolution of Alphatec's financial situation; the
ability to develop and implement new technologies, including the continued
transition to the Company's new 0.5 micron process and the continued migration
to 0.35 and 0.25 micron processes; the level of expenditures for research and
development and sales, general and administrative functions of the Company;
cost associated with future litigation; and costs associated with protecting
the Company's intellectual property. Any one or more of these factors could
result in the Company failing to achieve its expectations as to future
revenues, gross profit and income from operations. Additionally, risks
inherent in the cyclical nature of both the semiconductor industry and the
markets addressed by the Company's products may cause the Company's quarterly
and annual results of operations to vary significantly. The Company is also
dependent on subcontract vendors for a portion of the assembly and test
manufacturing of its products, which presents risks, including the lack of
guaranteed production capacity, delays in delivery, susceptibility to
disruption in supply, and reduced control over product costs, adverse weather
conditions, and manufacturing yields. The Company's operating results could
also be impacted by sudden fluctuations in customer requirements, currency
exchange rate fluctuations, and other economic conditions affecting customer
demand and the cost of operations in one or more of the global markets in which
the Company does business. Typically, the Company requires new orders, in
addition to its existing backlog, to meet each quarter's revenue plan.
The Company has made substantial capital expenditures to increase its assembly
and test manufacturing capacity and its wafer fabrication capacity and
capability. Should the need for this additional capacity and capability not
17
<PAGE>18
materialize (such as insufficient loading of the Philippines backend
manufacturing plant or accelerated upgrade to 0.35 and 0.25 micron
technologies), expected cost savings will not materialize and the need to write
off capital equipment made obsolete by the technology conversion may be
required. The Company continues to evaluate its overall manufacturing capacity
and capability relative to market conditions. There can be no assurance that
market conditions will permit the Company to fully utilize this increased
capacity and capability or that the increases in fixed costs and operating
expenses related to this expansion of capacity and capability will not
materially and adversely affect the Company's business, financial condition and
results of operation.
The ASPs of the Company's products historically have decreased over the
products' lives and are expected to continue to do so. To offset such ASP
decreases, the Company relies primarily on cost reductions in the manufacturing
of such products, increased unit demand to absorb fixed costs and the
introduction of new, higher priced products which incorporate advanced
features. To the extent that such cost reductions, increased unit demand or
new product introductions do not occur in a timely manner or newly introduced
products do not gain market acceptance, the Company's business, financial
condition and results of operations could be materially and adversely affected.
The Company must order silicon and other raw materials and build inventory well
in advance of product shipments. Because the Company's markets are volatile
and subject to rapid technology and price changes, there is a risk that the
Company will forecast incorrectly and produce excess or insufficient
inventories of particular products. This inventory risk is heightened because
many of the Company's customers place orders with short lead times. These
factors increase not only the inventory risk, but also the difficulty of
forecasting quarterly operating results.
As a participant in the semiconductor industry, the Company operates in a
technologically advanced, rapidly changing and highly competitive environment.
While the Company cannot predict what effect these and other factors will have
on the Company, they could result in significant volatility in the Company's
future performance. To the extent the Company's performance may not meet
expectations published by external sources, public reaction could result in a
sudden and significantly adverse impact on the market price of the Company's
securities, particularly on a short-term basis.
The Company's headquarters and some manufacturing facilities are located near
major earthquake faults. In the event of a major earthquake, the Company could
suffer damages which could materially and adversely affect the Company's
business, financial conditions and results of operations.
Current pending material litigation and claims are described in Note 7 of the
Notes to the Condensed Consolidated Financial Statements. Although the Company
does not believe that its products and processes infringe the proprietary
rights of any third parties, there can be no assurance that infringement or
invalidity claims or actions (or claims for indemnification resulting from
infringement claims) will not be asserted against the Company or that any such
assertions (including the counterclaim by the Trust as noted in Note 7) will
not materially and adversely affect the Company's business, financial
conditions or results of operations. Irrespective of the validity or the
successful assertion of such claims or actions (including the counterclaim by
the Trust as noted in Note 7), the Company could incur significant costs with
18
<PAGE>19
respect to the defense thereof which could have a material adverse effect on
the Company's business, financial conditions or results of operations.
Moreover, although the Company might seek to obtain a license under a third
party's intellectual property rights with respect to any such claims or actions
asserted against the Company, there can be no assurance that, under such
circumstances, a license would be available under reasonable terms or at all.
LIQUIDITY AND CAPITAL RESOURCES:
- ---------------------------------
The Company's cash, cash equivalents and short-term investments totaled $302.4
million at September 29, 1997, an increase of $208.6 million compared to the
end of 1996.
On September 24, 1997, the Company completed a $175.0 million private placement
of 5-year convertible subordinated notes. The notes are due in the year 2002,
with a coupon rate of 6.00% and an initial conversion premium of 48.2%. The
notes are convertible into approximately 7,408,000 shares of common stock and
are callable by the Company three years after the date of issuance. Net
proceeds were $170.2 million, after issuance costs of $4.8 million.
In April 1997, the Company sold capital equipment located in its Minnesota
wafer fabrication facility to Fleet Capital Leasing ("Fleet") in a sale-
leaseback agreement. The Company received $25.8 million from Fleet in exchange
for the capital equipment and as a result of the transaction, recorded an
insignificant gain that will be amortized over the life of the lease.
In February 1997, the Company called for redemption of all of the 3.15%
Convertible Subordinated Notes that were due in 2001. The redemption was
effective March 26, 1997 with $110 million aggregate principle amount
outstanding at the time the notes were called and an aggregate redemption price
of approximately $99 million. Prior to 5:00 P.M. EST, on March 25, 1997,
holders had the option to convert their notes into shares of Cypress common
stock at a conversion rate of 72.1746 shares of stock per $1,000 amount at
maturity of the notes. Alternatively, holders had the right to redeem their
notes at a total redemption price of $900.25 per $1,000 amount at maturity of
the notes. Approximately 15% of the holders elected the cash settlement, and
as a result, the Company paid $14.3 million in March 1997. In July 1996, the
Company established a three-year $100 million unsecured revolving credit
facility with certain banks. In 1996, the Company borrowed $49 million against
the line of credit. During the first quarter of 1997, the Company borrowed the
remaining $51 million from its line of credit as a result of the Company's
decision in February 1997 to call for redemption of its convertible
subordinated notes. A significant amount of liquidity was required to
facilitate the potential cash redemption of the outstanding notes. In April
1997, the Company paid back the $51 million it borrowed in the first quarter.
During the first nine months of 1997, the Company purchased $112.2 million in
capital equipment compared to $175.7 million in the comparable period in 1996.
The Company continued to purchase equipment for its domestic wafer fabrication
plants, its test and assembly facility in the Philippines, its backend
manufacturing subcontractors, and its technology group in San Jose. Equipment
purchased for the Company's wafer fabs is expected to improve wafer
manufacturing capacity and capabilities as the Company implements new
technologies, including its 0.5, 0.35 and 0.25 micron processes, while
19
<PAGE>20
equipment purchased for the Philippines and it subcontractors will be used to
increase manufacturing capacity and tool certain packaging capabilities.
Capital equipment purchases for the technology group is expected to enhance the
Company's research and development capabilities. Capital purchases for the
remainder of 1997 are expected to be approximately $50.0 million as the Company
continues to buy equipment to expand manufacturing capabilities and capacity
and to enhance its research and development capabilities.
In October 1997, the Board of Directors approved a stock repurchase program
whereby up to 2 million shares of the Company's common stock may be purchased
in the open market from time to time. As of the date of this filing,
approximately 314,000 shares have been repurchased.
Although the Company believes that existing cash together with cash from
operations, supplemented as necessary with borrowing under its revolving credit
agreement, will provide sufficient resources to meet present and future working
capital requirements and other cash needs for at least the next twelve months,
in the event that ASPs continue to decline at rates above normal industry
levels and increased demand continues to be insufficient to offset the effects
of such declines, the Company may be required to raise additional capital
through a debt or equity financing. Although additional financing may be
required, there can be no assurance that it would be available to the Company
or available at terms the Company deems satisfactory.
20
<PAGE>21
PART II - OTHER INFORMATION
ITEM 1. The information required by this item is included in Part I in Note 7
of Notes to the Condensed Consolidated Financial Statements.
ITEM 6. (a) Exhibit - 11.1 "Computation of Net Income Per Common Share and
Dilutive Common Share Equivalents"
(b) Exhibit - 27 "Financial Data Schedule"
(c) Reports on Form 8-K - None
21
<PAGE>22
<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER COMMON SHARE AND DILUTIVE
COMMON SHARE EQUIVALENTS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sep. 29, Sep. 30, Sep. 29, Sep. 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY:
- ----------------------------
Weighted average number of
common shares outstanding 89,990 80,400 88,618 80,049
Common share equivalents:
Dilutive effect of
outstanding stock options 6,030 2,628 3,786 3,195
---------- ---------- ---------- ----------
Weighted average number of
common shares and dilutive
common share equivalents
outstanding 96,020 83,028 92,404 83,244
========== ========== ========== ==========
Net income used in per share
computation $ 7,210 $ 583 $ 18,311 $ 51,724
========== ========== ========== ==========
Net income per common and
common equivalent share $ 0.08 $ 0.01 $ 0.20 $ 0.62
========== ========== ========== ==========
FULLY DILUTED:
- ----------------------------
Weighted average number of
common shares outstanding N/A N/A N/A 80,049
Common share equivalents:
Dilutive effect of
outstanding stock options N/A N/A N/A 3,222
Shares issuable upon
conversion of convertible
subordinated notes N/A N/A N/A 7,940
---------- ---------- ---------- ----------
Weighted average number of
common shares and dilutive
common share equivalents
outstanding N/A N/A N/A 91,211
========== ========== ========== ==========
22
<PAGE>23
CYPRESS SEMICONDUCTOR CORPORATION
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER COMMON SHARE AND DILUTIVE
COMMON SHARE EQUIVALENTS (Continued)
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sep. 29, Sep. 30, Sep. 29, Sep. 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income used in per share
computation $ N/A $ N/A $ N/A $ 54,489
========== ========== ========== ==========
Net income per common and
common equivalent share $ N/A $ N/A $ N/A $ 0.60
========== ========== ========== ==========
</TABLE>
23
<PAGE>24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYPRESS SEMICONDUCTOR CORPORATION
Date: November 13, 1997 /s/ T.J. Rodgers
----------------------- ---------------------------------
T.J. Rodgers
President and Chief Executive
Officer
/s/ Emmanuel Hernandez
---------------------------------
Emmanuel Hernandez
Vice President, Finance and
Administration and Chief Financial
Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER AND NINE MONTH
PERIODS ENDED SEPTEMBER 29, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-29-1997 DEC-29-1997
<PERIOD-START> JUL-01-1997 DEC-31-1996
<PERIOD-END> SEP-29-1997 SEP-29-1997
<CASH> 22,625 22,625
<SECURITIES> 279,772 279,772
<RECEIVABLES> 77,027 77,027
<ALLOWANCES> 4,677 4,677
<INVENTORY> 70,671 70,671
<CURRENT-ASSETS> 496,532 496,532
<PP&E> 442,210 442,210
<DEPRECIATION> 353,234 353,234
<TOTAL-ASSETS> 1,013,001 1,013,001
<CURRENT-LIABILITIES> 167,804 167,804
<BONDS> 175,000 175,000
<COMMON> 1,012 1,012
0 0
0 0
<OTHER-SE> 636,233 636,233
<TOTAL-LIABILITY-AND-EQUITY> 1,013,001 1,013,001
<SALES> 410,222 410,222
<TOTAL-REVENUES> 410,222 410,222
<CGS> 93,345 262,381
<TOTAL-COSTS> 93,345 262,381
<OTHER-EXPENSES> 24,560 70,009
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 948 4,034
<INCOME-PRETAX> 11,007 27,934
<INCOME-TAX> 3,797 9,623
<INCOME-CONTINUING> 7,210 18,311
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,210 18,311
<EPS-PRIMARY> 0.08 0.20
<EPS-DILUTED> 0.08 0.20
</TABLE>
