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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 June 29, 1998 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
---------------------------- ---------------------------
(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 report
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.
June 29, 1998 (all one class): 90,745,000
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CYPRESS SEMICONDUCTOR CORPORATION
FORM 10-Q
Quarter Ended June 29, 1998
Index
Part I - Financial Information
- --------------------------------
Item 1. Condensed Consolidated Financial Statements Pages 3 - 12
Item 2. Management's Discussion and Analysis Pages 13 - 19
Part II - Other Information
- --------------------------------
Item 1. Legal Proceedings Page 20
Item 4. Submission of Matters to a Vote of Security Holders Page 20
Item 6. Exhibits and Reports on Form 8-K Page 21 - 22
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per-share data)
(Unaudited)
<CAPTION>
Jun. 29, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 112,832 $ 151,725
Short-term investments 72,832 49,836
---------- ----------
Total cash, cash equivalents and
short-term investments 185,664 201,561
Accounts receivable, net of allowances of
$1,013 at June 29, 1998 and $3,524 at
December 29, 1997 53,123 67,854
Inventories 67,373 76,925
Other current assets 42,290 51,740
---------- ----------
Total current assets 348,450 398,080
Property, plant and equipment (net) 378,057 442,661
Other assets, including restricted investments of
$60,018 and $60,112 and long-term marketable
securities of $67,142 and $42,146, at
June 29, 1998 and December 29, 1997, respectively. 134,153 115,529
---------- ----------
Total assets $ 860,660 $ 956,270
========== ==========
See accompanying notes to condensed consolidated financial statements.
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CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except share and per-share data)
(Unaudited)
<CAPTION>
Jun. 29, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,760 $ 60,857
Accrued liabilities 43,230 21,472
Deferred income on sales to distributors 11,198 9,636
Income taxes payable -- 1,088
---------- ----------
Total current liabilities 102,188 93,053
Convertible subordinated notes 175,000 175,000
Deferred income taxes 36,070 36,070
Other long-term liabilities, including minority
interest 7,784 8,671
---------- ----------
Total liabilities 321,042 312,794
---------- ----------
Commitments and contingencies (Note 6)
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; 98,147,000 issued;
90,745,000 and 90,684,000 outstanding 907 1,015
Additional paid-in capital 441,312 430,682
Retained earnings 225,975 333,910
---------- ----------
668,194 765,607
Less shares of common stock held in
treasury, at cost: 7,402,000 at June 29, 1998
and 7,463,000 at December 29, 1997 (128,576) (122,131)
---------- ----------
Total stockholders' equity 539,618 643,476
---------- ----------
Total liabilities and stockholders'
equity $ 860,660 $ 956,270
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
Jun. 29, Jun. 30, Jun. 29, Jun. 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 119,675 $ 138,142 $ 236,628 $ 264,141
---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues 83,393 86,687 197,775 169,036
Research and development 24,463 24,426 48,951 45,449
Selling, general and
administrative 19,880 19,135 42,076 36,699
Restructuring costs -- -- 65,099 --
---------- ---------- ---------- ----------
Total operating costs
and expenses 127,736 130,248 353,901 251,184
---------- ---------- ---------- ----------
Operating income (loss) (8,061) 7,894 (117,273) 12,957
Interest expense (2,677) (779) (5,519) (3,095)
Interest and other income 3,275 2,238 3,377 7,064
---------- ---------- ---------- ----------
Income (loss) before income taxes (7,463) 9,353 (119,415) 16,926
(Provision) benefit for income taxes 717 (3,213) 11,480 (5,826)
---------- ---------- ---------- ----------
Net income (loss) $ (6,746) $ 6,140 $ (107,935) $ 11,100
========== ========== ========== ==========
Net income (loss) per share:
Basic $ (0.07) $ 0.07 $ (1.19) $ 0.13
Diluted $ (0.07) $ 0.07 $ (1.19) $ 0.13
Weighted average common and
common equivalent shares
outstanding:
Basic 91,036 88,768 91,052 85,303
Diluted 91,036 94,096 91,052 94,383
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
----------------------
Jun. 29, Jun. 30,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (107,935) $ 11,100
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 56,505 54,501
Restructuring charges 65,099 --
Other non-recurring costs 8,827 --
Non-cash interest and amortization of debt
issuance costs 502 953
Changes in operating assets and liabilities:
Receivables 13,962 (1,977)
Inventories 9,552 (14,402)
Other assets (15,644) 7,470
Accounts payable and accrued liabilities (11,489) (3,849)
Deferred income 1,562 573
Income taxes payable and deferred income taxes (1,088) 17,523
---------- ----------
Net cash generated by operations 19,853 71,892
---------- ----------
Cash flows from investing activities:
Increase in short-term investments (net) (22,996) (26,841)
Sale of capital equipment to Fleet Capital Leasing -- 25,222
Acquisition of property, plant and equipment (38,939) (65,471)
---------- ----------
Net cash used for investing activities (61,935) (67,090)
---------- ----------
Cash flows from financing activities:
Repurchase of common stock (6,444) --
Redemption of Convertible debt -- (14,331)
Issuance of common stock 10,521 10,491
Increase (decrease) in other long-term liabilities,
including minority interest (888) 1,544
---------- ----------
Net cash generated (used) by financing activities 3,189 (2,296)
---------- ----------
Net increase (decrease) in cash and cash equivalents (38,893) 2,506
Cash and cash equivalents, beginning of year 151,725 20,119
---------- ----------
Cash and cash equivalents, end of quarter $ 112,832 $ 22,625
========== ==========
</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, it is suggested that this financial
data be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 29, 1997 included in the
Company's 1997 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 six-month periods ended
June 29, 1998 are not necessarily indicative of the results to be expected for
the full year.
2. Inventories
Jun. 29, Dec. 29,
1998 1997
---------- ----------
Raw materials $ 9,908 $ 17,900
Work in process 32,325 35,281
Finished goods 25,140 23,744
---------- ----------
$ 67,373 $ 76,925
========== ==========
3. Earnings Per Share
The Company adopted Statement of Accounting Standard No. 128 ("FAS 128"),
Earnings Per Share ("EPS") in 1997. FAS 128 requires presentation of both
basic and diluted EPS on the income statement. Basic EPS is computed by
dividing net income available to stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) during the period.
Diluted EPS is computed using the weighted average number of common and
potential common stock equivalent shares outstanding during the period. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise of
stock options. Potential common stock equivalent shares are included in the
computation of diluted EPS, except when anti-dilutive. FAS 128 requires the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computation as follows:
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<TABLE>
<CAPTION>
(In thousands, except per-share amounts)
Three Months Ended
June 29, 1998 June 30, 1997
------------------------------------------------------------
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $ (6,746) 91,036 $ (0.07) $ 6,140 88,768 $ 0.07
========= =========
Effects of Dilutive
Securities:
Stock options -- -- -- 5,328
Convertible debentures -- -- -- --
--------- --------- --------- ---------
Diluted EPS:
Net income (loss) $ (6,746) 91,036 $ (0.07) $ 6,140 94,096 $ 0.07
========= ========= ========= ========= ========= =========
Six Months Ended
June 29, 1998 June 30, 1997
------------------------------------------------------------
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $(107,935) 91,052 $ (1.19) $ 11,100 85,303 $ 0.13
========= =========
Effects of Dilutive
Securities:
Stock options -- -- -- 5,328
Convertible debentures -- -- 966 3,752
--------- --------- --------- ---------
Diluted EPS:
Net income (loss) $(107,935) 91,052 $ (1.19) $ 12,066 94,383 $ 0.13
========= ========= ========= ========= ========= =========
</TABLE>
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Options to purchase 22,609,000 shares of common stock were outstanding at June
29, 1998, but were not included in the computation of diluted EPS as the effect
of these shares was anti-dilutive. Convertible debentures outstanding at June
29, 1998 convertible to 7,408,000 shares of common stock were also excluded
from diluted EPS as their effect was anti-dilutive.
4. Restructuring and Other Non-Recurring Costs
In March 1998, the Company recorded a $65.1 million restructuring reserve to
write-down and write-off manufacturing facilities, equipment and improvements;
operating costs attributable to the closure and consolidation of manufacturing
facilities; consolidation of test facilities; write-down of non-usable
inventory in the Company's Thai backend manufacturing facility; the severance
of manufacturing and other personnel and other costs.
The original restructuring plan included the shut down of the Company's
six-inch. 0.6 micron wafer fabrication plant, Fab III, in Bloomington,
Minnesota and movement of all production to its eight-inch, 0.35 micron fab,
Fab IV, also in Minnesota. The adjustments recorded related primarily to the
carrying value of manufacturing assets. As a result of developments in the
semiconductor industry, such as decreasing average selling prices, particularly
in its largest product line, Memory Products, the Company has accelerated the
use of more advanced manufacturing processes to produce its products. The use
of these more advanced processes indicated that the carrying value of these
selected older assets would not be recoverable. The fair value of such
manufacturing assets was based primarily upon third party estimates of fair
value. The impairment charge related to those assets that could not be
upgraded to eight-inch capability for use in Fab IV.
Fab II, located in Round Rock, Texas has been used in the manufacture of wafers
for the Memory Products, Datacommunication, Programmable Products and Computer
Products divisions. A decision was made as part of the restructuring to
discontinue producing commodity Static Ramdom Access Memory ("SRAM") products
in Texas. Costs associated with this decision included severance payments for
approximately 100 employees, the write-off of equipment which could not be used
elsewhere and other related costs.
The Company uses a third party subcontractor, located in Thailand, for a
portion of its test manufacturing. The restructuring included plans to
consolidate the Company's Thai test manufacturing operation into its subsidiary
operation located in the Philippines. Costs associated with this consolidation
included severance payments, write-off of non-usable inventory and the write-
down of equipment that could not be used in its Manila plant.
The decision to centralize most of the wafer production in an eight-inch fab
caused the Company to make a decision to upgrade its R&D wafer fab, Fab I,
located in San Jose, California, from six-inch to eight-inch to ensure
compatibility. The charges associated with this anticipated upgrade included
facility write-downs and disposal of certain six-inch manufacturing equipment.
Separately, the Company recorded a $27.3 million charge for additional
inventory reserves related to the ongoing, over-supply and continued inventory
corrections by end user customers, the write-off of pre-operating costs related
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to its Minnesota and Philippines plants and the write-off of an equity
investment. These charges were recorded in cost of revenues, selling, general
and administrative expenses, and other income and expenses on the income
statement.
The following table sets forth the Company's restructuring expense and charges
taken against the reserve for the quarter ended June 29, 1998 and the
remaining restructuring reserve balance at June 29, 1998:
<TABLE>
<CAPTION>
(In thousands)
1998 Balance
Restructuring Jun.29,
Expense Utilized Adjustments 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Write-down of fixed assets $ 44,950 $ (5,377) $ -- $ 39,573
Write-down of inventory 1,964 (1,964) -- --
Severance and other employee
related charges 4,779 (2,058) 1,400 4,121
Other fixed asset related
charges 3,030 -- -- 3,030
Provision for phase-down and
consolidation of manufacturing
facilities 10,376 (451) (1,400) 8,525
------------- ------------- ------------- ------------
Total $ 65,099 $ (9,850) $ 0 $ 55,249
============= ============= ============= ============
</TABLE>
For the quarter and six month period ended June 29, 1998, the Company charged
$6.3 million and $9.9 million, respectively, against the restructuring reserve.
These charges were primarily related to the write-off of fixed assets located
at the Company's domestic wafer manufacturing facilities, the write-off of
inventory located at the Company's third party subcontractor in Thailand and
expenses incurred for severance and other employee related items. Adjustments
were made in the current quarter to reflect revisions to estimates previously
made with the purpose of appropriately classifying costs according to their end
purpose.
The Company has shut down Fab 3 which included severance payments to
approximately 140 employees. As of August 13, 1998, the Company has completed
production of all products in Fab III and no further manufacturing is expected
to occur.
The Company has discontinued producing commodity SRAM products in Fab II and
has incurred severance costs associated with the restructuring.
The Company is also in the midst of moving its third party subcontractor
backend manufacturing operation located in Thailand to the Philippines and is
expected to complete the move by December 1998.
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5. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). FAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains and losses be either reported in the
statement of operations or as a deferred item depending on the type of hedging
relationship that exists with respect to such derivative. Adopting the
provisions of SFAS 133 are not expected to have a material effect on the
Company's consolidated financial statements, which will be effective in fiscal
year 2000.
6. Impact of Litigation
The semiconductor industry has experienced a substantial amount of litigation
regarding patent and other intellectual property rights. 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. 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.
In May 1998, EMI Group of North America, Inc. ("EMI") filed suit against the
Company in the Federal Court in Delaware, claiming that the Company has
infringed on two patents owned by EMI. The Company has reviewed the charges,
and it believes that the charges are without merit, that it does not infringe
the patents in question, and that the patents are invalid and/or unenforceable.
In July 1998, EMI amended their complaint against the Company, alleging that
the Company infringes two further patents owned by EMI. The Company is in the
process of reviewing the charges to determine whether they have any merit. The
Company will vigorously defend itself in these matters. However, because of
the nature and inherent uncertainties of litigation, should the outcome of this
action be unfavorable, the Company may be required to pay damages and other
expenses, which could have a material adverse effect on the Company's financial
position and results of operations.
In January 1998, the Company was contacted by an attorney representing the
estate of Mr. Jerome Lemelson, charging that the Company infringes certain
patents owned by Mr. Lemelson. The estate of Mr. Lemelson has not filed suit,
but has urged the Company to enter into a licensing agreement with the estate
in order to avoid litigation. The Company is in the process of reviewing the
claims to determine their validity. Should the estate file suit, the Company
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will vigorously defend itself in this matter. However, because of the nature
and inherent uncertainties of litigation, should the outcome of this action be
unfavorable, the Company may be required to pay damages and other expenses,
which could have a material adverse effect on the Company's financial position
and results of operations.
In June 1997, the Company commenced a declaratory judgment 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 part of the process for manufacturing semiconductors is
unenforceable, invalid and not infringed by the Company. The Trust has
counter-claimed for patent infringement on the same patent, alleging such
patent covers oxide-isolated integrated circuits. In December 1997, in a
related case, the United States District Court for the Eastern District of
Virginia preliminarily ruled that the patent is unenforceable due to
unequitable conduct by Dr. Li and his attorneys in obtaining the patent. Dr.
Li has the right to file an appeal, although no such appeal had been filed as
of August 13, 1998. The Company believes it has meritorious defenses to the
counter-claim 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.
On October 2, 1997, the Company filed an action against Kevin Yourman, Joseph
Weiss, and their associated law offices in the Superior Court of California in
Santa Clara County for malicious civil prosecution in the underlying securities
fraud actions initiated by Messrs. Yourman and Weiss in 1992. The underlying
securities fraud actions were dismissed because no officer of the Company made
any actionable false or misleading statements or omissions. An appeal affirmed
the lower court's finding that Messrs. Yourman and Weiss failed to put forth
evidence showing a genuine issue of fact with regard to any statements by the
Company's officers. A motion by Messrs. Yourman and Weiss to dismiss the
Company's malicious prosecution action was denied, and appeals of this denial
to the Supreme Court of California were also denied. As a result, this action
will go forward into discovery. Although the expenses and risks of litigation
are unpredictable, the Company believes it will prevail. The Company believes
that this action, regardless of its outcome, will have little, if any, effect
on the Company's financial condition or results of operations.
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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
materially 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.
RESULTS OF OPERATIONS:
- --------------------------
Revenues for the quarter and six month period ended June 29, 1998 decreased
13.4% and 10.4%, respectively, compared to the comparable periods a year ago,
dropping to $119.7 million and $236.6 million in 1998 compared to $138.1
million and $264.1 million in 1997. The decline in revenues is attributable to
reduced sales in the Memory Products Division ("MPD"), the Programmable
Products Division ("PPD") and the Data Communications Division ("DCD"). MPD's
revenues decreased 10.6%, comparing the second quarter of 1998 to the
comparable quarter in 1997, primarily as a result of lower revenues recorded
for the sale of Static Random Access Memory ("SRAM") products. SRAM revenues
decreased 8.8% comparing the second quarter of 1998 to the comparable period in
1997 due to a 14.0% decrease in average selling prices ("ASPs"). Even though
SRAM unit sales volume in the second quarter of 1998 was 7.1% higher than in
the second quarter of 1997, it was not enough to offset the decline in ASPs.
ASPs for SRAM products continue to decline in 1998, but at a reduced rate
compared to 1997.
Revenues generated from the Company's PPD product line decreased significantly,
dropping 33.2% comparing the second quarter of 1998 to the comparable quarter
in 1997. Similar to the first quarter of 1998, PPD's revenues in the second
quarter of 1998 were lower due to the Company's decision to exit the commodity
Erasable Programmable Read-only Memory ("EPROM") business in December 1997 and
the sale of its Field Programmable Gate Array ("FPGA") line of products to
Quicklogic Corporation in 1997. Revenues generated from the Programmable
Read-only Memory ("PROM") and EPROM line of products were $2.7 million lower in
the second quarter of 1998 compared to the comparable period in 1997. In the
second quarter of 1997, the Company recorded $4.0 million of revenue, primarily
due to $3.5 million in non-recurring engineering revenue related to the sale of
its FPGA product line to Quicklogic. The remaining decrease in PPD revenues
was primarily related to the division's Small Programmable Logic Device
("SPLD") line of products which recorded 22.1% less revenue in the second
quarter of 1998 compared to the second quarter in 1997. Lower revenues were
due to both a reduction in ASPs and unit sales volume.
Revenues generated from the DCD product line during the second quarter of 1998
decreased 8.9% compared to the same quarter a year ago. The decrease in
revenues was primarily due to lower sales volume from the sale of Specialty
Memory products, which include the Dual-Port and First-in, First-out ("FIFO")
family of products. Revenues generated from the sale of Specialty Memory
products decreased 13.2% comparing the second quarter of 1998 to the same
quarter last year due to a 20.4% decrease in unit sales volume.
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Similar to the first quarter of 1998, the Company's Computer Products Division
("CPD") was the only division to record an increase in revenues growing 28.7%
comparing the second quarter of 1998 to the same quarter in 1997. CPD's
revenue growth can be attributed to its Clock line of products which increased
revenues 47.0% as a result of a 30.4% increase in unit sales volume and a 15.5%
increase in ASPs comparing the second quarter of 1998 to the comparable quarter
a year ago.
As noted above, the Company continued to experience reductions in ASPs
throughout several of its product lines. The decrease in ASPs continued to be
caused by industry over-supply and ongoing inventory corrections by end user
customers, particularly evident in the telecommunication and data communication
markets that the Company principally serves. Even though ASPs in several
markets have continued to decline in 1998, the rate of decline has in generally
been less than the rate of decline experienced throughout 1997. ASPs for the
remainder of 1998 are expected to continue to decline, but at a reduced rate
from that experienced in 1997.
In March 1998, the Company recorded a one-time, pre-tax restructuring and other
non-recurring charge of $92.4 million. The $65.1 million restructuring charge
included the write-off of certain equipment, the removal costs associated with
equipment that will be transferred to another of the Company's wafer
fabrication facilities, the conversion costs associated with the transformation
of the San Jose fab from a six-inch R&D facility to an eight-inch facility,
severance costs and other employee related expenses, and other restructuring
costs. In addition, the Company recorded a non-recurring, pre-tax charge of
$27.3 million for additional inventory reserves related to the ongoing over-
supply and continued inventory corrections by end user customers, the write-
off of a certain equity investment and the write-off of pre-operating costs
related to its Minnesota and Philippines plants. These charges were recorded
in cost of revenues, selling, general and administrative expenses, and other
income and expenses on the income statement.
The Company's cost of revenues as a percentage of revenues for the quarter and
six month period ended June 29, 1998 increased to 69.7% and 83.6%,
respectively, compared to 60.6% and 64.0%, respectively, in the comparable
periods in 1997. In the first quarter of 1998, the Company recorded non-
recurring, pre-tax charges of $21.7 million, primarily related to the write-off
of pre-operating costs at the Company's domestic wafer fabrication plant in
Minnesota and its assembly and test facility located in the Philippines, the
write-down of certain inventory, and the write-down of certain equipment
located in Minnesota. Without these non-recurring costs, the cost of revenues
as a percentage of revenues for the six month period in 1998 would have been
74.4%. Revenues continue to fall due to declining ASPs, despite an increase in
units sold. This has contributed to the increase in cost of revenues as a
percentage of revenues. Should ASPs in the future continue to erode at a rate
greater than anticipated, gross margins could be materially adversely affected.
The Company continues to introduce new products and new methods of reducing
manufacturing costs in order to mitigate the effects of declining ASPs. In
March 1998, the Company announced a restructuring of its domestic wafer
fabrication facilities and its offshore back-end manufacturing operations.
This restructuring includes the shutdown of the Company's six-inch wafer
fabrication plant and the movement of production to its eight-inch
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<PAGE>15
facility in Minnesota, the downsizing of its wafer fabrication plant in Texas,
and the consolidation of its Thai test manufacturing operation, located at
Alphatec Electronics Pcl ("Alphatec"), into its Philippines plant. These
activities are expected to ultimately increase the Company's efficiencies and
lower manufacturing costs.
At June 29, 1998, the Company had consigned approximately $11.4 million, net
book value, of capital assets to Alphatec and Alphatec's production represented
approximately 15.3% of the Company's backend manufacturing capacity (down from
approximately 17.0% in the fourth quarter of 1997). As stated above, the
Company plans to consolidate its test manufacturing operations located at
Alphatec into its Philippines plant by the end of 1998, which will eliminate
the majority of the backend manufacturing activity performed by Alphatec. In
1997, Alphatec experienced financial difficulties; however, the assembly and
test operations with which the Company currently does business continue to
operate under normal operating conditions. The Company is in the process of
move its production out of Alphatec and into its backend manufacturing facility
in the Philippines. Should Alphatec cease operations or be forced to reduce
its manufacturing capacity before the Company is able to move its test
operations to the Philippines, 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") expenses as a percent of revenues increased
to 20.4% and 20.7%, respectively, for the quarter and six month period ended
June 29, 1998, compared to 17.7% and 17.2%, respectively, for the comparable
periods in 1997. The increase in R&D expenses as a percent of revenues can be
attributed to lower revenues as actual R&D spending remained relatively
constant. The Company continued to spend on 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. Even with the Company's commitment to increase design
capabilities in its design centers and the transformation of the San Jose wafer
manufacturing facility into an eight-inch research and development wafer
facility, R&D spending is projected to remain relatively constant in the future
as the Company explores new markets and improves its design and process
technologies in an effort to increase revenues and reduce costs. Actual
spending in R&D may increase in the future in proportion to revenue growth.
Selling, general and administrative ("SG&A") expenses as a percent of revenues
for the quarter and six month period ended June 29, 1998 increased to 16.6% and
17.8%, respectively, compared to 13.9% in both comparable periods a year ago.
Actual SG&A spending in the second quarter of 1998 was slightly higher compared
to the second quarter in 1997; however, SG&A spending for the six month period
in 1998 grew 14.7% in comparison to the first six months in 1997. The increase
in SG&A spending was primarily due to $2.5 million of non-recurring, pre-tax
charges recorded in the first quarter of 1998 related to costs incurred to
ensure customer satisfaction and higher marketing costs due to a new sales
force training program and higher expenditures in marketing communications.
With the exception of variable spending, such as incentive bonuses and
commissions, the Company plans to keep SG&A spending relatively constant.
15
<PAGE>16
The operating loss for the quarter and six month period ended June 29, 1998 was
$8.1 million, or 6.7% of revenues, and $117.3 million, or 49.6% of revenues,
respectively, compared to operating income of $7.9 million, or 5.7% of revenues
and $13.0 million, or 4.9% of revenues, respectively, in the comparable periods
in 1997. Without the $89.3 million of restructuring and other non-recurring
charges recorded as operating charges, the operating loss in the first six
months of 1998 would have been $28.0 million ($25.3 million net of taxes). The
Company continued to experience the effects of falling ASPs as revenues have
declined even though the number of units sold increased.
For the quarter ended June 29, 1998, the Company recorded net interest and
other income of $0.6 million compared to net interest and other income of $1.5
million in the comparable period in 1997. For the six month period ended June
29, 1998, the Company recorded net interest and other expenses of $2.1 million
compared to net interest and other income of $4.0 million in the comparable
period a year ago. In the first quarter of 1998, the Company recorded a non-
recurring, pre-tax charge of $3.1 million related to the write-down of a
certain investment. Without this write-down, net interest and other income
would have been $1.0 million. In the first quarter of 1997, the Company
recorded a $3.8 million gain from the sale of its remaining investment in
Vitesse Corporation. The gain was partially offset by one-time costs
associated with the conversion of the 1994 convertible subordinated notes and
costs associated with the increased borrowing from the Company's line of
credit.
FACTORS AFFECTING FUTURE RESULTS:
- -----------------------------------
Except for the historical information contained herein, the discussion in this
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including, but not limited to,
statements as to the future operating results and business plans of the
Company, that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited to, general
economic conditions, the cyclical nature of both the semiconductor industry and
the markets addressed by the Company's products, such as networking, computer,
and telecommunications markets, the effects of competition, characterized by
price erosion, rapid technological change and heightened foreign competition in
many markets, slower than expected growth in demand for semiconductor products,
the availability and extent of utilization of manufacturing capacity,
dependence on independent subcontract vendors, dependence on limited sources of
supplies, fluctuation in manufacturing yields, the successful development and
timing and market acceptance of new product introductions, product
obsolescence, costs associated with future litigation, costs associated with
protecting the Company's intellectual property, the successful ramp up of the
Company's Philippines back-end manufacturing plant, and the ability to develop
and implement new technologies including the continued transition to full
commercial production of the Company's new 0.35 and 0.25 micron processes,
dependence on key personnel, risk of international operations and the effects
of environmental regulations.
16
<PAGE>17
The Company's quarterly and annual results of operations are affected by a
variety of factors that could materially and adversely affect revenues, gross
profit and income from operations. These factors include, among others, demand
for the Company's products; changes in product mix; competitive pricing
pressure (particularly in the static RAM market); fluctuations in manufacturing
yields; 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 introduction by
competitors; availability and extent of utilization of manufacturing capacity;
product obsolescence; the successful ramp up of the Company's Philippines
backend manufacturing plant; the inability to execute successfully the
Company's restructuring plan; the ability to develop and implement new
technologies, including the transition of the Company's new 0.35 and 0.25
micron process and continued migration to smaller geometries; the conversion
and upgrade of existing equipment base to these technologies including transfer
of equipment and capability among sites; the conversion and upgrade of the
existing equipment set from 6-inch to 8-inch capability; the level of
expenditures for research and development and sales, general and administrative
functions of the Company; costs 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 the semiconductor
industry may cause the Company's quarterly and annual results of operations to
vary significantly. Moreover, as is common in the semiconductor industry, the
Company frequently ships more products in the third month of each quarter than
in either of the first two months of the quarter, and shipments in the third
month are higher at the end of that month. The concentration of sales in the
last month of the quarter contributes to the difficulty in predicting the
Company's quarterly revenues and results of operations.
Since the Company recognizes revenues from sales to domestic distributors only
upon the distributors' sale to end customers, the Company is highly dependent
on the accuracy of distributors' estimates on their resale, which could be
materially different from the actual amounts finally reported. These factors
also contribute to the difficulty in predicting the Company's quarterly revenue
and results of operations, particularly in the last month of the quarter.
Additionally, 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 that could materially and adversely affect the
Company's business, financial conditions and results of operations.
YEAR 2000 DISCLOSURE:
- ----------------------
In the next two years, most companies will face a potentially serious
information systems problem because many software application and operational
programs written in the past may not properly recognize calendar dates
beginning in the year 2000. This problem could force computers to either shut
down or provide incorrect data or information. The Company began the process
of identifying the changes required to its computer programs and hardware, in
17
<PAGE>18
consultation with software and hardware providers in late 1996. Efforts are
being made to modify or replace any non-compliant software, systems and
equipment by the year 1999. In 1997, the Company began the process of
replacing certain software by implementing a new accounting software system
that is year 2000 compliant. Further, the Company is aware of the risk to
third parties and the potential adverse impact on the Company resulting from
the failure by these parties to adequately address the year 2000 problem. In
response to this, the Company is inquiring of strategic suppliers and large
customers to determine the extent to which the Company is vulnerable to these
third parties' failure to remediate their own year 2000 issues. The Company
has expended and will continue to expend appropriate resources to address these
issues on a timely basis. An assessment of the problem associated with the
year 2000 is expected to be completed by October 1998. The Company's
preliminary plan is to have all products, equipment, hardware and software year
2000 compliant by June 1999, however, no estimate of the expected total cost of
this effort can be made at this time, nor can any assurance by given that the
year 2000 problem will not have a materially adverse impact on the Company's
earnings.
MARKET RISK DISCLOSURE:
- ---------------------------
The Company has an investment portfolio of securities that are classified as
"available-for-sale". These securities are subject to interest rate risk and
will fall in value if market interest rates increase. The Company attempts to
limit this exposure by investing primarily in short-term securities. The
Company has foreign subsidiaries that operate and sell the Company's products
in various global markets. As a result, the Company's cash flow and earnings
are exposed to fluctuations in interest rates and foreign currency exchange
rates even though the Company uses the U.S. dollar as its functional currency
for all foreign subsidiaries. The Company attempts to limit these exposures
through the use of various hedge instruments, primarily forward contracts and
currency option contracts (with maturities of less than three months) to manage
its exposure associated with firm intercompany and third party transactions and
net asset and liability positions denominated in non-functional currencies.
For further discussion of risk factors, refer to the Company's filing on Form
10-K with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES:
- ---------------------------------
The Company's cash, cash equivalents and short-term investments totaled $185.7
million at June 29, 1998, a decrease of $15.9 million compared to the end of
1997.
During the first six months of 1998, the Company purchased $38.9 million in
capital equipment compared to $65.5 million in the comparable period in 1997.
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 0.35 and 0.25 micron processes. A majority of the
18
<PAGE>19
new equipment purchased will be for Fab IV located in Minnesota as the Company
converts its equipment from six-inch to eight-inch. Equipment purchased for
the Philippines and its subcontractors will be used to increase manufacturing
capacity and tool certain packaging capabilities. Capital equipment purchases
for the technology group are expected to enhance and accelerate the Company's
research and development capabilities. In 1998, the San Jose R&D fab will be
purchasing new equipment as it converts from a six-inch facility to an eight-
inch facility. Capital purchases for the remainder of 1998 are expected to be
approximately $45.0 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 authorized the repurchase of up to 2.0
million shares of the Company's common stock. In December 1997, the Board of
Directors authorized the repurchase of an additional 2.0 million shares. As of
August 13, 1998, 1.4 million shares have been repurchased under this program
for $12.5 million. The shares purchased are expected to be issued in
conjunction with the Company's 1994 Stock Option Plan and Employee Stock
Purchase Program. In conjunction with the authorized stock repurchase program,
the Company sold put warrants through private placements for which the Company
received a net amount of $4.6 million during the first six months of 1998. The
Company has a maximum potential obligation to purchase 5.6 million shares of
its common stock at an aggregate price of $53.8 million as of August 13, 1998.
The puts have various expiration periods from August 1998 through May 1999.
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.
In February 1997, the Company called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective 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 out $14.3 million.
In July 1996, the Company established a three-year $100 million unsecured
revolving credit facility with Bank of America National Trust and Savings
Association as agent on behalf of certain banks. The applicable interest rate
for usage under this agreement was a graduated scale of LIBOR, plus a spread.
The agreement contained certain financial and other covenants including
limitation on indebtedness, liens, disposition of assets, consolidations and
mergers, investments and contingent obligations, and maintenance of a specified
leverage ratio, consolidated tangible net worth, quick ratio and adjusted
EBIT/fixed charge coverage ratio. The Company cancelled the line of credit
during the second quarter of 1998.
The Company believes that existing cash and cash from operations will be
sufficient to meet present and anticipated 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.
19
<PAGE>20
PART II - OTHER INFORMATION
ITEM 1. The information required by this item is included in Part I in Note 6
of Notes to the Condensed Consolidated Financial Statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 15, 1998, at the Company's Annual Meeting of Shareholders, the
nominated slate of directors was elected, the appointment of Price
Waterhouse as the Company's independent accountants was ratified, the
amendment to the Employee Qualified Stock Purchase Plan was approved,
the Company's proposal regarding composition of the Board of Directors
was approved and Shareholder proposal regarding the composition of the
Board of Directors was not approved. The results of the votes were as
follows:
(1) Election of Directors:
Total Votes
Total Votes For Withheld From
Each Director Each Director
--------------- -------------
T.J. Rodgers 81,084,823 1,891,415
Pierre R. Lamond 81,178,788 1,797,450
Fred B. Bialek 80,858,683 2,117,555
Eric A. Benhamou 81,152,358 1,823,800
John C. Lewis 81,182,455 1,793,783
(2) Ratify the appointment of Price Waterhouse LLP as the Independent
Accountants of the Company for fiscal year 1998:
For 81,986,294 Against 655,134 Abstain 334,810
(3) To approve amendments to the Employee Qualified Stock Purchase
Plan and the reservation of 2,500,000 shares for issuance
thereunder.
For 28,177,172 Against 14,339,575
Abstain 865,074 Broker Non-Vote 39,594,417
(4) To approve the Company's proposal regarding composition of the
Board of Directors:
For 66,159,889 Against 15,786,664 Abstain 1,029,685
(5) To approve the Shareholder's proposal regarding composition of the
Board of Directors:
For 14,035,150 Against 25,925,711
Abstain 3,970,144 Broker Non-Vote 39,045,233
20
<PAGE>21
ITEM 6:
(a) Exhibit - 27 "Financial Data Schedule"
(b) Reports on Form 8-K - None
21
<PAGE>22
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: August 13, 1998 /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
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER AND ENDED SIX
MONTH PERIOD ENDED JUNE 29, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-28-1998 DEC-28-1998
<PERIOD-START> MAR-31-1998 DEC-30-1997
<PERIOD-END> JUN-29-1998 JUN-29-1998
<CASH> 112,832 112,832
<SECURITIES> 72,832 72,832
<RECEIVABLES> 53,123 53,123
<ALLOWANCES> 1,013 1,013
<INVENTORY> 67,373 67,373
<CURRENT-ASSETS> 348,450 348,450
<PP&E> 378,057 378,057
<DEPRECIATION> 415,301 415,301
<TOTAL-ASSETS> 860,660 860,660
<CURRENT-LIABILITIES> 102,188 102,188
<BONDS> 175,000 175,000
<COMMON> 907 907
0 0
0 0
<OTHER-SE> 538,711 538,711
<TOTAL-LIABILITY-AND-EQUITY> 860,660 860,660
<SALES> 119,675 236,628
<TOTAL-REVENUES> 119,675 236,628
<CGS> 83,393 197,775
<TOTAL-COSTS> 83,393 197,775
<OTHER-EXPENSES> 24,463 48,951
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,677 5,519
<INCOME-PRETAX> (7,463) (119,415)
<INCOME-TAX> (717) (11,480)
<INCOME-CONTINUING> (6,746) (107,935)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,746) (107,935)
<EPS-PRIMARY> (0.07) (1.19)
<EPS-DILUTED> (0.07) (1.19)
</TABLE>
