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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 March 30, 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
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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.
March 30, 1998 (all one class): 90,919,000
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CYPRESS SEMICONDUCTOR CORPORATION
FORM 10-Q
Quarter Ended March 30, 1998
Index
Part I - Financial Information
- --------------------------------
Item 1. Condensed Consolidated Financial Statements Pages 3 - 11
Item 2. Management's Discussion and Analysis Pages 12 - 18
Part II - Other Information
- --------------------------------
Item 1. Legal Proceedings Page 19
Item 6. Exhibits and Reports on Form 8-K Page 19
2
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per-share data)
(Unaudited)
<CAPTION>
Mar. 30, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 137,058 $ 151,725
Short-term investments 61,083 49,836
---------- ----------
Total cash, cash equivalents and
short-term investments 198,141 201,561
Accounts receivable, net of allowances of
$1,093 at March 30, 1998 and $3,524 at
December 29, 1997 59,140 67,854
Inventories 64,983 76,925
Other current assets 63,153 51,740
---------- ----------
Total current assets 385,417 398,080
Property, plant and equipment (net) 396,177 442,661
Other assets, including restricted investments of
$60,058 and $60,112 and long-term marketable
securities of $32,362 and $42,146, at
March 30, 1998 and December 29, 1997, respectively. 98,992 115,529
---------- ----------
Total assets $ 880,586 $ 956,270
========== ==========
3
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CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except share and per-share data)
(Unaudited)
<CAPTION>
Mar. 30, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,220 $ 60,857
Accrued liabilities 38,026 21,472
Deferred income on sales to distributors 10,105 9,636
Income taxes payable -- 1,088
---------- ----------
Total current liabilities 113,351 93,053
Convertible subordinated notes 175,000 175,000
Deferred income taxes 36,070 36,070
Other long-term liabilities, including minority
interest 8,350 8,671
---------- ----------
Total liabilities 332,771 312,794
---------- ----------
Commitments and contingencies (Note 5)
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;
90,919,000 and 90,684,000 outstanding 1,015 1,015
Additional paid-in capital 438,316 430,682
Retained earnings 232,721 333,910
---------- ----------
672,052 765,607
Less shares of common stock held in
treasury, at cost: 7,228,000 at March 30, 1998
and 7,463,000 at December 29, 1997 (124,237) (122,131)
---------- ----------
Total stockholders' equity 547,815 643,476
---------- ----------
Total liabilities and stockholders'
equity $ 880,586 $ 956,270
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended
----------------------
Mar. 30, Mar. 31,
1998 1997
---------- ----------
<S> <C> <C>
Revenues $ 116,953 $ 125,999
---------- ----------
Costs and expenses:
Cost of revenues 114,382 82,349
Research and development 24,488 21,023
Selling, general and administrative 22,196 17,564
Restructuring costs (Note 4) 65,099 --
---------- ----------
Total operating costs and expenses 226,165 120,936
---------- ----------
Operating income (loss) (109,212) 5,063
Interest expense (2,842) (2,316)
Interest and other income 102 4,826
---------- ----------
Income (loss) before income taxes (111,952) 7,573
(Provision) benefit for income taxes 10,763 (2,613)
---------- ----------
Net income (loss) $ (101,189) $ 4,960
========== ==========
Net income (loss) per share:
Basic $ (1.11) $ 0.06
Diluted $ (1.11) $ 0.06
Weighted average common and
common equivalent shares
outstanding:
Basic 91,068 81,838
Diluted 91,068 94,489
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
----------------------
Mar. 30, Mar. 31,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (101,189) $ 4,960
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 29,180 27,639
Restructuring charges 65,099 --
Other non-recurring costs 8,827 --
Non-cash interest and amortization of debt
issuance costs 2,873 951
Changes in operating assets and liabilities:
Receivables 8,905 (7,642)
Inventories 11,942 (7,066)
Other assets (2,054) 7,038
Accounts payable and accrued liabilities (1,858) (3,104)
Deferred income 469 (565)
Income taxes payable and deferred income taxes (1,088) 8,929
---------- ----------
Net cash generated by operations 21,106 31,140
---------- ----------
Cash flows from investing activities:
Increase in short-term investments (net) (11,247) (55,628)
Acquisition of property, plant and equipment (29,734) (30,021)
---------- ----------
Net cash used for investing activities (40,981) (85,649)
---------- ----------
Cash flows from financing activities:
Repurchase of common stock (2,106) --
Borrowings from line of credit -- 50,999
Redemption of Convertible debt -- (14,331)
Issuance of common stock 7,634 4,055
Other long-term liabilities, including minority
interest (320) (4,403)
---------- ----------
Net cash generated by financing activities 5,208 36,320
---------- ----------
Net decrease in cash and cash equivalents (14,667) (18,189)
Cash and cash equivalents, beginning of year 151,725 20,119
---------- ----------
Cash and cash equivalents, end of quarter $ 137,058 $ 1,930
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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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-month period ended March 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
2. Inventories
Mar. 30, Dec. 29,
1998 1997
---------- ----------
Raw materials $ 9,600 $ 17,900
Work in process 25,238 35,281
Finished goods 30,145 23,744
---------- ----------
$ 64,983 $ 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:
7
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<TABLE>
<CAPTION>
(In thousands, except per-share amounts)
Three Months Ended
March 30, 1998 March 31, 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) $(101,189) 91,068 $ (1.11) $ 4,960 81,838 $ 0.06
========= =========
Effects of Dilutive
Securities:
Stock options -- -- -- 5,147
Convertible debentures -- -- 966 7,504
--------- --------- --------- ---------
Diluted EPS:
Net income (loss) $(101,189) 91,068 $ (1.11) $ 5,926 94,489 $ 0.06
========= ========= ========= ========= ========= =========
</TABLE>
Options to purchase 22,848,000 shares of common stock were outstanding at March
30, 1998, but were not included in the computation of diluted EPS as the effect
of these shares was anti-dilutive. Convertible debentures outstanding at March
30, 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 assembly
inventory in the Company's Thai test facility; the severance of manufacturing
and other personnel and other costs.
8
<PAGE>9
The Company plans to shut down its six-inch, 0.6 micron wafer fabrication
plant, Fab III, in Bloomington, Minnesota and move all production to its eight-
inch, 0.35 micron fab, Fab IV, also in Minnesota. The adjustments from this
decision relate 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 may not be
recoverable. The fair value of such manufacturing assets was based primarily
upon third party estimates of fair value. The impairment charge relates to
those assets that cannot 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 has been made to discontinue producing Static
Ramdom Access Memory ("SRAM") products in Texas. Costs associated with this
decision include severance payments for approximately 100 employees, the write-
off of equipment which cannot 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 Company plans to consolidate its Thai
test manufacturing operation into its subsidiary operation located in the
Philippines. Costs associated with this include severance payments, write-off
of non-usable assembly inventory and the write-down of equipment that the
Company will not be able to use 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 move include 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
to its Minnesota and Philippines plants and the write-off of a certain equity
investment. These charges were recorded in cost of revenues, selling, general
and administrative expenses, and other income and expenses on the income
statement.
9
<PAGE>10
The following table sets forth the Company's restructuring expense and charges
taken against the reserve for the quarter ended March 30, 1998 and the
remaining restructuring reserve balance at March 30, 1998:
<TABLE>
<CAPTION>
(In thousands)
1998 Balance
Restructuring Mar. 30,
Expense Utilized 1998
------------- ------------- -------------
<S> <C> <C> <C>
Write-down of fixed assets $ 44,950 $ (1,578) $ 43,372
Write-down of inventory 1,964 (1,964) --
Severance and other employee
related charges 4,779 -- 4,779
Other fixed asset related
charges 3,030 -- 3,030
Provision for phase-down and
consolidation of manufacturing
facilities 10,376 -- 10,376
------------- ------------- -------------
Total $ 65,099 $ (3,542) $ 61,557
============= ============= =============
</TABLE>
During the first quarter of 1998, $3.5 million was charged against the
restructuring reserve, primarily to write-off inventory located at the
Company's third party subcontractor in Thailand and fixed assets located at
the Company's domestic wafer manufacturing facilities.
5. 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.
10
<PAGE>11
In January 1998, the Company was contacted by the attorneys representing the
estate of Mr. Jerome Lemelson charging that the Company infringed on certain
patents registered by Mr. Lemelson. The attorneys for the estate have not
filed suit, but have 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 charges to determine the validity of the charge. Should the
estate file suit, the Company 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 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 counter-claimed 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". In December 1997, in a related
case, the Federal Court for the Eastern District of Virginia preliminarily
ruled that the Li's 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 as been filed as of May 14, 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 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.
11
<PAGE>12
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 ended March 30, 1998 decreased 7.2% compared to the
comparable period a year ago, dropping to $117.0 million in 1998 compared to
$126.0 million in the first quarter of 1997. The decline in revenues can be
attributed to the Memory Products Division ("MPD"), the Programmable Products
Division ("PPD") and the Data Communications Division ("DCD"). MPD's revenues
decreased 2.4% comparing the first quarter of 1998 to the comparable quarter in
1997, primarily as a result of lower average selling prices ("ASPs") for Static
Random Access Memory ("SRAM") products. Even though unit sales volume in the
first quarter of 1998 was 11.2% higher than in the first quarter of 1997, it
was not enough to offset the 12.0% decrease in ASPs. ASPs for SRAM products
continued to decline in 1998, but at a reduced rate compared to 1997.
Revenues generated from the Company's PPD product line decreased significantly
dropping 31.4% comparing the first quarter of 1998 to the first quarter of
1997. In December 1997, the Company announced its intention to exit the
commodity Erasable Programmable Read-only Memory ("EPROM") business in order to
concentrate its efforts on products yielding higher margins. As a result of
this decision, revenues generated from the Programmable Read-only Memory
("PROM") and EPROM line of products were $3.5 million lower in the first
quarter of 1998 compared to the comparable period in 1997. In March 1997, the
Company sold its Field Programmable Gate Array ("FPGA") line of products to
QuickLogic Corporation in exchange for an increase in the Company's equity
position in QuickLogic. In the first quarter of 1997, the FPGA product line
contributed $2.8 million in revenues. The remaining decrease in PPD revenues
can be attributed to the Small Programmable Logic Device ("SPLD") line of
products which recorded a $2.3 million decrease in revenues, comparing the
first quarter of 1998 to the same quarter in 1997. Lower revenues were the
result of declining ASPs experienced in the first quarter of 1998.
Revenues generated from the DCD product line during the first quarter of 1998
decreased 5.9% compared to the same quarter last year. The decrease in
revenues was primarily due to lower ASPs and 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 13.6% comparing the first quarter of 1998 to the same
quarter last year due to a 12.2% decline in ASPs. The Channel line of products
continued to show a modest increase in revenues growing 8.1%. This increase in
revenues was primarily the result of a 6.4% increase in unit sales volume.
12
<PAGE>13
The Company's Computer Products Division ("CPD") was the only division to
record an increase in revenues growing 38.2% comparing the first quarter of
1998 to the same quarter in 1997. CPD's revenue growth can be attributed to a
55.5% increase in unit sales volume from the sale of Clock products.
As noted above, the Company continued to experience reductions in ASPs,
particularly in its SRAM products. The decrease in ASPs continued to be caused
by industry over-supply and continued 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
continued to decline the rate of decline has in most part 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 cost 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
ended March 30, 1998 increased to 97.8% compared to 65.4% in the comparable
period in 1997. 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 would
have been 79.2%. As a result of declining ASPs, the Company is selling more
units even though revenues continue to decline. Should ASPs in the future
continue to erode at a rate greater than anticipated, this could have a
material adverse effect on the gross margin. 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 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 increase the Company's
efficiencies and lower manufacturing costs.
13
<PAGE>14
At March 30, 1998, the Company has consigned approximately $13.5 million, net
book value, of capital assets to Alphatec and Alphatec's production represented
approximately 14.0% 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, continues to
operate under normal operating conditions. The Company has evaluated
alternative options and has commenced qualification of products and processes
at other subcontract vendors. 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 20.9% for the quarter ended March 30, 1998, compared to 16.7% for
the comparable period in 1997. Actual R & D spending increased $3.5 million,
primarily a result of the Company's decision to continue spending 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 ended March 30, 1998 increased to 19.0%, compared to
13.9% in the same period last year. Actual SG&A spending increased $4.6
million, primarily due to $2.5 million of non-recurring, pre-tax charges
related to costs incurred to ensure customer satisfaction. With the exception
of variable spending, such as incentive bonuses and commissions, the Company
plans to keep SG&A spending relatively constant.
The operating loss for the quarter ended March 30, 1998 was $109.2 million, or
93.4% of revenues, compared with operating income of $5.1 million, or 4.0% of
revenues in the comparable period in 1997. Without the $89.3 million of
restructuring and other non-recurring charges recorded as operating charges,
the operating loss in the first quarter of 1998 would have been $19.9 million
($18.0 million net of taxes). The Company continued to experience the effects
of shrinking ASPs as revenues have declined even though the number of units
sold increased significantly.
For the quarter ended March 30, 1998, the Company recorded net interest and
other expense of $2.7 million compared to net interest and other income of $2.5
14
<PAGE>15
million in the comparable period of 1997. In 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 $0.4 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.
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 back-
end manufacturing plant, resolution of Alphatec's financial situation; the
inability to exucute 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
15
<PAGE>16
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
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. 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.
16
<PAGE>17
The Company has determined it has no exposure to contingencies related to the
year 2000 issue for the products it has sold.
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 $198.1
million at March 30, 1998, a decrease of $3.4 million compared to the end of
1997.
During the first three months of 1998, the Company purchased $29.7 million in
capital equipment compared to $30.0 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
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 $70.0 million as the Company continues to buy equipment to expand
manufacturing capabilities and capacity and to enhance its research and
development capabilities.
17
<PAGE>18
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. In
the first three months of 1998, an aggregate of 242,500 shares were purchased
for $2.1 million. As of the date of this filing, 876,100 shares have been
repurchased under this program for $8.5 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 $3.4 million during the first
quarter of 1998. The Company has the maximum potential obligation to purchase
4.8 million shares of its common stock at an aggregate price of $47.0 million
as of March 30, 1998. The puts have various expiration periods from May 1998
through October 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.
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 is a graduated scale of LIBOR, plus a spread.
The agreement contains 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. At March 30, 1998, the Company was not in
compliance with certain financial covenants. However, at that time, the
Company had no borrowings against the line of credit. The Company is expecting
to cancel the line of credit during the second quarter of 1998.
The Company believes that existing cash, cash from operations and borrowings
under its revolving line of credit agreement, 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.
18
<PAGE>19
PART II - OTHER INFORMATION
ITEM 1. The information required by this item is included in Part I in Note 5
of Notes to the Condensed Consolidated Financial Statements.
ITEM 6:
(a) Exhibit - 27 "Financial Data Schedule"
(b) Reports on Form 8-K - None
19
<PAGE>20
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: May 14, 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
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 30,
1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1998
<PERIOD-START> DEC-30-1997
<PERIOD-END> MAR-30-1998
<CASH> 137,058
<SECURITIES> 61,083
<RECEIVABLES> 59,140
<ALLOWANCES> 1,093
<INVENTORY> 64,983
<CURRENT-ASSETS> 385,417
<PP&E> 396,177
<DEPRECIATION> 396,173
<TOTAL-ASSETS> 880,586
<CURRENT-LIABILITIES> 113,351
<BONDS> 175,000
<COMMON> 1,015
0
0
<OTHER-SE> 546,800
<TOTAL-LIABILITY-AND-EQUITY> 880,586
<SALES> 116,953
<TOTAL-REVENUES> 116,953
<CGS> 114,382
<TOTAL-COSTS> 114,382
<OTHER-EXPENSES> 24,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,842
<INCOME-PRETAX> (111,952)
<INCOME-TAX> (10,763)
<INCOME-CONTINUING> (101,189)
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<NET-INCOME> (101,189)
<EPS-PRIMARY> (1.11)
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