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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 28, 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 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.
September 28, 1998 (all one class): 85,987,000
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CYPRESS SEMICONDUCTOR CORPORATION
FORM 10-Q
Quarter Ended September 28, 1998
Index
Part I - Financial Information
- --------------------------------
Item 1. Condensed Consolidated Financial Statements Pages 3 - 13
Item 2. Management's Discussion and Analysis Pages 14 - 21
Part II - Other Information
- --------------------------------
Item 1. Legal Proceedings Page 22
Item 6. Exhibits and Reports on Form 8-K Page 22
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share data)
(Unaudited)
<CAPTION>
Sep. 28, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 93,361 $ 151,725
Short-term investments 93,222 49,836
---------- ----------
Total cash, cash equivalents and
short-term investments 186,583 201,561
Accounts receivable, net of allowances of
$1,097 at September 28, 1998 and $3,524 at
December 29, 1997 63,712 67,854
Inventories 58,063 76,925
Other current assets 43,937 51,740
---------- ----------
Total current assets 352,295 398,080
Property, plant and equipment (net) 364,371 442,661
Other assets, including restricted investments of
$59,444 and $60,112 and long-term marketable
securities of $38,519 and $42,146, at
September 28, 1998 and December 29, 1997,
respectively. 104,209 115,529
---------- ----------
Total assets $ 820,875 $ 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 per-share data)
(Unaudited)
<CAPTION>
Sep. 28, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,350 $ 60,857
Accrued liabilities 37,668 21,472
Deferred income on sales to distributors 11,696 9,636
Income taxes payable -- 1,088
---------- ----------
Total current liabilities 106,714 93,053
Convertible subordinated notes 170,000 175,000
Deferred income taxes 36,070 36,070
Other long-term liabilities, including minority
interest 6,736 8,671
---------- ----------
Total liabilities 319,520 312,794
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000
shares authorized; none issued and
outstanding -- --
Common stock, $.01 par value, 250,000
shares authorized; 98,147 issued;
85,987 and 90,684 outstanding 860 1,015
Additional paid-in capital 428,003 430,682
Retained earnings 226,488 333,910
---------- ----------
655,351 765,607
Less shares of common stock held in
treasury, at cost: 12,160 at September 28,
1998 and 7,463 at December 29, 1997 (153,996) (122,131)
---------- ----------
Total stockholders' equity 501,355 643,476
---------- ----------
Total liabilities and stockholders'
equity $ 820,875 $ 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 Nine-Months Ended
---------------------- ----------------------
Sep. 28, Sep. 29, Sep. 28, Sep. 29,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 126,048 $ 146,081 $ 362,676 $ 410,222
---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues 86,406 93,345 284,181 262,381
Research and development 24,168 24,560 73,119 70,009
Selling, general and
administrative 20,152 18,977 62,228 55,676
Restructuring costs -- -- 65,099 --
---------- ---------- ---------- ----------
Total operating costs
and expenses 130,726 136,882 484,627 388,066
---------- ---------- ---------- ----------
Operating income (loss) (4,678) 9,199 (121,951) 22,156
Interest expense (2,688) (948) (8,207) (4,043)
Interest and other income 4,924 2,756 8,301 9,821
---------- ---------- ---------- ----------
Income (loss) before income taxes (2,442) 11,007 (121,857) 27,934
(Provision) benefit for income taxes 2,955 (3,797) 14,435 (9,623)
---------- ---------- ---------- ----------
Net income (loss) $ 513 $ 7,210 $ (107,422) $ 18,311
========== ========== ========== ==========
Net income (loss) per share:
Basic $ 0.01 $ 0.08 $ (1.19) $ 0.21
Diluted $ 0.01 $ 0.08 $ (1.19) $ 0.20
Weighted average common and
common equivalent shares
outstanding:
Basic 90,161 90,054 90,755 86,887
Diluted 92,183 96,084 90,755 95,038
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>
Nine-Months Ended
----------------------
Sep. 28, Sep. 29,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (107,422) $ 18,311
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, amortization and other 89,449 82,557
Restructuring charges 65,099 --
Amortization of debt issuance costs 767 872
Changes in operating assets and liabilities:
Receivables 6,407 886
Inventories 18,862 (17,564)
Other assets 9,353 10,889
Accounts payable and accrued liabilities (7,461) (8,432)
Deferred income 2,060 445
Income taxes payable and deferred income taxes (1,088) 23,177
---------- ----------
Net cash generated by operations 76,026 111,141
---------- ----------
Cash flows from investing activities:
Increase in short-term investments (net) (43,386) (216,620)
Proceeds from sale of capital 1,294 25,764
Acquisition of property, plant and equipment (51,339) (110,751)
---------- ----------
Net cash used for investing activities (93,431) (310,607)
---------- ----------
Cash flows from financing activities:
Issuance (retirement) of convertible subordinated
notes, net of issuance costs (4,325) 170,187
Repurchase of common stock (50,425) --
Redemption of convertible debt -- (14,331)
Issuance of common stock 10,367 25,082
Proceeds from put premiums 5,359 --
Increase (decrease) in other long-term liabilities,
including minority interest (1,935) 1,519
---------- ----------
Net cash generated (used) by financing activities (40,959) 182,457
---------- ----------
Net decrease in cash and cash equivalents (58,364) (8,009)
Cash and cash equivalents, beginning of year 151,725 20,119
---------- ----------
Cash and cash equivalents, end of quarter $ 93,361 $ 12,110
========== ==========
</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 nine-month periods ended
September 28, 1998 are not necessarily indicative of the results to be expected
for the full year.
2. Inventories
Sep. 28, Dec. 29,
1998 1997
---------- ----------
Raw materials $ 8,586 $ 17,900
Work in process 29,655 35,281
Finished goods 19,822 23,744
---------- ----------
$ 58,063 $ 76,925
========== ==========
3. Earnings Per Share
FAS 128 requires presentation of both basic and diluted EPS on the statement of
operations. 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
September 28, 1998 September 29, 1997
------------------------------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income $ 513 90,161 $ 0.01 $ 7,210 90,054 $ 0.08
========= =========
Effects of Dilutive
Securities:
Stock options -- 1,436 -- 6,030
Put options -- 586 -- --
--------- --------- --------- ---------
Diluted EPS:
Net income $ 513 92,183 $ 0.01 $ 7,210 96,084 $ 0.08
========= ========= ========= ========= ========= =========
Nine-months Ended
September 28, 1998 September 29, 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) $(107,422) 90,755 $ (1.19) $ 18,311 86,887 $ 0.21
========= =========
Effects of Dilutive
Securities:
Stock options -- -- -- 5,502
Convertible debentures -- -- 1,061 2,649
--------- --------- --------- ---------
Diluted EPS:
Net income (loss) $(107,422) 90,755 $ (1.19) $ 19,372 95,038 $ 0.20
========= ========= ========= ========= ========= =========
</TABLE>
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Options to purchase 17,275,317 shares of common stock were outstanding at
September 28, 1998, but were not included in the computation of diluted EPS
since their exercise price was higher than the average market price.
Convertible debentures outstanding at September 28, 1998 convertible to
7,196,000 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 back-end manufacturing facility located in Thailand;
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 3, in Bloomington,
Minnesota and movement of all production to its eight-inch, 0.35 micron fab,
Fab 4, also in Minnesota. The adjustments recorded related primarily to the
write-down of 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
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 4. This charge also included
severance payments for approximately 140 employees.
Fab 2, 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 Random Access Memory ("SRAM") products
in Texas. Costs associated with this decision included severance payments for
approximately 100 employees and the write-off of equipment which could not be
used elsewhere and all 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 test manufacturing operation in Thailand 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 Philippines
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 1,
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.
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The following tables set forth the Company's restructuring expense and charges
taken against the reserve for the quarter and nine-month period ended September
28, 1998, respectively, and the restructuring reserve balance remaining at
September 28, 1998:
<TABLE>
<CAPTION>
(In thousands)
Third Quarter 1998 Activity
Balance Balance
Jun. 28, Sep.29,
1998 Utilized Adjustments 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Write-down of fixed assets $ 39,573 $ (1,374) $ -- $ 38,199
Write-down of inventory -- -- -- --
Severance and other employee
related charges 4,121 (324) -- 3,797
Other fixed asset related
charges 3,030 -- -- 3,030
Provision for phase-down and
consolidation of manufacturing
facilities 8,525 (1,713) -- 6,812
------------- ------------- ------------- ------------
Total $ 55,249 $ (3,411) $ 0 $ 51,838
============= ============= ============= ============
1998 Restructuring Activity
1998 Balance
Restructuring Sep.29,
Expense Utilized Adjustments 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Write-down of fixed assets $ 44,950 $ (6,751) $ -- $ 38,199
Write-down of inventory 1,964 (1,964) -- --
Severance and other employee
related charges 4,779 (2,382) 1,400 3,797
Other fixed asset related
charges 3,030 -- -- 3,030
Provision for phase-down and
consolidation of manufacturing
facilities 10,376 (2,164) (1,400) 6,812
------------- ------------- ------------- ------------
Total $ 65,099 $ (13,261) $ 0 $ 51,838
============= ============= ============= ============
</TABLE>
For the quarter and nine-month period ended September 28, 1998, the Company
charged $3.4 million and $13.3 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
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expenses incurred for severance and other employee related items. Adjustments
reflect revisions to estimates previously made with the purpose of
appropriately classifying costs according to their end purpose. During the
third quarter of 1998, the Company disposal of some equipment which were
included in the restructuring reserve.
The Company has completed the shut down of Fab 3, which included severance
payments to approximately 140 employees.
The Company has discontinued producing commodity SRAM products in Fab 2 and
has made severance payments to approximately 100 employees in relation to the
restructuring of the facility.
The Company is also in the midst of moving its third party subcontractor
test operation located in Thailand to the Philippines and is expected to
complete the move by December 1998.
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 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 during the first quarter.
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 derivatives. 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
11
<PAGE>12
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 infringed two further patents owned by EMI. The Company has
reviewed these charges and believes that these charges are also without merit
and that it does not infringe the patents in question, and that the patents are
invalid and/or unenforceable. 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.
At this time the Company believes that the outcome of these actions will not
have a material adverse effect on the Company's financial position or 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
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. At this time, the Company believes that the outcome
of this action will not have a material adverse effect on the Company's
financial position or 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 November 10, 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.
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At this time, the Company believes that the outcome of this action will not
have a material adverse effect on the Company's financial position or results
of operations.
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 was also subsequently
denied by the Supreme Court of California. This action has gone forward into
discovery and the defendants have offered a settlement which has been refused
by the Company. Although the results 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.
In June 1998, the Company was contacted by Lucent Technologies ("Lucent")
regarding the infringement of four or more patents owned by Lucent.
Subsequently, the Company has notified Lucent that Lucent has infringed on one
of the Company's patents. The Company believes that a new cross-licensing
agreement will be finalized with Lucent by the first quarter of 1999. The
Company believes the outcome of this action 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 nine-month period ended September 28, 1998
decreased 13.7% and 11.6%, respectively, compared to the comparable periods a
year ago. Revenues dropped to $126.0 million and $362.7 million for the
quarter and nine-month period ended September 28, 1998, respectively, compared
to $146.1 million and $410.2 million in the respective periods in 1997. The
decline in revenues continues to be attributable to reduced revenues in the
Company's highest revenue producing division, the Memory Products Division
("MPD") where revenues decreased 20.3%, comparing the third quarter of 1998 to
the comparable quarter in 1997. Revenue for Static Random Access Memory
("SRAM") products continue to decline due to lower sales volume and lower
average selling prices ("ASPs"). Comparing the third quarter of 1998 to the
third quarter of 1997, sales volume decreased 5.9%, while ASPs declined 15.7%.
SRAM average selling prices appear to have stabilized in 1998 but are at a
lower level than in 1997.
Revenues generated from the Company's Programmable Products Division ("PPD")
also continued to decline, dropping 32.1% comparing the third quarter of 1998
to the comparable quarter in 1997. Similar to the first half of 1998, PPD's
revenues in the third 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
33.0% lower in the third quarter of 1998 compared to the comparable quarter in
1997. Revenues generated from the Company's Programmable Logic line of
products also continued to fall, dropping 31.4% comparing the third quarter of
1998 to the third quarter of 1997. Lower revenues were primarily due to a
32.5% decline in unit sales volume. ASPs for Programmable Logic products have
remained relatively constant.
In the third quarter of 1998, revenues generated from the Company's
Datacommunication Division ("DCD") increased 5.3% compared to the same quarter
in 1997. This revenue growth was primarily due to sales volume from the sale
of Specialty Memory products, which include the Dual-Port and First-in,
First-out ("FIFO") family of products.
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<PAGE>15
Revenues generated by the Company's Computer Products Division ("CPD")
continued to grow during the third quarter of 1998 increasing by 11.6%, compared
to the same quarter a year ago. CPD's revenue growth can be attributed to its
Clock line of products which increased revenues 25.5% as a result of a 63.5%
increase in unit sales volume. This increased sales volume more than offset a
22.8% decline in ASPs comparing the same time periods. CPD also benefited from
increased revenues recorded from the sale of its Universal Serial Bus ("USB")
line of products. USB is a relatively new line of products and the Company
recorded an insignificant amount of revenues in 1997.
As noted above, the Company continued to experience reductions in ASPs
throughout several of its product lines, however, the rate of decline has
decreased from that experienced in 1997. The decrease in ASPs continued to be
caused by industry over-supply, particularly evident in the telecommunication
and data communication markets that the Company principally serves. The
Company does not expect ASPs for the remainder of 1998 to fluctuate
significantly from those experienced during the third quarter of 1998.
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 back-end manufacturing facility located in Thailand;
the severance of manufacturing and other personnel, and other costs.
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 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 during the first quarter.
As of September 28, 1998, the total restructuring reserve remaining on the
Company's balance sheet was $51.8 million, primarily related to the write-off
of fixed assets awaiting disposition.
For the quarter and nine-month period ended September 28, 1998, the Company
charged $3.4 million and $13.3 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.
The Company's cost of revenues as a percentage of revenues for the quarter and
nine-month period ended September 28, 1998 increased to 68.6% and 78.4%,
respectively, compared to 63.9% and 64.0%, respectively, in the comparable
periods in 1997. In the first quarter of 1998, the Company recorded in cost of
sales, non-recurring, one-time charges of $21.7 million, primarily related to
the write-down of certain inventory, 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 and write-down of certain
equipment located in Minnesota. Without these non-recurring costs, cost of
revenues as a percentage of revenues for the nine-month period in 1998 would
have been 72.4%.
15
<PAGE>16
Revenues in 1998 have continued to decline due to lower ASPs, despite an
increase in units sold. 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 on its
gross margin. 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 test manufacturing operations, located at Alphatec
Electronics Pcl ("Alphatec"), into its Philippines plant. The portion of the
activities completed to date has increased the Company's manufacturing
efficiencies and as a result, lowered the Company's manufacturing costs as a
percentage of revenues. The Company is expecting to continue to benefit from
these restructuring activities in future quarters.
At September 28, 1998, the Company had consigned approximately $9.8 million,
net book value, of capital assets to Alphatec and Alphatec's production
represented approximately 8.1% 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 test manufacturing activity performed by Alphatec. In 1997, Alphatec
experienced financial difficulties; however, the Company believed that the
assembly and test operations with which the Company currently does business
continue to operate normally. The Company is in the process of moving its test
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, the Company's ability to manufacture a 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 19.2% and 20.2%, respectively, for the quarter and nine-month period ended
September 28, 1998, compared to 16.8% and 17.1%, respectively, for the
comparable periods in 1997. The increase in R&D expenses as a percent of
revenues is attributable to lower revenues as actual R&D spending decreased
slightly comparing the third quarter of 1998 to the comparable quarter in
1997. The Company continued to spend on R&D in an effort to accelerate the
development of new products and 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 six-inch R & D facility
into an eight-inch R & D facility, R&D spending as a percent of revenues 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.
Selling, general and administrative ("SG&A") expenses as a percent of revenues
for the quarter and nine-month period ended September 28, 1998 increased to
16.0% and 17.2%, respectively, compared to 13.0% and 13.6%, respectively in the
comparable periods a year ago. SG&A spending for the first nine-months of 1998
16
<PAGE>17
grew 11.8% in comparison to the first nine-months in 1997. The increase in
SG&A spending was primarily due to costs incurred to ensure customer
satisfaction, 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
expects to keep SG&A spending relatively constant.
The Company's operating loss for the quarter and nine-month period ended
September 28, 1998 was $4.7 million, or 3.7% of revenues, and $122.0 million,
or 33.6% of revenues, respectively, compared to operating income of $9.2
million, or 6.3% of revenues and $22.2 million, or 5.4% 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 nine months of 1998 would have been $32.7
million. Although the Company's revenues have increased each quarter throughout
1998, due to the effects of falling ASPs, the Company had to sell more units in
order to achieve such growth.
For the quarter and nine-month period ended September 28, 1998, the Company
recorded net interest and other income of $2.2 million and $0.1 million,
respectively, compared to $1.8 million and $5.8 million in the comparable
periods in 1997. 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 for
the nine-month period ended September 28, 1998 would have been $3.2 million.
In September 1998, the Company recorded a $0.7 million gain related to the
retirement of $5.0 million principal amount of its $175.0 million, 6.0%
convertible subordinated note. During 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 under the Company's line of
credit.
For the quarter and nine-month period ended September 28, 1998, the Company
recorded an income tax benefit of $3.0 million and $14.4 million, respectively,
compared to an income tax expense of $3.8 million and $9.6 million,
respectively, in the comparable periods in 1997. The income tax benefit
recorded in the third quarter of 1998 was as a result of a comprehensive study
recently completed by the Company in relation to additional R & D tax credits.
As of September 28, 1998, the income tax rate for 1998 was 11.8%. In 1997, the
income tax rate for the quarter and nine-month period was 34.5%. The Company
expects to record zero tax provision for the fourth quarter of 1998.
FACTORS AFFECTING FUTURE RESULTS:
- -----------------------------------
The discussion in this report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, including,
among other things, statements as to our future expenditure levels, operating
results and business plans that involve risks and uncertainties. Our actual
17
<PAGE>18
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 our 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 our intellectual property, the successful ramp
up of our Philippines back-end manufacturing plant, and the ability to develop
and implement new technologies including the continued transition to full
commercial production of our new 0.35 and 0.25 micron processes, dependence on
key personnel, risk of international operations and the effects of
environmental regulations.
Our 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 our
products; changes in the product mix of sales; 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 our new products; the Company's ability to
introduce new products that meet customer requirements; market acceptance of
our products; product introduction by competitors; availability and extent of
utilization of manufacturing capacity; product obsolescence; the successful
ramp up of our 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 to our 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 ours; costs associated with future litigation; and
costs associated with protecting our intellectual property. Any one or more of
these factors could result in us 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 our
quarterly and annual results of operations to vary significantly. Moreover, as
is common in the semiconductor industry, we frequently ship 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 our quarterly revenues and results of operations.
Since we recognize revenues from sales to domestic distributors only upon the
distributors' sale to end customers, we are highly dependent on the accuracy of
distributors' estimates on their resale, which could be materially different
from the actual amounts finally reported.
18
<PAGE>19
Additionally, our headquarters and some manufacturing facilities are located
near major earthquake faults. In the event of a major earthquake, we could
suffer damages that could materially and adversely affect our business,
financial conditions and results of operations.
YEAR 2000 DISCLOSURE:
- ----------------------
In just over a year, most companies will face a potentially serious problem
because many software applications, operational systems and equipment with
embedded chips or processors may not properly recognize or accurately process
calendar dates beginning in the year 2000, due to the prevalent use of two
digits to represent the year in these equipment or systems.
Like many other companies, the year 2000 issue creates a risk for Cypress. The
year 2000 problem could affect computers, software and other equipment used and
operated by the Company. This could result in system failures causing
disruptions in operations, including among other things, interruptions in
manufacturing, design and process development operations; temporary disruptions
in processing business transactions and disruptions in normal business
operations.
The Company has taken company-wide actions to assess the nature and extent of
work required to prepare its products, systems, equipment and infrastructure
for the Year 2000. In addition, the Company has engaged in the process of
evaluating its key suppliers and customers to determine the extent to which the
Company's operation's are vulnerable based upon third parties to remediatation
of their own Year 2000 issues. These activities represent continuing efforts
of the Company to address the year 2000 problem which commenced with the
implementation of a Year 2000-compliant accounting software system in 1997.
The Company's president and executive staff have assumed the responsibility of
managing the impact of the Year 2000 problem on the Company including, programs
for identification, inventory taking, risk assessment and cost estimates of
problems associated with the Year 2000; the plans, remediation effort and
testing methodology to correct those problems; and the development of
contingency plans should some of the corrective actions fail to correct the
problem or not get implemented in a timely manner. These activities, in
varying phases, are currently in process.
It is the objective of the Company for its MIS systems to be compliant by March
1999 and the rest of its systems, equipment and infrastructure to be compliant
by June 1999.
To date, the Company has incurred an insignificant amount of expenditures
related to the Year 2000 problem and an estimate of the total cost of
remediation is expected to be available by the end of fiscal year 1998.
19
<PAGE>20
At this time, the Company cannot give any assurance that the Year 2000 problem
will not have a material adverse affect on the Company's operations and earnings
in the future. Since the programs, as described, are still on going, all
potential Year 2000 issues have not yet been identified. Therefore, the
potential impact of these issues on the Company's financial condition and
results of operations cannot be determined at this time.
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 $186.6
million at September 28, 1998, a decrease of $15.0 million compared to the end
of 1997.
During the first nine-months of 1998, the Company purchased $51.3 million in
capital equipment compared to $110.8 million in the comparable period in 1997.
The Company purchased 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 was
for Fab IV located in Minnesota for the conversion of equipment from six-inch
to eight-inch. Equipment purchased for the Philippines and its subcontractors
was 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. Capital purchases for the remainder of 1998 are expected to be
approximately $40.0 million as the Company continues to buy equipment to expand
manufacturing capabilities and capacity and to enhance its research and
development capabilities.
20
<PAGE>21
During 1997, the Board of Directors authorized the repurchase of up to 4.0
million shares of the Company's common stock. In September 1998, the Board of
Directors authorized an additional 10.0 million shares to be repurchased. To
date, 8.1 million shares have been repurchased under this entire program for
$67.5 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 $9.4 million as of November 10, 1998. The Company may have a maximum
potential obligation to purchase 6.0 million shares of its common stock at an
aggregate price of $57.6 million as of November 10, 1998. The puts have
various expiration periods from November 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 September 1998, the Company retired $5.0 million principal amount of its
$175.0 million, 6.0% convertible subordinated notes for $4.3 million, resulting
in a $0.7 million pre-tax gain. In October 1998, the Company retired an
additional $10.0 million principal amount of its convertible subordinated note
for $8.6 million, resulting in a $1.4 million, pre-tax gain. Offsetting the
gain was the write-off of costs associated with the issuance of the bond of
$0.4 million (pre-tax).
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 line of credit was
cancelled 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
decline at rates above normal industry levels and increased demand is
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.
21
<PAGE>22
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 5. Other Information
In July 1998, Pierre Lamond resigned as the Company's Chairman of the
board of directors. Mr. Lamond served on the Company's board for
14 years. The Company has named Eric Benhamou, Chief Executive
Officer of 3Com and a board member since 1993, as the new Chairman of
the board. In September 1998, the Company announced Alan F. Shugart as
a new board member replacing Mr. Benhamou. Mr. Shugart is the founder
of Seagate Technology Inc.
ITEM 6:
(a) Exhibit - 27 "Financial Data Schedule"
(b) Reports on Form 8-K - None
22
<PAGE>23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYPRESS SEMICONDUCTOR CORPORATION
Date: November 10, 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
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER AND NINE
MONTH PERIOD ENDED SEPTEMBER 28, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-28-1998 DEC-28-1998
<PERIOD-START> JUN-30-1998 DEC-29-1997
<PERIOD-END> SEP-28-1998 SEP-28-1998
<CASH> 93,361 93,361
<SECURITIES> 93,222 93,222
<RECEIVABLES> 63,712 63,712
<ALLOWANCES> 1,097 1,097
<INVENTORY> 58,063 58,063
<CURRENT-ASSETS> 352,295 352,295
<PP&E> 364,371 364,371
<DEPRECIATION> 428,880 428,880
<TOTAL-ASSETS> 820,875 820,875
<CURRENT-LIABILITIES> 106,714 106,714
<BONDS> 170,000 170,000
<COMMON> 860 860
0 0
0 0
<OTHER-SE> 500,495 500,495
<TOTAL-LIABILITY-AND-EQUITY> 820,875 820,875
<SALES> 126,048 362,676
<TOTAL-REVENUES> 126,048 362,676
<CGS> 86,406 284,181
<TOTAL-COSTS> 86,406 284,181
<OTHER-EXPENSES> 24,168 73,119
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,688 8,207
<INCOME-PRETAX> (2,442) (121,857)
<INCOME-TAX> (2,955) (14,435)
<INCOME-CONTINUING> 513 (107,422)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 513 (107,422)
<EPS-PRIMARY> 0.01 (1.19)
<EPS-DILUTED> 0.01 (1.19)
</TABLE>
