<PAGE>1
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 April 4, 1999 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
-------
CYPRESS SEMICONDUCTOR CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2885898
---------------------------- ---------------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or identification No.)
organization)
3901 North First Street, San Jose, California 95134-1599
- ------------------------------------------------------------------------------
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-2600
----------------
NOT APPLICABLE
- ------------------------------------------------------------------------------
(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.
April 4, 1999 (all one class): 103,603,000
-----------------------------------------------
<PAGE>2
CYPRESS SEMICONDUCTOR CORPORATION
FORM 10-Q
Quarter Ended April 4, 1999
Index
Page
----
Part I -- FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.............................. 3
Condensed Consolidated Statements of Operations.................... 5
Condensed Consolidated Statements of Cash Flows.................... 6
Notes to Condensed Consolidated Financial Statements............... 7
Item 2. Management's Discussion and Analysis of Financial Condition.......... 19
Part II -- OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings.................................................... 36
Item 6. Exhibits and Reports on Form 8-K..................................... 36
Signatures................................................................... 37
<PAGE>3
<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share data)
(Unaudited)
<CAPTION>
April 4, January 3,
1999 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 182,648 $ 142,102
Short-term investments................................................... 42,396 18,459
---------- ----------
Total cash, cash equivalents and short-term investments.................. 225,044 160,561
Accounts receivable, net of allowances of $3,172 at April 4, 1999
and $3,050 at January 3, 1999.......................................... 80,004 68,955
Inventories.............................................................. 70,198 65,096
Other current assets..................................................... 18,001 14,372
---------- ----------
Total current assets 393,247 308,984
Property, plant and equipment (net)........................................ 338,707 348,936
Other assets including restricted cash of $59,226 and $59,741
and long-term marketable securities of $42,276 and $57,046.............. 107,568 125,011
---------- ----------
Total assets................................................. $ 839,522 $ 782,931
========== ==========
See accompanying notes to condensed consolidated financial statements.
<PAGE>4
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share data)
(Unaudited)
<CAPTION>
April 4, January 3,
1999 1999
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 54,972 $ 53,932
Accrued liabilities...................................................... 44,067 33,145
Deferred income on sales to distributors................................. 13,899 13,300
Income taxes payable..................................................... 14,151 13,591
---------- ----------
Total current liabilities............................................ 127,089 113,968
Convertible subordinated notes........................................... 160,000 160,000
Other long-term liabilities.............................................. 7,690 10,240
---------- ----------
Total liabilities.................................................... 294,779 284,208
---------- ----------
Commitments and Contingencies (Note 7)
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000 shares authorized;
none issued and outstanding............................................ -- --
Common stock, $0.01 par value, 250,000 shares authorized;
109,586; 103,603 and 96,298 outstanding at
April 4, 1999 and January 3, 1999, respectively........................ 1,096 1,096
Additional paid-in capital............................................... 475,982 481,640
Notes receivable......................................................... (7,892) --
Retained earnings........................................................ 156,073 180,625
---------- ----------
625,259 663,361
Less shares of common stock held in treasury at cost:
5,983 shares at April 4, 1999 and 13,288 shares at January 3, 1999..... (80,516) (164,638)
---------- ----------
Total stockholders' equity........................................... 544,743 498,723
---------- ----------
Total liabilities and stockholders' equity....................... $ 839,522 $ 782,931
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>5
<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
(Unaudited)
<CAPTION>
Three Months Ended
--------------------------
April 4, March 30,
1999 1998
--------- ---------
<S> <C> <C>
Revenues................................................................... $ 151,591 $ 132,153
--------- ---------
Costs and expenses:
Cost of revenues......................................................... 88,803 125,320
Research and development................................................. 30,950 27,021
Selling, general and administrative...................................... 23,439 23,772
Restructuring and merger costs........................................... 31 58,896
-------- --------
Total operating costs and expenses................................... 143,223 235,009
-------- --------
Operating income (loss).................................................... 8,368 (102,856)
Interest expense........................................................... (2,323) (2,986)
Interest and other income.................................................. 3,096 108
-------- --------
Income (loss) before income taxes.......................................... 9,141 (105,734)
(Provision) benefit for income taxes....................................... (457) 9,979
-------- --------
Net income (loss).......................................................... $ 8,684 $ (95,755)
======== ========
Net income (loss) per share:
Basic.................................................................... $ 0.09 $ (0.93)
Diluted.................................................................. $ 0.09 $ (0.93)
Shares used in per share calculations:
Basic.................................................................... 97,319 102,537
Diluted.................................................................. 100,916 102,537
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>6
<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
---------------------------
April 4, March 30,
1999 1998
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss)........................................................ $ 8,684 $ (95,755)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................................... 27,452 29,752
Restructuring charges (reversals)...................................... (3,710) 58,896
Other non-recurring costs.............................................. -- 8,827
Non-cash interest and amortization of debt issuance costs.............. 266 2,873
Changes in operating assets and liabilities:
Accounts receivable...................................................... (13,407) 7,373
Inventories.............................................................. (5,102) 10,819
Other assets............................................................. (810) (10,628)
Accounts payable and accrued liabilities................................. 5,702 (1,750)
Deferred income.......................................................... 822 469
Income taxes payable..................................................... 560 (1,088)
---------- ----------
Net cash flow generated from operating activities.................... 20,457 9,788
---------- ----------
Cash flow from investing activities:
Purchase of investments.................................................. (22,898) (40,137)
Sale or maturities of investments........................................ 13,731 38,603
Acquisition of property, plant and equipment............................. (12,299) (29,782)
Proceeds from the sale of equipment...................................... 6,823 34
---------- ----------
Net cash flow used for investing activities.......................... (14,643) (31,282)
---------- ----------
Cash flow from financing activities:
Repurchase of common stock............................................... -- (2,106)
Borrowings from line of credit........................................... -- (1,560)
Re-issuance of treasury shares........................................... 45,023 7,721
Issuance of notes to employees........................................... (7,892) --
Other long-term liabilities, including minority interest................. (2,399) (662)
---------- ----------
Net cash flow generated by financing activities...................... 34,732 3,393
---------- ----------
Net increase (decrease) in cash and cash equivalents....................... 40,546 (18,101)
Cash and cash equivalents, beginning of year............................... 142,102 157,468
---------- ----------
Cash and cash equivalents, end of quarter.................................. $ 182,648 $ 139,367
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>7
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended April 4, 1999
(Unaudited)
NOTE 1 -- INTERIM STATEMENTS
- ----------------------------
In the opinion of management of Cypress Semiconductor Corporation
("Cypress"), 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 Cypress 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 related notes
thereto for the year ended January 3, 1999 included in Cypress's 1998 Annual
Report on Form 10-K.
Beginning with its 1998 fiscal year-end, Cypress ended its fiscal months,
quarters and years on Sundays, rather than Mondays, bringing its fiscal period
ends in line with predominant industry practice. This change did not have a
significant effect on Cypress's condensed consolidated financial statements for
the three-month period ended April 4, 1999 as compared to the three-month period
ended March 30, 1998. For interim financial reporting purposes, Cypress reports
on a 13-week quarter. The results of operations for the three-month period ended
April 4, 1999 are not necessarily indicative of the results to be expected for
the full year.
NOTE 2 -- MERGER-RELATED ACTIVITY
- ---------------------------------
On April 1, 1999, Cypress completed a merger with IC WORKS Incorporated
("ICW"), which was accounted for as a pooling of interests. The consolidated
financial statements give effect to the merger for all periods presented. The
fiscal years of Cypress and ICW are different. ICW has changed its fiscal
year-end to coincide with that of Cypress. The condensed consolidated statements
of operations for the three months ended April 4, 1999 and the three months
ended March 30, 1998 combine Cypress's consolidated statements of operations for
the three month periods ended April 4, 1999 and March 30, 1998 and ICW's
consolidated statements of operations for the corresponding three month periods
ended April 3, 1999 and March 28, 1998.
The results of operations previously reported by the separate companies and
the combined amounts presented in the accompanying condensed consolidated
financial statements are presented below.
<PAGE>8
<TABLE>
Three months ended April 4, 1999:
---------------------------------
<CAPTION>
Cypress ICW Total
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Total revenue........................... $ 130,380 $ 21,211 $ 151,591
Net income.............................. $ 5,962 $ 2,722 $ 8,684
Three months ended March 30, 1998:
----------------------------------
<CAPTION>
Cypress ICW Total
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Total revenue........................... $ 116,953 $ 15,200 $ 132,153
Net loss................................ $ (93,973) $ (1,782) $ (95,755)
</TABLE>
Through April 4, 1999, Cypress has recorded aggregate merger-related
transaction costs of $3.7 million. These charges, which consist primarily of
investment banking and other professional fees, have been included in
restructuring and merger costs.
NOTE 3 -- INVENTORIES
- ---------------------
<TABLE>
<CAPTION>
April 4, January 3,
1999 1999
--------- --------
(In thousands)
<S> <C> <C>
Raw materials........................... $ 8,231 $ 8,939
Work-in-process......................... 39,005 35,399
Finished goods.......................... 22,962 20,758
-------- --------
Total......................... $ 70,198 $ 65,096
======== ========
</TABLE>
<PAGE>9
NOTE 4 -- EARNINGS PER SHARE
- ----------------------------
Statement of Accounting Standards No. 128 ("SFAS 128") requires a
reconciliation of the numerators and denominators of the basic and diluted per
share computations. Basic earnings per share ("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 all potential dilutive
common 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. Following is a
reconciliation of the numerators and denominators of the basic and diluted EPS
computations for the periods presented below.
<TABLE>
<CAPTION>
April 4, 1999 March 30, 1998
----------------------------- -------------------------------
Per-Share Per-Share
Income Shares Amount Loss Shares Amount
-------- -------- --------- -------- ------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss)...... $ 8,684 97,319 $ 0.09 $(95,755) 102,537 $ (0.93)
Effects of dilutive
securities:
Stock options.......... -- 3,597 -- --
-------- -------- --------- -------- ------- ---------
Diluted EPS:
Net income (loss)...... $ 8,684 100,916 $ 0.09 $(95,755) 102,537 $ (0.93)
======= ======= ========= ========= ======= =========
</TABLE>
At April 4, 1999 and March 30, 1998, options to purchase 18,047,000 and
22,848,000 shares, respectively, of common stock were outstanding but were
excluded from the computation of diluted EPS. Options were excluded from the
calculation at April 4, 1999 because the exercise prices were greater than the
average market price of common shares during the quarter. Due to losses incurred
by Cypress during the first quarter of 1998, all options were excluded from the
diluted EPS calculation. Convertible debentures outstanding at April 4, 1999 and
March 30, 1998 convertible to 6,772,000 and 7,408,000 shares, respectively, of
common stock were also excluded from diluted EPS as their effect was
anti-dilutive.
<PAGE>10
NOTE 5 -- RESTRUCTURING AND OTHER NON-RECURRING COSTS
- -----------------------------------------------------
1998 Restructuring and Other Non-recurring Costs
------------------------------------------------
In March 1998, Cypress implemented an overall cost reduction plan and
recorded a $57.1 million restructuring reserve. The restructuring entailed:
o The shutdown of Fab 3, located in Bloomington, Minnesota and
consolidation of parts of Fab 3 operations with other operations of
Cypress.
o The discontinuance of the 0.6 micron 256k Static Random Access Memory
("SRAM") production in Fab 2 located in Texas.
o The conversion of an existing research and development fab located in
San Jose (Fab 1) to eight-inch capability in order to be compatible
with the state of the art eight-inch Minnesota manufacturing facility.
o The transfer of Cypress's test operations from its subcontractor,
Alphatec, in Thailand to Cypress's production facility in the
Philippines.
The restructuring activities described above include the termination of
approximately 850 employees primarily from manufacturing both at Cypress and at
Alphatec.
Separate from the restructuring charge, Cypress recorded additional charges
of $27.3 million, which were recorded as operating expenses in the first quarter
of 1998. These charges were for inventory reserves ($15.8 million), the
write-off of pre-operating costs ($3.8 million), the write-off of an equity
investment ($3.1 million), costs incurred to reimburse a customer for certain
product expenses incurred ($2.5 million) and the write-off of obsolete equipment
in Fab 4 ($2.1 million). The write-down of inventory was made to establish
incremental reserves for excess inventory and was recorded as cost of revenues.
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operation in the Philippines. As a result of
restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits. These costs were written off to cost of sales. There
were no capitalized pre-operating costs subsequent to the first quarter of 1998.
<PAGE>11
The $3.1 million write-off of the investment was recorded against net
interest and other income to reflect the decline in the value of a certain
investment. Selling, general and administrative costs included the write-off of
$2.5 million in costs incurred to reimburse a customer for certain product
expenses incurred. During Cypress's periodic review of equipment, some equipment
was identified as obsolete and $2.1 million was charged to cost of sales to
write-off the obsolete equipment.
The following tables set forth charges taken against the reserve during the
quarter ended April 4, 1999 and Cypress's 1998 restructuring expense and charges
taken against the reserve from the date the restructuring commenced through
April 4, 1999, respectively.
<TABLE>
<CAPTION>
Balance Balance
January 3, April 4,
1999 Utilized Other 1999
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Severance and other employee related charges(1), (2). $ 2,309 $ (54) $(2,255) $ --
Other fixed asset related charges(1)................. 3,030 -- (520) 2,510
Provision for phase-down and consolidation of
manufacturing facilities(1)........................ 339 -- (339) --
------- ------- ------- -------
Total...................................... $ 5,678 $ (54) $(3,114) $ 2,510
======= ======= ======= =======
<CAPTION>
1998 Balance
Restructuring April 4,
Expense Utilized Other 1999
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Write-down of inventory(1)........................... $ 3,250 $(3,250) $ -- $ --
Severance and other employee related charges(1), (2). 5,334 (2,234) (3,100) --
Other fixed asset related charges(1)................. 3,030 -- (520) 2,510
Provision for phase-down and consolidation of
manufacturing facilities(1)........................ 976 (637) (339) --
------- ------- ------- -------
Total...................................... $12,590 $(6,121) $(3,959) $ 2,510
======= ======= ======= =======
<FN>
- ----------
(1) Classified on the Condensed Consolidated Balance Sheet as part of accrued
liabilities.
(2) The amount utilized represents cash payments related to
severance of approximately 850 employees.
</FN>
</TABLE>
<PAGE>12
During the quarter ended April 4, 1999, Cypress reversed $3.7 million of
previously provided restructuring costs. $2.2 million of severance and other
employee related charges and $0.3 million for the provision for phase-down and
consolidation of manufacturing facilities were reversed in conjunction with the
completion of the Alphatec restructuring activities. $0.5 million was reversed
for other fixed asset related charges based on the determination that a portion
of the fixed asset removal costs accrual would not be required. These reversals
related to Cypress's 1998 restructuring activities. Cypress also reversed $0.7
million of fixed asset installation costs related to its 1996 restructuring
activities which was no longer required.
Restructuring activities associated with Fabs 2 and 3 were completed in May
and July 1998, respectively, consistent with our restructuring schedule except
for the disposal of equipment. Fab 1 restructuring was not completed in January
1999 as originally planned. Cypress is evaluating alternatives to achieve its
eight-inch conversion plan for its R&D facility and should have resolution in
the first half of 1999. The Alphatec consolidation and transfer activity was
completed in January 1999, one month later than originally planned. Cypress
continues its efforts to dispose of assets held for sale impacted by
restructuring activities and expects to recover the originally determined
salvage value for those assets.
1997 Restructuring Costs
------------------------
During the fourth quarter of 1997, Cypress (ICW) made a decision to shut
down its wafer fabrication business located in San Jose. In connection with the
exit of the wafer fabrication business, Cypress (ICW) recorded a restructuring
charge of $9.9 million related to the impairment of assets ($3.9 million),
non-cancelable operating lease commitments ($3.6 million), costs associated with
a reduction in work force ($0.2 million) and other transaction costs ($2.2
million). The other transaction costs related primarily to inventory write-offs,
expenses incurred to remove and return leased equipment and brokerage and
professional fees.
The following tables set forth charges taken against the reserve during the
quarter ended April 4, 1999 and Cypress's (ICW's) 1997 restructuring expense and
charges taken against the reserve from the date the restructuring commenced
through April 4, 1999, respectively. The actual liquidation of substantially all
of the impaired assets was completed in November 1998. The balance of the
reserve remaining will be utilized by March 2000 when the operating lease
commitments end.
<PAGE>13
<TABLE>
<CAPTION>
Balance Balance
January 3, April 4,
1999 Utilized 1999
------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Operating lease costs(1)............................. $ 2,332 $ (522) $ 1,810
Severance and other employee related charges(1)...... 60 (60) --
Transaction and other costs(1)....................... -- -- --
------- ------- -------
Total...................................... $ 2,392 $ (582) $ 1,810
======= ======= =======
<CAPTION>
1997 Balance
Restructuring April 4,
Expense Utilized 1999
--------- ------- -------
(In thousands)
<S> <C> <C> <C>
Operating lease costs(1)............................. $ 3,615 $(1,805) $ 1,810
Severance and other employee related charges(1)...... 207 (207) --
Transaction and other costs(1)....................... 2,164 (2,164) --
--------- ------- -------
Total...................................... $ 5,986 $(4,176) $ 1,810
========= ======= =======
<FN>
- ----------
(1) Classified on the Condensed Consolidated Balance Sheet as part of accrued
liabilities.
</FN>
</TABLE>
NOTE 6 -- EQUITY AND DEBT TRANSACTIONS
- --------------------------------------
During the first quarter of 1999, Cypress filed a registration statement on
Form S-3 with the Securities and Exchange Commission. Under this shelf
registration, Cypress can, over the next two years, sell any combination of debt
securities, preferred stock and common stock in one or more offerings up to a
total dollar amount of $300.0 million dollars. Pursuant to the shelf
registration, on March 29, 1999, Cypress sold 7,227,000 shares of common stock.
Cypress was required to sell 4,669,000 shares of common stock to cure tainted
shares to allow the merger with ICW to be accounted for as a pooling of
interests. Cypress received approximately $33.8 million proceeds, net of
issuance costs, from the sale of these shares. The remaining 2,558,000 shares
were sold by the underwriters of the offering.
<PAGE>14
In March 1999, Cypress announced a program whereby all U.S. employees were
offered loans to facilitate the exercise of vested stock options. The loan
program was initiated to reduce the number of tainted shares to allow the merger
with ICW to be accounted for as a pooling of interests. Under the terms of the
program, only options which were vested as of March 1, 1999 and whose exercise
price was less than or equal to $9.75 could qualify for a loan. The loans,
including interest, are due at the earlier of three days following the sale of
the shares or within thirty days of the date the individual ceases to be an
employee of Cypress. The loans bear interest and are secured by Cypress common
shares. At April 4, 1999, loans receivable under this program totaled $7.9
million.
During 1997, Cypress (ICW) entered into an agreement to borrow $2.0 million
from a third party with interest accruing at 6.0% per annum. The loan became due
simultaneously with the merger of Cypress and ICW and was repaid in April 1999.
Also during 1997, Cypress (ICW) issued promissory notes to three significant
customers for $2.0 million, $1.4 million and $0.3 million, bearing interest at
6.0%, 10.0% and 7.5%, respectively and due in October 2000, August 2000 and July
1999, respectively. As of April 4, 1999, a total of $4.4 million was payable
under the notes.
In fiscal years 1997 and 1998, the Board of Directors authorized the
repurchase of up to 14.0 million shares of Cypress's common stock. Through
January 3, 1999, 8.1 million shares were repurchased under this entire program
for $67.5 million. On February 25, 1999, the Board of Directors terminated the
stock repurchase program to cure the tainted shares to allow the merger with ICW
to be accounted for as a pooling of interests. The repurchased shares have been
and are expected to continue to be used in conjunction with Cypress's 1994 Stock
Option Plan and Employee Stock Purchase Plan. During 1998, Cypress reissued
1,782,000 of common stock under such plans. During Q1 1999, Cypress reissued a
total of 7,305,000 shares in relation to the stock offering described above and
in conjunction with the 1994 Stock Option Plan and Employee Purchase Plan. Such
shares had been repurchased under the 1997 and 1998 plan and repurchase programs
prior to 1997.
In conjunction with the authorized stock repurchase program, Cypress sold
put warrants through private placements for which Cypress received a net amount
of $3.2 million through April 4, 1999. Cypress has a maximum potential
obligation to purchase 250,000 shares of its common stock at an aggregate price
of $2.5 million as of April 4, 1999. The puts expire May 20, 1999. Cypress 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. It is Cypress's intent to settle these put warrants with stock, if
necessary and therefore, no amount was classified out of stockholders' equity in
the accompanying consolidated balance sheets.
<PAGE>15
During 1997, Cypress (ICW) had a revolving line of credit with a bank
totaling up to $6.5 million. The line of credit, which had an original
expiration in March 1999, was renewed in December 1998. Under the terms of the
renewal, Cypress can borrow up to $6.0 million at a rate of prime plus 1.25%
through December 1999. The agreement contains certain financial covenants, with
which Cypress was in compliance with at April 4, 1999. Cypress did not have any
borrowings against the line of credit as of April 4, 1999. In July 1996, Cypress
established a three-year $100.0 million unsecured revolving credit facility with
Bank of America National Trust and Savings Association as agent on behalf of
certain banks. During 1998, Cypress cancelled the line of credit.
NOTE 7 -- IMPACT OF LITIGATION
- ------------------------------
The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. From time to
time, Cypress 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. Cypress is currently and may in the future be
involved in litigation with respect to alleged infringement by Cypress 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 Cypress's business, financial
condition and results of operations.
During 1998, EMI Group of North America, Inc. ("EMI") filed suit against
Cypress in the Federal Court in Delaware, claiming that Cypress has infringed on
four patents owned by EMI. Cypress and EMI entered into a license agreement in
February 1999, for one of the four patents in the lawsuit. In return, EMI has
agreed to withdraw two of the four patents from the lawsuit, including the
patent related to the licensing agreement. Cypress has reviewed the charges
related to the remaining two patents and believes that these charges are without
merit, that it does not infringe the patents in question and that the patents
are invalid and/or unenforceable. While no assurance can be given regarding the
outcome of this action, Cypress believes that the final outcome of the matters
will not have a material effect on Cypress's consolidated financial position or
results of operations. Cypress 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, Cypress may be required to pay
damages and other expenses, which could have a material adverse effect on
Cypress's financial position and results of operations.
<PAGE>16
In January 1998, Cypress was contacted by an attorney representing the
estate of Mr. Jerome Lemelson, charging that Cypress infringes certain patents
owned by Mr. Lemelson. On February 26, 1999, the estate filed suit against
Cypress and 87 other companies. Cypress is in the process of reviewing the
claims to determine their validity, and at this time, Cypress believes that the
patents are invalid and/or unenforceable. While no assurance can be given
regarding the outcome of this action, Cypress believes that the final outcome of
the matters will not have a material effect on Cypress's consolidated financial
position or results of operations. Cypress 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, Cypress may be required to pay
damages and other expenses, which could have a material adverse effect on
Cypress's financial position and results of operations.
In June 1997, Cypress 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 Cypress. 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 inequitable 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 May 18, 1999.
Cypress believes it has meritorious defenses to the counter-claim and intends to
defend itself vigorously. While no assurance can be given regarding the outcome
of this action, Cypress believes that the final outcome of the matters will not
have a material effect on Cypress's consolidated financial position or results
of operations. However, should the outcome of this action be unfavorable,
Cypress's business, financial condition and results of operations could be
materially and adversely affected.
On October 2, 1997, Cypress filed an action against Kevin Yourman, Joseph
Weiss, and their associated law offices in the Superior Court of California
("Superior Court") 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 Cypress 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 Cypress's officers. On May 4 1999, the Superior Court granted
a summary judgement motion by Messrs. Yourman and Weiss, holding that Messrs.
Yourman and Weiss had probable cause to bring the underlying litigation. Cypress
plans to appeal the decision. However, the results of litigation are
unpredictable. Cypress believes that this action, regardless of its outcome,
will have little, if any effect on Cypress's consolidated financial position or
results of operations.
<PAGE>17
In June 1998, Cypress was contacted by Lucent Technologies ("Lucent")
regarding the infringement of four or more patents owned by Lucent.
Subsequently, Cypress has notified Lucent that Lucent has infringed on one of
Cypress's patents. In March 1999, Cypress and Lucent signed a patent
cross-license agreement covering essentially all semiconductor patents of both
companies. The terms of this cross-license agreement will have little, if any
effect on Cypress's consolidated financial position or results of operations.
NOTE 8 -- COMPREHENSIVE INCOME
- ------------------------------
In fiscal 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
Cypress adopted this statement as of the first quarter of 1998 and has
determined that it does not have any changes in equity (net assets) from
non-owner sources.
NOTE 9 -- SEGMENT REPORTING
- ---------------------------
Cypress has two reportable segments, Memory Products and Non-memory
Products. The Memory Products segment includes Static Random Access Memories
("SRAMs") and multichip modules. The Non-memory Products segment includes
programmable logic products, data communication devices, computer products,
non-volatile memory products and wafers manufactured by the foundry. Cypress
evaluates the performance of its two segments based on profit or loss from
operations before income taxes, excluding nonrecurring gains and losses.
Cypress's reportable segments are strategic business units that offer
different products. Products that fall under the two segments differ in nature,
are manufactured utilizing different technologies and have a different
end-purpose. As such, they are managed separately. Memory Products are
characterized as a commodity, which is depicted by high unit sales volume and
lower gross margins. These products are manufactured using more advanced
technology. A significant portion of the wafers produced for Memory Products are
manufactured at Cypress's technologically advanced, eight-inch wafer production
facility located in Minnesota (Fab 4). Memory Products are used by a variety of
end-users but the product is used specifically for the storage and retrieval of
information. In contrast to Memory Products, unit sales of non-Memory Products
are generally lower than Memory Products, but sell at higher gross margins. Some
Non-memory Products are manufactured utilizing less technologically advanced
processes. A majority of wafers for Non-memory Products are manufactured at
Cypress's less technologically advanced six-inch Fab located in Texas (Fab 2).
Products in the Non-memory segment perform non-memory functions such as
floating-point mathematics, store fixed data that is not to be altered during
normal machine operations and data transfer and routing functions of signals
throughout a computer system.
The tables below set forth information about the reportable segments for
the three month periods ended April 4, 1999 and March 30, 1998. Cypress does not
allocate income taxes or non-recurring items to segments.
<PAGE>18
Business Segment Net Revenues
- -----------------------------
<TABLE>
<CAPTION>
Three Months Ended
April 4, March 30,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Memory.................................... $ 58,253 $ 49,059
Non-memory................................ 93,338 83,094
-------- --------
Total consolidated revenues............. $151,591 $132,153
======== ========
</TABLE>
Business Segment Profit (Loss)
- ------------------------------
<TABLE>
<CAPTION>
Three Months Ended
April 4, March 30,
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Memory.................................... $ (6,523) $(42,286)
Non-memory................................ 14,860 (1,674)
Restructuring and merger costs............ 31 (58,896)
Interest income and other................. 3,096 108
Interest expense.......................... (2,323) (2,986)
---------- ----------
Income (loss) before provision for income
taxes...................... $ 9,141 $(105,734)
========== ==========
</TABLE>
NOTE 10 -- 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"). SFAS 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. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations and stockholders equity, depending on the type of
hedging relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal year 2000, are not
expected to have a material effect on Cypress's consolidated financial
statements.
<PAGE>19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three Months Ended April 4, 1999
All references are to Cypress's fiscal quarters ended April 4, 1999 ("Q1
1999") and March 30, 1998 ("Q1 1998), unless otherwise indicated. This report
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
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
--------
Revenues for Q1 1999 were $151.6 million, an increase of $19.4 million or
14.7% compared to revenues of $132.2 million for Q1 1998. Cypress derives its
revenues from the sale of Memory Products and Non-memory Products.
Sales from Memory Products include Static Random Access Memories ("SRAMs")
and multichip modules. Revenues from the sale of Memory Products for Q1 1999
increased $9.2 million or 18.7% over revenues from the sale of these products
for Q1 1998. From Q1 1998 to Q1 1999, sale of SRAMs increased $8.9 million or
19.1% and multichip module sales increased $0.3 million or 11.8%. The rise in
Memory Product revenues, as compared to Q1 1998 resulted from both higher
average selling prices ("ASPs") and an increase in unit sales. ASPs were stable
during the last three quarters of fiscal 1998 and increased during Q1 1999.
Non-memory Products include computer products, data communication devices,
non-volatile memory devices and programmable logic products. Non-memory Products
also include foundry revenues. Foundry revenues represent the sale of wafers to
customers. Revenues from the sale of Non-memory Products increased $10.2 million
or 12.3% comparing Q1 1999 to Q1 1998. The growth related primarily to increases
in computer products of $10.9 million or 35.3%, data communication devices of
$2.5 million or 8.6%, and non-volatile memory devices of $0.3 million or 4.0%. A
decrease in the sale of programmable logic products of $2.0 million or 18.3%
partially offset the increases. Additionally, a decline in foundry revenues of
$1.5 million or 26.5% contributed to the overall change. The revenue growth in
computer products from Q1 1998 to Q1 1999 was primarily a result of the
expansion in the motherboard clock business. Both higher unit sales and ASPs
contributed to the increase in data communication device revenues. The net
increase in non-volatile memory devices was a result of higher ASPs offset by a
decline in unit sales. The net decrease in programmable logic products was due
to declining ASPs, offset by higher unit sales.
As is typical in the semiconductor industry, ASPs of products generally
decline over the lives of such products. The decreases in ASPs continue to be
caused by industry over-supply, particularly with the semiconductor companies
that service the telecommunication and data communication markets that Cypress
principally serves. To increase revenues, Cypress seeks to expand its market
share in the markets it currently serves and to introduce and sell new products.
Cypress will remain competitive with respect to its pricing to prevent a further
decline in sales or to increase sales.
<PAGE>20
Cost of Revenues
----------------
Cost of revenues for Q1 1999 were 58.6% of revenues, compared to 94.8% of
revenues for Q1 1998. Cost of revenues for Q1 1998 included one-time
non-recurring charges totaling $21.7 million. These charges included $15.8
million related to the write-down of inventory, $3.8 million for the write-off
of pre-operating costs and $2.1 million for the write-off of certain equipment.
Excluding these one-time non-recurring charges, cost of revenues as a percent of
revenues for Q1 1998 would have been 78.4%. The decrease in manufacturing costs
as a percent of revenues from Q1 1998 to Q1 1999 reflects higher revenues due to
a combination of greater sales of higher margin products and higher unit sales
volumes.
The $15.8 million charge in Q1 1998 for incremental inventory reserves
arose due to market conditions. These conditions resulted in the ongoing
over-supply and continued inventory corrections by end-user customers. The
write-off of pre-operating costs during Q1 1998 included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operations in the Philippines. As a result of
the restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits. There were no capitalized pre-operating costs
subsequent to the first quarter of 1998. The write-off of equipment in Q1 1998
was related to equipment identified as obsolete during Cypress's periodic review
of equipment and was no longer considered useable.
Revenues have continued to be impacted by fluctuations in ASPs. Should ASPs
erode at a rate greater than anticipated, gross margins could be materially
adversely affected. Cypress continues to introduce new products and new methods
of reducing manufacturing costs in order to mitigate the effects of ASPs on its
gross margins. In March 1998, Cypress announced restructuring activities for its
domestic wafer fabrication facilities and offshore back-end manufacturing
operations. Activities completed to date have increased Cypress's manufacturing
efficiencies and as a result, its gross margin has been increasing since Q1
1998.
Cypress expects to continue to benefit from these restructuring activities in
the future.
Research & Development
----------------------
Research and development ("R&D") expenditures for Q1 1999 were $31.0
million or 20.4% of revenues, compared to $27.0 million or 20.4% of revenues for
Q1 1998. R&D expenditures in Q1 1999 increased $4.0 million or 14.5% compared to
Q1 1998. The increase in R&D costs relates primarily to a $1.2 million increase
in depreciation and an overall increase in R&D spending.
R&D expenditures continue to increase as Cypress continues its efforts to
accelerate the development of new products and migration to more advanced
process technologies. Even with Cypress's commitment to increase design
capabilities at its design centers, R&D spending as a percent of revenues is
projected to remain relatively constant in the future. Cypress is continuing to
explore new markets and improve its design and process technologies in an effort
to increase revenues and reduce costs.
<PAGE>21
Selling, General and Administrative
-----------------------------------
Selling, general and administrative ("SG&A") expenses for Q1 1999 were
$23.4 million or 15.5% of revenues, compared to $23.8 million or 18.0% of
revenues for Q1 1998. SG&A expenses decreased by $0.4 million or 1.4% compared
to Q1 1998. The decrease results primarily from $2.5 million in costs incurred
during Q1 1998 to reimburse a customer for certain product expenses incurred
which did not recur in Q1 1999. This decrease has been offset by an increase in
commissions and salary and related benefit costs. Commission costs increased
$1.0 million from Q1 1998 to Q1 1999 as a result of greater sales. In addition,
salaries and benefits rose $0.9 million. The change in all other SG&A expenses
from Q1 1998 to Q1 1999 were not significant. With the exception of variable
spending such as incentive bonuses and commissions, Cypress expects recurring
SG&A spending to remain relatively constant.
1998 Restructuring and Other Non-recurring Costs
------------------------------------------------
In March 1998, Cypress recorded a one-time, pre-tax restructuring and other
non-recurring charge of $84.4 million. The $57.1 million restructuring charge
entailed:
1. The shutdown of Fab 3, located in Bloomington, Minnesota and
consolidation of parts of Fab 3 operations with other operations of
Cypress.
2. The discontinuance of the 0.6 micron 256k SRAM production in Fab 2 located
in Texas.
3. The conversion of an existing research and development fab located in
San Jose ("Fab 1") to eight-inch capability in order to be compatible
with the state of the art eight-inch Minnesota manufacturing facility.
4. The transfer of Cypress's test operations from its subcontractor,
Alphatec, in Thailand to Cypress's production facility in the
Philippines.
The restructuring activities described above include the termination of
approximately 850 personnel, primarily from manufacturing, both at Cypress and
at Alphatec.
Separate from the restructuring charge, Cypress recorded an additional
$27.3 million, which were recorded as operating expenses in the first quarter of
1999. These charges were for inventory reserves ($15.8 million), the write-off
of pre-operating costs ($3.8 million), the write-off of an equity investment
($3.1 million), costs incurred to reimburse a customer for certain product
expenses incurred ($2.5 million) and the write-off of obsolete equipment in Fab
4 ($2.1 million). The write-down of inventory was made to establish incremental
reserves for excess inventory and was recorded as cost of revenues.
<PAGE>22
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operation in the Philippines. As a result of
restructuring activities described above, Cypress wrote off its previously
capitalized pre-operating costs as an impaired asset due to uncertainties
surrounding their future economic benefits. Such costs were being amortized over
five years at a rate based on estimated units to be manufactured during that
period. There were no capitalized pre-operating costs subsequent to the first
quarter of 1998.
The $3.1 million write-off of the equity investment was recorded against
net interest and other income to reflect the decline in the value of a certain
investment. Selling, general and administrative costs included the write-off of
$2.5 million in costs incurred to reimburse a customer for certain product
expenses incurred. During Cypress's periodic review of equipment, some equipment
was identified as obsolete and $2.1 million was charged to cost of sales to
write-off the obsolete equipment.
Restructuring activities associated with Fabs 2 and 3 were completed in May
and July 1998, respectively, consistent with our restructuring schedule except
for the disposal of equipment. Fab 1 restructuring was not completed in January
1999 as originally planned. Cypress is evaluating alternatives to achieve its
eight-inch conversion plan for its R&D facility and should have resolution in
the first half of 1999. The Alphatec consolidation and transfer activity was
completed in January 1999, one month later than originally planned. Cypress
continues its efforts to dispose of assets held for sale impacted by
restructuring activities and expects to recover the originally determined
salvage value for those assets.
In Q1 1998, Cypress (ICW) also recorded a $1.8 million charge to recognize
the further impairment of the assets that were written down during the 1997
restructuring.
1999 Restructuring and Merger Costs
-----------------------------------
During Q1 1999, Cypress reversed $3.7 million of previously provided
restructuring costs. $2.2 million of severance and other employee related
charges and $0.3 million for the provision for phase-down and consolidation of
manufacturing facilities were reversed in conjunction with the completion of the
Alphatec restructuring activities. $0.5 million was reversed for other fixed
asset related charges based on the determination that a portion of the fixed
asset removal costs accrual would not be required. These reversals related to
Cypress's 1998 restructuring activities. Cypress also reversed $0.7 million of
fixed asset installation costs related to its 1996 restructuring activities
which was no longer required.
During Q1 1999, Cypress recorded aggregate merger-related transaction costs
of $3.7 million. These charges which consist primarily of investment banking and
other professional fees offset the reversal of restructuring charges and were
included in restructuring and merger costs on the statements of operations.
<PAGE>23
Interest Expense
----------------
Interest expense was $2.3 million for Q1 1999, compared to $3.0 million for
Q1 1998. The interest expense for both periods is primarily associated with the
6.0% Convertible Subordinated Notes ("Notes"), which were issued in September
1997 and are due in 2002. $0.4 million of the decrease from Q1 1998 is
attributable to the retirement of $5.0 million and $10.0 million of the Notes in
the third and fourth quarters of 1998, respectively. The remaining $0.3 million
decrease relates primarily to interest costs associated with the revolving line
of credit that was outstanding during Q1 1998 and cancelled during the second
quarter of 1998.
Interest and Other Income
-------------------------
Net interest and other income was $3.1 million for Q1 1999, compared to
$0.1 million for Q1 1998. Net interest and other income for Q1 1999 includes
interest income of $3.5 million, offset by $0.3 million in amortization of bond
issuance costs and foreign exchange losses of $0.2 million. Net interest and
other income for Q1 1998 includes interest income of $3.4 million and foreign
exchange gains of $0.1 million. The amount is offset by a non-recurring, pre-tax
charge of $3.1 million recorded Q1 1998 to reflect the decline in the value of a
certain investment and $0.3 million in amortization of bond issuance costs.
Taxes
-----
Cypress's effective tax rates for Q1 1999 and Q1 1998 were 5.0% and 9.4%,
respectively. A tax benefit of $10.0 million was realized during Q1 1998
compared to an expense of $0.5 million during Q1 1999. The benefit was
attributable primarily to the utilization of loss carrybacks, the utilization of
research and development tax credits and non-U.S. income taxed at lower tax
rates compared to U.S. tax rates, principally related to Cypress's operations in
the Philippines. The tax benefit recognized during Q1 1998 is less than the
expected statutory rate on Cypress's loss due to limitations on Cypress's
ability to carry such losses back to prior periods.
During 1998, the United States Internal Revenue Service began an
examination of tax returns for fiscal years 1994 through 1996. The examination
is expected to continue through December 1999. Management believes that no
material adjustments will result from this examination.
Net Income (Loss) and Net Income (Loss) Per Share
-------------------------------------------------
Net income for Q1 1999 was $8.7 million or $0.09 diluted earnings per
share, compared to a net loss of $95.8 million or $0.93 per share, on a diluted
basis for Q1 1998. The net loss for Q1 1998 included a restructuring charge of
$58.9 million and other non-recurring charges totaling $27.3 million. Excluding
the restructuring and non-recurring charges, the net loss for Q1 1998 was $17.7
million or $0.17 per share, on a diluted basis.
<PAGE>24
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cypress's cash, cash equivalents and short-term investments totaled $225.0
million at April 4, 1999, a $64.5 million increase from the end of fiscal 1998.
During Q1 1999, Cypress purchased $12.3 million in capital equipment
compared to $29.8 million in Q1 1998. Cypress purchased equipment for its
domestic wafer fabrication plants, its test and assembly facility in the
Philippines and its San Jose design and technology groups. Equipment purchased
for its fabs is expected to improve wafer manufacturing capacity and
capabilities as Cypress implements new technologies, including its 0.18- and
0.25-micron processes. A majority of the equipment purchased was for Fab 4
equipment located in Minnesota to increase the capacity and capability of Fab 4.
Equipment purchased for the Philippines was used to increase manufacturing
capacity and tool certain packaging capabilities. Capital equipment purchases
for the technology group are expected to enhance and accelerate research and
development capabilities. Capital expenditures for the remainder of 1999 are
expected to be approximately $123.0 million as Cypress continues its efforts to
increase its manufacturing capabilities and capacity and to enhance its research
and development capabilities. Commitments for purchases beyond March 2000 are
not considered to be significant.
During Q1 1999, Cypress filed a registration statement on Form S-3 with the
Securities and Exchange Commission. Under this shelf registration, Cypress can,
over the next two years, sell any combination of debt securities, preferred
stock and common stock in one or more offerings up to a total dollar amount of
$300.0 million dollars. Pursuant to the shelf registration, on March 29, 1999,
Cypress sold 7,227,000 shares of common stock. Cypress was required to sell
4,669,000 shares of common stock to cure tainted shares to allow the merger with
ICW to be accounted for as a pooling of interests. Cypress received
approximately $33.8 million proceeds, net of issuance costs, from the sale of
these shares. The remaining 2,558,000 shares were sold by the underwriters of
the offering.
In March 1999, Cypress announced a program whereby all U.S. employees were
offered loans to facilitate the exercise of vested stock options. The loan
program was initiated to reduce the number of tainted shares to allow the merger
with ICW to be accounted for as a pooling of interests. Under the terms of the
program, only options which were vested as of March 1, 1999 and whose exercise
price was less than or equal to $9.75 could qualify for a loan. The loans,
including interest, are due at the earlier of three days following the sale of
the shares or within thirty days of the date the individual ceases to be an
employee of Cypress. The loans bear interest and are secured by Cypress common
shares. At April 4, 1999, loans receivable under this program totaled $7.9
million.
<PAGE>25
During 1997, Cypress (ICW) entered into an agreement to borrow $2.0 million
from a third party with interest accruing at 6.0% per annum. The loan became due
simultaneously with the merger of Cypress and ICW and was repaid in April 1999.
Also during 1997, Cypress (ICW) issued promissory notes to three significant
customers for $2.0 million, $1.4 million and $0.3 million, bearing interest at
6.0%, 10.0% and 7.5%, respectively and due in October 2000, August 2000 and July
1999, respectively. As of April 4, 1999, a total of $4.4 million was payable
under the notes.
In fiscal years 1997 and 1998, the Board of Directors authorized the
repurchase of up to 14.0 million shares of Cypress's common stock. Through
January 3, 1999, 8.1 million shares were repurchased under this entire program
for $67.5 million. On February 25, 1999, the Board of Directors terminated the
stock repurchase program to cure the tainted shares to allow the merger with ICW
to be accounted for as a pooling of interests. The repurchased shares have been
and are expected to continue to be used in conjunction with Cypress's 1994 Stock
Option Plan and Employee Stock Purchase Plan. During 1998, Cypress reissued
1,782,000 of common stock under such plans. During Q1 1999, Cypress reissued a
total of 7,305,000 shares in relation to the stock offering described above and
in conjunction with the 1994 Stock Option Plan and Employee Purchase Plan. Such
shares had been repurchased under the 1997 and 1998 plan and repurchase programs
prior to 1997.
In conjunction with the authorized stock repurchase program, Cypress sold
put warrants through private placements for which Cypress received a net amount
of $3.2 million through April 4, 1999. Cypress has a maximum potential
obligation to purchase 250,000 shares of its common stock at an aggregate price
of $2.5 million as of April 4, 1999. The puts expire May 20, 1999. Cypress 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. It is Cypress's intent to settle these put warrants with stock, if
necessary and therefore, no amount was classified out of stockholders' equity in
the accompanying consolidated balance sheets.
During 1997, Cypress (ICW) had a revolving line of credit with a bank
totaling up to $6.5 million. The line of credit, which had an original
expiration in March 1999, was renewed in December 1998. Under the terms of the
renewal, Cypress can borrow up to $6.0 million at a rate of prime plus 1.25%
through December 1999. The agreement contains certain financial covenants, with
which Cypress was in compliance with at April 4, 1999. Cypress did not have any
borrowings against the line of credit as of April 4, 1999. In July 1996, Cypress
established a three-year $100.0 million unsecured revolving credit facility with
Bank of America National Trust and Savings Association as agent on behalf of
certain banks. During 1998, Cypress cancelled the line of credit.
Cypress believes that existing cash and cash equivalents 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. Cypress's
operating results may be adversely impacted by various risk factors causing
Cypress to raise additional capital through debt or equity financing. Although
additional financing may be required, there can be no assurance that it would be
available to Cypress or available at terms Cypress deems satisfactory.
<PAGE>26
FACTORS AFFECTING FUTURE RESULTS
- --------------------------------
Risk Factors
------------
Except for the historical information contained herein, the discussion in
this Form 10-Q 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
Cypress, that involve risks and uncertainties. We use words such as
"anticipate", "believes", "expects", "future", "intends" and similar expressions
to identify forward-looking statements. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks described below or elsewhere in this Form 10-Q. If
any of the following risks actually occur, our business, financial condition and
operating results could be materially adversely affected.
CYPRESS'S FUTURE OPERATING RESULTS ARE VERY LIKELY TO FLUCTUATE AND THEREFORE
MAY FAIL TO MEET EXPECTATIONS.
Cypress's operating results have varied widely in the past, and may
continue to fluctuate in the future. In addition, our operating results may not
follow any past trends. Our future operating results will depend on many factors
and may fluctuate and fail to meet the expectations of Cypress or others for a
variety of reasons set forth in these Risk Factors. Any downward fluctuation or
failure to meet expectations will likely adversely affect the value of your
investment in our stock. The factors we believe make our results more likely to
fluctuate, and difficult to predict, than results of a typical, non-technology
company our size and age, and which are therefore most likely to produce
departure from expectations, include:
o the intense competitive pricing pressure to which our products are subject,
which can lead to rapid and unexpected declines in average selling prices;
o the complexity of our manufacturing processes and the sensitivity of our
production costs to declines in manufacturing yields, which make yield
problems both possible and costly when they occur;
o the need for constant, rapid new product introductions which present an
ongoing design and manufacturing challenge significantly impacted by even
relatively minor errors, and which may never achieve expected market
demand.
As a result of these or other factors we could fail to achieve our
expectations as to future revenues, gross profit and income from operations.
Also, the performance of the semiconductor industry as a whole is characterized
by cyclical swings in revenue and profitability and these swings may adversely
impact Cypress.
Since we recognize revenues from sales to our domestic distributors only
when these distributors make a sale to customers, we are highly dependent on the
accuracy of their resale estimates. The occurrence of inaccurate estimates also
contributes to the difficulty in predicting our quarterly revenue and results of
operations, particularly in the last month of the quarter.
<PAGE>27
CYPRESS FACES PERIODS OF INDUSTRY-WIDE SEMICONDUCTOR OVER-SUPPLY WHICH HARM ITS
RESULTS.
The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, its products, and these
fluctuations have helped produce many occasions when supply and demand for the
industry's products are not in balance. In the past, our operating results have
been adversely affected by these industry-wide fluctuations in the demand for
semiconductors, which have resulted in under-utilization of our manufacturing
capacity. In some cases, industry downturns with these characteristics have
lasted more than a year. If these cycles continue, they will materially and
adversely affect our business, financial condition and results of operations.
CYPRESS'S FINANCIAL RESULTS COULD BE ADVERSELY IMPACTED IF THE MARKETS IN WHICH
IT SELLS ITS PRODUCTS DO NOT GROW.
Cypress's continued success depends in large part on the continued growth
of various electronics industries that use our semiconductors, including the
following industries:
o data communications and telecommunications equipment;
o computers and computer related peripherals;
o automotive electronics;
o industrial controls; and
o customer electronics equipment and military equipment.
A significant portion of our products are incorporated into data
communications and telecommunication end-products. Any decline in the demand for
networking applications, mass storage, telecommunications, cellular base
stations, cellular handsets and other personal communication devices which
incorporate our products could adversely affect our business, financial
condition and operating results. In addition, certain of our products, including
Universal Serial Bus microcontrollers, high frequency clocks and static RAMs,
are incorporated into computer and computer-related products, which have
historically experienced significant fluctuations in demand. In addition, we may
be materially and adversely affected by slower growth in the other markets in
which we sell our products.
CYPRESS IS AFFECTED BY A GENERAL PATTERN OF PRODUCT PRICE DECLINE AND
FLUCTUATIONS, WHICH CAN ADVERSELY IMPACT OUR BUSINESS.
Even in the absence of an industry downturn, the average selling prices of
our products historically have decreased during the products' lives, and we
expect this trend to continue. In order to offset these average selling price
decreases, we attempt to manufacture the products more cheaply, to generate
greater unit demand to reduce fixed costs per unit and to introduce new, higher
priced products that incorporate advanced features. If our efforts to achieve
these cost reductions, increased unit demand or new product introductions are
not successful or do not occur in a timely manner, or if our newly introduced
products do not gain market acceptance, our business, financial condition and
results of operations could be materially and adversely affected.
<PAGE>28
In addition to following the general pattern of decreasing average prices
referenced above, the selling prices for certain products, particularly
commodity static RAM products, fluctuate significantly with real and perceived
changes in the balance of supply and demand for these products. Growth in
worldwide supply of static RAMs in recent periods resulted in a decrease in
average selling prices for our products. In the event we are unable to decrease
per unit manufacturing costs faster than the rate at which average selling
prices continue to decline, our business, financial condition and results of
operations will be materially and adversely affected. In addition, we expect our
competitors to invest in new manufacturing capacity and achieve significant
manufacturing yield improvements in the future. These developments could
dramatically increase worldwide supply of static RAM products and associated
downward pressure on pricing.
CYPRESS MAY BE UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS,
AND MAY FACE SIGNIFICANT EXPENSES AS A RESULT OF ONGOING, OR FUTURE, LITIGATION.
Protection of intellectual property rights is crucial to Cypress, since
that is how we keep others from copying the innovations which are central to our
existing and future products. So although we are not currently, we may become
involved in litigation to enforce our patents or other intellectual property
rights, to protect our trade secrets and know-how, to determine the validity or
scope of the proprietary rights of others, or to defend against claims of
invalidity. This kind of litigation can be expensive, regardless of whether we
win or lose.
Also, Cypress is now and may again become involved in litigation relating
to alleged infringement by us of others' patents or other intellectual property
rights. This kind of litigation is frequently expensive to both the winning
party and the losing party and takes up large amounts of management's time and
attention. In addition, if we lose in this kind of litigation a court could
require us to pay substantial damages and/or royalties, prohibiting us from
using essential technologies. For these and other reasons, this kind of
litigation could have a material adverse effect on our business, financial
condition and results of operations. Also, although we may seek to obtain a
license under a third party's intellectual property rights in order to bring an
end to certain claims or actions asserted against us, we may not be able to
obtain such a license on reasonable terms or at all.
We have entered into technology license agreements with third parties which
give those parties the right to use patents and other technology developed by
us, and which give us the right to use patents and other technology developed by
them. We anticipate that we will continue to enter into these kinds of licensing
arrangements in the future; however, it is possible that licenses we want will
not be available to us on commercially reasonable terms. If we lose existing
licenses to key technology, or are unable to enter into new licenses which we
deem important, it could have a material adverse effect on our business,
financial condition and results of operations.
<PAGE>29
Because it is critical to our success that we are able to prevent
competitors from copying our innovations, we intend to continue to seek patent,
trade secret and mask work protection for our semiconductor manufacturing
technologies. The process of seeking patent protection can be long and
expensive, and we cannot be certain that any currently pending or future
applications will actually result in issued patents, or that, even if patents
are issued, they will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. Furthermore, others may develop
technologies that are similar or superior to our technology or design around the
patents we own.
We also rely on trade secret protection for our technology, in part through
confidentiality agreements with our employees, consultants and third parties.
However, employees may breach these agreements, and we may not have adequate
remedies for any breach. In any case, others may come to know about or determine
our trade secrets through a variety of methods. In addition, the laws of certain
territories in which we develop, manufacture or sell our products may not
protect our intellectual property rights to the same extent as do the laws of
the United States.
CYPRESS'S FINANCIAL RESULTS COULD BE ADVERSELY IMPACTED IF IT FAILS TO DEVELOP,
INTRODUCE AND SELL NEW PRODUCTS OR FAILS TO DEVELOP AND IMPLEMENT NEW
MANUFACTURING TECHNOLOGIES.
Like many semiconductor companies, which frequently operate in a highly
competitive, quickly changing environment marked by rapid obsolescence of
existing products, Cypress's future success depends on its ability to develop
and introduce new products which customers choose to buy. In the last three
recent years we have introduced and sold an average of 131 new products a year,
and these products have been an important source of revenue for us. If we fail
to compete and introduce new product designs in a timely manner or are unable to
manufacture products according to the requirements of these designs (discussed
more below), or if our customers do not successfully introduce new systems or
products incorporating ours, or market demand for our new products does not
exist as anticipated, our business, financial condition and results of
operations could be adversely affected.
For Cypress and many other semiconductor companies, introduction of new
products is a major manufacturing challenge. The new products the market
requires tend to be increasingly complex, incorporating more functions and
operating at greater speed than prior products. Increasing complexity generally
requires smaller features on a chip. This makes manufacturing new generations of
products substantially more difficult than prior products. Ultimately, whether
we can successfully introduce these and other new products depends on our
ability to develop and implement new ways of manufacturing semiconductors. If we
are unable to design, develop, manufacture, market and sell new products
successfully, our business, financial condition and results of operations would
be materially and adversely affected.
INTERRUPTIONS IN THE AVAILABILITY OF RAW MATERIALS CAN ADVERSELY IMPACT
CYPRESS'S FINANCIAL PERFORMANCE.
<PAGE>30
Cypress's semiconductor manufacturing operations require raw materials that
must meet exacting standards. We generally have available more than one source
of these materials, but there are only a limited number of suppliers capable of
delivering certain raw materials that meet our standards. If we need to use
other companies as suppliers, we would need them to go through a qualification
process. In addition, the raw materials we need for our business could get
harder to obtain as worldwide use of semiconductors increases. Although we have
faced shortages from time to time in the past and on occasion our suppliers have
told us they need more time than expected to fill our orders, to date we have
not experienced any significant interruption in operations as a result of
difficulties in obtaining raw materials for our manufacturing operations.
However, interruption of any raw material source could have a material adverse
effect on our business, financial condition and results of operations.
PROBLEMS IN THE PERFORMANCE OF OTHER COMPANIES CYPRESS HIRES TO PERFORM CERTAIN
MANUFACTURING TASKS CAN ADVERSELY IMPACT CYPRESS'S FINANCIAL PERFORMANCE.
A high percentage of our products are assembled, packaged and tested at our
manufacturing facility located in the Philippines. We rely on independent
subcontractors to assemble, package and test the balance of our products. This
reliance involves certain risks, since we have reduced control over
manufacturing quality and delivery schedules, whether these companies have
adequate capacity to meet our needs and whether or not they discontinue or
phase-out assembly processes we rely on. We cannot be certain that these
subcontractors will continue to assemble, package and test products for us, and
it might be difficult for us to find alternatives if they do not do so.
THE COMPLEX, ESSENTIAL NATURE OF CYPRESS'S MANUFACTURING ACTIVITIES MAKE THE
COMPANY HIGHLY SUSCEPTIBLE TO MANUFACTURING PROBLEMS AND THESE PROBLEMS CAN HAVE
SUBSTANTIAL NEGATIVE IMPACT WHEN THEY OCCUR.
Making semiconductors is a highly complex and precise process, requiring
production in a tightly controlled, clean environment. Even very small
impurities in our manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer or other factors
can cause a substantial percentage of wafers to be rejected or numerous chips on
each wafer to be nonfunctional. We may experience problems in achieving an
acceptable success rate in the manufacture of wafers, and the likelihood of
facing such difficulties is higher in connection with the transition to new
manufacturing methods. The interruption of wafer fabrication or the failure to
achieve acceptable manufacturing yields at any of our facilities would have a
material adverse effect on our business, financial condition and results of
operations. We may also experience manufacturing problems in our assembly and
test operations and in the introduction of new packaging materials.
CYPRESS MAY NOT BE ABLE TO USE ALL OF ITS EXISTING OR FUTURE MANUFACTURING
CAPACITY, WHICH CAN NEGATIVELY IMPACT ITS BUSINESS.
Cypress has spent, and expects to continue spending, large amounts of money
to upgrade and increase its wafer fabrication, assembly and test manufacturing
capability and capacity. If we end up not needing this capacity and capability
for any of a variety of reasons, including inadequate demand or a significant
shift in mix of product orders making our existing capacity and capability
<PAGE>31
inadequate or in excess of actual needs, our fixed costs per semiconductor
produced will increase, which will adversely affect us. In addition, if the need
for more advanced technologies requires accelerated conversion to technologies
capable of manufacturing semiconductors having smaller features, or using larger
wafers, we are likely to face higher operating expenses and the need to
write-off capital equipment made obsolete by the technology conversion, which
could adversely affect our business and results of operations.
CYPRESS'S OPERATIONS AND FINANCIAL RESULTS COULD BE SEVERELY HARMED BY CERTAIN
NATURAL DISASTERS.
Cypress's headquarters and some manufacturing facilities are located near
major earthquake faults. If a major earthquake or other natural disaster occurs,
we could suffer damages that could materially and adversely affect our business,
financial condition and results of operations.
CYPRESS'S BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WILL BE
ADVERSELY IMPACTED IF IT FAILS TO COMPETE IN ITS HIGHLY COMPETITIVE INDUSTRY AND
MARKETS.
The semiconductor industry is intensely competitive. This intense
competition results in a difficult operating environment for most companies in
the industry, including Cypress, marked by erosion of product sale prices over
the lives of each product, rapid technological change, limited product life
cycles and strong domestic and foreign competition in many markets. If we are
not able to compete successfully in this environment, our business, operating
results and financial condition will be adversely affected. A primary cause of
this highly competitive environment is the strengths or our competitors; the
industry consists of major domestic and international semiconductor companies,
many of which have substantially greater financial, technical, marketing,
distribution and other resources than we do. Cypress faces competition from
other domestic and foreign high-performance integrated circuit manufacturers,
many of which have advanced technological capabilities and have increased their
participation in markets which are important to us. Our ability to compete
successfully in a rapidly evolving high performance end of the semiconductor
technology spectrum depends on many factors, including:
o our success in developing new products and manufacturing technologies;
o the quality and price of our products;
o the diversity of our product line;
o the cost effectiveness of our design, development, manufacturing and
marketing efforts;
o the pace at which customers incorporate our products into their
systems, and
o the number and nature of our competitors and general economic
conditions.
We believe we currently compete effectively in the above areas to the
extent they are within our control; however, given the pace at which events
change in the industry, our current abilities are not a guarantee of future
success.
<PAGE>32
CYPRESS MUST BUILD SEMICONDUCTORS BASED ON ITS FORECASTS OF DEMAND, AND CAN END
UP WITH LARGE AMOUNTS OF UNSOLD PRODUCT IF ITS FORECASTS ARE WRONG.
Cypress must order materials and build semiconductors based on its existing
orders, which may be cancelled under many circumstances, and to a greater extent
on its internal forecasts. As a result, we are very dependent on our forecasts
to predict what we think we will be able to sell. Because our markets are
volatile and subject to rapid technology and price changes, our forecasts may be
wrong, and we may make too many or too few of certain products. Also, our
customers frequently place orders requesting product delivery almost immediately
after the order is made, which makes forecasting customer demand all the more
difficult. The above factors also make it difficult to forecast quarterly
operating results. If we are unable to predict accurately the appropriate amount
of product required to meet customer demand, our business, financial condition
and results of operations could be materially adversely affected.
CYPRESS MUST SPEND HEAVILY ON EQUIPMENT TO STAY COMPETITIVE, AND WILL BE
ADVERSELY IMPACTED IF IT IS UNABLE TO SECURE FINANCING FOR SUCH INVESTMENTS.
Semiconductor manufacturers generally must spend heavily on equipment to
maintain or increase manufacturing capacity and capability in order to remain
competitive. In particular, Cypress expects to spend in excess of $100 million
on equipment in 1999 and anticipates significant continuing capital expenditures
in subsequent years. In the past, we have reinvested a substantial portion of
our cash flow from operations in capacity expansion and improvement programs.
However, our cash flows from operations depend primarily on average selling
prices, which have been declining, and the per unit cost of our products. If we
are unable to decrease costs for our products at a rate at least as fast as the
rate of decline in selling prices for such products, we may not be able to
generate enough cash flow from operations to maintain or increase manufacturing
capability and capacity as necessary. In that case we would need to seek
financing from external sources to satisfy our needs for manufacturing equipment
and, if cash flow from operations declines too much, for operational cash needs
as well. However, such financing may not be available on terms which are
satisfactory to us, in which case our business, financial condition and results
of operations will be adversely impacted.
CYPRESS COMPETES WITH OTHERS TO ATTRACT AND RETAIN KEY PERSONNEL, AND ANY LOSS
OF, OR INABILITY TO ATTRACT, SUCH PERSONNEL WOULD HURT US.
To a greater degree than most non-technology companies, Cypress depends on
the efforts and abilities of certain key management and technical personnel. Our
future success will depend in part upon our ability retain these personnel, and
to attract and retain other highly qualified personnel, particularly product
design engineers. We compete for such personnel with other companies, academic
institutions, government entities and other organizations. Competition for
personnel such as these is intense throughout the technology industry and we may
not be successful in hiring or retaining new or existing qualified personnel. If
we lose existing qualified personnel or are unable to hire new qualified
personnel as needed, our business, financial condition and results of operations
could be adversely affected.
CYPRESS FACES ADDITIONAL PROBLEMS AND UNCERTAINTIES ASSOCIATED WITH
INTERNATIONAL OPERATIONS THAT COULD ADVERSELY IMPACT IT.
<PAGE>33
International sales represented 52.7% revenues in Q1 1999 and 43.9% of our
revenues in Q1 1998. Our offshore assembly and test operations, as well as our
international sales, face risks frequently associated with foreign operations,
including:
- currency exchange fluctuations,
- political instability,
- changes in local economic conditions,
- the devaluation of local currencies,
- import and export controls, and
- changes in tax laws, tariffs and freight rates.
To the extent any such risks materialize, our business, financial condition
and results of operations could be materially and adversely affected.
CYPRESS MUST COMPLY WITH MANY DIFFERENT ENVIRONMENTAL REGULATIONS, WHICH CAN BE
EXPENSIVE.
Cypress must comply with many different federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. This compliance can be expensive. In addition, over the last several
years, the public has paid a great deal of attention to the potentially negative
environmental impact of semiconductor manufacturing operations. This attention
and other factors may lead to changes in environmental regulations which could
force us to purchase additional equipment or comply with other potentially
costly requirements. If we fail to control the use of, or to adequately restrict
the discharge of, hazardous substances under present or future regulations, we
could face substantial liability or suspension of our manufacturing operations,
which could have a material adverse effect on our business, financial condition
and results of operations.
CYPRESS DEPENDS ON THIRD PARTIES TO TRANSPORT ITS PRODUCTS AND COULD BE HARMED
IF THESE PARTIES EXPERIENCE PROBLEMS.
Cypress relies on independent carriers and freight forwarders to move its
products between manufacturing plants and to its customers. Cypress has limited
control over these parties; however, any transport or delivery problems because
of their errors, or because of unforeseen interruptions in their activities due
to factors such as strikes, political instability, natural disasters and
accidents, could have a materially adverse effect on our business, financial
conditions and results of operations and ultimately impact our relationship with
our customers.
Year 2000 Readiness Disclosure
------------------------------
In less than 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 systems and equipment.
<PAGE>34
Like many other companies, the year 2000 issue poses a risk for Cypress.
The year 2000 problem could affect our computers, software and other equipment
we use and operate. 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 other normal business operations.
Cypress has taken company-wide actions to assess the nature and extent of
work required to prepare its products, systems, equipment and infrastructure for
January 1, 2000. In addition, we have engaged in the process of evaluating our
key suppliers and customers to determine the extent to which our operations are
vulnerable based upon third parties' failure to address their own year 2000
issues. These activities represent our ongoing efforts to address the year 2000
problem that we commenced with the implementation of a year 2000-compliant
accounting software system in 1997.
Cypress's president and executive staff have assumed the responsibility of
managing the impact of the year 2000 problem on all aspects of our operations,
including programs for identification, inventory taking, risk assessment and
cost estimates of problems associates with the year 2000; the plans, remediation
effort and testing methodology to correct those problems; and the development of
contingency plans if some of the corrective actions fail to correct the problem
or do not get implemented in a timely manner. These activities, in varying
phases, are currently in process.
As of April 1999, Cypress has completed 95% of its year 2000 compliance
efforts for our internal business (MIS) systems. It is our objective to complete
the remainder of our compliance efforts for our MIS systems and to ensure the
rest of our systems, equipment and infrastructure are compliant by June 1999.
Our efforts since the beginning of fiscal year 1999 have shifted in focus from
inventory taking and assessment to remediation, testing, and contingency
planning activities. All mission critical systems, equipment, and infrastructure
elements are being tested for year 2000 readiness by June 1999. We have also
begun contingency planning efforts, considering Cypress's entire supply chain
and external infrastructure, to ensure plans will be in place to address any
unforeseen year 2000 failures.
Through 1998, Cypress has incurred little cost in addressing the year 2000
problem. In 1999 we expect to incur between two and three million dollars of
expense and capital outlays for remediation, testing and contingency planning
efforts. During Q1 1999, approximately 40% of planned expenditures have been
incurred.
In the event year 2000 issues relating to key customers and suppliers are
not successfully resolved, based on information available to us at present, we
believe that the most reasonably likely worse case scenario is a temporary
disruption in infrastructure service, particularly power and telecommunications,
which could adversely impact supplier deliveries or customer shipments. If
severe disruptions occur in these areas and are not corrected in a timely
manner, a revenue or profit shortfall may result in fiscal year 2000.
Cypress Year 2000 contingency planning efforts are guided by three elements
and specifically expressed in our Year 2000 Mission: (1) Cypress serves its
customers continuously, (2) Cypress maintains continuous employment, and (3)
Cypress increases shareholder value relative to its competitors. The executive
staff of Cypress is directly responsible for developing and approving Cypress's
<PAGE>35
year 2000 contingency planning efforts, and the team is led by the CEO. The
operating assumption that external infrastructure may be down for up to 2-4
weeks has been used in order to create a suitable framework for contingency
planning efforts, and as a result, Cypress expects to have plans in place to
address any unforeseen year 2000 failures. Our contingency planning efforts will
continue through June 1999, at which time these activities will be documented
and implemented accordingly. A number of business responses are being actively
considered and all should be viewed as likely for some segment of our
customer/supplier base:
- developing second/alternate source suppliers for critical raw
materials and subcontract operations,
- work-in-process inventory "build ahead" in Cypress wafer fab
locations,
- finished goods inventory "build ahead" in Cypress/subcontractor
assembly locations,
- increased consignment inventory programs for strategic customers (up
to 3 months on customer premises),
- higher year-end 1999 stocking levels for primary Cypress distributors,
- partial/full company shutdown for up to 14 days, o facility "safe
state" plans, including plans to preserve equipment and the controlled
environment of manufacturing facilities (i.e., temperature and
humidity controls) for a period of 2 weeks using self-generated power
in the event of infrastructure shutdown, and
- early payment/collection as well as delayed payment/collection for
Cypress suppliers, customers and employees.
Market Risk Disclosure
----------------------
Cypress is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. To mitigate these risks, Cypress
utilizes derivative financial instruments. Cypress does not use derivative
financial instruments for speculative or trading purposes.
A majority of Cypress's revenue and capital spending is transacted in U.S.
dollars. However, Cypress does enter into these transactions in other
currencies, primarily Japanese yen and certain other European currencies. To
protect against reductions in value and the volatility of future cash flows
caused by changes in foreign exchange rates, Cypress has established revenue and
balance sheet hedging programs. Cypress's hedging programs reduce, but do not
always eliminate, the impact of foreign currency rate movements. There have been
no significant changes in the market risk disclosures during the three-months
ended April 4, 1999 ad compared to the discussion in our 1998 Annual Report on
Form 10-K for the year ended January 3, 1999.
<PAGE>36
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
- ---------------------------
The information required by this item is included in Part I in Note 7 of
Notes to the Condensed Consolidated Financial Statements.
Item 6 -- Exhibits and Reports on Form 8-K
- ------------------------------------------
a. Exhibits
Exhibit 27 -- Financial Data Schedule
b. Reports on Form 8-K
1. Filed February 12, 1999 -- Filing includes a description of the
transaction between Cypress and IC Works Inc., financial
statements of IC Works Inc., and the Agreement and Plan of
Reorganization dated January 21, 1999.
2. Filed March 24, 1999 -- Amendment to Form 8-K filed February 12, 1999.
3. April 16, 1999 -- Filing relates to the acquisition of IC Works
Inc. and contains a copy of the press release regarding
consummation of the merger issued by Cypress on April 5, 1999 as
an exhibit.
<PAGE>37
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 CORORATION
By /s/ T.J. RODGERS
------------------------------
T.J. Rodgers
President and Chief Executive Officer
By /s/ EMMANUEL HERNANDEZ
------------------------------
Emmanuel Hernandez
Vice President, Finance and Administration and Chief Financial Officer
Dated: May 19, 1999
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