<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________to__________.
Commission file number 1-10079
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CYPRESS SEMICONDUCTOR CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2885898
---------------------------- ---------------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or identification No.)
organization)
3901 North First Street, San Jose, California 95134-1599
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(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-2600
----------------
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
March 30, 1998 (all one class): 90,919,000
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CYPRESS SEMICONDUCTOR CORPORATION
FORM 10-Q/A
Quarter Ended March 30, 1998
Index
Part I - Financial Information
- --------------------------------
Item 1. Condensed Consolidated Financial Statements Pages 3 - 13
Item 2. Management's Discussion and Analysis Pages 14 - 22
Part II - Other Information
- --------------------------------
Item 1. Legal Proceedings Page 23
Item 6. Exhibits and Reports on Form 8-K Page 23
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per-share data)
(Unaudited)
<CAPTION>
(Restated)
Mar. 30, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 137,058 $ 151,725
Short-term investments 61,083 49,836
---------- ----------
Total cash, cash equivalents and
short-term investments 198,141 201,561
Accounts receivable, net of allowances of
$1,093 at March 30, 1998 and $3,524 at
December 29, 1997 59,140 67,854
Inventories 64,983 76,925
Other current assets 62,369 51,740
---------- ----------
Total current assets 384,633 398,080
Property, plant and equipment (net) 388,467 442,661
Assets held for sale 6,310 --
Other assets, including restricted investments of
$60,058 and $60,112 and long-term marketable
securities of $32,362 and $42,146, at
March 30, 1998 and December 29, 1997, respectively. 98,992 115,529
---------- ----------
Total assets $ 878,402 $ 956,270
========== ==========
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CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except share and per-share data)
(Unaudited)
<CAPTION>
(Restated)
Mar. 30, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,220 $ 60,857
Accrued liabilities 28,626 21,472
Deferred income on sales to distributors 10,105 9,636
Income taxes payable -- 1,088
---------- ----------
Total current liabilities 103,951 93,053
Convertible subordinated notes 175,000 175,000
Deferred income taxes 36,070 36,070
Other long-term liabilities, including minority
interest 8,350 8,671
---------- ----------
Total liabilities 323,371 312,794
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; none issued and
outstanding -- --
Common stock, $.01 par value, 250,000,000
shares authorized; 98,147,000 issued;
90,919,000 and 90,684,000 outstanding 1,015 1,015
Additional paid-in capital 438,316 430,682
Retained earnings 239,937 333,910
---------- ----------
679,268 765,607
Less shares of common stock held in
treasury, at cost: 7,228,000 at March 30, 1998
and 7,463,000 at December 29, 1997 (124,237) (122,131)
---------- ----------
Total stockholders' equity 555,031 643,476
---------- ----------
Total liabilities and stockholders'
equity $ 878,402 $ 956,270
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended
----------------------
(Restated)
Mar. 30, Mar. 31,
1998 1997
---------- ----------
<S> <C> <C>
Revenues $ 116,953 $ 125,999
---------- ----------
Costs and expenses:
Cost of revenues 114,382 82,349
Research and development 24,488 21,023
Selling, general and administrative 22,196 17,564
Restructuring costs (Note 5) 57,099 --
---------- ----------
Total operating costs and expenses 218,165 120,936
---------- ----------
Operating income (loss) (101,212) 5,063
Interest expense (2,842) (2,316)
Interest and other income 102 4,826
---------- ----------
Income (loss) before income taxes (103,952) 7,573
(Provision) benefit for income taxes 9,979 (2,613)
---------- ----------
Net income (loss) $ (93,973) $ 4,960
========== ==========
Net income (loss) per share:
Basic $ (1.03) $ 0.06
Diluted $ (1.03) $ 0.06
Weighted average common and
common equivalent shares
outstanding:
Basic 91,068 81,838
Diluted 91,068 94,489
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
----------------------
(Restated)
Mar. 30, Mar. 31,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (93,973) $ 4,960
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 29,180 27,639
Restructuring charges 57,099 --
Other non-recurring costs 8,827 --
Non-cash interest and amortization of debt
issuance costs 2,873 951
Changes in operating assets and liabilities:
Receivables 8,905 (7,642)
Inventories 11,942 (7,066)
Other assets (1,270) 7,038
Accounts payable and accrued liabilities (1,858) (3,104)
Deferred income 469 (565)
Income taxes payable (1,088) 8,929
---------- ----------
Net cash generated by operations 21,106 31,140
---------- ----------
Cash flows from investing activities:
Increase in short-term investments (net) (11,247) (55,628)
Acquisition of property, plant and equipment (29,734) (30,021)
---------- ----------
Net cash used for investing activities (40,981) (85,649)
---------- ----------
Cash flows from financing activities:
Repurchase of common stock (2,106) --
Borrowings from line of credit -- 50,999
Redemption of Convertible debt -- (14,331)
Issuance of common stock 7,634 4,055
Other long-term liabilities, including minority
interest (320) (4,403)
---------- ----------
Net cash generated by financing activities 5,208 36,320
---------- ----------
Net decrease in cash and cash equivalents (14,667) (18,189)
Cash and cash equivalents, beginning of year 151,725 20,119
---------- ----------
Cash and cash equivalents, end of quarter $ 137,058 $ 1,930
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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CYPRESS SEMICONDUCTOR CORPORATION
Notes to Condensed Consolidated Financial Statements (Restated)
(Unaudited)
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 notes thereto for the
year ended December 29, 1997 included in Cypress's 1997 Annual Report on
Form 10-K.
For interim financial reporting purposes, Cypress reports on a 13-week quarter.
The results of operations for the three-month period ended March 30, 1998 are
not necessarily indicative of the results to be expected for the full year.
2. Restatement
In response to a review by the staff of the Securities and Exchange Commission,
Cypress is revising previously reported financial statements. Specifically,
and as discussed in detail in Note 5, the consolidated financial statements for
the quarter ended March 30, 1998 have been restated to adjust the charges
related to the restructuring activity which occurred during the first quarter
of 1998. As a result of the restatement, net loss and net loss per share for
the three month period ended March 30, 1998 are as follows:
Three Months Ended
Previous Restated
---------- ----------
Net loss $ (101,189) $ (93,973)
========== ==========
Basic EPS $ (1.11) $ (1.03)
========== ==========
Diluted EPS $ (1.11) $ (1.03)
========== ==========
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3. Inventories
Mar. 30, Dec. 29,
1998 1997
---------- ----------
Raw materials $ 9,600 $ 17,900
Work in process 25,238 35,281
Finished goods 30,145 23,744
---------- ----------
$ 64,983 $ 76,925
========== ==========
4. Earnings Per Share
Cypress adopted Statement of Accounting Standard No. 128 ("FAS 128"), Earnings
Per Share ("EPS") in 1997. FAS 128 requires presentation of both basic and
diluted EPS on the income statement. Basic EPS is computed by dividing net
income available to stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted EPS is
computed using the weighted average number of common and potential common stock
equivalent shares outstanding during the period. In computing diluted EPS, the
average stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options. Potential common
stock equivalent shares are included in the computation of diluted EPS, except
when anti-dilutive. FAS 128 requires the reconciliation of the numerators and
denominators of the basic and diluted earnings per share computation as
follows:
<TABLE>
<CAPTION>
(In thousands, except per-share amounts)
Three Months Ended
(Restated)
March 30, 1998 March 31, 1997
------------------------------------------------------------
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $ (93,973) 91,068 $ (1.03) $ 4,960 81,838 $ 0.06
========= =========
Effects of Dilutive
Securities:
Stock options -- -- -- 5,147
Convertible debentures -- -- 966 7,504
--------- --------- --------- ---------
Diluted EPS:
Net income (loss) $ (93,973) 91,068 $ (1.03) $ 5,926 94,489 $ 0.06
========= ========= ========= ========= ========= =========
</TABLE>
8
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Options to purchase 22,848,000 shares of common stock were outstanding at
March 30, 1998, but were not included in the computation of diluted EPS as the
effect of these shares was anti-dilutive. Convertible debentures outstanding
at March 30, 1998 convertible to 7,408,000 shares of common stock were also
excluded from diluted EPS as their effect was anti-dilutive.
5. Restructuring and Other Non-Recurring Costs
In March 1998, Cypress recorded restructuring charges for $65.1 million. This
primarily related to the write-down of the carrying value of fixed assets to
their recoverable amount, thus requiring a charge of $52.5 million and
establishment of reserves amounting to $12.6 million relating to the write-down
of inventory; operating costs attributable to the closure and consolidation of
manufacturing facilities; consolidation of test facilities; severance of
manufacturing and other personnel and other costs.
Subsequently, Cypress revised the charge previously recorded in March 1998 in
order to better reflect when the charges were required. The revisions included
reductions in the charges for the write-down of assets of $6.1 million and the
reduction in the reserves required for severance and inventory write-downs
amounting to $1.9 million. These charges were recorded in subsequent quarters.
The restructuring 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.
(5) The restructuring activities described above include the termination
of approximately 850 personnel, primarily from manufacturing, both at
Cypress and at Alphatec.
FAB 3 - The charge relating to the shutdown of Fab 3 was $28.4 million. Of
this amount, $26.0 million related to the write-down of equipment held for
sale, $1.7 million of other fixed asset related charges for incremental third
party costs expected to be incurred in the eventual physical removal of the
written down assets, $0.5 million for severance and $0.2 million related to
inventory.
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Fab 3 assets, which were not upgradable to eight-inch capability, were written
down based on the estimated useful lives of the assets and the salvage value of
the assets. The estimated useful lives were generally two months as a result
of the decision to discontinue production in Fab 3 and the salvage value was
determined based on the estimated sales value of used semiconductor equipment.
Non-upgradable Fab 3 assets were depreciated to their salvage value during
the production phase-down period. Fab 3 assets, which are upgradable to
eight-inch capability, will be transferred to Fab 4. Assets were written down
to the revised carrying values and are included in "Assets held for sale" in
the accompanying balance sheet.
In accordance with the restructuring plan, Cypress plans to cease Fab 3
production in the second quarter of 1998. As of March 30, 1998, a substantial
amount of the equipment remains on hand. Cypress expects to recover the
originally determined salvage value for such equipment, however, no assurance
can be given as to the amount of proceeds which will ultimately be collected.
FAB 2 - The decision to discontinue manufacturing SRAM products on Cypress's
0.6 micron 256K SRAM process in Texas resulted in excess equipment and employee
redundancy. Charges related to this decision totaled $21.3 million, of which
$18.0 million related to the write-down of equipment held for sale, $0.3
million related to the write-down of inventory, $1.7 million related to
severance and other employee related costs and $1.3 million of other fixed
asset related charges for incremental third party costs expected to be incurred
in the eventual physical removal of the written down assets and the resolution
of certain related tax matters.
Excess equipment in Fab 2 was written down based on the estimated useful lives
of the assets and the estimated salvage value of the assets. The salvage value
was determined based on the estimated sales value of used semiconductor
equipment. Cypress had the ability and intention to sell all the equipment
immediately but due to the semiconductor industry slow-down, Cypress
recognized immediate sale of the equipment would be difficult. The equipment
was kept in the fab, ready for demonstration and testing by a willing buyer.
Cypress plans to use the equipment during the production phase-down period
through the beginning of the second quarter of 1998.
Similar to Fab 3 equipment, most of the equipment in Fab 2 remains on hand due
to the over-supply of used semiconductor equipment on the market. Cypress
expects to recover the originally determined salvage value for such equipment,
however, no assurance can be given as to the amount of proceeds which will
ultimately be collected.
FAB 1 AND SAN JOSE OPERATIONS - The restructuring plan included the upgrade of
Fab 1 to an eight-inch facility to ensure compatibility with Cypress's Fab 4
manufacturing facility in Minnesota. Fab 1 is used for research and
development purposes. The plan assumed commencement of Fab 1 restructuring
activities during the middle of 1998 with completion by the end of January
1999. The plan included the disposal of six-inch manufacturing equipment in
January 1999 which was not upgradable to eight-inch capability. Therefore, the
remaining net book value of $6.1 million of such assets is being written off
over the estimated useful life through January 1999. Incremental depreciation
charges, to reflect the revised useful lives of this equipment will be included
in research and development costs from the second quarter onward. Cypress also
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<PAGE>11
reserved $1.0 million to write-down the value of certain other equipment and
assets and reserved $1.3 million related to severance and other employee
related costs.
ALPHATEC - Cypress reserved $5.1 million to provide for the consolidation of
Thailand test activities from Alphatec, Cypress's subcontractor, with Cypress's
Philippines facility. Of this $5.1 million reserve, $1.5 million relates
to production inventories which are no longer useable as a result of this
consolidation, $1.3 million relates to severance costs at the subcontractor,
$1.3 million relates to excess equipment and leasehold improvements which are
no longer used and $1.0 million for other fixed asset related charges for
incremental third party costs expected to be incurred in the eventual physical
removal of the written down assets. The assets were considered held for sale
and were written down to their revised carrying values. The transfer of
production from Alphatec to the Philippines facility is expected to begin
during the second quarter of 1998 and be completed by December 1998. There are
no capitalized pre-operating costs subsequent to the first quarter of 1998.
The following table sets forth the restructuring expense reserve and charges
taken against the reserve based on the restated restructuring charges for the
quarter ended March 30, 1998.
<TABLE>
<CAPTION>
(In thousands)
Q198 Balance
Restructuring Mar. 30,
Charges Utilized 1998
------------- ------------- -------------
<S> <C> <C> <C>
Write-down of inventory $ 1,964 $ (1,964) $ --
Severance and other employee
related charges 4,779 -- 4,779
Other fixed asset related
charges 3,030 -- 3,030
Provision for phase-down and
consolidation of manufacturing
facilities 976 -- 976
------------- ------------- -------------
Total $ 10,749 $ (1,964) $ 8,785
============= ============= =============
</TABLE>
During the first quarter of 1998, $2.0 million was charged against the
restructuring reserve. Charges against the reserve were primarily to write-off
inventory located at Cypress's third party subcontractor in Thailand.
Separate from the restructuring charge, Cypress recorded an additional $27.3
million, which were recorded as operating expenses. These charges resulted from
changes in market conditions and were considered as part of ongoing operations.
They included inventory reserves ($15.8 million), the write-off of
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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 described above, Cypress wrote off its previously
capitalized pre-operating costs as an impaired asset due to uncertainties
surrounding their future economic benefits. The pre-operating costs totaling
$3.8 million, net of accumulated amortization were included in other assets at
December 29, 1997. Such costs were being amortized over five years at a rate
based on estimated units to be manufactured during that period.
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.
6. Impact of Litigation
The semiconductor industry has experienced a substantial amount of litigation
regarding patent and other intellectual property rights. From time to time,
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.
In January 1998, Cypress was contacted by the attorneys representing the
estate of Mr. Jerome Lemelson charging that Cypress infringed on certain
patents registered by Mr. Lemelson. The attorneys for the estate have not
filed suit, but have urged Cypress to enter into a licensing agreement with
the estate in order to avoid litigation. Cypress is in the process of
reviewing the charges to determine the validity of the charge. Should the
estate file suit, 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.
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<PAGE>13
In June 1997, Cypress commenced a declaratory judgement action in the United
States District Court for the District of Nevada against the Li Second Family
Trust ("the Trust") asking for declaratory relief to the effect that a U.S.
patent relating to a portion of the process for manufacturing semiconductors is
unenforceable, invalid and not infringed by Cypress. The Trust has
counter-claimed for patent infringement on the same patent alleging such patent
covers oxide-isolated integrated circuits. In correspondence, attorneys for
the trust have argued that such patent "is applicable to NMOS, CMOS, Bipolar,
BiCMOS and other technologies". In January 1998, in a related case, the
Federal Court for the Eastern District of Virginia preliminarily ruled that the
Li's patent is unenforceable due to unequitable conduct by Dr. Li and his
attorneys in obtaining the patent. Dr. Li has the right to file an appeal,
although no such appeal as been filed as of May 14, 1998. Cypress believes it
has meritorious defenses to the counter-claim and intends to defend itself
vigorously. However, should the outcome of this action be unfavorable,
Cypress's business, financial condition and results of operations could be
materially and adversely affected.
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<PAGE>13
On October 2, 1997, Cypress filed an action against Kevin Yourman, Joseph
Weiss, and their associated law offices in the Superior Court of California in
Santa Clara County for malicious civil prosecution in underlying securities
fraud actions initiated by Messrs. Yourman and Weiss in 1992. The underlying
securities fraud actions were dismissed because no officer of 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
Cypress's officers. A motion by Messrs. Yourman and Weiss to dismiss Cypress's
malicious prosecution action was denied, and appeals of this denial to the
Supreme Court of California were also denied. As a result, this action will go
forward into discovery. Although the expenses and risks of litigation are
unpredictable, Cypress believes it will prevail. Cypress believes that this
action, regardless of its outcome, will have little, if any, effect on
Cypress's financial condition or results of operations.
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<PAGE>14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the factors set forth in "Factors Affecting Future Results" and elsewhere in
this Report.
RESULTS OF OPERATIONS:
- --------------------------
Revenues for the quarter ended March 30, 1998 decreased 7.2% compared to the
comparable period a year ago, dropping to $117.0 million in 1998 compared to
$126.0 million in the first quarter of 1997. The decline in revenues can be
attributed to the Memory Products Division ("MPD"), the Programmable Products
Division ("PPD") and the Data Communications Division ("DCD"). MPD's revenues
decreased 2.4% comparing the first quarter of 1998 to the comparable quarter in
1997, primarily as a result of lower average selling prices ("ASPs") for Static
Random Access Memory ("SRAM") products. Even though unit sales volume in the
first quarter of 1998 was 11.2% higher than in the first quarter of 1997, it
was not enough to offset the 12.0% decrease in ASPs. ASPs for SRAM products
continued to decline in 1998, but at a reduced rate compared to 1997.
Revenues generated from Cypress's PPD product line decreased significantly
dropping 31.4% comparing the first quarter of 1998 to the first quarter of
1997. In December 1997, Cypress announced its intention to exit the commodity
Erasable Programmable Read-only Memory ("EPROM") business in order to
concentrate its efforts on products yielding higher margins. As a result of
this decision, revenues generated from the Programmable Read-only Memory
("PROM") and EPROM line of products were $3.5 million lower in the first
quarter of 1998 compared to the comparable period in 1997. In March 1997,
Cypress sold its Field Programmable Gate Array ("FPGA") line of products to
QuickLogic Corporation in exchange for an increase in Cypress's equity
position in QuickLogic. In the first quarter of 1997, the FPGA product line
contributed $2.8 million in revenues. The remaining decrease in PPD revenues
can be attributed to the Small Programmable Logic Device ("SPLD") line of
products which recorded a $2.3 million decrease in revenues, comparing the
first quarter of 1998 to the same quarter in 1997. Lower revenues were the
result of declining ASPs experienced in the first quarter of 1998.
Revenues generated from the DCD product line during the first quarter of 1998
decreased 5.9% compared to the same quarter last year. The decrease in
revenues was primarily due to lower ASPs and lower sales volume from the sale
of Specialty Memory products, which include the Dual-Port and First-in,
First-out ("FIFO") family of products. Revenues generated from the sale of
Specialty Memory products decreased 13.6% comparing the first quarter of 1998
to the same quarter last year due to a 12.2% decline in ASPs. The Channel line
of products continued to show a modest increase in revenues growing 8.1%. This
increase in revenues was primarily the result of a 6.4% increase in unit sales
volume.
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<PAGE>15
Cypress's Computer Products Division ("CPD") was the only division to record an
increase in revenues growing 38.2% comparing the first quarter of 1998 to the
same quarter in 1997. CPD's revenue growth can be attributed to a 55.5%
increase in unit sales volume from the sale of Clock products.
As noted above, Cypress continued to experience reductions in ASPs,
particularly in its SRAM products. The decrease in ASPs continued to be caused
by industry over-supply and continued corrections by end user customers,
particularly evident in the telecommunication and data communication markets
that Cypress principally serves. Even though ASPs in several markets
continued to decline the rate of decline has in most part been less than the
rate of decline experienced throughout 1997. ASPs for the remainder of 1998
are expected to continue to decline, but at a reduced rate from that
experienced in 1997.
In March 1998, 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 capabilities 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.
(5) 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. These charges resulted from
changes in market conditions and were considered as part of ongoing operations.
They included 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 described above, Cypress wrote off its previously
capitalized pre-operating costs as an impaired asset due to uncertainties
surrounding their future economic benefits. The pre-operating costs totaling
15
<PAGE>16
$3.8 million, net of accumulated amortization were included in other assets at
December 29, 1997. Such costs were being amortized over five years at a rate
based on estimated units to be manufactured during that period. There are 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.
Cypress's cost of revenues as a percentage of revenues for the quarter ended
March 30, 1998 increased to 97.8% compared to 65.4% in the comparable period in
1997. As discussed above, Cypress recorded non-recurring, pre-tax charges of
$21.7 million under cost of revenues, primarily related to the write-off of
pre-operating costs at Cypress's domestic wafer fabrication plant in Minnesota
and its assembly and test facility located in the Philippines, the write-down
of certain inventory, and the write-down of certain equipment located in
Minnesota. Without these non-recurring costs, the cost of revenues as a
percentage of revenues would have been 79.2%. As a result of declining ASPs,
Cypress is selling more units even though revenues continue to decline. Should
ASPs in the future continue to erode at a rate greater than anticipated,
this could have a material adverse effect on the gross margin. Cypress
continues to introduce new products and new methods of reducing manufacturing
costs in order to mitigate the effects of declining ASPs. These restructuring
activities, which took place during March 1998 are expected to increase
Cypress's efficiencies and lower manufacturing costs.
At March 30, 1998, Cypress has consigned approximately $13.5 million, net book
value, of capital assets to Alphatec and Alphatec's production represented
approximately 14.0% of Cypress's backend manufacturing capacity (down from
approximately 17.0% in the fourth quarter of 1997). As stated above, Cypress
plans to consolidate its test manufacturing operations located at Alphatec into
its Philippines plant by the end of 1998, which will eliminate the majority of
the backend manufacturing activity performed by Alphatec. In 1997, Alphatec
experienced financial difficulties; however, the assembly and test operations
with which Cypress currently does business, continues to operate under normal
operating conditions. Cypress has evaluated alternative options and has
commenced qualification of products and processes at other subcontract vendors.
Should Alphatec cease operations or be forced to reduce its manufacturing
capacity before Cypress is able to move its test operations to the Philippines,
Cypress's ability to manufacture a material portion of its products in the
future and ability to recover its assets could be impaired. Cypress management
believes that Alphatec's financial difficulties have not negatively impacted
Alphatec's ability to manufacture Cypress's products to date.
Research and development ("R&D") expenses as a percent of revenues increased to
20.9% for the quarter ended March 30, 1998, compared to 16.7% for the
comparable period in 1997. Actual R&D spending increased $3.5 million,
primarily a result of Cypress's decision to continue spending on R&D in an
effort to accelerate the development of new products and the development of its
0.35 and 0.25 micron process technologies. Increases in R&D spending were
16
<PAGE>17
primarily from salaries and related benefits and depreciation expense. Even
with Cypress's commitment to increase design capabilities in its design centers
and the transformation of the San Jose wafer manufacturing facility into an
eight-inch research and development wafer facility, R&D spending is projected to
remain relatively constant in the future as Cypress explores new markets and
improves its design and process technologies in an effort to increase revenues
and reduce costs. Actual spending in R&D may increase in the future in
proportion to revenue growth.
Selling, general and administrative ("SG&A") expenses as a percent of revenues
for the quarter ended March 30, 1998 increased to 19.0%, compared to 13.9% in
the same period last year. Actual SG&A spending increased $4.6 million,
primarily due to $2.5 million of non-recurring, pre-tax charges related to
costs incurred to reimburse a customer for certain product expenses incurred.
Also contributing the increased spending was costs associated with a new
training program for the sales forces and higher marketing communications
expenditures. With the exception of variable spending, such as incentive
bonuses and commissions, Cypress plans to keep SG&A spending relatively
constant.
The operating loss for the quarter ended March 30, 1998 was $101.2 million, or
86.5% of revenues, compared with operating income of $5.1 million, or 4.0% of
revenues in the comparable period in 1997. Without the $81.3 million of
restructuring and other non-recurring charges recorded as operating charges,
the operating loss in the first quarter of 1998 would have been $19.9 million.
Cypress continued to experience the effects of shrinking ASPs as revenues have
declined even though the number of units sold increased significantly.
For the quarter ended March 30, 1998, Cypress recorded net interest and
other expense of $2.7 million compared to net interest and other income of $2.5
million in the comparable period of 1997. In 1998, Cypress recorded a non-
recurring, pre-tax charge of $3.1 million to reflect the decline in the value
of a certain investment. Without this write-down, net interest and other
income would have been $0.4 million. In the first quarter of 1997, Cypress
recorded a $3.8 million gain from the sale of its remaining investment in
Vitesse Corporation. The gain was partially offset by one-time costs
associated with the conversion of the 1994 convertible subordinated notes and
costs associated with the increased borrowing from Cypress's line of credit.
Tax benefits booked during the first quarter of 1998 have been restated to
reflect the revised loss for the quarter at a rate of 9.6%, consistent with the
original filing. The benefit recognized is less than an expected statutory
rate on Cypress's loss due to limitations on Cypress's ability to carry such
loss back to prior periods.
FACTORS AFFECTING FUTURE RESULTS:
- -----------------------------------
Except for the historical information contained herein, the discussion in this
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including, but not limited to,
statements as to the future operating results and business plans of Cypress,
that involve risks and uncertainties. Cypress's actual results could differ
17
<PAGE>18
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, general economic
conditions, the cyclical nature of both the semiconductor industry and the
markets addressed by Cypress's products, such as networking, computer, and
telecommunications markets, the effects of competition, characterized by price
erosion, rapid technological change and heightened foreign competition in many
markets, slower than expected growth in demand for semiconductor products, the
availability and extent of utilization of manufacturing capacity, dependence on
independent subcontract vendors, dependence on limited sources of supplies,
fluctuation in manufacturing yields, the successful development and timing and
market acceptance of new product introductions, product obsolescence, costs
associated with future litigation, costs associated with protecting Cypress's
intellectual property, the successful ramp up of Cypress's Philippines back-end
manufacturing plant, and the ability to develop and implement new technologies
including the continued transition to full commercial production of Cypress's
new 0.35 and 0.25 micron processes, dependence on key personnel, risk of
international operations and the effects of environmental regulations.
Cypress's quarterly and annual results of operations are affected by a variety
of factors that could materially and adversely affect revenues, gross profit
and income from operations. These factors include, among others, demand for
Cypress's products; changes in product mix; competitive pricing pressure
(particularly in the static RAM market); fluctuations in manufacturing yields;
cost and availability of raw materials; unanticipated delays or problems in the
introduction or performance of Cypress's new products; Cypress's ability to
introduce new products that meet customer requirements; market acceptance of
Cypress's products; product introduction by competitors; availability and
extent of utilization of manufacturing capacity; product obsolescence; the
successful ramp up of Cypress's Philippines back-end manufacturing plant,
resolution of Alphatec's financial situation; the inability to execute
successfully Cypress's restructuring plan; the ability to develop and implement
new technologies, including the transition of Cypress's new 0.35 and 0.25
micron process and continued migration to smaller geometries; the conversion
and upgrade of existing equipment base to these technologies including transfer
of equipment and capability among sites; the conversion and upgrade of the
existing equipment set from 6-inch to 8-inch capability; the level of
expenditures for research and development and sales, general and administrative
functions of Cypress; costs associated with future litigation; and costs
associated with protecting Cypress's intellectual property. Any one or more of
these factors could result in Cypress failing to achieve its expectations as to
future revenues, gross profit and income from operations. Additionally, risks
inherent in the cyclical nature of the semiconductor industry may cause
Cypress's quarterly and annual results of operations to vary significantly.
Moreover, as is common in the semiconductor industry, Cypress frequently ships
more products in the third month of each quarter than in either of the first
two months of the quarter, and shipments in the third month are higher at the
end of that month. The concentration of sales in the last month of the quarter
contributes to the difficulty in predicting Cypress's quarterly revenues and
results of operations.
Since Cypress recognizes revenues from sales to domestic distributors only upon
the distributors' sale to end customers, Cypress is highly dependent on the
accuracy of distributors' estimates on their resale, which could be materially
different from the actual amounts finally reported. These factors also
18
<PAGE>19
contribute to the difficulty in predicting Cypress's quarterly revenue and
results of operations, particularly in the last month of the quarter.
Additionally, Cypress's headquarters and some manufacturing facilities are
located near major earthquake faults. In the event of a major earthquake,
Cypress could suffer damages that could materially and adversely affect
Cypress's business, financial conditions and results of operations.
YEAR 2000 READINESS DISCLOSURE:
- --------------------------------
In the next two years, most companies will face a potentially serious
information systems problem because many software application and operational
programs written in the past may not properly recognize calendar dates
beginning in the year 2000. This problem could force computers to either
shut
down or provide incorrect data or information. Cypress began the process
of identifying the changes required to its computer programs and hardware, in
consultation with software and hardware providers in late 1996. Efforts are
being made to modify or replace any non-compliant software, systems and
equipment during 1999. In 1997, Cypress began the process of replacing
certain software by implementing a new accounting software system that is year
2000 compliant.
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. Further, Cypress is aware of the risk to third parties and
the potential adverse impact on Cypress resulting from the failure by these
parties to adequately address the year 2000 problem. In response to this,
Cypress is inquiring of strategic suppliers and large customers to determine
the extent to which Cypress is vulnerable to these third parties failure to
remediate their own year 2000 issues.
Cypress's Year 2000 contingency planning efforts are guided by three elements
and specifically expressed in its 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
improving Cypress's Year 2000 contingency planning efforts, and the team is led
by the Chief Executive Officer. 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's wafer fab locations,
- - finished goods inventory "build ahead" in Cypress's/subcontractor assembly
locations,
19
<PAGE>20
- - increase 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,
- - facility "safe state" plans. including plans to preserve equipment and
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.
Cypress has expended and will continue to expend appropriate resources to
address these issues on a timely basis. However, no estimate of the expected
total cost of this effort can be made at this time, nor can any assurance by
given that the year 2000 problem will not have a materially adverse impact on
Cypress's earnings. Costs incurred through May 12, 1998 have been
insignificant.
MARKET RISK DISCLOSURE:
- ---------------------------
Cypress has an investment portfolio of securities that are classified as
"available-for-sale". These securities are subject to interest rate risk and
will fall in value if market interest rates increase. Cypress attempts to
limit this exposure by investing primarily in short-term securities. Cypress
has foreign subsidiaries that operate and sell Cypress's products in various
global markets. As a result, Cypress's cash flow and earnings are exposed to
fluctuations in interest rates and foreign currency exchange rates even though
Cypress uses the U.S. dollar as its functional currency for all foreign
subsidiaries. Cypress attempts to limit these exposures through the use of
various hedge instruments, primarily forward contracts and currency option
contracts (with maturities of less than three months) to manage its exposure
associated with firm intercompany and third party transactions and net asset
and liability positions denominated in non-functional currencies.
For further discussion of risk factors, refer to Cypress's filing on Form
10-K with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES:
- ---------------------------------
Cypress's cash, cash equivalents and short-term investments totaled $198.1
million at March 30, 1998, a decrease of $3.4 million compared to the end of
1997.
During the first three months of 1998, Cypress purchased $29.7 million in
capital equipment compared to $30.0 million in the comparable period in 1997.
Cypress continued to purchase equipment for its domestic wafer fabrication
plants, its test and assembly facility in the Philippines, its backend
manufacturing subcontractors, and its technology group in San Jose. Equipment
purchased for Cypress's wafer fabs is expected to improve wafer manufacturing
capacity and capabilities as Cypress implements new technologies, including its
20
<PAGE>21
0.35 and 0.25 micron processes. A majority of the new equipment purchased will
be for Fab 4 located in Minnesota as Cypress converts its equipment from
six-inch to eight-inch. Equipment purchased for the Philippines and Cypress's
subcontractors will be used to increase manufacturing capacity and tool certain
packaging capabilities. Capital equipment purchases for the technology group
are expected to enhance and accelerate Cypress's research and development
capabilities. In 1998, the San Jose R&D fab will be purchasing new equipment
as it converts from a six-inch facility to an eight-inch facility. Capital
purchases for the remainder of 1998 are expected to be approximately $70.0
million as Cypress continues to buy equipment to expand manufacturing
capabilities and capacity and to enhance its research and development
capabilities.
In October 1997, the Board of Directors authorized the repurchase of up to 2.0
million shares of Cypress's common stock. In December 1997, the Board of
Directors authorized the repurchase of an additional 2.0 million shares. In
the first three months of 1998, an aggregate of 242,500 shares were purchased
for $2.1 million. As of May 12, 1998, 876,100 shares have been repurchased
under this program for $8.5 million. The shares purchased are expected to be
issued in conjunction with Cypress's 1994 Stock Option Plan and Employee Stock
Purchase Program. In conjunction with the authorized stock repurchase program,
Cypress sold put warrants through private placements for which Cypress received
a net amount of $3.4 million during the first quarter of 1998. Cypress has the
maximum potential obligation to purchase 4.8 million shares of its common stock
at an aggregate price of $47.0 million as of March 30, 1998. The puts have
various expiration periods from May 1998 through October 1998. 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 intention to settle these put warrants with stock and
therefore, no amount was classified out of stockholders' equity in the
accompanying balance sheet.
In September 1997, Cypress completed a $175.0 million private placement of
5-year convertible subordinated notes. The notes are due in the year 2002,
with a coupon rate of 6.00% and an initial conversion premium of 48.2%. The
notes are convertible into approximately 7,408,000 shares of common stock and
are callable by Cypress three years after the date of issuance. Net proceeds
were $170.2 million, after issuance costs of $4.8 million. A portion of the
proceeds from the notes were used to repay the $49.0 million balance
outstanding under the revolving credit facility, acquire equipment, purchase a
building in Woodinville, Washington and for stock repurchases in 1997. The
remaining proceeds have been invested in interest-bearing investment grade
securities and have been used for general corporate purposes, including capital
expenditures to add manufacturing capacity and capability, development and
commercialization of products, working capital and potential strategic
acquisitions or investments.
In February 1997, Cypress called for redemption of all of the 3.15% Convertible
Subordinated Notes which was effective March 26, 1997. At the time of
conversion, approximately 85% of the holders elected to convert their notes
into Cypress's common stock, increasing the amount of common stock
outstanding by 6,789,013 shares. As a result of holders electing the cash
settlement, Cypress paid out $14.3 million.
21
<PAGE>22
In July 1996, Cypress established a three-year $100 million unsecured
revolving credit facility with Bank of America National Trust and Savings
Association as agent on behalf of certain banks. The applicable interest rate
for usage under this agreement is a graduated scale of LIBOR, plus a spread.
The agreement contains certain financial and other covenants including
limitation on indebtedness, liens, disposition of assets, consolidations and
mergers, investments and contingent obligations, and maintenance of a specified
leverage ratio, consolidated tangible net worth, quick ratio and adjusted
EBIT/fixed charge coverage ratio. At March 30, 1998, Cypress was not in
compliance with certain financial covenants. However, at that time, Cypress
had no borrowings against the line of credit. Cypress is expecting to cancel
the line of credit during the second quarter of 1998.
Cypress believes that existing cash, cash from operations and borrowings under
its revolving line of credit agreement, will be sufficient to meet present and
anticipated working capital requirements and other cash needs for at least the
next twelve months. There are no significant purchase commitments beyond one
year. In the event that ASPs continue to decline at rates above normal
industry levels and increased demand continues to be insufficient to offset the
effects of such declines, Cypress may be required to raise additional capital
through a debt or equity financing. Although additional financing may be
required, there can be no assurance that it would be available to Cypress or
available at terms Cypress deems satisfactory.
22
<PAGE>23
PART II - OTHER INFORMATION
ITEM 1. The information required by this item is included in Part I in Note 6
of Notes to the Condensed Consolidated Financial Statements.
ITEM 6:
(a) Exhibit - 27 "Financial Data Schedule"
(b) Reports on Form 8-K - None
23
<PAGE>24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYPRESS SEMICONDUCTOR CORPORATION
Date: March 24, 1999 /s/ T.J. Rodgers
----------------------- ---------------------------------
T.J. Rodgers
President and Chief Executive
Officer
/s/ Emmanuel Hernandez
---------------------------------
Emmanuel Hernandez
Vice President, Finance and
Administration and Chief Financial
Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 30,
1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1998
<PERIOD-START> DEC-30-1997
<PERIOD-END> MAR-30-1998
<CASH> 137,058
<SECURITIES> 61,083
<RECEIVABLES> 59,140
<ALLOWANCES> 1,093
<INVENTORY> 64,983
<CURRENT-ASSETS> 384,633
<PP&E> 392,967
<DEPRECIATION> 396,173
<TOTAL-ASSETS> 878,402
<CURRENT-LIABILITIES> 103,951
<BONDS> 175,000
<COMMON> 1,015
0
0
<OTHER-SE> 554,016
<TOTAL-LIABILITY-AND-EQUITY> 878,402
<SALES> 116,953
<TOTAL-REVENUES> 116,953
<CGS> 114,382
<TOTAL-COSTS> 114,382
<OTHER-EXPENSES> 24,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,842
<INCOME-PRETAX> (103,952)
<INCOME-TAX> (9,979)
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<NET-INCOME> (93,973)
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