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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 September 28, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________to__________.
Commission file number 1-10079
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CYPRESS SEMICONDUCTOR CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2885898
---------------------------- ---------------------------
(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.
September 28, 1998 (all one class): 85,987,000
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CYPRESS SEMICONDUCTOR CORPORATION
FORM 10-Q/A
Quarter Ended September 28, 1998
Index
Part I - Financial Information
- --------------------------------
Item 1. Condensed Consolidated Financial Statements Pages 3 - 14
Item 2. Management's Discussion and Analysis Pages 15 - 24
Part II - Other Information
- --------------------------------
Item 1. Legal Proceedings Page 25
Item 5 Other Information Page 25
Item 6. Exhibits and Reports on Form 8-K Page 25
2
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share data)
(Unaudited)
<CAPTION>
(Restated)
Sep. 28, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 93,361 $ 151,725
Short-term investments 93,222 49,836
---------- ----------
Total cash, cash equivalents and
short-term investments 186,583 201,561
Accounts receivable, net of allowances of
$1,097 at September 28, 1998 and $3,524 at
December 29, 1997 63,712 67,854
Inventories 58,063 76,925
Other current assets 43,508 51,740
---------- ----------
Total current assets 351,866 398,080
Property, plant and equipment (net) 355,710 442,661
Assets held for sale 3,661 --
Other assets, including restricted investments of
$59,444 and $60,112 and long-term marketable
securities of $38,519 and $42,146, at
September 28, 1998 and December 29, 1997,
respectively. 104,209 115,529
---------- ----------
Total assets $ 815,446 $ 956,270
========== ==========
See accompanying notes to condensed consolidated financial statements.
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CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except per-share data)
(Unaudited)
<CAPTION>
(Restated)
Sep. 28, Dec. 29,
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,350 $ 60,857
Accrued liabilities 30,109 21,472
Deferred income on sales to distributors 11,696 9,636
Income taxes payable -- 1,088
---------- ----------
Total current liabilities 99,155 93,053
Convertible subordinated notes 170,000 175,000
Deferred income taxes 36,070 36,070
Other long-term liabilities, including minority
interest 6,736 8,671
---------- ----------
Total liabilities 311,961 312,794
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000
shares authorized; none issued and
outstanding -- --
Common stock, $.01 par value, 250,000
shares authorized; 98,147 issued;
85,987 and 90,684 outstanding 860 1,015
Additional paid-in capital 428,003 430,682
Retained earnings 228,618 333,910
---------- ----------
657,481 765,607
Less shares of common stock held in
treasury, at cost: 12,160 at September 28,
1998 and 7,463 at December 29, 1997 (153,996) (122,131)
---------- ----------
Total stockholders' equity 503,485 643,476
---------- ----------
Total liabilities and stockholders'
equity $ 815,446 $ 956,270
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
(Unaudited)
<CAPTION>
Three-Months Ended Nine-Months Ended
---------------------- ----------------------
(Restated) (Restated)
Sep. 28, Sep. 29, Sep. 28, Sep. 29,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 126,048 $ 146,081 $ 362,676 $ 410,222
---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues 86,406 93,345 284,181 262,381
Research and development 25,968 24,560 76,719 70,009
Selling, general and
administrative 20,152 18,977 62,228 55,676
Restructuring costs (59) -- 58,940 --
---------- ---------- ---------- ----------
Total operating costs
and expenses 132,467 136,882 482,068 388,066
---------- ---------- ---------- ----------
Operating income (loss) (6,419) 9,199 (119,392) 22,156
Interest expense (2,688) (948) (8,207) (4,043)
Interest and other income 4,924 2,756 8,301 9,821
---------- ---------- ---------- ----------
Income (loss) before income taxes (4,183) 11,007 (119,298) 27,934
(Provision) benefit for income taxes 2,955 (3,797) 14,006 (9,623)
---------- ---------- ---------- ----------
Net income (loss) $ (1,228) $ 7,210 $ (105,292) $ 18,311
========== ========== ========== ==========
Net income (loss) per share:
Basic $ (0.01) $ 0.08 $ (1.16) $ 0.21
Diluted $ (0.01) $ 0.08 $ (1.16) $ 0.20
Weighted average common and
common equivalent shares
outstanding:
Basic 90,161 90,054 90,755 86,887
Diluted 90,161 96,084 90,755 95,038
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine-Months Ended
----------------------
(Restated)
Sep. 28, Sep. 29,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (105,292) $ 18,311
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, amortization and other 93,049 82,557
Restructuring charges 58,940 --
Amortization of debt issuance costs 767 872
Changes in operating assets and liabilities:
Receivables 6,407 886
Inventories 18,862 (17,564)
Other assets 9,782 10,889
Accounts payable and accrued liabilities (7,461) (8,432)
Deferred income 2,060 445
Income taxes payable (1,088) 23,177
---------- ----------
Net cash generated by operations 76,026 111,141
---------- ----------
Cash flows from investing activities:
Increase in short-term investments (net) (43,386) (216,620)
Proceeds from sale of capital 1,294 25,764
Acquisition of property, plant and equipment (51,339) (110,751)
---------- ----------
Net cash used for investing activities (93,431) (310,607)
---------- ----------
Cash flows from financing activities:
Issuance (retirement) of convertible subordinated
notes, net of issuance costs (4,325) 170,187
Repurchase of common stock (50,425) --
Redemption of convertible debt -- (14,331)
Issuance of common stock 10,367 25,082
Proceeds from put premiums 5,359 --
Increase (decrease) in other long-term liabilities,
including minority interest (1,935) 1,519
---------- ----------
Net cash generated (used) by financing activities (40,959) 182,457
---------- ----------
Net decrease in cash and cash equivalents (58,364) (8,009)
Cash and cash equivalents, beginning of year 151,725 20,119
---------- ----------
Cash and cash equivalents, end of quarter $ 93,361 $ 12,110
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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 and the Form 10-Q/A filed for the three-month period ended
March 30, 1998 and the three- and six-month periods ended June 29, 1998.
For interim financial reporting purposes, Cypress reports on a 13-week quarter.
The results of operations for the three and nine-month periods ended September
28, 1998 are not necessarily indicative of the results to be expected for the
full year.
2. 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 quarters ended March 30, 1998, June 29, 1998 and September 28, 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 income(loss) and net income(loss) per share for the three
and nine month periods ended September 28, 1998 are as follows:
Three Months Ended Nine Months Ended
Previous Restated Previous Restated
---------- ---------- ---------- ----------
Net income(loss) $ 513 $ (1,228) $ (107,422) $ (105,292)
========== ========== ========== ==========
Basic EPS $ 0.00 $ (0.01) $ (1.19) $ (1.16)
========== ========== ========== ==========
Diluted EPS $ 0.00 $ (0.01) $ (1.19) $ (1.16)
========== ========== ========== ==========
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3. Inventories
Sep. 28, Dec. 29,
1998 1997
---------- ----------
Raw materials $ 8,586 $ 17,900
Work in process 29,655 35,281
Finished goods 19,822 23,744
---------- ----------
$ 58,063 $ 76,925
========== ==========
4. Earnings Per Share
FAS 128 requires presentation of both basic and diluted EPS on the statement of
operations. Basic EPS is computed by dividing net income available to
stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS is computed using the
weighted average number of common and potential common stock equivalent shares
outstanding during the period. In computing diluted EPS, the average stock
price for the period is used in determining the number of shares assumed to be
purchased from the exercise of stock options. Potential common stock
equivalent shares are included in the computation of diluted EPS, except when
anti-dilutive. FAS 128 requires the reconciliation of the numerators and
denominators of the basic and diluted earnings per share computation as
follows:
<TABLE>
<CAPTION>
(In thousands, except per-share amounts)
Three-months Ended
(Restated)
September 28, 1998 September 29, 1997
------------------------------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $ (1,228) 90,161 $ (0.01) $ 7,210 90,054 $ 0.08
========= =========
Effects of Dilutive
Securities:
Stock options -- -- -- 6,030
Put options -- -- -- --
--------- --------- --------- ---------
Diluted EPS:
Net income (loss) $ (1,228) 90,161 $ (0.01) $ 7,210 96,084 $ 0.08
========= ========= ========= ========= ========= =========
</TABLE>
8
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<TABLE>
Nine-months Ended
(Restated)
September 28, 1998 September 29, 1997
------------------------------------------------------------
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $(105,292) 90,755 $ (1.16) $ 18,311 86,887 $ 0.21
========= =========
Effects of Dilutive
Securities:
Stock options -- -- -- 5,502
Convertible debentures -- -- 1,061 2,649
--------- --------- --------- ---------
Diluted EPS:
Net income (loss) $(105,292) 90,755 $ (1.16) $ 19,372 95,038 $ 0.20
========= ========= ========= ========= ========= =========
</TABLE>
Options to purchase 17,275,317 shares of common stock were outstanding at
September 28, 1998, but were not included in the computation of diluted EPS
since their exercise price was higher than the average market price.
Convertible debentures outstanding at September 28, 1998 convertible to
7,196,000 shares of common stock were also excluded from diluted EPS as their
effect was anti-dilutive.
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. Certain of these charges were recorded in the
current quarter as outlined below.
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.
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(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..
Separate from the restructuring charge, Cypress recorded an additional $27.3
million, which were recorded as operating expenses in the first quarter of
1998. 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
$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.
10
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The following tables set forth Cypress's restructuring expense and charges
taken against the reserve for the quarter and nine-month period ended September
28, 1998, respectively, and the restructuring reserve balance remaining at
September 28, 1998:
<TABLE>
<CAPTION>
(In thousands)
Third Quarter 1998 Activity (Restated)
Balance Q398 Restructuring Activities Balance
Jun. 28, Increase/ Sep.29,
1998 (Decrease) Utilized 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Write-down of inventory $ 500 $ 786 $ (1,286) $ --
Severance and other employee
related charges 4,121 (845) (324) 2,952
Other fixed asset related
charges 3,030 -- -- 3,030
Provision for phase-down and
consolidation of manufacturing
facilities 525 -- (152) 373
------------- ------------- ------------- ------------
Total $ 8,176 $ (59) $ (1,762) $ 6,355
============= ============= ============= ============
1998 Restructuring Activity (Restated)
1998 Balance
Restructuring Sep.29,
Expense Utilized 1998
------------- ------------- -------------
<S> <C> <C> <C>
Write-down of inventory 3,250 (3,250) --
Severance and other employee
related charges 5,271 (2,319) 2,952
Other fixed asset related
charges 3,030 -- 3,030
Provision for phase-down and
consolidation of manufacturing
facilities 976 (603) 373
------------- ------------- -------------
Total $ 12,527 $ (6,172) $ 6,355
============= ============= =============
</TABLE>
For the quarter and nine-month period ended September 28, 1998, Cypress charged
$1.8 million and $6.2 million, respectively, against the restructuring
reserve. These charges were primarily related to the write-off of inventory
located at Cypress's third party subcontractor in Thailand and its domestic
11
<PAGE>12
wafer fabrication facility located in Minnesota, and expenses incurred for
severance and other employee related items.
Beginning in the second quarter of 1998, production was phased down in Fab 3
and in accordance with the restructuring plan, production ceased in July 1998.
Also in conjunction with the closure of FAB 3 in Minnesota, Cypress established
a reserve for $1.4 million to cover severance costs associated with the
reduction of work force at that location. This was based on the anticipated
level of payouts that would be made to the personnel that were included in the
work force reduction. As part of a review of inventory, it was noted that
Cypress required an additional reserve of $0.5 million to cover inventory that
was to be written off. This related to a change in estimate regarding
inventory that had been previously reserved.
Cypress has discontinued producing its 0.6 micron 256K SRAM devices in Fab 2
with the last wafer starts occurring during the last week of May 1998.
Severance costs associated with the restructuring were paid during the second
quarter of 1998.
All severance related activity at Fab 2 and Fab 3 were completed by the end of
the third quarter of 1998. As a result of resolution and the finalization of
certain of these severance matters, Cypress reversed $0.8 million of excess
restructuring reserves during the third quarter.
Cypress is also in the midst of moving its third party subcontractor
backend manufacturing operation located in Thailand to the Philippines and
expects to complete the move by December 1998.
In September 1998, an additional $0.8 million restructuring reserve was
established representing a change in estimate for inventory write-offs related
to the Fab 3 restructuring
Also in September 1998, Cypress sold some equipment to a third party for $2.7
million. These assets were classified as assets held-for-sale on the balance
sheet at their estimated salvage value.
The restructuring plan included the disposal of six-inch manufacturing
equipment by January 1999 which was not upgradable to eight-inch capability in
Cypress's research and development wafer fabrication facility in San Jose
("Fab 1").. The remaining net book value of $6.1 million of such assets at the
end of the first quarter, is being written off over the estimated useful life
through January 1999. Incremental depreciation charges of $1.8 million, to
reflect the revised useful lives of this equipment, have been included in
research and development costs for the third quarter and are expected to
continue through January 1999.
5. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). 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, and
the corresponding derivative gains and losses be either reported in the
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<PAGE>13
statement of operations or as a deferred item depending on the type of hedging
relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133 are not expected to have a material effect on the
Company's consolidated financial statements, which will be effective in fiscal
year 2000.
6. Impact of Litigation
The semiconductor industry has experienced a substantial amount of litigation
regarding patent and other intellectual property rights. From time to time,
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 May 1998, EMI Group of North America, Inc. ("EMI") filed suit against
Cypress in the Federal Court in Delaware, claiming that Cypress has
infringed on two patents owned by EMI. Cypress has reviewed the charges,
and it believes that the charges are without merit, that it does not infringe
the patents in question, and that the patents are invalid and/or unenforceable.
In July 1998, EMI amended their complaint against Cypress, alleging that
Cypress infringed two further patents owned by EMI. Cypress has reviewed these
charges and believes that these charges are also without merit and that it does
not infringe the patents in question, and that the patents are invalid and/or
unenforceable. 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. At this time Cypress
believes that the outcome of these actions will not have a material adverse
effect on Cypress's financial position or 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.
13
<PAGE>14
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 January 1998, in a
related case, the United States District Court for the Eastern District of
Virginia preliminarily ruled that the patent is unenforceable due to
unequitable conduct by Dr. Li and his attorneys in obtaining the patent. Dr.
Li has the right to file an appeal, although no such appeal had been filed as
of November 10, 1998. 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.
At this time, Cypress believes that the outcome of this action will not
have a material adverse effect on Cypress's financial position or results
of operations.
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 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
Cypress's officers. A motion by Messrs. Yourman and Weiss to dismiss Cypress's
malicious prosecution action was denied, and was also subsequently denied by
the Supreme Court of California. This action has gone forward into discovery
and the defendants have offered a settlement which has been refused by Cypress.
Although the results 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.
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. Cypress believes that a new cross-licensing agreement will be
finalized with Lucent by the first quarter of 1999. Cypress believes the
outcome of this action will have little, if any, effect on Cypress's financial
condition or results of operations.
14
<PAGE>15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the factors set forth in "Factors Affecting Future Results" and elsewhere in
this Report.
RESULTS OF OPERATIONS:
- --------------------------
Revenues for the quarter and nine-month period ended September 28, 1998
decreased 13.7% and 11.6%, respectively, compared to the comparable periods a
year ago. Revenues dropped to $126.0 million and $362.7 million for the
quarter and nine-month period ended September 28, 1998, respectively, compared
to $146.1 million and $410.2 million in the respective periods in 1997. The
decline in revenues continues to be attributable to reduced revenues in the
Company's highest revenue producing division, the Memory Products Division
("MPD") where revenues decreased 20.3%, comparing the third quarter of 1998 to
the comparable quarter in 1997. Revenue for Static Random Access Memory
("SRAM") products continue to decline due to lower sales volume and lower
average selling prices ("ASPs"). Comparing the third quarter of 1998 to the
third quarter of 1997, sales volume decreased 5.9%, while ASPs declined 15.7%.
SRAM average selling prices appear to have stabilized in 1998 but are at a
lower level than in 1997.
Revenues generated from Cypress's Programmable Products Division ("PPD")
also continued to decline, dropping 32.1% comparing the third quarter of 1998
to the comparable quarter in 1997. Similar to the first half of 1998, PPD's
revenues in the third quarter of 1998 were lower due to Cypress's decision
to exit the commodity Erasable Programmable Read-only Memory ("EPROM") business
in December 1997 and the sale of its Field Programmable Gate Array ("FPGA")
line of products to Quicklogic Corporation in 1997. Revenues generated from
the Programmable Read-only Memory ("PROM") and EPROM line of products were
33.0% lower in the third quarter of 1998 compared to the comparable quarter in
1997. Revenues generated from Cypress's Programmable Logic line of
products also continued to fall, dropping 31.4% comparing the third quarter of
1998 to the third quarter of 1997. Lower revenues were primarily due to a
32.5% decline in unit sales volume. ASPs for Programmable Logic products have
remained relatively constant.
In the third quarter of 1998, revenues generated from Cypress's
Datacommunication Division ("DCD") increased 5.3% compared to the same quarter
in 1997. This revenue growth was primarily due to sales volume from the sale
of Specialty Memory products, which include the Dual-Port and First-in,
First-out ("FIFO") family of products.
Revenues generated by Cypress's Computer Products Division ("CPD") continued to
grow during the third quarter of 1998 increasing by 11.6%, compared to the same
quarter a year ago. CPD's revenue growth can be attributed to its Clock line
of products which increased revenues 25.5% as a result of a 63.5% increase in
15
<PAGE>16
unit sales volume. This increased sales volume more than offset a 22.8%
decline in ASPs comparing the same time periods. CPD also benefited from
increased revenues recorded from the sale of its Universal Serial Bus ("USB")
line of products. USB is a relatively new line of products and Cypress
recorded an insignificant amount of revenues in 1997.
As noted above, Cypress continued to experience reductions in ASPs throughout
several of its product lines, however, the rate of decline has decreased from
that experienced in 1997. The decrease in ASPs continued to be caused by
industry over-supply, particularly evident in the telecommunication and data
communication markets that Cypress principally serves. Cypress does not expect
ASPs for the remainder of 1998 to fluctuate significantly from those
experienced during the third quarter of 1998.
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.
(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 in the first quarter of
1998. 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
16
<PAGE>17
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. Ther 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.
During the second quarter of 1998, in conjunction with the closure of Fab 3 in
Minnesota, Cypress established a reserve for $1.4 million to cover severance
costs associated with the reduction in work force at that location. This was
based on the anticipated level of payouts to employees that would be made to
personnel that were included in the work force reduction. All severance
related activity in Fab 2 and Fab 3 were completed by the end by the end of the
third quarter of 1998. As a result, Cypress reversed $0.8 million of excess
restructuring reserves during the quarter.
Also, as part of a review of inventory, it was noted that Cypress required an
additional reserve of $0.5 million to cover inventory that was to be written
off. This related to a change in estimate regarding inventory that had been
previously reserved. During the third quarter of 1998, Cypress recorded an
additional $0.8 million restructuring reserve related to the write-off of
certain inventory located in Fab 3
With respect to the remaining assets currently held-for-sale, their carrying
values have been written down to its estimated salvage value. Cypress
continues to actively pursue potential buyers, however no assurances can be
given that such actions will be successful or that the estimated proceeds from
such sales will be realized.
For the quarter and nine-month period ended September 28, 1998, Cypress charged
$1.8 million and $6.2 million, respectively, against the restructuring
reserve. These charges were primarily related to the write-off of fixed assets
located at Cypress's domestic wafer manufacturing facilities, the write-off of
inventory located at Cypress's third party subcontractor in Thailand and
expenses incurred for severance and other employee related items.
Cypress's cost of revenues as a percentage of revenues for the quarter and
nine-month period ended September 28, 1998 increased to 68.6% and 78.4%,
respectively, compared to 63.9% and 64.0%, respectively, in the comparable
periods in 1997. In the first quarter of 1998, Cypress recorded in cost of
sales, non-recurring, one-time charges of $21.7 million, primarily related to
the write-down of certain inventory, the write-off of pre-operating costs at
Cypress's domestic wafer fabrication plant in Minnesota and its assembly
and test facility located in the Philippines and write-down of certain
equipment located in Minnesota. Without these non-recurring costs, cost of
revenues as a percentage of revenues for the nine-month period in 1998 would
have been 72.4%.
17
<PAGE>18
Revenues in 1998 have continued to decline due to lower ASPs, despite an
increase in units sold. Should ASPs in the future continue to erode at a rate
greater than anticipated, gross margins could be materially adversely affected.
Cypress continues to introduce new products and new methods of reducing
manufacturing costs in order to mitigate the effects of declining ASPs on its
gross margin. In March 1998, Cypress announced a restructuring of its
domestic wafer fabrication facilities and its offshore back-end manufacturing
operations. This restructuring includes the shutdown of Cypress's six-inch
wafer fabrication plant and the movement of production to its eight-inch
facility in Minnesota, the downsizing of its wafer fabrication plant in Texas,
and the consolidation of its test manufacturing operations, located at Alphatec
Electronics Pcl ("Alphatec"), into its Philippines plant. The portion of the
activities completed to date has increased Cypress's manufacturing efficiencies
and as a result, lowered Cypress's manufacturing costs as a percentage of
revenues. Cypress is expecting to continue to benefit from these restructuring
activities in future quarters.
At September 28, 1998, Cypress had consigned approximately $9.8 million, net
book value, of capital assets to Alphatec and Alphatec's production represented
approximately 8.1% 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 test
manufacturing activity performed by Alphatec. In 1997, Alphatec experienced
financial difficulties; however, Cypress believed that the assembly and test
operations with which Cypress currently does business continue to operate
normally. Cypress is in the process of moving its test production out of
Alphatec and into its backend manufacturing facility in the Philippines.
Should Alphatec cease operations or be forced to reduce its manufacturing
capacity, Cypress's ability to manufacture a portion of its products in the
future and ability to recover its assets could be impaired. Cypress management
believes that Alphatec's financial difficulties have not negatively impacted
Alphatec's ability to manufacture Cypress's products to date.
Research and development ("R&D") expenses as a percent of revenues increased
to 20.6% and 21.2%, respectively, for the quarter and nine-month period ended
September 28, 1998, compared to 16.8% and 17.1%, respectively, for the
comparable periods in 1997. The increase in R&D expenses as a percent of
revenues is primarily attributable to lower revenues comparing the third
quarter of 1998 to the comparable quarter in 1997. Actual R&D spending also
increased, primarily due to the $1.8 million incremental depreciation charge
incurred to reflect the revised useful lives of certain assets impacted by the
upgrade of Fab 1 to an eight-inch facility during the third quarter of 1998.
Cypress continued to spend on R&D in an effort to accelerate the development of
new products and its 0.35 and 0.25 micron process technologies. Even with
Cypress's commitment to increase design capabilities in its design centers and
the transformation of the San Jose six-inch R&D facility into an eight-inch R&D
facility, R&D spending as a percent of revenues is projected to remain
relatively constant in the future as Cypress explores new markets and improves
its design and process technologies in an effort to increase revenues and reduce
costs.
18
<PAGE>19
Selling, general and administrative ("SG&A") expenses as a percent of revenues
for the quarter and nine-month period ended September 28, 1998 increased to
16.0% and 17.2%, respectively, compared to 13.0% and 13.6%, respectively in the
comparable periods a year ago. SG&A spending for the first nine-months of 1998
grew 11.8% in comparison to the first nine-months in 1997. The increase in
SG&A spending was primarily due to a $2.5 million of non-recurring, pre-tax
charges recorded in the first quarter of 1998 related to costs incurred to
reimburse a customer for certain product expenses incurred, higher marketing
costs due to a new sales force training program and higher expenditures in
marketing communications. With the exception of variable spending, such as
incentive bonuses and commissions, Cypress expects to keep SG&A spending
relatively constant.
Cypress's operating loss for the quarter and nine-month period ended
September 28, 1998 was $5.5 million, or 4.4% of revenues, and $118.5 million,
or 32.7% of revenues, respectively, compared to operating income of $9.2
million, or 6.3% of revenues and $22.2 million, or 5.4% of revenues,
respectively, in the comparable periods in 1997. Without the $85.3 million of
restructuring and other non-recurring charges recorded as operating charges,
the operating loss in the first nine months of 1998 would have been $33.2
million. Although Cypress's revenues have increased each quarter throughout
1998, due to the effects of falling ASPs, Cypress had to sell more units in
order to achieve such growth.
For the quarter and nine-month period ended September 28, 1998, Cypress
recorded net interest and other income of $2.2 million and $0.1 million,
respectively, compared to $1.8 million and $5.8 million in the comparable
periods in 1997. In the first quarter of 1998, Cypress recorded a
non-recurring, pre-tax charge of $3.1 million related to the write-down of a
certain investment. Without this write-down, net interest and other income for
the nine-month period ended September 28, 1998 would have been $3.2 million.
In September 1998, Cypress recorded a $0.7 million gain related to the
retirement of $5.0 million principal amount of its $175.0 million, 6.0%
convertible subordinated note. During the first quarter of 1997, 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 under Cypress's line of credit.
For the quarter and nine-month period ended September 28, 1998, Cypress
recorded an income tax benefit of $3.0 million and $14.0 million, respectively,
compared to an income tax expense of $3.8 million and $9.6 million,
respectively, in the comparable periods in 1997. The income tax benefit
recorded in the third quarter of 1998 was as a result of a comprehensive study
recently completed by Cypress in relation to additional R&D tax credits. As
of September 28, 1998, the income tax rate for 1998 was 11.8%. In 1997, the
income tax rate for the quarter and nine-month period was 34.5%. Cypress
expects to record zero tax provision for the fourth quarter of 1998.
FACTORS AFFECTING FUTURE RESULTS:
- -----------------------------------
The discussion in this report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, including,
19
<PAGE>20
among other things, statements as to our future expenditure levels, operating
results and business plans that involve risks and uncertainties. Cypress's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, general economic conditions, the cyclical nature of both the semiconductor
industry and the markets addressed by our products, such as networking,
computer, and telecommunications markets, the effects of competition,
characterized by price erosion, rapid technological change and heightened
foreign competition in many markets, slower than expected growth in demand for
semiconductor products, the availability and extent of utilization of
manufacturing capacity, dependence on independent subcontract vendors,
dependence on limited sources of supplies, fluctuation in manufacturing yields,
the successful development and timing and market acceptance of new product
introductions, product obsolescence, costs associated with future litigation,
costs associated with protecting our intellectual property, the successful ramp
up of 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 our 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 its
products; changes in the product mix of sales; competitive pricing pressure
(particularly in the static RAM market); fluctuations in manufacturing yields;
cost and availability of raw materials; unanticipated delays or problems in the
introduction or performance of 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 our Philippines backend manufacturing plant; the inability to
execute successfully Cypress's restructuring plan; the ability to develop and
implement new technologies, including the transition to our new 0.35 and 0.25
micron process and continued migration to smaller geometries; the conversion
and upgrade of existing equipment base to these technologies including transfer
of equipment and capability among sites; the conversion and upgrade of the
existing equipment set from 6-inch to 8-inch capability; the level of
expenditures for research and development and sales, general and administrative
functions of ours; costs associated with future litigation; and costs
associated with protecting our intellectual property. Any one or more of these
factors could result in us failing to achieve its expectations as to future
revenues, gross profit and income from opeerations. Additionally, risk
inherent in the cyclical nature of the semiconductor industry may cause our
quarterly and annual results of operations to vary significantly. Moreover, as
is common in the semiconductor industry, we frequently ship more products in
the third month of each quarter than in either of the first two months of the
quarter, and shipments in the third month are higher at the end of that month.
The concentration of sales in the last month of the quarter contributes to the
difficulty in predicting our quarterly revenues and results of operations.
Since 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.
20
<PAGE>21
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 DISCLOSURE:
- ----------------------
In just over a year, most companies will face a potentially serious problem
because many software applications, operational systems and equipment with
embedded chips or processors may not properly recognize or accurately process
calendar dates beginning in the year 2000, due to the prevalent use of two
digits to represent the year in this equipment or systems.
Like many other companies, the year 2000 issue creates a risk for Cypress. The
year 2000 problem could affect computers, software and other equipment used and
operated by Cypress. This could result in system failures causing disruptions
in operations, including among other things, interruptions in manufacturing,
design and process development operations; temporary disruptions in processing
business transactions and disruptions in normal business operations.
Cypress has taken company-wide actions to assess the nature and extent of
work required to prepare its products, systems, equipment and infrastructure
for the Year 2000. In addition, Cypress has engaged in the process of
evaluating its key suppliers and customers to determine the extent to which
Cypress's operation's are vulnerable based upon third parties remediatation
of their own Year 2000 issues. These activities represent continuing efforts
of Cypress to address the year 2000 problem which 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 Cypress including, programs for
identification, inventory taking, risk assessment and cost estimates of
problems associated with the Year 2000; the plans, remediation effort and
testing methodology to correct those problems; and the development of
contingency plans should some of the corrective actions fail to correct the
problem or not get implemented in a timely manner. These activities, in
varying phases, are currently in process.
It is the objective of Cypress for its MIS systems to be compliant by March
1999 and the rest of its systems, equipment and infrastructure to be compliant
by June 1999.
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 related 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
21
<PAGE>22
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,
- - 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.
To date, Cypress has incurred an insignificant amount of expenditures related
to the Year 2000 problem and an estimate of the total cost of remediation is
expected to be available by the end of fiscal year 1998.
At this time, Cypress cannot give any assurance that the Year 2000 problem will
not have a material adverse affect on Cypress's operations and earnings in the
future. Since the programs, as described, are still on going, all potential
Year 2000 issues have not yet been identified. Therefore, the potential impact
of these issues on Cypress's financial condition and results of operations
cannot be determined at this time.
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.
22
<PAGE>23
LIQUIDITY AND CAPITAL RESOURCES:
- ---------------------------------
Cypress's cash, cash equivalents and short-term investments totaled $186.6
million at September 28, 1998, a decrease of $15.0 million compared to the end
of 1997.
During the first nine-months of 1998, Cypress purchased $51.3 million in
capital equipment compared to $110.8 million in the comparable period in 1997.
Cypress purchased equipment for its domestic wafer fabrication plants, its
test and assembly facility in the Philippines, its backend manufacturing
subcontractors, and its technology group in San Jose. Equipment purchased for
Cypress's wafer fabs is expected to improve wafer manufacturing capacity
and capabilities as Cypress implements new technologies, including its 0.35
and 0.25 micron processes. A majority of the new equipment purchased was for
Fab IV located in Minnesota for the conversion of equipment from six-inch to
eight-inch. Equipment purchased for the Philippines and its subcontractors was
used to increase manufacturing capacity and tool certain packaging
capabilities. Capital equipment purchases for the technology group are
expected to enhance and accelerate Cypress's research and development
capabilities. Capital purchases for the remainder of 1998 are expected to be
approximately $40.0 million as Cypress continues to buy equipment to expand
manufacturing capabilities and capacity and to enhance its research and
development capabilities.
During 1997, the Board of Directors authorized the repurchase of up to 4.0
million shares of Cypress's common stock. In September 1998, the Board of
Directors authorized an additional 10.0 million shares to be repurchased. To
date, 8.1 million shares have been repurchased under this entire program for
$67.5 million. The shares purchased are expected to be issued in conjunction
with 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 $9.4 million as of November 10, 1998. Cypress may have a maximum
potential obligation to purchase 6.0 million shares of its common stock at an
aggregate price of $57.6 million as of November 10, 1998. The puts have
various expiration periods from November 1998 through May 1999. 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.
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 was 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.
23
<PAGE>24
In September 1998, Cypress retired $5.0 million principal amount of its
$175.0 million, 6.0% convertible subordinated notes for $4.3 million, resulting
in a $0.7 million pre-tax gain. In October 1998, Cypress retired an additional
$10.0 million principal amount of its convertible subordinated note for $8.6
million, resulting in a $1.4 million, pre-tax gain. Offsetting the gain was
the write-off of costs associated with the issuance of the bond of $0.4 million
(pre-tax).
In February 1997, 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.
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 line of credit was cancelled 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.
24
<PAGE>25
PART II - OTHER INFORMATION
ITEM 1. The information required by this item is included in Part I in Note 6
of Notes to the Condensed Consolidated Financial Statements.
ITEM 5. Other Information
In July 1998, Pierre Lamond resigned as Cypress's Chairman of the
board of directors. Mr. Lamond served on Cypress's board for
14 years. Cypress has named Eric Benhamou, Chief Executive
Officer of 3Com and a board member since 1993, as the new Chairman of
the board. In September 1998, Cypress announced Alan F. Shugart as
a new board member replacing Mr. Benhamou. Mr. Shugart is the founder
of Seagate Technology Inc.
ITEM 6:
(a) Exhibit - 27 "Financial Data Schedule"
(b) Reports on Form 8-K - None
25
<PAGE>26
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
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER AND NINE
MONTH PERIOD ENDED SEPTEMBER 28, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-28-1998 DEC-28-1998
<PERIOD-START> JUN-30-1998 DEC-29-1997
<PERIOD-END> SEP-28-1998 SEP-28-1998
<CASH> 93,361 93,361
<SECURITIES> 93,222 93,222
<RECEIVABLES> 63,712 63,712
<ALLOWANCES> 1,097 1,097
<INVENTORY> 58,063 58,063
<CURRENT-ASSETS> 351,866 351,866
<PP&E> 355,710 355,710
<DEPRECIATION> 432,480 432,480
<TOTAL-ASSETS> 815,446 815,446
<CURRENT-LIABILITIES> 99,092 99,092
<BONDS> 170,000 170,000
<COMMON> 860 860
0 0
0 0
<OTHER-SE> 502,625 502,625
<TOTAL-LIABILITY-AND-EQUITY> 815,446 815,446
<SALES> 126,048 362,676
<TOTAL-REVENUES> 126,048 362,676
<CGS> 86,406 284,181
<TOTAL-COSTS> 86,406 284,181
<OTHER-EXPENSES> 25,968 76,719
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,688 8,207
<INCOME-PRETAX> (4,183) (119,392)
<INCOME-TAX> (2,955) (14,006)
<INCOME-CONTINUING> (1,228) (105,292)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,228) (105,292)
<EPS-PRIMARY> (0.01) (1.16)
<EPS-DILUTED> (0.01) (1.16)
</TABLE>
