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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
For the fiscal year ended January 2, 2000
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
[No Fee Required]
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
3901 North First Street, San Jose, California 95134-1599
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 943-2600
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
on Which Registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
form 10-K. [ ]
At March 3, 2000, registrant had outstanding 112,787,375 shares of Common
Stock.
The market value of voting stock held by non-affiliates of the registrant,
based upon the closing sale price of the Common Stock on March 3, 2000 on the
New York Stock
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Exchange, was approximately $4,636,000,000. Shares of Common Stock held by each
executive officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference in Items 9, 10, 11 and 12 of Part III
of this 10-K Report.
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PART I
ITEM I. BUSINESS
This Item contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in "Risk
Factors" and elsewhere in this Report.
General
Cypress Semiconductor Corporation designs, develops, manufactures and
markets a broad line of high-performance digital and mixed-signal integrated
circuits for a range of markets, including data communications,
telecommunications, computers, and instrumentation systems. We currently offer
approximately 500 products from our two business segments; memory products and
non-memory products. Our products are marketed worldwide through a network of 25
North American sales offices, 6 North American distributors, 26 U.S. sales
representative firms, 7 European sales offices, 2 Japanese sales offices, 2
Chinese sales offices, an office in Singapore, an office in Korea, an office in
Taiwan, and 39 international sales representative firms. We sell our products to
a wide range of customers, including Lucent Technologies Inc., Motorola, Inc.,
Nortel Networks Corporation, Seagate Technology, Inc., Compaq Computer
Corporation, 3Com Corporation, IBM, Cisco Systems, Inc. and Sony Corporation. In
1999, international sales accounted for 51% of our total sales.
Cypress was founded in 1982 and our initial strategy was to provide
innovative high-performance complementary metal-oxide silicon, referred to as
CMOS, integrated circuits to niche markets that were believed to be too small to
be targeted by the major established international semiconductor manufacturers.
In 1992, we modified our strategy to focus on selected high-volume products,
particularly memory products, which could be brought to market quickly and
cost-effectively. This strategy was successful until 1996 when the average
selling prices of memory products began to decline. To offset the effects of
declining average selling prices and its impact on revenues from memory
products, we modified our strategy by diversifying our product mix to focus on
non-memory products. We have also directed our sales and marketing effort and
new product development resources, more towards the data communication and
telecommunication end markets. Because of the highly competitive nature of the
semiconductor industry, its cyclicality and anticipated pressure on average
selling prices over the life of any particular product, our ability to
successfully implement this strategy and achieve our revenue, earnings and gross
margin goals will depend upon a number of factors. These factors include our
ability to:
o maintain our position in the high-performance markets;
o increase our presence in the more competitive high-volume markets;
o continue to successfully design and develop new products utilizing
advanced semiconductor design and process technologies in a timely
fashion;
o improve manufacturing yields and reduce manufacturing costs and cycle
time; and
o effectively market and sell our products in light of significant
domestic and international competition.
Cypress was incorporated in California in December 1982. The initial public
offering of our common stock occurred in May 1986 at which time our common stock
commenced trading on the Nasdaq National Market. In February 1987, we
reincorporated in Delaware and on October 17, 1988, began listing our common
stock on the New York Stock Exchange.
Products
We concentrate our efforts in two market segments, memory products and
non-memory products. Our memory product segment manufactures integrated circuits
on silicon wafers using leading edge process technology. A significant portion
of the wafers we produce for memory products is manufactured at our
technologically advanced, eight-inch wafer production facility located in
Minnesota, which we refer to as Fab 4. Certain memory products are often
characterized as commodities, with high unit sales volume and significant shifts
in supply and demand; these factors mean a potentially greater exposure to
fluctuations in average selling price and gross margin. Sales of memory products
are generally driven by higher volumes and results of operations are improved
through advancements in technology and attainment of lower manufacturing costs.
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In contrast, some non-memory products are manufactured utilizing less
technologically advanced processes compared to memory products and are generally
design or customer solution driven. A majority of the wafers we produce for
non-memory products are manufactured at our six-inch fab located in Texas, which
we refer to as Fab 2. In addition, we purchase wafers fabricated at smaller
geometries from foundries. Unit sales volume of certain non-memory products is
generally lower than memory products, but gross margin is higher. Future sales
and results of operations of non-memory products are driven by the introduction
of new products, design wins and improvements in technology. Because the
semiconductor industry is characterized by rapid technological change, resulting
in products with greater speed, densities and performance capabilities and by
the continuing evolution of process technologies, our success will continue to
depend upon the timely development, introduction and market acceptance of new
products in the non-memory products market segment.
Please refer to our Note 11 to our annual financial statements included in
this Report for detailed information about the composition of revenues from our
memory and non-memory product market segments.
Memory Products
Our memory products, which include static random access memory products,
primarily serve the data communications, telecommunications and personal
computer markets.
Static RAM (Static Random Access Memory). Static RAMs are used for storage
and retrieval of data in data communication, telecommunication, computers and
other electronic systems. Common networking applications include hubs, switches,
routers, test and measurement instrumentation, video and simulation. Telecom
applications include cellular phones, pagers, radios, global positioning
satellite systems and cellular base stations.
The static RAM market is characterized by the requirements for many
different densities (number of bits per memory circuit), organizations (number
of bits available to the user in a single access of the RAM) and levels of power
consumption (low power and ultra-low-power devices are required for portable
battery operated equipment). In addition, the market is divided into fast
asynchronous, slow micro-power and synchronous segments. This differentiation of
the static RAM market when combined with the different RAM features incorporated
by various manufacturers, the need for military, industrial and commercial grade
products, the need for different package types, and the grading of product by
speed and power, produces a complex market structure.
Non-Memory Products
Non-memory products include a variety of products that serve the data
communications, telecommunications, personal computer, PC peripheral, military
and consumer markets. Non-memory products include programmable logic products
and programming software, programmable-skew clocking, data communication
products, computer products, including clocks and universal serial bus, referred
to as USB, microcontrollers and non-volatile memory products.
PLDs (Programmable Logic Devices). The logic in an electrical system
performs the non-memory functions, such as floating-point mathematics or the
organization and routing of signals throughout a computer system. This
constitutes a significant portion of the circuitry in most systems. We
manufacture several families of programmable logic circuits, which are
programmable by the user. PLDs facilitate the replacement of many standard logic
devices with a single device, thus reducing package count and cost, improving
performance and allowing miniaturization. Our PLD portfolio consists of a wide
variety of devices ranging from simple PLDs such as the Flash 22V10, to the
very-high-density complex PLDs such as the Cypress Ultra37000 and Delta 39K
families. All our products are supported by the Warp(TM) software tool set,
which enables design description in either VHDL (very high-speed integrated
circuit hardware description language), an industry standard developed by
Cypress or in Verilog, another industry standard.
PROMs (Programmable Read-Only Memories). Read-only memory, referred to as
ROM, is a memory in which the data is fixed even when the power is off. ROMs are
used to provide start up data to computers when they are turned on. PROMs are
blank ROMs that can be customized by the customer to fit specific needs. They
are used in computer-peripherals, telecommunications systems and instrumentation
equipment which store fixed data that is not to be altered during normal machine
operations. We have been a supplier of high-performance CMOS PROMs since 1984.
These early devices were the first to combine the fast memory access of PROM
with the low power consumption of CMOS technology. We offer a broad family of
high performance PROMs ranging in density from 4K to 256K bits, available in a
variety of standard and proprietary user interfaces.
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First-in, First-out ("FIFOs"). FIFOs are used as an elasticity buffer
between systems operating at different frequencies. We offer FIFO memories in a
variety of high-bandwidth synchronous and asynchronous architectures with
industry-standard pinouts. We have recently added 32 new x36 FIFOs to our
portfolio.
Multi-port Memories. Dual-port and QuadPortTM RAMs are memories that can be
accessed by two or four different processors or busses simultaneously.
Multi-ports are ideal memory solutions for shared-memory and switching
applications, including networking switches and routers, cellular base stations,
mass storage devices, and telecommunication equipment. Our family of synchronous
and asynchronous multi-port RAMs range in density from 8 Kbit to 1 Mbit in x8,
x9, x16, x18, and x36 configurations. We further enhanced our leadership
position in multi-ports by introducing the world's first x36 dual-port (FLEx36TM
Dual-port) and the world's first high-density (1-megabit) / high-performance (10
Gbps) QuadPort RAM.
RoboClock. Our RoboClock family of high performance programmable clock
buffers offer very high performance specifications (i.e. zero propagation delay
and 50/50 duty cycle) and programmable features (i.e. programmable skew and
multiple/divide functions) allowing customers to compensate for clock skews
arising from varying circuit board trace lengths and device set-up and hold
times.
HOTLink (High-speed Optical Transceiver Link). Our HOTLink serial
transceivers are the industry standard products for moving serial data at rates
from 50-400Mbps. These products support a variety of applications and industrial
protocols including fibre channel, enterprise system connection, asynchronous
transfer mode, digital video broadcast, Advanced Micro Devices, Inc.'s TAXIChip
protocol, generic backplane and point-to-point applications.
WAN (Wide Area Network) Our family of high-performance SONET/SDH
(Synchronous Optical Network/Synchronous Digital Hierarchy) transceivers move
SONET or SDH frames between equipment at the SONET/SDH data rates of 51.85Mbps
(OC-1) and 155.52Mbps (OC-3). Our recent acquisition of Arcus Technology, Inc.
enhanced our expertise in PDH (Plesiochronous Digital Hierarchy) and SONET/SDH
technology and E1-3 mapper products that are currently shipping for revenue.
Programmable Clocks. We are a leader in the timing technology device market
primarily due to our clocks and clock distribution circuits. Clocks' frequency
synthesizers integrate essentially all clock requirements of a microprocessor
based system, thus reducing size, power, consumption and cost. These devices are
widely used in personal computers, disk drives, modems, digital video disks,
video CD players and home video games. We are the only supplier offering true
field-programmable clocks, and all our clock outputs have the desired
characteristics of high drive, low jitter, low EMI, and low skew.
FCTs (Fast CMOS Technology). We offer a full complement of FCTs with
standard logic and bus interface functions in a variety of formats. FCT devices
are used in a wide variety of applications whenever the need arises for very
high-speed logic functions. FCT logic is used in almost all types of high-speed
systems for data/bus management, buffering, and a variety of other simple logic
functions. Our logic choices include 3.3- and 5-V products; high-drive and
balance drive strengths; 8- and 16-bit organizations, and numerous package
options.
USB (Universal Serial Bus). USB is a four-wire connection between a PC and
its peripherals (such as keyboards, mice, printers, joysticks, scanners and
modems), facilitating an easy-to-use architecture known as "plug and play." This
new standard has been supported by Microsoft Corporation, Intel Corporation and
other large original equipment manufacturers, referred to as OEMs. In 1997, we
entered into a strategic alliance with Microsoft to produce our first USB
product, an 8-bit, RISC-based microcontroller for Microsoft's new Internet
mouse. In 1999 we acquired Anchor Chips, Inc. to expand our high performance USB
product line. Also in 1999, we acquired the license to manufacture Intel's USB
products, further expanding the USB product portfolio. We now make USB
microcontrollers for a broad range of peripherals from personal computers, mice
and keyboards to high performance devices such as DSL modems and digital
cameras, giving us the broadest USB product portfolio in the industry.
Research and Development
We place great emphasis on research and development. This is partially
reflected by our commitment of significant management resources to continuously
improve process and product design development cycle time. Our current product
strategy requires rapid development of new products using emerging process
technologies while minimizing research and development costs. We perform
research and development at two levels: research and development related to
process technology is managed at the corporate level; and research and
development related to new product design is managed at the operating level, in
concert with our new product design organization.
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The major focus of our process technology research is the continuous
migration to smaller geometries. Currently, we are in the process of
transitioning from 0.25-micron to 0.16-micron fabrication technology. We began
selling 0.25-micron Static RAM products during the fourth quarter of 1998.
Our wafer fabrication facility located in San Jose, which we refer to as
Fab 1, is utilized for research and development programs focusing mainly on
continuous migration to smaller geometries. Development programs for 0.16-micron
technologies are currently in progress in Fab 1. Fab 1 also develops process
enhancements to current generation technology. In fiscal 1999, we began the
process of converting Fab 1 from a six-inch facility into an eight-inch
facility. This conversion is expected to be completed by June 2000.
We have a central design group that focuses on new product design and
improvement of design methodologies. This group has ongoing efforts to reduce
design cycle time and increase first pass yield through structured re-use of IP
Blocks from a controlled intellectual property library, development of
computer-aided design tools and improved design business processes. We currently
have 48 design teams in place working on new product designs. Design work
primarily occurs at design centers located in: Colorado Springs, Colorado; San
Jose, California; San Diego, California; Woodinville, Washington; Bloomington,
Minnesota; Austin, Texas; Starkville, Mississippi; Nashua, New Hampshire;
Bangalore, India; Basingstoke, United Kingdom; and Cork, Ireland. In addition,
we have software development teams in: Beaverton, Oregon; Lexington, Kentucky
and San Jose, California
Manufacturing
In 1999, we continued to manufacture our products at three sub-micron wafer
fabrication facilities located in California, Minnesota and Texas, the principal
facilities being the latter two. These fabrication facilities utilize our
proprietary 0.25, 0.35, 0.5, 0.65 and 0.8-micron CMOS, 0.8 and 0.5-micron
BiCMOS, and 0.65-micron Flash technologies. To enhance our competitive position,
we emphasized programs to reduce manufacturing cycle times, reduce die size,
improve labor productivity, improve efficient use of capital resources,
eliminate manufacturing steps, improve defect densities, improve yields and
ultimately lower manufacturing costs. We invested $57.4 million in 1999 to
increase the capacity and capability of our primary wafer fabrication plants,
Fab 2 and Fab 4. We have also continued to utilize various foundries to augment
production output to respond to increasing market demand and focus on RAM and
BiCMOS technologies in our own wafer fabrication plants.
A significant portion of our assembly and test operations is performed by
our highly automated assembly and test facility in the Philippines, which
accounted for 46% of our 1999 output, and through various offshore
subcontractors. Our Philippines facility focuses its investments in high volume
products and packages where our ability to significantly leverage manufacturing
costs is high. The Philippines plant currently has capability for numerous types
of packaging and will be developing capability for several other packages in the
near future. In 1999, we invested $17.6 million in capital to expand our
Philippines' manufacturing capability with state-of-the art equipment. When
fully utilized, this plant is expected to provide approximately 65% of our
assembly and test manufacturing capacity.
The complicated nature of our wafer fabrication process often resulted in
certain wafers being rejected or individual die on each wafer to be
non-functional, adversely affecting manufacturing yields. Similar yield losses
may be experienced in the assembly and test phase of manufacturing. Our
philosophy is to prevent the yield loss and/or quality problems to the extent
possible through analytical and statistical manufacturing controls. We test our
products at various stages in the fabrication, assembly and test processes. We
perform high temperature burn-in testing as well as continuous reliability
monitoring on all products, and conduct numerous quality control inspections
throughout the entire production flow using quality-control analytic equipment.
This combination of manufacturing controls, product testing and quality control
inspections is intended to reduce costs while maintaining an uninterrupted
supply of product.
Marketing and Sales
We use four channels to sell our products: direct OEM sales by our sales
force; direct OEM sales by manufacturing representative firms; sales through
domestic distributors; and sales through international trading companies and
representative firms. Our marketing and sales efforts are organized around four
regions: North America, Europe, Japan and Asia/Pacific. We also have a strategic
accounts group, which is responsible for specific customers with worldwide
operations. We augment our sales effort with field application engineers, who
are specialists in our product portfolio and work with customers to "design in"
our products for their systems. Field application engineers also help us
identify emerging markets and new products.
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International revenues accounted for 51% of our total revenues in 1999
compared to 45% in 1998 and 39% in 1997, respectively. Please refer to Note 11
to our annual financial statements included with this Report for additional
information on geographic distribution of our revenues.
We typically warrant our products against defects in materials and
workmanship for a period of one year and that product warranty is generally
limited to a refund of the original purchase price of the product.
Backlog
Our sales are typically made pursuant to standard purchase orders for
delivery of catalog products. Generally, customer relationships are not subject
to long-term contracts. Products to be delivered and delivery schedules, under
purchase orders outstanding from time to time, are frequently revised to reflect
changes in customer needs. For these reasons, our backlog at any particular date
is not representative of actual sales for any succeeding period and we believe
that our backlog is not a meaningful indicator of future revenues.
Competition
We face competition from other domestic and foreign high-performance
integrated circuit manufacturers, many of which have advanced technological
capabilities and have increased their participation in the markets in which we
operate. We compete with a large number of companies primarily in the
telecommunications, data communications, personal computer, personal computer
peripheral and military markets. Competitors, including Altera Corporation,
Hitachi, Integrated Device Technology, Inc., Integrated Silicon Solutions, Inc.,
Motorola, Inc., Samsung, Texas Instruments Incorporated and Xilinx, Inc, target
certain markets and compete directly with our products. Competition is based on
various factors that can vary among products and markets. These factors include
design and quality of the products, product performance, price and service.
The semiconductor industry is intensely competitive. This intense
competition results in a difficult operating environment for most companies in
the industry, including Cypress. This environment is characterized by erosion of
product sale prices over the lives of each product, rapid technological change,
limited product life cycles and strong domestic and foreign competition in many
markets. Our ability to compete successfully in a rapidly evolving high
performance end of the semiconductor technology spectrum depends on many
factors, including:
o our success in developing new products and manufacturing technologies;
o the delivery performance, quality and price of our products;
o the diversity of our product line;
o the cost effectiveness of our design, development, manufacturing and
marketing efforts;
o the pace at which customers incorporate our products into their systems,
and
o the number and nature of our competitors and general economic conditions.
We believe that we currently compete effectively in the above areas to the
extent they are within our control, however, given the pace at which events
change in the industry, our current abilities are not a guarantee of future
success. If we are not able to compete successfully in this environment, our
business, operating results and financial condition will be adversely affected.
Patents and Licenses
We currently have 368 patents and approximately 330 additional patent
applications on file with the United States Patent and Trademark Office and are
preparing to file more patent applications. In addition to factors such as
innovation, technological expertise and experienced personnel, we believe that
patents are becoming increasingly important to remain competitive in the
industry and we have an active program to acquire additional patent and other
intellectual property protection.
We have, and in the future may continue to, enter into technology license
agreements with third parties that give those parties the right to use patents
and other technology developed by us. Some of these agreements also give us the
right to use patents and other technologies developed by such other parties,
some of which involve payment of royalties.
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There can be no assurance that patents owned by us will not be invalidated,
circumvented or challenged, or that the rights granted thereunder will provide
competitive advantage to us. We are, and may in the future be, involved in
litigation with respect to alleged infringement or involved in litigation to
enforce our intellectual property rights. There can also be no assurance that
license agreements will continue to be available to us on commercially
reasonable terms in the future.
Employees
As of January 2, 2000, we and our subsidiaries had 3,810 employees,
compared to 3,030 at the end of fiscal 1998. In 1998, we laid-off 363 employees
located in Fab 2 in Texas, Fab 3 in Minnesota and our test operations in
Thailand in conjunction with our 1998 restructuring activity. None of our
employees are represented by a collective bargaining agreement, nor have we ever
experienced any work stoppages.
Risk Factors
Except for the historical information contained herein, the discussion in
this 10-K 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,
that involve risks and uncertainties. We use such words as "anticipated,"
"believes," "expects," "future," "intends," and similar expressions to identify
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for any reason, including
the risks described below and elsewhere in this Form 10-K. If any of the
following risks actually occur, our business, financial condition and operating
results could be seriously harmed.
Our future operating results are unusually likely to fluctuate and therefore may
fail to meet expectations.
Our operating results have varied widely in the past and may continue to
fluctuate in the future. In addition, our operating results may not follow any
past trends. Our future operating results will depend on many factors and may
fluctuate and fail to meet our expectations or those of others for a variety of
reasons, including the following:
o the intense competitive pricing pressure to which our products are subject,
which can lead to rapid and unexpected declines in average selling prices;
o the complexity of our manufacturing processes and the sensitivity of our
production costs to declines in manufacturing yields, which make yield
problems both possible and costly when they occur; and
o the need for constant, rapid, new product introductions which present an
ongoing design and manufacturing challenge, which can be significantly
impacted by even relatively minor errors, and which may result in products
never achieving expected market demand.
As a result of these or other factors we could fail to achieve our
expectations as to future revenues, gross profit and income from operations. Any
downward fluctuation or failure to meet expectations will likely adversely
affect the value of your investment in Cypress.
In addition, because we recognize revenues from sales to our domestic
distributors only when these distributors make a sale to customers, we are
highly dependent on the accuracy of their resale estimates. The occurrence of
inaccurate estimates also contributes to the difficulty in predicting our
quarterly revenue and results of operations.
We face periods of industry-wide semiconductor over-supply that harm our
results.
The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, semiconductors. These
fluctuations have helped produce many occasions when supply and demand for
semiconductors have not been in balance. In the past, these industry-wide
fluctuations in demand, which have resulted in under-utilization of our
manufacturing capacity, have harmed our operating results. In some cases,
industry downturns with these characteristics have lasted more than a year. If
these cycles continue, they will seriously harm our business, financial
condition and results of operations.
Our financial results could be seriously harmed if the markets in which we sell
our products do not grow.
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Our continued success depends in large part on the continued growth of
various electronics industries that use our semiconductors, including the
following industries:
o data communications and telecommunications equipment;
o computers and computer related peripherals;
o automotive electronics;
o industrial controls; and
o customer electronics equipment and military equipment.
A significant portion of our products is incorporated into data
communications and telecommunications end-products. Any decline in the demand
for networking applications, mass storage, telecommunications, cellular base
stations, cellular handsets and other personal communication devices that
incorporate our products could seriously harm our business, financial condition
and operating results. In addition, certain of our products, including USB
microcontrollers, high-frequency clocks and static RAMs, are incorporated into
computer and computer-related products, which have historically experienced
significant fluctuations in demand. We may also be seriously harmed by slower
growth in the other markets in which we sell our products.
We are affected by a general pattern of product price decline and fluctuations,
which can harm our business.
Even in the absence of an industry downturn, the average selling prices of
our products have historically decreased during the products' lives, and we
expect this trend to continue. In order to offset the average selling price
decreases, we attempt to decrease manufacturing costs of our products, and to
introduce new, higher priced products that incorporate advanced features. If
these efforts are not successful or do not occur in a timely manner, or if our
newly introduced products do not gain market acceptance, our business, financial
condition and results of operations could be seriously harmed.
In addition to following the general pattern of decreasing average selling
prices, the selling prices for certain products, particularly commodity static
RAM products, fluctuate significantly with real and perceived changes in the
balance of supply and demand for these products. Growth in the worldwide supply
of static RAMs in recent periods resulted in a decrease in average selling
prices for such products. In the event we are unable to decrease per unit
manufacturing costs at a rate equal to or faster than the rate at which average
selling prices continue to decline, our business, financial condition and
results of operations will be seriously harmed. Furthermore, we expect our
competitors to invest in new manufacturing capacity and achieve significant
manufacturing yield improvements in the future. These developments could
dramatically increase the worldwide supply of static RAM products and result in
associated downward pressure on prices.
We may be unable to protect our intellectual property rights adequately, and may
face significant expenses as a result of ongoing or future litigation.
Protection of our intellectual property rights is essential to keep others
from copying the innovations that are central to our existing and future
products. Consequently, we may become involved in litigation to enforce our
patents or other intellectual property rights, to protect our trade secrets and
know-how, to determine the validity or scope of the proprietary rights of
others, or to defend against claims of invalidity. This type of litigation can
be expensive, regardless of whether we win or lose.
Also, we are now and may again become involved in litigation relating to
alleged infringement by us of others' patents or other intellectual property
rights. This type of litigation is frequently expensive to both the winning
party and the losing party and takes up significant amounts of management's time
and attention. In addition, if we lose such a lawsuit, a court could require us
to pay substantial damages and/or royalties or prohibit us from using essential
technologies. For these and other reasons, this type of litigation could
seriously harm our business, financial condition and results of operations.
Also, although we may seek to obtain a license under a third party's
intellectual property rights in order to bring an end to certain claims or
actions asserted against us, we may not be able to obtain such a license on
reasonable terms or at all.
We have entered into technology license agreements with third parties that
give those parties the right to use patents and other technology developed by
us, and that give us the right to use patents and other technology developed by
them. We anticipate that we will continue to enter into these kinds of licensing
arrangements in the future. It is possible however, that licenses we want will
not be available to us on commercially reasonable terms. If we lose existing
licenses to key technology, or are unable to enter into new licenses which we
deem important, our business, financial condition and results of operations
could be seriously harmed.
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It is critical to our success that we be able to prevent competitors from
copying our innovations, we therefore intend to continue to seek patent, trade
secret and mask work protection for our semiconductor manufacturing
technologies. The process of seeking patent protection can be long and
expensive, and we cannot be certain that any currently pending or future
applications will actually result in issued patents, or that, even if patents
are issued, they will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. Furthermore, others may develop
technologies that are similar or superior to our technology or design around the
patents we own.
We also rely on trade secret protection for our technology, in part through
confidentiality agreements with our employees, consultants and third parties.
However, these parties may breach these agreements, and we may not have adequate
remedies for any breach. Also, others may come to know about or determine our
trade secrets through a variety of methods. In addition, the laws of certain
territories in which we develop, manufacture or sell our products may not
protect our intellectual property rights to the same extent as the laws of the
United States.
Our financial results could be adversely impacted if we fail to develop,
introduce and sell new products or fail to develop and implement new
manufacturing technologies.
Like many semiconductor companies, which frequently operate in a highly
competitive, quickly changing environment marked by rapid obsolescence of
existing products, our future success depends on our ability to develop and
introduce new products that customers choose to buy. We introduce significant
numbers of product each year, which are an important source of revenue for us.
If we fail to compete and introduce new product designs in a timely manner or
are unable to manufacture products according to the requirements of these
designs (discussed more below), or if our customers do not successfully
introduce new systems or products incorporating ours, or market demand for our
new products does not exist as anticipated, our business, financial condition
and results of operations could be seriously harmed.
For Cypress and many other semiconductor companies, introduction of new
products is a major manufacturing challenge. The new products the market
requires tend to be increasingly complex, incorporating more functions and
operating at faster speeds than prior products. Increasing complexity generally
requires smaller features on a chip. This makes manufacturing new generations of
products substantially more difficult than prior generations. Ultimately,
whether we can successfully introduce these and other new products depends on
our ability to develop and implement new ways of manufacturing semiconductors.
If we are unable to design, develop, manufacture, market and sell new products
successfully, our business, financial condition and results of operations would
be seriously harmed.
Interruptions in the availability of raw materials can seriously harm our
financial performance.
Our semiconductor manufacturing operations require raw materials that must
meet exacting standards. We generally have more than one source available for
these materials, but there are only a limited number of suppliers capable of
delivering certain raw materials that meet our standards. If we need to use
other companies as suppliers, they must go through a qualification process. In
addition, the raw materials we need for our business could become scarcer as
worldwide demand for semiconductors increases. Interruption of our sources of
raw materials could seriously harm our business, financial condition and results
of operations.
Problems in the performance of other companies we hire to perform certain
manufacturing tasks can seriously harm our financial performance.
A high percentage of our products are assembled, packaged and tested at our
manufacturing facility located in the Philippines. We rely on independent
subcontractors to assemble, package and test the balance of our products. This
reliance involves certain risks, because we have less control over manufacturing
quality and delivery schedules, whether these companies have adequate capacity
to meet our needs and whether or not they discontinue or phase-out assembly
processes we require. We cannot be certain that these subcontractors will
continue to assemble, package and test products for us, and it might be
difficult for us to find alternatives if they do not do so.
The complex nature of our manufacturing activities makes us highly susceptible
to manufacturing problems and these problems can have substantial negative
impact on us when they occur.
Making semiconductors is a highly complex and precise process, requiring
production in a tightly controlled, clean environment. Even very small
impurities in our manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer or other factors
can cause a substantial percentage of wafers to be rejected or numerous chips on
each wafer to
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<PAGE>
be nonfunctional. We may experience problems in achieving an acceptable success
rate in the manufacture of wafers, and the likelihood of facing such
difficulties is higher in connection with the transition to new manufacturing
methods. The interruption of wafer fabrication or the failure to achieve
acceptable manufacturing yields at any of our facilities would seriously harm
our business, financial condition and results of operations. We may also
experience manufacturing problems in our assembly and test operations and in the
introduction of new packaging materials.
We may not be able to use all of our existing or future manufacturing capacity,
which can negatively impact our business.
We have spent, and expect to continue to spend, significant amounts of
money to upgrade and increase our wafer fabrication, assembly and test
manufacturing capability and capacity. If we do not need some of this capacity
and capability for any of a variety of reasons, including inadequate demand or a
significant shift in the mix of product orders that makes our existing capacity
and capability inadequate or in excess of our actual needs, our fixed costs per
semiconductor produced will increase, which will harm us. In addition, if the
need for more advanced products requires accelerated conversion to technologies
capable of manufacturing semiconductors having smaller features, or requires the
use of larger wafers, we are likely to face higher operating expenses and may
need to write-off capital equipment made obsolete by the technology conversion,
either of which could seriously harm our business and results of operations.
Our operations and financial results could be severely harmed by certain natural
disasters.
Our headquarters and some manufacturing facilities and some of our major
vendors' facilities are located near major earthquake faults. If a major
earthquake or other natural disaster occurs, we could suffer damages that could
seriously harm our business, financial condition and results of operations.
Our business, results of operations and financial condition will be seriously
harmed if we fail to successfully compete in our highly competitive industry and
markets.
The semiconductor industry is intensely competitive. This intense
competition results in a difficult operating environment for us and most other
semiconductor companies that is marked by erosion of average selling prices over
the lives of each product, rapid technological change, limited product life
cycles and strong domestic and foreign competition in many markets. A primary
cause of this highly competitive environment is the strength of our competitors.
The industry consists of major domestic and international semiconductor
companies, many of which have substantially greater financial, technical,
marketing, distribution and other resources than we do. We face competition from
other domestic and foreign high-performance integrated circuit manufacturers,
many of which have advanced technological capabilities and have increased their
participation in markets that are important to us. If we are unable to compete
successfully in this environment, our business, operating results and financial
condition will be seriously harmed.
Our ability to compete successfully in the rapidly evolving high
performance portion of the semiconductor technology industry depends on many
factors, including:
o our success in developing new products and manufacturing technologies;
o the quality and price of our products;
o the diversity of our product line; o the cost effectiveness of our design,
development, manufacturing and marketing efforts;
o the pace at which customers incorporate our products into their systems,
and
o the number and nature of our competitors and general economic conditions.
Although we believe we currently compete effectively in the above areas to
the extent they are within our control, given the pace of change in the
industry, our current abilities are not a guarantee of future success.
We must build semiconductors based on our forecasts of demand, and if our
forecasts are inaccurate, we may have large amounts of unsold products or we may
not be able to fill all orders.
We order materials and build semiconductors based primarily on our internal
forecasts, and secondarily on existing orders, which may be cancelled under many
circumstances. Consequently, we depend on our forecasts to determine inventory
levels for our products and the amount of manufacturing capacity that we need.
Because our markets are volatile and subject to rapid technological and price
changes, our forecasts may be wrong, and we may make too many or too few of
certain products or have too much or too little manufacturing capacity. Also,
our customers frequently place orders requesting product delivery almost
immediately after the order is
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<PAGE>
made, which makes forecasting customer demand even more difficult. The above
factors also make it difficult to forecast quarterly operating results. If we
are unable to predict accurately the appropriate amount of product required to
meet customer demand, our business, financial condition and results of
operations could be seriously harmed.
We must spend heavily on equipment to stay competitive, and will be adversely
impacted if we are unable to secure financing for such investments.
In order to remain competitive semiconductor manufacturers generally must
spend heavily on equipment to maintain or increase manufacturing capacity and
capability. We have budgeted for approximately $250.0 million in expenditures on
equipment in 2000 and anticipate significant continuing capital expenditures in
subsequent years. In the past, we have reinvested a substantial portion of our
cash flow from operations in capacity expansion and improvement programs.
However, our cash flows from operations depend primarily on average selling
prices, which generally decline over time, and on the per-unit cost of our
products.
If we are unable to decrease costs for our products at a rate at least as
fast as the rate of the decline in selling prices for such products, we may not
be able to generate enough cash flow from operations to maintain or increase
manufacturing capability and capacity as necessary. In such a situation we would
need to seek financing from external sources to satisfy our needs for
manufacturing equipment and, if cash flow from operations declines too much, for
operational cash needs as well. Such financing, however, may not be available on
terms which are satisfactory to us or at all, in which case our business,
financial condition and results of operations will be seriously harmed.
We compete with others to attract and retain key personnel, and any loss of, or
inability to attract, such personnel would harm us.
To a greater degree than most non-technology companies, we depend on the
efforts and abilities of certain key management and technical personnel. Our
future success depends, in part, upon our ability to retain such personnel, and
to attract and retain other highly qualified personnel, particularly product and
process engineers. We compete for these individuals with other companies,
academic institutions, government entities and other organizations. Competition
for such personnel is intense and we may not be successful in hiring or
retaining new or existing qualified personnel. If we lose existing qualified
personnel or are unable to hire new qualified personnel as needed, our business,
financial condition and results of operations could be seriously harmed.
We face additional problems and uncertainties associated with international
operations that could seriously harm us.
International sales represented approximately 51% of our revenues during
fiscal 1999 and approximately 45% of our revenues during fiscal 1998. Our
offshore assembly and test operations, as well as our international sales, face
risks frequently associated with foreign operations, including:
o currency exchange fluctuations,
o political instability,
o changes in local economic conditions,
o the devaluation of local currencies,
o import and export controls, and
o changes in tax laws, tariffs and freight rates.
To the extent any such risks materialize, our business, financial condition
and results of operations could be seriously harmed.
We are subject to many different environmental regulations, and compliance with
them may be costly.
We are subject to many different governmental regulations related to the
storage, use, discharge and disposal of toxic, volatile or otherwise hazardous
chemicals used in our manufacturing process. Compliance with these regulations
can be costly. In addition, over the last several years, the public has paid a
great deal of attention to the potentially negative environmental impact of
semiconductor manufacturing operations. This attention and other factors may
lead to changes in environmental regulations that could force us to purchase
additional equipment or comply with other potentially costly requirements. If we
fail to control the use of, or to adequately restrict the discharge of,
hazardous substances under present or future regulations, we could face
substantial liability or suspension of our manufacturing operations, which could
seriously harm our business, financial condition and results of operations.
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<PAGE>
We depend on third parties to transport our products and could be harmed if
these parties experience problems.
We rely on independent carriers and freight haulers to move our products
between manufacturing plants and our customers. We have limited control over
these parties; however, any transport or delivery problems because of their
errors, or because of unforeseen interruptions in their activities due to
factors such as strikes, political instability, natural disasters and accidents,
could seriously harm our business, financial condition and results of operations
and ultimately impact our relationship with our customers.
We may fail to integrate our business and technologies with those of companies
that we have recently acquired and that we may acquire in the future.
We completed four acquisitions in calendar 1999, recently announced the
pending acquisition of Galvantech, Inc. and may pursue additional acquisitions
in the future. If we fail to successfully or properly integrate these
businesses, our quarterly and annual results may be seriously harmed.
Integrating additional businesses, products and services could be expensive,
time-consuming and a strain on our resources. Specific issues that we face with
regard to prior and future acquisitions include:
o the difficulty of integrating acquired technology or products;
o the difficulty of assimilating the personnel of the acquired companies;
o the difficulty of coordinating and integrating geographically dispersed
operations;
o our ability to retain customers of the acquired company;
o the potential disruption of our on-going business and distraction of
management;
o the maintenance of brand recognition of acquired businesses;
o the failure to successfully develop acquired in-process technology,
resulting in the impairment of amounts currently capitalized as intangible
assets;
o unanticipated expenses related to technology integration;
o the maintenance of uniform standards, corporate cultures, controls,
procedures and policies;
o the impairment of relationships with employees and customers as a result of
any integration of new management personnel; and
o the potential unknown liabilities associated with acquired businesses.
We face a number of unknown risks associated with year 2000 problems.
The year 2000 computer issue creates a variety of risks for us. The year
2000 computer problem refers to the potential for system and processing failures
of date-related data as a result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date represented as "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, interruptions in manufacturing, design and process development
operations, disruptions in processing business transactions, and disruptions in
other normal business activities. Issues related to the year 2000 computer
problem could still arise. The risks involve:
o potential warranty or other claims by customers with respect to errors in
our products;
o errors in systems we use to run our business;
o errors in systems used by our suppliers;
o errors in systems used by customers; and
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<PAGE>
o potential reduced spending by customers as a result of concerns about
potential year 2000 problems.
We have designed most of our products to be year 2000 compliant and have
developed corrective measures for other products that were not originally
designed to be year 2000 compliant. However, our products may be integrated into
or used in conjunction with products supplied by other vendors. We cannot
evaluate whether all of the products of other vendors are year 2000 compliant.
We may face claims based on year 2000 problems in other companies' products or
based on issues arising from the integration or use of multiple products. We may
in the future be required to defend our products in legal proceedings which
could be expensive regardless of the merits of these claims.
If our suppliers, vendors, partners, customers and service providers fail
to correct their year 2000 problems, these failures could result in an
interruption in, or a failure of, our normal business activities or operations.
If a year 2000 problem occurs, it may be difficult to determine which party's
products have caused the problem. These failures could interrupt our operations
and damage our relationships with customers. Due to the general uncertainty
inherent in the year 2000 problem resulting from the readiness of third-party
suppliers and vendors, we are unable to determine at this time whether
third-party year 2000 failures could harm our business, results of operations
and financial condition.
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding each of Cypress's current executive officers
is set forth below:
Executive
Officer
Name Age Position Since
- ------------------ --- ------------------------------------------- -------
T. J. Rodgers 52 President and Chief Executive Officer 1982
Antonio R. Alvarez 43 Executive Vice President, Memory Products 1993
Division and Research and Development
Emmanuel Hernandez 44 Executive Vice President, Finance and 1993
Administration, Chief Financial Officer
J. Daniel McCranie 56 Executive Vice President, Marketing and Sales 1993
Except as set forth below, each of Cypress's executive officers has been
engaged in his principal occupation described above during the past five years.
There is no family relationship between any director or executive officer of
Cypress.
T.J. Rodgers is a co-founder of Cypress Semiconductor Corporation and has
been its president and chief executive officer since 1982. Mr. Rodgers serves as
a director of C-Cube Corporation.
Antonio R. Alvarez joined Cypress in May 1987 as a senior technical
engineer. Mr. Alvarez was transferred to Cypress's former subsidiary, Aspen
Semiconductor Corporation, in April 1988 as the manager of BiCMOS technology. In
October 1989, Mr. Alvarez returned to the corporate office as Vice President,
Research and Development. In February 1993, Mr. Alvarez also became responsible
for Fab I when it was merged with the research and development department. Prior
to joining Cypress in 1987, Mr. Alvarez worked in various engineering and
management positions at Motorola Corporation from September 1979 through July
1987. His last position at Motorola was as a senior member of the technical
staff.
Emmanuel Hernandez joined Cypress in June 1993 as Corporate Controller. In
January 1994, Mr. Hernandez was promoted to Vice President, Finance and
Administration, and Chief Financial Officer. Prior to joining Cypress, Mr.
Hernandez held various financial positions with National Semiconductor
Corporation from 1976 through 1993.
J. Daniel McCranie joined Cypress in October 1993 as Vice President of
Marketing and Sales. Prior to joining Cypress, Mr. McCranie was President and
CEO of SEEQ Technology from 1989 through 1993. Mr. McCranie also held the
position of Vice President of Sales and Marketing for SEEQ for five years prior
to becoming President and CEO. Previously, he held marketing and sales positions
at Harris Semiconductor, AMD, American Microsystems and Signetics.
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<PAGE>
ITEM 2. PROPERTIES
Our executive offices, engineering and research and development facilities
are located in an approximately 60,000 square-foot building at 195 Champion
Court, San Jose, California, under a lease that will expire in 2004. Located
immediately adjacent to our executive offices is one of our wafer fabrication
facilities (Fab 1), which is primarily utilized for R & D operations. This
facility is located in an approximately 61,000 square-foot leased building at
3901 North First Street, San Jose, California. The current lease expires in
2004. The lease rates for these facilities are subject to variations based on
the London interbank offering rate (LIBOR) and a requirement to sell, extend the
lease, or acquire the property at the end of the lease term (see Note 9 of the
Consolidated Financial Statements).
Research and development and other Cypress staff functions also are located
at the San Jose building complex. This office space is composed of approximately
75,000 square feet in a building located at 4001 North First Street, San Jose,
California under a lease which expires in 2001. In addition, we have leased
75,000 square feet of additional office space at 3939 North First Street, San
Jose, California. This building was occupied in 1997 and is currently leased
until 2001. As described above, the lease rates for these facilities are subject
to variations based on LIBOR and we are required to sell, extend the lease or
acquire the property at the end of the lease term.
We also have a 36,000 square feet office facility located at 101 Nicholson
Lane, San Jose, California under a lease that expires in 2003. We have the
option to extend the lease for three additional years after the original lease
term expires. The lease rate increases 3% to 4% each year over the life of the
lease.
In December 1988, we purchased the two undeveloped industrial lots on
either side of our headquarters building. These similarly sized lots, comprising
a total of approximately 8.5 acres, will be retained for future expansion of the
San Jose building complex. In the third quarter of 1996, we began operations in
a new 162,000-square foot highly automated assembly and test manufacturing plant
in Cavite, the Philippines. We own an approximately 100,000 square foot wafer
fabrication facility, referred to as Fab 2 in Round Rock, Texas. In addition, we
also own an approximately 170,000 square foot wafer fabrication facility,
referred to as Fab 3, and we lease an approximately 100,000 square foot wafer
fabrication facility, referred to as Fab 4 on 18 acres of land in Bloomington,
Minnesota. The Fab 4 lease rate is subject to variations based on LIBOR and a
requirement to sell, extend the lease, or acquire the property at the end of the
lease term in December 2004 (see Note 9 of the Consolidated Financial
Statements).
In November 1997, we purchased real estate comprised of approximately 3.5
acres of land and 58,000-square feet of building in Woodinville, Washington. The
property is the new primary location of our interface products organization,
previously located in a leased facility in Kirkland, WA.
We lease additional space for domestic sales and design centers in
Huntsville, Alabama; Irvine, San Diego, San Jose, and Woodland Hills,
California; Denver and Colorado Springs, Colorado; Clearwater, Altamonte
Springs, and Pompano Beach, Florida; Roswell, Georgia; Palatine, Illinois;
Lexington, Kentucky; Columbia, Maryland; Minnetonka, Minnesota; Starkville,
Mississippi; Nashua, New Hampshire; Laurence Harbor and Ridgewood, New Jersey;
Northport and Oyster Bay, New York; Raleigh, North Carolina; Beaverton, Oregon;
Elkins Park and Trevose, Pennsylvania; and Austin, Houston and Richardson,
Texas. We lease international sales, representative and design centers in
Antwerp and Waterloo, Belgium; Toronto, Ontario, Canada; Le Ulis Cedex, France;
Cork, Ireland; Milan and Orbassano, Italy; Tokyo and Osaka, Japan; Taby, Sweden;
Cheshire, Basingstoke and Hertfordshire, United Kingdom; Zorneding, Germany;
Singapore; Taipei, Taiwan; Seoul, Korea; Hong Kong and Shanghai, China;
Lehdokkitie, Finland and Bangalore, India.
As of the end of fiscal year 1999, current properties are suitable for
immediate needs. There are no plans to re-locate or expand current facilities at
this time. Two undeveloped industrial lots at our headquarters are available for
future expansion.
ITEM 3. LEGAL PROCEEDINGS:
The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. From time to
time, we have received, and may receive in the future, communications alleging
that our products or our processes may infringe on product or process technology
rights held by others. We are currently, and may in the future be, involved in
litigation with respect to alleged infringement by us of another party's
patents. In the future, we may be involved with litigation to:
o enforce our patents or other intellectual property rights;
o protect our trade secrets and know-how;
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<PAGE>
o determine the validity or scope of the proprietary rights of others; and
o 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. Such litigation could
also result in payment of substantial damages and/or royalties or prohibitions
against utilization of essential technologies, and could have a material adverse
effect on our business, financial condition and results of operations.
During 1998, EMI Group of North America, Inc. filed suit against us in the
Federal Court in Delaware, claiming that we infringed on four patents owned by
EMI. Cypress and EMI entered into a license agreement in February 1999, for one
of the four patents in the lawsuit. EMI withdrew two of the four patents from
the lawsuit, including the patent related to the licensing agreement. The case
involving the two remaining patents went to trial in October 1999. The jury
ruled in favor of us claiming that none of the patent claims was infringed by us
and that each asserted claim was invalid due to prior art and physical
impossibility (i.e., the patents require a step that is physically impossible to
perform). EMI may file an appeal, although no such appeal has been filed as of
March 9, 2000. Should EMI appeal the decision of the Federal Court, we intend to
defend ourselves vigorously. However, should the outcome of this action be
unfavorable, our business, financial condition and results of operations could
be materially and adversely affected.
In January 1998, an attorney representing the estate of Mr. Jerome Lemelson
contacted us and charged that we infringed certain patents owned by Mr.
Lemelson. On February 26, 1999, the Lemelson attorneys sued us and 87 other
companies for infringement of 16 patents. We have reviewed and investigated the
allegations in the complaint and we believe that the suits are without merit. We
will vigorously defend ourselves in this matter. While no assurance can be given
regarding the outcome of this action, we believe that the final outcome of the
matter will not have a material effect on our consolidated financial position or
results of operations. However, because of the nature and inherent uncertainties
of litigation, should the outcome of this action be unfavorable, we may be
required to pay damages and other expenses, which could have a material adverse
effect on our financial position and results of operations.
In June 1997, we commenced a declaratory judgment action in the United
States District Court for the District of Nevada against the Li Second Family
Trust. In this action, we asked 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 us. The Trust has counter-claimed
for patent infringement on the same patent, alleging such patent covers
oxide-isolated integrated circuits. In May 1999, in a related case, the United
States District Court for the Eastern District of Virginia ruled that the patent
is unenforceable due to inequitable conduct by Dr. Li and his attorneys in
obtaining the patent. We believe that we have meritorious defenses to the
counter-claim and intends to defend ourselves vigorously. While no assurance can
be given regarding the outcome of this action, we believe that the final outcome
of the matters will not have a material effect on our consolidated financial
position or results of operations. However, should the outcome of this action be
unfavorable, our business, financial condition and results of operations could
be materially and adversely affected.
On October 2, 1997, we filed an action against Kevin Yourman, Joseph Weiss,
and their associated law offices in the Superior Court of California ("Superior
Court") in Santa Clara County for malicious civil prosecution in the underlying
securities fraud actions initiated by Messrs. Yourman and Weiss in 1992. The
underlying securities fraud actions were dismissed because the court found that
none of our officers 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 our officers. On May 4, 1999, the Superior Court granted a
summary judgment motion by Messrs. Yourman and Weiss, holding that Messrs.
Yourman and Weiss had probable cause to bring the underlying litigation. We are
appealing the decision. Even though, the results of litigation are
unpredictable, we believe that this action, regardless of its outcome, will have
little, if any, effect on our consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended January 2, 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock is listed on the New York Stock Exchange under the trading
symbol "CY". The following table sets forth, for the periods indicated, the low,
high and closing price for the common stock. We have not paid cash dividends and
have no present plans to do so. At January 2, 2000 there were approximately
42,000 holders of record of our Common Stock.
PRICE RANGE OF COMMON STOCK ($)
--------------------------------
LOW HIGH CLOSE
--- ---- -----
Fiscal Year ended January 2, 2000:
First Quarter ............................. 7.38 10.38 9.31
Second Quarter ............................ 9.31 18.31 18.00
Third Quarter ............................. 17.06 28.94 23.38
Fourth Quarter ............................ 21.31 33.50 32.38
Fiscal Year ended January 3, 1999:
First Quarter ............................. 8.06 11.00 10.00
Second Quarter ............................ 7.38 10.69 8.25
Third Quarter ............................. 5.50 9.31 9.06
Fourth Quarter ............................ 8.00 12.00 8.31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended(1)
---------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Operating results:
<S> <C> <C> <C> <C> <C>
Revenues ......................... $ 705,487 $ 554,891 $ 598,485 $ 569,941 $ 636,108
Restructuring and other
non-recurring costs .......... 33,812 60,737 9,882 10,932 17,800
Operating Income (loss) .......... 52,823 (120,521) 8,508 54,110 162,966
Income (loss) before tax ......... 95,871 (118,441) 13,139 55,584 164,201
Net income (loss) ................ 91,054 (104,918) 7,526 25,108 104,995
Net income (loss) per share
Basic ......................... $ 0.87 $ (1.03) $ 0.08 $ 0.28 $ 1.18
Diluted ....................... $ 0.81 $ (1.03) $ 0.07 $ 0.26 $ 1.02
Weighted average common and common
equivalent shares outstanding
Basic ......................... 104,703 101,944 100,137 90,247 89,321
Diluted ....................... 111,735 101,944 107,866 95,555 106,253
Balance sheet data:
Cash and short-term investments .. $ 270,556 $ 160,561 $ 203,870 $ 95,699 $ 165,363
Working capital .................. 344,630 236,081 309,661 125,746 195,131
Total assets ..................... 1,117,224 823,996 978,466 834,931 791,491
Long term debt and capital lease
obligations (excluding current
portion) ...................... 226,484 211,305 224,412 135,266 123,171
Stockholders' equity ............. 697,975 498,723 644,632 512,116 492,394
</TABLE>
(1) We operate on a 52- or 53-week fiscal year. Fiscal year 1999 was a 52-week
fiscal year ending on the Sunday closest to December 31. 1998 was a 53-week
fiscal year ending on the Sunday closest to December 31. Fiscal year 1997
was a 52-week fiscal year ending on the Monday closest to December 31.
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<PAGE>
ITEM 7. Management's Discussion and Analysis of Operations and Financial
Condition
This report may contain forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, about the prospects for Cypress as well as the
semiconductor industry more generally, including without limitation, statements
about increases in gross margin, rate of growth of research and development
expenditures as a percent of revenues, rate of growth of selling, general and
administrative expenses, profitability goals, revenue goals, growth rate goals,
market share goals, market size and growth projections, new product
introductions, planned manufacturing capacity, and efficiency and cost goals.
Actual results could differ materially from those described in the
forward-looking statements as a result of various factors including, but not
limited to, the factors identified in the Letter to Shareholders and the
Management's Discussion and Analysis section, particularly "Factors Affecting
Future Results," as well as the following:
(1) increased competition which could result in lost sales or price
erosion;
(2) changes in product demand by the electronics and semiconductor
industries, which are noted for rapidly changing needs, coupled with
an inability by Cypress to generate product enhancements or new
product introductions which keep pace with or meet those rapidly
changing needs;
(3) failure by Cypress to develop or introduce successfully new products
in areas of expected new or increased demand, or development and
introduction of superior new products serving those areas by others;
(4) failure of expected growth in demand for, or areas of expected new
demand for, semiconductor products to materialize;
(5) failure to successfully bring on line and utilize additional
manufacturing capacity, or to transition existing capacity to new
uses;
(6) inability to develop and/or adopt more advanced manufacturing
technology;
(7) inability of Cypress's patents or other proprietary rights to ensure
adequate protection against encroachment on Cypress's technology by
competitors; and
(8) failure to attract and/or retain key personnel.
Overview
Revenues for Cypress increased 27.1% to $705.5 million in fiscal 1999 from
$554.9 million in fiscal 1998. Net income for fiscal 1999 was $91.1 million
compared to a net loss of $104.9 million in fiscal 1998. The net loss for fiscal
1998 included a restructuring charge of $60.7 million and other non-recurring
charges totaling $27.3 million. Excluding the restructuring and non-recurring
charges, the net loss for fiscal 1998 was $26.9 million. Cypress earned $0.81
per share, on a diluted basis, during fiscal 1999 compared to a diluted net loss
of $1.03 per share in fiscal 1998.
On March 2, 2000, Cypress completed the merger with Galvantech, Inc.
("Galvantech"), which will be accounted for as a pooling of interests. The
agreement provides for Cypress to issue up to 3.6 million shares in exchange for
all outstanding stock and options of Galvantech. The fiscal years of Cypress and
Galvantech were different and Galvantech has changed its fiscal periods to
coincide with that of Cypress. Galvantech specializes in niche, ultra-high
performance memories for data communications applications.
On January 31, 2000, Cypress filed a universal shelf registration statement
with the Securities and Exchange Commission. The registration statement which
was effective February 8, 2000 will allow Cypress to market and sell up to
$400.0 million of its securities. The shelf registration statement allows
Cypress flexibility to raise funds from the offering of debt securities, common
stock, or a combination thereof, subject to market conditions and Cypress's
capital needs.
On January 19, 2000, Cypress completed a $283.0 million
registered-placement of 5-year convertible subordinated notes. The notes are due
in the year 2005, with a coupon rate of 4.00% and an initial conversion premium
of 28.5%. The notes are convertible into approximately 6.1 million shares of
common stock and are callable by Cypress no earlier than February 5, 2003. Net
proceeds were $275.2 million, after issuance costs of $7.8 million.
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On October 5, 1999, Cypress announced that it has signed a definitive
agreement with Altera Corporation ("Altera") to acquire Altera's MAX 5000
Programmable Logic Device ("PLD") product line and its equity interest in
Cypress's wafer fabrication facility in Round Rock, Texas ("Fab II") for
approximately $13.0 million in cash. The acquisition has been accounted for as a
purchase. In 1988, Altera licensed its MAX 5000 family of products to Cypress in
consideration of manufacturing capacity. Altera later acquired a 17% equity
interest in the Round Rock wafer fabrication facility. By acquiring Altera's
equity interest in October 1999, Fab II is now 100% owned by Cypress.
On June 30, 1999, Cypress acquired all of the outstanding capital stock of
Arcus Technology (USA), Inc. and the assets of Arcus Technology (India) Limited
(referred to collectively as "Arcus"). Arcus specializes in new data
communications arenas including dense wave multiplexing (which allows multiple
signals to be transmitted over a single fiber optic cable) and "IP over SONET"
(the technology needed to code and decode Internet traffic to send it over the
telephone system). The acquisition was accounted for as a purchase and the
estimated fair value of assets acquired and liabilities assumed were included in
Cypress's consolidated balance sheet as of June 30, 1999, the effective date of
the purchase. The results of operations were included from the date of purchase.
Cypress acquired Arcus for $17.7 million, including cash of $11.5 million and
stock of $6.2 million, excluding direct acquisition costs of $0.8 million for
legal and accounting fees.
On May 25, 1999, Cypress acquired all of the outstanding capital stock of
Anchor Chips, Inc. ("Anchor"), a company that designs and markets
microcontroller chips to support the Universal Serial Bus. The acquisition was
accounted for as a purchase and the estimated fair value of assets acquired and
liabilities assumed were included in Cypress's consolidated financial statements
as of May 25, 1999, the effective date of the purchase. The results of
operations were included from the date of purchase. Cypress paid approximately
$15.0 million in cash excluding direct acquisition costs of $0.7 million for
investment banking, legal and accounting fees.
On April 1, 1999, Cypress completed a merger with IC WORKS Incorporated
("ICW"), which was accounted for as a pooling of interests. The consolidated
financial statements and the notes to the consolidated financial statements give
effect to the merger for all periods presented. The fiscal years of Cypress and
ICW were different. ICW has changed its fiscal year-end to coincide with that of
Cypress. Cypress's consolidated statements of operations for the periods ended
January 3, 1999 and December 27, 1997, have been combined with ICW's
consolidated statements of operations for the corresponding twelve month periods
ended December 28, 1998 and March 28, 1998. During fiscal 1999, Cypress recorded
merger-related transaction costs of $3.7 million related to the acquisition of
ICW. These charges, which consist primarily of investment banking and other
professional fees, have been included under acquisition and merger costs in the
Consolidated Statements of Operations.
Results of Operations
Revenues
Revenues for fiscal 1999 were $705.5 million, an increase of $150.6 million
or 27.1% versus revenues for fiscal 1998, and an increase of $107.0 million or
17.9% compared to revenues for fiscal 1997. Cypress derives its revenues from
the sale of Memory Products and Non-memory Products, primarily targeted to the
data communications and computation markets.
Revenues from the sale of Memory Products for 1999 increased $73.8 million
or 37.6% over revenues from the sale of these products for fiscal 1998 and
increased $43.1 million, or 19.0% compared to fiscal 1997. From fiscal 1998 to
fiscal 1999, sales of Static Random Access Memories products ("SRAM") grew $74.9
million or 40.3%. Revenues from SRAMs during fiscal 1999 increased $52.3 million
or 25.1% compared to fiscal 1997. The increase in Memory Product revenues, as
compared to fiscal 1998, resulted from both higher average selling prices
("ASPs") and an increase in unit sales. ASPs grew 16.7% from fiscal 1998 to
fiscal 1999 and unit sa1es increased 17.9% over the same period. The increase in
unit sales in fiscal 1999 can be attributed to new product revenues,
particularly in the 4meg synchronous, the No Bus Latency ("NoBL"), the 2 meg
More Battery Life ("MoBL") and the 1 meg x16 micropower family of products. The
synchronous and NoBL demand was driven by the surge in the networking market,
while sales for MoBL and micropower were driven by the cellular phone market.
Unit sales volume of Memory Products increased 16.2% comparing fiscal 1999 to
fiscal 1997, while ASPs remained relatively constant.
Non-memory Products include programmable logic products, data communication
devices, computer products and non-volatile memory products. Non-memory products
also include foundry revenues. Foundry revenue represents sales of wafers to
customers. Revenues from the sale of Non-memory Products increased $76.8 million
or 21.4% comparing fiscal 1999 to fiscal 1998 and $63.9
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million, or 17.2% compared to fiscal 1997. The increase in revenues related
primarily to the sale of computer products, which include programmable clock
products and universal serial bus ("USB") products, and from the sale of data
communication devices.
In fiscal 1999, revenues from the sale of computer products increased $54.7
million, or 36.9% and $86.5 million, or 74.2%, respectively, compared to fiscal
1998 and fiscal 1997, respectively. The revenue growth in programmable clocks
can be attributed to higher unit sales, primarily as a result of the
introduction of the BX clock chip in 1999 and greater acceptance of other clock
products. Also in fiscal 1999, revenues for USB products grew, in comparison to
fiscal 1998 and 1997, primarily as a result of an increase in the adoption rate
of USB products in the market place, particularly in the personal computer
market. USB revenues in fiscal 1999 also benefited from the acquisition of
Anchor in May 1999. ASPs remained relatively stable comparing fiscal 1999 to
fiscal 1998.
Revenues generated from the sale of data communication devices in fiscal
1999, increased $22.7 million or 18.3% compared to fiscal 1998 and $20.0
million, or 15.8% compared to fiscal 1997. The revenue growth in fiscal 1999 was
the result of higher unit sales as units sold in fiscal 1999 increased 20.0% and
18.9% compared to fiscal 1998 and fiscal 1997, respectively. Data
communication's revenue growth can be attributed to their ability to align
themselves with several key customers in the Storage Area Network, Local Area
Network and Wide Area Network markets. Contributions were primarily from the 1
Megabit Dual Port Ram, HotLink Transceivers and RoboClock Skew Clock Buffer
family of products. The increase in unit sales more than offset the minimal
decline in ASPs, comparing the same periods.
Revenues from the sale of programmable logic products in fiscal year 1999,
increased $3.3 million or 7.9% compared to fiscal 1998, however, decreasing
$14.7 million or 24.8% compared to fiscal 1997. In fiscal 1999, revenues
increased, compared to fiscal 1998, due to the ramp up of sales in the 37K and
FLASH family of products. The revenue growth in the 37K and FLASH family of
products more than offset declining sales in the more mature MAX and Small PLD
family of products. Non-volatile memory product revenues remained relatively
constant in fiscal 1999 decreasing $0.8 million compared to fiscal 1998. In
1997, Cypress decided to cease selling certain non-volatile memory devices,
Erasable Programmable Read-only Memory ("EPROM"). As a result, the sale of
non-volatile memory products decreased $13.1 million or 31.7% from fiscal 1999
to fiscal 1997.
As is typical in the semiconductor industry, ASPs of products generally
decline over the lifetime of the products. To increase revenues, Cypress seeks
to expand its market share in the markets it currently serves and to introduce
and sell new products with higher ASPs. Cypress will seek to remain competitive
with respect to its pricing to prevent a further decline in sales.
Cost of Revenues
Cost of revenues for fiscal 1999 were 54.4% of revenues, compared to 73.7%
of revenues for fiscal 1998 and 65.8% of revenues during fiscal 1997. The
decrease in cost of revenues as a percent of revenues was primarily due to a
significant increase in unit sales, resulting in lower fixed cost per unit sold
and the introduction of new products with higher margins. In order to offset the
decrease in ASPs, Cypress must continue to find ways to lower manufacturing
costs and introduce new products with higher margins in order to remain
competitive in the marketplace.
Cost of revenues for fiscal 1998 included one-time non-recurring charges
totaling $21.7 million. These charges included $15.8 million related to the
write-down of inventory, $3.8 million for the write-off of pre-operating costs
and $2.1 million for the write-off of certain equipment. The $15.8 million
charge for incremental inventory reserves arose due to market conditions
resulting in the ongoing, over-supply and continued inventory corrections by
end-user customers.
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 operations in the Philippines. As a result of
the restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits. The pre-operating costs totaling $3.8 million, net of
accumulated amortization were included in other assets at December 29, 1997.
The write-off of equipment was related to equipment identified as obsolete
during Cypress's periodic review of equipment and no longer considered usable.
Excluding these one-time non-recurring charges, cost of revenues as a percent of
revenues for fiscal 1998 would have been 69.8%.
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 restructuring activities for its
domestic wafer fabrication facilities and offshore back-end manufacturing
operations. Activities completed to date have increased Cypress's manufacturing
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efficiencies and as a result, its gross margin has been increasing since the
first quarter of fiscal 1998. Cypress expects to benefit from these
restructuring activities in the future.
Research and Development
Research and development ("R&D") expenditures for fiscal 1999 were $129.3
million or 18.3% of revenues, compared with $114.6 million or 20.6% of revenues
for fiscal 1998 and $104.3 million or 17.4% of revenues for fiscal 1997. R&D
expenditures in fiscal 1999 increased $14.8 million or 12.9% compared to fiscal
1998 and $25.0 million or 24.0% compared to fiscal 1997. R&D expenditures
increased from fiscal 1997 through fiscal 1999 as Cypress continued its effort
to accelerate the development of new products and migrate to more advanced
process technologies. In 1999, spending in Cypress's design centers grew due to
increased headcount and additional spending from design centers acquired with
the purchase of Arcus and Anchor. During 1998, Cypress began utilizing the 0.25
micron process technology for manufacturing purposes, and in 1999, started
development of 0.16 micron process technologies. Cypress believes that its
future success will depend on its ability to develop and introduce new products
that will compete effectively on the basis of price and performance, and will
address customer needs. In fiscal 2000, Cypress is expecting to continue to
increase spending in R&D in order to improve its design and process technologies
in an effort to increase revenues and reduce costs. As part of this effort, in
fiscal 2000, Cypress expects to complete the conversation its San Jose R&D wafer
fab from a six-inch facility into an eight-inch facility. This will make
Cypress's R&D fab more compatible with its technologically advanced wafer fabs
in Minnesota. This conversion is expected to be completed in June 2000.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for fiscal 1999 were
$105.9 million or 15.0% of revenues, compared to $91.0 million or 16.4% of
revenues for fiscal 1998 and $82.0 million or 13.7% of revenues for fiscal 1997.
SG&A expenses for fiscal 1999 increased by $14.9 million or 16.3% as compared to
fiscal 1998 and by $23.9 million or 29.1% when compared to fiscal 1997. SG&A
spending increased in from fiscal 1997 to fiscal 1998 and from fiscal 1998 to
fiscal 1999 principally because of higher sales and marketing expenditures
related to salesmen and rep commissions, a new sales force training program and
higher marketing communication expenditures. In fiscal 1999, Cypress also
incurred higher legal costs, primarily associated with its successful defense of
the EMI patent infringement lawsuit. With the exception of variable spending,
such as incentive bonuses, salary adjustments and commissions, Cypress expects
to keep SG&A spending as a percent of revenues relatively constant in fiscal
2000.
1999 Restructuring, Merger and Acquisition, and Other Non-Recurring Costs
During fiscal 1999, Cypress recorded a net $33.8 million in restructuring,
merger and acquisition, and other non-recurring costs. These one-time,
non-recurring costs included a $12.3 million write-off of a certain
manufacturing asset that will not be utilized and an $11.9 million one-time
compensation charge. In the first quarter of fiscal 1999, Cypress recorded
one-time charges of $3.7 million associated with the merger with IC Works. These
charges were for investment banking fees and other professional fees. Cypress
also recorded $8.8 million in costs associated with the purchase of Anchor and
Arcus comprising of $4.0 million for in-process technology, $1.6 million for
transaction costs and $3.2 million in amortization of intangible assets. During
the fourth quarter of fiscal 1999, Cypress acquired Altera's MAX 5000
Programmable Logic Device ("PLD") product line and its equity interest in
Cypress's wafer fabrication facility in Round Rock, Texas. As part of the
transaction, Cypress recorded intangible assets associated with the product
rights and incurred $0.3 million for the amortization of these intangibles.
These non-recurring charges were offset by a reversal of $3.1 million of the
1998 restructuring reserve. The reversed charges related to $2.2 million of
severance and other employee related charges and $0.3 million for the provision
for phase-down and completion of the Alphatec restructuring activities. Cypress
also reversed $0.5 million of the 1998 restructuring reserve for other fixed
asset related charges that were no longer considered necessary. During fiscal
1999, Cypress reversed $0.7 million of the 1996 restructuring reserve related to
fixed asset de-installation charges that were no longer required.
1998 Restructuring and Other Non-Recurring Costs
During 1998, Cypress implemented an overall cost reduction plan and
recorded a $58.9 million restructuring reserve. The restructuring entailed:
o The shutdown of Fab 3, located in Bloomington, Minnesota and
consolidation of parts of Fab 3 operations with other operations of
Cypress.
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o The discontinuance of the 0.6 micron 256k SRAM production in Fab 2
located in Texas.
o The conversion of an existing research and development fab located in
San Jose (Fab 1) to eight-inch capability in order to be compatible
with the state of the art eight-inch Minnesota manufacturing facility.
o The transfer of Cypress's test operations from its subcontractor,
Alphatec, in Thailand to Cypress's production facility in the
Philippines.
o The restructuring activities described above include the termination
of approximately 850 manufacturing employees primarily from Cypress
and Alphatec.
FAB 3 -- The charge related to the shutdown of Fab 3 was $30.2 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, $1.1 million related to severance and other employee related costs
and $1.4 million related to inventory.
Fab 3 assets, which were not upgradable to 8-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 down to their salvage value during
the production phase-down period. Fab 3 assets, which were upgradable to 8-inch
capability, were transferred to Fab 4 production during the third quarter of
1998.
In accordance with the restructuring plan, Fab 3 production was phased down
beginning in the second quarter of 1998 and ceased in July 1998. From this time,
Cypress has held the non-upgradable equipment for sale. As of January 2, 2000,
some of the equipment still has not been sold. Cypress expects to recover the
originally determined salvage value for such equipment, however, no assurance
can be given as to the amount of proceeds that 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 with this decision totaled $21.3 million, of which
$18.0 million related to the write-down of equipment, $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 for the 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 useful lives of the
assets and the estimated salvage value of the assets. 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 used the equipment during the production
phase-down period through May 1998.
As of January 2, 2000, some of this 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 that 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 and write-down of six-inch manufacturing
equipment that was not upgradable to eight-inch capability. The remaining net
book value of such assets was written off over the estimated useful life through
January 1999. Incremental depreciation charges, to reflect the revised useful
lives of this equipment, were included in research and development costs for
1998 and January 1999. Cypress also reserved $1.0 million to write-down the
value of certain other equipment and reserved $1.3 million related to severance
and other employee related costs. In fiscal 2000, Cypress expects to convert its
San Jose R&D wafer fab from a six-inch facility into an eight-inch facility.
This will make Cypress's R&D fab more compatible with its technologically
advanced wafer fabs in Minnesota. This conversion is expected to be completed in
June 2000.
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 was
related to production inventories which were no longer useable as a result of
this consolidation, $1.3 million was related to severance costs at the
subcontractor and
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$2.3 million was related to excess equipment and leasehold improvements which
were no longer used. The assets were considered held for sale and were written
down to their revised carrying value. The transfer of production from Alphatec
to the Philippines facility began during the second quarter of 1998 and was
completed in January 1999, one month later than originally planned.
OTHER -- Separate from the restructuring charge, Cypress recorded an
additional charge of $27.3 million, which was recorded as operating expenses.
The charges were for inventory reserves ($15.8 million), the write-off of
pre-operating costs ($3.8 million), the write-off of an equity investment ($3.1
million), costs incurred to reimburse a customer for expenses incurred as a
consequence of Cypress's defective products ($2.5 million) and the write-off of
obsolete equipment in Fab 4 ($2.1 million). The write-down of inventory was made
to establish incremental reserves for excess inventory and was recorded as cost
of revenues.
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operation in the Philippines. As a result of
restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits and accordingly the costs were written off to cost of
sales. There were no capitalized pre-operating costs subsequent to the first
quarter of 1998.
The $3.1 million write-off of the investment was recorded against net
interest and other income to reflect the decline in the value of a certain
investment. Selling, general and administrative costs included the write-off of
$2.5 million in costs incurred to reimburse a customer for certain product
expenses incurred. During Cypress's periodic review of equipment, some equipment
was identified as obsolete and $2.1 million was charged to cost of sales to
write-off the obsolete equipment.
1997 Restructuring Costs - Cypress (ICW)
In fiscal 1997, Maxim Integrated Products, Inc. ("Maxim") agreed to
purchase wafer fabrication assets from Cypress and its Fab Partners to purchase
certain equipment from Cypress lessors thereby relieving Cypress of significant
future equipment lease obligations. Maxim also acquired the property that housed
the fab from Samsung Semiconductor, Inc. as part of the same transaction. The
remaining assets to be disposed at the end of fiscal year 1997 were liquidated
between April 1998 and June 1998 (including at an equipment auction in June
1998). Due to the lack of any meaningful sale of assets at the June auction, the
actual liquidation of substantially all of the remaining assets was completed in
November 1998. In May 1998, Maxim purchased approximately $0.5 million of the
assets to be disposed of in another asset sale transaction separate from the
November 1997 transaction.
Cypress entered into the following material agreements related to the sale
of its fab assets to Maxim in November 1997:
1. Asset purchase agreements -- related to the purchase of assets from each of
the respective owners of assets. (Fab Partners, lessors, and Cypress.) The
loss incurred by the Company as a result of these agreements is included as
part of the restructuring costs in the accompanying financial statements.
2. Loan agreement -- related to a loan by Maxim to Cypress in the amount of
$2.0 million. Recorded as long-term debt in March 1998 and is payable at
the earlier of an IPO, change in control, or four years.
3. Foundry agreement -- related to Cypress agreement for Maxim to provide
BiCMOS foundry services to Cypress . This agreement terminated in December
1998. No effect on financials.
4. Operating agreement -- related to sharing of the fab between Cypress and
Maxim for a period of up to seven months from close (actual duration was
four months). Specifics of the agreements include how costs are shared, who
has control and when the fab transfers sequentially from Cypress to Maxim,
the basis for one party billing the other for its manufacturing activities
within the fab during the period of sharing the fab, and an agreement with
Maxim that they will hire substantially all the wafer fab-related employees
based on a prescribed schedule. The operating agreement was substantially
completed in March 1998.
Cypress and Maxim also entered into an operating agreement that outlined
the utilization of and cost-sharing for the facility during the six-month
transition period following the sale of the fab assets to Maxim.
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While Maxim had acquired most of Cypress owned and leased fab assets and
certain related assets, Cypress still owned or leased other wafer fabrication
assets that were not purchased by Maxim. As such, in connection with the exit of
the wafer fabrication business, Cypress recorded a restructure charge of
approximately $9.9 million related to impairment of assets sold to Maxim ($2.2
million), impairment of assets held for sale ($1.8 million), refinancing of
lease agreements ($3.6 million), employee severance ($0.2 million), and other
transaction costs ($2.2 million). These agreements with Maxim resulted in a
reduction of headcount of approximately 113 foundry employees (most of whom were
hired by Maxim). The total expected cash outlay related to this charge was
approximately $6.7 million at December 29, 1997, of which the remaining $4.1
million was paid in 1999.
In November 1997, Cypress also borrowed $2.0 million from Maxim with
interest accruing at 6% per annum. The note and interest are to be repaid at the
earlier of: a majority sale of Cypress, the consummation of a public offering of
Cypress common stock, or four years from the date of the note (November 2001).
In addition, Cypress entered into a wafer purchase agreement with Maxim that
allows Cypress to buy BiCMOS wafers from Maxim for a period of up to two years.
On the closing date of the transaction, November 20, 1997, Maxim purchased
Cypress six-inch wafer fabrication leasehold improvements and manufacturing
equipment as well as certain five-inch wafer fabrication equipment, which
Cypress owned or acquired through capital leases. The carrying value of the
six-inch and five-inch fabrication assets were $14.25 million and $0.4 million,
respectively. Proceeds of the sale of these assets to Maxim were $12.5 million
to Cypress. Substantially all the assets held at December 29, 1997 were sold
prior to January 3, 1999.
Interest Expense
Interest expense was $9.6 million for fiscal 1999, compared to $11.3
million for fiscal 1998 and $8.5 million for fiscal 1997. Interest expense
incurred during fiscal 1999 is primarily associated with the 6.0% Convertible
Subordinated Notes, which were issued in September 1997 and are due in 2002. The
decrease in fiscal 1999 is primarily attributable to the retirement of $15.0
million of these Notes towards the end of 1998. Interest incurred during fiscal
1997 also included expenses from the convertible bond redeemed in March 1997 and
a revolving line of credit.
Interest and Other Income, Net
Net interest and other income was $52.7 million for fiscal 1999 compared to
$13.4 million for fiscal 1998 and $13.1 million for fiscal 1997. Net interest
and other income for fiscal 1999 included a $36.2 million gain from the sale of
a certain investment and $17.8 million of interest income. Offsetting other
income was $1.0 million related to the amortization of bond issuance costs. In
fiscal 1998, net interest and other income included interest income of $15.2
million, a $1.7 million pre-tax net gain related to the retirement of $15.0
million of Cypress's 6.0% Convertible Subordinated Notes and foreign exchange
gains of $0.5 million. The 1998 interest and other income, net is offset by a
non-recurring, pre-tax charge of $3.1 million recorded to reflect the decline in
value of a certain investment and $1.0 million in amortization of bond issuance
costs. Interest and other income, net for fiscal 1997 relates primarily to
interest income of $10.5 million and a $3.8 million gain from the sale of a
certain investment. .
Taxes
Cypress's effective tax rates for fiscal years 1999, 1998 and 1997 were
5.0%, 11.4% and 42.7%, respectively. A tax benefit of $13.5 million was realized
during fiscal 1998 compared to expenses of $4.8 million and $5.6 million during
fiscal 1999 and fiscal 1997, respectively. The benefit was attributable
primarily to the utilization of loss carrybacks, the utilization of research and
development tax credits and non-U.S. income taxed at lower tax rates compared to
U.S. tax rates, principally related to Cypress's operations in the Philippines.
During 1998, the United States Internal Revenue Service began an
examination of tax returns for fiscal years 1994 through 1996. The examination
is expected to continue through May 2000. Management believes that the outcome
of the examination will not have a material effect on Cypress's consolidated
financial position or results of operations.
Earnings Before Goodwill
Cypress reported basic earnings before goodwill ("EBG") and diluted EBG.
EBG refers to earnings excluding pretax acquisition and restructuring related
charges and credits, in-process research and development costs, transaction
costs and amortization of intangible assets, net of tax. EBG for the year ended
January 2, 2000 also excluded the one-time, pre-tax gain of $36.2 million from
the sale of a certain investment. These charges and credits are excluded from
the computation of EBG and are collectively referred to
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as goodwill by Cypress. Cypress presented EBG as a measure of our operating
results, however, EBG is not intended to replace operating income or net income
as an indicator of operating performance or to replace cash-flow as a measure of
liquidity because EBG is not a concept under generally accepted accounting
principles. Also, our calculation of EBG may not be comparable to EBG as
calculated by other companies. The table below reconciles basic and diluted net
income (loss) per share to basic and diluted earnings (loss) before goodwill per
share, respectively.
Reconciliation of basic net income (loss) per share to basic earnings (loss) per
share before goodwill:
<TABLE>
<CAPTION>
Years ended
Jan. 2, Jan. 3, Dec. 29,
2000 1999 1997
----- ----- -----
<S> <C> <C> <C>
Basic net income (loss) per share .................... $ 0.87 $(1.03) $0.08
Goodwill net of taxes per share ...................... $ 0.01 $ -- $ --
Restructuring costs (credits) net of taxes per share . $(0.03) $ 0.53 $0.05
----- -----
Basic earnings (loss) before goodwill per share ...... $ 0.85 $(0.50) $0.13
----- ----- -----
</TABLE>
Reconciliation of diluted net income (loss) per share to diluted earnings (loss)
per share before goodwill:
<TABLE>
<CAPTION>
Years ended
Jan. 2, Jan. 3, Dec. 29,
2000 1999 1997
----- ----- -----
<S> <C> <C> <C>
Diluted net income (loss) per share ................. $0.81 $(1.03) $0.07
Goodwill net of taxes per share ..................... $0.01 $ -- $ --
Restructuring costs (credits) net of taxes per share $(0.03) $0.53 $0.05
----- ----- -----
Diluted earnings (loss) before goodwill per share ... $0.79 $(0.50) $0.12
----- ----- -----
</TABLE>
Stock Based Compensation
Cypress accounts for stock-based compensation arrangements in accordance
with provision of APB No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and discloses pro forma information regarding net income (loss) and
earnings (loss) per share as allowed by Statement of Accounting Standards No.
123 (SFAS 123). Under APB 25, compensation cost is recognized based on the
difference, if any, between the fair market price of Cypress's stock on the date
of grant and the amount an employee must pay to acquire the stock. As permitted
by SFAS 123, Cypress discloses pro-forma net income (loss) and pro-forma net
income (loss) per share as if it had recorded compensation cost. The pro-forma
effect on net income (loss) and net income (loss) per share is based on the
estimated grant date fair value, as defined by SFAS 123 for awards granted under
the Cypress's 1994 and 1999 Stock Option Plans and its Employee Stock Purchase
Plan. Inclusive of the pro-forma effect, basic and diluted net income was $58.8
for fiscal 1999 and basic and diluted net loss was $135.9 million and $17.5
million for fiscal years 1998 and 1997, respectively. Pro-forma basic net income
per share was $0.56 and diluted net income per share was $0.53 for fiscal 1999.
Pro-forma basic and diluted net loss per share was ($1.34) and ($0.18) for
fiscal years 1998 and 1997, respectively. The pro-forma effect may be impacted
by various factors including re-pricing of existing options.
In January 1998, substantially all outstanding stock options with an
exercise price in excess of $9.75 per share were cancelled and replaced with new
options having an exercise price of $9.75 per share, the fair market value on
the date that the employees accepted the repricing. A total of 10,464,000 shares
were repriced. This repricing excluded the Board of Directors, the Chief
Executive Officer and the Executive staff of Cypress.
Liquidity and Capital Resources
Cypress's cash, cash equivalents and short-term investments totaled $270.6
million at the end of fiscal year 1999, a $110.0 million increase from the end
of 1998.
On January 31, 2000, Cypress filed a universal shelf registration statement
with the Securities and Exchange Commission (SEC). The registration statement,
which was effective February 8, 2000, will allow Cypress to market and sell up
to $400.0 million of its securities. The shelf registration statement will allow
Cypress flexibility to raise funds from the offering of debt securities, common
stock, or a combination thereof, subject to market conditions and Cypress's
capital needs.
During fiscal 1999, Cypress filed a registration statement on Form S-3 with
the Securities and Exchange Commission. Under this shelf registration, Cypress
could through March 2001 sell any combination of debt securities, preferred
stock and common stock in one or more offerings up to a total amount of $300.0
million dollars. The full amount of this shelf registration statement has been
used
Page 25
<PAGE>
by the transactions described in this paragraph. On January 19, 2000, Cypress
completed a $283.0 million registered-placement of 5-year convertible
subordinated notes. The notes are due in the year 2005, with a coupon rate of
4.00% and an initial conversion premium of 28.5%. The notes are convertible into
approximately 6.1 million shares of common stock and are callable by Cypress no
earlier than February 5, 2003. Net proceeds were $275.2 million, after issuance
costs of $7.8 million. Pursuant to the shelf registration, on March 29, 1999,
Cypress sold 7.2 million shares of common stock. Cypress received approximately
$33.8 million in proceeds, net of issuance costs, from the sale of these shares.
The remaining 2.5 million shares were sold by selling stockholders. Cypress did
not receive any proceeds from the shares sold by the selling stockholders.
During 1999, Cypress purchased $114.1 million in capital equipment, a $31.2
million increase from the $82.9 million purchased in 1998, and a $29.7 million
decrease from the $143.8 million purchased 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 design and
technology groups. Equipment purchased for its fabs is expected to improve wafer
manufacturing capacity and capabilities as Cypress implements new technologies,
including its 0.16 and 0.25 micron processes. A majority of the equipment
purchased was for Fab 4a located in Minnesota to increase its capacity and
capability. 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 research and development capabilities. Capital expenditures in 2000
are expected to be significantly higher compared to 1999 as Cypress continues
its efforts to increase its wafer manufacturing capabilities and capacity by
purchasing more equipment for Fab 4a and by constructing Fab 4b and Fab 4c,
located on the same site as Fab 4a in Minnesota. Cypress also expects to
continue upgrading its research and development fab in San Jose from six-inch to
eight-inch to ensure compatibility with Cypress's wafer manufacturing facilities
in Minnesota. The conversion is expected to be completed by June 2000. Cypress
will also continue to purchase new software and equipment to enhance its
research and development capabilities. In fiscal 2000, Cypress expects to
purchase approximately $250.0 million in capital equipment.
In March 1999, Cypress announced a program whereby all U.S. employees were
offered loans to facilitate the exercise of vested stock options. Under the
terms of the program, only options which were vested as of March 1, 1999 and
whose exercise price was less than or equal to $9.75 could qualify for a loan.
The loans, including interest, are due at the earlier of three days following
the sale of the shares, within thirty days of the date the individual ceases to
be an employee of Cypress or 3 years from the grant date of the loan. The loans
bear interest at a rate of 4.71% and are secured by Cypress common shares. At
January 2, 2000, amounts receivable under this program totaled $8.2 million.
In 1998, Cypress retired a total of $15.0 million principal of its $175.0
million, 6.0% convertible subordinated notes for $12.9 million, resulting in a
pre-tax net gain of $1.7 million. The net gain was recorded as interest and
other income. The notes, which were issued in September 1997, are due October 1,
2002 and contain a coupon rate of 6.0%. The remaining outstanding notes are
convertible into approximately 6,772,000 shares of common stock and are callable
by Cypress on or after October 2, 2000. 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 strategic acquisitions or investments.
During fiscal 1997, Cypress entered into an agreement to borrow $2.0
million from a third party with interest accruing at 6.0% per annum. The loan
was repaid in April 1999. Also during 1997, Cypress issued promissory notes to
three significant customers for $2.0 million, $1.4 million and $0.3 million,
bearing interest at 6.0%, 10.0% and 7.5%, respectively and due in October 2000,
August 2000 and July 1999, respectively. As of January 2, 2000, a total of $0.7
million was payable under the notes.
In fiscal years 1997 and 1998, the Board of Directors authorized the
repurchase of up to 14.0 million shares of Cypress's common stock. Through
January 3, 1999, 8.1 million shares had been repurchased under this entire
program for $67.5 million. On February 25, 1999, the Board of Directors
terminated the stock repurchase program. The unsold repurchased shares were and
are expected to continue to be used for option exercises under Cypress's 1994
Stock Option Plan and stock purchases under the Employee Stock Purchase Plan.
During 1998, Cypress reissued 1.8 million shares of common stock under such
plans. During fiscal 1999, Cypress reissued a total of 8.3 million shares in
relation to the stock offering described above and in conjunction with the 1994
Stock Option Plan and Employee Purchase Plan. Such shares had been repurchased
under the 1997/1998 plan and repurchase programs prior to 1997.
Page 26
<PAGE>
In February 1997, Cypress called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of 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 6.8 million shares. As a result of holders electing the cash
settlement, Cypress paid out $14.3 million.
In April 1997, Cypress sold capital equipment located in its Minnesota
wafer fabrication facility to Fleet Capital Leasing ("Fleet") in a
sale-leaseback agreement. In October 1997, Cypress entered into a similar
agreement with Comdisco, Inc. ("Comdisco") for other capital equipment located
in Minnesota. Cypress received a total of $28.2 million from Fleet and Comdisco
in exchange for the capital equipment and as a result of the transactions,
recorded an immaterial gain that will be amortized over the life of the leases.
In 1994 and 1995, Cypress entered into three operating lease agreements
with respect to its office and manufacturing facilities in San Jose and
Minnesota. In 1999, the lease related to the San Jose office and research and
development facilities expired. In October 1999, Cypress re-entered into a new
operating lease agreement with the same leasor for the same facilities. In April
1996, Cypress entered into an additional lease agreement for two office
facilities in San Jose. These agreements require that Cypress maintain a
specific level of restricted cash or investments to serve as collateral for
these leases and maintain compliance with certain financial covenants. Cypress's
restricted investment balance as of January 2, 2000 and January 3, 1999 was
$61.2 million and $59.7 million, respectively, and is recorded as other assets
on the Balance Sheet. Cypress was in compliance with its covenants at January 2,
2000.
In 1997, Cypress established a revolving line of credit with a bank
totaling up to $6.5 million. Cypress cancelled this line of credit in June 1999.
In July 1996, Cypress established a three-year $100.0 million unsecured
revolving credit facility with Bank of America National Trust and Savings
Association as agent on behalf of certain banks. During 1998, Cypress cancelled
this line of credit.
Cypress believes that existing cash and cash equivalents and cash from
operations will be sufficient to meet present and anticipated working capital
requirements and other cash needs for at least the next twelve months. Beyond
twelve months, changes in market demand and the possible need to increase
manufacturing capacity and capability, may cause Cypress to raise additional
capital through debt or equity financing. Although additional financing may be
required, there can be no assurance that it would be available to Cypress or
available at terms Cypress deems satisfactory.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Cypress is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. To mitigate these risks, Cypress
utilizes derivative financial instruments. Cypress does not use derivative
financial instruments for speculative or trading purposes.
The fair value of Cypress's investment portfolio or related income would
not be significantly impacted by either a 100 basis point increase or decrease
in interest rates due mainly to the short-term nature of the major portion of
Cypress's investment portfolio. An increase in interest rates would not
significantly increase interest expense due to the fixed nature of Cypress's
debt obligation.
A majority of Cypress's revenue and capital spending is transacted in U.S.
dollars. However, Cypress does enter into these transactions in other
currencies, primarily Japanese yen and certain other European currencies. To
protect against reductions in value and the volatility of future cash flows
caused by changes in foreign exchange rates, Cypress has established revenue and
balance sheet hedging programs. Cypress's hedging programs reduce, but do not
always eliminate, the impact of foreign currency rate movements. Based on
Cypress's overall currency rate exposure at January 2, 2000, a near-term 10%
appreciation or depreciation in the U.S. dollar would have an immaterial effect
on Cypress's financial position, results of operations and cash flows over the
next fiscal year.
All of the potential changes noted above are based on sensitivity analyses
performed on Cypress's balances as of January 2, 2000.
Page 27
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
ASSETS
January 2, January 3,
2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 155,011 $ 142,102
Short-term investments ......................................... 115,545 18,459
----------- -----------
Total cash, cash equivalents and short-term
investments ....................................... 270,556 160,561
Accounts receivable, net (Note 2) .............................. 100,114 68,955
Inventories (Note 2) ........................................... 89,432 65,096
Other current assets ........................................... 77,293 55,437
----------- -----------
Total current assets ................................... 537,395 350,049
----------- -----------
Property, plant and equipment, net (Note 2) ...................... 357,183 348,936
Other assets (Note 2) ............................................ 222,646 125,011
----------- -----------
$ 1,117,224 $ 823,996
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 99,549 $ 53,932
Accrued compensation and employee benefits ..................... 32,428 20,293
Other accrued liabilities (Note 2).............................. 19,717 12,852
Deferred income on sales to distributors ....................... 20,760 13,300
Income taxes payable ........................................... 20,311 13,591
----------- -----------
Total current liabilities .............................. 192,765 113,968
----------- -----------
Convertible subordinated notes ................................... 160,000 160,000
Deferred income taxes ............................................ 56,100 41,065
Other long-term liabilities ...................................... 10,384 10,240
----------- -----------
Total liabilities ...................................... 419,249 325,273
----------- -----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized; none . -- --
issued and outstanding
Common stock, $.01 par value, 250,000 shares authorized;
115,496 and 110,753 issued; 110,516 and 97,465 outstanding at
January 2, 2000 and January 3, 1999 ........................ 1,155 1,107
Additional paid-in-capital ..................................... 534,225 482,781
Notes receivable from stockholders ............................. (8,186) --
Deferred compensation .......................................... (484) (1,152)
Retained earnings .............................................. 243,989 180,625
----------- -----------
770,699 663,361
Less: shares of common stock held in treasury, at cost;
4,980 shares at January 2, 2000 and 13,288
shares at January 3, 1999 .................................. (72,724) (164,638)
----------- -----------
Total stockholders' equity ............................. 697,975 498,723
----------- -----------
$ 1,117,224 $ 823,996
=========== ===========
</TABLE>
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Page 28
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------
January 2, January 3, December 29,
2000 1999 1997
--------- --------- -----------
<S> <C> <C> <C>
Revenues ......................................... $ 705,487 $ 554,891 $ 598,485
--------- --------- ---------
Cost of revenues ................................. 383,639 409,108 393,769
Research and development ......................... 129,331 114,551 104,300
Selling, general and administrative .............. 105,882 91,016 82,026
Acquisition and other non-recurring costs, net ... 37,623 -- --
Restructuring costs .............................. (3,811) 60,737 9,882
--------- --------- ---------
Total operating costs and expenses ..... 652,664 675,412 589,977
--------- --------- ---------
Operating income (loss) .......................... 52,823 (120,521) 8,508
Interest expense ................................. (9,617) (11,276) (8,461)
Interest income and other, net ................... 52,665 13,356 13,092
--------- --------- ---------
Income (loss) before income taxes ................ 95,871 (118,441) 13,139
(Provision) benefit for income taxes ............. (4,817) 13,523 (5,613)
--------- --------- ---------
Net income (loss) ................................ $ 91,054 $(104,918) $ 7,526
========= ========= =========
Net income (loss) per share:
Basic .......................................... $ 0.87 $ (1.03) $ 0.08
Diluted ........................................ $ 0.81 $ (1.03) $ 0.07
Weighted average common and common
equivalent shares outstanding:
Basic .......................................... 104,703 101,944 100,137
Diluted ........................................ 111,735 101,944 107,866
</TABLE>
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Page 29
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Notes
Common Stock Additional Receivable Total
------------------- Paid-In From Deferred Retained Treasury Stockholders'
Shares Amount Capital Stockholders Compensation Earnings Stock Equity
--------- --------- --------- ------------ ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 30, 1996 .... 91,104 $1,014 $344,533 -- $(621) $284,033 $(116,843) $512,116
Re-issuance of treasury
shares under employee
stock plans and other .......... 5,556 22 36,980 -- -- -- -- 37,002
Premiums received from put
option issuances ............... -- -- 2,760 -- -- -- -- 2,760
Tax benefit resulting from stock
option transactions ............ -- -- 6,959 -- -- -- -- 6,959
Issuance of common stock
from the conversion of the
convertible debt ............... 6,789 67 83,036 -- -- -- -- 83,103
Repurchase of common stock
under stock repurchase program . (516) -- -- -- -- -- (5,288) (5,288)
Adjustment to deferred
compensation ................... -- -- -- -- 454 -- -- 454
Net income for the year .......... -- -- -- -- -- 7,526 -- 7,526
--------- --------- --------- -------- -------- --------- --------- ---------
Balances at December 29, 1997 .... 102,933 1,103 474,268 -- (167) 291,559 (122,131) 644,632
Cypress (ICW) activities for the . -- -- -- -- -- 1,622 -- 1,622
Quarter ended March 28, 1999
Re-issuance of treasury
shares under employee
stock plans and other .......... 2,139 4 1,893 -- -- (7,638) 19,767 14,026
Premiums received from put
option issuances ............... -- -- 6,620 -- -- -- -- 6,620
Repurchase of common stock
under stock repurchase program . (7,607) -- -- -- -- -- (62,274) (62,274)
Adjustment to deferred
compensation ................... -- -- -- -- (985) -- -- (985)
Net loss for the year ............ -- -- -- -- -- (104,918) -- (104,918)
--------- --------- --------- -------- -------- --------- --------- ---------
Balances at January 3, 1999 ...... 97,465 1,107 482,781 -- (1,152) 180,625 (164,638) 498,723
Re-issuance of treasury shares and
issuance of common stock under . 13,051 48 37,438 -- -- (27,690) 91,914 101,710
employee stock plans and other
Tax benefit resulting from stock
option transactions ............ -- -- 13,772 -- -- -- -- 13,772
Notes receivable from stockholders -- -- -- (8,186) -- -- -- (8,186)
Compensation expense to outside
consultants .................... -- -- 234 -- -- -- -- 234
Adjustment to deferred
compensation ................... -- -- -- -- 668 -- -- 668
Net income for the year .......... -- -- -- -- -- 91,054 -- 91,054
--------- --------- --------- -------- -------- --------- --------- ---------
Balances at January 2, 2000 ...... 110,516 $1,155 $534,225 $(8,186) $(484) $243,989 $(72,724) $697,975
--------- --------- --------- -------- -------- --------- --------- ---------
</TABLE>
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Page 30
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
------------------------------------
January 2, January 3, December 29,
2000 1999 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) ................................... $91,054 $(104,918) $7,526
Adjustments to reconcile net income (loss) to net
cash
generated by operating activities:
Depreciation and amortization ....................... 107,423 114,598 114,013
Acquired in-process research and development ........ 4,019 -- --
Non-cash interest and amortization of debt issuance
costs ............................................ 1,034 1,034 3,978
Net gain on early retirement of debt ................ -- (1,734) --
Loss on sale of fixed assets ........................ -- 1,069 --
Loss on write down of fixed assets .................. 10,336 -- --
Deferred gain on sale of fixed assets ............... (3,959) -- (3,431)
Gain on sale of investment .......................... (36,237) -- --
Restructuring costs (credits) ....................... (3,811) 60,737 4,952
Other non-recurring costs ........................... -- 8,827 --
Deferred income taxes ............................... (9,971) (797) 14,782
Changes in operating assets and liabilities:
Receivables ...................................... (30,282) 9,332 4,191
Inventories ...................................... (22,788) 18,013 (25,895)
Other assets ..................................... (10,577) 35,298 (152)
Accounts payable and accrued liabilities ......... 55,280 (14,862) (16,695)
Deferred income .................................. 7,460 2,445 (5,266)
Income taxes payable ............................. 6,720 (22,770) 15,870
--------- --------- ---------
Net cash flow generated from operating activities ..... 165,701 106,272 113,873
--------- --------- ---------
Cash flow from investing activities:
Purchase of investments ............................. (218,236) (110,718) (112,185)
Sale or maturities of investments ................... 66,872 127,195 93,870
Acquisition of property, plant and equipment ........ (114,120) (82,929) (143,803)
Acquisition of Anchor ............................... (14,956) -- --
Acquisition of Arcus ................................ (9,883) -- --
Acquisition of technology rights .................... (4,700) -- --
Acquisition of product rights and equity interest ... (12,187) -- --
from Altera
Proceeds from sale of investment .................... 36,237 -- --
Proceeds from sale of equipment ..................... 15,179 6,551 40,789
--------- --------- ---------
Net cash flow used for investing activities ........... (255,794) (59,901) (121,329)
--------- --------- ---------
Cash flow from financing activities:
Repayment of line of credit ......................... -- (3,369) (49,249)
Repayment of debt ................................... (2,653) -- --
Repayment of notes payable .......................... -- (1,186) (5,780)
Issuance of convertible subordinated notes, net of
issuance costs ................................... -- -- 170,187
Redemption of convertible debt ...................... -- -- (14,331)
Early retirement of debt ............................ -- (12,916) --
Restricted investments related to building lease
agreements ....................................... -- -- 601
Repurchase of common stock .......................... -- (62,274) (5,288)
Re-issuance of treasury shares and issuance of
common
stock ............................................. 113,444 12,470 41,173
Issuance of notes to stockholders ................... (8,186) -- --
Premiums received from put options .................. -- 6,620 2,760
Other long-term liabilities, including minority
interest ......................................... 397 (1,082) (615)
--------- --------- ---------
Net cash flow generated (used) for financing activities 103,002 (61,737) 139,458
--------- --------- ---------
Cypress (ICW) net change in cash during the quarter
ended March 28, 1999 ............................. -- 3,434 --
Net increase (decrease) in cash and cash equivalents .. 12,909 (11,932) 132,002
Cash and cash equivalents, beginning of year .......... 142,102 154,034 22,032
--------- --------- ---------
Cash and cash equivalents, end of year ................ $155,011 $142,102 $154,034
========= ========= =========
Supplemental disclosures:
Cash paid during the year for:
Interest ......................................... $9,600 $10,092 $5,707
Income taxes ..................................... $3,546 $452 $1,550
</TABLE>
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Page 31
<PAGE>
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Cypress -- Cypress Semiconductor Corporation ("Cypress") designs, develops,
manufactures and markets a broad line of high-performance digital and
mixed-signal integrated circuits for a range of markets, including computers,
data communications, telecommunications and instrumentation systems.
Cypress's operations outside of the U.S. expanded in 1996 with the addition
of its test and assembly plant in the Philippines. Cypress's other foreign
operations include several sales offices and design centers located in various
parts of the world. Revenues to international customers were 51%, 45% and 39% of
total revenues in 1999, 1998 and 1997, respectively.
In 1999, Cypress purchased from Altera Corporation, Altera's 17% equity
interest in Cypress Semiconductor (Texas) Inc. ("CTI"), Cypress's wafer
fabrication facility in Texas. As a result of this purchase, all of Cypress's
subsidiaries were wholly owned at January 2, 2000 (See Note 4).
The consolidated financial statements include the accounts of Cypress and
all of its subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
Fiscal Year -- Beginning with its 1998 fiscal year end, Cypress ended its
fiscal months, quarters and years on Sundays, rather than Mondays, bringing its
fiscal period ends in line with predominant industry practice. Fiscal years
1999, 1998 and 1997 ended January 2, 2000, January 3, 1999 and December 29,
1997, respectively. Fiscal year 1999 was a 52-week year ending on the Sunday
closest to December 31, fiscal year 1998 was a 53-week year ending on the Sunday
closest to December 31 and fiscal year 1997 was a 52-week year ending on the
Monday closest to December 31. Operating results for the additional week were
considered immaterial to Cypress's consolidated operating results for the year
ended January 3, 1999.
Management Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates, although such differences are not expected to be material to the
financial statements.
Reclassifications -- Certain prior year amounts have been adjusted to
conform to current year presentation.
Fair Value of Financial Instruments -- For certain of Cypress's financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable and other current liabilities, the carrying amounts approximate their
fair value due to the relatively short maturity of these items. The estimated
fair market value of Cypress's investments reasonably estimate their fair values
based on market information. At January 2, 2000, the estimated fair value of the
Convertible Subordinated Notes was $234.2 million.
The estimated fair values have been determined by Cypress, using available
market information. However, considerable judgement is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented are not necessarily indicative of the amounts that Cypress could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies could have a material effect on the estimated
fair value amounts.
Cash Equivalents-- Highly liquid investments purchased with an original
maturity of ninety days or less are considered to be cash equivalents.
Investments --All Cypress investments are classified as available-for-sale.
Investments in available-for-sale securities are reported at fair value with
unrealized gains and losses, net of related tax, if any, included as a component
of stockholders' equity. Unrealized gains and losses net of related taxes, were
not material for the year ended January 2, 2000 or cumulatively.
In fiscal 1998, Cypress recorded a $3.0 million writedown of a certain
investment that was believed to be permanently impaired. In 1999, due to a
resurgence in the semiconductor business, the value of the investment increased.
In fiscal 1999, Cypress sold the investment, recording a pre-tax gain of $36.2
million, which is included in interest and other income, net.
Page 32
<PAGE>
Inventories -- Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market. Market is
based on estimated net realizable value.
Property, Plant and Equipment -- Property, plant and equipment are stated
at cost, less accumulated depreciation. Depreciation is computed for financial
reporting purposes using the straight-line method over the estimated useful
lives of the assets as presented below. Leasehold improvements and leasehold
interests are amortized over the shorter of the estimated useful lives of the
assets or the remaining term of the lease. Accelerated methods of computing
depreciation are used for tax purposes.
Useful Lives
in Years
--------
Equipment............................... 3 to 7
Buildings and leasehold improvements.... 7 to 10
Furniture and fixtures.................. 5
Pre-operating Costs -- Incremental costs incurred in connection with
developing major production capability at new manufacturing plants, including
depreciation, amortization and cost of qualification of equipment and production
processes were capitalized up to December 1997. 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. In fiscal 1998,
these costs were written off and at January 2, 2000, no pre-operating costs are
remaining.
Long-Lived Assets -- Long-lived assets held and used by Cypress are
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, all long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
market value, less expected selling costs.
Revenue Recognition -- Revenues from product sales are generally recognized
upon shipment and a reserve is provided for estimated returns. A portion of
Cypress's sales are made to domestic distributors under agreements which allow
certain rights of return and price protection on products unsold. Accordingly,
Cypress defers recognition of revenues and profit on such sales until these
distributors resell the products.
Cypress sells to certain international distributors with a provision for
price adjustments on certain products. Cypress reserves for all anticipated
price adjustments. No rights of return exist on sales to international
distributors. Accordingly, sales are recognized upon shipment.
Cypress also has inventory, which is held by certain customers on a
consignment basis. Revenues are recorded when title transfers as defined per the
respective consignment agreements.
Income Taxes -- Cypress follows the liability method of accounting for
income taxes which requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
Earnings Per Share -- In accordance with Statement of Accounting Standard
No. 128 ("SFAS 128"), Cypress reports Earnings Per Share ("EPS"), both basic and
diluted EPS on the income statement. Basic EPS is based upon weighted-average
common shares outstanding. Diluted EPS is computed using the weighted average
common shares outstanding plus any potentially dilutive securities, except when
their effect is anti-dilutive. Dilutive securities include stock options and
convertible debt.
Translation of Foreign Currencies -- Cypress uses the U.S. dollar as its
functional currency for all foreign subsidiaries. Accordingly, gains and losses
from translation of foreign currency financial statements into U.S. dollars are
included in results of operations. Sales to customers are primarily denominated
in U.S. dollars. All foreign currency translation gains and losses have not been
material in any year.
Concentration of Credit Risk -- Financial instruments that potentially
subject Cypress to concentrations of credit risk are primarily investments and
trade accounts receivable. Cypress's investment policy requires cash investments
to be placed with high-credit quality institutions and to limit the amount of
credit from any one issuer.
Cypress sells its products to original equipment manufacturers and
distributors throughout the world. Cypress performs ongoing credit evaluations
of its customers' financial condition whenever deemed necessary and generally
does not require collateral. Cypress maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of all accounts
receivable.
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<PAGE>
No one end user accounted for greater than 10% of revenues in 1999, 1998 or
1997. Sales to one distributor accounted for greater than 10% of total revenues
in 1999, 1998 and 1997.
Accounting for Stock-Based Compensation -- Cypress accounts for its stock
option plans and its employee stock purchase plan in accordance with provisions
of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". In accordance with Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", Cypress
provides additional pro-forma disclosures in Note 7.
Comprehensive Income -- In 1998, Cypress adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income is defined as the change in equity
of a company during a period from transactions and other events and
circumstances, excluding transactions resulting from investments by owners and
distributions to owners. Cypress did not have a material difference between net
income and comprehensive income for the year ended January 2, 2000 or
cumulatively.
Segment Reporting -- In fiscal 1998, Cypress adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131")." SFAS 131 establishes standards for
disclosures about products and services, geographic areas and major customers.
(See Note 11).
Recent Accounting Pronouncements -- In June 1999, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 amends
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," to defer its effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
133 establishes accounting and reporting standards for derivative instruments
including standalone instruments, such as forward currency exchange contracts
and interest rate swaps or embedded derivatives and requires that these
instruments be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in the income statement or stockholders'
equity, depending on the nature of the transaction. Cypress is required to adopt
SFAS 133 in the first quarter of its fiscal year 2001.The effect of SFAS 133 is
not expected to be material to the Cypress's financial statements.
Note 2: Balance Sheet Components
Available-For-Sale Securities
Cypress's portfolio of available-for-sale securities consists of the
following:
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
Corporate debt securities ............................ $175,510 $101,042
State and municipal obligations ...................... 77,902 73,607
Money markets ........................................ 69,755 --
Other ................................................ 39,811 23,341
-------- --------
Total available-for-sale securities ........ $362,978 $197,990
======== ========
At January 2, 2000 and January 3, 1999, the net unrealized holding gains and
losses on securities were immaterial. The securities at January 2, 2000 and
January 3, 1999 by contractual maturity are shown below.
January 2, January 3,
2000 1999
-------- --------
(In thousands)
Due in one year or less .............................. $251,654 $140,944
Due after one year through two years ................. 111,324 57,046
-------- --------
Total available-for-sale securities ....... $362,978 $197,990
======== ========
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<PAGE>
Accounts Receivable, Net
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
Accounts receivable, gross ................... $103,098 $72,005
Allowance for doubtful accounts and
customer returns ............................. (2,984) (3,050)
--------- ---------
Accounts receivable, net .......... $100,114 $68,955
========= =========
Inventories, Net
January 2, January 3,
2000 1999
---------- ----------
(In thousands)
Raw materials .......................... $13,360 $8,939
Work-in-process ........................ 45,247 37,087
Finished goods ......................... 30,825 19,070
------- -------
Total ........................ $89,432 $65,096
======= =======
Property, Plant and Equipment
January 2, January 3,
2000 1999
----------- ---------
(In thousands)
Land ............................................. $13,829 $13,533
Equipment ........................................ 733,581 623,393
Buildings and leasehold improvements ............. 101,976 96,825
Furniture and fixtures ........................... 8,449 6,656
--------- ---------
Total property, plant and equipment .............. 857,835 740,407
Accumulated depreciation andamortization ......... (500,652) (391,471)
--------- ---------
Net property, plant and equipment ...... $357,183 $348,936
========= =========
Other Assets
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
Restricted investments ................... $61,198 $59,742
Long-term investments .................... 111,324 57,046
Other, principally purchased intangibles.. 50,124 8,223
-------- --------
Total .......................... $222,646 $125,011
======== ========
In September 1999, Cypress acquired the rights and patents covering the
Silicon Oxide Nitride Oxide Silicon ("SONOS") non-volatile memory technology
from NVX Corporation for $4.7 million. These intangible assets are included in
Other Assets on the Consolidated Balance Sheet and are being amortized over
their useful life.
Other Accrued Liabilities
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
Sales commissions ................................ $3,031 $3,290
Restructuring reserves ........................... 2,313 8,070
Warranty reserve ................................. 2,672 --
Other ............................................ 11,701 1,492
------- -------
Other accrued liabilities .............. $19,717 $12,852
======= =======
Note 3: Acquisitions
Acquisition of Arcus Technology Companies
On June 30, 1999, Cypress acquired all of the outstanding capital stock of
Arcus Technology (USA), Inc. and the assets of Arcus Technology (India) Limited
(referred to as "Arcus" on a combined basis). Arcus specializes in data
communications technologies including dense wave multiplexing (which allows
multiple signals to be transmitted over a single fiber optic cable) and "IP over
SONET" (the technology used to code and decode Internet traffic to send it over
the telephone system). The acquisition was accounted for using purchase
accounting. Accordingly, the estimated fair value of assets acquired and
liabilities assumed were
Page 35
<PAGE>
included in Cypress's condensed consolidated balance sheet as of and since June
30, 1999, the effective date of the purchase. The results of operations of Arcus
are included in Cypress's consolidated results of operations during the second
half of Cypress's fiscal year 1999.
Cypress acquired Arcus for a total consideration of $17.7 million,
including cash of $11.5 million and stock of $6.2 million, (excluding direct
acquisition costs of $0.8 million for legal and accounting fees). Through
December 31, 1999 Cypress paid $9.9 million in cash and issued $2.3 million in
stock. The remaining $1.6 million in cash and $3.9 million in stock are expected
to be paid and issued by future installments. The total purchase price was
allocated to the estimated fair value of assets acquired and liabilities assumed
at the time of the acquisition based on independent appraisals and management
estimates as follows:
(In thousands)
Fair value of tangible net assets ...................... $391
In-process research and development .................... 2,500
Current technology ..................................... 4,400
Assembled workforce .................................... 1,600
Deferred compensation .................................. 5,553
Excess of purchase price over net assets acquired ...... 3,264
-------
$17,708
=======
The valuation method used to value the in-process technology of Arcus is a
form of discounted cash flow method commonly known as the "percentage of
completion" approach whereby the cash flow derived from the technology is
multiplied by the percentage of completion of the in-process technology. This
approach is a widely recognized appraisal method and is commonly used to value
technology assets. The value of the in-process technology of Arcus is the
discounted expected future cash flow attributable to the in-process technology,
taking into consideration the percentage of completion of products utilizing
this technology, utilization of pre-existing technology, the risks related to
the characteristics and applications of the technology, existing and future
markets, and the technological risk associated with completing the development
of the technology. The cash flow derived from the in-process technology projects
was discounted using a discount rate of 32.5%, which was appropriate for the
risk of this technology for which commercial feasibility had not been
established. The percentage of completion for each in-process project was
determined by identifying milestones of completed project steps as compared to
the remaining milestones to be completed to bring the project to technical and
commercial feasibility. Milestones were based on management's estimate of tasks
completed, value added and degree of difficulty of the portion of the project
completed as of the acquisition date, in comparison with the tasks to be
completed to bring the project to technical and commercial feasibility. A
deduction of 7.5% to 12.0% of expected future revenue was made in calculating
future cash flows from in-process technology and attributed to previously
existing technology.
The value of current technology was determined by estimating the future
cash flows to be derived from products based on existing commercially feasible
technologies at the date of the acquisition, and discounting associated cash
flow using a discount rate of 25.0%, which was appropriate for the business
risks inherent in manufacturing and marketing these products. Factors considered
in estimating the future cash flow to be derived from the existing technology
include risks related to the characteristics and applications of the technology,
existing and future markets, and assessment of the age of the technology within
its life span.
The value of the assembled workforce is based on estimated costs to replace
the existing staff including recruiting, hiring and training costs for all
categories of employee to fully deploy a work force of similar size and skill to
the same level of productivity as the existing work force. Deferred compensation
value is the cash and stock consideration to be paid by future installments.
Development of in-process technology remains a substantial risk to Cypress
due to many factors including the remaining effort to achieve technical
feasibility, rapidly changing customer requirements and competitive threats from
other companies and technologies. Additionally, the value of the other
intangible assets acquired may become impaired. The in-process research and
development valuation as well as the valuation of other intangible assets was
prepared by an independent appraiser of technology assets, based on inputs from
Cypress and Arcus management, utilizing valuation methods that are recognized by
the Securities and Exchange Commission ("SEC") staff. However, there can be no
assurance that the SEC staff will not take issue with any assumptions used in
the appraiser's valuation model and require Cypress to revise the amount
allocated to in-process research and development.
The amounts allocated to current technology, assembled workforce, and
residual goodwill are being amortized over their respective estimated useful
lives between six and ten years using the straight-line method. The deferred
compensation is being amortized on a straight line basis over two years.
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<PAGE>
Acquisition of Anchor Chips, Inc.
On May 25, 1999, Cypress acquired all of the outstanding capital stock of
Anchor Chips, Inc. ("Anchor"), a company that designs and markets
micro-controller chips that support Universal Serial Bus applications. The
acquisition was accounted for using purchase accounting. Accordingly, the
estimated fair value of assets acquired and liabilities assumed were included in
Cypress's condensed consolidated balance sheet as of and since May 25, 1999, the
effective date of the purchase. The results of operations of Anchor were
included in Cypress's consolidated results of operations as of and since the
effective date of the purchase.
Cypress paid approximately $15.0 million in cash, which excludes direct
acquisition costs of $0.7 million for investment banking, legal and accounting
fees. In addition Cypress assumed net liabilities of approximately $0.9 million.
The total purchase consideration of $15.9 million was allocated to the estimated
fair value of assets acquired and liabilities assumed based on a valuation
completed by management, using a valuation methodology commonly applied by
independent appraisers, as follows:
(In thousands)
Fair value of tangible net liabilities ................ $(919)
In-process research and development ................... 1,519
Assembled workforce ................................... 1,320
Current technology .................................... 13,036
--------
$14,956
=======
The valuation method used to value the in-process technology of Anchor is a
form of discounted cash flow method commonly known as the "percentage of
completion" approach whereby the cash flow derived from the technology is
multiplied by the percentage of completion of the in-process technology. This
approach is a widely recognized appraisal method and is commonly used to value
technology assets. The value of the in-process technology of Anchor is the
discounted expected future cash flow attributable to the in-process technology,
taking into consideration the percentage of completion of products utilizing
this technology, utilization of pre-existing technology, the risks related to
the characteristics and applications of the technology, existing and future
markets, and the technological risk associated with completing the development
of the technology. The cash flow derived from the in-process technology projects
was discounted using a discount rate of 32.5%, which was appropriate for the
risk of this technology for which commercial feasibility had not been
established. The percentage of completion for each in-process project was
determined by identifying milestones of completed project steps as compared to
the remaining milestones to be completed to bring the project to technical and
commercial feasibility. Milestones were based on management's estimate of tasks
completed, value added and degree of difficulty of the portion of the project
completed as of the acquisition date, in comparison with the tasks to be
completed to bring the project to technical and commercial feasibility. A
deduction of 7.5% to 12.0% of expected future revenue was made in calculating
future cash flows from in-process technology and attributed to previously
existing technology.
The value of the assembled workforce is based on estimated costs to replace
the existing staff including recruiting, hiring and training costs for all
categories of employee to fully deploy a work force of similar size and skill to
the same level of productivity as the existing work force.
The value of current technology was determined by estimating the future
cash flows to be derived from products based on existing commercially feasible
technologies at the date of the acquisition, and discounting associated cash
flow using a discount rate of 25.0%, which was appropriate for the business
risks inherent in manufacturing and marketing these products. Factors considered
in estimating the future cash flow to be derived from the existing technology
include risks related to the characteristics and applications of the technology,
existing and future markets, and assessment of the age of the technology within
its life span.
Development of in-process technology remains a substantial risk to Cypress
due to many factors including the remaining effort to achieve technical
feasibility, rapidly changing customer requirements and competitive threats from
other companies and technologies. Additionally, the value of the other
intangible assets acquired may become impaired. The in-process research and
development valuation as well as the valuation of other intangible assets was
prepared by management, utilizing valuation methods that are recognized by the
Securities and Exchange Commission ("SEC") staff. However, there can be no
assurance that the SEC staff will not take issue with any assumptions used in
the valuation model and require Cypress to revise the amount allocated to
in-process research and development.
The amounts allocated to current technology, and assembled workforce are
being amortized over their estimated useful lives of five -years using the
straight-line method. There was no goodwill associated with the acquisition of
Anchor.
Page 37
<PAGE>
Acquisition from Altera
On October 5, 1999, Cypress announced that it has signed a definitive
agreement with Altera Corporation ("Altera") to acquire Altera's MAX 5000
Programmable Logic Device ("PLD") product line and its equity interest in
Cypress's wafer fabrication facility in Round Rock, Texas ("Fab II") for
approximately $13.0 million in cash. The acquisition was accounted for as a
purchase. In 1988, Altera licensed its MAX 5000 family of products to Cypress in
consideration of manufacturing capacity. Altera later acquired a 17% equity
interest in the Round Rock wafer fabrication facility. By acquiring Altera's
equity interest in October 1999, Fab II is now 100% owned by Cypress.
Merger with IC WORKS Incorporated
On April 1, 1999, Cypress completed a merger with IC WORKS Incorporated
("ICW"), which was accounted for as a pooling of interests. The condensed
consolidated financial statements and the notes to the condensed consolidated
financial statements give effect to the merger for all periods presented. The
fiscal years of Cypress and ICW were different. ICW has changed its fiscal
year-end to coincide with that of Cypress. Cypress's consolidated statements of
operations for the periods ended January 3, 1999 and December 27, 1997, have
been combined with ICW's consolidated statements of operations for the
corresponding twelve month periods ended December 28, 1998 and March 28, 1998.
During fiscal 1999, Cypress recorded merger-related transaction costs of
$3.7 million related to the acquisition of ICW. These charges, which consist
primarily of investment banking and other professional fees, have been included
under acquisition and merger costs in the Consolidated Statements of Operations.
Note 4: Restructuring and Other Non-Recurring Costs
1999 Restructuring, Merger and Acquisition, and Other Non-Recurring Costs
During fiscal 1999, Cypress recorded a net $33.8 million in restructuring,
merger and acquisition, and other non-recurring costs. These one-time,
non-recurring costs included a $12.3 million write-off of a certain
manufacturing asset that is not in service and will be scrapped and an $11.9
million one-time compensation charge associated with retention and performance
payments to key employees in December 1999. In the first quarter of fiscal 1999,
Cypress recorded one-time charges of $3.7 million associated with the merger
with IC Works. These charges were for investment banking fees and other
professional fees. Cypress also recorded $8.8 million in costs associated with
the purchases of Anchor and Arcus comprising of $4.0 million for in-process
technology, $1.6 million for transaction costs and $3.2 million in amortization
of intangible assets. During the fourth quarter of fiscal 1999, Cypress acquired
Altera's MAX 5000 Programmable Logic Device ("PLD") product line and its equity
interest in Cypress's wafer fabrication facility in Round Rock, Texas. As part
of the transaction, Cypress recorded intangible assets associated with the
product rights and incurred $0.3 million for the amortization of these
intangibles. These non-recurring charges were offset by a reversal of $3.0
million of the 1998 restructuring reserve. The reversed charges related to $2.2
million of severance and other employee related charges and $0.3 million for the
provision for phase-down and completion of the Alphatec restructuring
activities. Cypress also reversed $0.5 million of the 1998 restructuring reserve
for other fixed asset related charges that were no longer considered necessary.
During fiscal 1999, Cypress reversed $0.7 million of the 1996 restructuring
reserve related to fixed asset de-installation charges that were no longer
required.
1998 Restructuring and Other Non-Recurring Costs
During 1998, Cypress implemented an overall cost reduction plan and
recorded a $58.9 million restructuring reserve. The restructuring entailed:
o The shutdown of Fab 3, located in Bloomington, Minnesota and consolidation
of parts of Fab 3 operations with other operations of Cypress.
o The discontinuance of the 0.6 micron 256k SRAM production in Fab 2 located
in Texas.
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<PAGE>
o The conversion of an existing research and development fab located in San
Jose (Fab 1) to eight-inch capability in order to be compatible with the
state of the art eight-inch Minnesota manufacturing facility.
o The transfer of Cypress's test operations from its subcontractor, Alphatec,
in Thailand to Cypress's production facility in the Philippines.
The restructuring activities described above included the termination of
approximately 850 employees, primarily from manufacturing, both at Cypress and
at Alphatec.
Separate from the restructuring charge, Cypress recorded additional charges
of $27.3 million, which were recorded as operating expenses in the first quarter
of 1998. These charges were for inventory reserves ($15.8 million), the
write-off of pre-operating costs ($3.8 million), the write-off of an equity
investment ($3.1 million), costs incurred to reimburse a customer for certain
product expenses incurred ($2.5 million) and the write-off of obsolete equipment
in Fab 4 ($2.1 million). The write-down of inventory was made to establish
incremental reserves for excess inventory and was recorded as cost of revenues.
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operation in the Philippines. As a result of
restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits. These costs were written off to cost of revenues.
There were no capitalized pre-operating costs subsequent to the first quarter of
1998.
The $3.1 million write-off of the equity investment was recorded against
net interest and other income to reflect the decline in the value of an
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 revenues to
write-off the obsolete equipment.
The following tables sets forth charges taken against the reserve during
fiscal 1999 and restructuring expense and charges taken from the date the
restructuring commenced through January 2, 2000.
<TABLE>
<CAPTION>
Balance Balance
January 3, January 2,
1999 Utilized Other 2000
------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Severance and other employee related charges(1) $ 2,309 $ (54) $(2,255) $ --
Other fixed asset related charges(1) .......... 3,030 (703) (520) 1,807
Provision for phase-down and consolidation of
manufacturing facilities(1) .................. 339 -- (339) --
------- ------- ------- -------
Total ............................... $ 5,678 $ (757) $(3,114) $ 1,807
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 Balance
Restructuring January 2,
Expense Utilized Other 2000
------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Write-down of inventory(1) .................... $ 3,250 $(3,250) $ -- $ --
Severance and other employee related charges(2) 5,334 (2,234) (3,100) --
Other fixed asset related charges(1) .......... 3,030 (703) (520) 1,807
Provision for phase-down and consolidation of
manufacturing facilities(1) ................... 976 (637) (339) --
------- ------- ------- -------
Total ............................... $12,590 $(6,824) $(3,959) $ 1,807
======= ======= ======= =======
</TABLE>
- ----------
(1) Classified on the Balance Sheet as part of accrued liabilities.
(2) The amount utilized represents cash payments related to severance of
approximately 850 employees.
During fiscal 1999, Cypress reversed $3.7 million of previously provided
restructuring costs. $2.2 million of severance and other employee related
charges and $0.3 million for the provision for phase-down and consolidation of
manufacturing facilities were reversed in conjunction with the completion of the
Alphatec restructuring activities. $0.5 million was reversed for other fixed
asset related charges based on the determination that a portion of the fixed
asset removal costs accrual would not be required. These reversals related to
Cypress's 1998 restructuring activities. Cypress also reversed a $0.7 million
reserve for fixed asset installation costs related to its 1996 restructuring
activities which was no longer required. In fiscal 1999, Cypress utilized $0.8
million, primarily
Page 39
<PAGE>
associated with the removal cost of equipment identified as part of the
restructuring.
Restructuring activities associated with Fabs 2 and 3 were completed in May
and July 1998, respectively, consistent with Cypress's restructuring schedule
except for the disposal of equipment. Fab 1 restructuring was not completed in
January 1999 as originally planned. Cypress has initiated plans to convert its
R&D wafer facility in San Jose to eight-inch capability and expects to have the
conversion completed by June 2000. The Alphatec consolidation and transfer
activity was completed in January 1999, one month later than originally planned.
1997 Restructuring Costs - Cypress (ICW)
During the fiscal 1997, Cypress made a decision to shut down its wafer fab
located in San Jose. In connection with the shut down of the wafer fab, Cypress
recorded a restructuring charge of $9.9 million related to the impairment of
assets ($3.9 million), non-cancelable operating lease commitments ($3.6
million), costs associated with a reduction in work force ($0.2 million) and
other transaction costs ($2.2 million). The other transaction costs related
primarily to inventory write-offs, expenses incurred to remove and return leased
equipment and brokerage and professional fees. The actual liquidation of
substantially all of the impaired assets was completed in November 1998. The
balance of the reserve remaining is expected to be utilized by March 2000 when
the operating lease commitment ends.
The following tables sets forth charges taken against the reserve during
fiscal 1999 and restructuring expense and charges taken from the date the
restructuring commenced through January 2, 2000.
Balance Balance
January 3, January 2,
1999 Utilized 2000
------- -------- ----------
(In thousands)
Operating lease costs ......... $ 2,332 $(1,826) $ 506
Severance costs ............... 60 (60) --
------- ------- -------
Total .................... $ 2,392 $(1,886) $ 506
======= ======= =======
1997 Balance
Restructuring January 2,
Expense Utilized 2000
------- -------- ---------
(In thousands)
Operating lease costs ............ $ 3,615 $(3,109) $ 506
Severance costs .................. 207 (207) --
Transaction and other costs ...... 2,164 (2,164) --
------- ------- -------
Total ....................... $ 5,986 $(5,480) $ 506
======= ======= =======
In November 1997, Cypress also borrowed $2.0 million from Maxim with
interest accruing at 6% per annum. The note and interest are to be repaid at the
earlier of: a majority sale of Cypress, the consummation of a public offering of
Cypress common stock, or four years from the date of the note (November 2001).
In addition, Cypress entered into a wafer purchase agreement with Maxim that
allows Cypress to buy BiCMOS wafers from Maxim for a period of up to two years.
On the closing date of the transaction, November 20, 1997, Maxim purchased
Cypress six-inch wafer fabrication leasehold improvements and manufacturing
equipment as well as certain five-inch wafer fabrication equipment, which
Cypress owned or acquired through capital leases. The carrying values of the
six-inch and five-inch fabrication assets were $14.25 million and $0.4 million,
respectively. Proceeds of the sale of these assets to Maxim were $12.5 million
to Cypress.
The following table summarizes the disposition of the six-inch and
five-inch fabrication assets held by Cypress through December 29, 1997.
Six-inch Five-inch
Assets Assets
-------- ---------
(In thousands)
Carrying value of assets prior to
recognition of impairment loss ............... $29,500 $6,000
Recognition of impairment .................... (15,250) (3,896)
Sale of assets to Maxim ...................... (14,250) (400)
Addition asset impairment .................... -- (551)
-------- --------
Total assets.............................. $ -- $1,153
======== ========
Substantially all the assets held at December 29, 1997 were sold prior to
January 2, 2000.
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<PAGE>
Note 5: Equity and Debt Transactions
During fiscal 1999, Cypress filed a registration statement on Form S-3 with
the Securities and Exchange Commission. Under this shelf registration, Cypress
could through March 2001 sell any combination of debt securities, preferred
stock and common stock in one or more offerings up to a total amount of $300.0
million dollars. The entire amount of this shelf registration statement has been
used by the transactions described in this paragraph. On January 19, 2000,
Cypress completed a $283.0 million registered-placement of 5-year Convertible
Subordinated Notes. The notes are due in the year 2005, with a coupon rate of
4.00% and an initial conversion premium of 28.5%. The notes are convertible into
approximately 6.1 million shares of common stock and are callable by Cypress no
earlier than February 5, 2003. Net proceeds were $275.2 million, after issuance
costs of $7.8 million. Pursuant to the shelf registration, on March 29, 1999,
Cypress sold 7.2 million shares of common stock. Cypress received approximately
$33.8 million in proceeds, net of issuance costs, from the sale of these shares.
The remaining 2.5 million shares were sold by selling stockholders. Cypress did
not receive any proceeds from the shares sold by the selling stockholders.
In March 1999, Cypress announced a program whereby all U.S. employees were
offered loans to facilitate the exercise of vested stock options. Under the
terms of the program, only options which were vested as of March 1, 1999 and
whose exercise price was less than or equal to $9.75 could qualify for a loan.
The loans, including interest, are due at the earlier of three days following
the sale of the shares, within thirty days of the date the individual ceases to
be an employee of Cypress or 3 years from the grant date of the loan. The loans
bear interest and are secured by full recourse. At January 2, 2000, loans
receivable and accrued interest under this program totaled $8.2 million.
In fiscal years 1997 and 1998, the Board of Directors authorized the
repurchase of up to 14.0 million shares of Cypress's common stock. Through
January 3, 1999, 8.1 million shares had been repurchased under this entire
program for $67.5 million. On February 25, 1999, the Board of Directors
terminated the stock repurchase program. The unsold repurchased shares were and
are expected to continue to be used for option exercises under Cypress's 1994
Stock Option Plan and stock purchases under the Employee Stock Purchase Plan.
During 1998, Cypress reissued 1.8 million shares of common stock under such
plans. During fiscal 1999, Cypress reissued a total of 8.3 million shares in
relation to the stock offering described above and in conjunction with the 1994
Stock Option Plan and Employee Purchase Plan. Such shares had been repurchased
under the 1997/1998 repurchase programs as well as repurchase programs prior to
1997.
Convertible Subordinated Notes
In 1998, Cypress retired a total of $15.0 million principal of its $175.0
million, 6.0% Convertible Subordinated Notes ("Notes") for $12.9 million,
resulting in a pre-tax net gain of $1.7 million. The gain was offset by the
write-off of bond issuance costs of $0.4 million (pre-tax). The net gain was
recorded as interest and other income. The Notes, which were issued in September
1997, are due October 1, 2002 and contain a coupon rate of 6.0% and an initial
conversion premium of 48.2%. The remaining outstanding Notes are convertible
into approximately 6,772,000 shares of common stock and are callable by Cypress
on or after October 2, 2000. The Notes are unsecured subordinated obligations.
In February 1997, Cypress called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of 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.
Notes Payable
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<PAGE>
During 1997, Cypress entered into an agreement to borrow $2.0 million from
a third party with interest accruing at 6.0% per annum. The loan was repaid in
April 1999. Also during 1997, Cypress issued promissory notes to three
significant customers for $2.0 million, $1.4 million and $0.3 million, bearing
interest at 6.0%, 10.0% and 7.5%, respectively and due in October 2000, August
2000 and July 1999, respectively. As of January 2, 2000, a total of $0.7 million
was payable under the notes.
Line of Credit
In 1997, Cypress established a revolving line of credit with a bank
totaling up to $6.5 million. Cypress cancelled this line of credit in June 1999.
In July 1996, Cypress established a three-year $100.0 million unsecured
revolving credit facility with Bank of America National Trust and Savings
Association as agent on behalf of certain banks. In 1998, Cypress cancelled this
line of credit.
Note 6: Earnings (Loss) Per Share
As required by SFAS 128, following is a reconciliation of the numerators
and the denominators of the basic and diluted earnings (loss) per share
computation:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
Per-Share Per-Share Per-Share
Income Shares Amount Loss Shares Amount Income Shares Amount
------ ------ ------ ---- ------ ------ ------ ------ ------
(In thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $ 91,054 104,703 $0.87 $(104,918) 101,944 $(1.03) $ 7,526 100,137 $0.08
===== ====== =====
Effects of dilutive
securities:
Stock options ... -- 7,032 -- -- -- 7,729
--------- ------- --------- ------- - --------- -------
Diluted EPS:
Net income (loss) $ 91,054 111,735 $0.81 $(104,918) 101,944 $(1.03) $ 7,526 107,866 $0.07
========= ======= ===== ========= ======= ====== ========= ======= =====
</TABLE>
At January 2, 2000, January 3, 1999 and December 29, 1997, options to
purchase 47,000, 24,774,000 and 5,696,000 shares, respectively, of common stock
were outstanding, but were excluded in the computation of diluted EPS as their
effect was anti-dilutive. Convertible debentures outstanding at January 2, 2000,
January 3, 1999 and December 29, 1997 convertible to 6,772,000, 6,772,000 and
7,408,000 shares, respectively, of common stock were also excluded from diluted
EPS as their effect was anti-dilutive.
Note 7: Common Stock Option and Other Employee Benefit Plans
1999 and 1994 Stock Option Plans
In 1999, Cypress adopted the 1999 Stock Option Plan ("The Plan"). Under the
terms of the Plan, options may be granted to qualified employees of acquired
companies and consultants of Cypress or its majority-owned subsidiaries. Options
become exercisable over a vesting period as determined by the Board of Directors
and expire over terms not exceeding ten years from the date of grant. The option
price for shares granted, under the Plan, is typically equal to the fair market
value of the common stock at the date of grant.
In 1994, Cypress adopted the 1994 Stock Option Plan, which replaced
Cypress's 1985 Incentive Stock Option Plan and the 1988 Directors' Stock Option
Plan (the "Terminated Plans") with respect to future option grants. Under the
terms of the 1994 Stock Option Plan, options may be granted to qualified
employees, consultants, officers and directors of Cypress or its majority-owned
subsidiaries. Options become exercisable over a vesting period as determined by
the Board of Directors and expire over terms not exceeding twenty years from the
date of grant. The option price for shares granted, under the 1994 Stock Option
Plan, is typically equal to the fair market value of the common stock at the
date of grant. The 1994 Stock Option Plan includes shares that remained
available under the Terminated Plans and provides for an annual increase in
shares available for issuance pursuant to non-statutory stock options equal to
4.5% of Cypress's outstanding common stock at the end of each fiscal year.
In January 1998, substantially all outstanding stock options with an
exercise price in excess of $9.75 per share were cancelled and replaced with new
options having an exercise price of $9.75 per share, the fair market value on
the date that the employees accepted the repricing. A total of 10,464,000 shares
were repriced. This repricing excluded the Board of Directors, the Chief
Executive Officer and the Executive staff of Cypress.
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<PAGE>
The following table summarizes Cypress's stock option activity and related
weighted average exercise price for each category for the years ended January 2,
2000, January 3, 1999 and December 29, 1997. The weighted average exercise price
for each category presented is also shown in the table below.
Shares Under the 1994 and 1999 Stock Option Plan
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- ----------------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
(In thousands except per-share amounts)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year.............. 26,515 $ 8.29 23,923 $ 9.27 22,172 $ 8.54
Options cancelled .................................. (2,011) 9.99 (13,862) 11.24 (1,903) 8.83
Options granted .................................... 8,626 17.48 17,593 9.12 6,618 10.73
Options exercised .................................. (7,766) 7.62 (1,139) 5.30 (2,964) 7.18
------ ------- ------
Options outstanding, end of year ................... 25,364 11.48 26,515 8.32 23,923 9.27
======= ====== ======= ====== ======= ======
Options exercisable at January 2, 2000 ............. 9,574 $ 8.57
======= ======
</TABLE>
All options were granted at an exercise price equal to the market value of
Cypress's stock at the date of grant. The weighted average estimated fair value
at the date of grant, as defined by SFAS 123, for options granted in 1999, 1998
and 1997 was $8.98, $3.61 and $5.06 per option, respectively. The estimated
grant date fair value is calculated using the Black-Scholes model. The
Black-Scholes model, as well as other currently accepted option valuation
models, was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from Cypress's stock option awards. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated grant date fair value.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for Cypress's stock option awards:
1999 1998 1997
---- ---- ----
Expected life ......... 7 years 7 years 6 years
Risk-free interest rate 5.76% 5.41% 6.63%
Volatility ............ .5668 .5467 .5529
Dividend yield ........ 0.00% 0.00% 0.00%
Significant option groups outstanding as of January 2, 2000 and the related
weighted average exercise price and contractual life information, are as
follows:
Outstanding Exercisable
Options with exercise ------------------ --------------- Remaining
prices range from Shares Price Shares Price Life (years)
----------------- ------ ----- ------ ----- ------------
(In thousands except per-share amounts)
$ 1.00-- $ 8.25.......... 4,239 $ 4.45 2,600 $ 4.40 5.57
$ 8.26-- $ 9.00.......... 4,277 $ 8.51 1,769 $ 8.50 7.64
$ 9.01-- $ 9.74.......... 1,610 $ 9.39 315 $ 9.28 7.89
$ 9.75-- $ 9.75.......... 5,748 $ 9.75 3,344 $ 9.75 6.73
$ 9.76-- $17.50.......... 4,345 $11.94 1,327 $11.63 7.22
$17.51-- $29.25.......... 5,145 $21.95 219 $21.21 9.72
Employee Qualified Stock Purchase Plan
In 1986, Cypress approved an Employee Qualified Stock Purchase Plan
("ESPP"), which allows eligible employees of Cypress and its subsidiaries to
purchase shares of common stock through payroll deductions. The ESPP consists of
consecutive 24-month offering periods composed of four 6-month exercise periods.
The shares can be purchased at the lower of 85% of the fair market value of the
common stock at the date of commencement of this two-year offering period or at
the last day of each 6-month exercise period. Purchases are limited to 10% of an
employee's eligible compensation, subject to a maximum annual employee
contribution limited to a $25,000 market value (calculated as the employee's
enrollment price multiplied by the number of purchased shares). Of the
11,373,000 shares authorized under the ESPP, 7,320,000 shares were issued
through 1999 including 953,000, 890,000 and 541,000 shares in 1999, 1998, and
1997, respectively.
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<PAGE>
Compensation costs (included in pro forma net income and net income per
share amounts) for the grant date fair value, as defined by SFAS 123, of the
purchase rights granted under the ESPP were calculated using the Black-Scholes
model. The following weighted average assumptions are included in the estimated
grant date fair value calculations for rights to purchase stock under the ESPP:
1999 1998 1997
---- ---- ----
Expected life............. 6 months 6 months 6 months
Risk-free interest rate... 5.94% 5.94% 5.80%
Volatility................ .5773 .5773 .5861
Dividend yield............ 0.00% 0.00% 0.00%
The weighted average estimated grant date fair value, as defined by SFAS
123, or rights to purchase stock under the ESPP granted in 1999, 1998 and 1997
were $7.50, $2.56 and $5.49 per share, respectively.
Pro Forma Net Income (Loss) and Net Income (Loss) Per Share
If Cypress had recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its 1994 Stock
Option Plan, its 1999 Stock Option Plan and its Employee Stock Purchase Plan,
Cypress's pro forma net income (loss) and earnings per share for the years ended
January 2, 2000, January 3, 1999 and December 29, 1997 would have been as
follows:
1999 1998 1997
---- ---- ----
(In thousands, except per-share amounts)
Pro forma net income (loss):
Basic .............................. $ 58,849 $ (135,907) $ (17,545)
Diluted ............................ $ 58,849 $ (135,907) $ (17,545)
Pro forma net income (loss) per share:
Basic .............................. $ 0.56 $ (1.34) $ (0.18)
Diluted ............................ $ 0.53 $ (1.34) $ (0.18)
The pro forma effect on net income (loss) and net income (loss) per share
for 1999, 1998 and 1997 is not representative of the pro forma effect on net
income in the future years because it does not take into consideration pro forma
compensation expense related to grants prior to 1995.
Deferred Compensation
Cypress recorded a provision for deferred compensation of approximately
$1,638,000 for the difference between the grant or issuance price and the deemed
fair value for financial reporting purposes of certain Cypress common stock
options granted or common stock issued in fiscal year ended January 3, 1999.
These amounts are being amortized over the vesting period of the individual
stock options or stock, generally a period of four to five years. The deferred
compensation expense provision was reduced by approximately $263,000 in fiscal
1997, representing an unvested portion of deferred compensation expense for
wafer fabrication employees terminated in fiscal 1998 upon the sale to Maxim.
Deferred compensation expense, which was recognized, totaled approximately
$668,000, $653,000 and $191,000 in fiscal years 1999, 1998 and 1997,
respectively.
Other Employee Benefit Plans
Cypress also maintains a Section 401(k) Plan, New Product Bonus Plan, Key
Employee Bonus Plan and Deferred Compensation Plan. The 401(k) Plan provides
participating employees with an opportunity to accumulate funds for retirement
and hardship. Eligible participants may contribute up to 15% of their eligible
earnings to the Plan Trust. Cypress does not make contributions to the plan.
Under the New Product Bonus Plan, which started in 1997, all qualified
employees are provided bonus payments based on Cypress attaining certain levels
of new product revenue, plus attaining certain levels of profitability. In 1999,
1998 and 1997, $6.9 million, $0.7 million and $0.5 million, respectively were
charged to operations in connection with the New Product Bonus Plan.
In 1994, a Key Employee Bonus Plan was established, which provides for
bonus payments to selected employees upon achievement of certain Cypress and
individual performance targets. In 1999 and 1998, $4.9 and $4.1 million,
respectively, were charged to operations in connection with this Plan. In 1997,
there were no charges to operations in connection with this Plan. Employees
eligible under the Key Employee Bonus Plan can elect to participate in the
Deferred Compensation Plan, which allows
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<PAGE>
eligible employees to defer their salary, bonus and other related payments.
Costs incurred by Cypress for the Deferred Compensation Plan during fiscal years
1999, 1998 and 1997 were insignificant.
Note 8: Income Taxes
The components of the provision for income taxes are summarized below.
Income before taxes is principally attributed to domestic operations.
Components of the Provision for Income Taxes
January 2, January 3, December 29,
2000 1999 1997
--------- --------- ---------
(In thousands)
Income (loss) before provision
for taxes .......................... $ 95,871 $(118,441) $ 13,139
--------- --------- ---------
Current tax expense:
U.S. Federal ....................... 13,913 $ (13,237) $ (10,483)
State and local .................... 115 -- 1,418
Foreign ............................ 760 511 500
--------- --------- ---------
Total current ................... 14,788 (12,726) (8,565)
--------- --------- ---------
Deferred tax expense (benefit):
U.S. Federal ....................... (9,971) (4,210) 16,033
State and local .................... -- 3,413 (1,855)
--------- --------- ---------
Total deferred .................. (9,971) (797) 14,178
--------- --------- ---------
Total ...................... $ 4,817 $ (13,523) $ 5,613
========= ========= =========
The tax provision (benefit) differs from the amounts obtained by applying
the statutory U.S. Federal Income Tax Rate to income before taxes as shown
below.
Tax Provision Difference
<TABLE>
<CAPTION>
January 2, January 3, December 29,
2000 1999 1997
---------- ---------- ------------
(In thousands)
<S> <C> <C> <C>
Statutory rate .......................................... 35% 35% 35%
Tax at U.S. statutory rate .............................. $ 33,554 $(41,454) $ 4,599
Foreign earnings ........................................ (11,442) (4,153) (1,151)
State income taxes, net of federal benefit .............. 114 3,413 922
Tax credits ............................................. (9,568) (3,700) (2,274)
Net Foreign Sales Corporation (FSC) benefit ............. (265) -- (78)
Benefit of tax free investments ......................... (80) (350) (482)
Current year loss with no benefit ....................... -- 18,498 3,812
Utilization of net operating loss ....................... (8,968) (1,740) --
Future benefits not recognized .......................... -- 15,900 --
Acquisition costs ....................................... 4,324 -- --
Income of acquired companies previously taxed ........... (2,611) -- --
Other, net .............................................. (241) (805) 265
F/S discrepancy ......................................... -- 868 --
-------- -------- --------
Total ................................................. $ 4,817 $(13,523) $ 5,613
======== ======== ========
</TABLE>
The components of the net deferred tax assets at January 2, 2000 and
January 3, 1999, under SFAS 109 were as follows:
<TABLE>
<CAPTION>
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred income on sales to distributors ....................... $ 16,185 $ 11,024
Inventory reserves and basis differences ....................... 7,136 15,928
Restructuring and legal reserves ............................... 22,804 2,161
Asset valuation and other reserves ............................. 10,562 26,564
State tax, net of federal tax .................................. (48) 420
Research and development tax credits ........................... 25,702 9,204
Net operating loss ............................................. 4,839 41,330
Intangibles arising from acquisitions .......................... 12,093 --
Other, net ..................................................... 5,931 1,942
--------- ---------
Total deferred tax assets ................................... 105,204 108,573
--------- ---------
Deferred tax liabilities:
Excess of tax over book depreciation ........................... (43,900) (39,856)
Intangibles arising from acquisitions .......................... (12,093) --
Other, net ..................................................... (107) (1,209)
--------- ---------
Total deferred tax liabilities .............................. (56,100) (41,065)
--------- ---------
Net deferred tax asset ........................................... 49,104 $ 67,508
Valuation allowance .............................................. (39,133) (67,508)
--------- ---------
Net deferred tax assets (liabilities) after valuation
allowance ...................................................... $ 9,971 $ --
========= =========
</TABLE>
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<PAGE>
A $13.8 million tax benefits associated with disqualifying dispositions of
stock options and employee stock purchase plan shares was realized in 1999.
There were no tax benefits associated with disqualifying dispositions of stock
options or employee stock purchase plan shares realized in 1998.
During 1998, the United States Internal Revenue Service began an
examination of tax returns for fiscal years 1994 through 1996. The examination
is expected to continue through May 2000. Management believes that no material
adjustments will ultimately result from this examination.
Other current assets include current deferred tax assets of $10.0 million
at January 2, 2000. Other assets include deferred tax assets of $9.8 million at
January 2, 2000. There were no deferred tax assets as of January 3, 1999.
Note 9: Commitments and Contingencies
Operating Lease Commitments
Cypress leases most of its manufacturing and office facilities under
non-cancelable operating lease agreements that expire at various dates through
2012. These leases require Cypress to pay taxes, insurance, and maintenance
expenses, and provide for renewal options at the then fair market rental value
of the property.
In April 1997, Cypress sold capital equipment located in its Minnesota
wafer fabrication facility to Fleet Capital Leasing ("Fleet") in a
sale-leaseback agreement. In October 1997, Cypress entered into a similar
agreement with Comdisco, Inc. ("Comdisco") for other capital equipment located
in Minnesota. Cypress received a total of $28.2 million from Fleet and Comdisco
in exchange for the capital equipment and as a result of the transactions,
recorded an immaterial gain that is being amortized over the life of the leases.
In 1994 and 1995, Cypress entered into three operating lease agreements
with respect to its office and manufacturing facilities, in San Jose and
Minnesota, respectively. In April 1996, Cypress entered into an additional lease
agreement related to two office facilities in San Jose. These agreements require
quarterly payments that vary based on the London Interbank Offering Rate
("LIBOR"), plus a spread. All leases provide Cypress with the option of either
acquiring the property at its original cost or arranging for the property to be
acquired at the end of the respective lease terms. Cypress is contingently
liable under certain first-loss clauses for up to $52.7 million at January 3,
1999. First loss clauses state that Cypress is potentially liable for any
decline in the value of the property up to a specified percentage. The purchase
option then permits Cypress to acquire the property at the lower value. Based on
management's estimate of the fair value of the properties, no liability was
required to be recorded at January 2, 2000, January 3, 1999 or December 29,
1997. Furthermore, Cypress is required to maintain a specific level of
restricted cash or investments to serve as collateral for these leases and
maintain compliance with certain financial covenants. As of January 2, 2000, the
amount of restricted investments recorded was $61.2 million, which is in
compliance with these agreements. These restricted cash or investments are
classified as non-current on the balance sheet.
The aggregate annual rental commitments under non-cancelable operating
leases as of January 2, 2000 are as follows:
Fiscal Year (In thousands)
2000 .............. $23,892
2001 .............. 11,168
2002 .............. 8,333
2003 .............. 8,093
2004 .............. 4,730
2005 and thereafter --
-------
Total ........... $56,216
=======
Rental expense was approximately $18.0 million in 1999, $21.9 million in
1998 and $17.2 million in 1997.
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<PAGE>
Litigation and Asserted Claims
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. In the future, Cypress may be involved with litigation
to:
o Enforce its patents or other intellectual property rights.
o Protect its trade secrets and know-how.
o Determine the validity or scope of the proprietary rights of others.
o 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. Such litigation could
also result in payment of substantial damages and/or royalties or prohibitions
against utilization of essential technologies, and could have a material adverse
effect on Cypress's business, financial condition and results of operations.
During 1998, EMI Group of North America, Inc. ("EMI") filed suit against
Cypress in the Federal Court in Delaware, claiming that Cypress infringed on
four patents owned by EMI. Cypress and EMI entered into a license agreement in
February 1999, for one of the four patents in the lawsuit. EMI then withdrew two
of the four patents from the lawsuit, including the patent related to the
licensing agreement. The case involving the remaining two patents went to trial
in October 1999. The jury ruled in favor of Cypress, finding that none of the
patent claims was infringed by Cypress and that each asserted claim was invalid
due to physical impossibility (i.e., the patents require a step that is
physically impossible to perform) and prior art (i.e., assuming it is possible
to perform the impossible step, the prior art would have also performed it). EMI
may file an appeal, although no such appeal has been filed as of February 25,
2000. Should EMI appeal the decision of the Federal Court, Cypress 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.
In January 1998, an attorney representing the estate of Mr. Jerome Lemelson
contacted Cypress and charged that Cypress infringed certain patents owned by
Mr. Lemelson. On February 26, 1999, the Lemelson attorneys sued Cypress and 87
other companies for infringement of 16 patents. Cypress has reviewed and
investigated the allegations in the complaint and Cypress believes that the
suits are without merit. Cypress will vigorously defend itself in this matter.
While no assurance can be given regarding the outcome of this action, Cypress
believes that the final outcome of the matter will not have a material effect on
Cypress's consolidated financial position or results of operations. However,
because of the nature and inherent uncertainties of litigation, should the
outcome of this action be unfavorable, Cypress may be required to pay damages
and other expenses, which could have a material adverse effect on Cypress's
financial position and results of operations.
In June 1997, Cypress commenced a declaratory judgment action in the United
States District Court for the District of Nevada against the Li Second Family
Trust ("the Trust"). In this action, Cypress asked 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 May 1999, in a related
case, the United States District Court for the Eastern District of Virginia
ruled that the patent is unenforceable due to inequitable conduct by Dr. Li and
his attorneys in obtaining the patent. Cypress believes it has meritorious
defenses to the counter-claim and intends to defend itself vigorously. While no
assurance can be given regarding the final outcome of this action, Cypress
believes that the final outcome of the matters will not have a material effect
on Cypress's consolidated financial position or results of operations. However,
should the outcome of this action be unfavorable, Cypress's business, financial
condition and results of operations could be materially and adversely affected.
On October 2, 1997, Cypress filed an action against Kevin Yourman, Joseph
Weiss, and their associated law offices in the Superior Court of California
("Superior Court") in Santa Clara County for malicious civil prosecution in the
underlying securities fraud actions initiated by Messrs. Yourman and Weiss in
1992. The underlying securities fraud actions were dismissed because no officer
of Cypress made any actionable false or misleading statements or omissions. An
appeal affirmed the lower court's finding that Messrs. Yourman and Weiss failed
to put forth evidence showing a genuine issue of fact with regard to any
statements by Cypress's officers. On May 4, 1999, the Superior Court granted a
summary judgment motion by Messrs. Yourman and Weiss, holding that Messrs.
Yourman and Weiss had probable cause to bring the underlying litigation. Cypress
is appealing the decision. However, the results of litigation are unpredictable.
Cypress believes that this action, regardless of its outcome, will have little,
if any effect on Cypress's
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<PAGE>
consolidated financial position or results of operations.
Purchase Commitments
At January 2, 2000, Cypress had purchase commitments aggregating $192.0
million, principally for manufacturing equipment and facilities. These
commitments relate to purchases to be made in 2000 and beyond. Commitments for
2000 purchases will be funded through a combination of cash resources,
retirement of investments and the $283.0 million 4.0% Convertible Subordinated
Notes (See Note 12).
Note 10: Related Parties
Between 1992 and 1995, Cypress made cost-basis investments in QuickLogic
Corporation ("QuickLogic") Series D and Series E preferred stock. In June 1996,
Cypress received $4.5 million from QuickLogic, the original intent of which was
to obtain a minority interest in CTI and to secure guaranteed fab capacity.
Cypress classified the $4.5 million as other long-term liabilities in 1996,
awaiting final negotiation of the terms and transaction approval from Altera, an
existing minority interest shareholder. In March 1997, Cypress signed a
definitive agreement with QuickLogic Corporation involving termination of an
existing joint development, licensing and foundry agreement for antifuse Field
Programmable Gate Array ("FPGA") products and the execution of a new foundry
agreement. Under the new agreement, Cypress ceased development, marketing and
selling of antifuse-based FPGA products. In return, QuickLogic paid $4.5
million, which represented $3.5 million of NRE revenue related to the sale of
technology rights and $1.0 million of compensation for inventory and other
assets, and issued shares of QuickLogic common stock that increased Cypress's
equity position in the privately-held QuickLogic to greater than 20%. Cypress
also entered into a five-year wafer-supply agreement to provide FPGA products to
QuickLogic. Revenues and net income contributed by the FPGA product line during
1997 and was not significant.
In the first quarter of 1998, due to QuickLogic's history of recording
losses, Cypress determined that its investment in QuickLogic had declined in
value and the decline in value was not temporary. Accordingly, Cypress wrote-off
its investment in QuickLogic to reflect this decline. During the second half of
1998 and throughout 1999, due to the resurgence in the semiconductor industry,
QuickLogic began recording profits. In October 1999, QuickLogic announced its
initial public offering. Cypress sold its investment in QuickLogic in October
1999 and as a result, recorded a $36.2 million gain.
Cypress recorded sales to QuickLogic of $7.1 million, $2.3 million and
$11.7 million in 1999, 1998 and 1997, respectively. At fiscal year-ends 1999 and
1998, Cypress had a receivable due from QuickLogic of $0.9 and $0.6 million,
respectively.
During 1990, Cypress made a cost-basis investment of $1.0 million in
Vitesse Semiconductor stock. Cypress sold its remaining investment in February
1997 and recorded a gain of $3.8 million in other income.
Note 11: Segment Information
Cypress has two reportable segments, Memory Products and Non-memory
Products. The Memory Products segment includes Static Random Access Memories
("SRAMs") and multichip modules. The Non-memory Products segment includes
programmable logic products, data communication devices, computer products,
non-volatile memory products and wafers manufactured by the foundry.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). Cypress evaluates
the performance of its two segments based on profit or loss from operations
before income taxes, excluding nonrecurring gains and losses.
Cypress's reportable segments are strategic business units that offer
different products. Products that fall under the two segments differ in nature,
are manufactured utilizing different technologies and have a different
end-purpose. As such, they are managed separately. Memory Products are
characterized more as a commodity, which is depicted by high unit sales volume
and lower gross margins. These products are manufactured using more advanced
technology. A significant portion of the wafers produced for Memory Products are
manufactured at Cypress's technologically advanced, eight-inch wafer production
facility located in Minnesota (Fab 4). Memory Products are used by a variety of
end-users but the product is used specifically for the storage and retrieval of
information. In contrast to Memory Products, unit sales of non-Memory Products
are generally lower than Memory Products, but sell at higher gross margins. Some
Non-memory Products are manufactured utilizing less technologically advanced
processes. A majority of wafers for
Page 48
<PAGE>
Non-memory Products are manufactured at Cypress's less technologically advanced
six-inch Fab located in Texas (Fab 2). Products in the Non-memory segment
perform non-memory functions such as floating-point mathematics, store fixed
data that is not to be altered during normal machine operations and data
transfer and routing functions of signals throughout a computer system.
The tables below set forth information about the reportable segments for
fiscal years 1999, 1998 and 1997. Cypress does not allocate income taxes or
non-recurring items to segments. In addition, segments do not have significant
non-cash items other than depreciation and amortization in reported profit or
loss.
Business Segment Net Revenues
1999 1998 1997
-------- -------- --------
(In thousands)
Memory ............................... $269,686 $195,929 $226,566
Non-memory ........................... 435,801 358,962 371,919
-------- -------- --------
Total consolidated revenues ........ $705,487 $554,891 $598,485
======== ======== ========
Business Segment Profit (Loss)
1999 1998 1997
--------- --------- ---------
(In thousands)
Memory ............................... $ (21,691) $ (94,781) $ (35,742)
Non-memory ........................... 108,326 34,997 54,132
Restructuring and other
non-recurring (costs) benefits ..... (33,812) (60,737) (9,882)
Interest income and other ............ 52,665 13,356 13,092
Interest expense ..................... (9,617) (11,276) (8,461)
--------- --------- ---------
Income (loss) before provision
for income taxes ................... $ 95,871 $(118,441) $ 13,139
========= ========= =========
Business Segment Depreciation
Depreciation by segment for the respective years was:
1999 1998 1997
-------- -------- --------
(In thousands)
Memory .................................. $ 66,164 $ 86,905 $ 77,420
Non-memory .............................. 41,259 27,693 36,593
-------- -------- --------
Total consolidated depreciation ....... $107,423 $114,598 $114,013
======== ======== ========
Geographic Area
Revenues are attributed to countries based on the customer location.
Revenues by geographic locations were:
1999 1998 1997
-------- -------- --------
(In thousands)
United States ................................. $345,185 $307,938 $363,709
Europe ........................................ 130,484 91,544 99,051
Japan ......................................... 67,603 51,902 53,701
Other foreign countries ....................... 162,215 103,507 82,024
-------- -------- --------
Total revenues .............................. $705,487 $554,891 $598,485
======== ======== ========
Assets by geographic locations were:
1999 1998 1997
-------- -------- --------
(In thousands)
United States ..................... $275,553 $276,770 $373,273
Philippines ....................... 77,426 69,996 67,629
Other foreign countries ........... 4,204 2,170 2,877
-------- -------- --------
Total assets .................... $357,183 $348,936 $443,779
======== ======== ========
Page 49
<PAGE>
Note 12: Subsequent Events
On March 2, 2000, Cypress completed the merger with Galvantech, Inc.
("Galvantech"), which will be accounted for as a pooling of interests. The
agreement provides for Cypress to issue up to 3.6 million shares in exchange for
all outstanding stock and options of Galvantech. The fiscal years of Cypress and
Galvantech were different and Galvantech has changed its fiscal periods to
coincide with that of Cypress. Galvantech specializes in niche, ultra-high
performance memories for data communications applications.
On January 31, 2000, Cypress filed a universal shelf registration statement
with the Securities and Exchange Commission (SEC). The registration statement,
when effective, will allow Cypress to market and sell up to $400.0 million of
its securities. The shelf registration statement will allow Cypress flexibility
to raise funds from the offering of debt securities, common stock, or a
combination thereof, subject to market conditions and Cypress's capital needs.
Page 50
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Cypress Semiconductor Corporation.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity, and of cash
flows present fairly, in all material respects, the financial position of
Cypress Semiconductor Corporation and its subsidiaries at January 2, 2000 and
January 3, 1999, and the results of their operations and their cash flows for
each of the three years in the period ended January 2, 2000, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 26, 2000,
except as to Note 12 which is as of March 2, 2000
Page 51
<PAGE>
Quarterly Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
Jan. 2, Oct 3, July 4, Apr. 4,
2000 1999 1999 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues ............. $ 207,876 $ 184,497 $ 161,523 $ 151,591
============= ============= ============= =============
Gross Profit ......... $ 101,798 $ 85,969 $ 71,293 $ 62,788
============= ============= ============= =============
Net income ........... $ 47,473 $ 26,417 $ 8,480 $ 8,684
============= ============= ============= =============
Net income per share:
Basic ................ $ 0.43 $ 0.25 $ 0.08 $ 0.09
============= ============= ============= =============
Diluted .............. $ 0.39 $ 0.23 $ 0.08 $ 0.09
============= ============= ============= =============
<CAPTION>
Three Months Ended
Jan. 3, Sept. 28, June 29, Mar. 30,
1999 1998 1998 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues ............. $ 145,570 $ 143,791 $ 133,376 $ 132,154
============= ============= ============= =============
Gross Profit ......... $ 49,948 $ 47,213 $ 41,629 $ 6,993
============= ============= ============= =============
Net income (loss) .... $ (1,751) $ 1,649 $ (9,221) $ (95,595)
============= ============= ============= =============
Net income (loss) per share:
Basic ................ $ (0.02) $ 0.02 $ (0.09) $ (0.92)
============= ============= ============= =============
Diluted .............. $ (0.02) $ 0.02 $ (0.09) $ (0.92)
============= ============= ============= =============
</TABLE>
Page 52
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning our directors is
incorporated by reference to the information set forth in the sections entitled
"Proposal One-Election of Directors" and "Compliance with Section 16(a) of the
Exchange Act" in our Proxy Statement for the 2000 Annual Meeting of Stockholders
to be filed with the Commission within 120 days after the end of the Company's
fiscal year ended January 2, 2000, except that the information required by this
item concerning the executive officers of Cypress is incorporated by reference
to the information set forth in the section entitled "Executive Officers of the
Registrant" at the end of Part I of this Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to our
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to our
Proxy Statement.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our equity securities to file reports of ownership on Form 3 and changes in
ownership on Form 4 or 5 with the Securities and Exchange Commission (the "SEC")
and the National Association of Securities Dealers. Such officers, directors and
10% stockholders are also required by SEC rules to furnish us with copies of all
Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by us, we
believe that, during the fiscal year ended January 2, 2000, all Section 16(a)
filing requirements applicable to our officers, directors and 10% stockholders
were satisfied.
Page 53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
PAGE
----
(1) FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 2, 2000 and January 3, 1999.... 28
Consolidated Statements of Operations for the three years
ended January 2, 2000 .............................................. 29
Consolidated Statements of Stockholders' Equity for the three years
ended January 2, 2000............................................... 30
Consolidated Statements of Cash Flows for the three years ended
January 2, 2000..................................................... 31
Notes to Consolidated Financial Statements............................ 32
Report of Independent Accountants..................................... 51
(2) FINANCIAL STATEMENT SCHEDULE
Schedule II-Valuation and qualifying accounts and reserves............ 58
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------------
<S> <C>
2.1 (1) Amendment and Plan of Reorganization by and among Cypress Semiconductor Corporation, CY Acquisition
Corporation and IC WORKS.
2.2 (2) Amendment and Plan of Reorganization by and among Cypress Semiconductor Corporation, CE Acquisition
Corporation and Galvantech, Inc.
3.1 (3) Restated Certificate of Incorporation, as amended.
3.2 * Certificate of Amendment dated May 13, 1992 to Restated Certificate of Incorporation.
3.3 * Certificate of Amendment dated October 23, 1995 to Restated Certificate of Incorporation, as amended.
3.4 (3) Bylaws, as amended.
4.1 (4) Lease dated April 12, 1996 between Cypress Semiconductor Corporation and BNP Leasing Corporation.
4.2 (5) Subordinated Indenture relating to our 6.0% convertible subordinated notes due 2002, and dated as of
September 15, 1997, between Cypress Semiconductor Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee, including the form of note.
4.3 (6) Subordinated Indenture relating to our 4.0% convertible subordinated notes due 2005, and dated as of
January 15, 2000, between Cypress Semiconductor Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee, including the form of note.
4.4 * Supplemental Trust Indenture relating to our 4.0% convertible subordinated notes due 2005, and dated a
of January 15, 2000, between Cypress Semiconductor Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee, including the form of note.
10.1 (3) (7) Form of Indemnification Agreement.
10.2 (7) * Cypress Semiconductor Corporation 1994 Stock Option Plan.
10.3 (7) (8) Cypress Semiconductor Corporation Employee Qualified Stock Purchase Plan, as amended.
10.4 (7) (9) Consulting Agreement between Fred Bialek and Cypress Semiconductor Corporation.
10.5 (7) * Cypress Semiconductor Corporation 1999 Key Employee Bonus Plan
Agreement.
10.6 (7) (10) Cypress Semiconductor Corporation 1999 Non-statutory Stock Option Plan
</TABLE>
Page 54
<PAGE>
21.1 * Subsidiaries of Cypress Semiconductor Corporation.
23.1 * Consent of Independent Accountants.
24.1 * Power of Attorney (see page 57).
27.1 * Financial Data Schedule.
- ----------
(1) Previously filed as an exhibit to our current report on Form 8-K dated
February 12, 1999.
(2) Previously filed as an exhibit to our current report on Form 8-K, dated
January 18, 2000.
(3) Previously filed as an exhibit to our registration statement on Form S-1
which was declared effective on March 4, 1987 (SEC file number 33-12153).
(4) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended December 30, 1996.
(5) Previously filed as an exhibit to our registration statement on Form S-3
dated December 19, 1997 (SEC file number 333-42829).
(6) Previously filed as an exhibit to our registration statement on Form S-3/A,
dated March 24, 1999 (SEC file number 333-67203).
(7) Management compensatory plan, contract or arrangement.
(8) Previously filed as an exhibit to our registration statement on Form S-8
dated December 10, 1998 (SEC file number 333-68703).
(9) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended January 3, 1999.
(10) Previously filed as an exhibit to our registration statement on Form S-8
dated April 20, 1999 (SEC file number 333-76665).
* Filed as an exhibit to this annual report.
(b) Reports on Form 8-K:
1. On December 8, 1999 we filed a report on Form 8-K, which reported under
Item 5, that pursuant to our acquisition of IC WORKS, Incorporated, we had
changed the fiscal year of IC WORKS, Incorporated to correspond to our fiscal
year. Pursuant to Item 7, we attached the financial statements of IC WORKS,
Incorporated, reflecting the resultant changes.
Page 55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant, Cypress Semiconductor Corporation, a
corporation organized and existing under the laws of the State of Delaware, has
duly caused this Annual Report to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of San Jose, State of California, on the
8th day of March 2000.
CYPRESS SEMICONDUCTOR CORPORATION
By: /s/ Emmanuel Hernandez
--------------------------------------------
Emmanuel Hernandez,
Chief Financial Officer, Vice President,
Finance and Administration
56
<PAGE>
POWER OF ATTORNEY
Each of the officers and directors of Cypress Semiconductor Corporation
whose signature appears below hereby constitutes and appoints T.J. Rodgers and
Emmanuel Hernandez and each of them, their true and lawful attorneys-in-fact and
agents, with full power of substitution, each with power to act alone, to sign
and execute on behalf of the undersigned any amendment or amendments to this
report on Form 10-K, and to perform any acts necessary to be done in order to
file such amendment, and each of the undersigned does hereby ratify and confirm
all that said attorneys-in-fact and agents, or their or his substitutes, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
- --------------------------- ----------------------------- -------------
/s/ T.J. Rodgers President, Chief Executive
- --------------------------- Officer and Director March 7, 2000
T. J. Rodgers (Principal Executive Officer)
/s/ Emmanuel Hernandez Chief Financial Officer
- --------------------------- Vice President, Finance and March 7, 2000
Emmanuel Hernandez Administration (Principal
Financial and Accounting
Officer)
/s/ Eric Benhamou
- --------------------------- Chairman of the Board of March 7, 2000
Eric Benhamou Directors
/s/ Fred B. Bialek
- --------------------------- Director March 7, 2000
Fred B. Bialek
/s/ John C. Lewis
- --------------------------- Director March 7, 2000
John C. Lewis
/s/ Al Shugart
- --------------------------- Director March 7, 2000
Al Shugart
Page 57
<PAGE>
SCHEDULE II
CYPRESS SEMICONDUCTOR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Charged to Charged to
Beginning Costs Other Ending
Description Balance and Expenses Accounts Deductions Balance
- ----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1997
Allowance for sales returns and doubtful
accounts ............................... $ 4,742,000 $ -- $ 502,000 $(1,134,000) $ 4,110,000
1998
Allowance for sales returns and doubtful
accounts ............................... $ 4,110,000 $ -- $ 1,917,000 $(2,977,000) $ 3,050,000
1999
Allowance for sales returns and doubtful
accounts ............................... $ 3,050,000 $ -- $ -- $ (66,000) $ 2,984,000
</TABLE>
58
CERTIFICATE OF AMENDMENT
OF
THE RESTATED CERTIFICATE OF INCORPORATION
OF
CYPRESS SEMICONDUCTOR CORPORATION
Cypress Semiconductor Corporation, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
certifies as follows:
1. That the Board of Directors of Cypress Semiconductor Corporation
unanimously approved the adoption of a resolution setting forth a proposed
amendment of the Restated Certificate of Incorporation of this corporation,
declaring said amendment to be advisable and authorizing the solicitation of the
stockholders of said corporation for consideration thereof. The resolution
setting forth the proposed amendment is as follows:
RESOLVED: That Section 4. (a) of the Restated Certificate of Incorporation
of this corporation shall be amended to read in its entirety as follows:
"4. (a) The Corporation is authorized to issue two classes of shares to be
designated, respectively, "Preferred Stock" and "Common Stock." The number
of shares of Preferred Stock authorized to be issued is five million
(5,000,000) and the number of shares of Common Stock authorized to be
issued is seventy-five million (75,000,000). The Preferred Stock and the
Common Stock shall each have a par value of $.01 per share. The aggregate
par value of all shares of Preferred Stock is $50,000 and the aggregate par
value of all shares of Common Stock is $750,000."
2. That pursuant to the resolution of its Board of Directors, the
corporation obtained, as required by Section 228 of the General Corporation Law
of the State of Delaware, the necessary number of shares required by statute as
were voted in favor of the amendment.
3. That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, this Certificate of Amendment is executed this 13th day
of May, 1992.
CYPRESS SEMICONDUCTOR CORPORATION
/s/ T.J. Rodgers
------------------------------------
T.J. Rodgers
President
ATTEST: /s/ Kenneth Goldman
------------------------------
Kenneth A. Goldman
Secretary
-2-
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CYPRESS SEMICONDUCTOR CORPORATION
CYPRESS SEMICONDUCTOR CORPORATION, a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), pursuant to the
provisions of the General Corporation Law of the State of Delaware, (the "GCL"),
DOES HEREBY CERTIFY as follows:
FIRST: The Certificate of Incorporation of the Corporation is hereby
amended by deleting the second, third and fourth sentences of Section 4(a) of
the Certificate of Incorporation in its present form and substituting therefor a
new second sentence of Section 4(a) in the following form:
"The total number of shares of all classes of stock which the Corporation
has authority to issue is Two Hundred Fifty Five Million (255,000,000),
consisting of Two Hundred Fifty Million (250,000,000) shares of Common
Stock, $0.01 par value (the "Common Stock"), and Five Million (5,000,000)
shares of Preferred Stock, $0.01 par value (the "Preferred Stock")."
SECOND: The amendment to the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment has been duly adopted in
accordance with the provisions of Section 242 of the GCL (a) the Board of
Directors of the Corporation having duly adopted a resolution setting forth such
amendment and declaring its advisability and submitting it to the stockholders
of the Corporation for their approval, and (b) the stockholders of the
Corporation having duly adopted such amendment by a vote of the holders of a
majority of the outstanding stock entitled to vote thereon by written consent of
the stockholders.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate of Amendment to be signed by Emmanuel
Hernandez, its Chief Financial Officer this 23rd day of October, 1995.
CYPRESS SEMICONDUCTOR CORPORATION
BY: /s/ Emmanuel Hernandez
------------------------------
[Corporate Seal]
================================================================================
Cypress Semiconductor Corporation
and
State Street Bank and Trust Company of California, N.A.
Trustee
Supplemental Trust Indenture
Dated as of January 15, 2000
Supplementing that certain
Subordinated Indenture
Dated as of January 15, 2000
Authorizing the Issuance and Delivery of
Subordinated Debt Securities
4% Convertible Subordinated Notes due 2005
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE ONE ISSUANCE OF NOTES..................................................2
Section 101 Issuance of Notes; Principal Amount; Maturity.......2
Section 102 Interest on the Notes; Payment of Interest..........2
ARTICLE TWO CERTAIN DEFINITIONS................................................3
Section 201 Certain Definitions.................................3
ARTICLE THREE CERTAIN COVENANTS................................................4
Section 301 Registration and Listing............................4
ARTICLE FOUR REDEMPTION OF NOTES...............................................4
Section 401 Right of Redemption.................................4
Section 402 Conversion Arrangement on Call for Redemption.......4
ARTICLE FIVE CONVERSION OF NOTES...............................................5
Section 501 Conversion Privilege and Conversion Price...........5
Section 502 Adjustment of Conversion Price......................6
Section 503 No Adjustment......................................11
ARTICLE SIX REDEMPTION AT OPTION OF HOLDERS UPON A CHANGE IN CONTROL..........11
Section 601 Purchase of Securities at Option of the Holder
Upon Change in Control..........................11
Section 602 Effect of Change in Control Purchase Notice........14
Section 603 Deposit of Change in Control Purchase Price........15
Section 604 Notes Purchased In Part............................15
Section 605 Compliance With Securities Laws Upon
Purchase of Notes...............................15
Section 606 Repayment to the Company...........................15
Section 607 Successive Consolidations, Mergers, Etc............16
ARTICLE SEVEN MISCELLANEOUS...................................................16
Section 701 Consent of Holders Required........................16
Section 702 Applicability of Certain Indenture Provisions......16
Section 703 Reference to and Effect on the Indenture...........17
Section 704 Supplemental Indenture May be Executed
In Counterparts.................................17
Section 705 Effect of Headings.................................17
Section 706 Separability.......................................17
-i-
<PAGE>
This Supplemental Trust Indenture, dated as of January 15, 2000 (the
"Supplemental Indenture"), between Cypress Semiconductor Corporation, a
corporation duly organized and existing under the laws of the State of Delaware
(the "Company"), and State Street Bank and Trust Company of California, N.A., a
national banking association organized and existing under the laws of the United
States of America, as Trustee (the "Trustee"), supplementing that certain
Subordinated Indenture, dated as of January 15, 2000, between the Company and
the Trustee (such Indenture, as supplemented by this Supplemental Indenture for
this series of Securities, being referred to herein as the "Indenture").
Recitals
A. The Company has duly authorized the execution and delivery of the
Indenture heretofore executed and delivered to provide for the issuance from
time to time of its unsecured debentures, notes, or other evidences of
indebtedness to be issued in one or more series as provided for in the Indenture
heretofore executed and delivered.
B. The Indenture heretofore executed and delivered provides that the
Securities of each series shall be in substantially the form set forth in the
Indenture heretofore executed and delivered, or in such other form as may be
established by or pursuant to a Board Resolution or in one or more supplemental
indentures thereto, in each case with such appropriate insertions, omissions,
substitutions, and other variations as are required or permitted by the
Indenture, and may have such letters, numbers, or other marks of identification
and such legends or endorsements placed thereon as may be required to comply
with the rules of any securities exchange or as may, consistently herewith, be
determined to be required by the officers executing such securities, as
evidenced by their execution thereof.
C. The Company and the Trustee have agreed that the Company shall issue and
deliver, and the Trustee shall authenticate, Securities denominated "4%
Convertible Subordinated Notes due 2005" (the "Notes") pursuant to the terms of
this Supplemental Indenture and substantially in the form set forth below, in
each case with such appropriate insertions, omissions, substitutions, and other
variations as are required or permitted by the Indenture heretofore executed and
delivered and this Supplemental Indenture, and with such letters, numbers, or
other marks of identification and such legends or endorsements placed thereon as
may be required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such Securities,
as evidenced by their execution of such Securities.
<PAGE>
ARTICLE ONE
ISSUANCE OF NOTES
Section 101 Issuance of Notes; Principal Amount; Maturity.
(a) On January 25, 2000, the Company shall issue and deliver to the
Trustee, and the Trustee shall authenticate, Notes substantially in the form set
forth in Annex 1, in each case with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by the Indenture
and this Supplemental Indenture, and with such letters, numbers, or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any Securities exchange or as may,
consistently herewith, be determined by the officers executing such Notes, as
evidenced by their execution of such Notes.
(b) There is hereby authorized a series of Securities designated the 4%
Convertible Subordinated Notes due 2005, which may be authenticated and
delivered under the Indenture in an unlimited principal amount. The Notes shall
mature on February 1, 2005, which shall be the Stated Maturity.
Section 102 Interest on the Notes; Payment of Interest.
(a) The Notes shall bear interest at the rate of 4% per annum from January
25, 2000 and to and including February 1, 2005. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
(b) The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date shall, as provided in such Indenture, be paid to the
Person in whose name a Note is registered at the close of business on the
Regular Record Date for such interest, which shall be the January 15 or July 15
(whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date.
(c) Payment of the principal of (and premium, if any) and any interest on
the Notes shall be made at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan, The City of New York (which shall
initially be State Street Bank and Trust Company, N.A., an affiliate of the
Trustee, as agent of the Trustee) or at the Corporate Trust Office of the
Trustee in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that at the option of the Company payment of interest may be made by
check mailed to the address of the Person entitled thereto as such address
appears in the Security Register; provided that a Holder with an aggregate
principal amount in excess of $2,000,000 will be paid by wire transfer in
immediately available funds at the election of such Holder.
The Company hereby initially designates the Trustee as Paying Agent,
Security Registrar, Custodian and conversion agent, and each of the Corporate
Trust Office of the Trustee and the office
-2-
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of the Trustee in the Borough of Manhattan, The City of New York (which shall
initially be State Street Bank and Trust Company, N.A., an affiliate of the
Trustee, as agent of the Trustee located at 61 Broadway, 15th floor, New York,
New York, 10006, Attn: Corporate Trust Administration (Cypress Semiconductor
Corporation 4% Convertible Subordinated Notes due 2005)), one such office or
agency of the Company for each of the aforesaid purposes.
ARTICLE TWO
CERTAIN DEFINITIONS
Section 201 Certain Definitions.
The terms defined in this Section 201 (except as herein otherwise expressly
provided or unless the context of this Supplemental Indenture otherwise
requires) for all purposes of this Supplemental Indenture and of any indenture
supplemental hereto have the respective meanings specified in this Section 201.
All other terms used in this Supplemental Indenture that are defined in the
Indenture or the Trust Indenture Act, either directly or by reference therein
(except as herein otherwise expressly provided or unless the context of this
Supplemental Indenture otherwise requires), have the respective meanings
assigned to such terms in the Indenture or the Trust Indenture Act, as the case
may be, as in force at the date of this Supplemental Indenture as originally
executed.
"Capital Stock" or "capital stock" of any person means any and all shares,
interests, partnership interests, participations, rights or other equivalents
(however designated) of such person's equity interest (however designated).
"Interest Payment Dates" with respect to the Notes shall be February 1 and
August 1.
"Principal Amount" of a Security means the principal amount as set forth on
the face of the Security.
"Regular Record Dates" with respect to the Notes shall be January 15 and
July 15.
"Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
other than any day on which the Common Stock is not traded on the New York Stock
Exchange, or if the Common Stock is not traded on the New York Stock Exchange,
on the principal exchange or market on which the Common Stock is traded or
quoted.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof under ordinary circumstances have the power to vote in
the election of the board of directors, managers or trustees of any Person (or
other persons performing similar functions), irrespective of whether or not, at
the time, Capital Stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency.
The definitions of other terms are specified in Articles Five and Six.
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ARTICLE THREE
CERTAIN COVENANTS
The following covenant shall be applicable to the Company for so long as
any of the Notes are outstanding.
Section 301 Registration and Listing.
The Company (i) will effect all registrations with, and obtain all
approvals by, all governmental authorities that may be necessary under any
United States Federal or state law (including the Securities Act, the Exchange
Act and state securities and Blue Sky laws) before the shares of Common Stock
issuable upon conversion of Notes may be lawfully issued and delivered, and
thereafter publicly traded, and qualified or listed as contemplated by clause
(ii); and (ii) will list the shares of Common Stock required to be issued and
delivered upon conversion of the Notes prior to such issuance or delivery on the
New York Stock Exchange or such other exchange or automated quotation as the
Common Stock is then listed at such date of conversion. The provisions of
Section 1008 of the Indenture shall not apply to this Section 301.
ARTICLE FOUR
REDEMPTION OF NOTES
Section 401 Right of Redemption. The Notes will not be subject to redemption
prior to February 5, 2003 and will be redeemable on and after such date at the
option of the Company, in whole or in part, upon not less than 20 nor more than
60 days' notice to the Holders, at the Redemption Prices (expressed as a
percentage of principal amount) set forth below.
The Redemption Price (expressed as a percentage of principal amount) is as
follows:
Year Redemption Price
---- ----------------
Beginning on February 5, 2003 and ending on January 31, 2004 101%
Beginning on February 1, 2004 and thereafter 100%
in each case together with accrued and unpaid interest to, but excluding, the
Redemption Date; provided, however, that interest installments whose Stated
Maturity is on such Redemption Date will be payable to the Holders of such
Notes, or one or more Predecessor Securities, of record at the close of business
on the relevant Record Dates referred to on the face hereof, all as provided in
the Indenture.
The Notes are not subject to redemption through operation of any sinking
fund.
Section 402 Conversion Arrangement on Call for Redemption.
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In connection with any redemption of Notes, the Company may arrange for the
purchase and conversion of any Notes by an agreement with one or more investment
bankers or other purchasers to purchase such Notes by paying to the Trustee in
trust for the Holders, on or before the date fixed for redemption, an amount not
less than the applicable Redemption Price, together with interest accrued to
(but excluding) the date fixed for redemption, of such Notes. Notwithstanding
anything to the contrary contained herein, the obligation of the Company to pay
the Redemption Price of such Notes, together with interest accrued to (but
excluding) the Redemption Date, shall be deemed to be satisfied and discharged
to the extent such amount is so paid by such purchasers. If such an agreement is
entered into, a copy of which will be filed with the Trustee prior to the
Redemption Date, any Notes not duly surrendered for conversion by the Holders
thereof may, at the option of the Company, be deemed, to the fullest extent
permitted by law, acquired by such purchasers from such Holders and
(notwithstanding anything to the contrary contained herein) surrendered by such
purchasers for conversion, all as of immediately prior to the close of business
on the Redemption Date (and the right to convert any such Notes shall be
extended through such time), subject to payment of the above amount as
aforesaid. At the direction of the Company, the Trustee shall hold and dispose
of any such amount paid to it in the same manner as it would monies deposited
with it by the Company for the redemption of Notes. Without the Trustee's prior
written consent, no arrangement between the Company and such purchasers for the
purchase and conversion of any Notes shall increase or otherwise affect any of
the powers, duties, responsibilities or obligations of the Trustee as set forth
in this Indenture, and the Company agrees to indemnify the Trustee from, and
hold it harmless against, any loss, liability or expense arising out of or in
connection with any such arrangement for the purchase and conversion of any
Notes between the Company and such purchasers to which the Trustee has not
consented in writing, including the costs and expenses, including reasonable
legal fees, incurred by the Trustee in the defense of any claim or liability
arising out of or in connection with the exercise or performance of any of its
powers, duties, responsibilities or obligations under this Indenture.
ARTICLE FIVE
CONVERSION OF NOTES
Section 501 Conversion Privilege and Conversion Price
Subject to and upon compliance with the provisions of this Article, at the
option of the Holder thereof, any Note may be converted into fully paid and
nonassessable shares of Common Stock of the Company at the Conversion Price,
determined as hereinafter provided, in effect at the time of conversion. Such
conversion right shall commence on January 25, 2000 and expire at the close of
business on February 1, 2005, subject, in the case of the conversion of any
Global Security, to any applicable book-entry procedures of the Depositary
therefor. In case a Note is called for redemption at the election of the
Company, such conversion right in respect of the Note shall expire at the close
of business on the Business Day next preceding the Redemption Date. A Note in
respect of which a Holder is exercising its option to require redemption upon a
Change in Control may be converted only if such Holder withdraws its election to
exercise its option in accordance with Article Six of this Supplemental
Indenture.
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The initial Conversion Price of the Notes is $46.25 per share of Common
Stock, and shall be adjusted in certain instances as provided in this Article
Five.
Section 502 Adjustment of Conversion Price
The Conversion Price shall be adjusted from time to time by the Company as
follows:
(a) In case the Company shall (i) pay a dividend on its Common Stock in
shares of Common Stock, (ii) make a distribution on its Common Stock in shares
of Common Stock, (iii) subdivide its outstanding Common Stock into a greater
number of shares, or (iv) combine its outstanding Common Stock into a smaller
number of shares, the Conversion Price in effect immediately prior thereto shall
be adjusted so that the Holder of any Security thereafter surrendered for
conversion shall be entitled to receive that number of shares of Common Stock
which it would have owned had such Note been converted immediately prior to the
happening of such event. An adjustment made pursuant to this subsection (a)
shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of subdivision or combination. The Company will not
pay any dividend on or make any distribution on shares of its Common Stock held
in the treasury of the Company.
(b) In case the Company shall issue rights or warrants to all or
substantially all holders of its Common Stock entitling them (for a period
commencing no earlier than the record date described below and expiring not more
than 60 days after such record date) to subscribe for or purchase shares of
Common Stock (or securities convertible into Common Stock) at a price per share
(or having a conversion price per share) less than the current market price per
share of Common Stock (as determined in accordance with subsection (e) of this
Section 502) on the record date for the determination of shareholders entitled
to receive such rights or warrants, the Conversion Price in effect immediately
prior thereto shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
such record date by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding on such record date plus the number of shares
which the aggregate offering price of the total number of shares of Common Stock
so offered (or the aggregate conversion price of the convertible securities so
offered, which shall be determined by multiplying the number of shares of Common
Stock issuable upon conversion of such convertible securities by the conversion
price per share of Common Stock pursuant to the terms of such convertible
securities) would purchase at the current market price per share (as defined in
subsection (e) of this Section 502) of Common Stock on such record date and of
which the denominator shall be the number of shares of Common Stock outstanding
on such record date plus the number of additional shares of Common Stock offered
(or into which the convertible securities so offered are convertible). Such
adjustment shall be made successively whenever any such rights or warrants are
issued, and shall become effective immediately after such record date. If at the
end of the period during which such rights or warrants are exercisable not all
rights or warrants shall have been exercised, the adjusted Conversion Price
shall be immediately readjusted to what it would have been based upon the number
of additional shares of Common Stock actually issued (or
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the number of shares of Common Stock issuable upon conversion of convertible
securities actually issued).
(c) In case the Company shall distribute to all or substantially all
holders of its Common Stock any shares of capital stock (other than dividends or
distributions of Common Stock on Common Stock to which Section 502(a) applies)
of the Company, or evidences of indebtedness or other assets (including
securities of any person other than the Company, but excluding all-cash
distributions to which 502(d) applies or any rights or warrants referred to in
502(b)), then in each such case the Conversion Price shall be adjusted so that
the same shall equal the price determined by multiplying the current Conversion
Price by a fraction of which the numerator shall be the current market price per
share (as defined in subsection (e) of this Section 502) of the Common Stock on
the record date mentioned below less the fair market value on such record date
(as determined by the Board of Directors, whose determination shall be
conclusive evidence of such fair market value and which shall be evidenced by an
Officers' Certificate delivered to the Trustee) of the portion of the capital
stock, evidences of indebtedness or other non-cash assets so distributed or of
such rights or warrants applicable to one share of Common Stock (determined on
the basis of the number of shares of Common Stock outstanding on the record
date) and of which the denominator shall be the current market price per share
(as defined in subsection (e) of this Section 502) of the Common Stock on such
record date. Such adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
distribution.
In the event that the Company implements a stockholder rights plan, such
rights plan shall provide, subject to customary exceptions, that upon conversion
of the Notes the Holders will receive, in addition to the Common Stock issuable
upon such conversion, the rights issued under such rights plan (notwithstanding
the occurrence of an event causing such rights to separate from the Common Stock
at or prior to the time of conversion). Any distribution of rights or warrants
pursuant to a stockholder rights plan complying with the requirements set forth
in the immediately preceding sentence of this paragraph shall not constitute a
distribution of rights or warrants for the purposes of this Section 502(c).
Rights or warrants distributed by the Company to all holders of Common
Stock entitling the holders thereof to subscribe for or purchase shares of the
Company's capital stock (either initially or under certain circumstances), which
rights or warrants, until the occurrence of a specified event or events
("Trigger Event"): (i) are deemed to be transferred with such shares of Common
Stock; (ii) are not exercisable; and (iii) are also issued in respect of future
issuances of Common Stock, shall be deemed not to have been distributed for
purposes of this Section 502(c) (and no adjustment to the Conversion Price under
this Section 502(c) will be required) until the occurrence of the earliest
Trigger Event. If such right or warrant is subject to subsequent events, upon
the occurrence of which such right or warrant shall become exercisable to
purchase different securities, evidences of indebtedness or other assets or
entitle the holder to purchase a different number or amount of the foregoing or
to purchase any of the foregoing at a different purchase price, then the
occurrence of each such event shall be deemed to be the date of issuance and
record date with respect to a new right or warrant (and a termination or
expiration of the existing right or warrant without exercise by
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the holder thereof). In addition, in the event of any distribution (or deemed
distribution) of rights or warrants, or any Trigger Event or other event (of the
type described in the preceding sentence) with respect thereto, that resulted in
an adjustment to the Conversion Price under this Section 502(c), (1) in the case
of any such rights or warrants which shall all have been redeemed or repurchased
without exercise by any holders thereof, the Conversion Price shall be
readjusted upon such final redemption or repurchase to give effect to such
distribution or Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price received by
a holder of Common Stock with respect to such rights or warrants (assuming such
holder had retained such rights or warrants), made to all holders of Common
Stock as of the date of such redemption or repurchase, and (2) in the case of
such rights or warrants all of which shall have expired or been terminated
without exercise, the Conversion Price shall be readjusted as if such rights and
warrants had never been issued.
(d) (1) In case the Company shall, by dividend or otherwise, at any time
distribute (a "Triggering Distribution") to all or substantially all holders of
its Common Stock all cash distributions in an aggregate amount that, together
with the aggregate amount of (A) any cash and the fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
evidence thereof and which shall be evidenced by an Officers' Certificate
delivered to the Trustee) of any other consideration payable in respect of any
tender offer by the Company or a Subsidiary of the Company for Common Stock
consummated within the 12 months preceding the date of payment of the Triggering
Distribution and in respect of which no Conversion Price adjustment pursuant to
this Section 502 has been made and (B) all other cash distributions to all or
substantially all holders of its Common Stock made within the 12 months
preceding the date of payment of the Triggering Distribution and in respect of
which no Conversion Price adjustment pursuant to this Section 502 has been made,
exceeds an amount equal to 10% of the product of the current market price per
share of Common Stock (as determined in accordance with subsection (e) of this
Section 502) on the Business Day (the "Determination Date") immediately
preceding the day on which such Triggering Distribution is declared by the
Company multiplied by the number of shares of Common Stock outstanding on the
Determination Date (excluding shares held in the treasury of the Company), the
Conversion Price shall be reduced so that the same shall equal the price
determined by multiplying such Conversion Price in effect immediately prior to
the Determination Date by a fraction of which the numerator shall be the current
market price per share of the Common Stock (as determined in accordance with
subsection (e) of this Section 502) on the Determination Date less the sum of
the aggregate amount of cash and the aggregate fair market value (determined as
aforesaid) of any such other consideration so distributed, paid or payable
within such 12 months (including, without limitation, the Triggering
Distribution) applicable to one share of Common Stock (determined on the basis
of the number of shares of Common Stock outstanding on the Determination Date),
and of which the denominator shall be such current market price per share of the
Common Stock (as determined in accordance with subsection (e) of this Section
502) on the Determination Date, such reduction to become effective immediately
prior to the opening of business on the day following the date on which the
Triggering Distribution is paid; provided that, in the event the portion of the
cash so distributed applicable to one share of Common Stock is equal to or
greater than such current market price per share of the Common Stock, in lieu of
the foregoing, an adequate adjustment provision shall be made so that each
holder of Notes shall have the right to
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receive upon conversion the amount of cash such holder would have received had
such holder converted each Note immediately prior to such distribution.
(2) In case any tender offer made by the Company or any of its Subsidiaries
for Common Stock shall expire and such tender offer (as amended upon the
expiration thereof) shall involve the payment of aggregate consideration in an
amount (determined as the sum of the aggregate amount of cash consideration and
the aggregate fair market value (as determined by the Board of Directors, whose
determination shall be conclusive evidence thereof and which shall be evidenced
by an Officers' Certificate delivered to the Trustee thereof ) of any other
consideration) that, together with the aggregate amount of (A) any cash and the
fair market value (as determined by the Board of Directors, whose determination
shall be conclusive evidence thereof and which shall be evidenced by an
Officers' Certificate delivered to the Trustee) of any other consideration
payable in respect of any other tender offers by the Company or any Subsidiary
of the Company for Common Stock consummated within the 12 months preceding the
date of the Expiration Date (as defined below) and in respect of which no
Conversion Price adjustment pursuant to this Section 502 has been made and (B)
all cash distributions to all or substantially all holders of its Common Stock
made within the 12 months preceding the Expiration Date and in respect of which
no Conversion Price adjustment pursuant to this Section 502 has been made,
exceeds an amount equal to 10% of the product of the current market price per
share of Common Stock (as determined in accordance with subsection (e) of this
Section 502) as of the last date (the "Expiration Date") tenders could have been
made pursuant to such tender offer (as it may be amended) (the last time at
which such tenders could have been made on the Expiration Date is hereinafter
sometimes called the "Expiration Time") multiplied by the number of shares of
Common Stock outstanding (including tendered shares but excluding any shares
held in the treasury of the Company) at the Expiration Time, then, immediately
prior to the opening of business on the day after the Expiration Date, the
Conversion Price shall be reduced so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
close of business on the Expiration Date by a fraction of which the numerator
shall be the product of the number of shares of Common Stock outstanding
(including tendered shares but excluding any shares held in the treasury of the
Company) at the Expiration Time multiplied by the current market price per share
of the Common Stock (as determined in accordance with subsection (e) of this
Section 502) on the Trading Day next succeeding the Expiration Date, and of
which the denominator shall be the sum of (x) the aggregate consideration
(determined as aforesaid) payable to stockholders based on the acceptance (up to
any maximum specified in the terms of the tender offer) of all shares validly
tendered and not withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased Shares")
and (y) the product of the number of shares of Common Stock outstanding (less
any Purchased Shares and excluding any shares held in the treasury of the
Company) at the Expiration Time and the current market price per share of Common
Stock (as determined in accordance with subsection (e) of this Section 502) on
the Trading Day next succeeding the Expiration Date, such reduction to become
effective immediately prior to the opening of business on the day following the
Expiration Date. In the event that the Company is obligated to purchase shares
pursuant to any such tender offer, but the Company is permanently prevented by
applicable law from effecting any or all such purchases or any or all such
purchases are rescinded, the Conversion Price shall again be adjusted to be the
Conversion Price which would have been in
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effect based upon the number of shares actually purchased. If the application of
this Section 502(d)(2) to any tender offer would result in a decrease in the
Conversion Price, no adjustment shall be made for such tender offer under this
Section 502(d)(2).
(3) For purposes of this Section 502(d), the term "tender offer" shall mean
and include both tender offers and exchange offers, all references to
"purchases" of shares in tender offers (and all similar references) shall mean
and include both the purchase of shares in tender offers and the acquisition of
shares pursuant to exchange offers, and all references to "tendered shares" (and
all similar references) shall mean and include shares tendered in both tender
offers and exchange offers.
(e) For the purpose of any computation under subsections (b), (c) and (d)
of this Section 502, the current market price per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices for the 30
consecutive Trading Days ending on the last full Trading Day before (i) the
Determination Date or the Expiration Date, as the case may be, with respect to
distributions or tender offers under subsection (d) of this Section 502 or (ii)
the record date with respect to distributions, issuances or other events
requiring such computation under subsection (b) or (c) of this Section 502. The
closing price for each day shall be the last reported sales price or, in case no
such reported sale takes place on such date, the average of the reported closing
bid and asked prices in either case on the New York Stock Exchange (the "NYSE")
or, if the Common Stock is not listed or admitted to trading on the NYSE, on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, the last reported sales price of the Common Stock as quoted
on NASDAQ (the term "NASDAQ" shall include, without limitation, the Nasdaq
National Market) or, in case no reported sales takes place, the average of the
closing bid and asked prices as quoted on NASDAQ or any comparable system or, if
the Common Stock is not quoted on NASDAQ or any comparable system, the closing
sales price or, in case no reported sale takes place, the average of the closing
bid and asked prices, as furnished by any two members of the National
Association of Securities Dealers, Inc. selected from time to time by the
Company for that purpose. If no such prices are available, the current market
price per share shall be the fair value of a share of Common Stock as determined
by the Board of Directors (which shall be evidenced by an Officers' Certificate
delivered to the Trustee).
(f) In any case in which this Section 502 shall require that an adjustment
be made following a record date or a Determination Date or Expiration Date, as
the case may be, established for purposes of this Section 502, the Company may
elect to defer (but only until five Business Days following the filing by the
Company with the Trustee of the certificate described in Section 1405 of the
Indenture) issuing to the Holder of any Note converted after such record date or
Determination Date or Expiration Date the shares of Common Stock and other
capital stock of the Company issuable upon such conversion over and above the
shares of Common Stock and other capital stock of the Company issuable upon such
conversion only on the basis of the Conversion Price prior to adjustment; and,
in lieu of the shares the issuance of which is so deferred, the Company shall
issue or cause its transfer agents to issue due bills or other appropriate
evidence prepared by the Company of the right to receive such shares. If any
distribution in respect of which an adjustment to the
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Conversion Price is required to be made as of the record date or Determination
Date or Expiration Date therefor is not thereafter made or paid by the Company
for any reason, the Conversion Price shall be readjusted to the Conversion Price
which would then be in effect if such record date had not been fixed or such
effective date or Determination Date or Expiration Date had not occurred.
(g) The Company may make such reductions to the Conversion Price, in
addition to those required by Article Five, as the board of directors of the
Company considers to be advisable to avoid or diminish any income tax to holders
of Common Stock or rights to purchase Common Stock resulting from any dividend
or distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes.
To the extent permitted by applicable law, the Company may from time to
time reduce the Conversion Price by any amount for any period of time if the
period is at least 20 days, the reduction is irrevocable during the period and
the board of directors of the Company shall have made a determination that such
reduction would be in the best interests of the Company, which determination
shall be conclusive. Whenever the Conversion Price is reduced pursuant to the
preceding sentence, the Company shall mail to the holders of record of the Notes
a notice of reduction at least 15 days prior to the date the reduced Conversion
Price takes effect, and such notice shall state the reduced Conversion Price and
the period during which it will be in effect.
Section 503 No Adjustment.
No adjustment in the Conversion Price shall be required unless the
adjustment would require an increase or decrease of at least 1% in the
Conversion Price as last adjusted; provided, however, that any adjustments which
by reason of this Section 503 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Article 4 shall be made to the nearest cent or to the nearest
1/1000th of a share, as the case may be.
ARTICLE SIX
REDEMPTION AT OPTION OF HOLDERS UPON A CHANGE IN CONTROL
Section 601 Purchase of Securities at Option of the Holder Upon Change in
Control.
(a) If at any time that Notes remain outstanding there shall occur a Change
in Control, Notes shall be purchased by the Company at the option of the Holders
thereof as of the date that is 30 Business Days after the occurrence of the
Change in Control (the "Change in Control Purchase Date") at a purchase price
equal to the principal amount of the Notes, plus accrued and unpaid interest to,
but excluding, the Change in Control Purchase Date (the "Change in Control
Purchase Price"), subject to satisfaction by or on behalf of any Holder of the
requirements set forth in subsection (c) of this Section 601.
A "Change in Control" shall be deemed to have occurred if any of the
following occurs after the date hereof:
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(1) any "person" or "group" (as such terms are defined below) is or becomes
the "beneficial owner" (as defined below), directly or indirectly, of shares of
Voting Stock of the Company representing 50% or more of the total voting power
of all outstanding classes of Voting Stock of the Company or has the power,
directly or indirectly, to elect a majority of the members of the Board of
Directors of the Company; or
(2) the Company consolidates with, or merges with or into, another Person
or the Company sells, assigns, conveys, transfers, leases or otherwise disposes
of all or substantially all of the assets of the Company, or any Person
consolidates with, or merges with or into, the Company, in any such event other
than pursuant to a transaction in which the Persons that "beneficially owned"
(as defined below), directly or indirectly, shares of Voting Stock of the
Company immediately prior to such transaction "beneficially own" (as defined
below), directly or indirectly, shares of Voting Stock of the Company
representing at least a majority of the total voting power of all outstanding
classes of Voting Stock of the surviving or transferee Person; or
(3) there shall occur the liquidation or dissolution of the Company.
For the purpose of the definition of "Change in Control", (i) "person" and
"group" have the meanings given such terms under Section 13(d) and 14(d) of the
Exchange Act or any successor provision to either of the foregoing, and the term
"group" includes any group acting for the purpose of acquiring, holding or
disposing of securities within the meaning of Rule 13d-5(b)(1) under the
Exchange Act (or any successor provision thereto), (ii) a "beneficial owner"
shall be determined in accordance with Rule 13d-3 under the Exchange Act, as in
effect on the date of this Indenture, except that the number of shares of Voting
Stock of the Company shall be deemed to include, in addition to all outstanding
shares of Voting Stock of the Company and Unissued Shares deemed to be held by
the "person" or "group" (as such terms are defined above) or other Person with
respect to which the Change in Control determination is being made, all Unissued
Shares deemed to be held by all other Persons, and (iii) the terms "beneficially
owned" and "beneficially own" shall have meanings correlative to that of
"beneficial owner". The term "Unissued Shares" means shares of Voting Stock not
outstanding that are subject to options, warrants, rights to purchase or
conversion privileges exercisable within 60 days of the date of determination of
a Change in Control.
Notwithstanding anything to the contrary in this Section 601, a Change in
Control shall not be deemed to have occurred if either (i) the closing price (as
defined in Section 502(e)) of the Common Stock for any five Trading Days during
the ten Trading Days immediately preceding the Change in Control is at least
equal to 105% of the Conversion Price in effect on such day; or (ii) in the case
of a merger or consolidation, all of the consideration excluding cash payments
for fractional shares in such merger or consolidation constituting the Change in
Control consists of common stock traded on a United States national securities
exchange or quoted on NASDAQ (or which will be so traded or quoted when issued
or exchanged in connection with such Change in Control) and as a result of such
transaction or transactions the Notes become convertible solely into such common
stock.
(b) Within 10 Business Days after the occurrence of a Change in Control,
the Company shall mail a written notice of the Change in Control to the Trustee
and to each Holder (and to
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beneficial owners as required by applicable law) and shall cause a copy of such
notice to be published in a daily newspaper of national circulation. The notice
shall include the form of a Change in Control Purchase Notice to be completed by
the Holder and shall state:
(1) the date of such Change in Control and, briefly, the events
causing such Change in Control;
(2) the date by which the Change in Control Purchase Notice pursuant
to this Section 601 must be given;
(3) the Change in Control Purchase Date;
(4) the Change in Control Purchase Price;
(5) briefly, the conversion rights of the Notes;
(6) the name and address of each Paying Agent and Conversion Agent;
(7) the Conversion Price and any adjustments thereto;
(8) that Notes as to which a Change in Control Purchase Notice has
been given may be converted into Common Stock pursuant to Article 5 of the
Supplemental Indenture only to the extent that the Change in Control
Purchase Notice has been withdrawn in accordance with the terms of this
Indenture;
(9) the procedures that the Holder must follow to exercise rights
under this Section 601;
(10) the procedures for withdrawing a Change in Control Purchase
Notice, including a form of notice of withdrawal; and
(11) that the Holder must satisfy the requirements set forth in the
Securities in order to convert the Securities.
If any of the Notes is in the form of a Global Security, then the Company
shall modify such notice to the extent necessary to accord with the procedures
of the Depositary applicable to the repurchase of Global Securities.
(c) A Holder may exercise its rights specified in subsection (a) of this
Section 601 upon delivery of a written notice (which shall be in substantially
the form included in Exhibit A hereto and which may be delivered by letter,
overnight courier, hand delivery, facsimile transmission or in any other written
form and, in the case of Global Securities, may be delivered electronically or
by other means in accordance with the Depositary's customary procedures) of the
exercise of such rights (a "Change in Control Purchase Notice") to any Paying
Agent at any time prior to the close of business on the Business Day next
preceding the Change in Control Purchase Date.
-13-
<PAGE>
The delivery of such Security to any Paying Agent (together with all
necessary endorsements) at the office of such Paying Agent shall be a condition
to the receipt by the Holder of the Change in Control Purchase Price therefor.
The Company shall purchase from the Holder thereof, pursuant to this
Section 601, a portion of a Note if the Principal Amount of such portion is
$1,000 or an integral multiple of $1,000. Provisions of the Indenture that apply
to the purchase of all of a Note pursuant to Sections 601 through 606 also apply
to the purchase of such portion of such Note.
Notwithstanding anything herein to the contrary, any Holder delivering to a
Paying Agent the Change in Control Purchase Notice contemplated by this
subsection (c) shall have the right to withdraw such Change in Control Purchase
Notice in whole or in a portion thereof that is a Principal Amount of $1,000 or
in an integral multiple thereof at any time prior to the close of business on
the Business Day next preceding the Change in Control Purchase Date by delivery
of a written notice of withdrawal to the Paying Agent in accordance with Section
602.
A Paying Agent shall promptly notify the Company of the receipt by it of
any Change in Control Purchase Notice or written withdrawal thereof.
Anything herein to the contrary notwithstanding, in the case of Global
Securities, any Change in Control Purchase Notice may be delivered or withdrawn
and such Securities may be surrendered or delivered for purchase in accordance
with the applicable procedures of the Depositary as in effect from time to time.
Section 602 Effect of Change in Control Purchase Notice.
Upon receipt by any Paying Agent of the Change in Control Purchase Notice
specified in Section 601(c), the Holder of the Note in respect of which such
Change in Control Purchase Notice was given shall (unless such Change in Control
Purchase Notice is withdrawn as specified below) thereafter be entitled to
receive the Change in Control Purchase Price with respect to such Note. Such
Change in Control Purchase Price shall be paid to such Holder promptly following
the later of (a) the Change in Control Purchase Date with respect to such Note
(provided the conditions in Section 601(c) have been satisfied) and (b) the time
of delivery of such Security to a Paying Agent by the Holder thereof in the
manner required by Section 601(c). Notes in respect of which a Change in Control
Purchase Notice has been given by the Holder thereof may not be converted into
shares of Common Stock on or after the date of the delivery of such Change in
Control Purchase Notice unless such Change in Control Purchase Notice has first
been validly withdrawn.
A Change in Control Purchase Notice may be withdrawn by means of a written
notice (which may be delivered by letter, overnight courier, hand delivery,
facsimile transmission or in any other written form and, in the case of Global
Securities, may be delivered electronically or by other means in accordance with
the Depositary's customary procedures) of withdrawal delivered by the Holder to
a Paying Agent at any time prior to the close of business on the Business Day
immediately preceding the Change in Control Purchase Date, specifying the
Principal Amount of the Security or portion
-14-
<PAGE>
thereof (which must be a Principal Amount of $1,000 or an integral multiple of
$1,000 in excess thereof) with respect to which such notice of withdrawal is
being submitted.
Section 603 Deposit of Change in Control Purchase Price.
On or before 11:00 a.m. New York City time on the Change in Control
Purchase Date, the Company shall deposit with the Trustee or with a Paying Agent
(other than the Company or an Affiliate of the Company) an amount of money (in
immediately available funds if deposited on such Business Day) sufficient to pay
the aggregate Change in Control Purchase Price of all the Notes or portions
thereof that are to be purchased as of such Change in Control Purchase Date. The
manner in which the deposit required by this Section 603 is made by the Company
shall be at the option of the Company, provided that such deposit shall be made
in a manner such that the Trustee or a Paying Agent shall have immediately
available funds on the Change in Control Purchase Date.
If a Paying Agent holds, in accordance with the terms hereof, money
sufficient to pay the Change in Control Purchase Price of any Note for which a
Change in Control Purchase Notice has been tendered and not withdrawn in
accordance with this Indenture then, on the Change in Control Purchase Date,
such Note will cease to be outstanding and the rights of the Holder in respect
thereof shall terminate (other than the right to receive the Change in Control
Purchase Price as aforesaid). The Company shall publicly announce the Principal
Amount of Notes purchased as a result of such Change in Control on or as soon as
practicable after the Change in Control Purchase Date.
Section 604 Notes Purchased In Part.
Any Note that is to be purchased only in part shall be surrendered at the
office of a Paying Agent and promptly after the Change in Control Purchase Date
the Company shall execute and the Trustee shall authenticate and deliver to the
Holder of such Note, without service charge, a new Note or Notes, of such
authorized denomination or denominations as may be requested by such Holder, in
aggregate Principal Amount equal to, and in exchange for, the portion of the
Principal Amount of the Note so surrendered that is not purchased.
Section 605 Compliance With Securities Laws Upon Purchase of Notes.
In connection with any offer to purchase or purchase of Notes under Section
601, the Company shall (a) comply with Rule 13e-4 and Rule 14e-1 (or any
successor to either such Rule), if applicable, under the Exchange Act, (b) file
the related Schedule 13E-4 (or any successor or similar schedule, form or
report) if required under the Exchange Act, and (c) otherwise comply with all
federal and state securities laws in connection with such offer, all so as to
permit the rights of the Holders and obligations of the Company under Sections
601 through 604 to be exercised in the time and in the manner specified therein.
Section 606 Repayment to the Company.
To the extent that the aggregate amount of cash deposited by the Company
pursuant to Section 603 exceeds the aggregate Change in Control Purchase Price
together with interest, if any,
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<PAGE>
thereon of the Notes or portions thereof that the Company is obligated to
purchase, then promptly after the Change in Control Purchase Date the Trustee or
a Paying Agent, as the case may be, shall return any such excess to the Company.
Section 607 Successive Consolidations, Mergers, Etc.
In the case of consolidation, merger, conveyance, transfer or lease to
which Section 1409 of the Indenture applies, in which the Common Stock of the
Company is changed or exchanged as a result into the right to receive equity
securities, cash or other property which includes shares of common Stock of the
Company or another Person that are, or upon issuance will be, traded on a United
States national securities exchange or approved for trading on an established
automated over-the-counter trading market in the United States and such shares
constitute at the time such change or exchange becomes effective in excess of
50% of the aggregate fair market value of such securities, cash and other
property (as determined by the Company, which determination shall be conclusive
and binding), then the Person formed by such consolidation, or resulting from
such merger or which acquires such assets, as the case may be, shall execute and
deliver to the Trustee a supplemental indenture (which shall comply with the
Trust Indenture Act as in force at the date of execution of such supplemental
indenture) modifying the provisions of the Indenture and this Supplemental
Indenture, as applicable, relating to the right of the Holders of the Notes to
cause the Company to redeem the Notes following a Change in Control, including
without limitation the applicable provisions of this Article Six, as determined
in good faith by the Company (which determination shall be conclusive and
binding), to make such provisions apply to the common stock of the issuer
thereof if different from the Company and the Common Stock of the Company (in
lieu of Common Stock of the Company).
ARTICLE SEVEN
MISCELLANEOUS
Section 701 Consent of Holders Required.
In addition to those modifications or amendments requiring the consent of
the Holder of each Outstanding Note effected thereby specified in Section 902 of
the Indenture, there can be no modification or amendment that would change the
obligation of the Company to redeem any Note upon the happening of a Change in
Control in a manner adverse to the Holder of Notes without the consent of the
Holder of each outstanding Note effected thereby.
Section 702 Applicability of Certain Indenture Provisions.
Each of the defeasance and covenant defeasance provisions of Article
Thirteen of the Indenture shall apply to the Notes; provided, however, that the
Company will not be able to defease the right of the Holders to convert the
Notes pursuant to Article Fourteen of the Indenture.
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<PAGE>
Section 703 Reference to and Effect on the Indenture.
This Supplemental Indenture shall be construed as supplemental to the
Indenture and all the terms and conditions of this Supplemental Indenture shall
be deemed to be part of the terms and conditions of the Indenture. Except as set
forth herein, the Indenture heretofore executed and delivered is hereby
ratified, approved and confirmed. The provisions of this Supplemental Indenture
shall for the purposes of this series of Securities supersede the provisions of
the Indenture heretofore executed and delivered to the extent such Indenture
heretofore executed and delivered is inconsistent herewith. This Supplemental
Indenture is subject to the provisions of the Trust Indenture Act, and shall, to
the extent applicable, be governed by such provisions.
Section 704 Supplemental Indenture May be Executed In Counterparts.
This instrument may be executed in any number of counterparts, each of
which shall be an original; but such counterparts shall together constitute but
one and the same instrument.
Section 705 Effect of Headings.
The Article and Section headings herein are for convenience only and shall
not affect the construction hereof.
Section 706 Separability
In case any one or more of the provisions contained in this Supplemental
Indenture or in the Notes shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not effect any other provisions of this Supplemental Indenture or of the
Notes, but this Supplemental Indenture and the Notes shall be construed as if
such invalid or illegal or unenforceable provision had never been contained
herein or therein.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed all as of the day and year first above written.
CYPRESS SEMICONDUCTOR CORPORATION
By: /s/ Emmanuel Hernandez
---------------------------------
Name: Emmanuel Hernandez
Title: Vice President and CFO
STATE STREET BANK AND TRUST COMPANY OF
CALIFORNIA, N. A., AS TRUSTEE
By: /s/ Paula Oswald
----------------------------------
Name: Paula M. Oswald
Title: Vice President
<PAGE>
Annex 1
[Form of Face of Security]
[If the Security is a Global Security, insert -- THIS SECURITY IS A GLOBAL
SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS
REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY
NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER
OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY
PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE.]
CYPRESS SEMICONDUCTOR CORPORATION
4% Convertible Subordinated Note due 2005
No. _________ $_____________
CUSIP:
Cypress Semiconductor Corporation, a corporation duly organized and
existing under the laws of Delaware (herein called the "Company," which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to ________________, or registered
assigns, the principal sum of ___________________ Dollars on February 1, 2005
and to pay interest thereon from January 25, 2000 or from the most recent
Interest Payment Date to which interest has been paid or duly provided for,
semi-annually on February 1 and August 1 in each year, commencing August 1,
2000, at the rate of 4% per annum, until the principal hereof is paid or made
available for payment. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in such Indenture,
be paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest, which shall be the January 15 or July 15 (whether or not a
Business Day), as the case may be, next preceding such Interest Payment Date.
Any such interest not so punctually paid or duly provided for will forthwith
cease to be payable to the Holder on such Regular Record Date and may either be
paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest to be fixed by the Trustee, notice
whereof shall be given to Holders of Securities of this series not less than 10
days prior to such Special Record Date, or be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities of this series may be listed, and upon such notice as
may be required by such exchange, all as more fully provided in said Indenture.
Payment of the principal of (and premium, if any) and any interest on this
Security will be made at the office or agency of the Company maintained for such
purpose in the Borough of
<PAGE>
Manhattan, The City of New York, or at the option of the Holder of this
Security, at the Corporate Trust Office, in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts; provided, however, that at the option of the Company
payment of interest may be made by check mailed to the address of the Person
entitled thereto as such address shall appear in the Security Register;
provided, further, that a Holder with an aggregate principle amount in excess of
$2,000,000 will be paid by wire transfer in immediately available funds at the
election of such Holder. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be signed
manually or by facsimile by their duly authorized officers and by its corporate
seal to be affixed or imported hereon.
Dated: January 25, 2000 CYPRESS SEMICONDUCTOR
CORPORATION
By: ________________________________
Title:
Attest:
By: ___________________________________
Title:
The Trustee's certificates of authentication shall be in substantially the
following form:
This is one of the Securities of the series designated herein referred to
in the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY OF
CALIFORNIA, N.A.
As Trustee
By: _______________________________
Authorized Signatory
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<PAGE>
Form of Reverse of Security
This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one or more
series under a Subordinated Indenture, dated as of January 15, 2000 (herein
called the "Indenture," which term shall have the meaning assigned to it in such
instrument), between the Company and State Street Bank and Trust Company of
California, N.A., as Trustee (herein called the "Trustee," which term includes
any successor trustee under the Indenture), and reference is hereby made to the
Indenture and all indentures supplemental thereto for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of
the Company, the Trustee, the holders of Senior Indebtedness and the Holders of
the Securities and of the terms upon which the Securities are, and are to be,
authenticated and delivered. This Security is one of the series designated on
the face hereof and is issued pursuant to a Supplemental Trust Indenture
supplementing the Indenture, dated as of January 15, 2000, from the Company to
Trustee relating to the issuance of the "4% Convertible Notes due 2005" of this
series (the "Supplemental Indenture").
The Securities will not be subject to redemption prior to February 5, 2003
and will be redeemable on and after such date at the option of the Company, in
whole or in part, upon not less than 20 nor more than 60 days' notice to the
Holders, at the Redemption Prices (expressed as a percentage of principal
amount) set forth below.
The Redemption Price (expressed as a percentage of principal amount) is as
follows:
Year Redemption Price
---- ----------------
Beginning on February 5, 2003 and ending on January 31, 2004 101%
Beginning on February 1, 2004 and thereafter 100%
in each case together with accrued and unpaid interest to, but excluding, the
Redemption Date; provided, however, that interest installments whose Stated
Maturity is on such Redemption Date will be payable to the Holders of such
Securities, or one or more Predecessor Securities, of record at the close of
business on the relevant Record Dates referred to on the face hereof, all as
provided in the Indenture.
The Securities are not subject to redemption through operation of any
sinking fund.
In the event of redemption of this Security in part only, a new Security or
Securities of this series and of like tenor for the unredeemed portion hereof
will be issued in the name of the Holder hereof upon the cancellation hereof.
If a Change in Control (as defined in the Supplemental Indenture) occurs at any
time prior to February 1, 2005, the Securities will be redeemable on the 30th
day after notice thereof at the option
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<PAGE>
of the Holder. Such payment shall be made at a purchase price equal to the
principal amount of the Security plus accrued and unpaid interest to, but
excluding, the Change in Control Purchase Date (as defined in the Supplemental
Indenture). The Company shall mail to all Holders a notice of the occurrence of
a Change in Control and of the redemption right arising as a result thereof on
or before the 10th Business Day after the occurrence of such Change in Control.
For a Security to be so repaid at the option of the Holder, the Company must
receive at the office or agency of the Company maintained for that purpose in
the Borough of Manhattan, the City of New York, or, at the option of the Holder,
the Corporate Trust Office of the Trustee, such Security with the form entitled
"Option to Elect Redemption Upon a Change in Control" on the reverse thereof
duly completed, together with such Securities duly endorsed for transfer, on or
before the 30th day after the date of such notice (or if such 30th day is not a
Business Day, the immediately succeeding Business Day).
The indebtedness evidenced by this Security is, to the extent and in the
manner provided in the Indenture, subordinate and subject in right of payment to
the prior payment in full of all Senior Indebtedness of the Company, and this
Security is issued subject to such provisions of the Indenture with respect
thereto. Each Holder of this Security, by accepting the same, (a) agrees to and
shall be bound by such provisions, (b) authorizes and directs the Trustee on his
or her behalf to take such action as may be necessary or appropriate to
effectuate the subordination so provided and (c) appoints the Trustee as his or
her attorney-in-fact for any and all such purposes.
The Indenture contains provisions for defeasance at any time of the entire
indebtedness of this Security or certain restrictive covenants and Events of
Default with respect to this Security, in each case upon compliance with certain
conditions set forth in the Indenture, except that the Company will not be able
to defease the right of the Holders to convert this Security pursuant to Article
Fourteen of the Indenture.
Subject to the provisions of the Indenture, the Holder of this Security is
entitled, at its option, at any time on or before February 1, 2005 (except that,
in case this Security or any portion hereof shall be redeemed, such right shall
terminate with respect to this Security or portion hereof, as the case may be,
so redeemed at the close of business on the first Business Day next preceding
the date fixed for redemption as provided in the Indenture, unless the Company
defaults in making the payment due upon redemption or except as otherwise
provided in the Indenture), to convert the principal amount of this Security (or
any portion hereof which is $1,000 or an integral multiple thereof) into fully
paid and non-assessable shares of the Common Stock of the Company, as said
shares shall be constituted at the date of conversion, at the initial Conversion
Price of $46.25 or at the adjusted Conversion Price in effect at the date of
conversion determined as provided in the Supplemental Indenture, upon surrender
of this Security, together with the conversion notice hereon duly executed, to
be accompanied (if so required by the Company) by instruments of transfer, in
form satisfactory to the Company and to the Trustee, duly executed by the Holder
or by its duly authorized attorney in writing. Such surrender shall, if made
during any period beginning at the close of business on a Regular Record Date
and ending at the opening of business on the Interest Payment Date next
following such Regular Record Date (unless this Security or the portion being
converted shall have been called for redemption on a Redemption Date during the
period beginning at the close of business on a Regular Record Date and ending at
the opening of business on the first
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<PAGE>
Business Day after the next succeeding Interest Payment Date, or if such
Interest Payment Date is not a Business Day, the second such Business Day), also
be accompanied by payment in funds acceptable to the Company of an amount equal
to the interest payable on such Interest Payment Date on the principal amount of
this Security then being converted. Subject to the aforesaid requirement for
payment and, in the case of a conversion after the Regular Record Date next
preceding any Interest Payment Date and on or before such Interest Payment Date,
to the right of the Holder of this Security (or any Predecessor Security) of
record at such Regular Record Date to receive an installment of interest (with
certain exceptions provided in the Indenture), no adjustment is to be made on
conversion for interest accrued hereon or for dividends on shares of Common
Stock issued on conversion. The Company is not required to issue fractional
shares upon any such conversion, but shall make adjustment therefor as provided
in the Indenture. The Conversion Price is subject to adjustment as provided in
the Indenture. In the event of conversion of this Security in part only, a new
Security or Securities for the unconverted portion hereof shall be issued in the
name of the Holder hereof upon the cancellation hereof.
If an Event of Default with respect to Securities of this series shall
occur and be continuing, the principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of more than 50% in principal amount of the Outstanding
Securities of each series to be affected. The Indenture also contains provisions
permitting the Holders of specified percentages in principal amount of the
Securities of each series at the time Outstanding, on behalf of the Holders of
all Securities of such series, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by the Holder of this Security
shall be conclusive and binding upon such Holder and upon all future Holders of
this Security and of any Security issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the Holder
of this Security shall not have the right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee
shall not have received from the Holders of a majority in principal amount of
Securities of this series at the time Outstanding a direction inconsistent with
such request, and shall have failed to institute any such proceeding, for 60
days after receipt of such notice, request and offer of indemnity. The foregoing
shall not apply to any suit instituted by the Holder of this Security for the
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<PAGE>
enforcement of any payment of principal hereof or any premium or interest hereon
on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and any premium and interest
on this Security at the times, place and rate, and in the coin or currency,
herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable in the Security Register,
upon surrender of this Security for registration of transfer at the office or
agency of the Company in any place where the principal of and any premium and
interest on this Security are payable, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the Holder hereof or its attorney duly
authorized in writing, and thereupon one or more new Securities of this series
and of like tenor, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series and of like tenor of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
This Security shall be deemed to be a contract made under the laws of New
York and for all purposes shall be construed in accordance with the laws of New
York, without regard to principles of conflicts of laws.
All terms used in this Security which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
-25-
<PAGE>
Abbreviations
The following abbreviations, when used in the inscription of the face of
this Security, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ________
TEN ENT - as tenants by the entireties
(Cust)
JT TEN - as joint tenants with right of Custodian ___________ under Uniform
survivorship and not as tenants (Minor)
in common Gifts to Minors Act _______________
(State)
Additional abbreviations may also be used though not in the above list.
Conversion Notice
To Cypress Semiconductor Corporation:
The undersigned owner of this Security hereby irrevocably exercises the
option to convert this Security, or portion hereof (which is $1,000 or an
integral multiple thereof) below designated, into shares of Common Stock of the
Company in accordance with the terms of the Indenture referred to in this
Security, and directs that the shares issuable and deliverable upon the
conversion, together with any check in payment for fractional shares and any
Securities representing any unconverted principal amount hereof, be issued and
delivered to the registered Holder hereof unless a different name has been
indicated below. If this Notice is being delivered on a date after the close of
business on a Regular Record Date and prior to the opening of business on the
related Interest Payment Date (unless this Security or the portion thereof being
converted has been called for redemption on a Redemption Date after the close of
business on a Regular Record Date and prior to the opening of business on the
first Business Day after the next succeeding Interest Payment Date, or if such
Interest Payment Date is not a Business Day, the next such Business Day), this
Notice is accompanied by payment, in funds acceptable to the Company, of an
amount equal to the interest payable on such Interest Payment Date of the
principal of this Security to be converted. If shares are to be issued in the
name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect hereto. Any amount required to be paid by
the undersigned on account of interest accompanies this Security.
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<PAGE>
Principal Amount to be Converted
(in an integral multiple of $1,000, if less
than all)
$_____________
Owner:
Dated: ____________ __________________________________
__________________________________
Signature(s) must be guaranteed by
a qualified guarantor institution
with membership in an approved
signature guarantee program
pursuant to Rule 17Ad-15 under the
Securities Exchange Act of 1934 if
shares of Common Stock are to be
delivered, or Securities to be
issued, other than to and in the
name of the registered owner.
__________________________________
Signature Guaranty
Fill in for registration of shares of Common Stock and Security if to be
issued otherwise than to the registered Holder.
____________________________________ __________________________________
(Name) Social Security or Other Taxpayer
Identification Number
____________________________________
(Address)
____________________________________
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<PAGE>
OPTION TO ELECT REDEMPTION
UPON A CHANGE OF CONTROL
To: Cypress Semiconductor Corporation
The undersigned registered owner of this Security hereby irrevocably
acknowledges receipt of a notice from Cypress Semiconductor Corporation (the
"Company") as to the occurrence of a Change in Control with respect to the
Company and requests and instructs the Company to redeem the entire principal
amount of this Security, or the portion thereof (which is $1,000 or an integral
multiple thereof) below designated, in accordance with the terms of the
Indenture referred to in this Security at the redemption price, together with
accrued interest to, but excluding, such date, to the registered Holder hereof.
Dated: ____________ ____________________________________
____________________________________
Signature(s)
Signature(s) must be guaranteed by a
qualified guarantor institution with
membership in an approved signature
guarantee program pursuant to Rule
17Ad-15 under the Securities
Exchange Act of 1934.
____________________________________
Signature Guaranty
Principal amount to be redeemed
(in an integral multiple of $1,000, if less than all):
___________________________________
NOTICE: The signature to the foregoing Election must correspond to the Name as
written upon the face of this Security in every particular, without alteration
or any change whatsoever.
-28-
SUMMARY
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS
COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED.
CYPRESS SEMICONDUCTOR CORPORATION
1994 STOCK OPTION PLAN
(As amended and Restated on January 25, 1996 and November __, 1996)
1. Purposes of the Plan. The purposes of this Stock Option Plan are:
o to attract and retain the best available personnel for positions of
substantial responsibility;
o to provide additional incentive to Employees, Directors and
Consultants and Outside Directors; and
o to promote the success of the Company's business.
2. Components of the Plan. The Plan provides for:
o the discretionary granting of Options to Employees, Directors and
Consultants, which Options may be either Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the
time of grant; and
o the grant of Nonstatutory Stock Options to Outside Directors pursuant
to an automatic, non-discretionary formula.
3. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 5 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
Federal and state securities laws, the Code, any stock exchange or quotation
system on which the common stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where options are, or will be, granted under
the Plan.
(c) "Board" means the Board of Directors of the Company.
<PAGE>
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a Committee appointed by the Board in accordance with
Section 5 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Cypress Semiconductor Corporation, a Delaware
corporation.
(h) "Consultant" means any person, including an advisor, engaged by the
Company or a Parent or Subsidiary to render services to such entity.
(i) "Continuous Status as a Director" means that the Director relationship
is not interrupted or terminated.
(j) "Continuous Status as an Employee or Consultant" means that the
employment or consulting relationship with the Company or any Parent or
Subsidiary is not interrupted or terminated. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of: (i) any leave of
absence approved by the Company, including sick leave, military leave, or any
other personal leave; provided, however, that for purposes of Incentive Stock
Options, no such leave may exceed ninety (90) days, unless reemployment upon the
expiration of such leave is guaranteed by contract (including certain Company
policies) or statute; provided, further, that on the ninety-first (91st) day of
any such leave (where reemployment is not guaranteed by contract or statute) the
Optionee's Incentive Stock Option shall cease to be treated as an Incentive
Stock Option and will be treated for tax purposes as a Nonstatutory Stock
Option; or (ii) transfers between locations of the Company or between the
Company, its Parent, its Subsidiaries or its successor.
(k) "Director" means a member of the Board.
(l) "Disability" means total and permanent disability as defined in Section
22(e)(3) of the Code.
(m) "Employee" means any person, including Officers and Directors, employed
by the Company or any Parent or Subsidiary of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(o) "Existing Directors" means members of the Board on October 12, 1988.
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<PAGE>
(p) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common
Stock shall be the closing sale price for such stock (or the mean of the
closing bid and asked prices, if no sales were reported), as quoted on such
exchange (or the exchange with the greatest volume of trading in Common
Stock) or system on the date of such determination (or, in the event such
date is not a trading day, the trading day immediately prior to the date of
such determination), as reported in The Wall Street Journal or such other
source as the Administrator deems reliable; or
(ii) If the Common Stock is quoted on the NASDAQ system (but not on
the National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean of the closing bid and
asked prices for such stock on the date of such determination (or, in the
event such date is not a trading day, the trading day immediately prior to
the date of such determination), as reported in The Wall Street Journal or
such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the
Administrator.
(q) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(r) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(s) "Notice of Grant" means a written notice evidencing certain terms and
conditions of an individual Option grant. The Notice of Grant is part of the
Option Agreement.
(t) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(u) "Option" means a stock option granted pursuant to the Plan or the
Terminated Plans.
(v) "Option Agreement" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
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<PAGE>
(w) "Option Exchange Program" means a program whereby outstanding options
are surrendered in exchange for options with a lower exercise price.
(x) "Optioned Stock" means the Common Stock subject to an Option.
(y) "Optionee" means an Employee, Consultant or Outside Director who holds
an outstanding Option.
(z) "Outside Director" means a Director who is not an Employee or
Consultant.
(aa) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(bb) "Plan" means this 1994 Stock Option Plan, as amended.
(cc) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(dd) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 14 of the Plan.
(ee) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(ff) "Terminated Plans" means the Company's 1985 Incentive Stock Option
Plan and 1988 Directors' Stock Option Plan, which are terminated upon adoption
of, and superseded by, this Plan; however, outstanding Options under the
Terminated Plans shall continue in full force in effect, subject to the
provisions of such Options and this Plan.
4. Stock Subject to the Plan. Subject to Section 14 of the Plan, the total
number of Shares reserved and available for issuance under the Plan is 3,455,791
Shares (pre-split) (including 455,791 Shares (pre-split) previously authorized
but unissued under the Terminated Plans), plus shares subject to options
outstanding under the Terminated Plans at the time of adoption of this plan
which are subsequently forfeited in connection with termination of employment or
other failure to exercise, increased on the first day of each new fiscal year of
the Company from and including the 1995 fiscal year by a number of Shares equal
to 4.5% of the number of Shares outstanding as of the last business day
preceding each such first day of each new fiscal year. However, the number of
Shares available for issuance pursuant to Incentive Stock Options shall not
include the foregoing annual increase, which shall be used solely for
Nonstatutory Stock Options.
Subject to Section 14 of the Plan, if any Shares that have been optioned
under an Option (whether granted under this Plan or the Terminated Plans) cease
to be subject to such Option (other than through exercise of the Option), or if
any Option granted hereunder or thereunder is forfeited, or any Option otherwise
terminates prior to the issuance of Common Stock to the
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<PAGE>
participant, the Shares that were subject to such Option shall again be
available for distribution in connection with future Options under the Plan.
Shares that have actually been issued under the Plan upon exercise of an Option
shall not in any event be returned to the Plan and shall not become available
for future distribution under the Plan.
5. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be administered by
different Committees with respect to. Different groups of Employees,
Consultants and Directors.
(ii) Section 162(m). To the extent that the Administrator determines
it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of
the Code, the Plan shall be administered by a Committee of two or more
"outside directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption
under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(v) Administration With Respect to Automatic Grants to Outside
Directors. Automatic Grants to Outside Directors shall be pursuant to a
non-discretionary formula as set forth in Section 11 hereof and therefore
shall not be subject to any discretionary administration.
(b) Powers of the Administrator. Subject to the provisions of the Plan, and
in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 3(p) of the Plan;
(ii) to select the Consultants, Directors and Employees to whom
Options may be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be covered
by each Option granted hereunder;
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<PAGE>
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions,
and any restriction or limitation regarding any Option or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by
such Option shall have declined since the date the Option was granted;
(viii) to construe and interpret the terms of the Plan and Options
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(x) to modify or amend each Option (subject to Section 16(c) of the
Plan);
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having
a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined. All elections by
an Optionee to have Shares withheld for this purpose shall be made in such
form and under such conditions as the Administrator may deem necessary or
advisable;
(xii) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option previously granted by
the Administrator;
(xiii) to institute an Option Exchange Program;
(xiv) to determine the terms and restrictions applicable to Options;
and
(xv) to make all other determinations deemed necessary or advisable
for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options.
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<PAGE>
6. Eligibility.
(a) Discretionary Stock Options. Nonstatutory Stock Options may be granted
to Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees. If otherwise eligible, an Employee or Consultant who has been
granted an Option may be granted additional Options.
(b) Outside Director Stock Options. Outside Directors shall also receive
Nonstatutory Stock Options pursuant to Section 11 hereof.
7. Limitations.
(a) Each Option shall be designated in the Notice of Grant or Option
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value:
(i) of Shares subject to an Optionee's incentive stock options granted
by the Company, any Parent or Subsidiary, which
(ii) become exercisable for the first time during any calendar year
(under all plans of the Company or any Parent or Subsidiary)
exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock
Options. For purposes of this Section 7(a), incentive stock options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time of grant.
(b) Neither the Plan nor any Option shall confer upon an Optionee any right
with respect to continuing the Optionee's employment or consulting relationship
or tenure as a director with the Company, nor shall they interfere in any way
with the Optionee's, the Company's, or the Company's stockholders', right to
terminate such employment or consulting relationship or tenure as a director
with the Company at any time, with or without cause.
(c) The following limitations shall apply to grants of Options to
Employees:
(i) No Employee shall be granted, in any fiscal year of the Company,
Options to purchase more than 500,000 Shares.
(ii) The foregoing limitation shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 14(a).
(iii) If an Option is canceled (other than in connection with a
transaction described in Section 14), the canceled Option will be counted
against the limit set forth in Section 7(c)(i). For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as
a cancellation of the Option and the grant of a new Option.
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<PAGE>
8. Term of Plan. The Plan shall become effective upon the date, in 1994, of
its approval by the stockholders of the Company. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 16 of the Plan.
9. Term of Option. The term of each Option shall be ten (10) years from the
date of grant or such shorter term as may be provided in the Notice of Grant or
Option Agreement. In the case of an Incentive Stock Option granted to an
Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant or such shorter term
as may be provided in the Notice of Grant or Option Agreement.
10. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less
than 110% of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be
no less than one hundred (100%) of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be no less than eighty-five percent (85%) of Fair
Market Value per Share on the date of grant. In the case of a Nonstatutory
Stock Option intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Code, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(b) Waiting Period and Exercise Dates. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be exercised
and shall determine any conditions which must be satisfied before the Option may
be exercised. In so doing, the Administrator may specify that an Option may not
be exercised until the completion of a service period.
(c) Form of Consideration. Except with respect to automatic stock option
grants to Outside Directors, the Administrator shall determine the acceptable
form of consideration for exercising an Option, including the method of payment.
In the case of an Incentive Stock Option, the Administrator shall determine the
acceptable form of consideration at the time of grant. Such
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<PAGE>
form of consideration shall be set forth in the Notice of Grant or Option
Agreement and may, as determined by the Administrator, consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the
Company of the sale or loan proceeds required to pay the exercise price;
(vi) any combination of the foregoing methods of payment; or
(vii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
11. Automatic Stock Option Grants to Outside Directors.
(a) Procedure for Grants. All grants of Options to Outside Directors
hereunder shall be automatic and non-discretionary and shall be made strictly in
accordance with the following provisions:
(i) Each Outside Director shall be automatically granted an Option to
purchase 80,000 Shares (the "First Option") upon the date on which such
person first becomes a Director, whether through election by the
stockholders of the Company or appointment by the Board of Directors to
fill a vacancy.
(ii) After the First Option has been granted to an Outside Director,
such Outside Director shall thereafter be automatically granted an Option
to purchase 20,000 Shares (a "Subsequent Option") on a date one year after
the date of grant of the First Option and on the same date each year
thereafter.
(iii) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, in the event that an automatic grant hereunder would cause the
number of Shares subject to outstanding Options plus the number of Shares
previously purchased upon exercise of Options to exceed the number of
Shares available for issuance under the Plan, then each such automatic
grant shall be for
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<PAGE>
that number of Shares determined by dividing the total number of Shares
remaining available for grant by the number of Outside Directors on the
automatic grant date. Any further grants shall then be deferred until such
time, if any, as additional Shares become available for grant under the
Plan.
(iv) The terms of an Option granted hereunder shall be as follows:
(A) the term of the Option shall be ten (10) years.
(B) the Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in
subsection (c) hereof.
(C) the exercise price per Share shall be 100% of the fair market
value per Share on the date of grant of the Option.
(D) the Option shall become exercisable as follows:
(1) If it is a First Option, it shall become exercisable
cumulatively in installments of 16,000 Shares per year beginning
on the date one year after such Director's election to the Board
of Directors.
(2) If it is a Subsequent Option, it shall become
exercisable cumulatively in installments of 4,000 Shares per year
beginning on the date one year after the date on which it was
granted.
(b) Consideration for Exercising Outside Director Stock Options. The
consideration to be paid for the Shares to be issued upon exercise of an
automatic Outside Director Option shall consist entirely of cash, check, other
Shares of Common Stock which (i) either have been owned by the Optionee for more
than six (6) months or were not acquired, directly or indirectly from the
Company and (ii) have a fair market value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised, or any combination of such methods of payment.
(c) Post-Directorship Exercisability.
(i) Termination of Status as a Director. If an Outside Director ceases
to serve as a Director, he may, but only within ninety days (90) after the
date he ceases to be a Director of the Company, exercise his Option to the
extent that he was entitled to exercise it at the date of such termination.
To the extent that he was not entitled to exercise an Option at the date of
such termination, or if he does not exercise such Option (which he was
entitled to exercise) within the time specified herein, the Option shall
terminate.
(ii) Disability of Director. Notwithstanding the provisions of Section
11(c)(i) above, in the event a Director is unable to continue his service
as a Director with the Company as a result of his Disability, he may, but
only within six (6) months from the date of
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<PAGE>
termination, exercise his Option to the extent he was entitled to exercise
it at the date of such termination. To the extent that he was not entitled
to exercise the Option at the date of termination, or if he does not
exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
(iii) Death of Director. In the event of the death of an Optionee:
(A) during the term of the Option who is at the time of his death
a Director of the Company and who shall have been in Continuous Status
as a Director since the date of grant of the Option, the Option may be
exercised, at any time within six (6) months following the date of
death, by the Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status a Director
for twelve (12) months after the date of death; or
(B) within thirty (30) days after the termination of Continuous
Status as a Director, the Option may be exercised, at any time within
six (6) months following the date of death, by the Optionee's estate
or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
12. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting of
options granted hereunder shall be tolled during any unpaid leave or absence. An
Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written
notice of exercise (in accordance with the Option Agreement) from the person
entitled to exercise the Option, and (ii) full payment for the Shares with
respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the stock
certificate evidencing such Shares is issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 14 of the
Plan.
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<PAGE>
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon termination
of an Optionee's Continuous Status as an Employee or Consultant, other than upon
the Optionee's death or Disability, the Optionee may exercise the Option, but
only within such period of time as is specified in the Notice of Grant or Option
Agreement, and only to the extent that the Optionee was entitled to exercise it
at the date of termination (but in no event later than the expiration of the
term of such Option as set forth in the Notice of Grant or Option Agreement). In
the absence of a specified time in the Notice of Grant or Option Agreement, the
Option shall remain exercisable for three months following the Optionee's
termination of Continuous Status as an Employee or Consultant. In the case of an
Incentive Stock Option, such period of time shall not exceed three (3) months
from the date of termination; in the case of a Nonstatutory Stock Option, such
period of time shall not exceed twenty- four (24) months from the date of
termination. If, at the date of termination, the Optionee is not entitled to
exercise the entire Option, the Shares covered by the unexercisable portion of
the Option shall revert to the Plan. If, after termination, the Optionee does
not exercise the Option within the time specified by the Administrator, the
Option shall terminate, and the Shares covered by such Option shall revert to
the Plan.
(c) Disability of Optionee. In the event that an Optionee's Continuous
Status as an Employee or Consultant terminates as a result of the Optionee's
Disability, the Optionee may exercise his or her Option at any time within (i)
for discretionary stock options, six (6) months or such other period of time not
exceeding twelve (12) months, as is specified in the Notice of Grant or Option
Agreement, or (ii) for automatic stock option grants to Outside Directors, six
(6) months from the date of such termination. Any such Options may only be
exercised to the extent that the Optionee was entitled to exercise it at the
date of such termination (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant or Option Agreement). If, at
the date of termination, the Optionee is not entitled to exercise his or her
entire Option, the Shares covered by the unexercisable portion of the Option
shall revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his death an
of the Company and who shall have been in Continuous Status as an Employee
or Consultant since the date of grant of the Option, the Option may be
exercised, at any time within six (6) months following the date of death,
by the Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent of the right
to exercise that would have accrued had the Optionee continued living and
remained in Continuous Status an Employee or Consultant for twelve (12)
months after the date of death; or
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<PAGE>
(ii) within thirty (30) days after the termination of Continuous
Status as an Employee or Consultant, the Option may be exercised, at any
time within six (6) months following the date of death, by the Optionee's
estate or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent of the right to exercise
that had accrued at the date of termination.
13. Non-Transferability of Options. Unless determined otherwise by the
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
14. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset
Sale or Change of Control.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, with respect to discretionary Options granted under
the Plan (but not with respect to Options granted to Outside Directors) the
Board may, in the exercise of its sole discretion in such instances, declare
that any such Option shall terminate as of a date fixed by the Board and give
each Optionee the right to exercise his or her Option as to all or any part of
the Optioned Stock, including Shares as to which the Option would not otherwise
be exercisable.
(c) Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option shall be assumed or an equivalent option shall
be substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. With respect to a discretionary Option granted under the
Plan (but not with respect to Options granted to Outside Directors), the
Administrator may,
-13-
<PAGE>
in the exercise of its sole discretion and in lieu of such assumption or
substitution, provide for the Optionee to have the right to exercise such Option
as to all of the Optioned Stock, including as to Shares which would not
otherwise be exercisable. With respect to Options granted to Outside Directors
on or after the Effective Date of the Plan, in the event that the successor
corporation does not agree to assume such Options or to substitute equivalent
options, each such outstanding Option shall become fully vested and exercisable,
including as to Shares as to which it would not otherwise be exercisable, unless
the Board, in its discretion, determines otherwise. With respect to Options
granted to Outside Directors prior to the Effective Date of the Plan, in the
event that the successor corporation does not agree to assume such Options or to
substitute equivalent options, such Options shall terminate.
If the Administrator makes a discretionary Option fully exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option shall be fully
exercisable for a period of thirty (30) days from the date of such notice, and
the Option will terminate upon the expiration of such period.
For the purposes of this subsection, the Option shall be considered assumed
if, following the merger or sale of assets, the option confers the right to
purchase, for each Share of Optioned Stock subject to the Option immediately
prior to the merger or sale of assets, the consideration (whether stock, cash,
or other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets was not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option, for each
Share of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
15. Option Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
16. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder approval of
any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise
-14-
<PAGE>
between the Optionee and the Administrator, which agreement must be in writing
and signed by the Optionee and the Company.
17. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise
of an Option unless the exercise of such Option and the issuance and delivery of
such Shares shall comply with Applicable Laws and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
18. Liability of Company.
(a) Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
19. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-15-
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
1994 STOCK OPTION PLAN
NOTICE OF GRANT
Unless otherwise defined herein, capitalized terms used herein shall have
the same meanings as set forth in the Plan.
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter.
Termination Period:
This Option may be exercised for 30 days after termination of the
Optionee's employment or consulting relationship with the Company. Upon the
death or Disability of the Optionee, this Option may be exercised for such
longer period as provided in the Plan. In the event of the Optionee's change in
status from Employee to Consultant or Consultant to Employee, this Option
Agreement shall remain in effect. In no event shall this Option be exercised
later than the Term/Expiration Date as provided above.
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
1994 STOCK OPTION PLAN
OPTION AGREEMENT
Unless otherwise defined herein, capitalized terms used herein shall have
the same meanings as set forth in the Plan.
1. Grant of Option. The Plan Administrator of the Company hereby grants to
the Optionee named in the Notice of Grant attached as Part I of this Agreement
(the "Optionee"), an option (the "Option") to purchase the number of Shares, as
set forth in the Notice of Grant, at the exercise price per share set forth in
the Notice of Grant (the "Exercise Price"), subject to the terms and conditions
of the Plan, which is incorporated herein by reference. Subject to Section 14(c)
of the Plan, in the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option under Section
422 of the Code. However, if this Option is intended to be an Incentive Stock
Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d)
it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term in
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement. In the event of
Optionee's death, Disability or other termination of Optionee's employment or
consulting relationship, the exercisability of the Option is governed by the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by payment of
the aggregate Exercise Price as to all Exercised Shares. This Option shall be
deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option unless
such issuance and exercise complies with all relevant provisions of law and the
requirements of any stock exchange or quotation service upon which the Shares
are then listed. Assuming such compliance, for income tax purposes the Exercised
Shares shall be considered transferred to the Optionee on the date the Option is
exercised with respect to such Exercised Shares.
<PAGE>
3. Method of Payment. Payment of the aggregate Exercise Price shall be by
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash; or
(b) check; or
(c) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price; or
(d) surrender of other Shares which (i) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six (6)
months on the date of surrender, and (ii) have a Fair Market Value on the date
of surrender equal to the aggregate Exercise Price of the Exercised Shares.
4. Non-Transferability of Option. This Option may not be transferred in any
manner otherwise than by will or by the laws of descent or distribution and may
be exercised during the lifetime of Optionee only by the Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal and California tax consequences
relating to this Option, as of the date of this Option, are set forth below.
THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING
THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option.
(i) Nonstatutory Stock Option. The Optionee may incur regular federal
income tax and California income tax liability upon exercise of a NSO. The
Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market
Value of the Exercised Shares on the date of exercise over their aggregate
Exercise Price. If the Optionee is an Employee, the Company will be
required to withhold from his or her compensation or collect from Optionee
and pay to the applicable taxing authorities an amount equal to a
percentage of this compensation income at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as an ISO, the
Optionee will have no regular federal income tax or California income tax
liability upon its exercise,
-2-
<PAGE>
although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal
tax purposes and may subject the Optionee to alternative minimum tax in the
year of exercise. In the event that the Optionee undergoes a change of
status from Employee to Consultant, any Incentive Stock Option of the
Optionee that remains unexercised shall cease to qualify as an Incentive
Stock Option and will be treated for tax purposes as a Nonstatutory Stock
Option on the ninety-first (91st) day following such change of status.
(b) Disposition of Shares.
(i) NSO. If the Optionee holds NSO Shares for at least one year, any
gain realized on disposition of the Shares will be treated as long-term
capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one year after
exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for
federal income tax purposes. If the Optionee disposes of ISO Shares within
one year after exercise or two years after the grant date, any gain
realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the excess, if any, of
the lesser of (A) the difference between the Fair Market Value of the
Shares acquired on the date of exercise and the aggregate Exercise Price,
or (B) the difference between the sale price of such Shares and the
aggregate Exercise Price.
(c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee
sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on
or before the later of (i) two years after the grant date, or (ii) one year
after the exercise date, the Optionee shall immediately notify the Company in
writing of such disposition. The Optionee agrees that he or she may be subject
to income tax withholding by the Company on the compensation income recognized
from such early disposition of ISO Shares by payment in cash or out of the
current earnings paid to the Optionee.
-3-
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: CYPRESS SEMICONDUCTOR
CORPORATION
By:
- ----------------------------------- ----------------------------------
Signature
Title:
- ----------------------------------- ------------------------------
Print Name
- -----------------------------------
Residence Address
- -----------------------------------
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
-----------------------------------
Spouse of Optionee
-4-
<PAGE>
EXHIBIT A
CYPRESS SEMICONDUCTOR CORPORATION
1994 STOCK OPTION PLAN
EXERCISE NOTICE
Cypress Semiconductor Corporation
3901 North First Street
San Jose, CA 95134
Attention: Secretary
1. Exercise of Option. Effective as of today, ________________, 199__, the
undersigned ("Purchaser") hereby elects to purchase ______________ shares (the
"Shares") of the Common Stock of Cypress Semiconductor Corporation (the
"Company") under and pursuant to the 1994 Stock Option Plan (the "Plan") and the
Stock Option Agreement dated _________________, 19___ (the "Option Agreement").
The purchase price for the Shares shall be $______________________, as required
by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the full
purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 14 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
<PAGE>
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties and supersede in their
entirety all prior undertakings and agreements of the Company and Purchaser with
respect to the subject matter hereof, and such agreement is governed by
California law except for that body of law pertaining to conflict of laws.
Submitted by: Accepted by:
PURCHASER: CYPRESS SEMICONDUCTOR
CORPORATION
By:
- ------------------------------------ ------------------------------
Signature
Its:
- ------------------------------------ ------------------------------
Print Name
Address: Address:
- ------------------------------------
3901 North First Street
- ------------------------------------ San Jose, CA 95134
-2-
Exhibit 21.1
List of Subsidiaries
Jurisdiction of
Name Incorporation
- ------- ------------------
Cypress Semiconductor (Minnesota) Inc. (CMI) .......... Delaware
Cypress Semiconductor (Texas) Inc. (CTI) .............. Delaware
Cypress Semiconductor Round Rock, Inc. ................ Delaware
Cypress Export, Inc. .................................. Barbados
Cypress Investment Corporation ........................ Delaware
Cypress Semiconductor International, Inc. ............. Delaware
Cypress Semiconductor SARL ............................ France
Cypress Semiconductor GmbH ............................ Germany
Cypress Semiconductor India Private Limited ........... India
Cypress Semiconductor Italia S.r.l. ................... Italy
Cypress Semiconductor K.K. ............................ Japan
Cypress Semiconductor AB .............................. Scandinavia
Cypress Semiconductor Limited ......................... UK
Cypress Semiconductor Singapore Pte. Ltd .............. Singapore
Cypress Semiconductor Canada .......................... Canada
Cypress Semiconductor Korea ........................... Korea
Cypress Semiconductor Philippines Inc. (CSPI) ......... Philippines
Cyland Corporation .................................... Philippines
Cypress Semiconductor (Thailand) Co., Ltd. ............ Thailand
Cypress Semiconductor World Trade Corporation ......... Cayman Islands
IC WORKS, Inc ......................................... California
Anchor Chips, Inc ..................................... Delaware
Cypress Microsystems, Inc. ............................ Delaware
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-95711) and in the Registration Statements on
Forms S-8 (No. 333-76667, 333-76665, 333-93719, 333-93839, 333-79997, 333-68703,
333-52035, 333-24831, 333-00535, 033-59153) of Cypress Semiconductor Corporation
of our report dated January 26, 2000 relating to the financial statements and
financial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
San Jose, California
March 8, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the year ended January 2, 2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> JAN-02-2000
<CASH> 155,011
<SECURITIES> 115,545
<RECEIVABLES> 100,114
<ALLOWANCES> 2,984
<INVENTORY> 89,432
<CURRENT-ASSETS> 537,395
<PP&E> 357,183
<DEPRECIATION> 500,652
<TOTAL-ASSETS> 1,117,224
<CURRENT-LIABILITIES> 192,765
<BONDS> 160,000
0
0
<COMMON> 1,155
<OTHER-SE> 696,820
<TOTAL-LIABILITY-AND-EQUITY> 697,975
<SALES> 705,487
<TOTAL-REVENUES> 705,487
<CGS> 383,639
<TOTAL-COSTS> 383,639
<OTHER-EXPENSES> 129,331
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,617
<INCOME-PRETAX> 95,871
<INCOME-TAX> 4,817
<INCOME-CONTINUING> 91,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,054
<EPS-BASIC> 0.87
<EPS-DILUTED> 0.81
</TABLE>
