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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
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PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 9, 2000
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Commission file number 1-10079
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
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CYPRESS SEMICONDUCTOR CORPORATION
Item 5. Other Events
On March 2, 2000, Cypress completed a merger with Galvantech, Inc.
("Galvantech"), which was accounted for as a pooling of interests. These
supplementary consolidated financial statements presented on this Form 8-K give
effect to the merger for all periods presented. The fiscal years of Cypress and
Galvantech were different and Galvantech has changed its fiscal periods to
coincide with that of Cypress. For the purpose of the consolidated balance sheet
for the fiscal years ended January 2, 2000 and January 3, 1999, Cypress's
consolidated balance sheets as of January 2, 2000 and January 3, 1999,
respectively, have been combined with Galvantech's consolidated balance sheets
as of December 31, 1999 and March 31, 1999, respectively. For the purpose of the
consolidated statements of operations, Cypress's consolidated statements of
operations for the periods ended January 2, 2000, January 3, 1999 and December
29, 1997, have been combined with Galvantech's consolidated statement of
operations for the twelve month periods ended December 31, 1999, March 31, 1999
and March 31, 1998. As a result, the results of operations of Galvantech for the
quarter ended March 31, 1999 are included in the supplementary consolidated
statements of operations of both 1998 and 1999.
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CYPRESS SEMICONDUCTOR CORPORATION
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Item 7. Financial Statements
Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................ 5
Quantitative and Qualitative Disclosure About Market Risk.............15
Supplementary Consolidated Balance Sheets.............................16
Supplementary Consolidated Statements of Operations...................17
Supplementary Consolidated Statements of Stockholders' Equity.........18
Supplementary Consolidated Statements of Cash Flows...................19
Notes to Supplementary Consolidated Financial Statements..............20
Report of Independent Accountants.....................................39
Quarterly Financial Data..............................................40
Signatures............................................................41
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Management's Discussion and Analysis of Operations and Financial Condition
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the factors set forth
on the inside front cover, in "Factors Affecting Future Results" and elsewhere.
Overview
Revenues for Cypress Semiconductor Corporation ("Cypress") increased 26.6%
to $744.8 million in fiscal 1999 from $588.5 million in fiscal 1998. Net income
for fiscal 1999 was $92.0 million compared to a net loss of $99.9 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
$20.7 million. Cypress earned $0.80 per share, on a diluted basis, during fiscal
1999 compared to a diluted net loss of $0.95 per share in fiscal 1998.
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.
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
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acquisition and merger costs in the Consolidated Statements of Operations.
Results of Operations
Revenues
Revenues for fiscal 1999 were $744.8 million, an increase of $156.3 million
or 26.6% versus revenues for fiscal 1998, and an increase of $111.9 million or
17.7% 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 $79.4 million
or 34.6% over revenues from the sale of these products for fiscal 1998 and
increased $48.0 million, or 18.4% compared to fiscal 1997. From fiscal 1998 to
fiscal 1999, sales of Static Random Access Memory products ("SRAM") grew $80.6
million or 36.7%. Revenues from SRAMs during fiscal 1999 increased $57.2 million
or 23.6% 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 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
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Cost of revenues for fiscal 1999 were 54.9% of revenues, compared to 73.0%
of revenues for fiscal 1998 and 67.1% 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
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 $135.3
million or 18.2% of revenues, compared with $116.4 million or 19.8% of revenues
for fiscal 1998 and $105.5 million or 16.7% of revenues for fiscal 1997. R&D
expenditures in fiscal 1999 increased $18.9 million or 16.2% compared to fiscal
1998 and $29.8 million or 28.2% 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
$111.4 million or 15.0% of revenues, compared to $95.6 million or 16.2% of
revenues for fiscal 1998 and $85.0 million or 13.4% of revenues for fiscal 1997.
SG&A expenses for fiscal 1999 increased by $15.8 million or 16.5% as compared to
fiscal 1998 and by $26.4 million or 31.0% when compared to fiscal 1997. SG&A
spending increased 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.
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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.
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
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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 $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.
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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 are 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.
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 that 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. 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 $53.2 million for fiscal 1999 compared to
$14.1 million for fiscal 1998 and $13.4 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 $18.0 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 $16.0
million, a $1.7 million pre-tax net gain related to the retirement
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of $15.0 million of Cypress's 6.0% Convertible Subordinated Notes and foreign
exchange gains of $0.5 million. The 1998 net interest and other income 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. Net interest and other income 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
7.1%, 10.0% and 65.4%, respectively. A tax benefit of $11.1 million was realized
during fiscal 1998 compared to expenses of $7.0 million and $6.1 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. These charges and
credits are excluded from the computation of EBG and are collectively referred
to 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 cashflow 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 ................................. $0.85 $(1.03) $0.08
Goodwill net of taxes per share ................................... $0.01 $ -- $0.01
Restructuring costs (credits) net of taxes per share .............. $(0.03) $0.52 $0.03
----- ----- -----
Basic earnings (loss) before goodwill per share ................... $0.83 $(0.51) $0.12
----- ----- -----
Reconciliation of diluted net income (loss) per share to diluted earnings (loss)
per share before goodwill:
<CAPTION>
Years ended
Jan. 2, Jan. 3, Dec. 29,
2000 1999 1997
------------- ------------- ---------
<S> <C> <C> <C>
Diluted net income (loss) per share ............................... $0.80 $(1.03) $0.07
Goodwill net of taxes per share ................................... $0.01 $ -- $0.01
Restructuring costs (credits) net of taxes per share .............. $(0.03) $0.52 $0.03
----- ----- -----
Diluted earnings (loss) before goodwill per share ................. $0.78 $(0.51) $0.11
----- ----- -----
</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 $59.7
million for fiscal 1999 and basic and diluted net loss was $130.9 million and
$21.9 million for fiscal years 1998 and 1997, respectively. Pro-forma basic
Page 11
<PAGE>
net income per share was $0.55 and diluted net income per share was $0.54 for
fiscal 1999. Pro-forma basic and diluted net loss per share was ($1.25) and
($0.21) 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 $280.6
million at the end of fiscal year 1999, a $106.4 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 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 $114.2 million in capital equipment, a $30.7
million increase from the $83.5 million purchased in 1998, and a $31.9 million
decrease from the $146.1 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.
Page 12
<PAGE>
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.
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.
Page 13
<PAGE>
Factors Affecting Future Results
Risk Factors
Except for the historical information contained herein, the discussion in
this 8-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 of
Cypress, 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 8-K.
If any of the following risks actually occur, our business, financial condition
and operating results could be materially adversely affected.
The risks and uncertainties described below are not the only ones Cypress
faces. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair Cypress's business operations. If any
of the following risks actually occur, our business financial condition and
operating results could be materially adversely affected, the trading price of
our common stock could decline and you might lose all or part of your
investment.
Following is a summary of the risk factors:
o Cypress's future operating results are very likely to fluctuate and
therefore may fail to meet expectations.
o Cypress faces periods of industry-wide semiconductor over-supply which may
harm its results.
o Cypress's financial results could be seriously harmed if the markets in
which it sells its products do not grow.
o Cypress is affected by a general pattern of product price decline and
fluctuations, which can adversely impact its business.
o Cypress may be unable to adequately protect its intellectual property
rights, and may face significant expenses as a result of ongoing, or
future, litigation.
o Cypress's financial results could be seriously harmed if it fails to
develop, introduce and sell new products or fails to develop and implement
new manufacturing technologies.
o Interruptions in the availability of raw materials can seriously harm
Cypress's financial performance.
o Problems in the performance of other companies Cypress hires to perform
certain manufacturing tasks can seriously impact Cypress's financial
performance.
o The complex nature of Cypress's manufacturing activities makes the company
highly susceptible to manufacturing problems and these problems can have
substantial negative impact when they occur.
o Cypress may not be able to use all of its existing or future manufacturing
capacity, which can negatively impact its business.
o Cypress's operations and financial results could be severely harmed by
certain natural disasters.
o Cypress's business, results of operations and financial condition will be
seriously harmed if it fails to compete in its highly competitive industry
and markets.
o Cypress must build semiconductors based on its forecasts of demand, and if
its forecasts are inaccurate, Cypress may have large amounts of unsold
product or the company may not be able to fill all orders.
o Cypress must spend heavily on equipment to stay competitive, and will be
adversely impacted if it is unable to secure financing for such
investments.
o Cypress competes with others to attract and retain key personnel, and any
loss of, or inability to attract such personnel would hurt Cypress.
o Cypress faces additional problems and uncertainties associated with
international operations that could seriously harm it.
o Cypress is subject to many different environmental regulations and
compliance with the may be costly. |X| Cypress depends on third parties to
transport its products and could be harmed if these parties experience
problems.
o Cypress faces a number of unknown risks associated with Year 2000 problems.
o Cypress may fail to integrate its business and technologies with those of
companies that it has recently acquired and that it may acquire in the
future.
For a complete detailed discussion of risk factors, refer to Cypress's annual
report for its fiscal year ended January 2, 2000 on Form 10-K filed with the
Securities and Exchange Commission.
Year 2000 Readiness Disclosure
Page 14
<PAGE>
The year 2000 computer issue creates a variety of risks for Cypress. 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
Cypress's products;
o errors in systems we use to run Cypress's business;
o errors in systems used by Cypress's suppliers;
o errors in systems used by customers; and
o potential reduced spending by customers as a result of concerns about
potential year 2000 problems.
Cypress has 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, its products may be integrated into
or used in conjunction with products supplied by other vendors. Cypress cannot
evaluate whether all of the products of other vendors are year 2000 compliant.
Cypress 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.
Cypress may in the future be required to defend its products in legal
proceedings that could be expensive regardless of the merits of these claims.
If Cypress's 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, its 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 its 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 its business, results of operations
and financial condition.
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 15
<PAGE>
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
ASSETS
<TABLE>
<CAPTION>
January 2, January 3,
2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 158,767 $ 151,113
Short-term investments ........................................ 121,859 23,123
----------- -----------
Total cash, cash equivalents and short-term ........... 280,626 174,236
investments
Accounts receivable, net (Note 2) ............................. 104,143 71,959
Inventories (Note 2) .......................................... 98,786 69,201
Other current assets .......................................... 77,993 56,264
----------- -----------
Total current assets .................................. 561,548 371,660
----------- -----------
Property, plant and equipment, net (Note 2) ..................... 357,936 351,179
Other assets (Note 2) ........................................... 226,759 127,260
----------- -----------
$ 1,146,243 $ 850,099
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 103,549 $ 56,033
Accrued compensation and employee benefits .................... 32,428 20,293
Other accrued liabilities (Note 2)............................. 23,307 15,665
Deferred income on sales to distributors ...................... 20,760 13,300
Income taxes payable .......................................... 20,311 15,209
----------- -----------
Total current liabilities ............................. 200,355 120,500
----------- -----------
Convertible subordinated notes .................................. 160,000 160,000
Deferred income taxes ........................................... 56,100 41,065
Other long-term liabilities ..................................... 10,384 10,240
----------- -----------
Total liabilities ..................................... 426,839 331,805
----------- -----------
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;
118,566 and 113,751 issued; 113,586 and 100,463 outstanding
at January 2, 2000 and January 3, 1999 ..................... 1,155 1,107
Additional paid-in-capital .................................... 557,100 505,056
Notes receivable from stockholders ............................ (8,186) --
Deferred compensation ......................................... (1,175) (1,961)
Retained earnings ............................................. 243,234 178,730
----------- -----------
792,128 682,932
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 ............................ 719,404 518,294
----------- -----------
$ 1,146,243 $ 850,099
=========== ===========
</TABLE>
The accompanying notes form an integral part of these Supplementary Consolidated
Financial Statements.
Page 16
<PAGE>
SUPPLEMENTARY 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 ........................................................ $ 744,803 $ 588,542 $ 632,914
--------- --------- ---------
Cost of revenues ................................................ 408,885 429,599 424,462
Research and development ........................................ 135,302 116,413 105,542
Selling, general and administrative ............................. 111,381 95,589 84,997
Acquisition and other non-recurring costs, net .................. 37,623 -- 3,669
Restructuring costs ............................................. (3,811) 60,737 9,882
--------- --------- ---------
Total operating costs and expenses .................... 689,380 702,338 628,552
--------- --------- ---------
Operating income (loss) ......................................... 55,423 (113,796) 4,362
Interest expense ................................................ (9,617) (11,276) (8,461)
Interest income and other, net .................................. 53,195 14,113 13,442
--------- --------- ---------
Income (loss) before income taxes ............................... 99,001 (110,959) 9,343
(Provision) benefit for income taxes ............................ (7,039) 11,109 (6,109)
--------- --------- ---------
Net income (loss) ............................................... $ 91,962 $ (99,850) $ 3,234
========= ========= =========
Net income (loss) per share:
Basic ......................................................... $ 0.85 $ (0.95) $ 0.03
Diluted ....................................................... $ 0.80 $ (0.95) $ 0.03
Weighted average common and common equivalent shares
outstanding:
Basic ......................................................... 107,737 104,925 102,708
Diluted ....................................................... 114,986 104,925 110,608
</TABLE>
The accompanying notes form an integral part of these Supplementary Consolidated
Financial Statements.
Page 17
<PAGE>
SUPPLEMENTARY 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 ...... 93,282 $ 1,014 $ 349,510 -- $ (756) $ 281,362 $(116,843) $ 514,287
Re-issuance of treasury
shares under employee
stock plans and other ............ 6,341 22 52,996 -- -- -- -- 53,018
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 commonstock
under stock repurchase program ... (516) -- -- -- -- -- (5,288) (5,288)
Adjustment to deferred
compensation ..................... -- -- 358 -- 250 -- -- 608
Net income for the year ............ -- -- -- -- -- 3,234 -- 3,234
------- --------- ------- -------- --------- --------- ---------
Balances at December 29, 1997 ...... 105,896 1,103 495,619 -- (506) 284,596 (122,131) 658,681
Cypress (ICW) activities for the
quarter ended March 28, 1999 ...... -- -- -- -- -- 1,622 -- 1,622
Re-issuance of treasury
Shares under employee
stock plans and other ............ 2,174 4 1,908 -- -- (7,638) 19,767 14,041
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 ..................... -- -- 909 -- (1,455) -- -- (546)
Net loss for the year .............. -- -- -- -- -- -- (99,850) (99,850)
------- ------- --------- ------- -------- --------- --------- ---------
Balances at January 3, 1999 ........ 100,463 1,107 505,056 -- (1,961) 178,730 (164,638) 518,294
Cypress (Galvantech)) activities for
the quarter ended March 31, 1999 .. -- -- -- -- -- 232 -- 232
Re-issuance of treasury shares and
issuance of common stock under -
employee stock plans and other ... 13,123 48 38,038 -- -- (27,690) 91,914 102,310
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 ..................... -- -- -- -- 786 -- -- 786
Net income for the year ............ -- -- -- -- -- 91,962 -- 91,962
------- ------- --------- ------- -------- --------- --------- ---------
Balances at January 2, 2000 ........ 113,586 $ 1,155 $ 557,100 (8,186) $ (1,175) $ 243,234 $ (72,724) $ 719,404
------- ------- --------- ------- -------- --------- --------- ---------
</TABLE>
The accompanying notes form an integral part of these Supplementary Consolidated
Financial Statements.
Page 18
<PAGE>
SUPPLEMENTARY 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) .......................................................... $ 91,962 $ (99,850) $ 3,234
Adjustments to reconcile net income (loss) to net cash
generated by operating activities:
Depreciation and amortization .............................................. 108,565 116,124 114,350
Acquired in-process research and development ............................... 4,019 -- 3,669
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 assets ............................................... 11,047 -- --
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 ............................................................. (30,419) 8,519 3,689
Inventories ............................................................. (30,149) 18,276 (26,512)
Other assets ............................................................ (13,547) 36,011 (1,287)
Accounts payable and accrued liabilities ................................ 58,652 (17,900) (15,764)
Deferred income ......................................................... 7,460 2,445 (5,266)
Income taxes payable .................................................... 6,720 (21,152) 15,870
--------- --------- ---------
Net cash flow generated from operating activities ............................ 161,366 111,609 112,264
--------- --------- ---------
Cash flow from investing activities:
Purchase of investments .................................................... (218,383) (113,753) (114,912)
Sale or maturities of investments .......................................... 66,872 127,195 93,870
Acquisition of property, plant and equipment ............................... (114,154) (83,457) (146,126)
Acquisition of Anchor ...................................................... (14,956) -- --
Acquisition of Arcus ....................................................... (9,883) -- --
Acquisition of technology rights ........................................... (4,700) -- --
Acquisition of product rights and equity interest from Altera .............. (12,187) -- --
Proceeds from sale of investment ........................................... 36,237 -- --
Proceeds from sale of equipment ............................................ 16,179 6,551 40,789
--------- --------- ---------
Net cash flow used for investing activities .................................. (254,975) (63,464) (126,379)
--------- --------- ---------
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 .................................................................... 114,044 12,485 52,400
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 ...................... 103,602 (61,722) 150,685
--------- --------- ---------
Net change in cash during the quarter
ended March 28, 1999 for mergers ........................................ (2,339) 3,434 --
Net increase (decrease) in cash and cash equivalents ......................... 7,654 (10,143) 136,570
Cash and cash equivalents, beginning of year ................................. 151,113 161,256 24,686
--------- --------- ---------
Cash and cash equivalents, end of year ....................................... $ 158,767 $ 151,113 $ 161,256
========= ========= =========
Supplemental disclosures:
Cash paid during the year for:
Interest ................................................................ $ 9,600 $ 10,092 $ 5,707
Income taxes ............................................................ $ 5,467 $ 699 $ 3,019
</TABLE>
The accompanying notes form an integral part of these Supplementary Consolidated
Financial Statements.
Page 19
<PAGE>
Notes to Supplementary Consolidated Financial Statements
Note 1: Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation -- On March 2, 2000, Cypress completed a merger with
Galvantech, Inc. ("Galvantech"), which was accounted for as a pooling of
interests. These supplementary consolidated financial statements presented on
this Form 8-K give effect to the merger for all periods presented. The fiscal
years of Cypress and Galvantech were different and Galvantech has changed its
fiscal periods to coincide with that of Cypress. For the purpose of the
consolidated balance sheet for the fiscal years ended January 2, 2000 and
January 3, 1999, Cypress's consolidated balance sheets as of January 2, 2000 and
January 3, 1999, respectively, have been combined with Galvantech's consolidated
balance sheets as of December 31, 1999 and March 31, 1999, respectively. For the
purpose of the consolidated statements of operations, Cypress's consolidated
statements of operations for the periods ended January 2, 2000, January 3, 1999
and December 29, 1997, have been combined with Galvantech's consolidated
statement of operations for the twelve month periods ended December 31, 1999,
March 31, 1999 and March 31, 1998. As a result, the results of operations of
Galvantech for the quarter ended March 31, 1999 are included in the
supplementary consolidated statements of operations of both 1998 and 1999.
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 49%, 43% and 41% 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.
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<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.
Page 21
<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 29,103
-------- --------
Total available-for-sale securities........... $362,978 $203,752
======== ========
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 $145,608
Due after one year through two years ......... 111,324 58,144
-------- --------
Total available-for-sale securities ...... $362,978 $203,752
======== ========
Page 22
<PAGE>
Accounts Receivable, Net
<TABLE>
<CAPTION>
January 2, January 3,
2000 1999
--------- ----------
(In thousands)
<S> <C> <C>
Accounts receivable, gross ........................... $ 107,614 $ 75,650
Allowance for doubtful accounts and customerrr
returns ............................................ (3,471) (3,691)
--------- ---------
Accounts receivable, net ................... $ 104,143 $ 71,959
========= =========
January 2, January 3,
2000 1999
--------- ----------
(In thousands)
Inventories, Net
Raw materials ........................................ $ 13,360 $ 10,174
Work-in-process ...................................... 49328 39,749
Finished goods ....................................... 36,098 19,278
--------- ---------
Total ...................................... $ 98,786 $ 69,201
========= =========
January 2, January 3,
2000 1999
--------- ----------
(In thousands)
Property, Plant and Equipment
Land ............................................... $ 13,829 $ 13,533
Equipment .......................................... 735,175 626,789
Buildings and leasehold improvements ............... 101,998 96,847
Furniture and fixtures ............................. 8,495 6,702
--------- ---------
Total property, plant and equipment ................ 859,497 743,871
Accumulated depreciation and amortization .......... (501,561) (392,692)
--------- ---------
Net property, plant and equipment........... $ 357,936 $ 351,179
========= =========
January 2, January 3,
2000 1999
--------- ----------
(In thousands)
Other Assets
Restricted investments .............................. $ 61,198 $ 59,742
Long-term investments ............................... 111,324 58,144
Other, principally purchased intangibles............. 54,237 9,374
--------- ---------
Total ..................................... $ 226,759 $ 127,260
========= =========
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
<CAPTION>
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................................. 15,291 4,305
--------- ---------
Other accrued liabilities... $ 23,307 $ 15,665
========= =========
</TABLE>
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 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
Page 23
<PAGE>
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.
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
Page 24
<PAGE>
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 is
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.
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
Page 25
<PAGE>
Round Rock, Texas ("Fab II") for approximately $13.0 million in cash. The
acquisition will be 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.
Acquisition of Modern Video Technology, Inc. ("MVT")
On March 28, 1998, Cypress (Galvantech) acquired all of the outstanding
capital stock of MVT, a California corporation involved primarily in the
development of video products. This acquisition was accounted for as a purchase.
The consideration for the acquisition totaled $4.8 million and was composed of
205,296 shares of common stock and the assumption of 14,264 options to purchase
Cypress's common stock. The total purchase price was allocated to assets
acquired and liabilities assumed based on a their estimated fair values as
follows:
(In thousands)
Acquired in-process video technology ......... $ 3,669
Acquired developed technology ................ 780
Current assets ............................... 223
Property and equipment ....................... 122
Current liabilities assumed .................. (5)
-------
$ 4,789
=======
Acquired in-process video technology, which had not reached technological
feasibility and had no alternative use, was expensed immediately. Acquired
development technology arising from the acquisition of MVT was written off in
fiscal 1999. On a pro-forma basis, MVT had been acquired on April 1, 1996 and
excluding the effect of expensing in-process video technology, the effect if the
acquisition on Cypress (Galvantech's) revenues and losses for the years ended
March 31, 1999 and 1998 would have not been material.
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
Page 26
<PAGE>
$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.
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>
Page 27
<PAGE>
<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 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
======= ======= =======
Page 28
<PAGE>
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 $ 29,500 $ 6,000
impairment loss
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.
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.
Page 29
<PAGE>
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
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) .......... $ 91,962 107,737 $0.85 $(99,850) 104,925 $(0.95) $ 3,234 102,708 $0.03
Effects of dilutive ===== ====== =====
securities:
Stock options .............. -- 7,249 -- -- -- 7,900
-------- ------- -------- ------- -------- -------
Diluted EPS:
Net income (loss) .......... $ 91,962 114,986 $0.80 $(99,850) 104,925 $(0.95) $ 3,234 110,608 $0.03
======== ======= ===== ======== ======= ====== ======== ======= =====
</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
Page 30
<PAGE>
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.
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 ............... 26,739 $ 8.26 24,096 $ 9.23 22,315 $ 8.49
Options cancelled .................................... (2,036) 9.87 (13,893) 11.22 (1,912) 8.79
Options granted ...................................... 8,706 17.34 17,709 9.06 6,686 10.62
Options exercised .................................... (7,813) 7.57 (1,173) 5.15 (2,993) 7.11
------ ------- ------
Options outstanding, end of year ..................... 25,596 11.43 26,739 8.26 24,096 9.23
======= ====== ======= ====== ======= ======
Options exercisable at January 2, 2000 ............... 9,640 $ 8.52
======= ======
</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:
<TABLE>
<CAPTION>
Outstanding Exercisable Remaining
Options with exercise ------------------ ------------------
prices range from Shares Price Shares Price Life (years)
--------------------- ------ ------- ------ ------- -----------
(In thousands except per-share amounts)
<S> <C> <C> <C> <C> <C> <C>
$ 1.00-- $ 8.25........... 4,471 $ 4.22 2,666 $ 4.29 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
</TABLE>
Page 31
<PAGE>
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.
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 997
-------- -------- -------
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 ............................. $ 59,666 $ (130,924) $ (21,905)
Diluted ........................... $ 59,666 $ (130,924) $ (21,905)
Pro forma net income (loss) per share:
Basic ............................. $ 0.55 $ (1.25) $ (0.21)
Diluted ........................... $ 0.52 $ (1.25) $ (0.21)
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
$509,000, $2,547,000 and $358,000 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
years ended January 2, 2000, January 3, 1999 and December 29, 1997,
respectively. 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.
Page 32
<PAGE>
Deferred compensation expense, which was recognized, totaled approximately
$1,295,000, $1,092,000 and $345,000 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 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 . $ 99,001 $(110,959) $ 9,343
--------- --------- ---------
taxes
Current tax expense:
U.S. Federal ..................... 15,732 $ (10,811) $ (10,155)
State and local .................. 518 412 1,586
Foreign .......................... 760 511 500
--------- --------- ---------
Total current ................. 17,010 (9,888) (8,069)
--------- --------- ---------
Deferred tax expense (benefit):
U.S. Federal ..................... (9,971) (4,550) 16,033
State and local .................. -- 3,329 (1,855)
--------- --------- ---------
Total deferred ................ (9,971) (1,221) 14,178
--------- --------- ---------
Total .................... $ 7,039 $ (11,109) $ 6,109
========= ========= =========
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 ............................ $ 34,650 $(38,836) $ 3,270
Foreign earnings ...................................... (11,443) (4,153) (1,151)
State income taxes, net of federal benefit ............ 114 3,329 922
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 1,825
Acquisition costs ..................................... 4,326 -- --
Income of acquired companies previously taxed ......... (2,611) -- --
Other, net ............................................ 884 (925) 265
F/S discrepancy ....................................... -- 868 --
-------- -------- --------
Total ............................................... $ 7,039 $(11,109) $ 6,109
======== ======== ========
</TABLE>
Page 33
<PAGE>
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 ..................... 9,042 17,834
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 ......................... 24,031 9,204
Research and development tax credits (ICW) ................... 1,671 --
Net operating loss ........................................... 4,839 41,330
Intangibles arising from acquisitions ........................ 12,093 --
Other, net ................................................... 6,371 2,382
--------- ---------
Total deferred tax assets ...................................... 107,550 110,919
--------- ---------
Deferred tax liabilities:
Excess of tax over book depreciation ......................... (44,016) (39,972)
Intangibles arising from acquisitions ........................ (12,093) --
Other, net ................................................... (107) (1,209)
--------- ---------
Total deferred tax liabilities ............................ (56,216) (41,181)
--------- ---------
Net deferred tax asset ......................................... 51,334 $ 69,738
Valuation allowance ............................................ (40,835) (69,210)
--------- ---------
Net deferred tax assets (liabilities) after valuation
allowance .................................................... $ 10,499 $ 528
========= =========
</TABLE>
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
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<PAGE>
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 ...................................... $24,043
2001 ...................................... 11,320
2002 ...................................... 8,360
2003 ...................................... 8,093
2004 ...................................... 4,730
2005 and thereafter ....................... --
-------
Total ................................... $56,546
=======
Rental expense was approximately $18.3 million in 1999, $22.0 million in
1998 and $17.3 million in 1997.
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
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<PAGE>
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 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.
Page 36
<PAGE>
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 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
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Memory .............................. $ 309,002 $ 229,580 $ 260,995
Non-memory .......................... 435,801 358,962 371,919
--------- --------- ---------
Total consolidated revenues ....... $ 744,803 $ 588,542 $ 632,914
========= ========= =========
Business Segment Profit (Loss)
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Memory .................................. $ (19,091) $ (88,056) $ (36,219)
Non-memory .............................. 108,326 34,997 54,132
Restructuring and other non-recurring
(costs) ................................. (33,812) (60,737) (13,551)
benefits
Interest income and other ............... 53,195 14,113 13,442
Interest expense ........................ (9,617) (11,276) (8,461)
--------- --------- ---------
Income (loss) before provision for income taxes $ 99,001 $(110,959) $ 9,343
========= ========= =========
</TABLE>
Page 37
<PAGE>
Business Segment Depreciation
Depreciation by segment for the respective years was:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Memory ..................................... $ 67,306 $ 88,431 $ 77,757
Non-memory ................................. 41,259 27,693 36,593
-------- -------- --------
Total consolidated depreciation .......... $108,565 $116,124 $114,350
======== ======== ========
Geographic Area
Revenues are attributed to countries based on the customer location.
Revenues by geographic locations were:
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
United States .............. $377,386 $337,665 $373,273
Europe ..................... 131,528 91,984 99,424
Japan ...................... 69,041 53,298 54,497
Other foreign countries .... 166,848 105,595 105,720
-------- -------- --------
Total revenues ........... $744,803 $588,542 $632,914
======== ======== ========
Assets by geographic locations were:
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
United States .............. $276,306 $279,013 $375,919
Philippines ................ 77,426 69,996 67,629
Other foreign countries .... 4,204 2,170 2,877
-------- -------- --------
Total assets ............. $357,936 $351,179 $446,425
======= ======== ========
</TABLE>
Note 12: Subsequent Events
On March 2, 2000, Cypress completed a merger with Galvantech, Inc.
("Galvantech"), which was accounted for as a pooling of interests. These
supplemental consolidated financial statements presented give effect to the
merger for all periods presented. The fiscal years of Cypress and Galvantech
were different and Galvantech has changed its fiscal periods to coincide with
that of Cypress. Cypress's consolidated balance sheets as of January 2, 2000,
January 3, 1999 and December 29, 1997, have been combined with Galvantech's
consolidated balance sheets as of December 31, 1999, March 31, 1999 and March
31, 1998. Cypress's consolidated statements of operations for the periods ended
January 2, 2000, January 3, 1999 and December 29, 1997 have been combined with
Galvantech's consolidated statement of operations for the twelve month periods
ended December 31, 1999, March 31, 1999 and March 31, 1998. As a result, the
results of operations of Galvantech for the quarter ended March 31, 1999 are
included in the Supplementary Consolidated Statements of Operations of both 1998
and 1999.
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 38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Cypress Semiconductor Corporation.
In our opinion, the accompanying supplementary consolidated balance sheets
and the related supplementary 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
March 2, 2000,
Page 39
03/08/00
<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 ............................ $ 219,908 $ 194,975 $ 170,796 $ 159,124
=============== =============== =============== =========
Gross Profit ........................ $ 105,504 $ 89,461 $ 75,125 $ 65,828
=============== =============== =============== =========
Net income .......................... $ 47,097 $ 26,319 $ 9,271 $ 9,275
=============== =============== =============== =========
Net income per share:
Basic ............................... $ 0.42 $ 0.24 $ 0.09 $ 0.09
=============== =============== =============== =========
Diluted ............................. $ 0.38 $ 0.22 $ 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 ............................ $ 153,103 $ 151,193 $ 142,868 $ 141,378
=============== =============== =============== =========
Gross Profit ........................ $ 52,988 $ 50,729 $ 45,616 $ 9,610
=============== =============== =============== =========
Net income (loss) ................... $ (1,160) $ 3,187 $ (7,780) $ (94,097)
=============== =============== =============== =========
Net income (loss) per share:
Basic ............................... $ (0.01) $ 0.03 $ (0.07) $ (0.89)
=============== =============== =============== =========
Diluted ............................. $ (0.01) $ 0.03 $ (0.07) $ (0.89)
=============== =============== =============== =========
</TABLE>
Page 40
<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 Form 8-K to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of San Jose, State of California, on the 9th day of
March 2000.
CYPRESS SEMICONDUCTOR CORPORATION
By: /s/ T.J. Rodgers
---------------------------------------------
President and Chief Executive Officer
By: /s/ Emmanuel Hernandez
---------------------------------------------
Emmanuel Hernandez,
Chief Financial Officer, Vice President,
Finance and Administration
Page 41
03/08/00
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 our report dated March 2, 2000
relating to the financial statements of Cypress Semiconductor Corporation, which
appears in the Current Report on Form 8-K of Cypress Semiconductor Corporation
dated March 9, 2000.
/s/ PriceWaterhouseCoopers LLP
- -----------------------------------------
PricewaterhouseCoopers LLP
San Jose, California
March 8, 2000
