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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The total number of shares of the registrant's common stock outstanding as of
April 30, 2000, was 119,460,000.
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<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ...................... 1
Condensed Consolidated Statements of Operations ............ 3
Condensed Consolidated Statements of Cash Flows ............ 4
Notes to Condensed Consolidated Financial Statements ....... 5
Item 2. Management's Discussion and Analysis of Financial Condition .. 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk .... 28
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 29
Item 6. Exhibits and Reports on Form 8-K ............................. 29
Signatures ........................................................... 30
2
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
April 2, January 2,
2000 2000
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 307,420 $ 158,767
Short-term investments .......................................... 209,679 121,859
---------- ----------
Total cash, cash equivalents and short-term investments ......... 517,099 280,626
Accounts receivable, net of allowances of $4,454 at April 2, 2000
and $3,471 at January 2, 2000 ................................. 136,508 104,143
Inventories, net ................................................ 94,551 98,786
Other current assets ............................................ 76,213 77,993
---------- ----------
Total current assets .................................... 824,371 561,548
Property, plant and equipment, net ................................ 394,197 357,936
Long-term investments ............................................. 184,208 111,324
Restricted investments ............................................ 61,252 61,198
Other assets ...................................................... 57,620 54,237
---------- ----------
Total assets ........................................ $1,521,648 $1,146,243
========== ==========
</TABLE>
The accompanying notes form an integral part of these condensed
consolidated financial statements.
1
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
April 2, January 2,
2000 2000
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 90,337 $ 103,549
Accrued liabilities .................................................. 65,412 55,735
Deferred income on sales to distributors ............................. 26,210 20,760
Income taxes payable ................................................. 33,668 20,311
----------- -----------
Total current liabilities ........................................ 215,627 200,355
Convertible subordinated notes ....................................... 443,000 160,000
Deferred income tax .................................................. 56,100 56,100
Other long-term liabilities .......................................... 10,191 10,384
----------- -----------
Total liabilities ................................................ 724,918 426,839
----------- -----------
Commitments and Contingencies (Note 13)
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000 shares authorized;
none issued and outstanding ........................................ -- --
Common stock, $0.01 par value, 250,000 shares authorized;
121,625 and 118,566 issued; 116,645 and 113,586
outstanding at April 2, 2000 and January 2, 2000 ................... 1,216 1,155
Additional paid-in capital ........................................... 578,467 555,925
Notes receivable from stockholders ................................... (6,583) (8,186)
Retained earnings .................................................... 296,354 243,234
----------- -----------
869,454 792,128
Less shares of common stock held in treasury at cost:
4,980 shares at April 2, 2000 and January 2, 2000 .................. (72,724) (72,724)
----------- -----------
Total stockholders' equity ....................................... 796,730 719,404
----------- -----------
Total liabilities and stockholders' equity ................... $ 1,521,648 $ 1,146,243
=========== ===========
</TABLE>
The accompanying notes form an integral part of these condensed
consolidated financial statements.
2
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
(Unaudited)
Three Months Ended
-------------------------
April 2, April 4,
2000 1999
--------- ---------
Revenues ......................................... $ 264,241 $ 159,124
--------- ---------
Costs and expenses:
Cost of revenues ............................... 130,777 93,298
Research and development ....................... 38,017 31,951
Selling, general and administrative ............ 33,103 24,539
Acquisition and merger costs ................... 4,090 3,742
Restructuring credits .......................... -- (3,710)
--------- ---------
Total operating costs and expenses ......... 205,987 149,820
--------- ---------
Operating income ................................. 58,254 9,304
Interest expense ................................. (4,551) (2,323)
Interest income and other ........................ 14,400 3,280
--------- ---------
Income before income taxes ....................... 68,103 10,261
Provision for income taxes ....................... 14,983 986
--------- ---------
Net income ....................................... $ 53,120 $ 9,275
========= =========
Net income per share:
Basic .......................................... $ 0.46 $ 0.09
Diluted ........................................ $ 0.41 $ 0.09
Shares used in per share calculations:
Basic .......................................... 115,317 100,353
Diluted ........................................ 138,080 104,167
The accompanying notes form an integral part of these condensed
consolidated financial statements.
3
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
April 2, April 4,
2000 1999
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income .............................................................. $ 53,120 $ 9,275
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................................... 29,859 27,452
Loss on sales of property, plant and equipment ........................ 380 --
Gain on sale of FCT product line ...................................... (5,000) --
Restructuring reversals ............................................... -- (3,710)
Amortization of debt issuance costs ................................... 664 266
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (32,365) (13,407)
Inventories ............................................................. 3,081 (5,102)
Other assets ............................................................ 3,164 (810)
Accounts payable and accrued liabilities ................................ (4,881) 5,702
Deferred income ......................................................... 5,450 822
Income taxes payable .................................................... 13,357 560
--------- ---------
Net cash flow generated from operating activities ................... 66,829 21,048
--------- ---------
Cash flow from investing activities:
Purchase of investments ................................................. (176,862) (22,898)
Sale or maturities of investments ....................................... 16,158 13,731
Acquisition of property, plant and equipment ............................ (64,232) (12,299)
Proceeds from sale of FCT product line .................................. 7,500 --
Proceeds from the sale of equipment ..................................... 295 6,823
--------- ---------
Net cash flow used for investing activities ......................... (217,141) (14,643)
--------- ---------
Cash flow from financing activities:
Issuance of convertible subordinated notes, net of issuance costs ....... 275,218 --
Issuance of common shares ............................................... 22,337 --
Re-issuance of treasury shares .......................................... -- 45,023
Repayment of stockholders' notes ........................................ 1,603 --
Issuance of notes to employees .......................................... -- (7,892)
Other long-term liabilities ............................................. (193) (2,399)
--------- ---------
Net cash flow generated by financing activities ..................... 298,965 34,732
--------- ---------
Net change in cash during the quarter ended
March 31, 1999 for merger ........................................ -- (591)
Net increase in cash and cash equivalents ................................. 148,653 40,546
Cash and cash equivalents, beginning of year .............................. 158,767 151,113
--------- ---------
Cash and cash equivalents, end of quarter ................................. $ 307,420 $ 191,659
========= =========
</TABLE>
The accompanying notes form an integral part of these condensed
consolidated financial statements.
4
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended April 2, 2000
(Unaudited)
Note 1 -- Interim Statements
In the opinion of management of Cypress Semiconductor Corporation ("Cypress"),
the accompanying unaudited condensed consolidated financial statements contain
all adjustments (consisting solely of normal recurring adjustments) necessary to
present fairly the financial information included therein. Cypress believes that
the disclosures are adequate to make the information not misleading. However, it
is suggested that this financial data be read in conjunction with the audited
consolidated financial statements and related notes thereto for the year ended
January 2, 2000 included in Cypress's 1999 Annual Report on Form 10-K and
Cypress's Current Report on Form 8-K dated March 9, 2000.
Beginning with its 1998 fiscal year-end, Cypress ended its fiscal months,
quarters and years on Sundays. For interim financial reporting purposes, Cypress
reports on a 13-week quarter. The results of operations for the three-month
period ended April 2, 2000 are not necessarily indicative of the results to be
expected for the full year.
Note 2 -- Merger with Galvantech Incorporated
On March 2, 2000, Cypress completed a merger with Galvantech, Inc. and its
subsidiaries ("Galvantech"), which was accounted for as a pooling of interests.
These 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 Galvantech were different, and
Galvantech has changed its fiscal periods to coincide with that of Cypress.
Cypress's consolidated balance sheets as of April 2, 2000 and January 2, 2000
have been combined with Galvantech's consolidated balance sheets as of April 2,
2000 and December 31, 1999 respectively. For the purpose of the condensed
consolidated statements of operations for the periods ended April 2, 2000 and
April 4, 1999, Cypress's condensed consolidated statements of operations have
been combined with Galvantech's condensed consolidated statements of operations
for the three month periods ended April 2, 2000 and March 31,1999 respectively.
As a result of combining Cypress's and Galvantech's financial statements for the
fiscal years ended January 2, 2000 and January 3, 1999, the results of
operations of Galvantech for the quarter ended March 31, 1999 were included in
the supplementary consolidated statements of operations of both 1998 and 1999.
Therefore, the balance sheet and cash and cash equivalents for the quarter ended
December 31, 1998 and March 31, 1999 are the same.
The results of operations previously reported by the separate companies prior to
the merger and included in the results of operations for the three month period
ended April 4, 1999 are presented below.
Three months ended April 4, 1999:
Cypress Galvantech Total
------- ---------- -----
(In thousands)
Total revenue .... $151,591 $ 7,533 $159,124
Net income ....... $ 8,684 $ 591 $ 9,275
During the quarter ended April 2, 2000, Cypress recorded merger-related costs of
$1.8 million related to the acquisition of Galvantech. These charges, which
consist primarily of legal, accounting and investment banking fees, have been
included under acquisition and merger costs in the condensed consolidated
statements of operations.
Note 3 -- Sale of FCT Business
On February 25, 2000, Cypress sold its FCT business including inventories,
product software, all technical data, and a license for the related intellectual
property. Total proceeds from the sale were $7.5 million; a gain of $5.0 million
was recorded. In conjunction with this sale, we entered into a supply agreement
for the related inventories. Inventories of $1.2 million were supplied under the
agreement in Q1 2000. We expect to complete
5
<PAGE>
our obligations under the supply agreement during the third quarter of our
fiscal year 2000. Revenues from FCT products were approximately 1% of our 1999
revenues.
Note 4 -- Acquisition from Altera
On October 5, 1999, Cypress announced that it 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. The acquisition was accounted for as a purchase. In 1988, Altera
licensed its MAX 5000 family of products to Cypress in consideration of
manufacturing capacity. Altera later acquired a 17% equity interest in the Round
Rock wafer fabrication facility. By acquiring Altera's equity interest in
October 1999, Fab II is now 100% owned by Cypress.
Note 5 -- 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 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 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 June 30,
1999, the effective date of the purchase. The results of operations from June
30, 1999 through Cypress's quarter ended July 4, 1999 were not significant and
were therefore excluded from that quarter's reported results. There are no
significant differences between the accounting policies of Cypress and Arcus.
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 April 2, 2000,
Cypress paid $9.9 million in cash and issued $2.3 million in stock. The
remaining $1.6 million in cash will be paid and the remaining $3.9 million in
stock will be issued as certain performance milestones are reached. The total
purchase price was allocated to the estimated fair value of assets acquired and
liabilities assumed 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.
6
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Quarter Ended April 2, 2000
(Unaudited)
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 employee
categories 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 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 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 assumptions used in
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 of
between six and ten years using the straight-line method. The deferred
compensation is being amortized on a straight-line basis over two years.
Note 6 -- 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 microcontroller chips
to support the Universal Serial Bus applications. The acquisition was accounted
for using purchase accounting. Accordingly, the estimated fair value of assets
acquired and liabilities assumed were included in Cypress's condensed
consolidated balance sheet as of and since May 25, 1999, the effective date of
the purchase. The results of operations of Anchor were included in Cypress's
consolidated results of operations as of and since the effective date of the
purchase.
Cypress paid approximately $15.0 million in cash, which excludes direct
acquisition costs of $0.7 million for investment banking, legal and accounting
fees. In addition Cypress assumed net liabilities of approximately $0.9 million.
The total purchase consideration of $15.0 million was allocated to the estimated
fair value of assets acquired and liabilities assumed based on the 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,
7
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Quarter Ended April 2, 2000
(Unaudited)
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 employee
categories to fully deploy a work force of similar size and skill to the same
level of productivity as the existing work force.
Development of in-process technology remains a substantial risk to Cypress due
to 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 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
Anchor 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
appraiser's valuation model and require Cypress to revise the amount allocated
to in-process research and development.
The amounts allocated to current technology and assembled workforce are being
amortized over their estimated useful lives of five-years using the
straight-line method. There was no goodwill associated with the acquisition of
Anchor.
Note 7 -- 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 period ended April 4, 1999 have been combined with ICW's consolidated
statements of operations for the corresponding three month period ended April 3,
1999.
During the quarter ended April 4, 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 condensed
consolidated statements of operations.
8
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Quarter Ended April 2, 2000
(Unaudited)
Note 8 -- Cash and Investments
April 2, January 2,
2000 2000
-------- --------
(In thousands)
Cash and cash equivalents .......... $307,420 $158,767
Short-term investments ............. 209,679 121,859
Long-term investments .............. 184,208 111,324
Restricted investments ............. 61,252 61,198
-------- --------
Total .................... $762,559 $453,148
======== ========
Note 9 -- Inventories
April 2, January 2,
2000 2000
------- -------
(In thousands)
Raw materials ................. $12,936 $13,360
Work-in-process ............... 42,570 49,328
Finished goods ................ 39,045 36,098
------- -------
Total ............... $94,551 $98,786
======= =======
Note 10 -- Earnings Per Share
Statement of Accounting Standards No. 128 ("SFAS 128") requires a reconciliation
of the numerators and denominators of the basic and diluted per share
computations. Basic earnings per share ("EPS") is computed by dividing net
income available to stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted EPS is
computed using the weighted average number of common and all potentially
dilutive common shares outstanding during the period. In computing diluted EPS,
the average stock price for the period is used in determining the number of
shares assumed to be purchased from the exercise of stock options and the
if-converted method is used for determining the number of shares assumed issued
from the conversion of the convertible subordinated notes. Following is a
reconciliation of the numerators and denominators of the basic and diluted EPS
computations for the periods presented below.
Three months ended April 2, 2000 and April 4, 1999:
<TABLE>
<CAPTION>
April 2, 2000 April 4, 1999
------------------------------- ---------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------- ------- ------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income ......... $53,120 115,317 $ 0.46 $ 9,275 100,353 $ 0.09
Effects of dilutive
securities:
6% Convertible Notes 1,872 6,772 -- --
4% Convertible Notes 1,649 4,640 -- --
Stock options ...... -- 11,351 -- 3,814
------- ------- ------- ------- ------- -------
Diluted EPS:
Net income ......... $56,641 138,080 $ 0.41 $ 9,275 104,167 $ 0.09
======= ======= ======= ======= ======= =======
</TABLE>
At April 2, 2000 and April 4, 1999, stock options outstanding were 24,667,000
and 24,567,000, respectively. Of the options outstanding, 79,000 and 18,047,000
shares, on a weighted average basis, were excluded from the computation of
diluted EPS because their exercise prices were greater than the average market
price of common shares during the respective quarters. Convertible debentures
outstanding at April 4, 1999 which were convertible to 6,772,000 shares of
common stock were also excluded from diluted EPS in that period as their effect
was anti-dilutive.
9
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Quarter Ended April 2, 2000
(Unaudited)
Note 11 -- Restructuring and Other Non-recurring Costs
1998 Restructuring and Other Non-recurring Costs
In March 1998, Cypress implemented an overall cost reduction plan and recorded a
$57.1 million restructuring reserve. The restructuring entailed:
o The shutdown of Fab 3, located in Bloomington, Minnesota and
consolidation of parts of Fab 3 operations with other operations of
Cypress.
o The discontinuance of the 0.6-micron 256K Static Random Access Memory
("SRAM") production in Fab 2 located in Texas.
o The conversion of an existing research and development fab located in
San Jose ("Fab 1") to eight-inch capability in order to be compatible
with the state of the art eight-inch Minnesota manufacturing facility.
o The transfer of Cypress's test operations from its subcontractor,
Alphatec, in Thailand to Cypress's production facility in the
Philippines.
The restructuring activities described above included the termination of
approximately 850 employees, primarily from manufacturing, both at Cypress and
at Alphatec.
The following tables set forth charges taken against the reserve during the
quarter ended April 2, 2000 and Cypress's 1998 restructuring expense and charges
taken against the reserve from the date the restructuring commenced through
April 2, 2000, respectively.
<TABLE>
<CAPTION>
Balance Balance
January 2, April 2,
2000 Utilized Other 2000
------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
Other fixed asset related charges(1) $1,807 $ (114) $ -- $1,693
</TABLE>
<TABLE>
<CAPTION>
1998 Balance
Restructuring April 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(1) (2) . 5,334 (2,234) (3,100) $ --
Other fixed asset related charges(1) ................ 3,030 (817) (520) 1,693
Provision for phase-down and consolidation of
manufacturing facilities(1) ....................... 976 (637) (339) --
------- ------- ------- -------
Total ..................................... $12,590 $(6,938) $(3,959) $ 1,693
======= ======= ======= =======
</TABLE>
- ----------
(1) Classified on the Condensed Consolidated Balance Sheet as part of accrued
liabilities.
(2) The amount utilized represents cash payments related to severance of
approximately 850 employees.
During the quarter ended April 4, 1999, Cypress reversed $3.7 million of
previously provided restructuring costs. $2.2 million of severance and other
employee related charges and $0.3 million for the provision for phase-down and
consolidation of manufacturing facilities were reversed in conjunction with the
completion of the Alphatec restructuring activities. $0.5 million was reversed
for other fixed asset related charges based on the
10
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Quarter Ended April 2, 2000
(Unaudited)
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.
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 is in the process of converting its R&D
wafer facility in San Jose to eight-inch capability and expects to have the
conversion completed by August 2000. The Alphatec consolidation and transfer
activity was completed in January 1999, one month later than originally planned.
1997 Restructuring Costs
During the fourth quarter of 1997, Cypress (ICW) made a decision to shut down
its wafer fab located in San Jose. In connection with the shut down of the wafer
fab, Cypress (ICW) recorded a restructuring charge of $9.9 million related to
the impairment of assets ($3.9 million), non-cancelable operating lease
commitments ($3.6 million), costs associated with a reduction in work force
($0.2 million) and other transaction costs ($2.2 million). The other transaction
costs related primarily to inventory write-offs, expenses incurred to remove and
return leased equipment and brokerage and professional fees.
The following tables set forth charges taken against the reserve during the
three-month period ended April 2, 2000 and Cypress's 1997 restructuring expense
and charges taken against the reserve from the date the restructuring commenced
through April 2, 2000 respectively. The actual liquidation of substantially all
of the impaired assets was completed in November 1998. The balance of the
reserve remaining will be utilized by June 2000 when the operating lease
commitments end.
Balance Balance
January 2, April 2,
2000 Utilized 2000
---- -------- ----
(In thousands)
Operating lease costs(1) ........ $506 $(21) $485
---- ---- ----
<TABLE>
<CAPTION>
1997 Balance
Restructuring April 2,
Expense Utilized 2000
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Operating lease costs(1) ...................... $ 3,615 $(3,130) $ 485
Severance and other employee related charges(1) 207 (207) --
Transaction and other costs(1) ................ 2,164 (2,164) --
------- ------- -------
Total ............................... $ 5,986 $(5,501) $ 485
======= ======= =======
</TABLE>
- ----------
(1) Classified on the Condensed Consolidated Balance Sheet as part of accrued
liabilities.
Note 12 -- Equity and Debt Transactions
On January 31, 2000, Cypress filed a registration statement on Form S-3 with the
Securities and Exchange Commission. Under this shelf registration, which was
effective February 8, 2000, Cypress can, through January 2002, sell any
combination of debt securities, preferred stock and common stock in one or more
offerings up to a total amount of $400.0 million. The shelf registration
statement allows Cypress flexibility to raise funds from the offering of debt
securities, common stock, preferred stock or a combination thereof, subject to
market conditions and Cypress's capital needs.
11
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Quarter Ended April 2, 2000
(Unaudited)
During the fourth quarter of 1998, Cypress filed a registration statement on
Form S-3 with the Securities and Exchange Commission. Under this shelf
registration statement, which was declared effective in the first quarter of
1999, 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. Pursuant to the shelf registration statement, 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. Cypress filed an additional registration statement on
Form S-3, pursuant to Rule 462(b) under the Securities Act, to register
securities in excess of the $300.0 million available under the shelf
registration statement. 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 4.0% 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.
In March 1999, Cypress announced a program whereby all U.S. employees were
offered loans to facilitate the exercise of vested stock options. 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 Cypress common shares. At April 2, 2000, loans
receivable and accrued interest under this program totaled $6.6 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
plan and repurchase programs prior to 1997.
Note 13 -- Legal Matters
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
12
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Quarter Ended April 2, 2000
(Unaudited)
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 withdrew two of the four patents
from the lawsuit, including the patent related to the licensing agreement. The
case involving the two remaining patents went to trial in October 1999. The jury
ruled in favor of Cypress claiming that none of the patents were infringed by
Cypress and that each asserted claim was invalid due to prior art and physical
impossibility (i.e. the patents require a step that is physically impossible to
perform). EMI may to file an appeal, although no such appeal has been filed as
of May 17, 2000. Should EMI appeal the decision of the Federal Court, Cypress
intends to defend itself vigorously. However, should the outcome of this action
be unfavorable, Cypress's business, financial condition and results of
operations could be materially and adversely affected.
In January 1998, an attorney representing the estate of Mr. Jerome Lemelson
contacted Cypress and charged that Cypress infringed certain patents owned by
Mr. Lemelson. On February 26, 1999, the Lemelson attorneys sued Cypress and 87
other companies for infringement of 16 patents. Cypress has reviewed and
investigated the allegations in the complaint and Cypress believes that the
suits are without merit. Cypress will vigorously defend itself in this matter.
While no assurance can be given regarding the outcome of this action, Cypress
believes that the final outcome of the matter will not have a material effect on
Cypress's consolidated financial position or results of operations. However,
because of the nature and inherent uncertainties of litigation, should the
outcome of this action be unfavorable, Cypress may be required to pay damages
and other expenses, which could have a material adverse effect on Cypress's
financial position and results of operations.
In June 1997, Cypress commenced a declaratory judgment action in the United
States District Court for the District of Nevada against the Li Second Family
Trust ("the Trust"). In this action, Cypress asked for declaratory relief to the
effect that an 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 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.
13
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Quarter Ended April 2, 2000
(Unaudited)
Note 14 -- Comprehensive Income
In fiscal 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
Comprehensive income refers to the change in the equity of a company during a
period from transactions except those resulting from investments by owners and
distributions to owners. Cypress adopted this statement as of the first quarter
of 1998 and has determined that it does not have any components of other
comprehensive income.
Note 15 -- Segment Reporting
Cypress has two reportable segments, Memory Products and Non-memory Products.
The Memory Products segment includes Static Random Access Memories ("SRAMs") and
multichip modules. The Non-memory Products segment includes programmable logic
products, data communication devices, interface products, computer products,
non-volatile memory products and wafers manufactured by the foundry. Cypress
evaluates the performance of its two segments based on profit or loss from
operations before income taxes, excluding nonrecurring gains and losses.
While both Memory and Non-Memory segments primarily serve the communications
marketplace, the segments differ in functionality. Memory Products are
delineated by their ability to store and retrieve information. Non-Memory
product functionality relates primarily to logic, timing, data transfer and
routing of information. The desired functionality will often determine the
price, margin and point of manufacture of a particular product in a market
segment.
The tables below set forth information about the reportable segments for
three-month periods ended April 2, 2000 and April 4, 1999. 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
Three Months Ended
-----------------------
April 2, April 4,
2000 1999
-------- --------
(In thousands)
Memory ................................... $122,666 $ 65,786
Non-memory ............................... 141,575 93,338
-------- --------
Total consolidated revenues ............ $264,241 $159,124
======== ========
Business Segment Profit (Loss)
Three Months Ended
-----------------------
April 2, April 4,
2000 1999
-------- --------
(In thousands)
Memory ................................... $ 18,642 $(11,901)
Non-memory ............................... 43,702 21,237
Acquisition and merger costs ............. 4,090 3,742
Restructuring credits .................... -- 3,710
Interest income and other ................ 14,400 3,280
Interest expense ......................... (4,551) (2,323)
-------- --------
Income before provision for
income taxes ........................... $ 68,103 $ 10,261
======== ========
14
<PAGE>
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Quarter Ended April 2, 2000
(Unaudited)
Note 16 -- Recent Accounting Pronouncements
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected Revenue
Recognition Issues" which provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. Adoption
of SAB 101 is required by the second quarter of fiscal 2000. Management is
currently evaluating SAB 101 and its effects on company revenue recognition
policies and practices. At this time, management believes that there is no
significant effect on the revenue recognition policies currently in place.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value. In addition,
corresponding derivative gains and losses should be either reported in the
statement of operations and stockholders equity, depending on the type of
hedging relationship that exists with respect to such derivatives. Adopting the
provisions of SFAS 133, which will be effective in fiscal year 2001, are not
expected to have a material effect on Cypress's consolidated financial
statements.
Note 17 -- Subsequent Events
Acquisition of RadioCom Corporation
On April 27, 2000, Cypress announced the signing of a letter of intent to
acquire RadioCom Corporation, a privately held company specializing in the
architecture and design of semiconductor radio frequency (RF) circuits.
RadioCom's average quarterly revenues of $150K (unaudited) for the last five
quarters are derived primarily from design services. The acquisition, which will
be accounted for as a purchase, is expected to be completed in the third quarter
of fiscal 2000.
Acquisition of Alation
On May 3, 2000, Cypress announced the signing of a definitive agreement to
acquire Alation Systems Inc., a privately held wireless systems company based in
Mountain View, CA. Alation possesses a deep portfolio of intellectual property
in the analog, DSP, and RF baseband technology, along with software and systems
expertise in the fast-growing wireless arena. The merger, which is expected to
close during the second quarter of fiscal 2000, is expected to be accounted for
as a pooling of interests.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three Months Ended April 2, 2000
All references are to Cypress's fiscal quarters ended April 2, 2000 ("Q1 2000"),
and April 4, 1999 ("Q1 1999), unless otherwise indicated. This report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
but not limited to, statements as to future operating results and business plans
of Cypress. We use words such as "anticipates", "believes", "expects", "future",
"intends" and similar expressions to identify forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the factors set forth in "Factors Affecting Future
Results" and elsewhere in this report.
Results of Operations
Revenues
Revenues for Q1 2000 were $264.2 million, an increase of $105.1 million or 66.1%
compared to revenues of $159.1 million for Q1 1999. Cypress derives its revenues
from the sale of Memory Products and Non-memory Products. Below is a summary of
revenues derived from the sale of Memory Products and Non-memory Products.
Three Months Ended
------------------------
April 2, April 4,
2000 1999
-------- --------
(In thousands)
Memory ............................... $122,666 $ 65,786
Non-memory ........................... 141,575 93,338
-------- --------
Total consolidated revenues ........ $264,241 $159,124
======== ========
Sales from Memory Products include Static Random Access Memories ("SRAMs") and
multichip modules. Revenues from the sale of Memory Products for Q1 2000
increased $56.9 million or 86.5% over revenues from the sale of these products
for Q1 1999. The rise in Memory Product revenues as compared to Q1 1999 resulted
from both higher average selling prices ("ASPs") and an increase in unit sales.
ASPs increased 31% and unit sales increased 61% comparing Q1 2000 to Q1 1999.
Revenue growth for SRAM products can be attributed to strong demand in the
communications markets. Sale of new products, such as the 1- and 2-Mbit MoBL
("More Battery Life") SRAM, have resulted in higher unit sales and higher ASPs.
Non-memory Products include computer products, interface products, data
communication devices, non-volatile memory devices and programmable logic
products. Non-memory Products also include foundry revenues. Foundry revenues
represent the sale of wafers to customers. Revenues from the sale of Non-memory
Products increased $48.2 million or 51.7% comparing Q1 2000 to Q1 1999. The
growth related primarily to increases in sales of data communication devices of
$23.3 million, interface products of $16.4 million, programmable logic products
of $6.9 million, and timing technology products of $4.7 million. These increases
were partially offset by decreases in foundry revenue of $1.8 million and
non-volatile memory of $1.3 million. The primary factors contributing to the
increase in data communication devices was higher unit sales and higher ASPs,
particularly in the specialty memory and channel line of products. The increase
in revenues for interface products can be attributed to higher unit sales due to
the growing market conversion to Universal Serial Bus ("USB") peripheral
products. The net increase in programmable logic devices was a result of higher
unit sales and higher ASPs. The revenue growth in timing technology products
from Q1 1999 to Q1 2000 was primarily a result of the increased unit sales due
to greater acceptance of Cypress's clock products.
The semiconductor industry is highly cyclical and subject to significant
downturns as a result of a variety of risk factors, including, but not limited
to, diminished product demand, production over-capacity and accelerated erosion
of ASPs. Revenues have continued to be impacted by fluctuations in ASPs. Should
ASPs erode at a rate greater than anticipated, gross margins could be seriously
harmed. Cypress continues to introduce new products
16
<PAGE>
and new methods of reducing manufacturing costs in order to mitigate the effects
of changes in ASPs on its gross margins.
Cost of Revenues
Cost as a percent of revenue decreased to 49.5% for Q1 2000 as compared to 58.6%
in Q1 1999. This improvement was brought about by a series of factors including
increased value-added, strong unit demand, a stable pricing environment and
continued cost reduction activities. Since 1998, Cypress has changed its product
focus more towards solutions in the data-communications market. This has
resulted in new product offerings having a high value added component. This is
in contrast to our prior focus of building larger and faster commodity memory
devices. A prime example of this is our MoBL SRAM. The end result of Cypress'
new focus is that selling prices and resulting margins are generally higher than
in prior periods. The communications focus has also resulted in increased unit
demand from our customers. Unit demand has further increased due to a strong
semiconductor market characterized by tightness in supply even in older
commodity products. This has enabled Cypress to enjoy improved factory
utilization and absorption over 1999 and into 2000. The tight supply and the
offering of more products that are not purely commodity driven has resulted in
stable pricing in a business that usually endures price declines over a
product-life cycle. Cypress has continued it's significant investment in process
technology, which has reduced the line widths, and resulting die size. Extensive
use of Cypress's .25 micron technology has led to significant cost reductions
particularly in the memory segment. While Cypress is optimistic about its
abilities to continue the trend of improving margins, there are significant risk
factors; described later in this report that could adversely impinge upon profit
margins.
In March 1998, Cypress announced restructuring activities for its domestic wafer
fabrication facilities and offshore back-end manufacturing operations.
Activities completed to date have increased Cypress's manufacturing efficiencies
and decrease cost of revenues. Cost of revenues as a percent of revenues may be
impacted by a variety of factors including but not limited to the following:
o Product mix;
o Factory capacity and utilization;
o Manufacturing yields;
o Availability of certain raw materials;
o Terms negotiated with third-party contractors; and
o Foreign currency fluctuations.
These and other factors could cause a significant increase or decrease on our
gross margin in future periods.
Research & Development
Research and development ("R&D") expenditures for Q1 2000 were $38.0 million or
14.4% of revenues, compared to $32.0 million or 20.1% of revenues for Q1 1999.
Even though absolute spending in R&D was $6.0 million higher comparing Q1 2000
to Q1 1999, R&D expenditures as a percentage of revenues declined as the
increase in revenues far exceeded the increase in spending. The $6.0 million
increase in R&D costs from Q1 1999 to Q1 2000 relates primarily to costs
associated with new product development at Cypress's design centers and to the
continued development of more advanced process technologies.
Cypress expects spending for R&D will continue to increase as Cypress continues
its efforts to accelerate the development of new products and migration to more
advanced process technologies. Cypress is continuing to explore new markets and
improve its design and process technologies in an effort to increase revenues
and reduce costs. The foregoing statements regarding Cypress's R&D spending
efforts are forward-looking.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for Q1 2000 were $33.1
million or 12.5% of revenues, compared to $24.5 million or 15.4% of revenues for
Q1 1999. Even though absolute spending in SG&A was $8.6 million higher comparing
Q1 2000 to Q1 1999, SG&A expenditures as a percentage of revenues declined as
the increase in revenues far exceeded the increase in spending. The $8.6 million
increase in SG&A costs from Q1
17
<PAGE>
1999 to Q1 2000 relates primarily to higher commission expenses, salary and
related benefit costs, legal fees, and expenses for other professional services.
The change in all other SG&A expenses from Q1 1999 to Q1 2000 were not
significant.
With the exception of variable spending such as incentive bonuses and
commissions, Cypress expects recurring SG&A spending to remain relatively
constant. The foregoing statement regarding Cypress's SG&A spending efforts is
forward-looking.
Acquisition and Merger Costs
During Q1 2000, Cypress recorded aggregate merger-related transaction costs of
$4.1 million. The $4.1 million of costs incurred in Q1 2000 relate to the
amortization of intangible assets recorded during the 1999 acquisitions of
Anchor and Arcus, and the merger with Galvantech in Q1 2000. Acquisition costs
of $1.8 million related to Galvantech and consist primarily of legal, accounting
and investment banking fees. During Q1 1999, Cypress recorded aggregate
merger-related transaction costs of $3.7 million related to the acquisition of
IC Works, Inc. These charges consist primarily of investment banking and other
professional fees.
1998 Restructuring Costs and Non-recurring Charges
In March 1998, Cypress recorded a one-time, pre-tax restructuring and other
non-recurring charge of $57.1 million and other non-recurring charges of $27.3
million. The $57.1 million restructuring charge entailed:
The shutdown of Fab 3 located in Bloomington, Minnesota and consolidation of
parts of Fab 3 operations with other operations of Cypress.
The discontinuance of the 0.6-micron 256K SRAM production in Fab 2 located in
Texas.
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.
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 personnel, primarily from manufacturing, both at Cypress and
at Alphatec.
During Q2 1998, in conjunction with the closure of Fab 3, Cypress established a
reserve for $1.4 million to cover severance costs associated with the reduction
of work force at that location. This was based on the anticipated level of
payments that would be made to personnel included in the work force reduction.
As a part of a review of inventory, it was noted that Cypress required an
additional reserve of $0.5 million to cover inventory that was written off. This
related to a change in estimate regarding inventory that had been previously
reserved.
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 is in the process of converting 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.
1999 Restructuring Credits
During Q1 1999, Cypress reversed $3.7 million of previously provided
restructuring costs. $2.2 million of severance and other employee related
charges and $0.3 million for the provision for phase-down and consolidation of
manufacturing facilities were reversed in conjunction with the completion of the
Alphatec restructuring activities. $0.5 million for other fixed asset related
charges was reversed 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.
18
<PAGE>
Interest Expense
Interest expense was $4.6 million during Q1 2000, compared to $2.3 million for
Q1 1999. Interest expense is primarily associated with the 6.0% Convertible
Subordinated Notes, issued in September 1997 and due in 2002, and the 4.0%
Convertible Subordinated Notes, issued in January 2000 and due in 2005. The
increase in interest expense relates primarily to the increase in interest due
to the January 2000 issuance of the 4.0% Convertible Subordinated Notes.
Interest Income and Other
Net interest income and other was $14.4 million for Q1 2000 compared to $3.3
million for Q1 1999. Net interest income and other includes interest income,
amortization of bond issuance costs, foreign exchange gains and losses and other
non-recurring items. The $11.1 million increase from Q1 1999 to Q1 2000 relates
primarily to higher interest income due to increased cash balances and higher
investment yields. Q1 2000 also includes a $5.0 million non-recurring gain
related to the sale of the FCT business.
Taxes
Cypress's effective tax rate for Q1 2000 and Q1 1999 were 22.0% and 10.0%,
respectively, resulting in an income tax expense of $15.0 million and $1.0
million, respectively. The increase in the effective tax rate from Q1 1999 to Q1
2000 can be attributed to increased profitability and foreign operations, and
decreased R&D credits and net operating loss carryovers. Cypress's effective
rate varies from the U.S. statutory rate due to non-deductible in-process
research and development charges and merger costs offset by utilization of loss
carryovers, earnings of foreign subsidiaries taxed at lower rates and tax
credits.
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 June 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. However, should the outcome of this
examination be unfavorable, Cypress may be required to pay penalties, back taxes
and interest, which could have a material adverse effect on Cypress's financial
position and results of operations.
Net Income and Net Income Per Share
Net income for Q1 2000 was $53.1 million or $0.41 per share on a diluted basis,
compared to a net income of $9.3 million or $0.09 per share, on a diluted basis
for Q1 1999.
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. We have presented EBG as a measure of our operating
results, but EBG is not intended to replace operating income or net income as an
indicator of operating performance, or to replace cash flow as a measure of
liquidity, because EBG is not a concept under generally accepted accounting
principles. Also, our calculation of EBG may not be comparable to EBG as
calculated by other companies. The table below reconciles basic and diluted net
income per share to basic and diluted earnings before goodwill per share,
respectively.
Reconciliation of basic net income per share to basic earnings before goodwill:
<TABLE>
<CAPTION>
Three Months Ended
-------------------
April 2, April 4,
2000 1999
----- -----
(In thousands)
<S> <C> <C>
Basic net income per share .......................... $ 0.46 $ 0.09
Goodwill & Acquisition costs net of taxes per share . $ 0.02 $ 0.04
Non-recurring gain on sale of FCT per share ......... $(0.03) $ --
Restructuring credits net of taxes per share ........ $ -- $(0.04)
------ ------
Basic earnings before goodwill per share ............ $ 0.45 $ 0.09
------ ------
</TABLE>
19
<PAGE>
Reconciliation of diluted net income per share to diluted earnings before
goodwill:
<TABLE>
<CAPTION>
Three Months Ended
--------------------
April 2, April 4,
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
Diluted net income per share ........................ $ 0.41 $ 0.09
Goodwill & Acquisition costs net of taxes per share . $ 0.02 $ 0.03
Non-recurring gain on sale of FCT per share ......... $(0.02) $ --
Restructuring credits net of taxes per share ........ $ -- $(0.03)
------ ------
Diluted earnings (loss) before goodwill per share ... $ 0.41 $ 0.09
------ ------
</TABLE>
Liquidity and Capital Resources
Cypress's cash, cash equivalents and short-term investments totaled $517.1
million at April 2, 2000, a $236.5 million increase from the end of fiscal 1999.
During the three months ended April 2, 2000, Cypress purchased $64.2 million in
capital equipment compared to $12.3 million in the same period in fiscal 1999.
Cypress purchased equipment for its domestic wafer fabrication plants, its test
and assembly facility in the Philippines and its San Jose design and technology
groups. Equipment purchased for its fabs is expected to improve wafer
manufacturing capacity and capabilities as Cypress implements new technologies,
including its 0.16- and 0.25-micron processes. A majority of the equipment
purchased was to increase the capacity and capability of Fab 4 located in
Minnesota. Equipment purchased for the Philippines was used to increase
manufacturing capacity and tool certain packaging capabilities. Purchases of
capital equipment for the technology group are expected to enhance and
accelerate research and development capabilities. Capital expenditures for the
remainder of 2000 are expected to be approximately $260.2 million as Cypress
continues its efforts to increase its manufacturing capabilities and capacity
and to enhance its research and development capabilities.
On January 31, 2000, Cypress filed a registration statement on Form S-3 with the
Securities and Exchange Commission. Under this shelf registration, which was
effective February 8, 2000, Cypress can, through January 2002, sell any
combination of debt securities, preferred stock and common stock in one or more
offerings up to a total amount of $400.0 million dollars. 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.
During the fourth quarter of 1998, Cypress filed a registration statement on
Form S-3 with the Securities and Exchange Commission. Under this shelf
registration statement, which was declared effective in the first quarter of
1999, 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. Pursuant to the shelf registration statement, 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. Cypress filed an additional registration statement on
Form S-3, pursuant to Rule 462(b) under the Securities Act, to register
securities in excess of the $300.0 million available under the shelf
registration statement. 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 4.0% 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.
In March 1999, Cypress announced a program whereby all U.S. employees were
offered loans to facilitate the exercise of vested stock options. 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 Cypress common shares. At April 2, 2000, loans
receivable under this program totaled $6.6 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
20
<PAGE>
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.
Cypress believes that existing cash and equivalents as well as cash from
operations will be sufficient to meet present and anticipated working capital
requirements for at least the next twelve months. Cypress's need for further
capacity and resulting capital expansion may result in the need to raise
additional capital through debt or equity financing. Conversely, Cypress's
operating results may be adversely impacted by various risk factors causing
Cypress to raise additional monies. Although additional financing may be
required, Cypress may not be able to obtain the capital or satisfactory terms.
Factors Affecting Future Results
Risk Factors
Except for the historical information contained herein, the discussion in this
Form 10-Q report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, but not limited to,
statements as to the future operating results and business plans of Cypress,
that involve risks and uncertainties. We use words such as "anticipate",
"believes", "expects", "future", "intends" and similar expressions to identify
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for any reason, including
the risks described below and elsewhere in this Form 10-Q. If any of the
following risks actually occur, our business, financial condition and operating
results could be seriously harmed.
Our future operating results are unusually likely to fluctuate and therefore may
fail to meet expectations. Our operating results have varied widely in the past,
and may continue to fluctuate in the future. In addition, our operating results
may not follow any past trends. Our future operating results will depend on many
factors and may fluctuate and fail to meet our expectations or those of others
for a variety of reasons, including the following:
o the intense competitive pricing pressure to which our products are subject,
which can lead to rapid and unexpected declines in average selling prices;
o the complexity of our manufacturing processes and the sensitivity of our
production costs to declines in manufacturing yields, which make yield
problems both possible and costly when they occur; and
o the need for constant, rapid new product introductions which present an
ongoing design and manufacturing challenge, which can be significantly
impacted by even relatively minor errors, and which may result in products
never achieving expected market demand.
As a result of these or other factors we could fail to achieve our expectations
as to future revenues, gross profit and income from operations. Any downward
fluctuation or failure to meet expectations will likely adversely affect the
value of your investment in Cypress.
In addition, because we recognize revenues from sales to our domestic
distributors only when these distributors make a sale to customers, we are
highly dependent on the accuracy of their resale estimates. The occurrence of
inaccurate estimates also contributes to the difficulty in predicting our
quarterly revenue and results of operations.
We face periods of industry-wide semiconductor over-supply which harm its
results.
The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, semiconductors. These
fluctuations have helped produce many occasions when supply and demand for
semiconductors have not been balance. In the past, these industry-wide
fluctuations in demand, which have resulted in under-utilization of our
manufacturing capacity, have harmed our operating results. In some cases,
21
<PAGE>
industry downturns with these characteristics have lasted more than a year. If
these cycles continue, they will seriously harm our business, financial
condition and results of operations.
Our financial results could be seriously harmed if the markets in which we sell
our products do not grow.
Our continued success depends in large part on the continued growth of various
electronics industries that use our semiconductors, including the following
industries:
o data communications and telecommunications equipment;
o computers and computer related peripherals;
o automotive electronics;
o industrial controls;
o customer electronics equipment; and
o military equipment.
A significant portion of our products is incorporated into data communications
and telecommunication end products. Any decline in the demand for networking
applications, mass storage, telecommunications, cellular base stations, cellular
handsets and other personal communication devices which incorporate our products
could seriously harm our business, financial condition and operating results. In
addition, certain of our products, including Universal Serial Bus
microcontrollers, high-frequency clocks and static RAMs, are incorporated into
computer and computer-related products, which have historically experienced
significant fluctuations in demand. We may also be seriously harmed by slower
growth in the other markets in which we sell our products.
We are affected by a general pattern of product price decline and fluctuations,
which can harm our business.
Even in the absence of an industry downturn, the average selling prices of our
products have historically decreased during the products' lives, and we expect
this trend to continue. In order to offset these average selling price
decreases, we attempt to decrease manufacturing costs of our products, and to
introduce new, higher priced products that incorporate advanced features. If our
efforts are not successful or do not occur in a timely manner, or if our newly
introduced products do not gain market acceptance, our business, financial
condition and results of operations could be seriously harmed.
In addition to following the general pattern of decreasing average selling
prices, the selling prices for certain products, particularly commodity static
RAM products, fluctuate significantly with real and perceived changes in the
balance of supply and demand for these products. Growth in worldwide supply of
static RAMs in recent periods resulted in a decrease in average selling prices
for such products. If we are unable to decrease per unit manufacturing costs
faster than a rate equal to or faster than the rate at which average selling
prices continue to decline, our business, financial condition and results of
operations will be seriously harmed. Furthermore, we expect our competitors to
invest in new manufacturing capacity and achieve significant manufacturing yield
improvements in the future. These developments could dramatically increase
worldwide supply of static RAM products and result in associated downward
pressure on prices.
We may be unable to adequately protect our intellectual property rights, and may
face significant expenses as a result of ongoing or future litigation.
Protection of intellectual property rights is essential to keep others from
copying the innovations that are central to our existing and future products.
Consequently, we may become involved in litigation to enforce our patents or
other intellectual property rights, to protect our trade secrets and know-how,
to determine the validity or scope of the proprietary rights of others, or to
defend against claims of invalidity. This kind of litigation can be expensive,
regardless of whether we win or lose.
Also, we are now and may again become involved in litigation relating to alleged
infringement by us of others' patents or other intellectual property rights.
This kind of litigation is frequently expensive to both the winning party and
the losing party and takes up significant amounts of management's time and
attention. In addition, if we lose such a lawsuit, a court could require us to
pay substantial damages and/or royalties, or prohibit us from using essential
technologies. For these and other reasons, this kind of litigation could
seriously harm our business, financial condition and results of operations.
Also, although we may seek to obtain a license under a third party's
intellectual property rights in order to bring an end to certain claims or
actions asserted against us, we may not be able to obtain such a license on
reasonable terms or at all.
22
<PAGE>
We have entered into technology license agreements with third parties that give
those parties the right to use patents and other technology developed by us, and
that give us the right to use patents and other technology developed by them. We
anticipate that we will continue to enter into these kinds of licensing
arrangements in the future. It is possible, however, that licenses we want will
not be available to us on commercially reasonable terms. If we lose existing
licenses to key technology, or are unable to enter into new licensing
agreements, which we deem important, our business, financial condition and
results of operations could be seriously harmed.
It is critical to our success that we are able to prevent competitors from
copying our innovations, we therefore intend to continue to seek patent, trade
secret and mask work protection for our semiconductor manufacturing
technologies. The process of seeking patent protection can be long and
expensive, and we cannot be certain that any currently pending or future
applications will actually result in issued patents, or that, even if patents
are issued, that they will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to us. Furthermore, others may
develop technologies that are similar or superior to our technology or design
around the patents we own.
We also rely on trade secret protection for our technology, in part through
confidentiality agreements with our employees, consultants and third parties.
However, these parties may breach these agreements, and we may not have adequate
remedies for any breach. Also, others may come to know about or determine our
trade secrets through a variety of methods. In addition, the laws of certain
territories in which we develop, manufacture or sell our products may not
protect our intellectual property rights to the same extent as the laws of the
United States.
Our financial results could be adversely impacted if it fails to develop,
introduce and sell new products or fails to develop and implement new
manufacturing technologies.
Like many semiconductor companies, which frequently operate in a highly
competitive, quickly changing environment marked by rapid obsolescence of
existing products, our future success depends on our ability to develop and
introduce new products which customers choose to buy. We introduce significant
numbers of new products each year, which are an important source of revenue for
us. If we fail to compete and introduce new product designs in a timely manner
or are unable to manufacture products according to the requirements of these
designs (discussed more below), or if our customers do not successfully
introduce new systems or products incorporating ours, or market demand for our
new products does not exist as anticipated, our business, financial condition
and results of operations could be seriously harmed.
For Cypress and many other semiconductor companies, introduction of new products
is a major manufacturing challenge. The new products the market requires tend to
be increasingly complex, incorporating more functions and operating at greater
speed than prior products. Increasing complexity generally requires smaller
features on a chip. This makes manufacturing new generations of products
substantially more difficult than prior products. Ultimately, whether we can
successfully introduce these and other new products depends on our ability to
develop and implement new ways of manufacturing semiconductors. If we are unable
to design, develop, manufacture, market and sell new products successfully, our
business, financial condition and results of operations would be seriously
harmed.
Interruptions in the availability of raw materials can seriously harm Cypress's
financial performance.
Our semiconductor manufacturing operations require raw materials that must meet
exacting standards. We generally have more than one source available for these
materials, but there are only a limited number of suppliers capable of
delivering certain raw materials that meet our standards. If we need to use
other companies as suppliers, they must go through a qualification process. In
addition, the raw materials we need for our business could become scarcer as
worldwide demand for semiconductors increases. Interruption of our sources of
raw materials could seriously harm our business, financial condition and results
of operations.
Problems in the performance of other companies we hire to perform certain
manufacturing tasks can seriously harm our financial performance.
A high percentage of our products are assembled, packaged and tested at our
manufacturing facility located in the Philippines. We rely on independent
subcontractors to assemble, package and test the balance of our products. This
reliance involves certain risks, because we have less control over manufacturing
quality and delivery schedules, whether these companies have adequate capacity
to meet our needs and whether or not they
23
<PAGE>
discontinue or phase-out assembly processes we require. We cannot be certain
that these subcontractors will continue to assemble, package and test products
for us, and it might be difficult for us to find alternatives if they do not do
so.
The complex nature of our manufacturing activities make the company highly
susceptible to manufacturing problems and these problems can have substantial
negative impact when they occur.
Making semiconductors is a highly complex and precise process, requiring
production in a tightly controlled, clean environment. Even very small
impurities in our manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer or other factors
can cause a substantial percentage of wafers to be rejected or numerous chips on
each wafer to be nonfunctional. We may experience problems in achieving an
acceptable success rate in the manufacture of wafers, and the likelihood of
facing such difficulties is higher in connection with the transition to new
manufacturing methods. The interruption of wafer fabrication or the failure to
achieve acceptable manufacturing yields at any of our facilities would seriously
harm our business, financial condition and results of operations. We may also
experience manufacturing problems in our assembly and test operations and in the
introduction of new packaging materials.
We may not be able to use all of our existing or future manufacturing capacity,
which can negatively impact our business.
We have spent, and expect to continue to spend, significant amounts of money to
upgrade and increase its wafer fabrication, assembly and test manufacturing
capability and capacity. If we do not need some of this capacity and capability
for any of a variety of reasons, including inadequate demand or a significant
shift in mix of product orders making our existing capacity and capability
inadequate or in excess of actual needs, our fixed costs per semiconductor
produced will increase, which will harm us. In addition, if the need for more
advanced products requires accelerated conversion to technologies capable of
manufacturing semiconductors having smaller features, or requires the use of
larger wafers, we are likely to face higher operating expenses and the need to
write-off capital equipment made obsolete by the technology conversion, which
could seriously harm our business and results of operations.
Our operations and financial results could be severely harmed by earthquakes.
Our headquarters, some manufacturing facilities and some of our major vendors'
facilities are located near major earthquake faults. If a major earthquake or
other natural disaster occurs, we could suffer damages that could seriously harm
our business, financial condition and results of operations.
Our business, results of operations and financial condition will be seriously
harmed if we fail to successfully compete in our highly competitive industry and
markets.
The semiconductor industry is intensely competitive. This intense competition
results in a difficult operating environment for us and most other semiconductor
companies that is marked by erosion of average selling prices over the lives of
each product, rapid technological change, limited product life cycles and strong
domestic and foreign competition in many markets. A primary cause of this highly
competitive environment is the strength of our competitors. The industry
consists of major domestic and international semiconductor companies, many of
which have substantially greater financial, technical, marketing, distribution
and other resources than we do. Cypress faces competition from other domestic
and foreign high-performance integrated circuit manufacturers, many of which
have advanced technological capabilities and have increased their participation
in markets that are important to us. If we are unable to compete successfully in
this environment, our business, operating results and financial condition will
be seriously harmed.
Our ability to compete successfully in the rapidly evolving high performance
portion of the semiconductor technology industry depends on many factors,
including:
o Our success in developing new products and manufacturing technologies;
o The quality and price of our products;
o The diversity of our product lines;
o The cost effectiveness of our design, development, manufacturing and
marketing efforts;
24
<PAGE>
o The pace at which customers incorporate our products into their systems;
and
o The number and nature of our competitors and general economic conditions.
Although we believe we currently compete effectively in the above areas to the
extent they are within our control, given the pace of change in the industry,
our current abilities are not a guarantee of future success.
We must build semiconductors based on our forecasts of demand, and if our
forecasts are inaccurate, we may have large amounts of unsold products or we may
not be able to fill all orders.
We order materials and build semiconductors based primarily on our internal
forecasts, and secondarily on existing orders, which may be cancelled under many
circumstances. Consequently, we depend on our forecasts to determine inventory
levels for our products and the amount of manufacturing capacity that we need.
Because our markets are volatile and subject to rapid technological and price
changes, our forecasts may be wrong, and we may make too many or too few of
certain products or have too much or too little manufacturing capacity. Also,
our customers frequently place orders requesting product delivery almost
immediately after the order is made, which makes forecasting customer demand all
the more difficult. The above factors also make it difficult to forecast
quarterly operating results. If we are unable to predict accurately the
appropriate amount of product required to satisfy customer demand, our business,
financial condition and results of operations could be seriously harmed.
We must spend heavily on equipment to stay competitive, and will be adversely
impacted if we are unable to secure financing for such investments.
In order to remain competitive, semiconductor manufacturers generally must spend
heavily on equipment to maintain or increase manufacturing capacity and
capability. We have budgeted for approximately $380.0 million in expenditures on
equipment in 2000 and anticipate significant continuing capital expenditures in
subsequent years. In the past, we have reinvested a substantial portion of our
cash flow from operations in capacity expansion and improvement programs.
However, our cash flows from operations depend primarily on average selling
prices, which generally decline over time, and on the per-unit cost of our
products.
If we are unable to reduce the costs for our products at a rate at least as fast
as the rate of decline in average selling prices for such products, we may not
be able to generate enough cash flow from operations to maintain or increase
manufacturing capability and capacity as necessary. In such a situation we would
need to seek financing from external sources to satisfy our needs for
manufacturing equipment and, if cash flow from operations declines too much, for
operational cash needs as well. Such financing, however, may not be available on
terms which are satisfactory to us or at all, in which case our business,
financial condition and results of operations will be seriously harmed.
We compete with others to attract and retain key personnel, and any loss of, or
inability to attract, such personnel would harm us.
To a greater degree than most non-technology companies, we depend on the efforts
and abilities of certain key management and technical personnel. Our future
success depends in part, upon our ability to retain such personnel, and to
attract and retain other highly qualified personnel, particularly product and
process engineers. We compete for these individuals with other companies,
academic institutions, government institutions and other organizations.
Competition for such personnel is intense, and we may not be successful in
hiring or retaining new or existing qualified personnel. If we lose existing
qualified personnel or are unable to hire new qualified personnel as needed, our
business, financial condition and results of operations could be seriously
harmed.
We face additional problems and uncertainties associated with international
operations that could seriously harm us.
International sales represented approximately 50% of our revenues during Q1 2000
and 40% of our revenues during the same period in fiscal 1999. Our offshore
assembly and test operations, as well as our international sales, face risks
frequently associated with foreign operations, including:
o currency exchange fluctuations,
25
<PAGE>
o political instability,
o changes in local economic conditions,
o the devaluation of local currencies,
o import and export controls, and
o changes in tax laws, tariffs and freight rates.
To the extent any such risks materialize, our business, financial condition and
results of operations could be seriously harmed.
We are subject to many different environmental regulations, and compliance with
them may be costly.
We are subject to many different governmental regulations related to the
storage, use, discharge and disposal of toxic, volatile or otherwise hazardous
chemicals used in its manufacturing process. Compliance with these regulations
can be costly. In addition, over the last several years, the public has paid a
great deal of attention to the potentially negative environmental impact of
semiconductor manufacturing operations. This attention and other factors may
lead to changes in environmental regulations that could force us to purchase
additional equipment or comply with other potentially costly requirements. If we
fail to control the use of, or to adequately restrict the discharge of,
hazardous substances under present or future regulations, we could face
substantial liability or suspension of our manufacturing operations, which could
have a seriously harm our business, financial condition and results of
operations.
We depend on third parties to transport our products and could be harmed if
these parties experience problems.
We rely on independent carriers and freight forwarders to move our products
between manufacturing plants and to our customers. We have limited control over
these parties; however, any transport or delivery problems because of their
errors, or because of unforeseen interruptions in their activities due to
factors such as strikes, political instability, natural disasters and accidents,
could seriously harm our business, financial conditions and results of
operations and ultimately impact our relationship with our customers.
We may fail to integrate our business and technologies with those of companies
we have recently acquired and that we may acquire in the future.
We completed four acquisitions in calendar year 1999, one acquisition in Q1
2000, recently announced the pending acquisition of RadioCom Corporation, and a
pending merger with Alation Systems Inc., and may pursue additional acquisitions
in the future. If we fail to successfully or properly integrate these
businesses, our quarterly and annual results may be seriously harmed.
Integrating additional businesses, products and services could be expensive,
time-consuming and a strain on our resources. Specific issues that we face with
regard to prior and future acquisitions include:
o the difficulty of integrating acquired technology or products;
o the difficulty of assimilating the personnel of the acquired companies;
o the difficulty of coordinating and integrating geographically dispersed
operations;
o our ability to retain customers of the acquired company;
o the potential disruption of our on-going business and distraction of
management;
o the maintenance of brand recognition of acquired businesses;
o the failure to successfully develop acquired in-process technology,
resulting in the impairment of amounts currently capitalized as intangible
assets;
o unanticipated expenses related to technology integration;
o the maintenance of uniform standards, corporate cultures, controls,
procedures and policies;
o the impairment of relationships with employees and customers as a result of
any integration of new
26
<PAGE>
management personnel; and
o the potential unknown liabilities associated with acquired businesses.
We face a number of unknown risks associated with the year 2000 problem.
The year 2000 computer issue creates a variety of risks for us. The year 2000
computer problem refers to the potential for system and processing failures of
date-related data as a result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date represented as "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including amount other
things, interruptions in manufacturing, design and process development
operations, disruptions in processing business transactions, and disruptions in
other normal business activities. Issues related to the year 2000 computer
problem could still arise. The risks involve:
o potential warranty or other claims by customers with respect to errors in
our products;
o errors in systems we use to run our business;
o errors in systems used by our suppliers;
o errors in systems used by customers; and
o potential reduced spending by customers as a result of concerns about
potential year 2000 problems.
We have designed most of our products to be year 2000 compliant and have
developed corrective measures for other products that were not originally
designed to be year 2000 compliant. However, our products may be integrated into
or used in conjunction with products supplied by other vendors. We cannot
evaluate whether all of the products of other vendors are year 2000 compliant.
We may face claims based on year 2000 problems in other companies' products. We
may in the future be required to defend our products in legal proceedings, which
could be expensive regardless of the merits of these claims.
If our suppliers, vendors, partners, customers and service providers fail to
correct their year 2000 problems, these failures could result in an interruption
in, or a failure of, our normal business activities or operations. If a year
2000 problem occurs, it may be difficult to determine which party's products
have caused the problem. These failures could interrupt our operations and
damage our relationships with customers. Due to the general uncertainty inherent
in the year 2000 problem resulting from the readiness of third-party suppliers
and vendors, we are unable to determine at this time whether third-party year
2000 failures could harm our business, results of operations and financial
condition.
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Item 3 - 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 obligations.
A majority of Cypress's revenue and capital spending is transacted in U.S.
dollars. However, Cypress does enter into these transactions in other
currencies, primarily Japanese yen and certain other European currencies. To
protect against reductions in value and the volatility of future cash flows
caused by changes in foreign exchange rates, Cypress has established revenue and
balance sheet hedging programs. Cypress's hedging programs reduce, but do not
always eliminate, the impact of foreign currency rate movements. There have been
no significant changes in the market risk disclosures during the three months
ended April 2, 2000 as compared to the discussion in our 1999 Annual Report on
Form 10-K for the year ended January 2, 2000.
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PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
The information required by this item is included in Part I in Note 13 of Notes
to the Condensed Consolidated Financial Statements.
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27.1-- Financial Data Schedule.
b. Reports on Form 8-K
On March 17, 2000, Cypress filed a report on Form 8-K, which reported under Item
5, that on January 25, 2000, we completed the offering of our 4% Convertible
Subordinated Notes due 2005, and reported under Item 7, the subordinated
indenture related to these securities.
On March 9, 2000, we filed a report on Form 8-K, which reported under Item 5
that on March 2, 2000, Cypress had completed a merger with Galvantech, Inc.,
which was accounted for as a pooling of interests. Pursuant to Item 7, we
attached the Consolidated Financial Statements reflecting the acquisition of
Galvantech, Inc.
On March 3, 2000, we filed a report on Form 8-K/A, which reported under Item 5 a
correction to the number of shares of our common stock issued and outstanding as
of January 3,1999 included in the press release filed as Exhibit 99.1 to our
Current Report on Form 8-K, filed on February 7, 2000.
On February 7, 2000, we filed a report on Form 8-K, which reported under Item 5
the completion of our 4% Convertible Subordinated Note Offering, and the
announcement of certain fourth quarter results.
On January 24, 2000, we filed a report on Form 8-K, which reported under Item 7
Exhibit 23.1, the consent of Independent Accountants related to our 4%
Convertible Subordinated Notes due 2005.
On January 19, 2000, we filed a report on form 8-K/A, which reported under Item
5 the completion of the merger with IC WORKS Incorporated on April 1, 1999,
which was accounted for as a pooling of interest. The consolidated financial
statements give effect to the merger for all periods presented.
On January 18, 2000, we filed a report on form 8-K, which reported under Item 5,
that we entered into an Agreement and Plan and Reorganization, pursuant to which
the Cypress will acquire Galvantech, Inc.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYPRESS SEMICONDUCTOR CORORATION
By /s/ T.J. RODGERS
------------------------------------
T.J. Rodgers
President and Chief Executive Officer
By /s/ EMMANUEL HERNANDEZ
------------------------------------
Emmanuel Hernandez
Vice President, Finance and
Administration and
Chief Financial Officer
Dated: May 17, 2000
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the year ended April 2, 2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-03-2000
<PERIOD-END> APR-02-2000
<CASH> 307,420
<SECURITIES> 209,679
<RECEIVABLES> 136,508
<ALLOWANCES> 4,454
<INVENTORY> 94,551
<CURRENT-ASSETS> 824,371
<PP&E> 394,197
<DEPRECIATION> 529,013
<TOTAL-ASSETS> 1,521,648
<CURRENT-LIABILITIES> 215,627
<BONDS> 443,000
0
0
<COMMON> 1,216
<OTHER-SE> 795,514
<TOTAL-LIABILITY-AND-EQUITY> 1,521,648
<SALES> 264,241
<TOTAL-REVENUES> 264,241
<CGS> 130,777
<TOTAL-COSTS> 130,777
<OTHER-EXPENSES> 38,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,551
<INCOME-PRETAX> 68,103
<INCOME-TAX> 14,983
<INCOME-CONTINUING> 53,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,120
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.41
</TABLE>