<PAGE>1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 8-K/A
------------------
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 19, 2000
------------------
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
------------------
================================================================================
<PAGE>2
CYPRESS SEMICONDUCTOR CORPORATION
Item 5. Other Events
On April 1, 1999, Cypress completed a merger with IC WORKS Incorporated
(referred to herein as "Cypress (ICW)"), which was accounted for as a pooling
of interests. The consolidated financial statements give effect to the
merger for all periods presented.
The fiscal years of Cypress and Cypress (ICW) were different. Cypress (ICW)
has changed its fiscal year end to coincide with that of Cypress. For the
purpose of the consolidated statement of operations for the fiscal years ended
December 30, 1996 and December 29, 1997, Cypress (ICW's) consolidated statement
of operations for the fiscal years ended March 29, 1997 and March 28, 1998,
respectively, were combined with Cypress's consolidated statement of operations
for fiscal years ended December 30, 1996 and December 29, 1997, respectively.
For the fiscal year 1998, Cypress (ICW) consolidated statement of operations for
the twelve month period ended December 26, 1998 was combined with Cypress's
consolidated statements of operations for the fiscal year ended January 3, 1999.
For the purpose of the consolidated balance sheet for the fiscal years ended
December 29, 1997 and January 3, 1999, Cypress (ICW's) consolidated balance
sheets as of March 28, 1998 and December 26, 1998, respectively, were combined
with Cypress's consolidated balance sheets as of December 29, 1997 and January
3, 1999, respectively. As a result, the results of Cypress (ICW's) operations
for the quarter ended March 28, 1998 is included in the consolidated statements
of operations of both fiscal years 1998 and 1997.
<PAGE>3
CYPRESS SEMICONDUCTOR CORPORATION
Page
----
Item 7. Financial Statements and Exhibits
Consolidated Balance Sheets........................................... 4
Consolidated Statements of Operations................................. 6
Consolidated Statement of Stockholders' Equity........................ 7
Consolidated Statements of Cash Flows................................. 8
Notes to Consolidated Financial Statements............................ 10
Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................ 40
Quantitative and Qualitative Disclosure About Market Risk............. 53
Report of Independent Accountants..................................... 57
Quarterly Financial Data.............................................. 58
Signatures............................................................ 59
Exhibits
23.1 Consent of Independent Accountants.............................. 60
<PAGE>4
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
<CAPTION>
ASSETS
Jan. 3, Dec. 29,
1999 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 142,102 $ 154,034
Short-term investments.................................... 18,459 49,836
---------- ----------
Total cash, cash equivalents and short-term
investments......................................... 160,561 203,870
Accounts receivable, net (Note 2).................... 68,955 77,815
Inventories (Note 2)................................. 65,096 84,232
Other current assets................................. 14,372 53,166
---------- ----------
Total current assets.............................. 308,984 419,083
---------- ----------
Property, plant and equipment, net (Note 2)............... 348,936 443,779
Other assets (Note 2)..................................... 125,011 115,604
---------- ----------
$ 782,931 $ 978,466
========== ==========
<PAGE>5
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except per-share amounts)
<CAPTION>
Jan. 3, Dec. 29,
1999 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 53,932 $ 67,049
Accrued compensation and employee benefits................ 20,293 17,287
Other accrued liabilities................................. 12,852 13,867
Deferred income on sales to distributors.................. 13,300 10,131
Income taxes payable...................................... 13,591 1,088
---------- ----------
Total current liabilities......................... 113,968 109,422
---------- ----------
Convertible subordinated notes............................ 160,000 175,000
Deferred income taxes..................................... -- 36,070
Other long-term liabilities, including minority interest.. 10,240 13,342
---------- ----------
Total liabilities...................... 284,208 333,834
---------- ----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized; none issued and outstanding.................. -- --
Common stock, $.01 par value, 250,000 shares
authorized; 110,753 and 110,396 issued; 97,465 and
102,933 outstanding at January 3, 1999 and
December 29, 1997........................................ 1,107 1,103
Additional paid-in-capital................................ 482,781 474,268
Deferred compensation..................................... (1,152) (167)
Retained earnings......................................... 180,625 291,559
---------- ----------
663,361 766,763
Less shares of common stock held in treasury, at
cost; 13,288 shares at January 3, 1999 and 7,463 shares
at December 29, 1997..................................... (164,638) (122,131)
---------- ----------
Total stockholders' equity............. 498,723 644,632
---------- ----------
$ 782,931 $ 978,466
========== ==========
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>6
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
<CAPTION>
Year Ended
Jan. 3, Dec. 29, Dec. 30,
1999 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues.......................................... $ 554,891 $ 598,485 $ 569,941
---------- ---------- ----------
Cost of revenues.................................. 409,108 393,769 338,687
Research and development.......................... 114,551 104,300 95,546
Selling, general and administrative............... 91,016 82,026 70,666
Restructuring and other non-recurring costs....... 60,737 9,882 10,932
---------- ---------- ----------
Total operating costs and expenses........... 675,412 589,977 515,831
---------- ---------- ----------
Operating income (loss)........................... (120,521) 8,508 54,110
Interest expense.................................. (11,276) (8,461) (7,743)
Interest income and other......................... 13,356 13,092 9,,217
---------- ---------- ----------
Income (loss) before income taxes................. (118,441) 13,139 55,584
(Provision) benefit for income taxes.............. 13,523 (5,613) (30,476)
---------- ---------- ----------
Net income (loss)............................ $ (104,918) $ 7,526 $ 25,108
========== ========== ==========
Net income (loss) per share:
Basic............................................ $ (1.03) $ 0.08 $ 0.28
Diluted.......................................... $ (1.03) $ 0.07 $ 0.26
Weighted average common and common equivalent shares
outstanding:
Basic............................................ 101,944 100,137 90,247
Diluted.......................................... 101,944 107,866 95,555
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>7
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Additional Total
Common Stock Paid-In Deferred Retained Treasury Stockholders'
Shares Amount Capital Compensation Earnings Stock Equity
-------- -------- ---------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996... 88,551 $ 959 $ 317,287 $ (812) $ 258,925 $ (83,965) $ 492,394
-------- -------- ---------- ------------ --------- --------- ---------
Issuance of common stock
under employee stock plans
and other.................... 5,390 55 23,352 -- -- -- 23,407
Tax benefit resulting from
stock option transactions.... -- -- 3,894 -- -- -- 3,894
Repurchase of common stock
under stock repurchase
program...................... (2,837) -- -- -- -- (32,878) (32,878)
Adjustment to deferred
compensation................. -- -- -- 191 -- -- 191
Net income for the year....... -- -- -- -- 25,108 -- 25,108
-------- --------- ---------- ------------ --------- --------- ---------
Balances at December 30, 1996. 91,104 1,014 344,533 (621) 284,033 (116,843) 512,116
Re-issuance of treasury
shares under employee
stock plans and other........ 5,556 22 36,980 -- -- -- 37,002
Premiums received from put
option issuances............. -- -- 2,760 -- -- -- 2,760
Tax benefit resulting from
stock option transactions.... -- -- 6,959 -- -- -- 6,959
Issuance of common stock
from the conversion of the
convertible debt............. 6,789 67 83,036 -- -- -- 83,103
Repurchase of common stock
under stock repurchase program (516) -- -- -- -- (5,288) (5,288)
Adjustment to deferred
compensation................. -- -- -- 454 -- -- 454
Net income for the year....... -- -- -- -- 7,526 -- 7,526
-------- --------- ---------- ------------ --------- --------- ---------
Balances at December 29, 1997. 102,933 1,103 474,268 (167) 291,559 (122,131) 644,632
-------- --------- ---------- ------------ --------- --------- ---------
Cypress (ICW) activities for
the quarter ended March 28, 1998 -- -- -- -- 1,622 -- 1,622
Re-issuance of treasury
shares under employee
stock plans and other........ 2,139 4 1,893 -- (7,638) 19,767 14,026
Premiums received from put
option issuances............. -- -- 6,620 -- -- -- 6,620
Repurchase of common stock
under stock repurchase program (7,607) -- -- -- -- (62,274) (62,274)
Adjustment to deferred........ -- -- -- (985) -- -- (985)
compensation
Net loss for the year......... -- -- -- -- (104,918) -- (104,918)
-------- --------- ---------- ------------ --------- --------- ---------
Balances at January 3, 1999... 97,465 $1,107 $482,781 $ (1,152) $ 180,625 $(164,638) $ 498,723
======== ========= ========== ============= ========= ========= =========
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>8
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Year Ended
Jan. 3, Dec. 29, Dec. 30,
1999 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)...................................... $ (104,918) $ 7,526 $ 25,108
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization........................ 114,598 114,013 100,393
Non-cash interest and amortization of debt
issuance costs...................................... 1,034 3,978 2,774
Net gain on early retirement of debt................. (1,734) -- --
Loss on sale of fixed assets......................... 1,069 -- --
Deferred gain on sale of assets...................... -- (3,431) (1,384)
Restructuring costs.................................. 60,737 4,952 17,950
Other non-recurring costs............................ 8,827 -- (12,943)
Deferred income taxes................................ (797) 14,782 6,216
Changes in operating assets and liabilities:
Receivables......................................... 9,332 4,191 39,824
Inventories......................................... 18,013 (25,895) (26,144)
Other assets........................................ 35,298 (152) (9,656)
Accounts payable and accrued liabilities............ (14,862) (16,695) (25,501)
Deferred income..................................... 2,445 (5,266) 1,712
Income taxes payable................................ (22,770) 5,870 (13,117)
---------- ---------- ----------
Net cash flow generated from operating activities 106,272 113,873 105,232
---------- ---------- ----------
Cash flow from investing activities:
Purchase of investments............................. (110,718) (112,185) (198,342)
Sale or maturities of investments................... 127,195 93,870 276,806
Acquisition of property, plant and equipment........ (82,929) (143,803) (223,256)
Proceeds from sale of equipment..................... 6,551 40,789 6,514
---------- ---------- ----------
Net cash flow used for investing activities........... (59,901) (121,329) (138,278)
---------- ---------- ----------
Cash flow from financing activities:
Borrowing from (repayment of) line of credit........ (3,369) (49,249) 51,058
Proceeds from issuance (repayment) of notes payable. (1,186) (5,780) 10,048
Issuance of Convertible Subordinated Notes, net of
issuance costs..................................... -- 170,187 --
Redemption of convertible debt...................... -- (14,331) --
Early retirement of debt............................ (12,916) -- --
Restricted investments related to building lease
agreements......................................... -- 601 (14,414)
Repurchase of common stock.......................... (62,274) (5,288) (32,878)
Issuance of common stock............................ 340 7,438 27,152
Re-issuance of treasury shares...................... 12,130 33,735 --
Premiums received from put options.................. 6,620 2,760 --
Other long-term liabilities, including minority
interest........................................... (1,082) (615) 880
---------- ---------- ----------
Net cash flow generated (used) for financing
activities........................................... (61,737) 139,458 41,846
---------- ---------- ----------
<PAGE>9
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<CAPTION>
Year Ended
Jan. 3, Dec. 29, Dec. 30,
1999 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cypress (ICW) net change in cash during the
quarter ended March 28, 1998......................... 3,434 -- --
Net increase (decrease) in cash and cash equivalents.. (11,932) 132,002 8,800
Cash and cash equivalents, beginning of year.......... 154,034 22,032 13,232
---------- ---------- ----------
Cash and cash equivalents, end of year.......... $ 142,102 $ 154,034 $ 22,032
========== ========== ==========
Supplemental disclosures:
Cash paid during the year for:
Interest............................................. $ 10,092 $ 5,707 $ 5,791
Income taxes......................................... $ 452 $ 1,550 $ 45,271
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
CYPRESS -- Cypress Semiconductor Corporation ("Cypress") designs, develops,
manufactures and markets a broad line of high-performance digital and
mixed-signal integrated circuits for a range of markets, including computers,
data communications, telecommunications and instrumentation systems.
Cypress's operations outside of the U.S. expanded in 1996 with the addition
of its test and assembly plant in the Philippines. Cypress's other foreign
operations include several sales offices and design centers located in various
parts of the world. Revenues to international customers were 45%, 39% and 37% of
total revenues in 1998, 1997 and 1996, respectively. As of January 3, 1999, all
of Cypress's subsidiaries were wholly owned except for Cypress Semiconductor
(Texas) Inc. ("CTI"), Cypress's wafer fabrication facility in Texas, which
was approximately 17% owned by Altera Corporation ("Altera"). Altera
receives a fixed amount of wafer fab capacity for its investment (see Note 11).
The consolidated financial statements include the accounts of Cypress and
all of its subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
On April 1, 1999, Cypress completed a merger with IC WORKS Incorporated
(referred to herein as "Cypress (ICW)"), which was accounted for as a pooling
of interests. The consolidated financial statements give effect to the
merger for all periods presented.
The results of operations previously reported by the separate companies and
the combined amounts presented in the accompanying consolidated financial
statements are presented below.
(In thousands)
1998 1997 1996
--------- --------- ---------
Revenues:
Cypress.............................. $ 486,841 $ 544,356 $ 528,385
ICW.................................. 68,050 54,129 41,556
--------- --------- ---------
Total revenues....................... $ 554,891 $ 598,485 $ 569,941
========= ========= =========
Net income (loss):
Cypress.............................. $(110,850) $ 18,419 $ 53,029
ICW.................................. 5,932 (10,893) (27,921)
--------- --------- ---------
Net income (loss).................... $(104,918) $ 7,526 $ 25,108
========= ========= =========
<PAGE>11
FISCAL YEAR -- Beginning with its 1998 fiscal year end, Cypress ended its
fiscal months, quarters and years on Sundays, rather than Mondays, bringing its
fiscal period ends in line with predominant industry practice. Fiscal years
1998, 1997 and 1996 ended January 3, 1999, December 29, 1997 and December 30,
1996, respectively. Fiscal year 1998 was a 53-week year ending on the Sunday
closest to December 31 while fiscal years 1997 and 1996 were 52-week years
ending on the Monday closest to December 31. Operating results for this
additional week were considered immaterial to Cypress's consolidated operating
results for the year ended January 3, 1999.
The fiscal years of Cypress and Cypress (ICW) were different. Cypress (ICW)
has changed its fiscal year end to coincide with that of Cypress. For the
purpose of the consolidated statement of operations for the fiscal years ended
December 30, 1996 and December 29, 1997, Cypress (ICW's) consolidated statement
of operations for the fiscal years ended March 29, 1997 and March 28, 1998,
respectively, were combined with Cypress's consolidated statement of operations
for fiscal years ended December 30, 1996 and December 29, 1997, respectively.
For the fiscal year 1998, Cypress (ICW) consolidated statement of operations for
the twelve month period ended December 26, 1998 was combined with Cypress's
consolidated statements of operations for the fiscal year ended January 3, 1999.
For the purpose of the consolidated balance sheet for the fiscal years ended
December 29, 1997 and January 3, 1999, Cypress (ICW's) consolidated balance
sheets as of March 28, 1998 and December 26, 1998, respectively, were combined
with Cypress's consolidated balance sheets as of December 29, 1997 and January
3, 1999, respectively. As a result, the results of Cypress (ICW's) operations
for the quarter ended March 28, 1998 is included in the consolidated statements
of operations of both fiscal years 1998 and 1997. Cypress (ICW's) results of
operations for the quarter ended March 28, 1999 were as follows:
Quarter ended
Mar. 28, 1999
(In Thousands)
--------------
Revenues.................... $ 15,201
==============
Gross profit...... ......... $ 4,422
==============
Loss before income taxes.... $ (1,622)
==============
Net loss.................... $ (1,622)
==============
Net loss per share:
Basic....................... $ (0.13)
==============
Diluted.................... $ (0.13)
==============
<PAGE>12
MANAGEMENT ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates, although such differences are not expected to be material to the
financial statements.
RECLASSIFICATIONS -- Certain prior year amounts have been adjusted to
conform to current year presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- For certain of Cypress's financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable and other current liabilities, the carrying amounts approximate their
fair value due to the relatively short maturity of these items. The estimated
fair market value of Cypress's investments reasonably estimate their fair values
based on market information. At January 3, 1999, the estimated fair value of the
Convertible Subordinated Notes was $141.8 million.
The estimated fair values have been determined by Cypress, using available
market information. However, considerable judgement is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented are not necessarily indicative of the amounts that Cypress could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies could have a material effect on the estimated
fair value amounts.
CASH EQUIVALENTS AND INVESTMENTS -- Highly liquid investments purchased with
an original maturity of ninety days or less are considered to be cash
equivalents. All Cypress investments are classified as available- for-sale.
Investments in available-for-sale securities are reported at fair value with
unrealized gains and losses net of related tax, if any, included as a component
of stockholders' equity.
INVENTORIES -- Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market. Market is
based on estimated net realizable value.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at
cost. Depreciation is computed for financial reporting purposes using the
straight-line method over the estimated useful lives of the assets as presented
below. Leasehold improvements and leasehold interests are amortized over the
shorter of the estimated useful lives of the assets or the remaining term of the
lease. Accelerated methods of computing depreciation are used for tax purposes.
Useful Lives
in Years
------------
Equipment............................... 3 to 7
Buildings and leasehold improvements.... 7 to 10
Furniture and fixtures.................. 5
PRE-OPERATING COSTS -- Incremental costs incurred in connection with
developing major production capability at new manufacturing plants, including
depreciation, amortization and cost of qualification of equipment and production
processes were capitalized up to December 1997. Pre-operating costs totaling
<PAGE>13
$3.8 million, net of accumulated amortization were included in other assets at
December 29, 1997. Such costs were being amortized over five years at a rate
based on estimated units to be manufactured during that period. In fiscal 1998,
these costs were written off and at January 3, 1999, no pre-operating costs are
remaining.
LONG-LIVED ASSETS -- Long-lived assets held and used by Cypress are reviewed
for impairment whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. In addition, all long-lived assets to
be disposed of are reported at the lower of carrying amount or fair market
value, less selling costs.
REVENUE RECOGNITION -- Revenues from product sales are generally recognized
upon shipment and a reserve is provided for estimated returns. A portion of
Cypress's sales are made to domestic distributors under agreements which allow
certain rights of return and price protection on products unsold by domestic
distributors. Accordingly, Cypress defers recognition of revenues and profit on
such sales until distributors resell the products.
Cypress sells to certain international distributors with a provision for
price adjustments on certain products. Cypress reserves for all anticipated
price adjustments. Certain international sales are made to distributors under
agreements that allow the rights of return Accordingly, revenues are deferred
until the merchandise are sold by the distributors.
Cypress also has inventory, which is held by certain customers on a
consignment basis. Revenues are recorded when title transfers as defined per the
respective consignment agreements.
INCOME TAXES -- Cypress follows the liability method of accounting for
income taxes which requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
EARNINGS PER SHARE -- In accordance with Statement of Accounting Standard
No. 128 ("SFAS 128"), Cypress reports Earnings Per Share ("EPS"), both basic and
diluted EPS on the income statement. Basic EPS is based upon weighted-average
common shares outstanding. Diluted EPS is computed using the weighted average
common shares outstanding plus any potentially dilutive securities, except when
their effect is anti-dilutive. Dilutive securities include stock options and
convertible debt.
TRANSLATION OF FOREIGN CURRENCIES -- Cypress uses the U.S. dollar as
its functional currency for all foreign subsidiaries. Accordingly, gains
and losses from translation of foreign currency financial statements into U.S.
dollars are included in results of operations. Sales to customers are primarily
denominated in U.S. dollars. All foreign currency translation gains and losses
have not been material in any year.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
subject Cypress to concentrations of credit risk are primarily investments and
trade accounts receivable. Cypress's investment policy requires cash investments
to be placed with high-credit quality institutions and to limit the amount of
credit from any one issuer.
Cypress sells its products to original equipment manufacturers and
distributors throughout the world. Cypress performs ongoing credit evaluations
of its customers' financial condition whenever deemed necessary and generally
<PAGE>14
does not require collateral. Cypress maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of all accounts
receivable.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- Cypress accounts for its stock
option plans and its employee stock purchase plan in accordance with provisions
of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". In accordance with Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", Cypress
provides additional pro-forma disclosures in Note 6.
COMPREHENSIVE INCOME -- In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). Cypress adopted this statement as of the
first quarter of 1998 and has determined that it does not have any changes in
equity (net assets) from non-owner sources.
SEGMENTAL REPORTING -- In fiscal 1998, Cypress adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 supersedes Statement
of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 establishes standards for disclosures about
products and services, geographic areas and major customers. (See Note 10.)
RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes a new model for accounting for derivatives and hedging
activities and supersedes 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 or 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 2000, are not expected to have a material effect on Cypress's
consolidated financial statements.
NOTE 2: BALANCE SHEET COMPONENTS
- ---------------------------------
AVAILABLE-FOR-SALE SECURITIES
Cypress's portfolio of available-for-sale securities consists of the
following:
Jan. 3, Dec. 29,
1999 1997
---------- ----------
(In thousands)
Corporate debt securities........... $ 101,042 $ 89,557
State and municipal obligations..... 73,607 94,675
Other............................... 23,341 48,042
---------- ----------
Total available-for-sale
securities.................... $ 197,990 $ 232,274
========== ==========
<PAGE>15
At January 3, 1999 and December 29, 1997, the net unrealized holding gains and
losses on securities were immaterial. The securities at January 3, 1999 and
December 29, 1997 by contractual maturity are shown below.
Jan. 3, Dec. 29,
1999 1997
---------- ----------
(In thousands)
Due in one year or less............. $ 140,944 $ 190,128
Due after one year through two years 57,046 42,146
---------- ----------
Total available-for-sale
securities.................... $ 197,990 $ 232,274
========== ==========
ACCOUNTS RECEIVABLE, NET
Jan. 3, Dec. 29,
1999 1997
---------- ----------
(In thousands)
Accounts receivable, gross.......... $ 72,005 $ 81,925
Allowance for doubtful accounts and
customer returns................... (3,050) (4,110)
---------- ----------
Accounts receivable, net....... $ 68,955 $ 77,815
========== ==========
INVENTORIES, NET
Jan. 3, Dec. 29,
1999 1997
---------- ----------
(In thousands)
Raw materials....................... $ 8,939 $ 17,900
Work-in-process..................... 37,087 39,506
Finished goods...................... 19,070 26,826
---------- ----------
Total............................. $ 65,096 $ 84,232
========== ==========
PROPERTY, PLANT AND EQUIPMENT
Jan. 3, Dec. 29,
1999 1997
---------- ----------
(In thousands)
Land................................. $ 13,533 $ 12,922
Equipment............................ 623,393 729,320
Buildings and leasehold improvements. 96,825 69,628
Furniture and fixtures............... 6,656 6,876
---------- ----------
Total property, plant and equipment.. 740,407 818,746
Accumulated depreciation and
amortization....................... (391,471) (374,967)
---------- ----------
Net property, plant and equipment... $ 348,936 $ 443,779
========== ==========
<PAGE>16
OTHER ASSETS
Jan. 3, Dec. 29,
1999 1997
---------- ----------
(In thousands)
Restricted investments.............. $ 59,742 $ 60,112
Long-term investments............... 57,046 42,146
Other............................... 8,223 13,346
---------- ----------
Total.......................... $ 125,011 $ 115,604
========== ==========
NOTE 3: RESTRUCTURING AND OTHER NON-RECURRING COSTS
- ---------------------------------------------------
1998 RESTRUCTURING AND OTHER NON-RECURRING COSTS
During 1998, Cypress implemented an overall cost reduction plan and recorded
a $58.9 million restructuring reserve. The restructuring entailed:
o The shutdown of Fab 3, located in Bloomington, Minnesota and
consolidation of parts of Fab 3 operations with other operations of
Cypress.
o The discontinuance of the 0.6 micron 256k SRAM production in Fab 2
located in Texas.
o The conversion of an existing research and development fab located in
San Jose (Fab 1) to eight-inch capability in order to be compatible with
the state of the art eight-inch Minnesota manufacturing facility.
o The transfer of Cypress's test operations from its subcontractor,
Alphatec, in Thailand to Cypress's production facility in the
Philippines.
o The restructuring activities described above include the termination of
approximately 850 employees primarily from manufacturing both at Cypress
and at Alphatec.
The following table sets forth Cypress's 1998 restructuring expense and
charges taken from the date the restructuring commenced through January 3, 1999.
<TABLE>
<CAPTION>
1998 Balance
Restructuring Jan. 3,
Expense Utilized 1999
----------- ----------- -----------
<S> <C> <C> <C>
(In thousands)
Write-down of inventory(1)........................... $ 3,250 $ (3,250) $ --
Severance and other employee related charges(1)...... 5,334 (3,025) 2,309
Other fixed asset related charges(1)................. 3,030 -- 3,030
Provision for phase-down and consolidation of
manufacturing facilities(1)......................... 976 (637) 339
----------- ----------- -----------
Total........................................... $ 12,590 $ (6,912) $ 5,678
=========== =========== ===========
- ----------
(1) Classified on the Balance Sheet as part of accrued liabilities.
</TABLE>
<PAGE>17
FAB 3 -- The charge related to the shutdown of Fab 3 was $30.2 million. Of
this amount, $26.0 million related to the write-down of equipment held for sale,
$1.7 million of other fixed asset related charges for incremental third party
costs expected to be incurred in the eventual physical removal of the written
down assets, $1.1 million related to severance and other employee related costs
and $1.4 million related to inventory.
Fab 3 assets, which were not upgradable to 8-inch capability, were written
down based on the estimated useful lives of the assets and the salvage value of
the assets. The estimated useful lives were generally two months as a result of
the decision to discontinue production in Fab 3 and the salvage value was
determined based on the estimated sales value of used semiconductor equipment.
Non-upgradable Fab 3 assets were depreciated down to their salvage value during
the production phase-down period. Fab 3 assets, which were upgradable to 8-inch
capability, were transferred to Fab 4 production during the third quarter of
1998.
In accordance with the restructuring plan, Fab 3 production was phased down
beginning in the second quarter of 1998 and ceased in July 1998. From this time,
Cypress has held the non-upgradable equipment for sale. However, due to the
over-supply of used semiconductor equipment, a substantial amount of the
equipment remains on hand. Cypress expects to recover the originally determined
salvage value for such equipment.
FAB 2 -- The decision to discontinue manufacturing SRAM products on
Cypress's 0.6 micron 256K SRAM process in Texas resulted in excess equipment and
employee redundancy. Charges with this decision totaled $21.3 million, of which
$18.0 million related to the write-down of equipment, $0.3 million related to
the write-down of inventory, $1.7 million related to severance and other
employee related costs and $1.3 million of other fixed asset related charges for
incremental third party costs expected to be incurred in the eventual physical
removal of the written down assets and the resolution of certain related tax
matters.
Excess equipment in Fab 2 was written down based on the useful lives of the
assets and the estimated salvage value of the assets. Cypress had the ability
and intention to sell all the equipment immediately but due to the semiconductor
industry slow-down, Cypress recognized immediate sale of the equipment would be
difficult. The equipment was kept in the fab, ready for demonstration and
testing by a willing buyer. Cypress used the equipment during the production
phase-down period through May 1998.
Similar to Fab 3 equipment, some of this equipment remains on hand due to
the over-supply of used semiconductor equipment on the market. Cypress expects
to recover the originally determined salvage value for such equipment, however,
no assurance can be given as to the amount of proceeds which will ultimately be
collected.
FAB 1 and San Jose Operations -- The restructuring plan included the upgrade
of Fab 1 to an eight-inch facility to ensure compatibility with Cypress's Fab 4
manufacturing facility in Minnesota. Fab 1 is used for research and development
purposes. The plan assumed commencement of Fab 1 restructuring activities during
the middle of 1998 with completion by the end of January 1999. The plan included
the disposal and write-down of six-inch manufacturing equipment which was not
<PAGE>18
upgradable to eight-inch capability. The remaining net book value of such assets
is being written off over the estimated useful life through January 1999.
Incremental depreciation charges, to reflect the revised useful lives of this
equipment were included in research and development costs for 1998 and will
continue through January 1999. Cypress also reserved $1.0 million to write-down
the value of certain other equipment and reserved $1.3 million related to
severance and other employee related costs.
ALPHATEC -- Cypress reserved $5.1 million to provide for the consolidation
of Thailand test activities from Alphatec, Cypress's subcontractor, with
Cypress's Philippines facility. Of this $5.1 million reserve, $1.5 million was
related to production inventories which were no longer useable as a result of
this consolidation, $1.3 million was related to severance costs at the
subcontractor and $2.3 million was related to excess equipment and leasehold
improvements which were no longer used. The assets were considered held for sale
and were written down to their revised carrying value. The transfer of
production from Alphatec to the Philippines facility began during the second
quarter of 1998 and was completed in January 1999, one month later than
originally planned.
OTHER -- Separate from the restructuring charge, Cypress recorded an
additional charge of $27.3 million, which were recorded as operating expenses.
The charges were for inventory reserves ($15.8 million), the write-off of
pre-operating costs ($3.8 million), the write-off of an equity investment ($3.1
million), costs incurred to reimburse a customer for expenses incurred as a
consequence of Cypress's defective products ($2.5 million) and the write-off of
obsolete equipment in Fab 4 ($2.1 million). The write-down of inventory was made
to establish incremental reserves for excess inventory and was recorded as cost
of revenues.
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operation in the Philippines. As a result of
restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits and accordingly the costs were written off to cost of
sales. There were no capitalized pre-operating costs subsequent to the first
quarter of 1998.
The $3.1 million write-off of the investment was recorded against net
interest and other income to reflect the decline in the value of a certain
investment. Selling, general and administrative costs included the write-off of
$2.5 million in costs incurred to reimburse a customer for certain product
expenses incurred. During Cypress's periodic review of equipment, some equipment
was identified as obsolete and $2.1 million was charged to cost of sales to
write-off the obsolete equipment.
1997 RESTRUCTURING COSTS
In fiscal 1997, Cypress (ICW) Board and management decided to exit the
wafer fabrication business completely and focus on becoming a fabless
semiconductor company. In November 1997, Cypress (ICW) entered into an agreement
with Maxim Integrated Products (Maxim) and various other agreements with other
parties to exit the wafer fabrication business through the sale, refinancing,
and disposal of all wafer fabrication related assets (fab). Maxim agreed to
<PAGE>19
purchase wafer fabrication assets from Cypress (ICW) and its Fab Partners and
also agreed to purchase certain equipment from Cypress (ICW) lessors thereby
relieving Cypress (ICW) of significant future equipment lease obligations. Maxim
also acquired the property that housed the fab from Samsung Semiconductor, Inc.
(SSI) as part of the same transaction. The remaining assets to be disposed at
the end of fiscal year 1997 were liquidated between April 1998 and June 1998
(including at an equipment auction in June 1998). Due to the lack of any
meaningful sale of assets at the June auction, the actual liquidation of
substantially all of the remaining assets was completed in November 1998. In May
1998, Maxim purchased approximately $0.5 million of the assets to be disposed of
in another asset sale transaction separate from the November 1997 transaction.
Cypress (ICW) entered into the following material agreements related to the
sale of its fab assets to Maxim in November 1997:
1. Asset purchase agreements -- related to the purchase of assets from each
of the respective owners of assets. (Fab Partners, lessors, and Cypress
(ICW).) The loss incurred by the Company as a result of these agreements
are included as part of the restructuring costs in the accompanying
financial statements.
2. Loan agreement -- related to a loan by Maxim to Cypress (ICW) in the
amount of $2.0 million. Recorded as long term debt in March 1998 and is
payable at the earlier of an IPO, change in control, or four years.
3. Foundry agreement -- related to Cypress (ICW) agreement for Maxim to
provide BiCMOS foundry services to Cypress (ICW). This agreement
terminated in December 1998. No effect on financials.
4. Operating agreement -- related to sharing of the fab between Cypress (ICW)
and Maxim for a period of up to seven months from close (actual duration
was four months). Specifics of the agreements include how costs are shared,
who has control and when the fab transfers sequentially from Cypress (ICW)
to Maxim, the basis for one party billing the other for its manufacturing
activities within the fab during the period of sharing the fab, and an
agreement with Maxim that they will hire substantially all the wafer
fab-related employees based on a prescribed schedule. The operating
agreement was substantially completed in March 1998.
Cypress (ICW) and Maxim also entered into an operating agreement that
outlined the utilization of and cost-sharing for the facility during the
six-month transition period following the sale of the fab assets to Maxim.
While Maxim had acquired most of Cypress (ICW) owned and leased fab assets
and certain related assets, Cypress (ICW) still owned or leased other wafer
fabrication assets that were not purchased by Maxim. As such, in connection with
the exit of the wafer fabrication business, Cypress (ICW) recorded a restructure
charge of approximately $9.9 million related to impairment of assets sold to
Maxim ($2.2 million), impairment of assets held for sale ($1.8 million),
refinancing of lease agreements ($3.6 million), employee severance ($0.2
million), and other transaction costs ($2.2 million). These agreements with
Maxim resulted in a reduction of headcount of approximately 113 foundry
employees (most of whom were hired by Maxim). The total expected cash outlay
related to this charge was approximately $6.7 million at December 29, 1997, of
which the remaining $4.1 million was paid in 1999. As of December 29, 1997 and
January 3, 1999, the remaining reserves related to these provisions are
summarized as follows (in thousands):
<PAGE>20
<TABLE>
<CAPTION>
Operating Transaction
lease Severance and other
Costs Costs Costs Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Fiscal 1997 provision................................ $ 3,615 $ 207 $ 2,164 $ 5,986
Amount utilized in 1997.............................. -- 29 1,808 1,837
--------- --------- --------- ---------
Balance at December 29, 1997......................... 3,615 178 356 4,149
Amount utilized in 1998.............................. 1,283 118 356 1,757
--------- --------- --------- ---------
Balance at January 3, 1999........................... $ 2,332 $ 60 $ -- $ 2,392
========= ========= ========= =========
Transaction and other costs include:
Brokerage, legal and accounting fees........... $ 922
Price discounts................................. 180
Purchase rebates................................ 431
Inventory write-offs............................ 205
Costs to remove and return leased equipment..... 426
------
Total...................................... $2,164
======
</TABLE>
In November 1997, Cypress (ICW) also borrowed $2.0 million from Maxim with
interest accruing at 6% per annum. The note and interest are to be repaid at the
earlier of: a majority sale of Cypress (ICW), the consummation of a public
offering of Cypress (ICW) common stock, or four years from the date of the note
(November 2001). In addition, Cypress (ICW) entered into a wafer purchase
agreement with Maxim that allows Cypress (ICW) to buy BiCMOS wafers from Maxim
for a period of up to two years.
On the closing date of the transaction, November 20, 1997, Maxim purchased
Cypress (ICW's) six-inch wafer fabrication leasehold improvements and
manufacturing equipment as well as certain five-inch wafer fabrication equipment
which Cypress (ICW) owned or acquired through capital leases. The carrying value
of the six-inch and five-inch fabrication assets were $14.25 million and $0.4
million, respectively. Proceeds of the sale of these assets to Maxim were $12.5
million to Cypress (ICW).
<PAGE>21
The following table summarizes the disposition of the six-inch and
five-inch fabrication assets held by Cypress (ICW) through December 29, 1997.
Six-inch Five-inch
Assets Assets
---------- ----------
(In thousands)
Carrying value of assets prior to
recognition of impairment loss ......... $ 29,500 $ 6,000
Recognition of impairment ............... (15,250) (3,896)
Sale of assets to Maxim.................. (14,250) (400)
Addition asset impairment................ -- (551)
---------- ----------
Total deferred tax assets........... $ -- $ 1,153
========== ==========
Substantially all the assets held at December 29, 1997 were sold prior to
January 3, 1999.
1996 Restructuring and Other Non-recurring Costs
During 1996, Cypress recorded a pre-tax restructuring and other
non-recurring benefit as detailed below:
1996
----------
Restructuring............ $ 9,100
Non-recurring benefit.... (17,800)
Other.................... 1,682
----------
Total............... $ (7,018)
==========
The $9.1 million pre-tax charge was a result of Cypress's decision to
restructure its San Jose, California wafer fabrication facility, from a
production wafer fabrication plant to predominantly a research and development
wafer fabrication facility. The charge included $5.9 million for the write-down
of certain excess equipment and $3.2 million for severance and other related
restructuring charges. Substantially all of the reserve has been used as of the
end of 1998.
The $17.8 million benefit was derived from the reversal of the reserve
established in 1995 related to the Texas Instruments ("TI") patent infringement
lawsuit. In July 1996, the Federal Circuit Court of Appeals ("Court") affirmed
the earlier decision of the trial court that Cypress did not infringe on either
of the patents in the suit. In September 1996, the Court decided that it would
not hear any appeal filed by the plaintiff regarding this matter and as a result
of this ruling, Cypress reversed the reserve established in 1995. In 1996, TI
filed a petition of certiorari in the United States Supreme Court. In June 1997,
the United States Supreme Court denied TI's petition of certiorari. Accordingly,
adjudication of the case was determined to be final.
<PAGE>22
In September 1996, Cypress recorded a one-time, pre-tax credit of $3.3
million related to the insurance reimbursement of defense costs incurred in
conjunction with the securities class-action lawsuit. This credit was offset by
$5.0 million of other non-recurring charges related to agreements with certain
companies regarding cross-licensing and other matters.
Due to deteriorating market conditions in the wafer foundry business during
fiscal 1996, demand for Cypress (ICW) foundry services declined significantly.
As a result of the decreased demand for foundry services and Cypress (ICW)
related cash flow constraints, management decided, in the fourth quarter of
fiscal 1996, to pursue the disposal of the six-inch equipment and related
leasehold equipment and machinery within its foundry business. As of March 1997,
the assets held for sale consisting of building leasehold improvements and
related machinery and equipment, had a carrying amount of approximately $29.5
million. Cypress (ICW) estimated the fair value of these assets based on
management's estimate of potential proceeds from their sale to be approximately
$14.25 million, net of an estimated $0.3 million for costs to sell the assets,
including commissions and legal and closing costs. As a result, Cypress (ICW)
recorded a $15.25 million charge to its results of operations in 1996
representing the excess of the $29.5 million carrying amount over the $14.25
million fair value less cost to sell.
In addition, Cypress (ICW) had remaining operating lease commitments for
machinery and equipment related to its foundry business, which will not be
utilized as a result of Cypress (ICW) decision to pursue the disposal of certain
fixed assets related to the foundry business. In accordance with EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity," Cypress (ICW) recorded a $2.7 million charge in fiscal
1996, representing the amount of operating lease payments to be made for which
no future economic benefit was anticipated. The $2.7 million representing future
cash outlays were made during fiscal 1997.
During fiscal 1996, Cypress (ICW) sold certain fully depreciated five-inch
equipment, which resulted in a gain of $4.8 million. As the equipment was
subsequently leased back from the buyers, the gains were deferred and are being
amortized over the life of the leases (three years). Approximately $1.3 million
of the gain was recognized in income during fiscal 1997. In fiscal 1997, the
lease was terminated, and Cypress (ICW) offset the deferred gain against lease
exit costs associated with the sale of the foundry.
The aggregate $17.95 million charge associated with the disposal of certain
foundry assets is presented as "provision for impairment of assets and
restructuring costs" in the fiscal 1996 consolidated statements of operations.
The assets impaired in fiscal year 1996 were expected to be disposed by December
1997 (pursuant to the requirements of the Forbearance Agreement), and were
disposed of in November 1997 when associated impaired assets were sold to Maxim.
NOTE 4: DEBT
- -------------
CONVERTIBLE SUBORDINATED NOTES
In 1998, Cypress retired a total of $15.0 million principal of its $175.0
million, 6.0% Convertible Subordinated Notes ("Notes") for $12.9 million,
resulting in a pre-tax net gain of $1.7 million. The gain was offset by the
<PAGE>23
write-off of bond issuance costs of $0.4 million (pre-tax). The net gain was
recorded as interest and other income. The Notes, which were issued in September
1997, are due October 1, 2002 and contain a coupon rate of 6.0% and an initial
conversion premium of 48.2%. The remaining outstanding Notes are convertible
into approximately 6,772,000 shares of common stock and are callable by Cypress
on or after October 2, 2000. The Notes are unsecured subordinated obligations.
In February 1997, Cypress called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of March 26, 1997. At the
time of conversion, approximately 85% of the holders elected to convert their
notes into Cypress's common stock, increasing the amount of common stock
outstanding by 6,789,013 shares. As a result of holders electing the cash
settlement, Cypress paid out $14.3 million.
NOTES PAYABLE
During 1997, Cypress (ICW) entered into an agreement to borrow $2.0 million from
a third party with interest accruing at 6.0% per annum. The loan became due
simultaneously with the merger of Cypress and ICW and was repaid in April
1999. Also during 1997, Cypress (ICW) issued promissory notes to three
significant customers for $2.0 million, $1.4 million and $0.3 million, bearing
interest at 6.0%, 10.0% and 7.5%, respectively and due in October 2000, August
2000 and July 1999, respectively. As of January 3, 1999, a total of $1.0 million
was payable under the notes.
LINE OF CREDIT
In 1997, Cypress (ICW) established a revolving line of credit with a bank
totaling up to $6.5 million. There were no borrowings against this line of
credit as of January 3, 1999.
<PAGE>24
NOTE 5: EARNINGS (LOSS) PER SHARE
- ----------------------------------
As required by SFAS 128, following is a reconciliation of the numerators and
the denominators of the basic and diluted per share computation:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- -------------------------- --------------------------
Per-Share Per-Share Per-Share
Loss Shares Amount Income Shares Amount Income Shares Amount
----------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per-share amounts)
--------- -------- -------- --------- -------- -------- --------- -------- --------
Basic EPS:
Net income (loss)...... $(104,918) 101,944 $ (1.03) $ 7,526 100,137 $ 0.08 $ 25,108 90,247 $ 0.28
Effects of dilutive
securities:
Stock options.......... -- -- -- -- 7,729 -- -- 5,308 --
--------- -------- -------- --------- -------- -------- --------- -------- --------
Diluted EPS:
Net income (loss)...... $(104,918) 101,944 $ (1.03) $ 7,526 107,866 $ 0.07 $ 25,108 95,555 $ 0.26
========= ======== ======== ========= ======== ======== ========= ======== ========
</TABLE>
At January 3, 1999 and December 29, 1997, options to purchase 24,774,000 and
5,696,000 shares, respectively, of common stock were outstanding, but were
excluded in the computation of diluted EPS as their effect was anti-dilutive. At
December 30, 1996, no outstanding options to purchase common stock were excluded
in the computation of diluted EPS. Convertible debentures outstanding at January
3, 1999, December 29, 1997 and December 30, 1996 convertible to 6,772,000,
7,408,000 and 7,408,000 shares, respectively, of common stock were also excluded
from diluted EPS as their effect was anti-dilutive.
NOTE 6: COMMON STOCK OPTION AND OTHER EMPLOYEE BENEFIT PLANS
- -------------------------------------------------------------
1994 STOCK OPTION PLAN
In 1994, Cypress adopted the 1994 Stock Option Plan, which replaced
Cypress's 1985 Incentive Stock Option Plan and the 1988 Directors' Stock Option
Plan (the "Terminated Plans") with respect to future option grants. Under the
terms of the 1994 Stock Option Plan, options may be granted to qualified
employees, consultants, officers and directors of Cypress or its majority-owned
subsidiaries. Options become exercisable over a vesting period as determined by
the Board of Directors and expire over terms not exceeding twenty years from the
date of grant. The option price for shares granted under the 1994 Stock Option
Plan is typically equal to the fair market value of the common stock at the date
of grant. The 1994 Stock Option Plan includes shares that remained available
under the Terminated Plans and provides for an annual increase in shares
available for issuance pursuant to non-statutory stock options equal to 4.5% of
Cypress's outstanding common stock at the end of each fiscal year.
<PAGE>25
In October 1996, substantially all outstanding options with a share price in
excess of $11.00 per share were cancelled and replaced with new options having
an exercise price of $11.00 per share. A total of 7,083,000 options were
repriced. In January 1998, substantially all outstanding stock options with an
exercise price in excess of $9.75 per share were cancelled and replaced with new
options having an exercise price of $9.75 per share, the fair market value on
the date that the employees accepted the repricing. A total of 10,464,000 shares
were repriced. This repricing excluded the Board of Directors, the Chief
Executive Officer and the Executive staff of Cypress.
The following table summarizes Cypress's stock option activity and related
weighted average exercise price for each category for the years ended January 3,
1999, December 29, 1997 and December 30, 1996. The weighted average exercise
price for each category presented is also shown in the table below.
SHARES UNDER THE 1994 STOCK OPTION PLAN
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands except per-share amounts)
Options outstanding, beginning of year..... 23,923 $ 9.27 22,172 $ 8.54 20,142 $ 9.50
Options cancelled................. (13,862) 11.24 (1,903) 8.83 (9,192) 14.21
Options granted................... 17,593 9.12 6,618 10.73 13,043 10.59
Options exercised................. (1,139) 5.30 (2,964) 7.18 (1,821) 5.28
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding, end of year.. 26,515 8.32 23,923 9.27 22,172 8.54
========== ========== ========== ========== ========== ==========
Options exercisable at January 3, 1999..... 13,599 $ 7.82
========== ==========
</TABLE>
All options were granted at an exercise price equal to the market value of
Cypress's stock at the date of grant. The weighted average estimated fair value
at the date of grant, as defined by SFAS 123, for options granted in 1998, 1997
and 1996 was $3.61, $5.06 and $3.07 per option, respectively. The estimated
grant date fair value disclosed by Cypress is calculated using the Black-Scholes
model. The Black-Scholes model, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from Cypress's stock option awards. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated grant date fair value.
<PAGE>26
The following weighted average assumptions are included in the estimated
grant date fair value calculations for Cypress's stock option awards:
1998 1997 1996
-------- -------- --------
Expected life............. 7 years 6 years 6 years
Risk-free interest rate... 5.41% 6.63% 6.04%
Volatility................ .5467 .5529 .5582
Dividend yield............ 0.00% 0.00% 0.00%
Significant option groups outstanding as of January 3, 1999 and the
related weighted average exercise price and contractual life information, are
as follows:
<TABLE>
<CAPTION>
Options with exercise Outstanding Exercisable Remaining
prices range from Shares Price Shares Price Life (years)
---------------------------- -------- -------- -------- -------- --------------
(In thousands except per-share amounts)
<S> <C> <C> <C> <C> <C> <C>
$1.00-- $ 8.38............. 9,495 $ 5.52 5,220 $ 4.78 6.56
$8.39-- $ 9.25............. 3,673 $ 8.67 2,294 $ 8.57 6.89
$9.26-- $ 9.75............. 9,314 $ 9.75 4,737 $ 9.75 7.62
$9.76-- $ 17.56............. 4,033 $ 11.24 1,348 $ 11.50 8.32
</TABLE>
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
In 1986, Cypress approved an Employee Qualified Stock Purchase Plan
("ESPP"), which allows eligible employees of Cypress and its subsidiaries to
purchase shares of common stock through payroll deductions. The ESPP consists of
consecutive 24-month offering periods composed of four 6-month exercise periods.
The shares can be purchased at the lower of 85% of the fair market value of the
common stock at the date of commencement of this two-year offering period or at
the last day of each 6-month exercise period. Purchases are limited to 10% of an
employee's eligible compensation, subject to a maximum annual employee
contribution limited to a $25,000 market value (calculated as the employee's
enrollment price multiplied by the number of purchased shares). Of the
10,100,000 shares authorized under the ESPP, 7,320,000 shares were issued
through 1998 including 890,000, 541,000 and 652,000 shares in 1998, 1997, and
1996, respectively.
Compensation costs (included in pro forma net income and net income per
share amounts) for the grant date fair value, as defined by SFAS 123, of the
purchase rights granted under the ESPP were calculated using the Black-Scholes
model. The following weighted average assumptions are included in the estimated
grant date fair value calculations for rights to purchase stock under the ESPP:
1998 1997 1996
---------- ---------- ----------
Expected life............. 6 months 6 months 6 months
Risk-free interest rate... 4.96% 5.80% 5.98%
Volatility................ .5371 .5861 .5882
Dividend yield............ 0.00% 0.00% 0.00%
<PAGE>27
The weighted average estimated grant date fair value, as defined by SFAS
123, or rights to purchase stock under the ESPP granted in 1998, 1997 and 1996
were $2.56, $5.49 and $5.37 per share, respectively.
PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
If Cypress had recorded compensation costs based on the estimated grant date
fair value, as defined by SFAS 123, for awards granted under its 1994 Stock
Option Plan and its Employee Stock Purchase Plan, Cypress's pro forma net income
(loss) and earnings per share for the years ended January 3, 1999, December 29,
1997 and December 30, 1996 would have been as follows:
1998 1997 1996
---------- ---------- ----------
(In thousands, except per-share amounts)
Pro forma net income (loss):
Basic.............................. $ (135,907) $(17,545) $ 4,559
Diluted............................ $ (135,907) $(17,545) $ 4,559
Pro forma net income (loss) per
share:
Basic.............................. $ (1.34) $ (0.18) $ 0.05
Diluted............................ $ (1.34) $ (0.18) $ 0.05
The pro forma effect on net income (loss) and net income (loss) per share
for 1998, 1997 and 1996 is not representative of the pro forma effect on net
income in the future years because it does not take into consideration pro forma
compensation expense related to grants prior to 1995.
TREASURY STOCK
During 1997, the Board of Directors authorized the repurchase of up to 4.0
million shares of Cypress's common stock. In September 1998, the Board of
Directors authorized the repurchase of up to an additional 10.0 million shares
under the stock repurchase program. Through January 3, 1999, 8.1 million shares
have been repurchased under this entire program for $67.5 million. The
repurchased shares are expected to be used in conjunction with Cypress's 1994
Stock Option Plan and Employee Stock Purchase Plan. During 1998, Cypress
reissued 1,782,000 shares of common stock under such plans. In conjunction with
the authorized stock repurchase program, Cypress sold put warrants through
private placements for which Cypress received a net amount of $9.4 million
through January 3, 1999. Cypress has a maximum potential obligation to purchase
4.5 million shares of its common stock at an aggregate price of $44.5 million as
of January 3, 1999. Cypress has the right to settle the put warrants with
cash or settle the difference between the exercise price and the fair
market value at the exercise date with stock or cash. The puts expired in May
1999 On February 25, 1999, the Board of Directors terminated the stock
repurchase program.
<PAGE>28
DEFERRED COMPENSATION
Cypress (ICW) recorded a provision for deferred compensation of
approximately $955,000 and $1,638,000 for the difference between the grant or
issuance price and the deemed fair value for financial reporting purposes of
certain Cypress (ICW) common stock options granted or common stock issued in
fiscal years ended December 30, 1996 and January 3, 1999, respectively. These
amounts are being amortized over the vesting period of the individual stock
options or stock, generally a period of four to five years. The deferred
compensation expense provision was reduced by approximately $263,000 in fiscal
1998, representing an unvested portion of deferred compensation expense for
wafer fabrication employees terminated in fiscal 1998 upon the sale to Maxim.
Deferred compensation expense, which was recognized, totaled approximately
$707,000, $191,000 and $143,000 in fiscal years 1998, 1997 and 1996,
respectively.
OTHER EMPLOYEE BENEFIT PLANS
Cypress also maintains a Section 401(k) Plan, New Product Bonus Plan, Key
Employee Bonus Plan and Deferred Compensation Plan. The 401(k) Plan provides
participating employees with an opportunity to accumulate funds for retirement
and hardship. Eligible participants may contribute up to 15% of their eligible
earnings to the Plan Trust. Cypress does not make contributions to the plan.
Under the New Product Bonus Plan effective for 1997, all qualified employees
are provided bonus payments, which are based on Cypress attaining certain levels
of new product revenue, plus attaining certain levels of profitability. In 1998
and 1997, $0.7 million and $0.5 million, respectively were charged to operations
in connection with the New Product Bonus Plan. In 1996, under the Profit Sharing
Plan, all qualified employees were provided an equal share of bonus payments,
which were based on Cypress achieving a targeted level of earnings per share. In
1996, no charges to operations were made in connection with the profit sharing
plan.
In 1994, a Key Employee Bonus Plan was established, which provides for bonus
payments to selected employees upon achievement of certain Cypress and
individual performance targets. In 1998, $4.1 million was charged to operations
in connection with this Plan. In 1997 and 1996, there were no charges to
operations in connection with this Plan. Employees eligible under the Key
Employee Bonus Plan can elect to participate in the Deferred Compensation Plan,
which allows eligible employees to defer their salary, bonus and other related
payments. Costs incurred by Cypress for the Deferred Compensation Plan during
fiscal years 1998, 1997 and 1996 were insignificant.
NOTE 7: INCOME TAXES
- ----------------------
The components of the provision for income taxes are summarized below.
Income before taxes is principally attributed to domestic operations.
<PAGE>29
COMPONENTS OF THE PROVISION FOR INCOME TAXES
Jan. 3, Dec. 29, Dec. 30,
1999 1997 1996
---------- ---------- ----------
(In thousands)
Income (loss) before provision for
taxes............................ $ (118,441) $ 13,139 $ 55,584
---------- ---------- ----------
Current tax expense:
U.S. Federal..................... (13,237) $ (10,483) $ 21,199
State and local.................. -- 1,418 1,706
Foreign.......................... 511 500 1,073
---------- ---------- ----------
Total current................ (12,726) (8,565) 23,978
---------- ---------- ----------
Deferred tax expense (benefit):
U.S. Federal..................... (4,210) 16,033 5,841
State and local.................. 3,413 (1,855) 657
---------- ---------- ----------
Total deferred............... (797) 14,178 6,498
---------- ---------- ----------
Total.................... $ (13,523) $ 5,613 $ 30,476
========== ========== ==========
The tax provision (benefit) differs from the amounts obtained by applying
the statutory U.S. Federal Income Tax Rate to income before taxes as shown
below.
TAX PROVISION DIFFERENCE
Jan. 3, Dec. 29, Dec. 30,
1999 1997 1996
---------- ---------- ----------
(In thousands)
Statutory rate......................... 35% 35% 35%
Tax at U.S. statutory rate............. $ (41,454) $ 4,599 $ 9,455
Foreign earnings....................... (4,153) (1,151) --
State income taxes, net of federal
benefit............................... 3,413 922 1,536
Tax credits............................ (3,700) (2,274) --
Net Foreign Sales Corporation (FSC)
benefit............................... -- (78) (1,548)
Benefit of tax free investments........ (350) (482) (998)
Current year loss with no benefit...... 18,498 3,812 9,772
Utilization of net operating loss...... (1,740) -- --
Future benefits not recognized......... 15,900 -- --
Other, net............................. (805) 265 2,259
F/S discrepancy........................ 868 -- --
---------- ---------- ----------
Total............................... $ (13,523) $ 5,613 $ 30,476
========== ========== ==========
<PAGE>30
The components of the net deferred tax assets at January 3, 1999 and
December 29, 1997, under SFAS 109 were as follows:
Jan. 3, Dec. 29,
1999 1997
---------- ----------
(In thousands)
Deferred tax assets:
Deferred income on sales to distributors. $ 11,024 $ 9,773
Inventory reserves and basis differences. 15,928 14,722
Restructuring and legal reserves......... 2,161 9
Asset valuation and other reserves....... 6,564 13,440
State tax, net of federal tax............ 420 421
Research and development tax credits..... 9,204 5,624
Net operating loss....................... 41,330 1,800
Other, net............................... 1,942 1,449
---------- ----------
Total deferred tax assets............. 108,573 47,238
---------- ----------
Deferred tax liabilities:
Excess of tax over book depreciation...... (39,856) (33,368)
Other, net................................ (1,209) (1,210)
---------- ----------
Total deferred tax liabilities........ (41,065) (34,578)
---------- ----------
Net deferred tax assets (liabilities)....... 67,508 12,660
Valuation allowance......................... (67,508) (13,457)
---------- ----------
Net deferred tax assets (liabilities) after
valuation allowance............... $ -- $ (797)
========== ==========
Other current assets include current deferred tax assets of $35,573,000 at
December 29, 1997.
Due to the uncertainty of the realization of the deferred tax assets,
Cypress has provided a full valuation allowance on the deferred tax assets at
January 3, 1999.
No tax benefits associated with disqualifying dispositions of stock options
or employee stock purchase plan shares were realized in 1998.
Utilization of Cypress (ICW's) operating loss and tax credit carryforwards
of $33.1 million are subject to an annual limitation due to the ownership
change limitations provided by the internal revenue code of 1986 and similar
state provisions. However, Cypress believes that such limitations will not have
a material effect on the future utilization of the losses.
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 December 1999. Management believes that no potential
adjustments will ultimately result from this examination.
<PAGE>31
NOTE 8: COMMITMENTS AND CONTINGENCIES
- --------------------------------------
OPERATING LEASE COMMITMENTS
Cypress leases most of its manufacturing and office facilities under
non-cancelable operating lease agreements that expire at various dates through
2012. These leases require Cypress to pay taxes, insurance, and maintenance
expenses, and provide for renewal options at the then fair market rental value
of the property.
In April 1997, Cypress sold capital equipment located in its Minnesota wafer
fabrication facility to Fleet Capital Leasing ("Fleet") in a sale-leaseback
agreement. In October 1997, Cypress entered into a similar agreement with
Comdisco, Inc. ("Comdisco") for other capital equipment located in Minnesota.
Cypress received a total of $28.2 million from Fleet and Comdisco in exchange
for the capital equipment and as a result of the transactions, recorded an
immaterial gain that is being amortized over the life of the leases.
In 1994 and 1995, Cypress entered into three operating lease agreements with
respect to its office and manufacturing facilities, in San Jose and Minnesota,
respectively. In April 1996, Cypress entered into an additional lease agreement
related to two office facilities in San Jose. These agreements require quarterly
payments that vary based on the London Interbank Offering Rate ("LIBOR"), plus a
spread. All leases provide Cypress with the option of either acquiring the
property at its original cost or arranging for the property to be acquired at
the end of the respective lease terms. Cypress is contingently liable under
certain first-loss clauses for up to $52.7 million at January 3, 1999. First
loss clauses state that Cypress is potentially liable for any decline in the
value of the property up to a specified percentage. The purchase option then
permits Cypress to acquire the property at the lower value. Based on
management's estimate of the fair value of the properties, no liability was
required to be recorded at January 3, 1999 or December 29, 1997. Furthermore,
Cypress is required to maintain a specific level of restricted cash or
investments to serve as collateral for these leases and maintain compliance with
certain financial covenants. As of January 3, 1999, the amount of restricted
investments recorded was $59.7 million, which is in compliance with these
agreements. These restricted cash or investments are classified as non-current
on the balance sheet.
The aggregate annual rental commitments under non-cancelable operating
leases as of January 3, 1999 are as follows:
Fiscal Year (In thousands)
----------- --------------
1999........................ $ 19,993
2000........................ 11,727
2001........................ 5,313
2002........................ 3,315
2003........................ 2,720
2004 and thereafter......... 4,949
--------------
Total.................. $ 48,017
==============
<PAGE>32
Rental expense was approximately $21.9 million in 1998, $17.2 million in
1997 and $9.4 million in 1996.
LITIGATION AND ASSERTED CLAIMS
The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. From time to
time, Cypress has received, and may receive in the future, communications
alleging that its products or its processes may infringe on product or process
technology rights held by others. Cypress is currently and may in the future be
involved in litigation with respect to alleged infringement by Cypress of
another party's patents, or may in the future be involved in litigation to
enforce its patents or other intellectual property rights, to protect its trade
secrets and know-how, to determine the validity or scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Such litigation has in the past and could in the future result in substantial
costs and diversion of management resources and payment of substantial damages
and/or royalties or prohibitions against utilization of essential technologies,
and could have a material adverse effect Cypress's business, financial condition
and results of operations.
During 1998, EMI Group of North America, Inc. ("EMI") filed suit against
Cypress in the Federal Court in Delaware, claiming that Cypress has infringed on
four patents owned by EMI. Cypress and EMI have entered into a license agreement
in February 1999, for one of the four patents in the lawsuit. In return, EMI has
agreed to withdraw two of the four patents from the lawsuit, including the
patent related to the licensing agreement. Cypress has reviewed the charges
related to the remaining two patents and believes that these charges are without
merit, that it does not infringe the patents in question and that the patents
are invalid and/or unenforceable. 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. Cypress will vigorously defend itself in these matters.
However, because of the nature and inherent uncertainties of litigation, should
the outcome of this action be unfavorable, Cypress may be required to pay
damages and other expenses, which could have a material adverse effect on
Cypress's financial position and results of operations.
In January 1998, Cypress was contacted by an attorney representing the
estate of Mr. Jerome Lemelson, charging that Cypress infringes certain patents
owned by Mr. Lemelson. On February 26, 1999, the estate filed suit against
Cypress and 87 other companies. Cypress is in the process of reviewing the
claims to determine their validity, and at this time, Cypress believes that the
patents are invalid and/or unenforceable.
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.
Cypress will vigorously defend itself in this matter; however, because of the
nature and inherent uncertainties of litigation, should the outcome of this
action be unfavorable, Cypress may be required to pay damages and other
expenses, which could have a material adverse effect on Cypress's financial
position and results of operations.
<PAGE>33
In June 1997, Cypress commenced a declaratory judgment action in the United
States District Court for the District of Nevada against the Li Second Family
Trust ("the Trust"), asking for declaratory relief to the effect that a U.S.
patent relating to a part of the process for manufacturing semiconductors is
unenforceable, invalid and not infringed by Cypress. The Trust has
counter-claimed for patent infringement on the same patent, alleging such patent
covers oxide-isolated integrated circuits. In December 1997, in a related case,
the United States District Court for the Eastern District of Virginia
preliminarily ruled that the patent is unenforceable due to unequitable conduct
by Dr. Li and his attorneys in obtaining the patent. Dr. Li has the right to
file an appeal, although no such appeal had been filed as of May 18, 1999.
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 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 the
Cypress's officers. On May 4, 1999, the Superior Court granted a summary
judgement motion by Messrs. Yourman and Weiss, holding that Messrs. Yourman and
Weiss had probable cause to bring the underlying litigation. Cypress plans to
appeal 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.
In March 1999, Cypress signed a cross-license technology agreement with
Lucent Technologies Corporation, licensing essentially all semiconductor patents
of both companies in settlement of certain license claims. The terms of this
cross-licensing agreement is not expected to have a material effect on
Cypress's consolidated financial position or results of operations.
PURCHASE COMMITMENTS
At January 3, 1999, Cypress had purchase commitments aggregating $55.7
million, principally for manufacturing equipment and facilities. These
commitments relate to purchases to be made in 1999. Purchase commitments beyond
1999 are not considered to be significant. Commitments for 1999 purchases will
be funded through a combination of cash resources, retirement of investments and
the $160.0 million, 6.0% Convertible Subordinated Notes.
<PAGE>34
NOTE 9: RELATED PARTIES
- ------------------------
Between 1992 and 1995, Cypress made cost-basis investments in QuickLogic
Corporation ("QuickLogic") Series D and Series E preferred stock. In June 1996,
Cypress received $4.5 million from QuickLogic, the original intent of which was
to obtain a minority interest in CTI and to secure guaranteed fab capacity.
Cypress classified the $4.5 million as other long-term liabilities in 1996,
awaiting final negotiation of the terms and transaction approval from Altera, an
existing minority interest shareholder. In March 1997, Cypress signed a
definitive agreement with QuickLogic Corporation involving termination of an
existing joint development, licensing and foundry agreement for antifuse Field
Programmable Gate Array ("FPGA") products and the execution of a new foundry
agreement. Under the new agreement, Cypress ceased development, marketing and
selling of antifuse-based FPGA products. In return, QuickLogic paid $4.5
million, which represented $3.5 million of NRE revenue related to the sale of
technology rights and $1.0 million of compensation for inventory and other
assets, and issued shares of QuickLogic common stock that increased Cypress's
equity position in the privately-held QuickLogic to greater than 20%. The $4.5
million cash consideration represented the payment Cypress received in June
1996. Cypress also entered into a five-year wafer-supply agreement to provide
FPGA products to QuickLogic. Revenues and net income contributed by the FPGA
product line during 1997 and 1996 were not significant.
In the first quarter of 1998, Cypress determined that its investment in
QuickLogic had declined in value and the decline in value was not temporary.
Accordingly, Cypress wrote-off its investment in QuickLogic to reflect this
decline.
Cypress recorded sales to QuickLogic of $2.3 million, $11.7 million and $8.2
million in 1998, 1997 and 1996, respectively. At fiscal year-ends 1998 and 1997,
Cypress had a receivable due from QuickLogic of $0.6 million and $1.5 million,
respectively.
During 1990, Cypress made a cost-basis investment of $1.0 million in Vitesse
Semiconductor stock. Cypress sold its remaining investment in February 1997 and
recorded a gain of $3.8 million in other income.
NOTE 10: SEGMENT INFORMATION
- -----------------------------
Cypress has two reportable segments, Memory Products and Non-memory
Products. The Memory Products segment includes Static Random Access Memories
("SRAMs") and multichip modules. The Non-memory Products segment includes
programmable logic products, data communication devices, interface products,
computer products, non-volatile memory products and wafers manufactured by the
foundry.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). Cypress evaluates
the performance of its two segments based on profit or loss from operations
before income taxes, excluding nonrecurring gains and losses.
<PAGE>35
Cypress's reportable segments are strategic business units that offer
different products. Products that fall under the two segments differ in nature,
are manufactured utilizing different technologies and have a different
end-purpose. As such, they are managed separately. Memory Products are
characterized as a commodity, which is depicted by high unit sales volume and
lower gross margins. These products are manufactured using more advanced
technology. A significant portion of the wafers produced for Memory Products are
manufactured at Cypress's technologically advanced, eight-inch wafer production
facility located in Minnesota (Fab 4). Memory Products are used by a variety of
end-users but the product is used specifically for the storage and retrieval of
information. In contrast to Memory Products, unit sales of non-Memory Products
are generally lower than Memory Products, but sell at higher gross margins. Some
Non-memory Products are manufactured utilizing less technologically advanced
processes. A majority of wafers for Non-memory Products are manufactured at
Cypress's less technologically advanced six-inch Fab located in Texas (Fab 2).
Products in the Non-memory segment perform non-memory functions such as
floating-point mathematics, store fixed data that is not to be altered during
normal machine operations and data transfer and routing functions of signals
throughout a computer system.
The tables below set forth information about the reportable segments for
fiscal years 1998, 1997 and 1996. 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
1998 1997 1996
--------- --------- ---------
(In thousands)
Memory............................ $ 195,929 $ 226,566 $ 271,192
Non-memory........................ 358,962 371,919 298,749
--------- --------- ---------
Total consolidated revenues.. $ 554,891 $ 598,485 $ 569,941
========= ========= =========
BUSINESS SEGMENT PROFIT (LOSS)
1998 1997 1996
--------- --------- ---------
(In thousands)
Memory............................. $ (94,781) $ (35,742) $ 61,384
Non-memory......................... 34,997 54,132 3,658
Restructuring and other
non-recurring costs............... (60,737) (9,882) (10,932)
Interest income and other.......... 13,356 13,092 9,217
Interest expense................... (11,276) (8,461) (7,743)
--------- --------- ---------
Income (loss) before provision
for income taxes............. $(118,441) $ 13,139 $ 55,584
========= ========= =========
<PAGE>36
BUSINESS SEGMENT DEPRECIATION
The following illustrates depreciation by segment for the respective years.
1998 1997 1996
--------- --------- ---------
(In thousands)
Memory............................. $ 86,905 $ 77,420 $ 63,121
Non-memory......................... 27,693 36,593 37,272
-------- --------- ---------
Total consolidated depreciation.. $114,598 $114,013 $100,393
======== ======== ========
GEOGRAPHIC AREA
The following illustrates revenues by geographic locations. Revenues are
attributed to countries based on the customer location.
1998 1997 1996
--------- --------- ---------
(In thousands)
United States...................... $ 307,938 $ 363,709 $ 357,088
Europe............................. 91,544 99,051 98,628
Japan.............................. 51,902 53,701 55,225
Other foreign countries............ 103,507 82,024 59,000
--------- --------- ---------
Total revenues................ $ 554,891 $ 598,485 $ 569,941
========= ========= =========
The following illustrates assets by geographic locations.
1998 1997 1996
--------- --------- ---------
(In thousands)
United States...................... $ 276,770 $ 373,273 $ 386,851
Philippines........................ 69,996 67,629 54,980
Other foreign countries............ 2,170 2,877 2,277
--------- --------- ---------
Total assets.................... $ 348,936 $ 443,779 $ 444,108
========= ========= =========
No one end user accounted for greater than 10% of revenues in 1998, 1997 or
1996. Sales to one distributor accounted for greater than 10% of total revenues
in 1998 and 1997. No one distributor accounted for greater than 10% of revenues
in 1996.
<PAGE>37
NOTE 11: SUBSEQUENT EVENTS (UNAUDITED)
- ---------------------------------------
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 as a purchase.
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 end were not significant and were therefore
excluded. There are no significant differences between the accounting policies
of Cypress and Arcus.
Cypress acquired Arcus for $17.7 million, including cash of $11.5
million and stock of $6.2 million, excluding direct acquisition costs of
$0.8 million for legal and accounting fees. Through October 3, 1999, 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
========
To determine the value of the in-process technology, the expected
future cash flow attributable to the in-process technology was discounted,
taking into account the percentage of completion, utilization of pre-existing
technology, risks related to the characteristics and applications of the
technology, existing and future markets, and technological risk associated
with completing the development of the technology. The valuation approach used
was a form of discounted cash flow approach commonly known as the "percentage
of completion" approach whereby the cash flows from the technology are
multiplied by the percentage of completion of the in-process technology.
Cypress expects that the in-process technology will be completed within a
period of twelve to twenty-four months after the closing of the transaction,
however, there remain significant technical challenges that must be resolved in
order to complete the in-process technology.
<PAGE>38
To determine the value of the current technology, the expected future cash
flow attributable to the current technology was discounted, taking into account
risks related to the characteristics and applications of the technology,
existing and future markets, and assessment of the life cycle stage of the
technology. The value of the assembled workforce was derived by estimating the
costs to replace the existing employees, including recruiting, hiring and
training costs for each category of employee.
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 markets and competitive threats from
other companies. Additionally, the value of other intangible assets acquired
may become impaired. The in-process research and development charge
valuation was prepared by an independent appraiser of technology assets, based
on inputs from Cypress management, utilizing valuation methodologies consistent
with those currently accepted by the Securities and Exchange Commission
("SEC"). However, there can be no assurance that the SEC will not take issue
with assumptions used in Cypress'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.
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. The acquisition was accounted for as
a purchase. Accordingly, the results of operations of Anchor and the estimated
fair value of assets acquired and liabilities assumed were included in Cypress's
condensed consolidated financial statements as of May 25, 1999, the effective
date of the purchase through the end of the period. There are no significant
differences between the accounting policies of Cypress and Anchor.
Cypress paid approximately $15.0 million in cash excluding direct
acquisition costs of $0.7 million for investment banking, legal and accounting
fees. The purchase price of $15.0 million was allocated to the estimated
fair value of assets acquired and liabilities assumed based on the valuation
completed by management, which is consistent with the methodology 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
========
<PAGE>39
To determine the value of the in-process technology, the expected future
cash flow attributable to the in-process technology was discounted, taking into
account the percentage of completion, utilization of pre-existing technology,
risks related to the characteristics and applications of the technology,
existing and future markets, and technological risk associated with completing
the development of the technology. The valuation approach used was a form of
discounted cash flow approach commonly known as the "percentage of completion"
approach whereby the cash flows from the technology are multiplied by the
percentage of completion of the in-process technology.
Cypress expects that the in-process technology will be successfully
developed and that the in-process technology will be completed within a period
of twelve to twenty-four months after the closing of the transaction. Cypress
expects that the in-process technology will be successfully developed, however,
there remain significant technical challenges that must be resolved in order to
complete the in-process technology.
To determine the value of the current technology, the expected future cash
flow attributable to the current technology was discounted, taking into account
risks related to the characteristics and applications of the technology,
existing and future markets, and assessment of the life cycle stage of the
technology. The value of the assembled workforce was derived by estimating the
costs to replace the existing employees, including recruiting, hiring and
training costs for each category of employee.
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 markets and competitive threats from
other companies. Additionally, the value of other intangible assets acquired
may become impaired. Cypress management believes that the in-process research
and development charge is valued consistently with valuation methodologies
utilized by independent appraisers of technology assets and valuation practices
consistent with those currently accepted by the SEC. However, there can be no
assurance that the SEC will not take issue with assumptions used in Cypress's
valuation model and require Cypress to revise the amount allocated to in-process
research and development.
The amounts allocated to assembled workforce and current technology 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.
CYPRESS ACQUIRES MAX 5000 PRODUCT LINE FROM ALTERA
On October 5, 1999, Cypress announced that it has signed a definitive
agreement with Altera Corporation ("Altera") to acquire Altera's MAX 5000
Programmable Logic Device ("PLD") product line and its equity interest in
Cypress's wafer fabrication facility in Round Rock, Texas ("Fab II") for
approximately $13.0 million. The acquisition will be accounted for as a
purchase. In 1988, Altera licensed its MAX 5000 family of products to
Cypress in consideration of manufacturing capacity. Altera later acquired a
17% equity interest in the Round Rock wafer fabrication facility. By
acquiring Altera's equity interest in October 1999, Fab II is now 100% owned
by Cypress.
<PAGE>40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
- ---------------------------------------------------------------
The "Management's Discussion and Analysis" may contain forward-looking
statements about the prospects for Cypress as well as the semiconductor industry
more generally including without limitation statements about increases in gross
margin, rate of growth of research and development expenditures as a percent of
revenues, rate of growth of selling, general and administrative expenses,
profitability goals, revenue goals, growth rate goals, market share goals,
market size and growth projections, new product introductions, planned
manufacturing capacity, and efficiency and cost goals. Actual results could
differ materially from those described in the forward-looking statements as a
result of various factors including, but not limited to, the factors identified
in the Letter to Shareholders and the Management's Discussion and Analysis
section, particularly "Factors Affecting Future Results," as well as the
following:
(1) increased competition which could result in lost sales or price
erosion;
(2) changes in product demand by the electronics and semiconductor
industries, which are noted for rapidly changing needs, coupled
with an inability by Cypress to generate product enhancements
or new product introductions which keep pace with or meet those
rapidly changing needs;
(3) failure by Cypress to develop or introduce successfully new
products in areas of expected new or increased demand, or
development and introduction of superior new products serving those
areas by others;
(4) failure of expected growth in demand for, or areas of expected new
demand for, semiconductor products to materialize;
(5) failure to successfully bring on line and utilize additional
manufacturing capacity, or to transition existing capacity to new
uses;
(6) inability to develop and/or adopt more advanced manufacturing
technology;
(7) inability of Cypress's patents or other proprietary rights to
ensure adequate protection against encroachment on Cypress's
technology by competitors; and
(8) failure to attract and/or retain key personnel.
OVERVIEW
- ----------
Revenues for Cypress Semiconductor Corporation ("Cypress") decreased 7.3% to
$554.9 million in fiscal 1998 from $598.5 million in fiscal 1997. The net loss
for fiscal 1998 was $104.9 million compared to net income of $7.5 million in
<PAGE>41
fiscal 1997. The net loss for fiscal 1998 included a restructuring charge of
$60.7 million and other non-recurring charges totaling $27.3 million. Excluding
the restructuring and non-recurring charges, the net loss for fiscal 1998 was
$26.9 million. Cypress incurred a net loss of $1.03 per share, on a diluted
basis, during fiscal 1998 compared to diluted earnings per share of $0.07 per
share in fiscal 1997.
On April 1, 1999, Cypress completed a merger with IC WORKS Incorporated
(referred to herein as "Cypress (ICW)"), which was accounted for as a pooling
of interests. The consolidated financial statements give effect to the
merger for all periods presented.
On November 16, 1998, Cypress filed a universal shelf registration
statement with the Securities and Exchange Commission (SEC). The registration
statement allows Cypress to market and sell up to $300 million of its
securities. The shelf registration statement allows Cypress flexibility
regarding the type of securities it can sell, including common stock, preferred
stock and various forms of debt securities. Pursuant to the shelf registration,
on March 29, 1999, Cypress sold 7.2 million shares of common stock, including
4.7 million shares it was required to sell to cure a taint to allow the merger
with ICW to be accounted for as a pooling of interests. Cypress received
approximately $33.8 million in proceeds, net of issuance costs, from the sale of
these shares. The remaining 2.5 million shares were sold by selling
stockholders. Cypress did not receive any proceeds from the shares sold by the
selling stockholders.
Beginning with its 1998 fiscal year end, Cypress ended its fiscal months,
quarters and years on Sundays, rather than Mondays, bringing its fiscal period
ends in line with predominant industry practice. For the year ended January 3,
1999, Cypress had a 53-week year, while fiscal years 1997 and 1996 each had
52-week years. Operating results for this additional week were considered
immaterial to Cypress's consolidated operating results for the year ended
January 3, 1999.
RESULTS OF OPERATIONS
- ----------------------
REVENUES
- ---------
Revenues for fiscal 1998 were $554.9 million, a decrease of $43.6 million or
7.3% versus revenues for fiscal 1997. This compares with a decrease of $15.1
million or 2.6% from fiscal 1996 to fiscal 1998. Cypress derives its revenues
from the sale of Memory Products and Non-memory Products.
Sales from Memory Products include Static Random Access Memories ("SRAMs")
and multichip modules. Revenues from the sale of Memory Products for 1998
decreased $30.6 million or 13.5% over revenues from the sale of these products
for fiscal 1997. This compares with a decrease of $75.3 million or 27.8% from
fiscal 1996 to fiscal 1998. From fiscal 1997 to fiscal 1998, sales of SRAMs
declined $22.6 million or 10.9% and multichip module sales decreased $8.0
million or 43.9%. Revenues from SRAMs during fiscal 1998 decreased $63.6 million
or 25.5% compared to fiscal 1996. Sales of multichip modules declined $11.7
million or 53.4% from fiscal 1996 to fiscal 1998. The decline in Memory Product
<PAGE>42
revenues, as compared to fiscal 1997, resulted from both lower average selling
prices ("ASPs") and a decline in unit sales. ASPs and unit sales decreased 11.9%
and 1.9%, respectively, from fiscal 1997 to fiscal 1998. Although ASPs for
Memory Products have decreased compared to fiscal 1997, they have been stable
during the last three quarters of fiscal 1998. Unit sales volume of Memory
Products increased 34.6% comparing fiscal 1998 to fiscal 1996. However, the
increase in unit sales volume was not enough to offset the decline in ASPs.
Non-memory Products include programmable logic products, data communication
devices, interface products, computer products and non-volatile memory products.
Non-memory products also include foundry revenues. Foundry revenue represents
sales of wafers to customers. Revenues from the sale of Non-memory Products
declined $13.0 million or 3.5% comparing 1998 to 1997. The decrease related
primarily to declines in the sale of programmable logic products of $18.0
million or 30.3% and data communication devices of $2.8 million or 2.2% and a
decrease in foundry revenue of $9.1 million or 39.0%. An increase in the sale of
computer products and interface products of $29.1 million or 23.9% partially
offset the decrease. Also contributing to the decrease was Cypress's decision to
cease selling certain non-volatile memory devices, Erasable Programmable
Read-only Memory ("EPROM") at the end of 1997. The end of revenues from the sale
of EPROMs combined with an overall decrease in the sale of other non-volatile
memory products contributed to a decrease of $12.2 million or 29.6% from fiscal
1998 to fiscal 1997. Revenues from the sale of Non-memory Products during fiscal
1998 increased $33.7 million or 13.1% compared to fiscal 1996. The increase
related to the rise in the sale of data communication devices of $33.5 million
or 37.1% and computer products of $33.2 million or 67.1% and an increase in
foundry revenue of $3.4 million or 31.2%. The increase was offset by a decrease
in the sale of non-volatile memory of $22.3 million or 43.4% and a decline in
the sale of programmable logic products of $14.1 million or 25.4%.
As is typical in the semiconductor industry, ASPs of products generally
decline over the lives of such products. The decreases in ASPs continue to be
caused by industry over-supply, particularly with the semiconductor companies
that service the telecommunication and data communication markets, that Cypress
principally serves. To increase revenues, Cypress seeks to expand its market
share in the markets it currently serves and to introduce and sell new products.
Cypress will remain competitive with respect to its pricing to prevent a further
decline in sales.
COST OF REVENUES
- -----------------
Cost of revenues for fiscal 1998 were 73.7% of revenues, compared to 65.8%
of revenues for fiscal 1997 and 59.4% of revenues during fiscal 1996. Cost of
revenues for fiscal 1998 included one-time non-recurring charges totaling $21.7
million. These charges included $15.8 million related to the write-down of
inventory, $3.8 million for the write-off of pre-operating costs and $2.1
million for the write-off of certain equipment. The $15.8 million charge for
incremental inventory reserves arose due to market conditions resulting in the
ongoing, over-supply and continued inventory corrections by end-user customers.
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operations in the Philippines. As a result of
<PAGE>43
the restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits. The pre-operating costs totaling $3.8 million, net of
accumulated amortization were included in other assets at December 29, 1997.
The write-off of equipment was related to equipment identified as obsolete
during Cypress's periodic review of equipment and was no longer considered
usable. Excluding these one-time non-recurring charges, cost of revenues as a
percent of revenues for fiscal 1998 would have been 69.8%. The increase in
manufacturing costs as a percent of revenues from fiscal 1996 through to fiscal
1998 continued to be a reflection of lower revenues due to a combination of
declining ASPs and lower unit sales volumes.
Revenues have continued to decline due primarily to lower ASPs. Should ASPs
continue to erode at a rate greater than anticipated, gross margins could be
materially adversely affected. Cypress continues to introduce new products and
new methods of reducing manufacturing costs in order to mitigate the effects of
declining ASPs on its gross margin. In March 1998, Cypress announced
restructuring activities for its domestic wafer fabrication facilities and
offshore back-end manufacturing operations. Activities completed to date have
increased Cypress's manufacturing efficiencies and as a result, its gross margin
has been increasing since the first quarter of fiscal 1998. Cypress expects to
benefit from these restructuring activities in the future.
RESEARCH AND DEVELOPMENT
- -------------------------
Research and development ("R&D") expenditures for fiscal 1998 were $114.6
million or 20.6% of revenues, compared with $104.3 million or 17.4% of revenues
for fiscal 1997 and $95.5 million or 16.8% of revenues for fiscal 1996. R&D
expenditures in fiscal 1998 increased $10.3 million or 9.8% compared to fiscal
1997 and $19.0 million or 19.9% compared to fiscal 1996. $5.4 million of the R&D
spending increase in 1998 from 1997 pertains to incremental depreciation
incurred to reflect the revised useful lives of certain assets impacted by the
decision to upgrade Fab 1 to an eight-inch facility. Increased salaries,
benefits and maintenance expenses account for the rest of the R&D spending
increase. The increase in R&D costs from fiscal 1996 to fiscal 1998 related to
increases in salary and benefit costs, expenses incurred for supplies, equipment
repair and maintenance expenses and amortization and depreciation charges.
R&D expenditures increased from fiscal 1996 through fiscal 1998 as Cypress
continued its effort to accelerate the development of new products and migration
to more advanced process technologies. During 1998, Cypress began utilizing the
0.25 micron process technology for manufacturing purposes and started
development of the 0.18 micron process technology. Even with Cypress's
commitment to increase design capabilities in its design centers, R&D spending
as a percent of revenues is projected to remain relatively constant in the
future. Cypress is continuing to explore new markets and improve its design and
process technologies in an effort to increase revenues and reduce costs.
SELLING, GENERAL AND ADMINISTRATIVE
- ------------------------------------
Selling, general and administrative ("SG&A") expenses for fiscal 1998 were
$91.0 million or 16.4% of revenues, compared to $82.0 million or 13.7% of
revenues for fiscal 1997 and $70.7 million or 12.4% of revenues for fiscal 1996.
<PAGE>44
SG&A expenses for fiscal 1998 increased by $9.0 million or 11.0% as compared to
fiscal 1997 and by $20.4 million or 28.8% when compared to fiscal 1996. SG&A
spending increased from fiscal 1997 to fiscal 1998 principally because of $2.5
million in costs incurred to reimburse a customer for certain product expenses
incurred, a new sales force training program and higher marketing communication
expenditures. The increase in SG&A spending from fiscal 1996 to fiscal 1998 was
due primarily to additional headcount, increased expenditures resulting from
increased efforts in strategic marketing and customer service and the
implementation of system enhancements. With the exception of variable spending,
such as incentive bonuses and commissions, Cypress expects to keep SG&A spending
relatively constant.
1998 RESTRUCTURING AND OTHER NON-RECURRING COSTS
- -------------------------------------------------
The semiconductor industry has experienced a significant downturn as a
result of over-capacity from sharply higher manufacturing efficiencies, large
capital investments in production capacity and semiconductor customers moving
towards a "just in time" mode of operating. Cypress has experienced a severe
price-orientated recession, which resulted in declining sales for most of 1996
and during the fourth quarter of 1997, although demand showed signs of recovery.
In the first quarter of 1998, Cypress experienced a further decline in demand
and eventually posted a drop in revenues as well as a significant decrease in
unit shipments. During this first quarter, the semiconductor industry overall
recorded its first quarterly revenue decline after several quarters of improving
demand. Cypress had also experienced a decline in its capacity utilization. In
view of these developments, Cypress determined that a major and rapid move away
from six-inch to eight-inch manufacturing capability was required, as well as
consolidation of its manufacturing operations.
During 1998, Cypress implemented an overall cost reduction plan and recorded
a $58.9 million restructuring reserve. The restructuring entailed:
o The shutdown of Fab 3, located in Bloomington, Minnesota and
consolidation of parts of Fab 3 operations with other operations of
Cypress.
o The discontinuance of the 0.6 micron 256k SRAM production in Fab 2
located in Texas.
o The conversion of an existing research and development fab located in
San Jose (Fab 1) to eight-inch capability in order to be compatible with
the state of the art eight-inch Minnesota manufacturing facility.
o The transfer of Cypress's test operations from its subcontractor,
Alphatec, in Thailand to Cypress's production facility in the
Philippines.
o The restructuring activities described above include the termination of
approximately 850 personnel, primarily from manufacturing both at
Cypress and at Alphatec.
FAB 3 -- The charge related to the shutdown of Fab 3 was $30.2 million. Of
this amount, $26.0 million related to the write-down of equipment held for sale,
$1.7 million related to incremental third party costs expected to be incurred in
the eventual physical removal of the written down assets ("other fixed asset
related charges"), $1.1 million related to severance and other employee related
costs and $1.4 million related to inventory.
<PAGE>45
Fab 3 assets, which were not upgradable to 8-inch capability, were written
down based on the estimated useful lives of the assets and the salvage value of
the assets. The estimated useful lives were generally two months as a result of
the decision to discontinue production in Fab 3 and the salvage value was
determined based on the estimated sales value of used semiconductor equipment.
Non-upgradable Fab 3 assets were depreciated to their salvage value during the
production phase-down period. Fab 3 assets, which were upgradable to 8-inch
capability, were transferred to Fab 4 production during the third quarter of
1998.
Beginning in the second quarter of 1998, production was phased down in Fab 3
and in accordance with the restructuring plan, production ceased in July 1998.
From this time, Cypress has held the non-upgradable equipment for sale. However,
due to the over-supply of used semiconductor equipment, a substantial amount of
the equipment remains on hand. Cypress expects to recover the originally
determined salvage value for such equipment, however, no assurance can be given
as to the amount of proceeds which will ultimately be collected.
FAB 2 -- The decision to discontinue manufacturing SRAM products on
Cypress's 0.6 micron 256K SRAM process in Texas resulted in excess equipment and
employee redundancy. Charges related to this decision totaled $21.3 million, of
which $18.0 million related to the write-down of equipment held for sale, $0.3
million related to the write-down of inventory, $1.7 million related to
severance and other employee related costs and $1.3 million of other fixed asset
related charges for incremental third party costs expected to be incurred in the
eventual physical removal of the written down assets and the resolution of
certain related tax matters.
Excess equipment in Fab 2 was written down based on the estimated useful
lives of the assets and the estimated salvage value of the assets. The salvage
value was determined based on the estimated sales value of used semiconductor
equipment. Cypress had the ability and intention to sell all the equipment
immediately, but due to the semiconductor industry slow-down, Cypress recognized
immediate sale of the equipment would be difficult. The equipment was kept in
the fab, ready for demonstration and testing by a willing buyer. Cypress used
the equipment during the production phase-down period through May 1998.
Similar to Fab 3 equipment, some of this equipment remains on hand due to
the over-supply of used semiconductor equipment on the market. Cypress expects
to recover the originally determined salvage value for such equipment, however,
no assurance can be given as to the amount of proceeds which will ultimately be
collected.
FAB 1 AND SAN JOSE OPERATIONS -- The restructuring plan included the upgrade
of Fab 1 to an eight-inch facility to ensure compatibility with Cypress's Fab 4
manufacturing facility in Minnesota. Fab 1 is used for research and development
purposes. The plan assumed commencement of Fab 1 restructuring activities during
the middle of 1998 with completion by the end of January 1999. The plan included
the disposal of six-inch manufacturing equipment in January 1999 which was not
upgradable to eight-inch capability. The remaining net book value of $6.1
million of such assets is being written off over the estimated useful life
through January 1999. Incremental depreciation charges of $5.4 million, to
reflect the revised useful lives of this equipment were included in research and
development costs for 1998 and will continue through January 1999. Cypress also
reserved $1.0 million to write-down the value of certain other equipment and
assets and reserved $1.3 million related to severance and other employee related
costs.
<PAGE>46
ALPHATEC -- Cypress reserved $5.1 million to provide for the consolidation
of Thailand test activities from Alphatec, Cypress's subcontractor, with
Cypress's Philippines facility. Of this $5.1 million reserve, $1.5 million was
related to production inventories which were no longer useable as a result of
this consolidation, $1.3 million was related to severance costs at the
subcontractor, $1.3 million related to excess equipment and leasehold
improvements which are no longer used and $1.0 million for other fixed asset
related charges for incremental third party costs expected to be incurred in the
eventual physical removal of the written down assets. The assets were considered
held for sale and were written down to their revised carrying value. The
transfer of production from Alphatec to the Philippines facility began during
the second quarter of 1998 and was completed in January 1999, one month later
than originally planned.
OTHER -- Separate from the restructuring charge, Cypress recorded an
additional $27.3 million, which were recorded as operating expenses. The charges
were for inventory reserves ($15.8 million), the write-off of pre-operating
costs ($3.8 million), the write-off of an equity investment ($3.1 million),
costs incurred to reimburse a customer for expenses incurred to reimburse a
customer for certain product expenses incurred ($2.5 million) and the write-off
of obsolete equipment in Fab 4 ($2.1 million). These charges are discussed under
the respective captions ("Cost of Sales", "Selling, General and Administrative"
and "Interest and Other Income"), where the charges were recorded.
1997 RESTRUCTURING COSTS
In fiscal 1997, Cypress (ICW) Board and management decided to exit the
wafer fabrication business completely and focus on becoming a fabless
semiconductor company. In November 1997, Cypress (ICW) entered into an agreement
with Maxim Integrated Products (Maxim) and various other agreements with other
parties to exit the wafer fabrication business through the sale, refinancing,
and disposal of all wafer fabrication related assets (fab). Maxim agreed to
purchase wafer fabrication assets from Cypress (ICW) and its Fab Partners and
also agreed to purchase certain equipment from Cypress (ICW) lessors thereby
relieving Cypress (ICW) of significant future equipment lease obligations. Maxim
also acquired the property that housed the fab from Samsung Semiconductor, Inc.
(SSI) as part of the same transaction. The remaining assets to be disposed at
the end of fiscal year 1997 were liquidated between April 1998 and June 1998
(including at an equipment auction in June 1998). Due to the lack of any
meaningful sale of assets at the June auction, the actual liquidation of
substantially all of the remaining assets was completed in November 1998. In May
1998, Maxim purchased approximately $0.5 million of the assets to be disposed of
in another asset sale transaction separate from the November 1997 transaction.
Cypress (ICW) entered into the following material agreements related to the
sale of its fab assets to Maxim in November 1997:
1. Asset purchase agreements -- related to the purchase of assets from
each of the respective owners of assets. (Fab Partners, lessors, and
Cypress (ICW).) The loss incurred by the Company as a result of these
agreements are included as part of the restructuring costs in the
accompanying financial statements.
<PAGE>47
2. Loan agreement -- related to a loan by Maxim to Cypress (ICW) in the
amount of $2.0 million. Recorded as long term debt in March 1998 and is
payable at the earlier of an IPO, change in control, or four years.
3. Foundry agreement -- related to Cypress (ICW) agreement for Maxim to
provide BiCMOS foundry services to Cypress (ICW). This agreement
terminated in December 1998. No effect on financials.
4. Operating agreement -- related to sharing of the fab between Cypress (ICW)
and Maxim for a period of up to seven months from close (actual duration
was four months). Specifics of the agreements include how costs are
shared, who has control and when the fab transfers sequentially from
Cypress (ICW) to Maxim, the basis for one party billing the other for its
manufacturing activities within the fab during the period of sharing the
fab, and an agreement with Maxim that they will hire substantially all the
wafer fab-related employees based on a prescribed schedule. The operating
agreement was substantially completed in March 1998.
Cypress (ICW) and Maxim also entered into an operating agreement that
outlined the utilization of and cost-sharing for the facility during the
six-month transition period following the sale of the fab assets to Maxim.
While Maxim had acquired most of Cypress (ICW) owned and leased fab assets
and certain related assets, Cypress (ICW) still owned or leased other wafer
fabrication assets that were not purchased by Maxim. As such, in connection with
the exit of the wafer fabrication business, Cypress (ICW) recorded a restructure
charge of approximately $9.9 million related to impairment of assets sold to
Maxim ($2.2 million), impairment of assets held for sale ($1.7 million),
refinancing of lease agreements ($3.6 million), employee severance ($0.2
million), and other transaction costs ($2.2 million). These agreements with
Maxim resulted in a reduction of headcount of approximately 113 foundry
employees (most of whom were hired by Maxim). The total expected cash outlay
related to this charge was approximately $6.7 million at December 29, 1997, of
which the remaining $4.1 million was paid in 1999.
In November 1997, Cypress (ICW) also borrowed $2.0 million from Maxim with
interest accruing at 6% per annum. The note and interest are to be repaid at the
earlier of: a majority sale of Cypress (ICW), the consummation of a public
offering of Cypress (ICW) common stock, or four years from the date of the note
(November 2001). In addition, Cypress (ICW) entered into a wafer purchase
agreement with Maxim that allows Cypress (ICW) to buy BiCMOS wafers from Maxim
for a period of up to two years.
On the closing date of the transaction, November 20, 1997, Maxim purchased
Cypress (ICW's) six-inch wafer fabrication leasehold improvements and
manufacturing equipment as well as certain five-inch wafer fabrication equipment
which Cypress (ICW) owned or acquired through capital leases. The carrying value
of the six-inch and five-inch fabrication assets were $14.25 million and $0.4
million, respectively. Proceeds of the sale of these assets to Maxim were $12.5
million to Cypress (ICW).
<PAGE>48
1996 RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the third quarter of 1996, Cypress announced a restructuring of its
San Jose, California wafer fabrication facility, from a production wafer
fabrication plant to predominantly a research and development wafer fabrication
facility. As a result of this restructuring, Cypress recorded a pre-tax charge
totaling $9.1 million. The charge included $5.9 million for the write-down of
certain excess equipment and $3.2 million for severance and other related
restructuring charges. Substantially all of the reserve has been used as of the
end of 1998.
In the third quarter of 1996, Cypress recorded a non-recurring benefit of
$17.8 million. The benefit was derived from the reversal of the reserve
established in 1995 related to the Texas Instruments ("TI") patent infringement
lawsuit. In July 1996, the Federal Circuit Court of Appeals ("Court") affirmed
the earlier decision of the trial court that Cypress did not infringe on either
of the patents in the suit. In September 1996, the court decided that it would
not hear any appeal filed by the plaintiff regarding this matter and as a result
of this ruling, Cypress reversed the reserve established in 1995. In 1996, TI
filed a petition of certiorari in the United States Supreme Court. In June 1997,
the United States Supreme Court denied TI's petition of certiorari. Accordingly,
adjudication of the case was determined to be final.
In September 1996, Cypress recorded a one-time, pre-tax credit of $3.3
million related to the insurance reimbursement of defense costs incurred in
conjunction with the securities class-action lawsuit. This credit was offset by
$5.0 million of other non-recurring charges related to agreements with certain
companies regarding cross-licensing and other matters.
Due to deteriorating market conditions in the wafer foundry business during
fiscal 1996, demand for Cypress (ICW) foundry services declined significantly.
As a result of the decreased demand for foundry services and Cypress (ICW)
related cash flow constraints, management decided, in the fourth quarter of
fiscal 1996, to pursue the disposal of the six-inch equipment and related
leasehold equipment and machinery within its foundry business. As of March 1997,
the assets held for sale consisting of building leasehold improvements and
related machinery and equipment, had a carrying amount of approximately $29.5
million. Cypress (ICW) estimated the fair value of these assets based on
management's estimate of potential proceeds from their sale to be approximately
$14.25 million, net of an estimated $0.3 million for costs to sell the assets,
including commissions and legal and closing costs. As a result, Cypress (ICW)
recorded a $15.25 million charge to its results of operations in 1996
representing the excess of the $29.5 million carrying amount over the $14.25
million fair value less cost to sell.
In addition, Cypress (ICW) had remaining operating lease commitments for
machinery and equipment related to its foundry business, which will not be
utilized as a result of Cypress (ICW) decision to pursue the disposal of certain
fixed assets related to the foundry business. In accordance with EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity," Cypress (ICW) recorded a $2.7 million charge in fiscal
1996, representing the amount of operating lease payments to be made for which
no future economic benefit was anticipated. The $2,.7 million representing
future cash outlays were made during fiscal 1997.
<PAGE>49
During fiscal 1996, Cypress (ICW) sold certain fully depreciated five-inch
equipment, which resulted in a gain of $4.8 million. As the equipment was
subsequently leased back from the buyers, the gains were deferred and are being
amortized over the life of the leases (three years). Approximately $1.3 million
of the gain was recognized in income during fiscal 1997. In fiscal 1997, the
lease was terminated, and Cypress (ICW) offset the deferred gain against lease
exit costs associated with the sale of the foundry.
The aggregate $17.95 million charge associated with the disposal of certain
foundry assets is presented as "provision for impairment of assets and
restructuring costs" in the fiscal 1996 consolidated statements of operations.
The assets impaired in fiscal year 1996 were expected to be disposed by December
1997 (pursuant to the requirements of the Forbearance Agreement), and were
disposed of in November 1997 when associated impaired assets were sold to Maxim.
INTEREST EXPENSE
- -----------------
Interest expense was $11.3 million for fiscal 1998, compared to $8.5 million
for fiscal 1997 and $7.7 million for fiscal 1996. Interest expense incurred
during fiscal 1998 is primarily associated with the 6.0% Convertible
Subordinated Notes ("Notes"), which were issued in September 1997 and are due in
2002. The increase in fiscal 1998 is primarily attributable to a full year of
interest related to the Notes during fiscal 1998 compared to three months of
interest incurred during fiscal 1997. Interest incurred during fiscal 1997 also
included expenses from the convertible bond redeemed in March 1997 and the
revolving line of credit. Interest incurred during fiscal 1996 comprised
primarily of interest costs related to the 3.15% Convertible Subordinated Notes
redeemed March 1997 and the revolving line of credit.
INTEREST AND OTHER INCOME
- --------------------------
Net interest and other income was $13.4 million for fiscal 1998 compared to
$13.1 million for fiscal 1997 and $9.2 million for fiscal 1996. Net interest and
other income for fiscal 1998 includes interest income of $15.3 million, a $1.7
million pre-tax net gain related to the retirement of $15.0 million of Cypress's
6.0% Convertible Subordinated Notes and foreign exchange gains of $0.5 million.
The amount is offset by a non-recurring, pre-tax charge of $3.1 million recorded
to reflect the decline in value of a certain investment and $1.0 million in
amortization of bond issuance costs. Net interest and other income for fiscal
1997 relates primarily to interest income and a $3.8 million gain from the sale
of Cypress's remaining investment in Vitesse Corporation. Net interest and other
income for fiscal 1996 comprises of interest income of $7.2 million, a credit
for minority interest of $1.5 million, gain from the sale of a portion of
Cypress's investment in Vitesse Corporation of $0.6 million and other
miscellaneous credits and charges.
TAXES
- ------
Cypress's effective tax rates for fiscal years 1998, 1997 and 1996 were
11.4%, 42.7% and 54.7%, respectively. A tax benefit of $13.5 million was
realized during fiscal 1998 compared to expenses of $5.6 million and $30.4
million during fiscal 1997 and fiscal 1996, respectively. The benefit was
<PAGE>50
attributable primarily to the utilization of loss carrybacks, the utilization of
research and development tax credits and non-U.S. income taxed at lower tax
rates compared to U.S. tax rates, principally related to Cypress's operations in
the Philippines. The decrease in the effective tax rate from fiscal 1996 to
fiscal 1997 was primarily as a result of R&D tax credits and certain tax
benefits related to Cypress's operations in the Philippines.
During 1998, the United States Internal Revenue Service began an examination
of tax returns for fiscal years 1994 through 1996. The examination is expected
to continue through December 1999. Management believes that no potential
adjustments will ultimately result from this examination.
STOCK BASED COMPENSATION
- --------------------------
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by Statement of Accounting Standards No. 123 (SFAS 123). As
permitted by SFAS 123, Cypress discloses pro-forma net income (loss) and
pro-forma net income (loss) per share as if it had recorded compensation cost.
The pro-forma effect on net income (loss) and net income (loss) per share is
based on the estimated grant date fair value, as defined by SFAS 123 for awards
granted under the Cypress's 1994 Stock Option Plan and its Employee Stock
Purchase Plan. Inclusive of the pro-forma effect, basic and diluted net loss was
$(135,907) and $(17,545) for 1998 and 1997, respectively. For 1996, pro-forma
basic and diluted net income was $4,559. Pro-forma basic and diluted net income
(loss) per share was $(1.34), $(0.18) and $0.05 for fiscal years 1998, 1997 and
1996, respectively. The pro-forma effect may be impacted by various factors
including re-pricing of existing options.
In January 1998, substantially all outstanding stock options with an
exercise price in excess of $9.75 per share were cancelled and replaced with new
options having an exercise price of $9.75 per share, the fair market value on
the date that the employees accepted the repricing. A total of 10,464,000 shares
were repriced. This repricing excluded the Board of Directors, the Chief
Executive Officer and the Executive staff of Cypress.
FACTORS AFFECTING FUTURE RESULTS
- ---------------------------------
RISK FACTORS
- -------------
The risks and uncertainties described below are not the only ones Cypress
faces. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair Cypress's business operations. If any
of the following risks actually occur, our business financial condition and
operating results could be materially adversely affected, the trading price of
our common stock could decline and you might lose all or part of your
investment.
Following is a summary of the risk factors:
- - Cypress's future operating results are very likely to fluctuate and therefore
may fail to meet expectations.
- - Cypress faces periods of industry-wide semiconductor over-supply which harm
its results.
<PAGE>51
- - Cypress's financial results could be adversely impacted if the markets in
which it sells its products do not grow.
- - Cypress is affected by a general pattern of product price decline and
fluctuations, which can adversely impact our business.
- - Cypress may be unable to adequately protect its intellectual property rights,
and may face significant expenses as a result of ongoing, or future,
litigation.
- - Cypress's 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.
- - Interruptions in the availability of raw materials can adversely impact
Cypress's financial performance.
- - Problems in the performance of other companies Cypress hires to perform
certain manufacturing tasks can adversely impact Cypress's financial
performance.
- - The complex, essential nature of Cypress's manufacturing activities make
the company highly susceptible to manufacturing problems and these problems
can have substantial negative impact when they occur.
- - Cypress may not be able to use all of its existing or future manufacturing
capacity, which can negatively impact its business.
- - Cypress's operations and financial results could be severely harmed by certain
natural disasters.
- - Cypress's business, results of operations and financial condition will be
adversely impacted if it fails to compete in its highly competitive
industry and markets.
- - Cypress must build semiconductors based on its forecasts of demand, and can
end up with large amounts of unsold product if its forecasts are wrong.
- - Cypress must spend heavily on equipment to stay competitive, and will be
adversely impacted if it is unable to secure financing for such
investments.
- - Cypress competes with others to attract and retain key personnel, and any
loss of, or inability to attract such personnel would hurt Cypress.
- - Cypress faces additional problems and uncertainties associated with
international operations that could adversely impact it.
- - Cypress must comply with many different environmental regulations, which can
be expensive.
- - Cypress depends on third parties to transport its products and could be harmed
if these parties experience problems.
- - Cypress' operations and products may not function properly in the year 2000,
which could significantly harm its business, financial condition and
results of operations.
For a complete detailed discussion of risk factors, refer to Cypress's
filing on Form 10-K with the Securities and Exchange Commission.
YEAR 2000 READINESS DISCLOSURE
- --------------------------------
In less than three months, most companies will face a potentially
serious problem because many software applications, operational systems and
equipment with embedded chips or processors may not properly recognize or
accurately process calendar dates beginning in the year 2000. The problem
arises because of the prevalent use of two digits to represent the year 2000
in these systems and equipment.
<PAGE>52
Like many other companies, the year 2000 issue poses a risk for Cypress.
The year 2000 problem could affect our computers, software and other equipment
we use and operate. This could result in system failures causing disruptions in
operations, including among other things, interruptions in manufacturing, design
and process development operations; temporary disruptions in processing business
transactions; and disruptions in other normal business operations.
Cypress has taken company-wide actions to assess the nature and extent of
work required to prepare its products, systems, equipment and infrastructure for
January 1, 2000. In addition, we have engaged in the process of evaluating our
key suppliers and customers to determine the extent to which our operations are
vulnerable based upon third parties' failure to address their own year 2000
issues. These activities represent our ongoing efforts to address the year 2000
problem that we commenced with the implementation of a year 2000-compliant
accounting software system in 1997.
Cypress's president and executive staff have assumed the responsibility
of managing the impact of the year 2000 problem on all aspects of our
operations, including programs for identification, inventory taking, risk
assessment and cost estimates of problems associated with the year 2000; the
plans, remediation effort and testing methodology to correct those problems; and
the development of contingency plans if some of the corrective actions fail to
correct the problem or do not get implemented in a timely manner. These
activities, in varying phases, are currently in process.
As of November 1999, Cypress has completed all of its year 2000
compliance efforts for our internal business (MIS) systems. An integrated
system test for critical business applications was completed at the end of
September 1999. As of October 1999, Cypress had completed 100% of the compliance
efforts related to the rest of our systems, equipment and infrastructure.
Our efforts since the beginning of fiscal year 1999 shifted in focus from
inventory taking and assessment to remediation, testing and contingency
planning activities. Contingency planning efforts have incorporated Cypress's
entire supply chain and external infrastructure, to ensure plans will be in
place to address any unforeseen year 2000 failures.
Cypress's compliance efforts will continue throughout the remainder of
1999. We continue to monitor systems, processes and suppliers for
unanticipated and previously undiscovered problems. We may discover new
information that may drive us to refine our year 2000 contingency and
migration plans and/or launch remediation and re-testing efforts.
Cypress incurred little cost during 1998 in addressing the year 2000
problem. In 1999 we expect to incur a total of $3.0 million of expense and
capital outlays for remediation, testing and contingency planning efforts.
Through Q3 1999, approximately 95% of planned expenditures have been incurred.
In the event year 2000 issues relating to key customers and suppliers are
not successfully resolved, based on information available to us at present, we
believe that the most reasonably likely worse case scenario is a temporary
disruption in infrastructure service, particularly power and telecommunications,
which could adversely impact supplier deliveries or customer shipments. If
severe disruptions occur in these areas and are not corrected in a timely
manner, a revenue or profit shortfall may result in fiscal year 2000.
<PAGE>53
Cypress Year 2000 contingency planning efforts are guided by three elements
and specifically expressed in our Year 2000 Mission: (1) Cypress serves its
customers continuously, (2) Cypress maintains continuous employment, and (3)
Cypress increases shareholder value relative to its competitors. The executive
staff of Cypress is directly responsible for developing and approving Cypress's
year 2000 contingency planning efforts, and the team is led by the CEO. The
operating assumption that external infrastructure may be down for up to 2-4
weeks has been used in order to create a suitable framework for contingency
planning efforts, and as a result, Cypress expects to have plans in place to
address any unforeseen year 2000 failures. Our contingency planning efforts will
continue through the end of the year. Many of these activities have already been
documented, implemented and communicated accordingly. A number of business
responses are being actively considered and/or have already been employed for
some segment of our customer/supplier base:
o developing second/alternate source suppliers for critical raw materials
and subcontract operations,
o work-in-process inventory "build ahead" in Cypress wafer fab locations,
o finished goods inventory "build ahead" in Cypress/subcontractor
assembly locations,
o increased consignment inventory programs for strategic customers (up to 3
months on customer premises),
o higher year-end 1999 stocking levels for primary Cypress distributors,
o intersite communication blackouts immediately around the December 31/January
1 date change in order to minimize the risk of external system intrusion
into Cypress's systems,
o facility "safe state" plans, including plans to preserve equipment and the
controlled environment of manufacturing facilities (i.e.,
temperature and humidity controls) for a period of 7 days using
self-generated power in the event of infrastructure shutdown, and
o early payment/collection as well as delayed payment/collection for Cypress
suppliers, customers and employees.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ----------------------------------------------------------
Cypress is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. To mitigate these risks, Cypress
utilizes derivative financial instruments. Cypress does not use derivative
financial instruments for speculative or trading purposes.
The fair value of Cypress's investment portfolio or related income would not
be significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of
Cypress's investment portfolio. An increase in interest rates would not
significantly increase interest expense due to the fixed nature of Cypress's
debt obligation.
A majority of Cypress's revenue and capital spending is transacted in U.S.
dollars. However, Cypress does enter into these transactions in other
currencies, primarily Japanese yen and certain other European currencies. To
protect against reductions in value and the volatility of future cash flows
caused by changes in foreign exchange rates, Cypress has established revenue and
balance sheet hedging programs. Cypress's hedging programs reduce, but do not
<PAGE>54
always eliminate, the impact of foreign currency rate movements. Based on
Cypress's overall currency rate exposure at January 3, 1999, a near-term 10%
appreciation or depreciation in the U.S. dollar would have an immaterial effect
on Cypress's financial position, results of operations and cash flows over the
next fiscal year.
All of the potential changes noted above are based on sensitivity analyses
performed on Cypress's balances as of January 3, 1999.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
Cypress's cash, cash equivalents and short-term investments totaled $160.6
million at the end of fiscal year 1998, a $43.3 million decrease from the end of
1997.
In 1998, Cypress retired a total of $15.0 million principal of its $175.0
million, 6.0% Convertible Subordinated Notes ("Notes") for $12.9 million,
resulting in a pre-tax net gain of $1.7 million. The net gain was recorded as
interest and other income. The Notes, which were issued in September 1997, are
due October 1, 2002 and contain a coupon rate of 6.0%. The remaining outstanding
Notes are convertible into approximately 6,772,000 shares of common stock and
are callable by Cypress on or after October 2, 2000.
A portion of the proceeds from the notes were used to repay the $49.0
million balance outstanding under the revolving credit facility, acquire
equipment, purchase a building in Woodinville, Washington and for stock
repurchases in 1997. The remaining proceeds have been invested in
interest-bearing investment grade securities and have been used for general
corporate purposes, including capital expenditures to add manufacturing capacity
and capability, development and commercialization of products, working capital
and potential strategic acquisitions or investments.
During 1998, Cypress purchased $82.9 million in capital equipment, a
significant decrease from the $143.8 million purchased in 1997. Cypress
purchased equipment for its domestic wafer fabrication plants, its test and
assembly facility in the Philippines, its backend manufacturing subcontractors
and its 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 0.18 and 0.25 micron processes. A
majority of the equipment purchased was for Fab 4 equipment located in Minnesota
to increase the capacity and capability of Fab 4. Equipment purchased for the
Philippines and its subcontractors was used to increase manufacturing capacity
and tool certain packaging capabilities. Capital equipment purchases for the
technology group are expected to enhance and accelerate research and development
capabilities. Capital expenditures in 1999 are expected to be approximately
$122.0 million as Cypress continues its efforts to increase its manufacturing
capabilities and capacity and to enhance its research and development
capabilities. Commitments for purchases beyond the year 1999 are not considered
to be significant.
During 1997, the Board of Directors authorized the repurchase of up to 4.0
million shares of Cypress's common stock. In September 1998, the Board of
Directors authorized the repurchase of up to an additional 10.0 million shares
under the stock repurchase program. Through January 3, 1999, 8.1 million shares
<PAGE>55
have been repurchased under this entire program for $67.5 million. The
repurchased shares are expected to be used in conjunction with Cypress's 1994
Stock Option Plan and Employee Stock Purchase Plan. During 1998, Cypress
reissued 1,782,000 shares of common stock under such plans. In conjunction with
the authorized stock repurchase program, Cypress sold put warrants through
private placements for which Cypress received a net amount of $9.4 million
through January 3, 1999. Cypress has a maximum potential obligation to purchase
4.5 million shares of its common stock at an aggregate price of $44.5 million as
of January 3, 1999. Cypress has the right to settle the put warrants
with cash or settle the difference between the exercise price and the fair
market value at the exercise date with stock or cash. The puts expired in May
1999. On February 25, 1999, the Board of Directors terminated the stock
repurchase program.
In February 1997, Cypress called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of March 26, 1997. At the
time of conversion, approximately 85% of the holders elected to convert their
notes into Cypress's common stock, increasing the amount of common stock
outstanding by 6.8 million shares. As a result of holders electing the cash
settlement, Cypress paid out $14.3 million.
In April 1997, Cypress sold capital equipment located in its Minnesota wafer
fabrication facility to Fleet Capital Leasing ("Fleet") in a sale-leaseback
agreement. In October 1997, Cypress entered into a similar agreement with
Comdisco, Inc. ("Comdisco") for other capital equipment located in Minnesota.
Cypress received a total of $28.2 million from Fleet and Comdisco in exchange
for the capital equipment and as a result of the transactions, recorded an
immaterial gain that will be amortized over the life of the leases.
During 1997, Cypress (ICW) entered into an agreement to borrow $2.0 million
from a third party with interest accruing at 6.0% per annum. The loan became due
simultaneously with the merger of Cypress and ICW and will be repaid in April
1999. Also during 1997, Cypress (ICW) issued promissory notes to three
significant customers for $2.0 million, $1.4 million and $0.3 million, bearing
interest at 6.0%, 10.0% and 7.5%, respectively and due in October 2000, August
2000 and July 1999, respectively. As of January 3, 1999, a total of $1.0 million
was payable under the notes.
In 1997, Cypress (ICW) established a revolving line of credit with a
bank totaling up to $6.5 million. There were no borrowings against this line
of credit as of January 3, 1999.
In July 1996, Cypress established a three-year $100.0 million unsecured
revolving credit facility with Bank of America National Trust and Savings
Association as agent on behalf of certain banks. During 1998, Cypress cancelled
this line of credit.
In 1994 and 1995, Cypress entered into three operating lease agreements with
respect to its office and manufacturing facilities in San Jose and Minnesota,
respectively. In April 1996, Cypress entered into an additional lease agreement
for two office facilities in San Jose. These agreements require that Cypress
maintain a specific level of restricted cash or investments to serve as
collateral for these leases and maintain compliance with certain financial
<PAGE>56
covenants. Cypress's restricted investment balance as of January 3, 1999 and
December 29, 1997 was $59.7 million and $60.1 million, respectively, and is
recorded as other assets on the Balance Sheet. Cypress was in compliance with
its covenants at January 3, 1999.
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). The acquisition was accounted for
as a purchase. Cypress acquired Arcus for $17.7 million, including cash of
$11.5 million and stock of $6.2 million, excluding direct acquisition costs of
$0.8 million for legal and accounting fees (see Note 11 to the Consolidated
Financial Statements).
On May 25, 1999, Cypress acquired all of the outstanding capital stock of
Anchor Chips, Inc. ("Anchor"). The acquisition was accounted for as a purchase.
Cypress paid approximately $15.0 million in cash, excluding direct costs of $0.7
million for investment banking, legal and accounting fees (see Note 11 to the
Consolidated Financial Statements).
On October 5, 1999, Cypress announced that it has signed a definitive
agreement with Altera Corporation ("Altera") to acquire Altera's MAX 5000
Programmable Logic Device ("PLD") product line and its equity interest in
Cypress's wafer fabrication facility in Round Rock, Texas ("FAB II") for
approximately $13.0 million. The acquisition will be accounted for as a
purchase (see Note 11 to the Consolidated Financial Statements).
Cypress believes that existing cash and cash equivalents and cash from
operations will be sufficient to meet present and anticipated working capital
requirements and other cash needs for at least the next twelve months. In the
event that ASPs continue to decline at rates above normal industry levels and
demand continues to be insufficient to offset the effects of such declines,
Cypress's operating results may be adversely impacted causing Cypress to raise
additional capital through debt or equity financing. Although additional
financing may be required, there can be no assurance that it would be available
to Cypress or available at terms Cypress deems satisfactory.
<PAGE>57
REPORT OF INDEPENDENT ACCOUNTANTS
-----------------------------------
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
CYPRESS SEMICONDUCTOR CORPORATION.
In our opinion, the consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Cypress
Semiconductor Corporation's and its subsidiaries at January 3, 1999 and December
29, 1997, and the results of their operations and their cash flows for each of
the three years in the period ended January 3, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
June 4, 1999
<PAGE>58
Quarterly Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
Jan. 3 Sep. 28 Jun. 29, Mar. 30
1999 1998 1998 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Revenues.............................. $ 145,570 $ 143,791 $ 133,376 $ 132,154
========== ========== ========== ==========
Gross Profit.......................... $ 48,947 $ 47,213 $ 41,629 $ 6,993
========== ========== ========== ==========
Net income (loss)..................... $ (1,751) $ 1,649 $ (9,221) $ (95,595)
========== ========== ========== ==========
Net income (loss) per share:
Basic................................. $ (0.02) $ 0.02 $ (0.09) $ (0.92)
========== ========== ========== ==========
Diluted............................... $ (0.02) $ 0.02 $ (0.09) $ (0.92)
========== ========== ========== ==========
Three Months Ended
Dec. 29 Sep. 29 Jun. 30, Mar. 31
1997 1997 1997 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Revenues.............................. $ 149,335 $ 159,722 $ 152,014 $ 137,414
========== ========== ========== ==========
Gross Profit.......................... $ 44,018 $ 57,126 $ 56,759 $ 46,813
========== ========== ========== ==========
Net income (loss)..................... $ (1,514) $ (1,291) $ 6,812 $ 3,518
========== ========== ========== ==========
Net income (loss) per share:
Basic................................. $ (0.01) $ (0.01) $ 0.07 $ 0.04
========== ========== ========== ==========
Diluted............................... $ (0.01) $ (0.01) $ 0.06 $ 0.03
========== ========== ========== ==========
</TABLE>
<PAGE>59
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: December 8, 1999
<PAGE>60
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3(No.333-67203) of Cypress Semiconductor Corporation of
our report dated June 4, 1999 relating to the financial statements, which
appears in the Current Report on Form 8-K of Cypress Semiconductor Corporation
dated December 8, 1999.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
January 18, 2000