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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
For the fiscal year ended January 2, 2000
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
[No Fee Required]
For the transition period from __________ to __________.
Commission File Number: 1-10079
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Cypress Semiconductor Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2885898
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3901 North First Street, San Jose, California 95134-1599
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 943-2600
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
on Which Registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
form 10-K. [ ]
At March 3, 2000, registrant had outstanding 112,787,375 shares of Common
Stock.
The market value of voting stock held by non-affiliates of the registrant,
based upon the closing sale price of the Common Stock on March 3, 2000 on the
New York Stock
Exchange, was approximately $4,636,000,000. Shares of Common Stock held by each
executive officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference in Items 9, 10, 11 and 12 of Part III
of this 10-K Report.
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PART I
ITEM I. BUSINESS
This Item contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in "Risk
Factors" and elsewhere in this Report.
General
Cypress Semiconductor Corporation designs, develops, manufactures and
markets a broad line of high-performance digital and mixed-signal integrated
circuits for a range of markets, including data communications,
telecommunications, computers, and instrumentation systems. We currently offer
approximately 500 products from our two business segments; memory products and
non-memory products. Our products are marketed worldwide through a network of 25
North American sales offices, 6 North American distributors, 26 U.S. sales
representative firms, 7 European sales offices, 2 Japanese sales offices, 2
Chinese sales offices, an office in Singapore, an office in Korea, an office in
Taiwan, and 39 international sales representative firms. We sell our products to
a wide range of customers, including Lucent Technologies Inc., Motorola, Inc.,
Nortel Networks Corporation, Seagate Technology, Inc., Compaq Computer
Corporation, 3Com Corporation, IBM, Cisco Systems, Inc. and Sony Corporation. In
1999, international sales accounted for 51% of our total sales.
Cypress was founded in 1982 and our initial strategy was to provide
innovative high-performance complementary metal-oxide silicon, referred to as
CMOS, integrated circuits to niche markets that were believed to be too small to
be targeted by the major established international semiconductor manufacturers.
In 1992, we modified our strategy to focus on selected high-volume products,
particularly memory products, which could be brought to market quickly and
cost-effectively. This strategy was successful until 1996 when the average
selling prices of memory products began to decline. To offset the effects of
declining average selling prices and its impact on revenues from memory
products, we modified our strategy by diversifying our product mix to focus on
non-memory products. We have also directed our sales and marketing effort and
new product development resources, more towards the data communication and
telecommunication end markets. Because of the highly competitive nature of the
semiconductor industry, its cyclicality and anticipated pressure on average
selling prices over the life of any particular product, our ability to
successfully implement this strategy and achieve our revenue, earnings and gross
margin goals will depend upon a number of factors. These factors include our
ability to:
o maintain our position in the high-performance markets;
o increase our presence in the more competitive high-volume markets;
o continue to successfully design and develop new products utilizing
advanced semiconductor design and process technologies in a timely
fashion;
o improve manufacturing yields and reduce manufacturing costs and cycle
time; and
o effectively market and sell our products in light of significant
domestic and international competition.
Cypress was incorporated in California in December 1982. The initial public
offering of our common stock occurred in May 1986 at which time our common stock
commenced trading on the Nasdaq National Market. In February 1987, we
reincorporated in Delaware and on October 17, 1988, began listing our common
stock on the New York Stock Exchange.
Products
We concentrate our efforts in two market segments, memory products and
non-memory products. Our memory product segment manufactures integrated circuits
on silicon wafers using leading edge process technology. A significant portion
of the wafers we produce for memory products is manufactured at our
technologically advanced, eight-inch wafer production facility located in
Minnesota, which we refer to as Fab 4. Certain memory products are often
characterized as commodities, with high unit sales volume and significant shifts
in supply and demand; these factors mean a potentially greater exposure to
fluctuations in average selling price and gross margin. Sales of memory products
are generally driven by higher volumes and results of operations are improved
through advancements in technology and attainment of lower manufacturing costs.
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In contrast, some non-memory products are manufactured utilizing less
technologically advanced processes compared to memory products and are generally
design or customer solution driven. A majority of the wafers we produce for
non-memory products are manufactured at our six-inch fab located in Texas, which
we refer to as Fab 2. In addition, we purchase wafers fabricated at smaller
geometries from foundries. Unit sales volume of certain non-memory products is
generally lower than memory products, but gross margin is higher. Future sales
and results of operations of non-memory products are driven by the introduction
of new products, design wins and improvements in technology. Because the
semiconductor industry is characterized by rapid technological change, resulting
in products with greater speed, densities and performance capabilities and by
the continuing evolution of process technologies, our success will continue to
depend upon the timely development, introduction and market acceptance of new
products in the non-memory products market segment.
Please refer to our Note 11 to our annual financial statements included in
this Report for detailed information about the composition of revenues from our
memory and non-memory product market segments.
Memory Products
Our memory products, which include static random access memory products,
primarily serve the data communications, telecommunications and personal
computer markets.
Static RAM (Static Random Access Memory). Static RAMs are used for storage
and retrieval of data in data communication, telecommunication, computers and
other electronic systems. Common networking applications include hubs, switches,
routers, test and measurement instrumentation, video and simulation. Telecom
applications include cellular phones, pagers, radios, global positioning
satellite systems and cellular base stations.
The static RAM market is characterized by the requirements for many
different densities (number of bits per memory circuit), organizations (number
of bits available to the user in a single access of the RAM) and levels of power
consumption (low power and ultra-low-power devices are required for portable
battery operated equipment). In addition, the market is divided into fast
asynchronous, slow micro-power and synchronous segments. This differentiation of
the static RAM market when combined with the different RAM features incorporated
by various manufacturers, the need for military, industrial and commercial grade
products, the need for different package types, and the grading of product by
speed and power, produces a complex market structure.
Non-Memory Products
Non-memory products include a variety of products that serve the data
communications, telecommunications, personal computer, PC peripheral, military
and consumer markets. Non-memory products include programmable logic products
and programming software, programmable-skew clocking, data communication
products, computer products, including clocks and universal serial bus, referred
to as USB, microcontrollers and non-volatile memory products.
PLDs (Programmable Logic Devices). The logic in an electrical system
performs the non-memory functions, such as floating-point mathematics or the
organization and routing of signals throughout a computer system. This
constitutes a significant portion of the circuitry in most systems. We
manufacture several families of programmable logic circuits, which are
programmable by the user. PLDs facilitate the replacement of many standard logic
devices with a single device, thus reducing package count and cost, improving
performance and allowing miniaturization. Our PLD portfolio consists of a wide
variety of devices ranging from simple PLDs such as the Flash 22V10, to the
very-high-density complex PLDs such as the Cypress Ultra37000 and Delta 39K
families. All our products are supported by the Warp(TM) software tool set,
which enables design description in either VHDL (very high-speed integrated
circuit hardware description language), an industry standard developed by
Cypress or in Verilog, another industry standard.
PROMs (Programmable Read-Only Memories). Read-only memory, referred to as
ROM, is a memory in which the data is fixed even when the power is off. ROMs are
used to provide start up data to computers when they are turned on. PROMs are
blank ROMs that can be customized by the customer to fit specific needs. They
are used in computer-peripherals, telecommunications systems and instrumentation
equipment which store fixed data that is not to be altered during normal machine
operations. We have been a supplier of high-performance CMOS PROMs since 1984.
These early devices were the first to combine the fast memory access of PROM
with the low power consumption of CMOS technology. We offer a broad family of
high performance PROMs ranging in density from 4K to 256K bits, available in a
variety of standard and proprietary user interfaces.
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First-in, First-out ("FIFOs"). FIFOs are used as an elasticity buffer
between systems operating at different frequencies. We offer FIFO memories in a
variety of high-bandwidth synchronous and asynchronous architectures with
industry-standard pinouts. We have recently added 32 new x36 FIFOs to our
portfolio.
Multi-port Memories. Dual-port and QuadPortTM RAMs are memories that can be
accessed by two or four different processors or busses simultaneously.
Multi-ports are ideal memory solutions for shared-memory and switching
applications, including networking switches and routers, cellular base stations,
mass storage devices, and telecommunication equipment. Our family of synchronous
and asynchronous multi-port RAMs range in density from 8 Kbit to 1 Mbit in x8,
x9, x16, x18, and x36 configurations. We further enhanced our leadership
position in multi-ports by introducing the world's first x36 dual-port (FLEx36TM
Dual-port) and the world's first high-density (1-megabit) / high-performance (10
Gbps) QuadPort RAM.
RoboClock. Our RoboClock family of high performance programmable clock
buffers offer very high performance specifications (i.e. zero propagation delay
and 50/50 duty cycle) and programmable features (i.e. programmable skew and
multiple/divide functions) allowing customers to compensate for clock skews
arising from varying circuit board trace lengths and device set-up and hold
times.
HOTLink (High-speed Optical Transceiver Link). Our HOTLink serial
transceivers are the industry standard products for moving serial data at rates
from 50-400Mbps. These products support a variety of applications and industrial
protocols including fibre channel, enterprise system connection, asynchronous
transfer mode, digital video broadcast, Advanced Micro Devices, Inc.'s TAXIChip
protocol, generic backplane and point-to-point applications.
WAN (Wide Area Network) Our family of high-performance SONET/SDH
(Synchronous Optical Network/Synchronous Digital Hierarchy) transceivers move
SONET or SDH frames between equipment at the SONET/SDH data rates of 51.85Mbps
(OC-1) and 155.52Mbps (OC-3). Our recent acquisition of Arcus Technology, Inc.
enhanced our expertise in PDH (Plesiochronous Digital Hierarchy) and SONET/SDH
technology and E1-3 mapper products that are currently shipping for revenue.
Programmable Clocks. We are a leader in the timing technology device market
primarily due to our clocks and clock distribution circuits. Clocks' frequency
synthesizers integrate essentially all clock requirements of a microprocessor
based system, thus reducing size, power, consumption and cost. These devices are
widely used in personal computers, disk drives, modems, digital video disks,
video CD players and home video games. We are the only supplier offering true
field-programmable clocks, and all our clock outputs have the desired
characteristics of high drive, low jitter, low EMI, and low skew.
FCTs (Fast CMOS Technology). We offer a full complement of FCTs with
standard logic and bus interface functions in a variety of formats. FCT devices
are used in a wide variety of applications whenever the need arises for very
high-speed logic functions. FCT logic is used in almost all types of high-speed
systems for data/bus management, buffering, and a variety of other simple logic
functions. Our logic choices include 3.3- and 5-V products; high-drive and
balance drive strengths; 8- and 16-bit organizations, and numerous package
options.
USB (Universal Serial Bus). USB is a four-wire connection between a PC and
its peripherals (such as keyboards, mice, printers, joysticks, scanners and
modems), facilitating an easy-to-use architecture known as "plug and play." This
new standard has been supported by Microsoft Corporation, Intel Corporation and
other large original equipment manufacturers, referred to as OEMs. In 1997, we
entered into a strategic alliance with Microsoft to produce our first USB
product, an 8-bit, RISC-based microcontroller for Microsoft's new Internet
mouse. In 1999 we acquired Anchor Chips, Inc. to expand our high performance USB
product line. Also in 1999, we acquired the license to manufacture Intel's USB
products, further expanding the USB product portfolio. We now make USB
microcontrollers for a broad range of peripherals from personal computers, mice
and keyboards to high performance devices such as DSL modems and digital
cameras, giving us the broadest USB product portfolio in the industry.
Research and Development
We place great emphasis on research and development. This is partially
reflected by our commitment of significant management resources to continuously
improve process and product design development cycle time. Our current product
strategy requires rapid development of new products using emerging process
technologies while minimizing research and development costs. We perform
research and development at two levels: research and development related to
process technology is managed at the corporate level; and research and
development related to new product design is managed at the operating level, in
concert with our new product design organization.
Page 5
The major focus of our process technology research is the continuous
migration to smaller geometries. Currently, we are in the process of
transitioning from 0.25-micron to 0.16-micron fabrication technology. We began
selling 0.25-micron Static RAM products during the fourth quarter of 1998.
Our wafer fabrication facility located in San Jose, which we refer to as
Fab 1, is utilized for research and development programs focusing mainly on
continuous migration to smaller geometries. Development programs for 0.16-micron
technologies are currently in progress in Fab 1. Fab 1 also develops process
enhancements to current generation technology. In fiscal 1999, we began the
process of converting Fab 1 from a six-inch facility into an eight-inch
facility. This conversion is expected to be completed by June 2000.
We have a central design group that focuses on new product design and
improvement of design methodologies. This group has ongoing efforts to reduce
design cycle time and increase first pass yield through structured re-use of IP
Blocks from a controlled intellectual property library, development of
computer-aided design tools and improved design business processes. We currently
have 48 design teams in place working on new product designs. Design work
primarily occurs at design centers located in: Colorado Springs, Colorado; San
Jose, California; San Diego, California; Woodinville, Washington; Bloomington,
Minnesota; Austin, Texas; Starkville, Mississippi; Nashua, New Hampshire;
Bangalore, India; Basingstoke, United Kingdom; and Cork, Ireland. In addition,
we have software development teams in: Beaverton, Oregon; Lexington, Kentucky
and San Jose, California
Manufacturing
In 1999, we continued to manufacture our products at three sub-micron wafer
fabrication facilities located in California, Minnesota and Texas, the principal
facilities being the latter two. These fabrication facilities utilize our
proprietary 0.25, 0.35, 0.5, 0.65 and 0.8-micron CMOS, 0.8 and 0.5-micron
BiCMOS, and 0.65-micron Flash technologies. To enhance our competitive position,
we emphasized programs to reduce manufacturing cycle times, reduce die size,
improve labor productivity, improve efficient use of capital resources,
eliminate manufacturing steps, improve defect densities, improve yields and
ultimately lower manufacturing costs. We invested $57.4 million in 1999 to
increase the capacity and capability of our primary wafer fabrication plants,
Fab 2 and Fab 4. We have also continued to utilize various foundries to augment
production output to respond to increasing market demand and focus on RAM and
BiCMOS technologies in our own wafer fabrication plants.
A significant portion of our assembly and test operations is performed by
our highly automated assembly and test facility in the Philippines, which
accounted for 46% of our 1999 output, and through various offshore
subcontractors. Our Philippines facility focuses its investments in high volume
products and packages where our ability to significantly leverage manufacturing
costs is high. The Philippines plant currently has capability for numerous types
of packaging and will be developing capability for several other packages in the
near future. In 1999, we invested $17.6 million in capital to expand our
Philippines' manufacturing capability with state-of-the art equipment. When
fully utilized, this plant is expected to provide approximately 65% of our
assembly and test manufacturing capacity.
The complicated nature of our wafer fabrication process often resulted in
certain wafers being rejected or individual die on each wafer to be
non-functional, adversely affecting manufacturing yields. Similar yield losses
may be experienced in the assembly and test phase of manufacturing. Our
philosophy is to prevent the yield loss and/or quality problems to the extent
possible through analytical and statistical manufacturing controls. We test our
products at various stages in the fabrication, assembly and test processes. We
perform high temperature burn-in testing as well as continuous reliability
monitoring on all products, and conduct numerous quality control inspections
throughout the entire production flow using quality-control analytic equipment.
This combination of manufacturing controls, product testing and quality control
inspections is intended to reduce costs while maintaining an uninterrupted
supply of product.
Marketing and Sales
We use four channels to sell our products: direct OEM sales by our sales
force; direct OEM sales by manufacturing representative firms; sales through
domestic distributors; and sales through international trading companies and
representative firms. Our marketing and sales efforts are organized around four
regions: North America, Europe, Japan and Asia/Pacific. We also have a strategic
accounts group, which is responsible for specific customers with worldwide
operations. We augment our sales effort with field application engineers, who
are specialists in our product portfolio and work with customers to "design in"
our products for their systems. Field application engineers also help us
identify emerging markets and new products.
Page 6
International revenues accounted for 51% of our total revenues in 1999
compared to 45% in 1998 and 39% in 1997, respectively. Please refer to Note 11
to our annual financial statements included with this Report for additional
information on geographic distribution of our revenues.
We typically warrant our products against defects in materials and
workmanship for a period of one year and that product warranty is generally
limited to a refund of the original purchase price of the product.
Backlog
Our sales are typically made pursuant to standard purchase orders for
delivery of catalog products. Generally, customer relationships are not subject
to long-term contracts. Products to be delivered and delivery schedules, under
purchase orders outstanding from time to time, are frequently revised to reflect
changes in customer needs. For these reasons, our backlog at any particular date
is not representative of actual sales for any succeeding period and we believe
that our backlog is not a meaningful indicator of future revenues.
Competition
We face competition from other domestic and foreign high-performance
integrated circuit manufacturers, many of which have advanced technological
capabilities and have increased their participation in the markets in which we
operate. We compete with a large number of companies primarily in the
telecommunications, data communications, personal computer, personal computer
peripheral and military markets. Competitors, including Altera Corporation,
Hitachi, Integrated Device Technology, Inc., Integrated Silicon Solutions, Inc.,
Motorola, Inc., Samsung, Texas Instruments Incorporated and Xilinx, Inc, target
certain markets and compete directly with our products. Competition is based on
various factors that can vary among products and markets. These factors include
design and quality of the products, product performance, price and service.
The semiconductor industry is intensely competitive. This intense
competition results in a difficult operating environment for most companies in
the industry, including Cypress. This environment is characterized by erosion of
product sale prices over the lives of each product, rapid technological change,
limited product life cycles and strong domestic and foreign competition in many
markets. Our ability to compete successfully in a rapidly evolving high
performance end of the semiconductor technology spectrum depends on many
factors, including:
o our success in developing new products and manufacturing technologies;
o the delivery performance, quality and price of our products;
o the diversity of our product line;
o the cost effectiveness of our design, development, manufacturing and
marketing efforts;
o the pace at which customers incorporate our products into their systems,
and
o the number and nature of our competitors and general economic conditions.
We believe that we currently compete effectively in the above areas to the
extent they are within our control, however, given the pace at which events
change in the industry, our current abilities are not a guarantee of future
success. If we are not able to compete successfully in this environment, our
business, operating results and financial condition will be adversely affected.
Patents and Licenses
We currently have 368 patents and approximately 330 additional patent
applications on file with the United States Patent and Trademark Office and are
preparing to file more patent applications. In addition to factors such as
innovation, technological expertise and experienced personnel, we believe that
patents are becoming increasingly important to remain competitive in the
industry and we have an active program to acquire additional patent and other
intellectual property protection.
We have, and in the future may continue to, enter into technology license
agreements with third parties that give those parties the right to use patents
and other technology developed by us. Some of these agreements also give us the
right to use patents and other technologies developed by such other parties,
some of which involve payment of royalties.
Page 7
There can be no assurance that patents owned by us will not be invalidated,
circumvented or challenged, or that the rights granted thereunder will provide
competitive advantage to us. We are, and may in the future be, involved in
litigation with respect to alleged infringement or involved in litigation to
enforce our intellectual property rights. There can also be no assurance that
license agreements will continue to be available to us on commercially
reasonable terms in the future.
Employees
As of January 2, 2000, we and our subsidiaries had 3,810 employees,
compared to 3,030 at the end of fiscal 1998. In 1998, we laid-off 363 employees
located in Fab 2 in Texas, Fab 3 in Minnesota and our test operations in
Thailand in conjunction with our 1998 restructuring activity. None of our
employees are represented by a collective bargaining agreement, nor have we ever
experienced any work stoppages.
Risk Factors
Except for the historical information contained herein, the discussion in
this 10-K report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, including, but not
limited to, statements as to the future operating results and business plans,
that involve risks and uncertainties. We use such words as "anticipated,"
"believes," "expects," "future," "intends," and similar expressions to identify
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements for any reason, including
the risks described below and elsewhere in this Form 10-K. If any of the
following risks actually occur, our business, financial condition and operating
results could be seriously harmed.
Our future operating results are unusually likely to fluctuate and therefore may
fail to meet expectations.
Our operating results have varied widely in the past and may continue to
fluctuate in the future. In addition, our operating results may not follow any
past trends. Our future operating results will depend on many factors and may
fluctuate and fail to meet our expectations or those of others for a variety of
reasons, including the following:
o the intense competitive pricing pressure to which our products are subject,
which can lead to rapid and unexpected declines in average selling prices;
o the complexity of our manufacturing processes and the sensitivity of our
production costs to declines in manufacturing yields, which make yield
problems both possible and costly when they occur; and
o the need for constant, rapid, new product introductions which present an
ongoing design and manufacturing challenge, which can be significantly
impacted by even relatively minor errors, and which may result in products
never achieving expected market demand.
As a result of these or other factors we could fail to achieve our
expectations as to future revenues, gross profit and income from operations. Any
downward fluctuation or failure to meet expectations will likely adversely
affect the value of your investment in Cypress.
In addition, because we recognize revenues from sales to our domestic
distributors only when these distributors make a sale to customers, we are
highly dependent on the accuracy of their resale estimates. The occurrence of
inaccurate estimates also contributes to the difficulty in predicting our
quarterly revenue and results of operations.
We face periods of industry-wide semiconductor over-supply that harm our
results.
The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, semiconductors. These
fluctuations have helped produce many occasions when supply and demand for
semiconductors have not been in balance. In the past, these industry-wide
fluctuations in demand, which have resulted in under-utilization of our
manufacturing capacity, have harmed our operating results. In some cases,
industry downturns with these characteristics have lasted more than a year. If
these cycles continue, they will seriously harm our business, financial
condition and results of operations.
Our financial results could be seriously harmed if the markets in which we sell
our products do not grow.
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Our continued success depends in large part on the continued growth of
various electronics industries that use our semiconductors, including the
following industries:
o data communications and telecommunications equipment;
o computers and computer related peripherals;
o automotive electronics;
o industrial controls; and
o customer electronics equipment and military equipment.
A significant portion of our products is incorporated into data
communications and telecommunications end-products. Any decline in the demand
for networking applications, mass storage, telecommunications, cellular base
stations, cellular handsets and other personal communication devices that
incorporate our products could seriously harm our business, financial condition
and operating results. In addition, certain of our products, including USB
microcontrollers, high-frequency clocks and static RAMs, are incorporated into
computer and computer-related products, which have historically experienced
significant fluctuations in demand. We may also be seriously harmed by slower
growth in the other markets in which we sell our products.
We are affected by a general pattern of product price decline and fluctuations,
which can harm our business.
Even in the absence of an industry downturn, the average selling prices of
our products have historically decreased during the products' lives, and we
expect this trend to continue. In order to offset the average selling price
decreases, we attempt to decrease manufacturing costs of our products, and to
introduce new, higher priced products that incorporate advanced features. If
these efforts are not successful or do not occur in a timely manner, or if our
newly introduced products do not gain market acceptance, our business, financial
condition and results of operations could be seriously harmed.
In addition to following the general pattern of decreasing average selling
prices, the selling prices for certain products, particularly commodity static
RAM products, fluctuate significantly with real and perceived changes in the
balance of supply and demand for these products. Growth in the worldwide supply
of static RAMs in recent periods resulted in a decrease in average selling
prices for such products. In the event we are unable to decrease per unit
manufacturing costs at a rate equal to or faster than the rate at which average
selling prices continue to decline, our business, financial condition and
results of operations will be seriously harmed. Furthermore, we expect our
competitors to invest in new manufacturing capacity and achieve significant
manufacturing yield improvements in the future. These developments could
dramatically increase the worldwide supply of static RAM products and result in
associated downward pressure on prices.
We may be unable to protect our intellectual property rights adequately, and may
face significant expenses as a result of ongoing or future litigation.
Protection of our intellectual property rights is essential to keep others
from copying the innovations that are central to our existing and future
products. Consequently, we may become involved in litigation to enforce our
patents or other intellectual property rights, to protect our trade secrets and
know-how, to determine the validity or scope of the proprietary rights of
others, or to defend against claims of invalidity. This type of litigation can
be expensive, regardless of whether we win or lose.
Also, we are now and may again become involved in litigation relating to
alleged infringement by us of others' patents or other intellectual property
rights. This type of litigation is frequently expensive to both the winning
party and the losing party and takes up significant amounts of management's time
and attention. In addition, if we lose such a lawsuit, a court could require us
to pay substantial damages and/or royalties or prohibit us from using essential
technologies. For these and other reasons, this type of litigation could
seriously harm our business, financial condition and results of operations.
Also, although we may seek to obtain a license under a third party's
intellectual property rights in order to bring an end to certain claims or
actions asserted against us, we may not be able to obtain such a license on
reasonable terms or at all.
We have entered into technology license agreements with third parties that
give those parties the right to use patents and other technology developed by
us, and that give us the right to use patents and other technology developed by
them. We anticipate that we will continue to enter into these kinds of licensing
arrangements in the future. It is possible however, that licenses we want will
not be available to us on commercially reasonable terms. If we lose existing
licenses to key technology, or are unable to enter into new licenses which we
deem important, our business, financial condition and results of operations
could be seriously harmed.
Page 9
It is critical to our success that we be able to prevent competitors from
copying our innovations, we therefore intend to continue to seek patent, trade
secret and mask work protection for our semiconductor manufacturing
technologies. The process of seeking patent protection can be long and
expensive, and we cannot be certain that any currently pending or future
applications will actually result in issued patents, or that, even if patents
are issued, they will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. Furthermore, others may develop
technologies that are similar or superior to our technology or design around the
patents we own.
We also rely on trade secret protection for our technology, in part through
confidentiality agreements with our employees, consultants and third parties.
However, these parties may breach these agreements, and we may not have adequate
remedies for any breach. Also, others may come to know about or determine our
trade secrets through a variety of methods. In addition, the laws of certain
territories in which we develop, manufacture or sell our products may not
protect our intellectual property rights to the same extent as the laws of the
United States.
Our financial results could be adversely impacted if we fail to develop,
introduce and sell new products or fail to develop and implement new
manufacturing technologies.
Like many semiconductor companies, which frequently operate in a highly
competitive, quickly changing environment marked by rapid obsolescence of
existing products, our future success depends on our ability to develop and
introduce new products that customers choose to buy. We introduce significant
numbers of product each year, which are an important source of revenue for us.
If we fail to compete and introduce new product designs in a timely manner or
are unable to manufacture products according to the requirements of these
designs (discussed more below), or if our customers do not successfully
introduce new systems or products incorporating ours, or market demand for our
new products does not exist as anticipated, our business, financial condition
and results of operations could be seriously harmed.
For Cypress and many other semiconductor companies, introduction of new
products is a major manufacturing challenge. The new products the market
requires tend to be increasingly complex, incorporating more functions and
operating at faster speeds than prior products. Increasing complexity generally
requires smaller features on a chip. This makes manufacturing new generations of
products substantially more difficult than prior generations. Ultimately,
whether we can successfully introduce these and other new products depends on
our ability to develop and implement new ways of manufacturing semiconductors.
If we are unable to design, develop, manufacture, market and sell new products
successfully, our business, financial condition and results of operations would
be seriously harmed.
Interruptions in the availability of raw materials can seriously harm our
financial performance.
Our semiconductor manufacturing operations require raw materials that must
meet exacting standards. We generally have more than one source available for
these materials, but there are only a limited number of suppliers capable of
delivering certain raw materials that meet our standards. If we need to use
other companies as suppliers, they must go through a qualification process. In
addition, the raw materials we need for our business could become scarcer as
worldwide demand for semiconductors increases. Interruption of our sources of
raw materials could seriously harm our business, financial condition and results
of operations.
Problems in the performance of other companies we hire to perform certain
manufacturing tasks can seriously harm our financial performance.
A high percentage of our products are assembled, packaged and tested at our
manufacturing facility located in the Philippines. We rely on independent
subcontractors to assemble, package and test the balance of our products. This
reliance involves certain risks, because we have less control over manufacturing
quality and delivery schedules, whether these companies have adequate capacity
to meet our needs and whether or not they discontinue or phase-out assembly
processes we require. We cannot be certain that these subcontractors will
continue to assemble, package and test products for us, and it might be
difficult for us to find alternatives if they do not do so.
The complex nature of our manufacturing activities makes us highly susceptible
to manufacturing problems and these problems can have substantial negative
impact on us when they occur.
Making semiconductors is a highly complex and precise process, requiring
production in a tightly controlled, clean environment. Even very small
impurities in our manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer or other factors
can cause a substantial percentage of wafers to be rejected or numerous chips on
each wafer to
Page 10
be nonfunctional. We may experience problems in achieving an acceptable success
rate in the manufacture of wafers, and the likelihood of facing such
difficulties is higher in connection with the transition to new manufacturing
methods. The interruption of wafer fabrication or the failure to achieve
acceptable manufacturing yields at any of our facilities would seriously harm
our business, financial condition and results of operations. We may also
experience manufacturing problems in our assembly and test operations and in the
introduction of new packaging materials.
We may not be able to use all of our existing or future manufacturing capacity,
which can negatively impact our business.
We have spent, and expect to continue to spend, significant amounts of
money to upgrade and increase our wafer fabrication, assembly and test
manufacturing capability and capacity. If we do not need some of this capacity
and capability for any of a variety of reasons, including inadequate demand or a
significant shift in the mix of product orders that makes our existing capacity
and capability inadequate or in excess of our actual needs, our fixed costs per
semiconductor produced will increase, which will harm us. In addition, if the
need for more advanced products requires accelerated conversion to technologies
capable of manufacturing semiconductors having smaller features, or requires the
use of larger wafers, we are likely to face higher operating expenses and may
need to write-off capital equipment made obsolete by the technology conversion,
either of which could seriously harm our business and results of operations.
Our operations and financial results could be severely harmed by certain natural
disasters.
Our headquarters and some manufacturing facilities and some of our major
vendors' facilities are located near major earthquake faults. If a major
earthquake or other natural disaster occurs, we could suffer damages that could
seriously harm our business, financial condition and results of operations.
Our business, results of operations and financial condition will be seriously
harmed if we fail to successfully compete in our highly competitive industry and
markets.
The semiconductor industry is intensely competitive. This intense
competition results in a difficult operating environment for us and most other
semiconductor companies that is marked by erosion of average selling prices over
the lives of each product, rapid technological change, limited product life
cycles and strong domestic and foreign competition in many markets. A primary
cause of this highly competitive environment is the strength of our competitors.
The industry consists of major domestic and international semiconductor
companies, many of which have substantially greater financial, technical,
marketing, distribution and other resources than we do. We face competition from
other domestic and foreign high-performance integrated circuit manufacturers,
many of which have advanced technological capabilities and have increased their
participation in markets that are important to us. If we are unable to compete
successfully in this environment, our business, operating results and financial
condition will be seriously harmed.
Our ability to compete successfully in the rapidly evolving high
performance portion of the semiconductor technology industry depends on many
factors, including:
o our success in developing new products and manufacturing technologies;
o the quality and price of our products;
o the diversity of our product line; o the cost effectiveness of our design,
development, manufacturing and marketing efforts;
o the pace at which customers incorporate our products into their systems,
and
o the number and nature of our competitors and general economic conditions.
Although we believe we currently compete effectively in the above areas to
the extent they are within our control, given the pace of change in the
industry, our current abilities are not a guarantee of future success.
We must build semiconductors based on our forecasts of demand, and if our
forecasts are inaccurate, we may have large amounts of unsold products or we may
not be able to fill all orders.
We order materials and build semiconductors based primarily on our internal
forecasts, and secondarily on existing orders, which may be cancelled under many
circumstances. Consequently, we depend on our forecasts to determine inventory
levels for our products and the amount of manufacturing capacity that we need.
Because our markets are volatile and subject to rapid technological and price
changes, our forecasts may be wrong, and we may make too many or too few of
certain products or have too much or too little manufacturing capacity. Also,
our customers frequently place orders requesting product delivery almost
immediately after the order is
Page 11
made, which makes forecasting customer demand even more difficult. The above
factors also make it difficult to forecast quarterly operating results. If we
are unable to predict accurately the appropriate amount of product required to
meet customer demand, our business, financial condition and results of
operations could be seriously harmed.
We must spend heavily on equipment to stay competitive, and will be adversely
impacted if we are unable to secure financing for such investments.
In order to remain competitive semiconductor manufacturers generally must
spend heavily on equipment to maintain or increase manufacturing capacity and
capability. We have budgeted for approximately $250.0 million in expenditures on
equipment in 2000 and anticipate significant continuing capital expenditures in
subsequent years. In the past, we have reinvested a substantial portion of our
cash flow from operations in capacity expansion and improvement programs.
However, our cash flows from operations depend primarily on average selling
prices, which generally decline over time, and on the per-unit cost of our
products.
If we are unable to decrease costs for our products at a rate at least as
fast as the rate of the decline in selling prices for such products, we may not
be able to generate enough cash flow from operations to maintain or increase
manufacturing capability and capacity as necessary. In such a situation we would
need to seek financing from external sources to satisfy our needs for
manufacturing equipment and, if cash flow from operations declines too much, for
operational cash needs as well. Such financing, however, may not be available on
terms which are satisfactory to us or at all, in which case our business,
financial condition and results of operations will be seriously harmed.
We compete with others to attract and retain key personnel, and any loss of, or
inability to attract, such personnel would harm us.
To a greater degree than most non-technology companies, we depend on the
efforts and abilities of certain key management and technical personnel. Our
future success depends, in part, upon our ability to retain such personnel, and
to attract and retain other highly qualified personnel, particularly product and
process engineers. We compete for these individuals with other companies,
academic institutions, government entities and other organizations. Competition
for such personnel is intense and we may not be successful in hiring or
retaining new or existing qualified personnel. If we lose existing qualified
personnel or are unable to hire new qualified personnel as needed, our business,
financial condition and results of operations could be seriously harmed.
We face additional problems and uncertainties associated with international
operations that could seriously harm us.
International sales represented approximately 51% of our revenues during
fiscal 1999 and approximately 45% of our revenues during fiscal 1998. Our
offshore assembly and test operations, as well as our international sales, face
risks frequently associated with foreign operations, including:
o currency exchange fluctuations,
o political instability,
o changes in local economic conditions,
o the devaluation of local currencies,
o import and export controls, and
o changes in tax laws, tariffs and freight rates.
To the extent any such risks materialize, our business, financial condition
and results of operations could be seriously harmed.
We are subject to many different environmental regulations, and compliance with
them may be costly.
We are subject to many different governmental regulations related to the
storage, use, discharge and disposal of toxic, volatile or otherwise hazardous
chemicals used in our manufacturing process. Compliance with these regulations
can be costly. In addition, over the last several years, the public has paid a
great deal of attention to the potentially negative environmental impact of
semiconductor manufacturing operations. This attention and other factors may
lead to changes in environmental regulations that could force us to purchase
additional equipment or comply with other potentially costly requirements. If we
fail to control the use of, or to adequately restrict the discharge of,
hazardous substances under present or future regulations, we could face
substantial liability or suspension of our manufacturing operations, which could
seriously harm our business, financial condition and results of operations.
Page 12
We depend on third parties to transport our products and could be harmed if
these parties experience problems.
We rely on independent carriers and freight haulers to move our products
between manufacturing plants and our customers. We have limited control over
these parties; however, any transport or delivery problems because of their
errors, or because of unforeseen interruptions in their activities due to
factors such as strikes, political instability, natural disasters and accidents,
could seriously harm our business, financial condition and results of operations
and ultimately impact our relationship with our customers.
We may fail to integrate our business and technologies with those of companies
that we have recently acquired and that we may acquire in the future.
We completed four acquisitions in calendar 1999, recently announced the
pending acquisition of Galvantech, Inc. and may pursue additional acquisitions
in the future. If we fail to successfully or properly integrate these
businesses, our quarterly and annual results may be seriously harmed.
Integrating additional businesses, products and services could be expensive,
time-consuming and a strain on our resources. Specific issues that we face with
regard to prior and future acquisitions include:
o the difficulty of integrating acquired technology or products;
o the difficulty of assimilating the personnel of the acquired companies;
o the difficulty of coordinating and integrating geographically dispersed
operations;
o our ability to retain customers of the acquired company;
o the potential disruption of our on-going business and distraction of
management;
o the maintenance of brand recognition of acquired businesses;
o the failure to successfully develop acquired in-process technology,
resulting in the impairment of amounts currently capitalized as intangible
assets;
o unanticipated expenses related to technology integration;
o the maintenance of uniform standards, corporate cultures, controls,
procedures and policies;
o the impairment of relationships with employees and customers as a result of
any integration of new management personnel; and
o the potential unknown liabilities associated with acquired businesses.
We face a number of unknown risks associated with year 2000 problems.
The year 2000 computer issue creates a variety of risks for us. The year
2000 computer problem refers to the potential for system and processing failures
of date-related data as a result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date represented as "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, interruptions in manufacturing, design and process development
operations, disruptions in processing business transactions, and disruptions in
other normal business activities. Issues related to the year 2000 computer
problem could still arise. The risks involve:
o potential warranty or other claims by customers with respect to errors in
our products;
o errors in systems we use to run our business;
o errors in systems used by our suppliers;
o errors in systems used by customers; and
Page 13
o potential reduced spending by customers as a result of concerns about
potential year 2000 problems.
We have designed most of our products to be year 2000 compliant and have
developed corrective measures for other products that were not originally
designed to be year 2000 compliant. However, our products may be integrated into
or used in conjunction with products supplied by other vendors. We cannot
evaluate whether all of the products of other vendors are year 2000 compliant.
We may face claims based on year 2000 problems in other companies' products or
based on issues arising from the integration or use of multiple products. We may
in the future be required to defend our products in legal proceedings which
could be expensive regardless of the merits of these claims.
If our suppliers, vendors, partners, customers and service providers fail
to correct their year 2000 problems, these failures could result in an
interruption in, or a failure of, our normal business activities or operations.
If a year 2000 problem occurs, it may be difficult to determine which party's
products have caused the problem. These failures could interrupt our operations
and damage our relationships with customers. Due to the general uncertainty
inherent in the year 2000 problem resulting from the readiness of third-party
suppliers and vendors, we are unable to determine at this time whether
third-party year 2000 failures could harm our business, results of operations
and financial condition.
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding each of Cypress's current executive officers
is set forth below:
Executive
Officer
Name Age Position Since
- ------------------ --- ------------------------------------------- -------
T. J. Rodgers 52 President and Chief Executive Officer 1982
Antonio R. Alvarez 43 Executive Vice President, Memory Products 1993
Division and Research and Development
Emmanuel Hernandez 44 Executive Vice President, Finance and 1993
Administration, Chief Financial Officer
J. Daniel McCranie 56 Executive Vice President, Marketing and Sales 1993
Except as set forth below, each of Cypress's executive officers has been
engaged in his principal occupation described above during the past five years.
There is no family relationship between any director or executive officer of
Cypress.
T.J. Rodgers is a co-founder of Cypress Semiconductor Corporation and has
been its president and chief executive officer since 1982. Mr. Rodgers serves as
a director of C-Cube Corporation.
Antonio R. Alvarez joined Cypress in May 1987 as a senior technical
engineer. Mr. Alvarez was transferred to Cypress's former subsidiary, Aspen
Semiconductor Corporation, in April 1988 as the manager of BiCMOS technology. In
October 1989, Mr. Alvarez returned to the corporate office as Vice President,
Research and Development. In February 1993, Mr. Alvarez also became responsible
for Fab I when it was merged with the research and development department. Prior
to joining Cypress in 1987, Mr. Alvarez worked in various engineering and
management positions at Motorola Corporation from September 1979 through July
1987. His last position at Motorola was as a senior member of the technical
staff.
Emmanuel Hernandez joined Cypress in June 1993 as Corporate Controller. In
January 1994, Mr. Hernandez was promoted to Vice President, Finance and
Administration, and Chief Financial Officer. Prior to joining Cypress, Mr.
Hernandez held various financial positions with National Semiconductor
Corporation from 1976 through 1993.
J. Daniel McCranie joined Cypress in October 1993 as Vice President of
Marketing and Sales. Prior to joining Cypress, Mr. McCranie was President and
CEO of SEEQ Technology from 1989 through 1993. Mr. McCranie also held the
position of Vice President of Sales and Marketing for SEEQ for five years prior
to becoming President and CEO. Previously, he held marketing and sales positions
at Harris Semiconductor, AMD, American Microsystems and Signetics.
Page 14
ITEM 2. PROPERTIES
Our executive offices, engineering and research and development facilities
are located in an approximately 60,000 square-foot building at 195 Champion
Court, San Jose, California, under a lease that will expire in 2004. Located
immediately adjacent to our executive offices is one of our wafer fabrication
facilities (Fab 1), which is primarily utilized for R & D operations. This
facility is located in an approximately 61,000 square-foot leased building at
3901 North First Street, San Jose, California. The current lease expires in
2004. The lease rates for these facilities are subject to variations based on
the London interbank offering rate (LIBOR) and a requirement to sell, extend the
lease, or acquire the property at the end of the lease term (see Note 9 of the
Consolidated Financial Statements).
Research and development and other Cypress staff functions also are located
at the San Jose building complex. This office space is composed of approximately
75,000 square feet in a building located at 4001 North First Street, San Jose,
California under a lease which expires in 2001. In addition, we have leased
75,000 square feet of additional office space at 3939 North First Street, San
Jose, California. This building was occupied in 1997 and is currently leased
until 2001. As described above, the lease rates for these facilities are subject
to variations based on LIBOR and we are required to sell, extend the lease or
acquire the property at the end of the lease term.
We also have a 36,000 square feet office facility located at 101 Nicholson
Lane, San Jose, California under a lease that expires in 2003. We have the
option to extend the lease for three additional years after the original lease
term expires. The lease rate increases 3% to 4% each year over the life of the
lease.
In December 1988, we purchased the two undeveloped industrial lots on
either side of our headquarters building. These similarly sized lots, comprising
a total of approximately 8.5 acres, will be retained for future expansion of the
San Jose building complex. In the third quarter of 1996, we began operations in
a new 162,000-square foot highly automated assembly and test manufacturing plant
in Cavite, the Philippines. We own an approximately 100,000 square foot wafer
fabrication facility, referred to as Fab 2 in Round Rock, Texas. In addition, we
also own an approximately 170,000 square foot wafer fabrication facility,
referred to as Fab 3, and we lease an approximately 100,000 square foot wafer
fabrication facility, referred to as Fab 4 on 18 acres of land in Bloomington,
Minnesota. The Fab 4 lease rate is subject to variations based on LIBOR and a
requirement to sell, extend the lease, or acquire the property at the end of the
lease term in December 2004 (see Note 9 of the Consolidated Financial
Statements).
In November 1997, we purchased real estate comprised of approximately 3.5
acres of land and 58,000-square feet of building in Woodinville, Washington. The
property is the new primary location of our interface products organization,
previously located in a leased facility in Kirkland, WA.
We lease additional space for domestic sales and design centers in
Huntsville, Alabama; Irvine, San Diego, San Jose, and Woodland Hills,
California; Denver and Colorado Springs, Colorado; Clearwater, Altamonte
Springs, and Pompano Beach, Florida; Roswell, Georgia; Palatine, Illinois;
Lexington, Kentucky; Columbia, Maryland; Minnetonka, Minnesota; Starkville,
Mississippi; Nashua, New Hampshire; Laurence Harbor and Ridgewood, New Jersey;
Northport and Oyster Bay, New York; Raleigh, North Carolina; Beaverton, Oregon;
Elkins Park and Trevose, Pennsylvania; and Austin, Houston and Richardson,
Texas. We lease international sales, representative and design centers in
Antwerp and Waterloo, Belgium; Toronto, Ontario, Canada; Le Ulis Cedex, France;
Cork, Ireland; Milan and Orbassano, Italy; Tokyo and Osaka, Japan; Taby, Sweden;
Cheshire, Basingstoke and Hertfordshire, United Kingdom; Zorneding, Germany;
Singapore; Taipei, Taiwan; Seoul, Korea; Hong Kong and Shanghai, China;
Lehdokkitie, Finland and Bangalore, India.
As of the end of fiscal year 1999, current properties are suitable for
immediate needs. There are no plans to re-locate or expand current facilities at
this time. Two undeveloped industrial lots at our headquarters are available for
future expansion.
ITEM 3. LEGAL PROCEEDINGS:
The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. From time to
time, we have received, and may receive in the future, communications alleging
that our products or our processes may infringe on product or process technology
rights held by others. We are currently, and may in the future be, involved in
litigation with respect to alleged infringement by us of another party's
patents. In the future, we may be involved with litigation to:
o enforce our patents or other intellectual property rights;
o protect our trade secrets and know-how;
Page 15
o determine the validity or scope of the proprietary rights of others; and
o defend against claims of infringement or invalidity.
Such litigation has in the past and could in the future result in
substantial costs and diversion of management resources. Such litigation could
also result in payment of substantial damages and/or royalties or prohibitions
against utilization of essential technologies, and could have a material adverse
effect on our business, financial condition and results of operations.
During 1998, EMI Group of North America, Inc. filed suit against us in the
Federal Court in Delaware, claiming that we infringed on four patents owned by
EMI. Cypress and EMI entered into a license agreement in February 1999, for one
of the four patents in the lawsuit. EMI withdrew two of the four patents from
the lawsuit, including the patent related to the licensing agreement. The case
involving the two remaining patents went to trial in October 1999. The jury
ruled in favor of us claiming that none of the patent claims was infringed by us
and that each asserted claim was invalid due to prior art and physical
impossibility (i.e., the patents require a step that is physically impossible to
perform). EMI may file an appeal, although no such appeal has been filed as of
March 9, 2000. Should EMI appeal the decision of the Federal Court, we intend to
defend ourselves vigorously. However, should the outcome of this action be
unfavorable, our business, financial condition and results of operations could
be materially and adversely affected.
In January 1998, an attorney representing the estate of Mr. Jerome Lemelson
contacted us and charged that we infringed certain patents owned by Mr.
Lemelson. On February 26, 1999, the Lemelson attorneys sued us and 87 other
companies for infringement of 16 patents. We have reviewed and investigated the
allegations in the complaint and we believe that the suits are without merit. We
will vigorously defend ourselves in this matter. While no assurance can be given
regarding the outcome of this action, we believe that the final outcome of the
matter will not have a material effect on our consolidated financial position or
results of operations. However, because of the nature and inherent uncertainties
of litigation, should the outcome of this action be unfavorable, we may be
required to pay damages and other expenses, which could have a material adverse
effect on our financial position and results of operations.
In June 1997, we commenced a declaratory judgment action in the United
States District Court for the District of Nevada against the Li Second Family
Trust. In this action, we asked for declaratory relief to the effect that a U.S.
patent relating to a part of the process for manufacturing semiconductors is
unenforceable, invalid and not infringed by us. The Trust has counter-claimed
for patent infringement on the same patent, alleging such patent covers
oxide-isolated integrated circuits. In May 1999, in a related case, the United
States District Court for the Eastern District of Virginia ruled that the patent
is unenforceable due to inequitable conduct by Dr. Li and his attorneys in
obtaining the patent. We believe that we have meritorious defenses to the
counter-claim and intends to defend ourselves vigorously. While no assurance can
be given regarding the outcome of this action, we believe that the final outcome
of the matters will not have a material effect on our consolidated financial
position or results of operations. However, should the outcome of this action be
unfavorable, our business, financial condition and results of operations could
be materially and adversely affected.
On October 2, 1997, we filed an action against Kevin Yourman, Joseph Weiss,
and their associated law offices in the Superior Court of California ("Superior
Court") in Santa Clara County for malicious civil prosecution in the underlying
securities fraud actions initiated by Messrs. Yourman and Weiss in 1992. The
underlying securities fraud actions were dismissed because the court found that
none of our officers made any actionable false or misleading statements or
omissions. An appeal affirmed the lower court's finding that Messrs. Yourman and
Weiss failed to put forth evidence showing a genuine issue of fact with regard
to any statements by our officers. On May 4, 1999, the Superior Court granted a
summary judgment motion by Messrs. Yourman and Weiss, holding that Messrs.
Yourman and Weiss had probable cause to bring the underlying litigation. We are
appealing the decision. Even though, the results of litigation are
unpredictable, we believe that this action, regardless of its outcome, will have
little, if any, effect on our consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended January 2, 2000.
Page 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock is listed on the New York Stock Exchange under the trading
symbol "CY". The following table sets forth, for the periods indicated, the low,
high and closing price for the common stock. We have not paid cash dividends and
have no present plans to do so. At January 2, 2000 there were approximately
42,000 holders of record of our Common Stock.
PRICE RANGE OF COMMON STOCK ($)
--------------------------------
LOW HIGH CLOSE
--- ---- -----
Fiscal Year ended January 2, 2000:
First Quarter ............................. 7.38 10.38 9.31
Second Quarter ............................ 9.31 18.31 18.00
Third Quarter ............................. 17.06 28.94 23.38
Fourth Quarter ............................ 21.31 33.50 32.38
Fiscal Year ended January 3, 1999:
First Quarter ............................. 8.06 11.00 10.00
Second Quarter ............................ 7.38 10.69 8.25
Third Quarter ............................. 5.50 9.31 9.06
Fourth Quarter ............................ 8.00 12.00 8.31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year ended(1)
---------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Operating results:
Revenues ......................... $ 705,487 $ 554,891 $ 598,485 $ 569,941 $ 636,108
Restructuring and other
non-recurring costs .......... 33,812 60,737 9,882 10,932 17,800
Operating Income (loss) .......... 52,823 (120,521) 8,508 54,110 162,966
Income (loss) before tax ......... 95,871 (118,441) 13,139 55,584 164,201
Net income (loss) ................ 91,054 (104,918) 7,526 25,108 104,995
Net income (loss) per share
Basic ......................... $ 0.87 $ (1.03) $ 0.08 $ 0.28 $ 1.18
Diluted ....................... $ 0.81 $ (1.03) $ 0.07 $ 0.26 $ 1.02
Weighted average common and common
equivalent shares outstanding
Basic ......................... 104,703 101,944 100,137 90,247 89,321
Diluted ....................... 111,735 101,944 107,866 95,555 106,253
Balance sheet data:
Cash and short-term investments .. $ 270,556 $ 160,561 $ 203,870 $ 95,699 $ 165,363
Working capital .................. 344,630 236,081 309,661 125,746 195,131
Total assets ..................... 1,117,224 823,996 978,466 834,931 791,491
Long term debt and capital lease
obligations (excluding current
portion) ...................... 226,484 211,305 224,412 135,266 123,171
Stockholders' equity ............. 697,975 498,723 644,632 512,116 492,394
(1) We operate on a 52- or 53-week fiscal year. Fiscal year 1999 was a 52-week
fiscal year ending on the Sunday closest to December 31. 1998 was a 53-week
fiscal year ending on the Sunday closest to December 31. Fiscal year 1997
was a 52-week fiscal year ending on the Monday closest to December 31.
Page 17
ITEM 7. Management's Discussion and Analysis of Operations and Financial
Condition
This report may contain forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, about the prospects for Cypress as well as the
semiconductor industry more generally, including without limitation, statements
about increases in gross margin, rate of growth of research and development
expenditures as a percent of revenues, rate of growth of selling, general and
administrative expenses, profitability goals, revenue goals, growth rate goals,
market share goals, market size and growth projections, new product
introductions, planned manufacturing capacity, and efficiency and cost goals.
Actual results could differ materially from those described in the
forward-looking statements as a result of various factors including, but not
limited to, the factors identified in the Letter to Shareholders and the
Management's Discussion and Analysis section, particularly "Factors Affecting
Future Results," as well as the following:
(1) increased competition which could result in lost sales or price
erosion;
(2) changes in product demand by the electronics and semiconductor
industries, which are noted for rapidly changing needs, coupled with
an inability by Cypress to generate product enhancements or new
product introductions which keep pace with or meet those rapidly
changing needs;
(3) failure by Cypress to develop or introduce successfully new products
in areas of expected new or increased demand, or development and
introduction of superior new products serving those areas by others;
(4) failure of expected growth in demand for, or areas of expected new
demand for, semiconductor products to materialize;
(5) failure to successfully bring on line and utilize additional
manufacturing capacity, or to transition existing capacity to new
uses;
(6) inability to develop and/or adopt more advanced manufacturing
technology;
(7) inability of Cypress's patents or other proprietary rights to ensure
adequate protection against encroachment on Cypress's technology by
competitors; and
(8) failure to attract and/or retain key personnel.
Overview
Revenues for Cypress increased 27.1% to $705.5 million in fiscal 1999 from
$554.9 million in fiscal 1998. Net income for fiscal 1999 was $91.1 million
compared to a net loss of $104.9 million in fiscal 1998. The net loss for fiscal
1998 included a restructuring charge of $60.7 million and other non-recurring
charges totaling $27.3 million. Excluding the restructuring and non-recurring
charges, the net loss for fiscal 1998 was $26.9 million. Cypress earned $0.81
per share, on a diluted basis, during fiscal 1999 compared to a diluted net loss
of $1.03 per share in fiscal 1998.
On March 2, 2000, Cypress completed the merger with Galvantech, Inc.
("Galvantech"), which will be accounted for as a pooling of interests. The
agreement provides for Cypress to issue up to 3.6 million shares in exchange for
all outstanding stock and options of Galvantech. The fiscal years of Cypress and
Galvantech were different and Galvantech has changed its fiscal periods to
coincide with that of Cypress. Galvantech specializes in niche, ultra-high
performance memories for data communications applications.
On January 31, 2000, Cypress filed a universal shelf registration statement
with the Securities and Exchange Commission. The registration statement which
was effective February 8, 2000 will allow Cypress to market and sell up to
$400.0 million of its securities. The shelf registration statement allows
Cypress flexibility to raise funds from the offering of debt securities, common
stock, or a combination thereof, subject to market conditions and Cypress's
capital needs.
On January 19, 2000, Cypress completed a $283.0 million
registered-placement of 5-year convertible subordinated notes. The notes are due
in the year 2005, with a coupon rate of 4.00% and an initial conversion premium
of 28.5%. The notes are convertible into approximately 6.1 million shares of
common stock and are callable by Cypress no earlier than February 5, 2003. Net
proceeds were $275.2 million, after issuance costs of $7.8 million.
Page 18
On October 5, 1999, Cypress announced that it has signed a definitive
agreement with Altera Corporation ("Altera") to acquire Altera's MAX 5000
Programmable Logic Device ("PLD") product line and its equity interest in
Cypress's wafer fabrication facility in Round Rock, Texas ("Fab II") for
approximately $13.0 million in cash. The acquisition has been accounted for as a
purchase. In 1988, Altera licensed its MAX 5000 family of products to Cypress in
consideration of manufacturing capacity. Altera later acquired a 17% equity
interest in the Round Rock wafer fabrication facility. By acquiring Altera's
equity interest in October 1999, Fab II is now 100% owned by Cypress.
On June 30, 1999, Cypress acquired all of the outstanding capital stock of
Arcus Technology (USA), Inc. and the assets of Arcus Technology (India) Limited
(referred to collectively as "Arcus"). Arcus specializes in new data
communications arenas including dense wave multiplexing (which allows multiple
signals to be transmitted over a single fiber optic cable) and "IP over SONET"
(the technology needed to code and decode Internet traffic to send it over the
telephone system). The acquisition was accounted for as a purchase and the
estimated fair value of assets acquired and liabilities assumed were included in
Cypress's consolidated balance sheet as of June 30, 1999, the effective date of
the purchase. The results of operations were included from the date of purchase.
Cypress acquired Arcus for $17.7 million, including cash of $11.5 million and
stock of $6.2 million, excluding direct acquisition costs of $0.8 million for
legal and accounting fees.
On May 25, 1999, Cypress acquired all of the outstanding capital stock of
Anchor Chips, Inc. ("Anchor"), a company that designs and markets
microcontroller chips to support the Universal Serial Bus. The acquisition was
accounted for as a purchase and the estimated fair value of assets acquired and
liabilities assumed were included in Cypress's consolidated financial statements
as of May 25, 1999, the effective date of the purchase. The results of
operations were included from the date of purchase. Cypress paid approximately
$15.0 million in cash excluding direct acquisition costs of $0.7 million for
investment banking, legal and accounting fees.
On April 1, 1999, Cypress completed a merger with IC WORKS Incorporated
("ICW"), which was accounted for as a pooling of interests. The consolidated
financial statements and the notes to the consolidated financial statements give
effect to the merger for all periods presented. The fiscal years of Cypress and
ICW were different. ICW has changed its fiscal year-end to coincide with that of
Cypress. Cypress's consolidated statements of operations for the periods ended
January 3, 1999 and December 27, 1997, have been combined with ICW's
consolidated statements of operations for the corresponding twelve month periods
ended December 28, 1998 and March 28, 1998. During fiscal 1999, Cypress recorded
merger-related transaction costs of $3.7 million related to the acquisition of
ICW. These charges, which consist primarily of investment banking and other
professional fees, have been included under acquisition and merger costs in the
Consolidated Statements of Operations.
Results of Operations
Revenues
Revenues for fiscal 1999 were $705.5 million, an increase of $150.6 million
or 27.1% versus revenues for fiscal 1998, and an increase of $107.0 million or
17.9% compared to revenues for fiscal 1997. Cypress derives its revenues from
the sale of Memory Products and Non-memory Products, primarily targeted to the
data communications and computation markets.
Revenues from the sale of Memory Products for 1999 increased $73.8 million
or 37.6% over revenues from the sale of these products for fiscal 1998 and
increased $43.1 million, or 19.0% compared to fiscal 1997. From fiscal 1998 to
fiscal 1999, sales of Static Random Access Memories products ("SRAM") grew $74.9
million or 40.3%. Revenues from SRAMs during fiscal 1999 increased $52.3 million
or 25.1% compared to fiscal 1997. The increase in Memory Product revenues, as
compared to fiscal 1998, resulted from both higher average selling prices
("ASPs") and an increase in unit sales. ASPs grew 16.7% from fiscal 1998 to
fiscal 1999 and unit sa1es increased 17.9% over the same period. The increase in
unit sales in fiscal 1999 can be attributed to new product revenues,
particularly in the 4meg synchronous, the No Bus Latency ("NoBL"), the 2 meg
More Battery Life ("MoBL") and the 1 meg x16 micropower family of products. The
synchronous and NoBL demand was driven by the surge in the networking market,
while sales for MoBL and micropower were driven by the cellular phone market.
Unit sales volume of Memory Products increased 16.2% comparing fiscal 1999 to
fiscal 1997, while ASPs remained relatively constant.
Non-memory Products include programmable logic products, data communication
devices, computer products and non-volatile memory products. Non-memory products
also include foundry revenues. Foundry revenue represents sales of wafers to
customers. Revenues from the sale of Non-memory Products increased $76.8 million
or 21.4% comparing fiscal 1999 to fiscal 1998 and $63.9
Page 19
million, or 17.2% compared to fiscal 1997. The increase in revenues related
primarily to the sale of computer products, which include programmable clock
products and universal serial bus ("USB") products, and from the sale of data
communication devices.
In fiscal 1999, revenues from the sale of computer products increased $54.7
million, or 36.9% and $86.5 million, or 74.2%, respectively, compared to fiscal
1998 and fiscal 1997, respectively. The revenue growth in programmable clocks
can be attributed to higher unit sales, primarily as a result of the
introduction of the BX clock chip in 1999 and greater acceptance of other clock
products. Also in fiscal 1999, revenues for USB products grew, in comparison to
fiscal 1998 and 1997, primarily as a result of an increase in the adoption rate
of USB products in the market place, particularly in the personal computer
market. USB revenues in fiscal 1999 also benefited from the acquisition of
Anchor in May 1999. ASPs remained relatively stable comparing fiscal 1999 to
fiscal 1998.
Revenues generated from the sale of data communication devices in fiscal
1999, increased $22.7 million or 18.3% compared to fiscal 1998 and $20.0
million, or 15.8% compared to fiscal 1997. The revenue growth in fiscal 1999 was
the result of higher unit sales as units sold in fiscal 1999 increased 20.0% and
18.9% compared to fiscal 1998 and fiscal 1997, respectively. Data
communication's revenue growth can be attributed to their ability to align
themselves with several key customers in the Storage Area Network, Local Area
Network and Wide Area Network markets. Contributions were primarily from the 1
Megabit Dual Port Ram, HotLink Transceivers and RoboClock Skew Clock Buffer
family of products. The increase in unit sales more than offset the minimal
decline in ASPs, comparing the same periods.
Revenues from the sale of programmable logic products in fiscal year 1999,
increased $3.3 million or 7.9% compared to fiscal 1998, however, decreasing
$14.7 million or 24.8% compared to fiscal 1997. In fiscal 1999, revenues
increased, compared to fiscal 1998, due to the ramp up of sales in the 37K and
FLASH family of products. The revenue growth in the 37K and FLASH family of
products more than offset declining sales in the more mature MAX and Small PLD
family of products. Non-volatile memory product revenues remained relatively
constant in fiscal 1999 decreasing $0.8 million compared to fiscal 1998. In
1997, Cypress decided to cease selling certain non-volatile memory devices,
Erasable Programmable Read-only Memory ("EPROM"). As a result, the sale of
non-volatile memory products decreased $13.1 million or 31.7% from fiscal 1999
to fiscal 1997.
As is typical in the semiconductor industry, ASPs of products generally
decline over the lifetime of the products. To increase revenues, Cypress seeks
to expand its market share in the markets it currently serves and to introduce
and sell new products with higher ASPs. Cypress will seek to remain competitive
with respect to its pricing to prevent a further decline in sales.
Cost of Revenues
Cost of revenues for fiscal 1999 were 54.4% of revenues, compared to 73.7%
of revenues for fiscal 1998 and 65.8% of revenues during fiscal 1997. The
decrease in cost of revenues as a percent of revenues was primarily due to a
significant increase in unit sales, resulting in lower fixed cost per unit sold
and the introduction of new products with higher margins. In order to offset the
decrease in ASPs, Cypress must continue to find ways to lower manufacturing
costs and introduce new products with higher margins in order to remain
competitive in the marketplace.
Cost of revenues for fiscal 1998 included one-time non-recurring charges
totaling $21.7 million. These charges included $15.8 million related to the
write-down of inventory, $3.8 million for the write-off of pre-operating costs
and $2.1 million for the write-off of certain equipment. The $15.8 million
charge for incremental inventory reserves arose due to market conditions
resulting in the ongoing, over-supply and continued inventory corrections by
end-user customers.
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operations in the Philippines. As a result of
the restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits. The pre-operating costs totaling $3.8 million, net of
accumulated amortization were included in other assets at December 29, 1997.
The write-off of equipment was related to equipment identified as obsolete
during Cypress's periodic review of equipment and no longer considered usable.
Excluding these one-time non-recurring charges, cost of revenues as a percent of
revenues for fiscal 1998 would have been 69.8%.
Cypress continues to introduce new products and new methods of reducing
manufacturing costs in order to mitigate the effects of declining ASPs on its
gross margin. In March 1998, Cypress announced restructuring activities for its
domestic wafer fabrication facilities and offshore back-end manufacturing
operations. Activities completed to date have increased Cypress's manufacturing
Page 20
efficiencies and as a result, its gross margin has been increasing since the
first quarter of fiscal 1998. Cypress expects to benefit from these
restructuring activities in the future.
Research and Development
Research and development ("R&D") expenditures for fiscal 1999 were $129.3
million or 18.3% of revenues, compared with $114.6 million or 20.6% of revenues
for fiscal 1998 and $104.3 million or 17.4% of revenues for fiscal 1997. R&D
expenditures in fiscal 1999 increased $14.8 million or 12.9% compared to fiscal
1998 and $25.0 million or 24.0% compared to fiscal 1997. R&D expenditures
increased from fiscal 1997 through fiscal 1999 as Cypress continued its effort
to accelerate the development of new products and migrate to more advanced
process technologies. In 1999, spending in Cypress's design centers grew due to
increased headcount and additional spending from design centers acquired with
the purchase of Arcus and Anchor. During 1998, Cypress began utilizing the 0.25
micron process technology for manufacturing purposes, and in 1999, started
development of 0.16 micron process technologies. Cypress believes that its
future success will depend on its ability to develop and introduce new products
that will compete effectively on the basis of price and performance, and will
address customer needs. In fiscal 2000, Cypress is expecting to continue to
increase spending in R&D in order to improve its design and process technologies
in an effort to increase revenues and reduce costs. As part of this effort, in
fiscal 2000, Cypress expects to complete the conversation its San Jose R&D wafer
fab from a six-inch facility into an eight-inch facility. This will make
Cypress's R&D fab more compatible with its technologically advanced wafer fabs
in Minnesota. This conversion is expected to be completed in June 2000.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for fiscal 1999 were
$105.9 million or 15.0% of revenues, compared to $91.0 million or 16.4% of
revenues for fiscal 1998 and $82.0 million or 13.7% of revenues for fiscal 1997.
SG&A expenses for fiscal 1999 increased by $14.9 million or 16.3% as compared to
fiscal 1998 and by $23.9 million or 29.1% when compared to fiscal 1997. SG&A
spending increased in from fiscal 1997 to fiscal 1998 and from fiscal 1998 to
fiscal 1999 principally because of higher sales and marketing expenditures
related to salesmen and rep commissions, a new sales force training program and
higher marketing communication expenditures. In fiscal 1999, Cypress also
incurred higher legal costs, primarily associated with its successful defense of
the EMI patent infringement lawsuit. With the exception of variable spending,
such as incentive bonuses, salary adjustments and commissions, Cypress expects
to keep SG&A spending as a percent of revenues relatively constant in fiscal
2000.
1999 Restructuring, Merger and Acquisition, and Other Non-Recurring Costs
During fiscal 1999, Cypress recorded a net $33.8 million in restructuring,
merger and acquisition, and other non-recurring costs. These one-time,
non-recurring costs included a $12.3 million write-off of a certain
manufacturing asset that will not be utilized and an $11.9 million one-time
compensation charge. In the first quarter of fiscal 1999, Cypress recorded
one-time charges of $3.7 million associated with the merger with IC Works. These
charges were for investment banking fees and other professional fees. Cypress
also recorded $8.8 million in costs associated with the purchase of Anchor and
Arcus comprising of $4.0 million for in-process technology, $1.6 million for
transaction costs and $3.2 million in amortization of intangible assets. During
the fourth quarter of fiscal 1999, Cypress acquired Altera's MAX 5000
Programmable Logic Device ("PLD") product line and its equity interest in
Cypress's wafer fabrication facility in Round Rock, Texas. As part of the
transaction, Cypress recorded intangible assets associated with the product
rights and incurred $0.3 million for the amortization of these intangibles.
These non-recurring charges were offset by a reversal of $3.1 million of the
1998 restructuring reserve. The reversed charges related to $2.2 million of
severance and other employee related charges and $0.3 million for the provision
for phase-down and completion of the Alphatec restructuring activities. Cypress
also reversed $0.5 million of the 1998 restructuring reserve for other fixed
asset related charges that were no longer considered necessary. During fiscal
1999, Cypress reversed $0.7 million of the 1996 restructuring reserve related to
fixed asset de-installation charges that were no longer required.
1998 Restructuring and Other Non-Recurring Costs
During 1998, Cypress implemented an overall cost reduction plan and
recorded a $58.9 million restructuring reserve. The restructuring entailed:
o The shutdown of Fab 3, located in Bloomington, Minnesota and
consolidation of parts of Fab 3 operations with other operations of
Cypress.
Page 21
o The discontinuance of the 0.6 micron 256k SRAM production in Fab 2
located in Texas.
o The conversion of an existing research and development fab located in
San Jose (Fab 1) to eight-inch capability in order to be compatible
with the state of the art eight-inch Minnesota manufacturing facility.
o The transfer of Cypress's test operations from its subcontractor,
Alphatec, in Thailand to Cypress's production facility in the
Philippines.
o The restructuring activities described above include the termination
of approximately 850 manufacturing employees primarily from Cypress
and Alphatec.
FAB 3 -- The charge related to the shutdown of Fab 3 was $30.2 million. Of
this amount, $26.0 million related to the write-down of equipment held for sale,
$1.7 million of other fixed asset related charges for incremental third party
costs expected to be incurred in the eventual physical removal of the written
down assets, $1.1 million related to severance and other employee related costs
and $1.4 million related to inventory.
Fab 3 assets, which were not upgradable to 8-inch capability, were written
down based on the estimated useful lives of the assets and the salvage value of
the assets. The estimated useful lives were generally two months as a result of
the decision to discontinue production in Fab 3 and the salvage value was
determined based on the estimated sales value of used semiconductor equipment.
Non-upgradable Fab 3 assets were depreciated down to their salvage value during
the production phase-down period. Fab 3 assets, which were upgradable to 8-inch
capability, were transferred to Fab 4 production during the third quarter of
1998.
In accordance with the restructuring plan, Fab 3 production was phased down
beginning in the second quarter of 1998 and ceased in July 1998. From this time,
Cypress has held the non-upgradable equipment for sale. As of January 2, 2000,
some of the equipment still has not been sold. Cypress expects to recover the
originally determined salvage value for such equipment, however, no assurance
can be given as to the amount of proceeds that will ultimately be collected.
FAB 2 -- The decision to discontinue manufacturing SRAM products on
Cypress's 0.6 micron 256K SRAM process in Texas resulted in excess equipment and
employee redundancy. Charges with this decision totaled $21.3 million, of which
$18.0 million related to the write-down of equipment, $0.3 million related to
the write-down of inventory, $1.7 million related to severance and other
employee related costs and $1.3 million of other fixed asset related charges for
incremental third party costs for the physical removal of the written down
assets and the resolution of certain related tax matters.
Excess equipment in Fab 2 was written down based on the useful lives of the
assets and the estimated salvage value of the assets. Cypress had the ability
and intention to sell all the equipment immediately but due to the semiconductor
industry slow-down, Cypress recognized immediate sale of the equipment would be
difficult. The equipment was kept in the fab, ready for demonstration and
testing by a willing buyer. Cypress used the equipment during the production
phase-down period through May 1998.
As of January 2, 2000, some of this equipment remains on hand. Cypress
expects to recover the originally determined salvage value for such equipment,
however, no assurance can be given as to the amount of proceeds that will
ultimately be collected.
FAB 1 and San Jose Operations -- The restructuring plan included the
upgrade of Fab 1 to an eight-inch facility to ensure compatibility with
Cypress's Fab 4 manufacturing facility in Minnesota. Fab 1 is used for research
and development purposes. The plan assumed commencement of Fab 1 restructuring
activities during the middle of 1998 with completion by the end of January 1999.
The plan included the disposal and write-down of six-inch manufacturing
equipment that was not upgradable to eight-inch capability. The remaining net
book value of such assets was written off over the estimated useful life through
January 1999. Incremental depreciation charges, to reflect the revised useful
lives of this equipment, were included in research and development costs for
1998 and January 1999. Cypress also reserved $1.0 million to write-down the
value of certain other equipment and reserved $1.3 million related to severance
and other employee related costs. In fiscal 2000, Cypress expects to convert its
San Jose R&D wafer fab from a six-inch facility into an eight-inch facility.
This will make Cypress's R&D fab more compatible with its technologically
advanced wafer fabs in Minnesota. This conversion is expected to be completed in
June 2000.
ALPHATEC -- Cypress reserved $5.1 million to provide for the consolidation
of Thailand test activities from Alphatec, Cypress's subcontractor, with
Cypress's Philippines facility. Of this $5.1 million reserve, $1.5 million was
related to production inventories which were no longer useable as a result of
this consolidation, $1.3 million was related to severance costs at the
subcontractor and
Page 22
$2.3 million was related to excess equipment and leasehold improvements which
were no longer used. The assets were considered held for sale and were written
down to their revised carrying value. The transfer of production from Alphatec
to the Philippines facility began during the second quarter of 1998 and was
completed in January 1999, one month later than originally planned.
OTHER -- Separate from the restructuring charge, Cypress recorded an
additional charge of $27.3 million, which was recorded as operating expenses.
The charges were for inventory reserves ($15.8 million), the write-off of
pre-operating costs ($3.8 million), the write-off of an equity investment ($3.1
million), costs incurred to reimburse a customer for expenses incurred as a
consequence of Cypress's defective products ($2.5 million) and the write-off of
obsolete equipment in Fab 4 ($2.1 million). The write-down of inventory was made
to establish incremental reserves for excess inventory and was recorded as cost
of revenues.
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operation in the Philippines. As a result of
restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits and accordingly the costs were written off to cost of
sales. There were no capitalized pre-operating costs subsequent to the first
quarter of 1998.
The $3.1 million write-off of the investment was recorded against net
interest and other income to reflect the decline in the value of a certain
investment. Selling, general and administrative costs included the write-off of
$2.5 million in costs incurred to reimburse a customer for certain product
expenses incurred. During Cypress's periodic review of equipment, some equipment
was identified as obsolete and $2.1 million was charged to cost of sales to
write-off the obsolete equipment.
1997 Restructuring Costs - Cypress (ICW)
In fiscal 1997, Maxim Integrated Products, Inc. ("Maxim") agreed to
purchase wafer fabrication assets from Cypress and its Fab Partners to purchase
certain equipment from Cypress lessors thereby relieving Cypress of significant
future equipment lease obligations. Maxim also acquired the property that housed
the fab from Samsung Semiconductor, Inc. as part of the same transaction. The
remaining assets to be disposed at the end of fiscal year 1997 were liquidated
between April 1998 and June 1998 (including at an equipment auction in June
1998). Due to the lack of any meaningful sale of assets at the June auction, the
actual liquidation of substantially all of the remaining assets was completed in
November 1998. In May 1998, Maxim purchased approximately $0.5 million of the
assets to be disposed of in another asset sale transaction separate from the
November 1997 transaction.
Cypress entered into the following material agreements related to the sale
of its fab assets to Maxim in November 1997:
1. Asset purchase agreements -- related to the purchase of assets from each of
the respective owners of assets. (Fab Partners, lessors, and Cypress.) The
loss incurred by the Company as a result of these agreements is included as
part of the restructuring costs in the accompanying financial statements.
2. Loan agreement -- related to a loan by Maxim to Cypress in the amount of
$2.0 million. Recorded as long-term debt in March 1998 and is payable at
the earlier of an IPO, change in control, or four years.
3. Foundry agreement -- related to Cypress agreement for Maxim to provide
BiCMOS foundry services to Cypress . This agreement terminated in December
1998. No effect on financials.
4. Operating agreement -- related to sharing of the fab between Cypress and
Maxim for a period of up to seven months from close (actual duration was
four months). Specifics of the agreements include how costs are shared, who
has control and when the fab transfers sequentially from Cypress to Maxim,
the basis for one party billing the other for its manufacturing activities
within the fab during the period of sharing the fab, and an agreement with
Maxim that they will hire substantially all the wafer fab-related employees
based on a prescribed schedule. The operating agreement was substantially
completed in March 1998.
Cypress and Maxim also entered into an operating agreement that outlined
the utilization of and cost-sharing for the facility during the six-month
transition period following the sale of the fab assets to Maxim.
Page 23
While Maxim had acquired most of Cypress owned and leased fab assets and
certain related assets, Cypress still owned or leased other wafer fabrication
assets that were not purchased by Maxim. As such, in connection with the exit of
the wafer fabrication business, Cypress recorded a restructure charge of
approximately $9.9 million related to impairment of assets sold to Maxim ($2.2
million), impairment of assets held for sale ($1.8 million), refinancing of
lease agreements ($3.6 million), employee severance ($0.2 million), and other
transaction costs ($2.2 million). These agreements with Maxim resulted in a
reduction of headcount of approximately 113 foundry employees (most of whom were
hired by Maxim). The total expected cash outlay related to this charge was
approximately $6.7 million at December 29, 1997, of which the remaining $4.1
million was paid in 1999.
In November 1997, Cypress also borrowed $2.0 million from Maxim with
interest accruing at 6% per annum. The note and interest are to be repaid at the
earlier of: a majority sale of Cypress, the consummation of a public offering of
Cypress common stock, or four years from the date of the note (November 2001).
In addition, Cypress entered into a wafer purchase agreement with Maxim that
allows Cypress to buy BiCMOS wafers from Maxim for a period of up to two years.
On the closing date of the transaction, November 20, 1997, Maxim purchased
Cypress six-inch wafer fabrication leasehold improvements and manufacturing
equipment as well as certain five-inch wafer fabrication equipment, which
Cypress owned or acquired through capital leases. The carrying value of the
six-inch and five-inch fabrication assets were $14.25 million and $0.4 million,
respectively. Proceeds of the sale of these assets to Maxim were $12.5 million
to Cypress. Substantially all the assets held at December 29, 1997 were sold
prior to January 3, 1999.
Interest Expense
Interest expense was $9.6 million for fiscal 1999, compared to $11.3
million for fiscal 1998 and $8.5 million for fiscal 1997. Interest expense
incurred during fiscal 1999 is primarily associated with the 6.0% Convertible
Subordinated Notes, which were issued in September 1997 and are due in 2002. The
decrease in fiscal 1999 is primarily attributable to the retirement of $15.0
million of these Notes towards the end of 1998. Interest incurred during fiscal
1997 also included expenses from the convertible bond redeemed in March 1997 and
a revolving line of credit.
Interest and Other Income, Net
Net interest and other income was $52.7 million for fiscal 1999 compared to
$13.4 million for fiscal 1998 and $13.1 million for fiscal 1997. Net interest
and other income for fiscal 1999 included a $36.2 million gain from the sale of
a certain investment and $17.8 million of interest income. Offsetting other
income was $1.0 million related to the amortization of bond issuance costs. In
fiscal 1998, net interest and other income included interest income of $15.2
million, a $1.7 million pre-tax net gain related to the retirement of $15.0
million of Cypress's 6.0% Convertible Subordinated Notes and foreign exchange
gains of $0.5 million. The 1998 interest and other income, net is offset by a
non-recurring, pre-tax charge of $3.1 million recorded to reflect the decline in
value of a certain investment and $1.0 million in amortization of bond issuance
costs. Interest and other income, net for fiscal 1997 relates primarily to
interest income of $10.5 million and a $3.8 million gain from the sale of a
certain investment. .
Taxes
Cypress's effective tax rates for fiscal years 1999, 1998 and 1997 were
5.0%, 11.4% and 42.7%, respectively. A tax benefit of $13.5 million was realized
during fiscal 1998 compared to expenses of $4.8 million and $5.6 million during
fiscal 1999 and fiscal 1997, respectively. The benefit was attributable
primarily to the utilization of loss carrybacks, the utilization of research and
development tax credits and non-U.S. income taxed at lower tax rates compared to
U.S. tax rates, principally related to Cypress's operations in the Philippines.
During 1998, the United States Internal Revenue Service began an
examination of tax returns for fiscal years 1994 through 1996. The examination
is expected to continue through May 2000. Management believes that the outcome
of the examination will not have a material effect on Cypress's consolidated
financial position or results of operations.
Earnings Before Goodwill
Cypress reported basic earnings before goodwill ("EBG") and diluted EBG.
EBG refers to earnings excluding pretax acquisition and restructuring related
charges and credits, in-process research and development costs, transaction
costs and amortization of intangible assets, net of tax. EBG for the year ended
January 2, 2000 also excluded the one-time, pre-tax gain of $36.2 million from
the sale of a certain investment. These charges and credits are excluded from
the computation of EBG and are collectively referred to
Page 24
as goodwill by Cypress. Cypress presented EBG as a measure of our operating
results, however, EBG is not intended to replace operating income or net income
as an indicator of operating performance or to replace cash-flow as a measure of
liquidity because EBG is not a concept under generally accepted accounting
principles. Also, our calculation of EBG may not be comparable to EBG as
calculated by other companies. The table below reconciles basic and diluted net
income (loss) per share to basic and diluted earnings (loss) before goodwill per
share, respectively.
Reconciliation of basic net income (loss) per share to basic earnings (loss) per
share before goodwill:
Years ended
Jan. 2, Jan. 3, Dec. 29,
2000 1999 1997
----- ----- -----
Basic net income (loss) per share .................... $ 0.87 $(1.03) $0.08
Goodwill net of taxes per share ...................... $ 0.01 $ -- $ --
Restructuring costs (credits) net of taxes per share . $(0.03) $ 0.53 $0.05
----- -----
Basic earnings (loss) before goodwill per share ...... $ 0.85 $(0.50) $0.13
----- ----- -----
Reconciliation of diluted net income (loss) per share to diluted earnings (loss)
per share before goodwill:
Years ended
Jan. 2, Jan. 3, Dec. 29,
2000 1999 1997
----- ----- -----
Diluted net income (loss) per share ................. $0.81 $(1.03) $0.07
Goodwill net of taxes per share ..................... $0.01 $ -- $ --
Restructuring costs (credits) net of taxes per share $(0.03) $0.53 $0.05
----- ----- -----
Diluted earnings (loss) before goodwill per share ... $0.79 $(0.50) $0.12
----- ----- -----
Stock Based Compensation
Cypress accounts for stock-based compensation arrangements in accordance
with provision of APB No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and discloses pro forma information regarding net income (loss) and
earnings (loss) per share as allowed by Statement of Accounting Standards No.
123 (SFAS 123). Under APB 25, compensation cost is recognized based on the
difference, if any, between the fair market price of Cypress's stock on the date
of grant and the amount an employee must pay to acquire the stock. As permitted
by SFAS 123, Cypress discloses pro-forma net income (loss) and pro-forma net
income (loss) per share as if it had recorded compensation cost. The pro-forma
effect on net income (loss) and net income (loss) per share is based on the
estimated grant date fair value, as defined by SFAS 123 for awards granted under
the Cypress's 1994 and 1999 Stock Option Plans and its Employee Stock Purchase
Plan. Inclusive of the pro-forma effect, basic and diluted net income was $58.8
for fiscal 1999 and basic and diluted net loss was $135.9 million and $17.5
million for fiscal years 1998 and 1997, respectively. Pro-forma basic net income
per share was $0.56 and diluted net income per share was $0.53 for fiscal 1999.
Pro-forma basic and diluted net loss per share was ($1.34) and ($0.18) for
fiscal years 1998 and 1997, respectively. The pro-forma effect may be impacted
by various factors including re-pricing of existing options.
In January 1998, substantially all outstanding stock options with an
exercise price in excess of $9.75 per share were cancelled and replaced with new
options having an exercise price of $9.75 per share, the fair market value on
the date that the employees accepted the repricing. A total of 10,464,000 shares
were repriced. This repricing excluded the Board of Directors, the Chief
Executive Officer and the Executive staff of Cypress.
Liquidity and Capital Resources
Cypress's cash, cash equivalents and short-term investments totaled $270.6
million at the end of fiscal year 1999, a $110.0 million increase from the end
of 1998.
On January 31, 2000, Cypress filed a universal shelf registration statement
with the Securities and Exchange Commission (SEC). The registration statement,
which was effective February 8, 2000, will allow Cypress to market and sell up
to $400.0 million of its securities. The shelf registration statement will allow
Cypress flexibility to raise funds from the offering of debt securities, common
stock, or a combination thereof, subject to market conditions and Cypress's
capital needs.
During fiscal 1999, Cypress filed a registration statement on Form S-3 with
the Securities and Exchange Commission. Under this shelf registration, Cypress
could through March 2001 sell any combination of debt securities, preferred
stock and common stock in one or more offerings up to a total amount of $300.0
million dollars. The full amount of this shelf registration statement has been
used
Page 25
by the transactions described in this paragraph. On January 19, 2000, Cypress
completed a $283.0 million registered-placement of 5-year convertible
subordinated notes. The notes are due in the year 2005, with a coupon rate of
4.00% and an initial conversion premium of 28.5%. The notes are convertible into
approximately 6.1 million shares of common stock and are callable by Cypress no
earlier than February 5, 2003. Net proceeds were $275.2 million, after issuance
costs of $7.8 million. Pursuant to the shelf registration, on March 29, 1999,
Cypress sold 7.2 million shares of common stock. Cypress received approximately
$33.8 million in proceeds, net of issuance costs, from the sale of these shares.
The remaining 2.5 million shares were sold by selling stockholders. Cypress did
not receive any proceeds from the shares sold by the selling stockholders.
During 1999, Cypress purchased $114.1 million in capital equipment, a $31.2
million increase from the $82.9 million purchased in 1998, and a $29.7 million
decrease from the $143.8 million purchased in 1997. Cypress purchased equipment
for its domestic wafer fabrication plants, its test and assembly facility in the
Philippines, its backend manufacturing subcontractors and its design and
technology groups. Equipment purchased for its fabs is expected to improve wafer
manufacturing capacity and capabilities as Cypress implements new technologies,
including its 0.16 and 0.25 micron processes. A majority of the equipment
purchased was for Fab 4a located in Minnesota to increase its capacity and
capability. Equipment purchased for the Philippines and its subcontractors was
used to increase manufacturing capacity and tool certain packaging capabilities.
Capital equipment purchases for the technology group are expected to enhance and
accelerate research and development capabilities. Capital expenditures in 2000
are expected to be significantly higher compared to 1999 as Cypress continues
its efforts to increase its wafer manufacturing capabilities and capacity by
purchasing more equipment for Fab 4a and by constructing Fab 4b and Fab 4c,
located on the same site as Fab 4a in Minnesota. Cypress also expects to
continue upgrading its research and development fab in San Jose from six-inch to
eight-inch to ensure compatibility with Cypress's wafer manufacturing facilities
in Minnesota. The conversion is expected to be completed by June 2000. Cypress
will also continue to purchase new software and equipment to enhance its
research and development capabilities. In fiscal 2000, Cypress expects to
purchase approximately $250.0 million in capital equipment.
In March 1999, Cypress announced a program whereby all U.S. employees were
offered loans to facilitate the exercise of vested stock options. Under the
terms of the program, only options which were vested as of March 1, 1999 and
whose exercise price was less than or equal to $9.75 could qualify for a loan.
The loans, including interest, are due at the earlier of three days following
the sale of the shares, within thirty days of the date the individual ceases to
be an employee of Cypress or 3 years from the grant date of the loan. The loans
bear interest at a rate of 4.71% and are secured by Cypress common shares. At
January 2, 2000, amounts receivable under this program totaled $8.2 million.
In 1998, Cypress retired a total of $15.0 million principal of its $175.0
million, 6.0% convertible subordinated notes for $12.9 million, resulting in a
pre-tax net gain of $1.7 million. The net gain was recorded as interest and
other income. The notes, which were issued in September 1997, are due October 1,
2002 and contain a coupon rate of 6.0%. The remaining outstanding notes are
convertible into approximately 6,772,000 shares of common stock and are callable
by Cypress on or after October 2, 2000. A portion of the proceeds from the notes
were used to repay the $49.0 million balance outstanding under the revolving
credit facility, acquire equipment, purchase a building in Woodinville,
Washington and for stock repurchases in 1997. The remaining proceeds have been
invested in interest-bearing investment grade securities and have been used for
general corporate purposes, including capital expenditures to add manufacturing
capacity and capability, development and commercialization of products, working
capital and strategic acquisitions or investments.
During fiscal 1997, Cypress entered into an agreement to borrow $2.0
million from a third party with interest accruing at 6.0% per annum. The loan
was repaid in April 1999. Also during 1997, Cypress issued promissory notes to
three significant customers for $2.0 million, $1.4 million and $0.3 million,
bearing interest at 6.0%, 10.0% and 7.5%, respectively and due in October 2000,
August 2000 and July 1999, respectively. As of January 2, 2000, a total of $0.7
million was payable under the notes.
In fiscal years 1997 and 1998, the Board of Directors authorized the
repurchase of up to 14.0 million shares of Cypress's common stock. Through
January 3, 1999, 8.1 million shares had been repurchased under this entire
program for $67.5 million. On February 25, 1999, the Board of Directors
terminated the stock repurchase program. The unsold repurchased shares were and
are expected to continue to be used for option exercises under Cypress's 1994
Stock Option Plan and stock purchases under the Employee Stock Purchase Plan.
During 1998, Cypress reissued 1.8 million shares of common stock under such
plans. During fiscal 1999, Cypress reissued a total of 8.3 million shares in
relation to the stock offering described above and in conjunction with the 1994
Stock Option Plan and Employee Purchase Plan. Such shares had been repurchased
under the 1997/1998 plan and repurchase programs prior to 1997.
Page 26
In February 1997, Cypress called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of March 26, 1997. At the
time of conversion, approximately 85% of the holders elected to convert their
notes into Cypress's common stock, increasing the amount of common stock
outstanding by 6.8 million shares. As a result of holders electing the cash
settlement, Cypress paid out $14.3 million.
In April 1997, Cypress sold capital equipment located in its Minnesota
wafer fabrication facility to Fleet Capital Leasing ("Fleet") in a
sale-leaseback agreement. In October 1997, Cypress entered into a similar
agreement with Comdisco, Inc. ("Comdisco") for other capital equipment located
in Minnesota. Cypress received a total of $28.2 million from Fleet and Comdisco
in exchange for the capital equipment and as a result of the transactions,
recorded an immaterial gain that will be amortized over the life of the leases.
In 1994 and 1995, Cypress entered into three operating lease agreements
with respect to its office and manufacturing facilities in San Jose and
Minnesota. In 1999, the lease related to the San Jose office and research and
development facilities expired. In October 1999, Cypress re-entered into a new
operating lease agreement with the same leasor for the same facilities. In April
1996, Cypress entered into an additional lease agreement for two office
facilities in San Jose. These agreements require that Cypress maintain a
specific level of restricted cash or investments to serve as collateral for
these leases and maintain compliance with certain financial covenants. Cypress's
restricted investment balance as of January 2, 2000 and January 3, 1999 was
$61.2 million and $59.7 million, respectively, and is recorded as other assets
on the Balance Sheet. Cypress was in compliance with its covenants at January 2,
2000.
In 1997, Cypress established a revolving line of credit with a bank
totaling up to $6.5 million. Cypress cancelled this line of credit in June 1999.
In July 1996, Cypress established a three-year $100.0 million unsecured
revolving credit facility with Bank of America National Trust and Savings
Association as agent on behalf of certain banks. During 1998, Cypress cancelled
this line of credit.
Cypress believes that existing cash and cash equivalents and cash from
operations will be sufficient to meet present and anticipated working capital
requirements and other cash needs for at least the next twelve months. Beyond
twelve months, changes in market demand and the possible need to increase
manufacturing capacity and capability, may cause Cypress to raise additional
capital through debt or equity financing. Although additional financing may be
required, there can be no assurance that it would be available to Cypress or
available at terms Cypress deems satisfactory.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Cypress is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. To mitigate these risks, Cypress
utilizes derivative financial instruments. Cypress does not use derivative
financial instruments for speculative or trading purposes.
The fair value of Cypress's investment portfolio or related income would
not be significantly impacted by either a 100 basis point increase or decrease
in interest rates due mainly to the short-term nature of the major portion of
Cypress's investment portfolio. An increase in interest rates would not
significantly increase interest expense due to the fixed nature of Cypress's
debt obligation.
A majority of Cypress's revenue and capital spending is transacted in U.S.
dollars. However, Cypress does enter into these transactions in other
currencies, primarily Japanese yen and certain other European currencies. To
protect against reductions in value and the volatility of future cash flows
caused by changes in foreign exchange rates, Cypress has established revenue and
balance sheet hedging programs. Cypress's hedging programs reduce, but do not
always eliminate, the impact of foreign currency rate movements. Based on
Cypress's overall currency rate exposure at January 2, 2000, a near-term 10%
appreciation or depreciation in the U.S. dollar would have an immaterial effect
on Cypress's financial position, results of operations and cash flows over the
next fiscal year.
All of the potential changes noted above are based on sensitivity analyses
performed on Cypress's balances as of January 2, 2000.
Page 27
ITEM 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
ASSETS
January 2, January 3,
2000 1999
----------- -----------
Current assets:
Cash and cash equivalents ...................................... $ 155,011 $ 142,102
Short-term investments ......................................... 115,545 18,459
----------- -----------
Total cash, cash equivalents and short-term
investments ....................................... 270,556 160,561
Accounts receivable, net (Note 2) .............................. 100,114 68,955
Inventories (Note 2) ........................................... 89,432 65,096
Other current assets ........................................... 77,293 55,437
----------- -----------
Total current assets ................................... 537,395 350,049
----------- -----------
Property, plant and equipment, net (Note 2) ...................... 357,183 348,936
Other assets (Note 2) ............................................ 222,646 125,011
----------- -----------
$ 1,117,224 $ 823,996
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 99,549 $ 53,932
Accrued compensation and employee benefits ..................... 32,428 20,293
Other accrued liabilities (Note 2).............................. 19,717 12,852
Deferred income on sales to distributors ....................... 20,760 13,300
Income taxes payable ........................................... 20,311 13,591
----------- -----------
Total current liabilities .............................. 192,765 113,968
----------- -----------
Convertible subordinated notes ................................... 160,000 160,000
Deferred income taxes ............................................ 56,100 41,065
Other long-term liabilities ...................................... 10,384 10,240
----------- -----------
Total liabilities ...................................... 419,249 325,273
----------- -----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized; none . -- --
issued and outstanding
Common stock, $.01 par value, 250,000 shares authorized;
115,496 and 110,753 issued; 110,516 and 97,465 outstanding at
January 2, 2000 and January 3, 1999 ........................ 1,155 1,107
Additional paid-in-capital ..................................... 534,225 482,781
Notes receivable from stockholders ............................. (8,186) --
Deferred compensation .......................................... (484) (1,152)
Retained earnings .............................................. 243,989 180,625
----------- -----------
770,699 663,361
Less: shares of common stock held in treasury, at cost;
4,980 shares at January 2, 2000 and 13,288
shares at January 3, 1999 .................................. (72,724) (164,638)
----------- -----------
Total stockholders' equity ............................. 697,975 498,723
----------- -----------
$ 1,117,224 $ 823,996
=========== ===========
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Page 28
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
Year Ended
-------------------------------------
January 2, January 3, December 29,
2000 1999 1997
--------- --------- -----------
Revenues ......................................... $ 705,487 $ 554,891 $ 598,485
--------- --------- ---------
Cost of revenues ................................. 383,639 409,108 393,769
Research and development ......................... 129,331 114,551 104,300
Selling, general and administrative .............. 105,882 91,016 82,026
Acquisition and other non-recurring costs, net ... 37,623 -- --
Restructuring costs .............................. (3,811) 60,737 9,882
--------- --------- ---------
Total operating costs and expenses ..... 652,664 675,412 589,977
--------- --------- ---------
Operating income (loss) .......................... 52,823 (120,521) 8,508
Interest expense ................................. (9,617) (11,276) (8,461)
Interest income and other, net ................... 52,665 13,356 13,092
--------- --------- ---------
Income (loss) before income taxes ................ 95,871 (118,441) 13,139
(Provision) benefit for income taxes ............. (4,817) 13,523 (5,613)
--------- --------- ---------
Net income (loss) ................................ $ 91,054 $(104,918) $ 7,526
========= ========= =========
Net income (loss) per share:
Basic .......................................... $ 0.87 $ (1.03) $ 0.08
Diluted ........................................ $ 0.81 $ (1.03) $ 0.07
Weighted average common and common
equivalent shares outstanding:
Basic .......................................... 104,703 101,944 100,137
Diluted ........................................ 111,735 101,944 107,866
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Page 29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Notes
Common Stock Additional Receivable Total
------------------- Paid-In From Deferred Retained Treasury Stockholders'
Shares Amount Capital Stockholders Compensation Earnings Stock Equity
--------- --------- --------- ------------ ----------- --------- --------- ---------
Balances at December 30, 1996 .... 91,104 $1,014 $344,533 -- $(621) $284,033 $(116,843) $512,116
Re-issuance of treasury
shares under employee
stock plans and other .......... 5,556 22 36,980 -- -- -- -- 37,002
Premiums received from put
option issuances ............... -- -- 2,760 -- -- -- -- 2,760
Tax benefit resulting from stock
option transactions ............ -- -- 6,959 -- -- -- -- 6,959
Issuance of common stock
from the conversion of the
convertible debt ............... 6,789 67 83,036 -- -- -- -- 83,103
Repurchase of common stock
under stock repurchase program . (516) -- -- -- -- -- (5,288) (5,288)
Adjustment to deferred
compensation ................... -- -- -- -- 454 -- -- 454
Net income for the year .......... -- -- -- -- -- 7,526 -- 7,526
--------- --------- --------- -------- -------- --------- --------- ---------
Balances at December 29, 1997 .... 102,933 1,103 474,268 -- (167) 291,559 (122,131) 644,632
Cypress (ICW) activities for the . -- -- -- -- -- 1,622 -- 1,622
Quarter ended March 28, 1999
Re-issuance of treasury
shares under employee
stock plans and other .......... 2,139 4 1,893 -- -- (7,638) 19,767 14,026
Premiums received from put
option issuances ............... -- -- 6,620 -- -- -- -- 6,620
Repurchase of common stock
under stock repurchase program . (7,607) -- -- -- -- -- (62,274) (62,274)
Adjustment to deferred
compensation ................... -- -- -- -- (985) -- -- (985)
Net loss for the year ............ -- -- -- -- -- (104,918) -- (104,918)
--------- --------- --------- -------- -------- --------- --------- ---------
Balances at January 3, 1999 ...... 97,465 1,107 482,781 -- (1,152) 180,625 (164,638) 498,723
Re-issuance of treasury shares and
issuance of common stock under . 13,051 48 37,438 -- -- (27,690) 91,914 101,710
employee stock plans and other
Tax benefit resulting from stock
option transactions ............ -- -- 13,772 -- -- -- -- 13,772
Notes receivable from stockholders -- -- -- (8,186) -- -- -- (8,186)
Compensation expense to outside
consultants .................... -- -- 234 -- -- -- -- 234
Adjustment to deferred
compensation ................... -- -- -- -- 668 -- -- 668
Net income for the year .......... -- -- -- -- -- 91,054 -- 91,054
--------- --------- --------- -------- -------- --------- --------- ---------
Balances at January 2, 2000 ...... 110,516 $1,155 $534,225 $(8,186) $(484) $243,989 $(72,724) $697,975
--------- --------- --------- -------- -------- --------- --------- ---------
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Page 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
------------------------------------
January 2, January 3, December 29,
2000 1999 1997
--------- --------- ---------
Cash flow from operating activities:
Net income (loss) ................................... $91,054 $(104,918) $7,526
Adjustments to reconcile net income (loss) to net
cash
generated by operating activities:
Depreciation and amortization ....................... 107,423 114,598 114,013
Acquired in-process research and development ........ 4,019 -- --
Non-cash interest and amortization of debt issuance
costs ............................................ 1,034 1,034 3,978
Net gain on early retirement of debt ................ -- (1,734) --
Loss on sale of fixed assets ........................ -- 1,069 --
Loss on write down of fixed assets .................. 10,336 -- --
Deferred gain on sale of fixed assets ............... (3,959) -- (3,431)
Gain on sale of investment .......................... (36,237) -- --
Restructuring costs (credits) ....................... (3,811) 60,737 4,952
Other non-recurring costs ........................... -- 8,827 --
Deferred income taxes ............................... (9,971) (797) 14,782
Changes in operating assets and liabilities:
Receivables ...................................... (30,282) 9,332 4,191
Inventories ...................................... (22,788) 18,013 (25,895)
Other assets ..................................... (10,577) 35,298 (152)
Accounts payable and accrued liabilities ......... 55,280 (14,862) (16,695)
Deferred income .................................. 7,460 2,445 (5,266)
Income taxes payable ............................. 6,720 (22,770) 15,870
--------- --------- ---------
Net cash flow generated from operating activities ..... 165,701 106,272 113,873
--------- --------- ---------
Cash flow from investing activities:
Purchase of investments ............................. (218,236) (110,718) (112,185)
Sale or maturities of investments ................... 66,872 127,195 93,870
Acquisition of property, plant and equipment ........ (114,120) (82,929) (143,803)
Acquisition of Anchor ............................... (14,956) -- --
Acquisition of Arcus ................................ (9,883) -- --
Acquisition of technology rights .................... (4,700) -- --
Acquisition of product rights and equity interest ... (12,187) -- --
from Altera
Proceeds from sale of investment .................... 36,237 -- --
Proceeds from sale of equipment ..................... 15,179 6,551 40,789
--------- --------- ---------
Net cash flow used for investing activities ........... (255,794) (59,901) (121,329)
--------- --------- ---------
Cash flow from financing activities:
Repayment of line of credit ......................... -- (3,369) (49,249)
Repayment of debt ................................... (2,653) -- --
Repayment of notes payable .......................... -- (1,186) (5,780)
Issuance of convertible subordinated notes, net of
issuance costs ................................... -- -- 170,187
Redemption of convertible debt ...................... -- -- (14,331)
Early retirement of debt ............................ -- (12,916) --
Restricted investments related to building lease
agreements ....................................... -- -- 601
Repurchase of common stock .......................... -- (62,274) (5,288)
Re-issuance of treasury shares and issuance of
common
stock ............................................. 113,444 12,470 41,173
Issuance of notes to stockholders ................... (8,186) -- --
Premiums received from put options .................. -- 6,620 2,760
Other long-term liabilities, including minority
interest ......................................... 397 (1,082) (615)
--------- --------- ---------
Net cash flow generated (used) for financing activities 103,002 (61,737) 139,458
--------- --------- ---------
Cypress (ICW) net change in cash during the quarter
ended March 28, 1999 ............................. -- 3,434 --
Net increase (decrease) in cash and cash equivalents .. 12,909 (11,932) 132,002
Cash and cash equivalents, beginning of year .......... 142,102 154,034 22,032
--------- --------- ---------
Cash and cash equivalents, end of year ................ $155,011 $142,102 $154,034
========= ========= =========
Supplemental disclosures:
Cash paid during the year for:
Interest ......................................... $9,600 $10,092 $5,707
Income taxes ..................................... $3,546 $452 $1,550
The accompanying notes form an integral part of these
Consolidated Financial Statements.
Page 31
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Cypress -- Cypress Semiconductor Corporation ("Cypress") designs, develops,
manufactures and markets a broad line of high-performance digital and
mixed-signal integrated circuits for a range of markets, including computers,
data communications, telecommunications and instrumentation systems.
Cypress's operations outside of the U.S. expanded in 1996 with the addition
of its test and assembly plant in the Philippines. Cypress's other foreign
operations include several sales offices and design centers located in various
parts of the world. Revenues to international customers were 51%, 45% and 39% of
total revenues in 1999, 1998 and 1997, respectively.
In 1999, Cypress purchased from Altera Corporation, Altera's 17% equity
interest in Cypress Semiconductor (Texas) Inc. ("CTI"), Cypress's wafer
fabrication facility in Texas. As a result of this purchase, all of Cypress's
subsidiaries were wholly owned at January 2, 2000 (See Note 4).
The consolidated financial statements include the accounts of Cypress and
all of its subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
Fiscal Year -- Beginning with its 1998 fiscal year end, Cypress ended its
fiscal months, quarters and years on Sundays, rather than Mondays, bringing its
fiscal period ends in line with predominant industry practice. Fiscal years
1999, 1998 and 1997 ended January 2, 2000, January 3, 1999 and December 29,
1997, respectively. Fiscal year 1999 was a 52-week year ending on the Sunday
closest to December 31, fiscal year 1998 was a 53-week year ending on the Sunday
closest to December 31 and fiscal year 1997 was a 52-week year ending on the
Monday closest to December 31. Operating results for the additional week were
considered immaterial to Cypress's consolidated operating results for the year
ended January 3, 1999.
Management Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates, although such differences are not expected to be material to the
financial statements.
Reclassifications -- Certain prior year amounts have been adjusted to
conform to current year presentation.
Fair Value of Financial Instruments -- For certain of Cypress's financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable and other current liabilities, the carrying amounts approximate their
fair value due to the relatively short maturity of these items. The estimated
fair market value of Cypress's investments reasonably estimate their fair values
based on market information. At January 2, 2000, the estimated fair value of the
Convertible Subordinated Notes was $234.2 million.
The estimated fair values have been determined by Cypress, using available
market information. However, considerable judgement is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented are not necessarily indicative of the amounts that Cypress could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies could have a material effect on the estimated
fair value amounts.
Cash Equivalents-- Highly liquid investments purchased with an original
maturity of ninety days or less are considered to be cash equivalents.
Investments --All Cypress investments are classified as available-for-sale.
Investments in available-for-sale securities are reported at fair value with
unrealized gains and losses, net of related tax, if any, included as a component
of stockholders' equity. Unrealized gains and losses net of related taxes, were
not material for the year ended January 2, 2000 or cumulatively.
In fiscal 1998, Cypress recorded a $3.0 million writedown of a certain
investment that was believed to be permanently impaired. In 1999, due to a
resurgence in the semiconductor business, the value of the investment increased.
In fiscal 1999, Cypress sold the investment, recording a pre-tax gain of $36.2
million, which is included in interest and other income, net.
Page 32
Inventories -- Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market. Market is
based on estimated net realizable value.
Property, Plant and Equipment -- Property, plant and equipment are stated
at cost, less accumulated depreciation. Depreciation is computed for financial
reporting purposes using the straight-line method over the estimated useful
lives of the assets as presented below. Leasehold improvements and leasehold
interests are amortized over the shorter of the estimated useful lives of the
assets or the remaining term of the lease. Accelerated methods of computing
depreciation are used for tax purposes.
Useful Lives
in Years
--------
Equipment............................... 3 to 7
Buildings and leasehold improvements.... 7 to 10
Furniture and fixtures.................. 5
Pre-operating Costs -- Incremental costs incurred in connection with
developing major production capability at new manufacturing plants, including
depreciation, amortization and cost of qualification of equipment and production
processes were capitalized up to December 1997. Pre-operating costs totaling
$3.8 million, net of accumulated amortization were included in other assets at
December 29, 1997. Such costs were being amortized over five years at a rate
based on estimated units to be manufactured during that period. In fiscal 1998,
these costs were written off and at January 2, 2000, no pre-operating costs are
remaining.
Long-Lived Assets -- Long-lived assets held and used by Cypress are
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, all long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
market value, less expected selling costs.
Revenue Recognition -- Revenues from product sales are generally recognized
upon shipment and a reserve is provided for estimated returns. A portion of
Cypress's sales are made to domestic distributors under agreements which allow
certain rights of return and price protection on products unsold. Accordingly,
Cypress defers recognition of revenues and profit on such sales until these
distributors resell the products.
Cypress sells to certain international distributors with a provision for
price adjustments on certain products. Cypress reserves for all anticipated
price adjustments. No rights of return exist on sales to international
distributors. Accordingly, sales are recognized upon shipment.
Cypress also has inventory, which is held by certain customers on a
consignment basis. Revenues are recorded when title transfers as defined per the
respective consignment agreements.
Income Taxes -- Cypress follows the liability method of accounting for
income taxes which requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
Earnings Per Share -- In accordance with Statement of Accounting Standard
No. 128 ("SFAS 128"), Cypress reports Earnings Per Share ("EPS"), both basic and
diluted EPS on the income statement. Basic EPS is based upon weighted-average
common shares outstanding. Diluted EPS is computed using the weighted average
common shares outstanding plus any potentially dilutive securities, except when
their effect is anti-dilutive. Dilutive securities include stock options and
convertible debt.
Translation of Foreign Currencies -- Cypress uses the U.S. dollar as its
functional currency for all foreign subsidiaries. Accordingly, gains and losses
from translation of foreign currency financial statements into U.S. dollars are
included in results of operations. Sales to customers are primarily denominated
in U.S. dollars. All foreign currency translation gains and losses have not been
material in any year.
Concentration of Credit Risk -- Financial instruments that potentially
subject Cypress to concentrations of credit risk are primarily investments and
trade accounts receivable. Cypress's investment policy requires cash investments
to be placed with high-credit quality institutions and to limit the amount of
credit from any one issuer.
Cypress sells its products to original equipment manufacturers and
distributors throughout the world. Cypress performs ongoing credit evaluations
of its customers' financial condition whenever deemed necessary and generally
does not require collateral. Cypress maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of all accounts
receivable.
Page 33
No one end user accounted for greater than 10% of revenues in 1999, 1998 or
1997. Sales to one distributor accounted for greater than 10% of total revenues
in 1999, 1998 and 1997.
Accounting for Stock-Based Compensation -- Cypress accounts for its stock
option plans and its employee stock purchase plan in accordance with provisions
of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". In accordance with Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", Cypress
provides additional pro-forma disclosures in Note 7.
Comprehensive Income -- In 1998, Cypress adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income is defined as the change in equity
of a company during a period from transactions and other events and
circumstances, excluding transactions resulting from investments by owners and
distributions to owners. Cypress did not have a material difference between net
income and comprehensive income for the year ended January 2, 2000 or
cumulatively.
Segment Reporting -- In fiscal 1998, Cypress adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131")." SFAS 131 establishes standards for
disclosures about products and services, geographic areas and major customers.
(See Note 11).
Recent Accounting Pronouncements -- In June 1999, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 amends
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," to defer its effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
133 establishes accounting and reporting standards for derivative instruments
including standalone instruments, such as forward currency exchange contracts
and interest rate swaps or embedded derivatives and requires that these
instruments be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in the income statement or stockholders'
equity, depending on the nature of the transaction. Cypress is required to adopt
SFAS 133 in the first quarter of its fiscal year 2001.The effect of SFAS 133 is
not expected to be material to the Cypress's financial statements.
Note 2: Balance Sheet Components
Available-For-Sale Securities
Cypress's portfolio of available-for-sale securities consists of the
following:
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
Corporate debt securities ............................ $175,510 $101,042
State and municipal obligations ...................... 77,902 73,607
Money markets ........................................ 69,755 --
Other ................................................ 39,811 23,341
-------- --------
Total available-for-sale securities ........ $362,978 $197,990
======== ========
At January 2, 2000 and January 3, 1999, the net unrealized holding gains and
losses on securities were immaterial. The securities at January 2, 2000 and
January 3, 1999 by contractual maturity are shown below.
January 2, January 3,
2000 1999
-------- --------
(In thousands)
Due in one year or less .............................. $251,654 $140,944
Due after one year through two years ................. 111,324 57,046
-------- --------
Total available-for-sale securities ....... $362,978 $197,990
======== ========
Page 34
Accounts Receivable, Net
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
Accounts receivable, gross ................... $103,098 $72,005
Allowance for doubtful accounts and
customer returns ............................. (2,984) (3,050)
--------- ---------
Accounts receivable, net .......... $100,114 $68,955
========= =========
Inventories, Net
January 2, January 3,
2000 1999
---------- ----------
(In thousands)
Raw materials .......................... $13,360 $8,939
Work-in-process ........................ 45,247 37,087
Finished goods ......................... 30,825 19,070
------- -------
Total ........................ $89,432 $65,096
======= =======
Property, Plant and Equipment
January 2, January 3,
2000 1999
----------- ---------
(In thousands)
Land ............................................. $13,829 $13,533
Equipment ........................................ 733,581 623,393
Buildings and leasehold improvements ............. 101,976 96,825
Furniture and fixtures ........................... 8,449 6,656
--------- ---------
Total property, plant and equipment .............. 857,835 740,407
Accumulated depreciation andamortization ......... (500,652) (391,471)
--------- ---------
Net property, plant and equipment ...... $357,183 $348,936
========= =========
Other Assets
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
Restricted investments ................... $61,198 $59,742
Long-term investments .................... 111,324 57,046
Other, principally purchased intangibles.. 50,124 8,223
-------- --------
Total .......................... $222,646 $125,011
======== ========
In September 1999, Cypress acquired the rights and patents covering the
Silicon Oxide Nitride Oxide Silicon ("SONOS") non-volatile memory technology
from NVX Corporation for $4.7 million. These intangible assets are included in
Other Assets on the Consolidated Balance Sheet and are being amortized over
their useful life.
Other Accrued Liabilities
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
Sales commissions ................................ $3,031 $3,290
Restructuring reserves ........................... 2,313 8,070
Warranty reserve ................................. 2,672 --
Other ............................................ 11,701 1,492
------- -------
Other accrued liabilities .............. $19,717 $12,852
======= =======
Note 3: Acquisitions
Acquisition of Arcus Technology Companies
On June 30, 1999, Cypress acquired all of the outstanding capital stock of
Arcus Technology (USA), Inc. and the assets of Arcus Technology (India) Limited
(referred to as "Arcus" on a combined basis). Arcus specializes in data
communications technologies including dense wave multiplexing (which allows
multiple signals to be transmitted over a single fiber optic cable) and "IP over
SONET" (the technology used to code and decode Internet traffic to send it over
the telephone system). The acquisition was accounted for using purchase
accounting. Accordingly, the estimated fair value of assets acquired and
liabilities assumed were
Page 35
included in Cypress's condensed consolidated balance sheet as of and since June
30, 1999, the effective date of the purchase. The results of operations of Arcus
are included in Cypress's consolidated results of operations during the second
half of Cypress's fiscal year 1999.
Cypress acquired Arcus for a total consideration of $17.7 million,
including cash of $11.5 million and stock of $6.2 million, (excluding direct
acquisition costs of $0.8 million for legal and accounting fees). Through
December 31, 1999 Cypress paid $9.9 million in cash and issued $2.3 million in
stock. The remaining $1.6 million in cash and $3.9 million in stock are expected
to be paid and issued by future installments. The total purchase price was
allocated to the estimated fair value of assets acquired and liabilities assumed
at the time of the acquisition based on independent appraisals and management
estimates as follows:
(In thousands)
Fair value of tangible net assets ...................... $391
In-process research and development .................... 2,500
Current technology ..................................... 4,400
Assembled workforce .................................... 1,600
Deferred compensation .................................. 5,553
Excess of purchase price over net assets acquired ...... 3,264
-------
$17,708
=======
The valuation method used to value the in-process technology of Arcus is a
form of discounted cash flow method commonly known as the "percentage of
completion" approach whereby the cash flow derived from the technology is
multiplied by the percentage of completion of the in-process technology. This
approach is a widely recognized appraisal method and is commonly used to value
technology assets. The value of the in-process technology of Arcus is the
discounted expected future cash flow attributable to the in-process technology,
taking into consideration the percentage of completion of products utilizing
this technology, utilization of pre-existing technology, the risks related to
the characteristics and applications of the technology, existing and future
markets, and the technological risk associated with completing the development
of the technology. The cash flow derived from the in-process technology projects
was discounted using a discount rate of 32.5%, which was appropriate for the
risk of this technology for which commercial feasibility had not been
established. The percentage of completion for each in-process project was
determined by identifying milestones of completed project steps as compared to
the remaining milestones to be completed to bring the project to technical and
commercial feasibility. Milestones were based on management's estimate of tasks
completed, value added and degree of difficulty of the portion of the project
completed as of the acquisition date, in comparison with the tasks to be
completed to bring the project to technical and commercial feasibility. A
deduction of 7.5% to 12.0% of expected future revenue was made in calculating
future cash flows from in-process technology and attributed to previously
existing technology.
The value of current technology was determined by estimating the future
cash flows to be derived from products based on existing commercially feasible
technologies at the date of the acquisition, and discounting associated cash
flow using a discount rate of 25.0%, which was appropriate for the business
risks inherent in manufacturing and marketing these products. Factors considered
in estimating the future cash flow to be derived from the existing technology
include risks related to the characteristics and applications of the technology,
existing and future markets, and assessment of the age of the technology within
its life span.
The value of the assembled workforce is based on estimated costs to replace
the existing staff including recruiting, hiring and training costs for all
categories of employee to fully deploy a work force of similar size and skill to
the same level of productivity as the existing work force. Deferred compensation
value is the cash and stock consideration to be paid by future installments.
Development of in-process technology remains a substantial risk to Cypress
due to many factors including the remaining effort to achieve technical
feasibility, rapidly changing customer requirements and competitive threats from
other companies and technologies. Additionally, the value of the other
intangible assets acquired may become impaired. The in-process research and
development valuation as well as the valuation of other intangible assets was
prepared by an independent appraiser of technology assets, based on inputs from
Cypress and Arcus management, utilizing valuation methods that are recognized by
the Securities and Exchange Commission ("SEC") staff. However, there can be no
assurance that the SEC staff will not take issue with any assumptions used in
the appraiser's valuation model and require Cypress to revise the amount
allocated to in-process research and development.
The amounts allocated to current technology, assembled workforce, and
residual goodwill are being amortized over their respective estimated useful
lives between six and ten years using the straight-line method. The deferred
compensation is being amortized on a straight line basis over two years.
Page 36
Acquisition of Anchor Chips, Inc.
On May 25, 1999, Cypress acquired all of the outstanding capital stock of
Anchor Chips, Inc. ("Anchor"), a company that designs and markets
micro-controller chips that support Universal Serial Bus applications. The
acquisition was accounted for using purchase accounting. Accordingly, the
estimated fair value of assets acquired and liabilities assumed were included in
Cypress's condensed consolidated balance sheet as of and since May 25, 1999, the
effective date of the purchase. The results of operations of Anchor were
included in Cypress's consolidated results of operations as of and since the
effective date of the purchase.
Cypress paid approximately $15.0 million in cash, which excludes direct
acquisition costs of $0.7 million for investment banking, legal and accounting
fees. In addition Cypress assumed net liabilities of approximately $0.9 million.
The total purchase consideration of $15.9 million was allocated to the estimated
fair value of assets acquired and liabilities assumed based on a valuation
completed by management, using a valuation methodology commonly applied by
independent appraisers, as follows:
(In thousands)
Fair value of tangible net liabilities ................ $(919)
In-process research and development ................... 1,519
Assembled workforce ................................... 1,320
Current technology .................................... 13,036
--------
$14,956
=======
The valuation method used to value the in-process technology of Anchor is a
form of discounted cash flow method commonly known as the "percentage of
completion" approach whereby the cash flow derived from the technology is
multiplied by the percentage of completion of the in-process technology. This
approach is a widely recognized appraisal method and is commonly used to value
technology assets. The value of the in-process technology of Anchor is the
discounted expected future cash flow attributable to the in-process technology,
taking into consideration the percentage of completion of products utilizing
this technology, utilization of pre-existing technology, the risks related to
the characteristics and applications of the technology, existing and future
markets, and the technological risk associated with completing the development
of the technology. The cash flow derived from the in-process technology projects
was discounted using a discount rate of 32.5%, which was appropriate for the
risk of this technology for which commercial feasibility had not been
established. The percentage of completion for each in-process project was
determined by identifying milestones of completed project steps as compared to
the remaining milestones to be completed to bring the project to technical and
commercial feasibility. Milestones were based on management's estimate of tasks
completed, value added and degree of difficulty of the portion of the project
completed as of the acquisition date, in comparison with the tasks to be
completed to bring the project to technical and commercial feasibility. A
deduction of 7.5% to 12.0% of expected future revenue was made in calculating
future cash flows from in-process technology and attributed to previously
existing technology.
The value of the assembled workforce is based on estimated costs to replace
the existing staff including recruiting, hiring and training costs for all
categories of employee to fully deploy a work force of similar size and skill to
the same level of productivity as the existing work force.
The value of current technology was determined by estimating the future
cash flows to be derived from products based on existing commercially feasible
technologies at the date of the acquisition, and discounting associated cash
flow using a discount rate of 25.0%, which was appropriate for the business
risks inherent in manufacturing and marketing these products. Factors considered
in estimating the future cash flow to be derived from the existing technology
include risks related to the characteristics and applications of the technology,
existing and future markets, and assessment of the age of the technology within
its life span.
Development of in-process technology remains a substantial risk to Cypress
due to many factors including the remaining effort to achieve technical
feasibility, rapidly changing customer requirements and competitive threats from
other companies and technologies. Additionally, the value of the other
intangible assets acquired may become impaired. The in-process research and
development valuation as well as the valuation of other intangible assets was
prepared by management, utilizing valuation methods that are recognized by the
Securities and Exchange Commission ("SEC") staff. However, there can be no
assurance that the SEC staff will not take issue with any assumptions used in
the valuation model and require Cypress to revise the amount allocated to
in-process research and development.
The amounts allocated to current technology, and assembled workforce are
being amortized over their estimated useful lives of five -years using the
straight-line method. There was no goodwill associated with the acquisition of
Anchor.
Page 37
Acquisition from Altera
On October 5, 1999, Cypress announced that it has signed a definitive
agreement with Altera Corporation ("Altera") to acquire Altera's MAX 5000
Programmable Logic Device ("PLD") product line and its equity interest in
Cypress's wafer fabrication facility in Round Rock, Texas ("Fab II") for
approximately $13.0 million in cash. The acquisition was accounted for as a
purchase. In 1988, Altera licensed its MAX 5000 family of products to Cypress in
consideration of manufacturing capacity. Altera later acquired a 17% equity
interest in the Round Rock wafer fabrication facility. By acquiring Altera's
equity interest in October 1999, Fab II is now 100% owned by Cypress.
Merger with IC WORKS Incorporated
On April 1, 1999, Cypress completed a merger with IC WORKS Incorporated
("ICW"), which was accounted for as a pooling of interests. The condensed
consolidated financial statements and the notes to the condensed consolidated
financial statements give effect to the merger for all periods presented. The
fiscal years of Cypress and ICW were different. ICW has changed its fiscal
year-end to coincide with that of Cypress. Cypress's consolidated statements of
operations for the periods ended January 3, 1999 and December 27, 1997, have
been combined with ICW's consolidated statements of operations for the
corresponding twelve month periods ended December 28, 1998 and March 28, 1998.
During fiscal 1999, Cypress recorded merger-related transaction costs of
$3.7 million related to the acquisition of ICW. These charges, which consist
primarily of investment banking and other professional fees, have been included
under acquisition and merger costs in the Consolidated Statements of Operations.
Note 4: Restructuring and Other Non-Recurring Costs
1999 Restructuring, Merger and Acquisition, and Other Non-Recurring Costs
During fiscal 1999, Cypress recorded a net $33.8 million in restructuring,
merger and acquisition, and other non-recurring costs. These one-time,
non-recurring costs included a $12.3 million write-off of a certain
manufacturing asset that is not in service and will be scrapped and an $11.9
million one-time compensation charge associated with retention and performance
payments to key employees in December 1999. In the first quarter of fiscal 1999,
Cypress recorded one-time charges of $3.7 million associated with the merger
with IC Works. These charges were for investment banking fees and other
professional fees. Cypress also recorded $8.8 million in costs associated with
the purchases of Anchor and Arcus comprising of $4.0 million for in-process
technology, $1.6 million for transaction costs and $3.2 million in amortization
of intangible assets. During the fourth quarter of fiscal 1999, Cypress acquired
Altera's MAX 5000 Programmable Logic Device ("PLD") product line and its equity
interest in Cypress's wafer fabrication facility in Round Rock, Texas. As part
of the transaction, Cypress recorded intangible assets associated with the
product rights and incurred $0.3 million for the amortization of these
intangibles. These non-recurring charges were offset by a reversal of $3.0
million of the 1998 restructuring reserve. The reversed charges related to $2.2
million of severance and other employee related charges and $0.3 million for the
provision for phase-down and completion of the Alphatec restructuring
activities. Cypress also reversed $0.5 million of the 1998 restructuring reserve
for other fixed asset related charges that were no longer considered necessary.
During fiscal 1999, Cypress reversed $0.7 million of the 1996 restructuring
reserve related to fixed asset de-installation charges that were no longer
required.
1998 Restructuring and Other Non-Recurring Costs
During 1998, Cypress implemented an overall cost reduction plan and
recorded a $58.9 million restructuring reserve. The restructuring entailed:
o The shutdown of Fab 3, located in Bloomington, Minnesota and consolidation
of parts of Fab 3 operations with other operations of Cypress.
o The discontinuance of the 0.6 micron 256k SRAM production in Fab 2 located
in Texas.
Page 38
o The conversion of an existing research and development fab located in San
Jose (Fab 1) to eight-inch capability in order to be compatible with the
state of the art eight-inch Minnesota manufacturing facility.
o The transfer of Cypress's test operations from its subcontractor, Alphatec,
in Thailand to Cypress's production facility in the Philippines.
The restructuring activities described above included the termination of
approximately 850 employees, primarily from manufacturing, both at Cypress and
at Alphatec.
Separate from the restructuring charge, Cypress recorded additional charges
of $27.3 million, which were recorded as operating expenses in the first quarter
of 1998. These charges were for inventory reserves ($15.8 million), the
write-off of pre-operating costs ($3.8 million), the write-off of an equity
investment ($3.1 million), costs incurred to reimburse a customer for certain
product expenses incurred ($2.5 million) and the write-off of obsolete equipment
in Fab 4 ($2.1 million). The write-down of inventory was made to establish
incremental reserves for excess inventory and was recorded as cost of revenues.
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operation in the Philippines. As a result of
restructuring activities, Cypress wrote off its previously capitalized
pre-operating costs as an impaired asset due to uncertainties surrounding their
future economic benefits. These costs were written off to cost of revenues.
There were no capitalized pre-operating costs subsequent to the first quarter of
1998.
The $3.1 million write-off of the equity investment was recorded against
net interest and other income to reflect the decline in the value of an
investment. Selling, general and administrative costs included the write-off of
$2.5 million in costs incurred to reimburse a customer for certain product
expenses incurred. During Cypress's periodic review of equipment, some equipment
was identified as obsolete and $2.1 million was charged to cost of revenues to
write-off the obsolete equipment.
The following tables sets forth charges taken against the reserve during
fiscal 1999 and restructuring expense and charges taken from the date the
restructuring commenced through January 2, 2000.
Balance Balance
January 3, January 2,
1999 Utilized Other 2000
------- -------- ------- -------
(In thousands)
Severance and other employee related charges(1) $ 2,309 $ (54) $(2,255) $ --
Other fixed asset related charges(1) .......... 3,030 (703) (520) 1,807
Provision for phase-down and consolidation of
manufacturing facilities(1) .................. 339 -- (339) --
------- ------- ------- -------
Total ............................... $ 5,678 $ (757) $(3,114) $ 1,807
======= ======= ======= =======
1998 Balance
Restructuring January 2,
Expense Utilized Other 2000
------- -------- ------- -------
(In thousands)
Write-down of inventory(1) .................... $ 3,250 $(3,250) $ -- $ --
Severance and other employee related charges(2) 5,334 (2,234) (3,100) --
Other fixed asset related charges(1) .......... 3,030 (703) (520) 1,807
Provision for phase-down and consolidation of
manufacturing facilities(1) ................... 976 (637) (339) --
------- ------- ------- -------
Total ............................... $12,590 $(6,824) $(3,959) $ 1,807
======= ======= ======= =======
- ----------
(1) Classified on the Balance Sheet as part of accrued liabilities.
(2) The amount utilized represents cash payments related to severance of
approximately 850 employees.
During fiscal 1999, Cypress reversed $3.7 million of previously provided
restructuring costs. $2.2 million of severance and other employee related
charges and $0.3 million for the provision for phase-down and consolidation of
manufacturing facilities were reversed in conjunction with the completion of the
Alphatec restructuring activities. $0.5 million was reversed for other fixed
asset related charges based on the determination that a portion of the fixed
asset removal costs accrual would not be required. These reversals related to
Cypress's 1998 restructuring activities. Cypress also reversed a $0.7 million
reserve for fixed asset installation costs related to its 1996 restructuring
activities which was no longer required. In fiscal 1999, Cypress utilized $0.8
million, primarily
Page 39
associated with the removal cost of equipment identified as part of the
restructuring.
Restructuring activities associated with Fabs 2 and 3 were completed in May
and July 1998, respectively, consistent with Cypress's restructuring schedule
except for the disposal of equipment. Fab 1 restructuring was not completed in
January 1999 as originally planned. Cypress has initiated plans to convert its
R&D wafer facility in San Jose to eight-inch capability and expects to have the
conversion completed by June 2000. The Alphatec consolidation and transfer
activity was completed in January 1999, one month later than originally planned.
1997 Restructuring Costs - Cypress (ICW)
During the fiscal 1997, Cypress made a decision to shut down its wafer fab
located in San Jose. In connection with the shut down of the wafer fab, Cypress
recorded a restructuring charge of $9.9 million related to the impairment of
assets ($3.9 million), non-cancelable operating lease commitments ($3.6
million), costs associated with a reduction in work force ($0.2 million) and
other transaction costs ($2.2 million). The other transaction costs related
primarily to inventory write-offs, expenses incurred to remove and return leased
equipment and brokerage and professional fees. The actual liquidation of
substantially all of the impaired assets was completed in November 1998. The
balance of the reserve remaining is expected to be utilized by March 2000 when
the operating lease commitment ends.
The following tables sets forth charges taken against the reserve during
fiscal 1999 and restructuring expense and charges taken from the date the
restructuring commenced through January 2, 2000.
Balance Balance
January 3, January 2,
1999 Utilized 2000
------- -------- ----------
(In thousands)
Operating lease costs ......... $ 2,332 $(1,826) $ 506
Severance costs ............... 60 (60) --
------- ------- -------
Total .................... $ 2,392 $(1,886) $ 506
======= ======= =======
1997 Balance
Restructuring January 2,
Expense Utilized 2000
------- -------- ---------
(In thousands)
Operating lease costs ............ $ 3,615 $(3,109) $ 506
Severance costs .................. 207 (207) --
Transaction and other costs ...... 2,164 (2,164) --
------- ------- -------
Total ....................... $ 5,986 $(5,480) $ 506
======= ======= =======
In November 1997, Cypress also borrowed $2.0 million from Maxim with
interest accruing at 6% per annum. The note and interest are to be repaid at the
earlier of: a majority sale of Cypress, the consummation of a public offering of
Cypress common stock, or four years from the date of the note (November 2001).
In addition, Cypress entered into a wafer purchase agreement with Maxim that
allows Cypress to buy BiCMOS wafers from Maxim for a period of up to two years.
On the closing date of the transaction, November 20, 1997, Maxim purchased
Cypress six-inch wafer fabrication leasehold improvements and manufacturing
equipment as well as certain five-inch wafer fabrication equipment, which
Cypress owned or acquired through capital leases. The carrying values of the
six-inch and five-inch fabrication assets were $14.25 million and $0.4 million,
respectively. Proceeds of the sale of these assets to Maxim were $12.5 million
to Cypress.
The following table summarizes the disposition of the six-inch and
five-inch fabrication assets held by Cypress through December 29, 1997.
Six-inch Five-inch
Assets Assets
-------- ---------
(In thousands)
Carrying value of assets prior to
recognition of impairment loss ............... $29,500 $6,000
Recognition of impairment .................... (15,250) (3,896)
Sale of assets to Maxim ...................... (14,250) (400)
Addition asset impairment .................... -- (551)
-------- --------
Total assets.............................. $ -- $1,153
======== ========
Substantially all the assets held at December 29, 1997 were sold prior to
January 2, 2000.
Page 40
Note 5: Equity and Debt Transactions
During fiscal 1999, Cypress filed a registration statement on Form S-3 with
the Securities and Exchange Commission. Under this shelf registration, Cypress
could through March 2001 sell any combination of debt securities, preferred
stock and common stock in one or more offerings up to a total amount of $300.0
million dollars. The entire amount of this shelf registration statement has been
used by the transactions described in this paragraph. On January 19, 2000,
Cypress completed a $283.0 million registered-placement of 5-year Convertible
Subordinated Notes. The notes are due in the year 2005, with a coupon rate of
4.00% and an initial conversion premium of 28.5%. The notes are convertible into
approximately 6.1 million shares of common stock and are callable by Cypress no
earlier than February 5, 2003. Net proceeds were $275.2 million, after issuance
costs of $7.8 million. Pursuant to the shelf registration, on March 29, 1999,
Cypress sold 7.2 million shares of common stock. Cypress received approximately
$33.8 million in proceeds, net of issuance costs, from the sale of these shares.
The remaining 2.5 million shares were sold by selling stockholders. Cypress did
not receive any proceeds from the shares sold by the selling stockholders.
In March 1999, Cypress announced a program whereby all U.S. employees were
offered loans to facilitate the exercise of vested stock options. Under the
terms of the program, only options which were vested as of March 1, 1999 and
whose exercise price was less than or equal to $9.75 could qualify for a loan.
The loans, including interest, are due at the earlier of three days following
the sale of the shares, within thirty days of the date the individual ceases to
be an employee of Cypress or 3 years from the grant date of the loan. The loans
bear interest and are secured by full recourse. At January 2, 2000, loans
receivable and accrued interest under this program totaled $8.2 million.
In fiscal years 1997 and 1998, the Board of Directors authorized the
repurchase of up to 14.0 million shares of Cypress's common stock. Through
January 3, 1999, 8.1 million shares had been repurchased under this entire
program for $67.5 million. On February 25, 1999, the Board of Directors
terminated the stock repurchase program. The unsold repurchased shares were and
are expected to continue to be used for option exercises under Cypress's 1994
Stock Option Plan and stock purchases under the Employee Stock Purchase Plan.
During 1998, Cypress reissued 1.8 million shares of common stock under such
plans. During fiscal 1999, Cypress reissued a total of 8.3 million shares in
relation to the stock offering described above and in conjunction with the 1994
Stock Option Plan and Employee Purchase Plan. Such shares had been repurchased
under the 1997/1998 repurchase programs as well as repurchase programs prior to
1997.
Convertible Subordinated Notes
In 1998, Cypress retired a total of $15.0 million principal of its $175.0
million, 6.0% Convertible Subordinated Notes ("Notes") for $12.9 million,
resulting in a pre-tax net gain of $1.7 million. The gain was offset by the
write-off of bond issuance costs of $0.4 million (pre-tax). The net gain was
recorded as interest and other income. The Notes, which were issued in September
1997, are due October 1, 2002 and contain a coupon rate of 6.0% and an initial
conversion premium of 48.2%. The remaining outstanding Notes are convertible
into approximately 6,772,000 shares of common stock and are callable by Cypress
on or after October 2, 2000. The Notes are unsecured subordinated obligations.
In February 1997, Cypress called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of March 26, 1997. At the
time of conversion, approximately 85% of the holders elected to convert their
notes into Cypress's common stock, increasing the amount of common stock
outstanding by 6,789,013 shares. As a result of holders electing the cash
settlement, Cypress paid out $14.3 million.
Notes Payable
Page 41
During 1997, Cypress entered into an agreement to borrow $2.0 million from
a third party with interest accruing at 6.0% per annum. The loan was repaid in
April 1999. Also during 1997, Cypress issued promissory notes to three
significant customers for $2.0 million, $1.4 million and $0.3 million, bearing
interest at 6.0%, 10.0% and 7.5%, respectively and due in October 2000, August
2000 and July 1999, respectively. As of January 2, 2000, a total of $0.7 million
was payable under the notes.
Line of Credit
In 1997, Cypress established a revolving line of credit with a bank
totaling up to $6.5 million. Cypress cancelled this line of credit in June 1999.
In July 1996, Cypress established a three-year $100.0 million unsecured
revolving credit facility with Bank of America National Trust and Savings
Association as agent on behalf of certain banks. In 1998, Cypress cancelled this
line of credit.
Note 6: Earnings (Loss) Per Share
As required by SFAS 128, following is a reconciliation of the numerators
and the denominators of the basic and diluted earnings (loss) per share
computation:
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
Per-Share Per-Share Per-Share
Income Shares Amount Loss Shares Amount Income Shares Amount
------ ------ ------ ---- ------ ------ ------ ------ ------
(In thousands, except per-share amounts)
Basic EPS:
Net income (loss) $ 91,054 104,703 $0.87 $(104,918) 101,944 $(1.03) $ 7,526 100,137 $0.08
===== ====== =====
Effects of dilutive
securities:
Stock options ... -- 7,032 -- -- -- 7,729
--------- ------- --------- ------- - --------- -------
Diluted EPS:
Net income (loss) $ 91,054 111,735 $0.81 $(104,918) 101,944 $(1.03) $ 7,526 107,866 $0.07
========= ======= ===== ========= ======= ====== ========= ======= =====
At January 2, 2000, January 3, 1999 and December 29, 1997, options to
purchase 47,000, 24,774,000 and 5,696,000 shares, respectively, of common stock
were outstanding, but were excluded in the computation of diluted EPS as their
effect was anti-dilutive. Convertible debentures outstanding at January 2, 2000,
January 3, 1999 and December 29, 1997 convertible to 6,772,000, 6,772,000 and
7,408,000 shares, respectively, of common stock were also excluded from diluted
EPS as their effect was anti-dilutive.
Note 7: Common Stock Option and Other Employee Benefit Plans
1999 and 1994 Stock Option Plans
In 1999, Cypress adopted the 1999 Stock Option Plan ("The Plan"). Under the
terms of the Plan, options may be granted to qualified employees of acquired
companies and consultants of Cypress or its majority-owned subsidiaries. Options
become exercisable over a vesting period as determined by the Board of Directors
and expire over terms not exceeding ten years from the date of grant. The option
price for shares granted, under the Plan, is typically equal to the fair market
value of the common stock at the date of grant.
In 1994, Cypress adopted the 1994 Stock Option Plan, which replaced
Cypress's 1985 Incentive Stock Option Plan and the 1988 Directors' Stock Option
Plan (the "Terminated Plans") with respect to future option grants. Under the
terms of the 1994 Stock Option Plan, options may be granted to qualified
employees, consultants, officers and directors of Cypress or its majority-owned
subsidiaries. Options become exercisable over a vesting period as determined by
the Board of Directors and expire over terms not exceeding twenty years from the
date of grant. The option price for shares granted, under the 1994 Stock Option
Plan, is typically equal to the fair market value of the common stock at the
date of grant. The 1994 Stock Option Plan includes shares that remained
available under the Terminated Plans and provides for an annual increase in
shares available for issuance pursuant to non-statutory stock options equal to
4.5% of Cypress's outstanding common stock at the end of each fiscal year.
In January 1998, substantially all outstanding stock options with an
exercise price in excess of $9.75 per share were cancelled and replaced with new
options having an exercise price of $9.75 per share, the fair market value on
the date that the employees accepted the repricing. A total of 10,464,000 shares
were repriced. This repricing excluded the Board of Directors, the Chief
Executive Officer and the Executive staff of Cypress.
Page 42
The following table summarizes Cypress's stock option activity and related
weighted average exercise price for each category for the years ended January 2,
2000, January 3, 1999 and December 29, 1997. The weighted average exercise price
for each category presented is also shown in the table below.
Shares Under the 1994 and 1999 Stock Option Plan
1999 1998 1997
----------------- ---------------- ----------------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
(In thousands except per-share amounts)
Options outstanding, beginning of year.............. 26,515 $ 8.29 23,923 $ 9.27 22,172 $ 8.54
Options cancelled .................................. (2,011) 9.99 (13,862) 11.24 (1,903) 8.83
Options granted .................................... 8,626 17.48 17,593 9.12 6,618 10.73
Options exercised .................................. (7,766) 7.62 (1,139) 5.30 (2,964) 7.18
------ ------- ------
Options outstanding, end of year ................... 25,364 11.48 26,515 8.32 23,923 9.27
======= ====== ======= ====== ======= ======
Options exercisable at January 2, 2000 ............. 9,574 $ 8.57
======= ======
All options were granted at an exercise price equal to the market value of
Cypress's stock at the date of grant. The weighted average estimated fair value
at the date of grant, as defined by SFAS 123, for options granted in 1999, 1998
and 1997 was $8.98, $3.61 and $5.06 per option, respectively. The estimated
grant date fair value is calculated using the Black-Scholes model. The
Black-Scholes model, as well as other currently accepted option valuation
models, was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from Cypress's stock option awards. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated grant date fair value.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for Cypress's stock option awards:
1999 1998 1997
---- ---- ----
Expected life ......... 7 years 7 years 6 years
Risk-free interest rate 5.76% 5.41% 6.63%
Volatility ............ .5668 .5467 .5529
Dividend yield ........ 0.00% 0.00% 0.00%
Significant option groups outstanding as of January 2, 2000 and the related
weighted average exercise price and contractual life information, are as
follows:
Outstanding Exercisable
Options with exercise ------------------ --------------- Remaining
prices range from Shares Price Shares Price Life (years)
----------------- ------ ----- ------ ----- ------------
(In thousands except per-share amounts)
$ 1.00-- $ 8.25.......... 4,239 $ 4.45 2,600 $ 4.40 5.57
$ 8.26-- $ 9.00.......... 4,277 $ 8.51 1,769 $ 8.50 7.64
$ 9.01-- $ 9.74.......... 1,610 $ 9.39 315 $ 9.28 7.89
$ 9.75-- $ 9.75.......... 5,748 $ 9.75 3,344 $ 9.75 6.73
$ 9.76-- $17.50.......... 4,345 $11.94 1,327 $11.63 7.22
$17.51-- $29.25.......... 5,145 $21.95 219 $21.21 9.72
Employee Qualified Stock Purchase Plan
In 1986, Cypress approved an Employee Qualified Stock Purchase Plan
("ESPP"), which allows eligible employees of Cypress and its subsidiaries to
purchase shares of common stock through payroll deductions. The ESPP consists of
consecutive 24-month offering periods composed of four 6-month exercise periods.
The shares can be purchased at the lower of 85% of the fair market value of the
common stock at the date of commencement of this two-year offering period or at
the last day of each 6-month exercise period. Purchases are limited to 10% of an
employee's eligible compensation, subject to a maximum annual employee
contribution limited to a $25,000 market value (calculated as the employee's
enrollment price multiplied by the number of purchased shares). Of the
11,373,000 shares authorized under the ESPP, 7,320,000 shares were issued
through 1999 including 953,000, 890,000 and 541,000 shares in 1999, 1998, and
1997, respectively.
Page 43
Compensation costs (included in pro forma net income and net income per
share amounts) for the grant date fair value, as defined by SFAS 123, of the
purchase rights granted under the ESPP were calculated using the Black-Scholes
model. The following weighted average assumptions are included in the estimated
grant date fair value calculations for rights to purchase stock under the ESPP:
1999 1998 1997
---- ---- ----
Expected life............. 6 months 6 months 6 months
Risk-free interest rate... 5.94% 5.94% 5.80%
Volatility................ .5773 .5773 .5861
Dividend yield............ 0.00% 0.00% 0.00%
The weighted average estimated grant date fair value, as defined by SFAS
123, or rights to purchase stock under the ESPP granted in 1999, 1998 and 1997
were $7.50, $2.56 and $5.49 per share, respectively.
Pro Forma Net Income (Loss) and Net Income (Loss) Per Share
If Cypress had recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its 1994 Stock
Option Plan, its 1999 Stock Option Plan and its Employee Stock Purchase Plan,
Cypress's pro forma net income (loss) and earnings per share for the years ended
January 2, 2000, January 3, 1999 and December 29, 1997 would have been as
follows:
1999 1998 1997
---- ---- ----
(In thousands, except per-share amounts)
Pro forma net income (loss):
Basic .............................. $ 58,849 $ (135,907) $ (17,545)
Diluted ............................ $ 58,849 $ (135,907) $ (17,545)
Pro forma net income (loss) per share:
Basic .............................. $ 0.56 $ (1.34) $ (0.18)
Diluted ............................ $ 0.53 $ (1.34) $ (0.18)
The pro forma effect on net income (loss) and net income (loss) per share
for 1999, 1998 and 1997 is not representative of the pro forma effect on net
income in the future years because it does not take into consideration pro forma
compensation expense related to grants prior to 1995.
Deferred Compensation
Cypress recorded a provision for deferred compensation of approximately
$1,638,000 for the difference between the grant or issuance price and the deemed
fair value for financial reporting purposes of certain Cypress common stock
options granted or common stock issued in fiscal year ended January 3, 1999.
These amounts are being amortized over the vesting period of the individual
stock options or stock, generally a period of four to five years. The deferred
compensation expense provision was reduced by approximately $263,000 in fiscal
1997, representing an unvested portion of deferred compensation expense for
wafer fabrication employees terminated in fiscal 1998 upon the sale to Maxim.
Deferred compensation expense, which was recognized, totaled approximately
$668,000, $653,000 and $191,000 in fiscal years 1999, 1998 and 1997,
respectively.
Other Employee Benefit Plans
Cypress also maintains a Section 401(k) Plan, New Product Bonus Plan, Key
Employee Bonus Plan and Deferred Compensation Plan. The 401(k) Plan provides
participating employees with an opportunity to accumulate funds for retirement
and hardship. Eligible participants may contribute up to 15% of their eligible
earnings to the Plan Trust. Cypress does not make contributions to the plan.
Under the New Product Bonus Plan, which started in 1997, all qualified
employees are provided bonus payments based on Cypress attaining certain levels
of new product revenue, plus attaining certain levels of profitability. In 1999,
1998 and 1997, $6.9 million, $0.7 million and $0.5 million, respectively were
charged to operations in connection with the New Product Bonus Plan.
In 1994, a Key Employee Bonus Plan was established, which provides for
bonus payments to selected employees upon achievement of certain Cypress and
individual performance targets. In 1999 and 1998, $4.9 and $4.1 million,
respectively, were charged to operations in connection with this Plan. In 1997,
there were no charges to operations in connection with this Plan. Employees
eligible under the Key Employee Bonus Plan can elect to participate in the
Deferred Compensation Plan, which allows
Page 44
eligible employees to defer their salary, bonus and other related payments.
Costs incurred by Cypress for the Deferred Compensation Plan during fiscal years
1999, 1998 and 1997 were insignificant.
Note 8: Income Taxes
The components of the provision for income taxes are summarized below.
Income before taxes is principally attributed to domestic operations.
Components of the Provision for Income Taxes
January 2, January 3, December 29,
2000 1999 1997
--------- --------- ---------
(In thousands)
Income (loss) before provision
for taxes .......................... $ 95,871 $(118,441) $ 13,139
--------- --------- ---------
Current tax expense:
U.S. Federal ....................... 13,913 $ (13,237) $ (10,483)
State and local .................... 115 -- 1,418
Foreign ............................ 760 511 500
--------- --------- ---------
Total current ................... 14,788 (12,726) (8,565)
--------- --------- ---------
Deferred tax expense (benefit):
U.S. Federal ....................... (9,971) (4,210) 16,033
State and local .................... -- 3,413 (1,855)
--------- --------- ---------
Total deferred .................. (9,971) (797) 14,178
--------- --------- ---------
Total ...................... $ 4,817 $ (13,523) $ 5,613
========= ========= =========
The tax provision (benefit) differs from the amounts obtained by applying
the statutory U.S. Federal Income Tax Rate to income before taxes as shown
below.
Tax Provision Difference
January 2, January 3, December 29,
2000 1999 1997
---------- ---------- ------------
(In thousands)
Statutory rate .......................................... 35% 35% 35%
Tax at U.S. statutory rate .............................. $ 33,554 $(41,454) $ 4,599
Foreign earnings ........................................ (11,442) (4,153) (1,151)
State income taxes, net of federal benefit .............. 114 3,413 922
Tax credits ............................................. (9,568) (3,700) (2,274)
Net Foreign Sales Corporation (FSC) benefit ............. (265) -- (78)
Benefit of tax free investments ......................... (80) (350) (482)
Current year loss with no benefit ....................... -- 18,498 3,812
Utilization of net operating loss ....................... (8,968) (1,740) --
Future benefits not recognized .......................... -- 15,900 --
Acquisition costs ....................................... 4,324 -- --
Income of acquired companies previously taxed ........... (2,611) -- --
Other, net .............................................. (241) (805) 265
F/S discrepancy ......................................... -- 868 --
-------- -------- --------
Total ................................................. $ 4,817 $(13,523) $ 5,613
======== ======== ========
The components of the net deferred tax assets at January 2, 2000 and
January 3, 1999, under SFAS 109 were as follows:
January 2, January 3,
2000 1999
--------- ---------
(In thousands)
Deferred tax assets:
Deferred income on sales to distributors ....................... $ 16,185 $ 11,024
Inventory reserves and basis differences ....................... 7,136 15,928
Restructuring and legal reserves ............................... 22,804 2,161
Asset valuation and other reserves ............................. 10,562 26,564
State tax, net of federal tax .................................. (48) 420
Research and development tax credits ........................... 25,702 9,204
Net operating loss ............................................. 4,839 41,330
Intangibles arising from acquisitions .......................... 12,093 --
Other, net ..................................................... 5,931 1,942
--------- ---------
Total deferred tax assets ................................... 105,204 108,573
--------- ---------
Deferred tax liabilities:
Excess of tax over book depreciation ........................... (43,900) (39,856)
Intangibles arising from acquisitions .......................... (12,093) --
Other, net ..................................................... (107) (1,209)
--------- ---------
Total deferred tax liabilities .............................. (56,100) (41,065)
--------- ---------
Net deferred tax asset ........................................... 49,104 $ 67,508
Valuation allowance .............................................. (39,133) (67,508)
--------- ---------
Net deferred tax assets (liabilities) after valuation
allowance ...................................................... $ 9,971 $ --
========= =========
Page 45
A $13.8 million tax benefits associated with disqualifying dispositions of
stock options and employee stock purchase plan shares was realized in 1999.
There were no tax benefits associated with disqualifying dispositions of stock
options or employee stock purchase plan shares realized in 1998.
During 1998, the United States Internal Revenue Service began an
examination of tax returns for fiscal years 1994 through 1996. The examination
is expected to continue through May 2000. Management believes that no material
adjustments will ultimately result from this examination.
Other current assets include current deferred tax assets of $10.0 million
at January 2, 2000. Other assets include deferred tax assets of $9.8 million at
January 2, 2000. There were no deferred tax assets as of January 3, 1999.
Note 9: Commitments and Contingencies
Operating Lease Commitments
Cypress leases most of its manufacturing and office facilities under
non-cancelable operating lease agreements that expire at various dates through
2012. These leases require Cypress to pay taxes, insurance, and maintenance
expenses, and provide for renewal options at the then fair market rental value
of the property.
In April 1997, Cypress sold capital equipment located in its Minnesota
wafer fabrication facility to Fleet Capital Leasing ("Fleet") in a
sale-leaseback agreement. In October 1997, Cypress entered into a similar
agreement with Comdisco, Inc. ("Comdisco") for other capital equipment located
in Minnesota. Cypress received a total of $28.2 million from Fleet and Comdisco
in exchange for the capital equipment and as a result of the transactions,
recorded an immaterial gain that is being amortized over the life of the leases.
In 1994 and 1995, Cypress entered into three operating lease agreements
with respect to its office and manufacturing facilities, in San Jose and
Minnesota, respectively. In April 1996, Cypress entered into an additional lease
agreement related to two office facilities in San Jose. These agreements require
quarterly payments that vary based on the London Interbank Offering Rate
("LIBOR"), plus a spread. All leases provide Cypress with the option of either
acquiring the property at its original cost or arranging for the property to be
acquired at the end of the respective lease terms. Cypress is contingently
liable under certain first-loss clauses for up to $52.7 million at January 3,
1999. First loss clauses state that Cypress is potentially liable for any
decline in the value of the property up to a specified percentage. The purchase
option then permits Cypress to acquire the property at the lower value. Based on
management's estimate of the fair value of the properties, no liability was
required to be recorded at January 2, 2000, January 3, 1999 or December 29,
1997. Furthermore, Cypress is required to maintain a specific level of
restricted cash or investments to serve as collateral for these leases and
maintain compliance with certain financial covenants. As of January 2, 2000, the
amount of restricted investments recorded was $61.2 million, which is in
compliance with these agreements. These restricted cash or investments are
classified as non-current on the balance sheet.
The aggregate annual rental commitments under non-cancelable operating
leases as of January 2, 2000 are as follows:
Fiscal Year (In thousands)
2000 .............. $23,892
2001 .............. 11,168
2002 .............. 8,333
2003 .............. 8,093
2004 .............. 4,730
2005 and thereafter --
-------
Total ........... $56,216
=======
Rental expense was approximately $18.0 million in 1999, $21.9 million in
1998 and $17.2 million in 1997.
Page 46
Litigation and Asserted Claims
The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. From time to
time, Cypress has received, and may receive in the future, communications
alleging that its products or its processes may infringe on product or process
technology rights held by others. Cypress is currently, and may in the future
be, involved in litigation with respect to alleged infringement by Cypress of
another party's patents. In the future, Cypress may be involved with litigation
to:
o Enforce its patents or other intellectual property rights.
o Protect its trade secrets and know-how.
o Determine the validity or scope of the proprietary rights of others.
o Defend against claims of infringement or invalidity.
Such litigation has in the past and could in the future result in
substantial costs and diversion of management resources. Such litigation could
also result in payment of substantial damages and/or royalties or prohibitions
against utilization of essential technologies, and could have a material adverse
effect on Cypress's business, financial condition and results of operations.
During 1998, EMI Group of North America, Inc. ("EMI") filed suit against
Cypress in the Federal Court in Delaware, claiming that Cypress infringed on
four patents owned by EMI. Cypress and EMI entered into a license agreement in
February 1999, for one of the four patents in the lawsuit. EMI then withdrew two
of the four patents from the lawsuit, including the patent related to the
licensing agreement. The case involving the remaining two patents went to trial
in October 1999. The jury ruled in favor of Cypress, finding that none of the
patent claims was infringed by Cypress and that each asserted claim was invalid
due to physical impossibility (i.e., the patents require a step that is
physically impossible to perform) and prior art (i.e., assuming it is possible
to perform the impossible step, the prior art would have also performed it). EMI
may file an appeal, although no such appeal has been filed as of February 25,
2000. Should EMI appeal the decision of the Federal Court, Cypress intends to
defend itself vigorously. However, should the outcome of this action be
unfavorable, Cypress's business, financial condition and results of operations
could be materially and adversely affected.
In January 1998, an attorney representing the estate of Mr. Jerome Lemelson
contacted Cypress and charged that Cypress infringed certain patents owned by
Mr. Lemelson. On February 26, 1999, the Lemelson attorneys sued Cypress and 87
other companies for infringement of 16 patents. Cypress has reviewed and
investigated the allegations in the complaint and Cypress believes that the
suits are without merit. Cypress will vigorously defend itself in this matter.
While no assurance can be given regarding the outcome of this action, Cypress
believes that the final outcome of the matter will not have a material effect on
Cypress's consolidated financial position or results of operations. However,
because of the nature and inherent uncertainties of litigation, should the
outcome of this action be unfavorable, Cypress may be required to pay damages
and other expenses, which could have a material adverse effect on Cypress's
financial position and results of operations.
In June 1997, Cypress commenced a declaratory judgment action in the United
States District Court for the District of Nevada against the Li Second Family
Trust ("the Trust"). In this action, Cypress asked for declaratory relief to the
effect that a U.S. patent relating to a part of the process for manufacturing
semiconductors is unenforceable, invalid and not infringed by Cypress. The Trust
has counter-claimed for patent infringement on the same patent, alleging such
patent covers oxide-isolated integrated circuits. In May 1999, in a related
case, the United States District Court for the Eastern District of Virginia
ruled that the patent is unenforceable due to inequitable conduct by Dr. Li and
his attorneys in obtaining the patent. Cypress believes it has meritorious
defenses to the counter-claim and intends to defend itself vigorously. While no
assurance can be given regarding the final outcome of this action, Cypress
believes that the final outcome of the matters will not have a material effect
on Cypress's consolidated financial position or results of operations. However,
should the outcome of this action be unfavorable, Cypress's business, financial
condition and results of operations could be materially and adversely affected.
On October 2, 1997, Cypress filed an action against Kevin Yourman, Joseph
Weiss, and their associated law offices in the Superior Court of California
("Superior Court") in Santa Clara County for malicious civil prosecution in the
underlying securities fraud actions initiated by Messrs. Yourman and Weiss in
1992. The underlying securities fraud actions were dismissed because no officer
of Cypress made any actionable false or misleading statements or omissions. An
appeal affirmed the lower court's finding that Messrs. Yourman and Weiss failed
to put forth evidence showing a genuine issue of fact with regard to any
statements by Cypress's officers. On May 4, 1999, the Superior Court granted a
summary judgment motion by Messrs. Yourman and Weiss, holding that Messrs.
Yourman and Weiss had probable cause to bring the underlying litigation. Cypress
is appealing the decision. However, the results of litigation are unpredictable.
Cypress believes that this action, regardless of its outcome, will have little,
if any effect on Cypress's
Page 47
consolidated financial position or results of operations.
Purchase Commitments
At January 2, 2000, Cypress had purchase commitments aggregating $192.0
million, principally for manufacturing equipment and facilities. These
commitments relate to purchases to be made in 2000 and beyond. Commitments for
2000 purchases will be funded through a combination of cash resources,
retirement of investments and the $283.0 million 4.0% Convertible Subordinated
Notes (See Note 12).
Note 10: Related Parties
Between 1992 and 1995, Cypress made cost-basis investments in QuickLogic
Corporation ("QuickLogic") Series D and Series E preferred stock. In June 1996,
Cypress received $4.5 million from QuickLogic, the original intent of which was
to obtain a minority interest in CTI and to secure guaranteed fab capacity.
Cypress classified the $4.5 million as other long-term liabilities in 1996,
awaiting final negotiation of the terms and transaction approval from Altera, an
existing minority interest shareholder. In March 1997, Cypress signed a
definitive agreement with QuickLogic Corporation involving termination of an
existing joint development, licensing and foundry agreement for antifuse Field
Programmable Gate Array ("FPGA") products and the execution of a new foundry
agreement. Under the new agreement, Cypress ceased development, marketing and
selling of antifuse-based FPGA products. In return, QuickLogic paid $4.5
million, which represented $3.5 million of NRE revenue related to the sale of
technology rights and $1.0 million of compensation for inventory and other
assets, and issued shares of QuickLogic common stock that increased Cypress's
equity position in the privately-held QuickLogic to greater than 20%. Cypress
also entered into a five-year wafer-supply agreement to provide FPGA products to
QuickLogic. Revenues and net income contributed by the FPGA product line during
1997 and was not significant.
In the first quarter of 1998, due to QuickLogic's history of recording
losses, Cypress determined that its investment in QuickLogic had declined in
value and the decline in value was not temporary. Accordingly, Cypress wrote-off
its investment in QuickLogic to reflect this decline. During the second half of
1998 and throughout 1999, due to the resurgence in the semiconductor industry,
QuickLogic began recording profits. In October 1999, QuickLogic announced its
initial public offering. Cypress sold its investment in QuickLogic in October
1999 and as a result, recorded a $36.2 million gain.
Cypress recorded sales to QuickLogic of $7.1 million, $2.3 million and
$11.7 million in 1999, 1998 and 1997, respectively. At fiscal year-ends 1999 and
1998, Cypress had a receivable due from QuickLogic of $0.9 and $0.6 million,
respectively.
During 1990, Cypress made a cost-basis investment of $1.0 million in
Vitesse Semiconductor stock. Cypress sold its remaining investment in February
1997 and recorded a gain of $3.8 million in other income.
Note 11: Segment Information
Cypress has two reportable segments, Memory Products and Non-memory
Products. The Memory Products segment includes Static Random Access Memories
("SRAMs") and multichip modules. The Non-memory Products segment includes
programmable logic products, data communication devices, computer products,
non-volatile memory products and wafers manufactured by the foundry.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). Cypress evaluates
the performance of its two segments based on profit or loss from operations
before income taxes, excluding nonrecurring gains and losses.
Cypress's reportable segments are strategic business units that offer
different products. Products that fall under the two segments differ in nature,
are manufactured utilizing different technologies and have a different
end-purpose. As such, they are managed separately. Memory Products are
characterized more as a commodity, which is depicted by high unit sales volume
and lower gross margins. These products are manufactured using more advanced
technology. A significant portion of the wafers produced for Memory Products are
manufactured at Cypress's technologically advanced, eight-inch wafer production
facility located in Minnesota (Fab 4). Memory Products are used by a variety of
end-users but the product is used specifically for the storage and retrieval of
information. In contrast to Memory Products, unit sales of non-Memory Products
are generally lower than Memory Products, but sell at higher gross margins. Some
Non-memory Products are manufactured utilizing less technologically advanced
processes. A majority of wafers for
Page 48
Non-memory Products are manufactured at Cypress's less technologically advanced
six-inch Fab located in Texas (Fab 2). Products in the Non-memory segment
perform non-memory functions such as floating-point mathematics, store fixed
data that is not to be altered during normal machine operations and data
transfer and routing functions of signals throughout a computer system.
The tables below set forth information about the reportable segments for
fiscal years 1999, 1998 and 1997. Cypress does not allocate income taxes or
non-recurring items to segments. In addition, segments do not have significant
non-cash items other than depreciation and amortization in reported profit or
loss.
Business Segment Net Revenues
1999 1998 1997
-------- -------- --------
(In thousands)
Memory ............................... $269,686 $195,929 $226,566
Non-memory ........................... 435,801 358,962 371,919
-------- -------- --------
Total consolidated revenues ........ $705,487 $554,891 $598,485
======== ======== ========
Business Segment Profit (Loss)
1999 1998 1997
--------- --------- ---------
(In thousands)
Memory ............................... $ (21,691) $ (94,781) $ (35,742)
Non-memory ........................... 108,326 34,997 54,132
Restructuring and other
non-recurring (costs) benefits ..... (33,812) (60,737) (9,882)
Interest income and other ............ 52,665 13,356 13,092
Interest expense ..................... (9,617) (11,276) (8,461)
--------- --------- ---------
Income (loss) before provision
for income taxes ................... $ 95,871 $(118,441) $ 13,139
========= ========= =========
Business Segment Depreciation
Depreciation by segment for the respective years was:
1999 1998 1997
-------- -------- --------
(In thousands)
Memory .................................. $ 66,164 $ 86,905 $ 77,420
Non-memory .............................. 41,259 27,693 36,593
-------- -------- --------
Total consolidated depreciation ....... $107,423 $114,598 $114,013
======== ======== ========
Geographic Area
Revenues are attributed to countries based on the customer location.
Revenues by geographic locations were:
1999 1998 1997
-------- -------- --------
(In thousands)
United States ................................. $345,185 $307,938 $363,709
Europe ........................................ 130,484 91,544 99,051
Japan ......................................... 67,603 51,902 53,701
Other foreign countries ....................... 162,215 103,507 82,024
-------- -------- --------
Total revenues .............................. $705,487 $554,891 $598,485
======== ======== ========
Assets by geographic locations were:
1999 1998 1997
-------- -------- --------
(In thousands)
United States ..................... $275,553 $276,770 $373,273
Philippines ....................... 77,426 69,996 67,629
Other foreign countries ........... 4,204 2,170 2,877
-------- -------- --------
Total assets .................... $357,183 $348,936 $443,779
======== ======== ========
Page 49
Note 12: Subsequent Events
On March 2, 2000, Cypress completed the merger with Galvantech, Inc.
("Galvantech"), which will be accounted for as a pooling of interests. The
agreement provides for Cypress to issue up to 3.6 million shares in exchange for
all outstanding stock and options of Galvantech. The fiscal years of Cypress and
Galvantech were different and Galvantech has changed its fiscal periods to
coincide with that of Cypress. Galvantech specializes in niche, ultra-high
performance memories for data communications applications.
On January 31, 2000, Cypress filed a universal shelf registration statement
with the Securities and Exchange Commission (SEC). The registration statement,
when effective, will allow Cypress to market and sell up to $400.0 million of
its securities. The shelf registration statement will allow Cypress flexibility
to raise funds from the offering of debt securities, common stock, or a
combination thereof, subject to market conditions and Cypress's capital needs.
Page 50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Cypress Semiconductor Corporation.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity, and of cash
flows present fairly, in all material respects, the financial position of
Cypress Semiconductor Corporation and its subsidiaries at January 2, 2000 and
January 3, 1999, and the results of their operations and their cash flows for
each of the three years in the period ended January 2, 2000, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 26, 2000,
except as to Note 12 which is as of March 2, 2000
Page 51
Quarterly Financial Data
(In thousands, except per share data)
Three Months Ended
Jan. 2, Oct 3, July 4, Apr. 4,
2000 1999 1999 1999
------------- ------------- ------------- -------------
Revenues ............. $ 207,876 $ 184,497 $ 161,523 $ 151,591
============= ============= ============= =============
Gross Profit ......... $ 101,798 $ 85,969 $ 71,293 $ 62,788
============= ============= ============= =============
Net income ........... $ 47,473 $ 26,417 $ 8,480 $ 8,684
============= ============= ============= =============
Net income per share:
Basic ................ $ 0.43 $ 0.25 $ 0.08 $ 0.09
============= ============= ============= =============
Diluted .............. $ 0.39 $ 0.23 $ 0.08 $ 0.09
============= ============= ============= =============
Three Months Ended
Jan. 3, Sept. 28, June 29, Mar. 30,
1999 1998 1998 1998
------------- ------------- ------------- -------------
Revenues ............. $ 145,570 $ 143,791 $ 133,376 $ 132,154
============= ============= ============= =============
Gross Profit ......... $ 49,948 $ 47,213 $ 41,629 $ 6,993
============= ============= ============= =============
Net income (loss) .... $ (1,751) $ 1,649 $ (9,221) $ (95,595)
============= ============= ============= =============
Net income (loss) per share:
Basic ................ $ (0.02) $ 0.02 $ (0.09) $ (0.92)
============= ============= ============= =============
Diluted .............. $ (0.02) $ 0.02 $ (0.09) $ (0.92)
============= ============= ============= =============
Page 52
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning our directors is
incorporated by reference to the information set forth in the sections entitled
"Proposal One-Election of Directors" and "Compliance with Section 16(a) of the
Exchange Act" in our Proxy Statement for the 2000 Annual Meeting of Stockholders
to be filed with the Commission within 120 days after the end of the Company's
fiscal year ended January 2, 2000, except that the information required by this
item concerning the executive officers of Cypress is incorporated by reference
to the information set forth in the section entitled "Executive Officers of the
Registrant" at the end of Part I of this Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to our
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to our
Proxy Statement.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our equity securities to file reports of ownership on Form 3 and changes in
ownership on Form 4 or 5 with the Securities and Exchange Commission (the "SEC")
and the National Association of Securities Dealers. Such officers, directors and
10% stockholders are also required by SEC rules to furnish us with copies of all
Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by us, we
believe that, during the fiscal year ended January 2, 2000, all Section 16(a)
filing requirements applicable to our officers, directors and 10% stockholders
were satisfied.
Page 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
PAGE
----
(1) FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 2, 2000 and January 3, 1999.... 28
Consolidated Statements of Operations for the three years
ended January 2, 2000 .............................................. 29
Consolidated Statements of Stockholders' Equity for the three years
ended January 2, 2000............................................... 30
Consolidated Statements of Cash Flows for the three years ended
January 2, 2000..................................................... 31
Notes to Consolidated Financial Statements............................ 32
Report of Independent Accountants..................................... 51
(2) FINANCIAL STATEMENT SCHEDULE
Schedule II-Valuation and qualifying accounts and reserves............ 58
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------------
2.1 (1) Amendment and Plan of Reorganization by and among Cypress Semiconductor Corporation, CY Acquisition
Corporation and IC WORKS.
2.2 (2) Amendment and Plan of Reorganization by and among Cypress Semiconductor Corporation, CE Acquisition
Corporation and Galvantech, Inc.
3.1 (3) Restated Certificate of Incorporation, as amended.
3.2 * Certificate of Amendment dated May 13, 1992 to Restated Certificate of Incorporation.
3.3 * Certificate of Amendment dated October 23, 1995 to Restated Certificate of Incorporation, as amended.
3.4 (3) Bylaws, as amended.
4.1 (4) Lease dated April 12, 1996 between Cypress Semiconductor Corporation and BNP Leasing Corporation.
4.2 (5) Subordinated Indenture relating to our 6.0% convertible subordinated notes due 2002, and dated as of
September 15, 1997, between Cypress Semiconductor Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee, including the form of note.
4.3 (6) Subordinated Indenture relating to our 4.0% convertible subordinated notes due 2005, and dated as of
January 15, 2000, between Cypress Semiconductor Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee, including the form of note.
4.4 * Supplemental Trust Indenture relating to our 4.0% convertible subordinated notes due 2005, and dated a
of January 15, 2000, between Cypress Semiconductor Corporation and State Street Bank and Trust Company of
California, N.A., as Trustee, including the form of note.
10.1 (3) (7) Form of Indemnification Agreement.
10.2 (7) * Cypress Semiconductor Corporation 1994 Stock Option Plan.
10.3 (7) (8) Cypress Semiconductor Corporation Employee Qualified Stock Purchase Plan, as amended.
10.4 (7) (9) Consulting Agreement between Fred Bialek and Cypress Semiconductor Corporation.
10.5 (7) * Cypress Semiconductor Corporation 1999 Key Employee Bonus Plan
Agreement.
10.6 (7) (10) Cypress Semiconductor Corporation 1999 Non-statutory Stock Option Plan
Page 54
21.1 * Subsidiaries of Cypress Semiconductor Corporation.
23.1 * Consent of Independent Accountants.
24.1 * Power of Attorney (see page 57).
27.1 * Financial Data Schedule.
- ----------
(1) Previously filed as an exhibit to our current report on Form 8-K dated
February 12, 1999.
(2) Previously filed as an exhibit to our current report on Form 8-K, dated
January 18, 2000.
(3) Previously filed as an exhibit to our registration statement on Form S-1
which was declared effective on March 4, 1987 (SEC file number 33-12153).
(4) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended December 30, 1996.
(5) Previously filed as an exhibit to our registration statement on Form S-3
dated December 19, 1997 (SEC file number 333-42829).
(6) Previously filed as an exhibit to our registration statement on Form S-3/A,
dated March 24, 1999 (SEC file number 333-67203).
(7) Management compensatory plan, contract or arrangement.
(8) Previously filed as an exhibit to our registration statement on Form S-8
dated December 10, 1998 (SEC file number 333-68703).
(9) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended January 3, 1999.
(10) Previously filed as an exhibit to our registration statement on Form S-8
dated April 20, 1999 (SEC file number 333-76665).
* Filed as an exhibit to this annual report.
(b) Reports on Form 8-K:
1. On December 8, 1999 we filed a report on Form 8-K, which reported under
Item 5, that pursuant to our acquisition of IC WORKS, Incorporated, we had
changed the fiscal year of IC WORKS, Incorporated to correspond to our fiscal
year. Pursuant to Item 7, we attached the financial statements of IC WORKS,
Incorporated, reflecting the resultant changes.
Page 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant, Cypress Semiconductor Corporation, a
corporation organized and existing under the laws of the State of Delaware, has
duly caused this Annual Report to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of San Jose, State of California, on the
8th day of March 2000.
CYPRESS SEMICONDUCTOR CORPORATION
By: /s/ Emmanuel Hernandez
--------------------------------------------
Emmanuel Hernandez,
Chief Financial Officer, Vice President,
Finance and Administration
56
POWER OF ATTORNEY
Each of the officers and directors of Cypress Semiconductor Corporation
whose signature appears below hereby constitutes and appoints T.J. Rodgers and
Emmanuel Hernandez and each of them, their true and lawful attorneys-in-fact and
agents, with full power of substitution, each with power to act alone, to sign
and execute on behalf of the undersigned any amendment or amendments to this
report on Form 10-K, and to perform any acts necessary to be done in order to
file such amendment, and each of the undersigned does hereby ratify and confirm
all that said attorneys-in-fact and agents, or their or his substitutes, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
- --------------------------- ----------------------------- -------------
/s/ T.J. Rodgers President, Chief Executive
- --------------------------- Officer and Director March 7, 2000
T. J. Rodgers (Principal Executive Officer)
/s/ Emmanuel Hernandez Chief Financial Officer
- --------------------------- Vice President, Finance and March 7, 2000
Emmanuel Hernandez Administration (Principal
Financial and Accounting
Officer)
/s/ Eric Benhamou
- --------------------------- Chairman of the Board of March 7, 2000
Eric Benhamou Directors
/s/ Fred B. Bialek
- --------------------------- Director March 7, 2000
Fred B. Bialek
/s/ John C. Lewis
- --------------------------- Director March 7, 2000
John C. Lewis
/s/ Al Shugart
- --------------------------- Director March 7, 2000
Al Shugart
Page 57
SCHEDULE II
CYPRESS SEMICONDUCTOR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Charged to Charged to
Beginning Costs Other Ending
Description Balance and Expenses Accounts Deductions Balance
- ----------- ----------- ---------- ----------- ----------- -----------
1997
Allowance for sales returns and doubtful
accounts ............................... $ 4,742,000 $ -- $ 502,000 $(1,134,000) $ 4,110,000
1998
Allowance for sales returns and doubtful
accounts ............................... $ 4,110,000 $ -- $ 1,917,000 $(2,977,000) $ 3,050,000
1999
Allowance for sales returns and doubtful
accounts ............................... $ 3,050,000 $ -- $ -- $ (66,000) $ 2,984,000
58