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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 3, 1999
[ ] 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
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 11, 1999, registrant had outstanding 85,470,267 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 11,
1999 on the New York Stock Exchange, was approximately $746,361,576. 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 1999 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 ("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
currently offers approximately 427 products from its two business segments,
Memory Products and Non-Memory Products. Cypress's products are marketed
worldwide through a network of 23 North American sales offices, 6 North American
distributors, 26 U.S. sales representative firms, 8 European sales offices, 2
Japanese sales offices, an office in Singapore, an office in Korea, an office in
Taiwan, and 39 international sales representative firms. Cypress sells its
products to a wide range of customers, including Altera, Cisco Systems, Compaq,
IBM, Lucent Technologies, Motorola, Northern Telecom, Seagate, Sony and 3Com
Corporation. In 1998, international sales accounted for 39% of the Cypress's
total sales.
Cypress's initial strategy, upon its founding in 1982, was to provide
innovative high-performance CMOS (complementary metal-oxide silicon) integrated
circuits to niche markets, which were believed to be too small to warrant the
considerable investment which would be required for the major established
international semiconductor manufacturers to target. In 1992, Cypress modified
its strategy to focus on selected high-volume products, particularly memory
products, to bring those products to market quickly and at reduced costs and to
achieve significant market acceptance for those targeted products. This strategy
was successful until 1996 when the average selling prices ("ASPs") of Memory
Products began to decline. To offset the effects of declining ASP's and
corresponding revenues from Memory Products, Cypress has modified its strategy
again to become a more diverse company and to expand its product base into
non-memory products. Because of the highly competitive nature of the
semiconductor industry, its cyclicality and the downward trend average selling
prices typically experience over the life of any particular product, Cypress's
ability to successfully implement this strategy and achieve its revenue,
earnings and gross margin goals will depend upon a number of factors. These
factors include its ability to maintain its position in the high-performance
markets, to increase its presence in the more competitive high-volume markets,
to continue to successfully design and develop new products utilizing advanced
semiconductor design and process technologies in a timely fashion, to improve
manufacturing yields and reduce manufacturing costs and cycle time, and to
effectively market and sell its products in light of significant domestic and
international competition.
On January 21, 1999, Cypress entered into an agreement to acquire IC WORKS.
The stock-for-stock pooling-of interests transaction, in which IC WORKS
stockholders and holders of options, warrants and other rights to acquire IC
WORKS stock will receive 13,700,000 shares of Cypress common stock, is expected
to close in the spring of 1999, subject to various conditions, including
customary regulatory approvals and approval by IC WORKS stockholders.
Cypress was incorporated in California in December 1982. Cypress's initial
public offering of Common Stock occurred in May 1986 at which time its Common
Stock commenced trading on the Nasdaq National Market. In February 1987, Cypress
reincorporated in Delaware and began listing its Common Stock on the New York
Stock Exchange on October 17, 1988.
PRODUCTS
Cypress concentrates its efforts in two market segments, Memory Products
and Non-Memory Products. The Memory Product segment manufactures integrated
circuits on silicon wafers using leading edge process technology. A significant
portion of the wafers produced for Memory Products are manufactured at Cypress's
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technologically advanced, eight-inch wafer production facility located in
Minnesota ("Fab 4"). Some Memory Products are often characterized as
commodities, with high unit sales volume and significant shifts in supply and
demand, factors that mean a potentially greater exposure to ASP and gross margin
fluctuations. Sales of memory products tend to be driven by higher volumes and
results of operations are improved through advancements in technology and
attainment of lower manufacturing costs. In contrast, some Non-Memory Products
are manufactured using less technologically advanced processes than Memory
Products and are generally design or customer solution driven. A majority of the
wafers produced for Non-Memory Products are manufactured at Cypress's six-inch
fab located in Texas ("Fab 2") while wafers for the more technologically
advanced products are purchased from foundries. Unit sales volume of Non-Memory
Products are generally lower than Memory Products, but sell at a higher gross
margin. 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 continually greater speed, densities and
performance capabilities and the ongoing evolution of process-technologies,
Cypress's success will continue to depend upon the timely development,
introduction and market acceptance of new products in these areas.
MEMORY PRODUCTS
Cypress's Memory Products primarily serve the data communications,
telecommunications and personal computer markets. Memory Products include Static
Random Access Memory ("SRAM") products and multichip modules.
SRAM (Static Random Access Memory). SRAMs are used for storage and
retrieval of data in computers, data communication, telecommunication and other
electronic systems. Common networking applications include hubs, switches,
routers, test and measurement instrumentation, video and simulation. Telecom
applications include battery-powered cellular phones, pagers, radios, handheld
games and global positioning systems. Because a computer is required to read
from or write to its memory several times to complete an operation,
high-performance system designers are very sensitive to memory access time,
which can be a major bottleneck in overall system performance. Fast SRAMs are
used for functions such as "cache memory" to store the data being processed by
the computer's central processing unit.
The SRAM 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 segmented into a variety
of fast, slow, synchronous, and asynchronous segments. This differentiation of
the SRAM 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.
Multichip Modules. Cypress's high-density memory and logic modules are
assembled from high-performance devices in a single surface mount package in
order to create custom or standard enhanced single-circuit equivalents such as
multi-megabyte SRAMs and complete cache memories used within many high-
performance personal computers. These modules can provide the solution to many
of the advanced circuit "building blocks" required by modern system designers.
The multichip modules allow Cypress increased visibility into customer trends
and future needs for single chip memory products and an additional means to
satisfy the present needs of customer systems already incorporating Cypress
products.
NON-MEMORY PRODUCTS
Non-Memory Products include a variety of products that serve the data
communications, telecommunications, personal computer, PC peripheral and
military 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 ("USB")
microcontrollers and non-volatile memory products.
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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. Cypress
manufactures 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. Cypress's PLD portfolio consist of a
wide variety of devices ranging from simple PLDs. including the Flash 16V8,
20V8, and 22V10, to the very-high-density CPLDs (complex PLDs). All Cypress
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 and Verilog,
another industry standard.
PROMs (Programmable Read-Only Memories). Read-only memory ("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. Cypress has 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. Cypress offers a broad
family of high performance PROMs ranging in density from 4K to 256K bits and
available in a variety of standard and proprietary user interfaces.
First-in, First-out ("FIFOs"). FIFOs are used to pass data between systems
operating at different frequencies. Cypress offers FIFO memories in a variety of
synchronous and asynchronous architectures with industry standard pinouts.
Dual Ports. Dual Ports are SRAMs that can be accessed by two different
computers simultaneously. Cypress's family of synchronous and asynchronous
dual-port RAMs range in density from 64 Kbit to 1 Mbit. Dual-ports are used in
shared-memory applications, including networking, base stations,
telecommunications, mass storage, instrumentation, and test equipment. Cypress
established itself as a technology leader in multi-port memory products by
introducing the world's first 1 megabit dual-port.
RoboClock and HOTLink. Cypress's first PLL (Phase Locked Loop) based
products, RoboClock(TM) and HOTLink(TM), have been in production for several
years. RoboClock offers programmable skew and zero-propagation delay, allowing
customers to compensate for clock skews arising from varying circuit board trace
lengths and device set-ups and hold times. HOTLink (High-speed Optical
Transceiver Link) is the industry-standard chipset for moving serial data at
rates from 150-400 Mbps; it supports a variety of application and industrial
protocols including Fiber Channel, Enterprise System Connection (ESCON),
asynchronous transfer mode ("ATM"), digital video broadcast (DVB), plus generic
backplane and point-to-point applications.
ATM and SONET/SDH (Asynchronous Transfer Mode and Synchronous Optical
Network/Synchronous Digital Hierarchy). Cypress offers a family of
high-performance communications solutions for data transfer and routing in
advanced switching systems. These PLL-based products move SONET or SDH frames
between equipment at the SONET/SDH data rates of 51.85 Mbps (OC-1) and 155.52
Mbps (OC-3).
Programmable Clocks. Cypress is a leader in the timing technology device
market primarily due to its Clocks. 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 ("DVDs"), video CD
players and home video games. Cypress is the only supplier offering true
field-programmable clocks, and all Cypress clock outputs have the desired
characteristics of high drive, low jitter, low electromagnetic interference, and
low skew.
FCTs (Fast CMOS Technology). Cypress offers 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. Cypress logic choices include
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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). The Universal Serial Bus ("USB") is a four-wire
connection between a PC and its peripherals (for example, printers, joysticks,
scanners, modems), facilitating an easy-to-use architecture known as "plug and
play". This new standard has been supported by Microsoft, Intel and other large
original equipment manufacturers (OEM). In 1997, Cypress entered into a
strategic alliance with Microsoft to produce its first USB product, an 8-bit,
RISC-based microcontroller for Microsoft's new Internet mouse. Cypress also now
makes microcontrollers for Microsoft keyboards and designs USB microcontrollers
for standalone and integrated product hub applications. USB root hubs increase
the number of peripherals a PC can accept; hub applications have allowed Cypress
to expand its market for USB products.
RESEARCH AND DEVELOPMENT
Cypress places great emphasis on research and development. This is
partially reflected by significant management time committed to continuously
improve process and product design development methodology and cycle time.
Cypress's current product strategy requires rapid development of new products
using emerging process technologies while minimizing research and development
costs. Cypress performs research and development at two levels. Research and
development related to process technology is managed at the corporate level,
while research and development related to new product design is managed at the
operating level, in cooperation with Cypress's new product design organization.
The major focus of process technology research is the continuous migration
to smaller manufacturing geometries. Currently, Cypress is in the process of
developing 0.25-micron and 0.18-micron fabrication technologies. Cypress began
selling 0.25-micron SRAM products during the fourth quarter of 1998.
Cypress's wafer fabrication facility located in San Jose ("Fab 1") is
primarily utilized for research and development programs focusing on improving
process technology. Development and qualification programs for 0.25-micron and
0.18-micron technologies are currently in progress in Fab 1.
In March 1998, Cypress recorded a restructuring charge to upgrade Fab 1
from a six-inch to an eight-inch wafer facility to ensure compatibility with its
eight-inch manufacturing facility in Minnesota ("Fab 4").
Cypress has a central design group which focuses on new product design and
improvement of design methodologies. This group has ongoing efforts to reduce
design cycle time including re-use of standard cells via an intellectual
property library, development of computer-aided design tools and improved design
business processes. Cypress currently has 40 design teams in place working on
new product designs. Design work primarily occurs at design centers located at
Colorado Springs, Colorado; San Jose, California; Woodinville, Washington;
Bloomington, Minnesota; Austin, Texas; Starkville, Mississippi; Nashua, New
Hampshire; Bangalore, India; Basingstoke, United Kingdom; and Cork, Ireland.
Cypress considers development of new products to be critical to its future
success. Cypress's success depends on its ability to develop and introduce new
products which compete effectively on the basis of price and performance and
which address customer requirements. In addition, if the development and
implementation of new process technologies is not completed in a timely and
cost-effective basis, Cypress's business, financial condition and results of
operations could be materially and adversely affected.
Cypress's future success is also dependent on its ability to hire and
retain highly skilled design and test engineers. Such employees are key to the
development of new products. Since the job market for skilled engineers is very
competitive, Cypress cannot ensure that it will be successful in hiring or
retaining such key personnel.
MANUFACTURING
Cypress began fiscal 1998 by manufacturing its products at four submicron
wafer fabrication facilities using its proprietary 0.35, 0.5, 0.65 and
0.8-micron CMOS, 0.8 and 0.5-micron BiCMOS, and 0.65-micron Flash technologies.
In March 1998, Cypress announced the shut down of Fab 3, which was a six-inch,
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0.6 micron wafer fabrication plant located in Minnesota, and consolidated parts
of Fab 3 operations with other operations of Cypress. Cypress converted a
significant portion of the equipment from Fab 3 from six-inch to eight-inch
capability. In addition, Cypress downsized its six-inch Fab 2 facility located
in Texas by transferring its 0.6 micron 256K SRAM production to Fab 4. This
transfer will allow Cypress to focus on reducing manufacturing costs on
high-margin non-memory products in Fab 2.
To enhance its competitive position, Cypress has programs to reduce
manufacturing cycle times, reduce die size, improve labor productivity, improve
efficient use of capital resources, manufacturing step-elimination, improved
defect densities, improve yields and ultimately lower manufacturing costs.
Cypress invested $40.8 million in 1998 to increase the capacity and capability
of its primary wafer fabrication plants, Fab 2 and Fab 4.
A majority of Cypress's assembly and test operations are performed by its
highly automated assembly and test facility in the Philippines, which handled
such operations for 54% of Cypress's 1998 output, and through various offshore
subcontractors. The Philippines facility focuses its investments on high volume
products and packages where the ability of Cypress to significantly lower
manufacturing costs is high. The Philippines plant currently has capability for
various types of packaging and will be developing capability for several other
packages in the near future. In March 1998, Cypress began transferring its test
operations at its subcontractor, Alphatec, located in Thailand, to Cypress's
production facility in the Philippines. In 1998, Cypress invested $15.6 million
in capital to expand its Philippines' manufacturing capability. When fully
utilized, this plant is expected to produce approximately 70% of Cypress's
assembly and test manufacturing capacity.
The complicated nature of the wafer fabrication process of Cypress at times
results in certain wafers being rejected or individual die on each wafer being
non-functional, adversely affecting manufacturing yields. Similar yield losses
may be experienced in the assembly and test phase of manufacturing. Cypress's
philosophy is to prevent yield loss and/or quality problems to the extent
possible through analytical manufacturing controls. Cypress tests its products
at various stages in the fabrication, assembly and test processes, performs high
temperature burn-in testing as well as continuous reliability monitoring on all
products, and conducts numerous quality control inspections throughout the
entire production flow using statistical process control and quality-control
analytical equipment. Cypress has, on occasion, experienced delayed product
shipments due to lower than expected production yields. Accordingly, to the
extent Cypress does not achieve acceptable product yields, its operating results
may be adversely affected.
MARKETING AND SALES
Cypress uses four channels to sell its products: direct OEM (original
equipment manufacturer) sales by the Cypress sales force, direct OEM sales by
manufacturing representative firms, sales through domestic distributors, and
sales through international trading companies and representative firms.
Cypress's marketing and sales efforts are organized around four regions: North
America, Europe, Japan and Asia/Pacific. Cypress also has a strategic accounts
group which is responsible for specific customers with worldwide operations.
Cypress augments its sales effort with FAEs (field application engineers), who
are specialists in its product portfolio and work with customers to "design in"
Cypress products for their systems. FAEs also help Cypress identify emerging
markets and new products.
International revenues accounted for 39% of Cypress's total revenues in
1998 compared to 36% in 1997 and 27% in 1996, respectively.
Cypress typically warrants its 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
Cypress's 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
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customer needs. For these reasons, Cypress's backlog at any particular date is
not representative of actual sales for any succeeding period and Cypress
believes that the backlog is not a good indicator of future revenue.
COMPETITION
Cypress faces competition from other domestic and foreign high-performance
integrated circuit manufacturers, many of which have advanced technological
capabilities and have increased their participation in the markets in which
Cypress operates. Cypress competes with a large number of companies primarily in
the telecommunications, data communications, personal computer, PC peripheral
and military markets. Competitors, including Advanced Micro Devices ("AMD"),
Altera, Hitachi, Integrated Device Technologies, Integrated Silicon Solutions
Inc., Motorola, Samsung, Texas Instruments and Xilinx, target certain markets
and compete directly with Cypress products. Competition is based on various
factors which 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. Cypress's ability to compete successfully in a rapidly evolving high
performance end of the semiconductor technology spectrum depends on many
factors, including:
- our success in developing new products and manufacturing technologies;
- the delivery performance, quality and price of our products;
- the diversity of our product line;
- the cost effectiveness of our design, development, manufacturing and
marketing efforts;
- the pace at which customers incorporate our products into their systems,
and
- the number and nature of our competitors and general economic conditions.
We believe 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
Cypress currently has 258 patents and approximately 335 additional patent
applications on file with the United States Patent Office and is preparing to
file more patent applications. In addition to factors such as innovation,
technological expertise and experienced personnel, Cypress believes that patents
are becoming increasingly important to remain competitive in the industry and
Cypress has an active program to acquire additional patent and other
intellectual property protection.
Cypress has, and in the future may continue to, enter into technology
license agreements with third parties which give those parties the right to use
patents and other technology developed by Cypress. Some of these agreements also
give Cypress the right to use patents and other technologies developed by such
other parties, some of which involve payment of royalties.
There can be no assurance that patents owned by Cypress will not be
invalidated, circumvented or challenged, or that the rights granted thereunder
will provide competitive advantage to Cypress. Cypress is and may in the future
be involved in litigation with respect to alleged infringement or in litigation
to enforce its intellectual property rights. There can also be no assurance that
license agreements will continue to be available to Cypress on commercially
reasonable terms in the future.
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RISK FACTORS
Except for the historical information contained herein, the discussion in
this Form 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 of
Cypress, that involve risks and uncertainties. We use words such as
"anticipate," "believes," 'expects," "future," "intends," and similar
expressions to identify forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, 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 materially adversely affected.
CYPRESS'S FUTURE OPERATING RESULTS ARE VERY LIKELY TO FLUCTUATE AND THEREFORE
MAY FAIL TO MEET EXPECTATIONS.
Cypress's 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 the expectations of Cypress or others for a
variety of reasons set forth in these Risk Factors. Any downward fluctuation or
failure to meet expectations will likely adversely affect the value of your
investment in our stock. The factors we believe make our results more likely to
fluctuate, and difficult to predict, than results of a typical, non-technology
company our size and age, and which are therefore most likely to produce
departure from expectations, include:
- the intense competitive pricing pressure to which our products are
subject, which can lead to rapid and unexpected declines in average
selling prices;
- 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;
- the need for constant, rapid new product introductions which present an
ongoing design and manufacturing challenge significantly impacted by even
relatively minor errors, and which may never achieve 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.
Also, the performance of the semiconductor industry as a whole is characterized
by cyclical swings in revenue and profitability and these swings may adversely
impact Cypress.
Since 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, particularly in the last month of the quarter.
CYPRESS FACES PERIODS OF INDUSTRY-WIDE SEMICONDUCTOR OVER-SUPPLY WHICH HARM ITS
RESULTS.
The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, its products, and these
fluctuations have helped produce many occasions when supply and demand for the
industry's products are not in balance. In the past, our operating results have
been adversely affected by these industry-wide fluctuations in the demand for
semiconductors, which have resulted in under-utilization of our manufacturing
capacity. In some cases, industry downturns with these characteristics have
lasted more than a year. If these cycles continue, they will materially and
adversely affect our business, financial condition and results of operations.
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CYPRESS'S FINANCIAL RESULTS COULD BE ADVERSELY IMPACTED IF THE MARKETS IN WHICH
IT SELLS ITS PRODUCTS DO NOT GROW.
Cypress's continued success depends in large part on the continued growth
of various electronics industries that use our semiconductors, including the
following industries:
- data communications and telecommunications equipment;
- computers and computer related peripherals;
- automotive electronics;
- industrial controls; and
- customer electronics equipment and military equipment.
A significant portion of our products are incorporated into data
communications and telecommunication end-products. Any decline in the demand for
networking applications, mass storage, telecommunications, cellular base
stations, cellular handsets and other personal communication devices which
incorporate our products could adversely affect our business, financial
condition and operating results. In addition, certain of our products, including
Universal Serial Bus micro-controllers, high frequency clocks and static RAMs,
are incorporated into computer and computer-related products, which have
historically experienced significant fluctuations in demand. In addition, we may
be materially and adversely affected by slower growth in the other markets in
which we sell our products.
CYPRESS IS AFFECTED BY A GENERAL PATTERN OF PRODUCT PRICE DECLINE AND
FLUCTUATIONS WHICH CAN ADVERSELY IMPACT OUR BUSINESS.
Even in the absence of an industry downturn, the average selling prices of
our products historically have decreased during the products' lives, and we
expect this trend to continue. In order to offset these average selling price
decreases, we attempt to manufacture the products more cheaply, to generate
greater unit demand to reduce fixed costs per unit and to introduce new, higher
priced products that incorporate advanced features. If our efforts to achieve
these cost reductions, increased unit demand or new product introductions 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 materially and adversely affected.
In addition to following the general pattern of decreasing average prices
referenced above, the selling prices for certain products, particularly
commodity static RAM products, fluctuate significantly with real and perceived
changes in the balance of supply and demand for these products. Growth in
worldwide supply of static RAMs in recent periods resulted in a decrease in
average selling prices for our products. In the event we are unable to decrease
per unit manufacturing costs faster than the rate at which average selling
prices continue to decline, our business, financial condition and results of
operations will be materially and adversely affected. In addition, we expect our
competitors to invest in new manufacturing capacity and achieve significant
manufacturing yield improvements in the future. These developments could
dramatically increase worldwide supply of static RAM products and associated
downward pressure on pricing.
CYPRESS MAY BE UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS,
AND MAY FACE SIGNIFICANT EXPENSES AS A RESULT OF ONGOING, OR FUTURE, LITIGATION.
Protection of intellectual property rights is crucial to Cypress, since
that is how we keep others from copying the innovations which are central to our
existing and future products. Even though we are not currently, we may become
involved in litigation to enforce our patents or other intellectual property
rights, to protect our trade secrets and know-how, to determine the validity or
scope of the proprietary rights of others, or to defend against claims of
invalidity. This kind of litigation can be expensive, regardless of whether we
win or lose.
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Also, Cypress is now and may again become involved in litigation relating
to alleged infringement by us of others' patents or other intellectual property
rights. This kind of litigation is frequently expensive to both the winning
party and the losing party and takes up large amounts of management's time and
attention. In addition, if we lose in this kind of litigation a court could
require us to pay substantial damages and/or royalties, prohibiting us from
using essential technologies. For these and other reasons, this kind of
litigation could have a material adverse effect on 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 which
give those parties the right to use patents and other technology developed by
us, and which give us the right to use patents and other technology developed by
them. We anticipate that we will continue to enter into this kind of licensing
arrangements in the future; however, it is possible 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, it could have a material adverse effect on our business,
financial condition and results of operations.
Because it is critical to our success that we are able to prevent
competitors from copying our innovations, we 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, employees may breach these agreements, and we may not have adequate
remedies for any breach. In any case, 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 do the laws of
the United States.
CYPRESS'S FINANCIAL RESULTS COULD BE ADVERSELY IMPACTED IF IT FAILS TO DEVELOP,
INTRODUCE AND SELL NEW PRODUCTS OR FAILS TO DEVELOP AND IMPLEMENT NEW
MANUFACTURING TECHNOLOGIES.
Like many semiconductor companies, which frequently operate in a highly
competitive, quickly changing environment marked by rapid obsolescence of
existing products, Cypress's future success depends on its ability to develop
and introduce new products which customers choose to buy. In the last three
years we have introduced and sold an average of 131 new products a year, and
these products have been 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 adversely affected.
For Cypress and many other semiconductor companies, introduction of new
products is a major manufacturing challenge. The new products the market
requires tend to be increasingly complex, incorporating more functions and
operating at greater speed than prior products. Increasing complexity generally
requires smaller features on a chip. This makes manufacturing new generations of
products substantially more difficult than prior products. Ultimately, whether
we can successfully introduce these and other new products depends on our
ability to develop and implement new ways of manufacturing semiconductors. If we
are unable to design, develop, manufacture, market and sell new products
successfully, our business, financial condition and results of operations would
be materially and adversely affected.
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INTERRUPTIONS IN THE AVAILABILITY OF RAW MATERIALS CAN ADVERSELY IMPACT
CYPRESS'S FINANCIAL PERFORMANCE.
Cypress's semiconductor manufacturing operations require raw materials that
must meet exacting standards. We generally have available more than one source
of 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, we would need them to go through a qualification
process. In addition, the raw materials we need for our business could get
harder to obtain as worldwide use of semiconductors increases. Although we have
faced shortages from time to time in the past and on occasion our suppliers have
told us they need more time than expected to fill our orders, to date we have
not experienced any significant interruption in operations as a result of
difficulties in obtaining raw materials for our manufacturing operations.
However, interruption of any raw material source could have a material adverse
effect on our business, financial condition and results of operations.
OPERATIONAL PROBLEMS EXPERIENCED BY ASSEMBLY AND TEST SUBCONTRACTORS USED BY
CYPRESS CAN ADVERSELY IMPACT ITS 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, since we have reduced 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 rely on. 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, ESSENTIAL NATURE OF CYPRESS'S MANUFACTURING ACTIVITIES MAKE THE
COMPANY HIGHLY SUSCEPTIBLE TO MANUFACTURING PROBLEMS AND THESE PROBLEMS CAN HAVE
SUBSTANTIAL NEGATIVE IMPACT WHEN THEY OCCUR.
Making semiconductors is a highly complex and precise process, requiring
production in a tightly controlled, clean environment. Even very small
impurities in our manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer or other factors
can cause a substantial percentage of wafers to be rejected or numerous chips on
each wafer to be nonfunctional. We may experience problems in achieving an
acceptable success rate in the manufacture of wafers, and the likelihood of
facing such difficulties is higher in connection with the transition to new
manufacturing methods. The interruption of wafer fabrication or the failure to
achieve acceptable manufacturing yields at any of our facilities would have a
material adverse effect on 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.
CYPRESS MAY NOT BE ABLE TO USE ALL OF ITS EXISTING OR FUTURE MANUFACTURING
CAPACITY, WHICH CAN NEGATIVELY IMPACT ITS BUSINESS.
Cypress has spent, and expects to continue spending, large amounts of money
to upgrade and increase its wafer fabrication, assembly and test manufacturing
capability and capacity. If we end up not needing this capacity and capability
for any of a variety of reasons, including inadequate demand or a significant
shift in mix of product orders making our existing capacity and capability
inadequate or in excess of actual needs, our fixed costs per semiconductor
produced will increase, which will adversely affect us. In addition, if the need
for more advanced technologies requires accelerated conversion to technologies
capable of manufacturing semiconductors having smaller features, or using larger
wafers, we are likely to face higher operating expenses and the need to
write-off capital equipment made obsolete by the technology conversion, which
could adversely affect our business and results of operations.
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CYPRESS'S OPERATIONS AND FINANCIAL RESULTS COULD BE SEVERELY HARMED BY CERTAIN
NATURAL DISASTERS.
Cypress's headquarters and some manufacturing facilities are located near
major earthquake faults. If a major earthquake or other natural disaster occurs,
we could suffer damages that could materially and adversely affect our business,
financial condition and results of operations.
CYPRESS'S BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WILL BE
ADVERSELY IMPACTED IF IT FAILS TO COMPETE IN ITS HIGHLY COMPETITIVE INDUSTRY AND
MARKETS.
The semiconductor industry is intensely competitive. This intense
competition results in a difficult operating environment for most companies in
the industry, including Cypress, marked 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. If we are
not able to compete successfully in this environment, our business, operating
results and financial condition will be adversely affected. A primary cause of
this highly competitive environment is the strengths of our competitors; the
industry consists of major domestic and international semiconductor companies,
many of which have substantially greater financial, technical, marketing,
distribution and other resources than we do. Cypress faces competition from
other domestic and foreign high performance integrated circuit manufacturers,
many of which have advanced technological capabilities and have increased their
participation in markets which are important to us. Our ability to compete
successfully in a rapidly evolving high performance end of the semiconductor
technology spectrum depends on many factors, including:
- our success in developing new products and manufacturing technologies;
- the quality and price of our products;
- the diversity of our product line;
- the cost effectiveness of our design, development, manufacturing and
marketing efforts;
- the pace at which customers incorporate our products into their systems,
and
- the number and nature of our competitors and general economic conditions.
We believe 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.
CYPRESS MUST BUILD SEMICONDUCTORS BASED ON ITS FORECASTS OF DEMAND, AND CAN END
UP WITH LARGE AMOUNTS OF UNSOLD PRODUCT IF ITS FORECASTS ARE WRONG.
Cypress must order materials and build semiconductors based on its existing
orders, which may be cancelled under many circumstances, and to a greater extent
on its internal forecasts. As a result, we are very dependent on our forecasts
to predict what we think we will be able to sell. Because our markets are
volatile and subject to rapid technology and price changes, our forecasts may be
wrong, and we may make too many or too few of certain products. Also, our
customers frequently place orders requesting product delivery almost immediately
after the order is made, which makes forecasting customer demand all the more
difficult. The above factors also make it difficult to forecast quarterly
operating results. If we are unable to predict accurately the appropriate amount
of product required to meet customer demand, our business, financial condition
and results of operations could be materially adversely affected.
CYPRESS MUST SPEND HEAVILY ON EQUIPMENT TO STAY COMPETITIVE, AND WILL BE
ADVERSELY IMPACTED IF IT IS UNABLE TO SECURE FINANCING FOR SUCH INVESTMENTS.
Semiconductor manufacturers generally must spend heavily on equipment to
maintain or increase manufacturing capacity and capability in order to remain
competitive. In particular, Cypress expects to spend in excess of $100 million
on equipment in 1999 and anticipates significant continuing capital expenditures
in subsequent years. In the past, we have reinvested a substantial portion of
our cash flow from operations in
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capacity expansion and improvement programs. However, our cash flows from
operations depend primarily on average selling prices, which have been
declining, and 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 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 that case 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.
However, such financing may not be available on terms which are satisfactory to
us, in which case our business, financial condition and results of operations
will be adversely impacted.
CYPRESS COMPETES WITH OTHERS TO ATTRACT AND RETAIN KEY PERSONNEL, AND ANY LOSS
OF, OR INABILITY TO ATTRACT, SUCH PERSONNEL WOULD HURT THE COMPANY.
To a greater degree than most non-technology companies, Cypress depends on
the efforts and abilities of certain key management and technical personnel. Our
future success will depend in part upon our ability retain these personnel, and
to attract and retain other highly qualified personnel, particularly product
design engineers. We compete for such personnel with other companies, academic
institutions, government entities and other organizations. Competition for
personnel such as these is intense throughout the technology industry 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 adversely affected.
CYPRESS FACES ADDITIONAL PROBLEMS AND UNCERTAINTIES ASSOCIATED WITH
INTERNATIONAL OPERATIONS THAT COULD ADVERSELY IMPACT IT.
International sales represented 39% of our revenues in 1998 and 36% in
1997. Our offshore assembly and test operations, as well as our international
sales, face risks frequently associated with foreign operations, including
- currency exchange fluctuations,
- political instability,
- changes in local economic conditions,
- the devaluation of local currencies,
- import and export controls, and
- 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 materially and adversely affected.
CYPRESS MUST COMPLY WITH MANY DIFFERENT ENVIRONMENTAL REGULATIONS, WHICH CAN BE
EXPENSIVE.
Cypress must comply with many different federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. This compliance can be expensive. 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 which could
force us to purchase additional equipment or comply with other potentially
costly requirements. If we fail to control the use of, or to adequately restrict
the discharge of, hazardous substances under present or future regulations, we
could face substantial liability or suspension of our manufacturing operations,
which could have a material adverse effect on our business, financial condition
and results of operations.
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CYPRESS DEPENDS ON THIRD PARTIES TO TRANSPORT ITS PRODUCTS AND COULD BE HARMED
IF THESE PARTIES EXPERIENCE PROBLEMS.
Cypress relies on independent carriers and freight forwarders to move its
products between manufacturing plants and to its customers. Cypress has 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 have a materially adverse effect on our business, financial
conditions and results of operations and ultimately impact our relationship with
our customers.
YEAR 2000 READINESS DISCLOSURE
In less than a year, most companies will face a potentially serious problem
because many software applications, operational systems and equipment with
embedded chips or processors may not properly recognize or accurately process
calendar dates beginning in the year 2000, due to the prevalent use of two
digits to represent the year in these systems and equipment.
Like many other companies, the year 2000 issue poses a risk for Cypress.
The year 2000 problem could affect our computers, software and other equipment
we use and operate. This could result in system failures causing disruptions in
operations, including among other things, interruptions in manufacturing, design
and process development operations; temporary disruptions in processing business
transactions; and disruptions in other normal business operations.
Cypress has taken company-wide actions to assess the nature and extent of
work required to prepare its products, systems, equipment and infrastructure for
January 1, 2000. In addition, we have engaged in the process of evaluating our
key suppliers and customers to determine the extent to which our operations are
vulnerable based upon third parties' failure to address their own year 2000
issues. These activities represent our ongoing efforts to address the year 2000
problem that we commenced with the implementation of a year 2000-compliant
accounting software system in 1997.
Cypress's president and executive staff have assumed the responsibility of
managing the impact of the year 2000 problem on all aspects of our operations,
including programs for identification, inventory taking, risk assessment and
cost estimates of problems associated with the year 2000; the plans, remediation
effort and testing methodology to correct those problems; and the development of
contingency plans if some of the corrective actions fail to correct the problem
or do not get implemented in a timely manner. These activities, in varying
phases, are currently in process.
It is our objective to ensure that our internal business (MIS) systems are
compliant by March 1999 and that the rest of our systems, equipment and
infrastructure are compliant by June 1999. Our efforts over the past three
months have shifted in focus from inventory taking and assessment to
remediation, testing, and contingency planning activities. All mission critical
systems, equipment, and infrastructure elements are being tested for year 2000
readiness by June 1999. We have also begun contingency planning efforts,
considering Cypress's entire supply chain and external infrastructure, to ensure
plans will be in place to address any unforeseen year 2000 failures.
Through 1998, Cypress has incurred little cost in addressing the year 2000
problem. In 1999 we expect to incur between two and three million dollars of
expense and capital outlays for remediation, testing and contingency planning
efforts.
In the event Year 2000 issues relating to key customers and suppliers are
not successfully resolved, based on information available to us at present, we
believe that the most reasonably likely worse case scenario is a temporary
disruption in infrastructure service, particularly power and telecommunications,
which could adversely impact supplier deliveries or customer shipments. If
severe disruptions occur in these areas and are not corrected in a timely
manner, a revenue or profit shortfall may result in fiscal year 2000.
Cypress Year 2000 contingency planning efforts are guided by three elements
and specifically expressed in our Year 2000 Mission: (1) Cypress serves its
customers continuously, (2) Cypress maintains continuous
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employment, and (3) Cypress increases shareholder value relative to its
competitors. The executive staff of Cypress is directly responsible for
developing and approving Cypress's Year 2000 contingency planning efforts, and
the team is led by the CEO. The operating assumption that external
infrastructure may be down for up to 2-4 weeks has been used in order to create
a suitable framework for contingency planning efforts, and as a result, Cypress
expects to have plans in place to address any unforeseen year 2000 failures. Our
contingency planning efforts will continue through June 1999, at which time
these activities will be documented and implemented accordingly. A number of
business responses are being actively considered and all should be viewed as
likely for some segment of our customer/supplier base:
- developing second/alternate source suppliers for critical raw materials
and subcontract operations,
- work-in-process inventory "build ahead" in Cypress wafer fab locations,
- finished goods inventory "build ahead" in Cypress/subcontractor assembly
locations,
- increased consignment inventory programs for strategic customers (up to 3
months on customer premises),
- higher year-end 1999 stocking levels for primary Cypress distributors,
- partial/full company shutdown for up to 14 days,
- facility "safe state" plans, including plans to preserve equipment and
the controlled environment of manufacturing facilities (i.e., temperature
and humidity controls) for a period of 2 weeks using self-generated power
in the event of infrastructure shutdown, and
- early payment/collection as well as delayed payment/collection for
Cypress suppliers, customers and employees.
EMPLOYEES
As of January 3, 1999, Cypress and its subsidiaries had 2,901 employees,
compared with 2,770 at the end of fiscal 1997. The majority of this increase
resulted from expansion of Cypress's Philippines assembly and test operations,
which at year-end had 1,047 employees. In conjunction with its 1998
restructuring activity, Cypress reduced its work force by 363 employees. A
majority of the employees were located in Fab 2 in Texas and Fab 3 in Minnesota.
None of Cypress's employees is represented by a collective bargaining agreement,
nor has Cypress ever experienced any work stoppage.
ITEM 2. PROPERTIES
Cypress's 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 1999.
Located immediately adjacent to Cypress's executive offices is one of Cypress's
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 1999. 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 8 of the Consolidated Financial Statements).
Product development and other Cypress staff functions also are located at
the San Jose site. 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, Cypress has 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 Cypress is required to extend the lease or acquire
the property at the end of the lease term.
In December 1988, the Cypress purchased the two undeveloped industrial lots
on either side of its headquarters building. These similarly sized lots,
comprising a total of approximately 8.5 acres, will be
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retained for future expansion of the San Jose building complex. In the third
quarter of 1996, Cypress began operations in a new 162,000-square foot highly
automated assembly and test manufacturing plant in Cavite, the Philippines.
Cypress owns an approximately 100,000 square foot wafer fabrication facility
(Fab 2) in Round Rock, Texas. In 1995, Cypress began construction of a new fab,
Fab 5, adjacent to Fab 2. Fab 5 construction will result in a
225,000-square-foot facility, with a 35,000-square-foot clean room. This
facility's construction is currently on hold. In addition, Cypress also owns
approximately 170,000 square foot wafer fabrication facility (Fab 3) and leases
approximately 100,000 square foot wafer fabrication facility (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 8 of the
Consolidated Financial Statements).
In November 1997, Cypress purchased land and building comprised of
approximately 3.5 acres of land and 58,000-sq. ft. of building in Woodinville,
Washington. The property is the new headquarters of our Computation Products
Division (CPD), previously located in a leased facility in Kirkland, WA.
Cypress leases 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, New Jersey; Raleigh, North
Carolina; Beaverton, Oregon; Trevose, Pennsylvania; and Austin, Houston and
Richardson, Texas. Cypress leases 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; Shanghai, China;
Lehdokkitie, Finland and Bangalore, India.
As of the end of fiscal year 1998, 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 Cypress's headquarters are
available for future expansion. Cypress may also re-utilize the Fab 3 building
space in Minnesota and continue building Fab 5 located in Round Rock, Texas
should the need arise.
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, Cypress has received, and may receive in the future, communications
alleging that its products or its processes may infringe on product or process
technology rights held by others. Cypress is currently and may in the future be
involved in litigation with respect to alleged infringement by Cypress of
another party's patents, or may in the future be involved in litigation to
enforce its patents or other intellectual property rights, to protect its trade
secrets and know-how, to determine the validity or scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Such litigation has in the past and could in the future result in substantial
costs and diversion of management resources and payment of substantial damages
and/or royalties or prohibitions against utilization of essential technologies,
and could have a material adverse effect Cypress's business, financial condition
and results of operations.
During 1998, EMI Group of North America, Inc. ("EMI") filed suit against
Cypress in the Federal Court in Delaware, claiming that Cypress has infringed on
four patents owned by EMI. Cypress and EMI have entered into a license agreement
in February 1999, for one of the four patents in the lawsuit. In return, EMI has
agreed to withdraw two of the four patents from the lawsuit, including the
patent related to the licensing agreement. Cypress has reviewed the charges
related to the remaining two patents and believes that these charges are without
merit, that it does not infringe the patents in question and that the patents
are invalid and/or unenforceable. While no assurance can be given regarding the
outcome of this action, Cypress believes that the final outcome of the matters
will not have a material effect on Cypress's consolidated financial position or
results of operations. Cypress will vigorously defend itself in these matters.
However, because of the nature and inherent uncertainties of litigation, should
the outcome of this action be
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unfavorable, Cypress may be required to pay damages and other expenses, which
could have a material adverse effect on Cypress's financial position and results
of operations.
In January 1998, Cypress was contacted by an attorney representing the
estate of Mr. Jerome Lemelson, charging that Cypress infringes certain patents
owned by Mr. Lemelson. On February 26, 1999, the estate filed suit against
Cypress and 87 other companies. Cypress is in the process of reviewing the
claims to determine their validity and Cypress's potential liability for
infringement, and at this time, Cypress believes that the patents are invalid
and/or unenforceable. While no assurance can be given regarding the outcome of
this action, Cypress believes that the final outcome of the matters will not
have a material effect on Cypress's consolidated financial position or results
of operations. Cypress will vigorously defend itself in this matter; however,
because of the nature and inherent uncertainties of litigation, should the
outcome of this action be unfavorable, Cypress may be required to pay damages
and other expenses, which could have a material adverse effect on Cypress's
financial position and results of operations.
In June 1997, Cypress commenced a declaratory judgment action in the United
States District Court for the District of Nevada against the Li Second Family
Trust ("the Trust"), asking for declaratory relief to the effect that a U.S.
patent relating to a part of the process for manufacturing semiconductors is
unenforceable, invalid and not infringed by Cypress. The Trust has
counter-claimed for patent infringement on the same patent, alleging such patent
covers oxide-isolated integrated circuits. In January 1998, in a related case,
the United States District Court for the Eastern District of Virginia
preliminarily ruled that the patent is unenforceable due to unequitable conduct
by Dr. Li and his attorneys in obtaining the patent. Dr. Li has the right to
file an appeal, although no such appeal had been filed as of March 12, 1999.
Cypress believes it has meritorious defenses to the counter-claim and intends to
defend itself vigorously. While no assurance can be given regarding the outcome
of this action, Cypress believes that the final outcome of the matters will not
have a material effect on Cypress's consolidated financial position or results
of operations. However, should the outcome of this action be unfavorable,
Cypress's business, financial condition and results of operations could be
materially and adversely affected.
On October 2, 1997, Cypress filed an action against Kevin Yourman, Joseph
Weiss, and their associated law offices in the Superior Court of California in
Santa Clara County for malicious civil prosecution in the underlying securities
fraud actions initiated by Messrs. Yourman and Weiss in 1992. The underlying
securities fraud actions were dismissed because no officer of Cypress made any
actionable false or misleading statements or omissions. An appeal affirmed the
lower court's finding that Messrs. Yourman and Weiss failed to put forth
evidence showing a genuine issue of fact with regard to any statements by the
Cypress's officers. A motion by Messrs. Yourman and Weiss to dismiss Cypress's
malicious prosecution action was denied, and was also subsequently denied by the
Supreme Court of California. This action has gone forward into discovery and the
defendants have offered a settlement, which has been refused by Cypress.
Although the results of litigation are unpredictable, Cypress believes it will
prevail. Cypress believes that this action, regardless of its outcome, will have
little, if any effect on Cypress's consolidated financial position or results of
operations.
In June 1998, Cypress was contacted by Lucent Technologies ("Lucent")
regarding the infringement of four or more patents owned by Lucent.
Subsequently, Cypress has notified Lucent that Lucent has infringed on one of
Cypress's patents. Cypress believes that a new cross-licensing agreement will be
finalized with Lucent by the end of March 1999. Cypress believes the outcome of
this action will have little, if any effect on Cypress's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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............. 51 President and Chief Executive Officer 1982
Antonio R. Alvarez........ 42 Executive Vice President, Memory Products Division 1993
and Research and Development
Emmanuel Hernandez........ 43 Executive Vice President, Finance and 1993
Administration, Chief Financial Officer
J. Daniel McCranie........ 55 Executive Vice President, Marketing and Sales 1993
Lothar Maier.............. 44 Vice President, Worldwide Wafer Manufacturing 1994
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 and C-Cube Corporation.
Antonio R. Alvarez joined the Cypress in May 1987 as a senior technical
engineer. Mr. Alvarez was transferred to the 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 took over the
responsibility for Fab I when it was merged with the research and development
department. In January 1998, Mr. Alvarez also became Vice President of Memory
Products. 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 the 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.
Lothar Maier joined Cypress in July 1983 as Manufacturing Engineering
Manager. Mr. Maier assumed full responsibility for Fab I in February 1988, and
held this position until the end of December 1990. Mr. Maier was transferred to
Cypress's subsidiary, Cypress Semiconductor (Minnesota), Inc. in January 1991 as
subsidiary President. In addition, Mr. Maier was promoted to Vice President of
Wafer Fabrication of Cypress in September 1994 and relocated back to San Jose in
the first half of 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Cypress's 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. Cypress has not paid cash
dividends and has no present plans to do so. At January 3, 1999 there were
approximately 2,617 holders of record of Cypress's common stock.
PRICE RANGE OF COMMON STOCK($)
------------------------------
LOW HIGH CLOSE
------ ------ ------
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
Fiscal year ended December 29, 1997:
First Quarter......................................... 11.62 15.25 12.50
Second Quarter........................................ 11.62 15.88 14.50
Third Quarter......................................... 14.19 18.94 15.50
Fourth Quarter........................................ 7.37 15.94 8.63
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED(1)
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating results:
Revenues....................................... $ 486,841 $544,356 $528,385 $596,071 $406,359
Restructuring and other non-recurring costs
(benefits)................................... 58,940 -- (7,018) 17,800 --
Operating income (loss)........................ (127,308) 18,313 81,594 159,171 77,792
Income (loss) before tax....................... (124,856) 24,032 83,505 161,384 80,115
Net income (loss).............................. (110,850) 18,419 53,029 102,477 50,472
Net income (loss) per share
Basic........................................ $ (1.24) $ 0.21 $ 0.66 $ 1.25 $ 0.67
Diluted...................................... $ (1.24) $ 0.21 $ 0.62 $ 1.09 $ 0.60
Weighted average common and common equivalent
shares outstanding
Basic........................................ 89,338 87,888 80,241 81,748 75,618
Diluted...................................... 89,338 94,648 91,604 97,309 88,311
Balance sheet data:
Cash and short-term investments................ $ 152,231 $201,561 $ 93,786 $161,618 $193,275
Working capital................................ 184,080 305,027 126,006 190,580 225,952
Total assets................................... 756,299 956,270 794,047 750,728 555,699
Long term debt and capital lease obligations
(excluding current portion).................. 167,589 219,741 127,895 117,572 111,538
Stockholders' equity........................... 489,101 643,476 510,746 472,099 352,999
- ---------------
(1) Cypress operates on a 52- or 53-week fiscal year. Fiscal year 1998 was a
53-week fiscal year ending on the Sunday closest to December 31. Fiscal
years 1997 and 1996 were 52-week fiscal years ending on the Monday closest
to December 31.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
The Letter to Shareholders and "Management's Discussion and Analysis" may
contain forward-looking statements about the prospects for Cypress as well as
the semiconductor industry more generally including without limitation
statements about increases in gross margin, rate of growth of research and
development expenditures as a percent of revenues, rate of growth of selling,
general and administrative expenses, profitability goals, revenue goals, growth
rate goals, market share goals, market size and growth projections, new product
introductions, planned manufacturing capacity, and efficiency and cost goals.
Actual results could differ materially from those described in the
forward-looking statements as a result of various factors including, but not
limited to, the factors identified in the Letter to Shareholders and the
Management's Discussion and Analysis section, particularly "Factors Affecting
Future Results," as well as the following:
(1) increased competition which could result in lost sales or price
erosion;
(2) changes in product demand by the electronics and semiconductor
industries, which are noted for rapidly changing needs, coupled with an
inability by Cypress to generate product enhancements or new product
introductions which keep pace with or meet those rapidly changing needs;
(3) failure by Cypress to develop or introduce successfully new
products in areas of expected new or increased demand, or development and
introduction of superior new products serving those areas by others;
(4) failure of expected growth in demand for, or areas of expected new
demand for, semiconductor products to materialize;
(5) failure to successfully bring on line and utilize additional
manufacturing capacity, or to transition existing capacity to new uses;
(6) inability to develop and/or adopt more advanced manufacturing
technology;
(7) inability of Cypress's patents or other proprietary rights to
ensure adequate protection against encroachment on Cypress's technology by
competitors; and
(8) failure to attract and/or retain key personnel.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the factors set forth
on the inside front cover, in "Factors Affecting Future Results" and elsewhere.
OVERVIEW
Revenues for Cypress Semiconductor Corporation ("Cypress") decreased 10.6%
to $486.8 million in fiscal 1998 from $544.4 million in fiscal 1997. The net
loss for fiscal 1998 was $110.8 million compared to net income of $18.4 million
in fiscal 1997. The net loss for fiscal 1998 included a restructuring charge of
$58.9 million and other non-recurring charges totaling $27.3 million. Excluding
the restructuring and non-recurring charges, the net loss for fiscal 1998 was
$24.6 million. Cypress incurred a net loss of $1.24 per share, on a diluted
basis, during fiscal 1998 compared to diluted earnings per share of $0.21 per
share in fiscal 1997.
On January 21, 1999, Cypress announced the signing of a definitive
agreement to acquire privately held IC Works, Inc. (ICW). The agreement provides
for Cypress to issue up to 13.7 million shares in exchange for all outstanding
stock and options of ICW. The merger is intended to be accounted for as a
pooling of interests. Completion of the merger is subject to ICW shareholder
approval and other closing conditions. Revenues for ICW during fiscal years
ending March 31, 1998, 1997 and 1996, were $54.1 million, $41.6 million and
$40.0 million, respectively. Net income (loss) for ICW during fiscal years
ending March 31, 1998, 1997 and 1996, was $(10.9) million, $(27.9) million and
$2.5 million, respectively.
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In response to a review by the staff of the Securities and Exchange
Commission, Cypress is revising previously reported financial statements. The
Management's Discussion and Analysis of Operations and Financial Condition and
the consolidated financial statements have been adjusted to reflect adjustments
related to restructuring activity.
On November 16, 1998, 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 $300
million of its securities. Cypress intends to issue shares in relation to the
ICW acquisition once the registration statement is effective. The shelf
registration statement will allow Cypress flexibility regarding the type of
securities it can sell, including common stock, preferred stock and various
forms of debt securities in the future.
Beginning with its 1998 fiscal year end, Cypress ended its fiscal months,
quarters and years on Sundays, rather than Mondays, bringing its fiscal period
ends in line with predominant industry practice. For the year ended January 3,
1999, Cypress had a 53-week year, while fiscal years 1997 and 1996 each had
52-week years. Operating results for this additional week were considered
immaterial to Cypress's consolidated operating results for the year ended
January 3, 1999.
RESULTS OF OPERATIONS
REVENUES
Revenues for fiscal 1998 were $486.8 million, a decrease of $57.5 million
or 10.6% versus revenues for fiscal 1997. This compares with a decrease of $41.5
million or 7.9% from fiscal 1996 to fiscal 1998. Cypress derives its revenues
from the sale of Memory Products and Non-memory Products.
Sales from Memory Products include Static Random Access Memories ("SRAMs")
and multichip modules. Revenues from the sale of Memory Products for 1998
decreased $30.6 million or 13.5% over revenues from the sale of these products
for fiscal 1997. This compares with a decrease of $75.3 million or 27.8% from
fiscal 1996 to fiscal 1998. From fiscal 1997 to fiscal 1998, sales of SRAMs
declined $22.6 million or 10.9% and multichip module sales decreased $8.0
million or 43.9%. Revenues from SRAMs during fiscal 1998 decreased $63.6 million
or 25.5% compared to fiscal 1996. Sales of multichip modules declined $11.7
million or 53.4% from fiscal 1996 to fiscal 1998. The decline in Memory Product
revenues, as compared to fiscal 1997, resulted from both lower average selling
prices ("ASPs") and a decline in unit sales. ASPs and unit sales decreased 11.9%
and 1.9%, respectively, from fiscal 1997 to fiscal 1998. Although ASPs for
Memory Products have decreased compared to fiscal 1997, they have been stable
during the last three quarters of fiscal 1998. Unit sales volume of Memory
Products increased 34.6% comparing fiscal 1998 to fiscal 1996. However, the
increase in unit sales volume was not enough to offset the decline in ASPs.
Non-memory Products include programmable logic products, data communication
devices, computer products and non-volatile memory products. Non-memory products
also include foundry revenues. Foundry revenue represents sales of wafers to
customers. Revenues from the sale of Non-memory Products declined $26.9 million
or 8.5% comparing 1998 to 1997. The decrease related primarily to declines in
the sale of programmable logic products of $18.0 million or 30.3% and data
communication devices of $2.8 million or 2.2% and a decrease in foundry revenue
of $9.1 million or 39.0%. An increase in the sale of computer products of $15.2
million or 22.5% partially offset the decrease. Also contributing to the
decrease was Cypress's decision to cease selling certain non-volatile memory
devices, Erasable Programmable Read-only Memory ("EPROM") at the end of 1997.
The end of revenues from the sale of EPROMs combined with an overall decrease in
the sale of other non-volatile memory products contributed to a decrease of
$12.2 million or 29.6% from fiscal 1998 to fiscal 1997. Revenues from the sale
of Non-memory Products during fiscal 1998 increased $33.7 million or 13.1%
compared to fiscal 1996. The increase related to the rise in the sale of data
communication devices of $33.5 million or 37.1% and computer products of $33.2
million or 67.1% and an increase in foundry revenue of $3.4 million or 31.2%.
The increase was offset by a decrease in the sale of non-volatile memory of
$22.3 million or 43.4% and a decline in the sale of programmable logic products
of $14.1 million or 25.4%.
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As is typical in the semiconductor industry, ASPs of products generally
decline over the lives of such products. The decreases in ASPs continue to be
caused by industry over-supply, particularly with the semiconductor companies
that service the telecommunication and data communication markets, that Cypress
principally serves. To increase revenues, Cypress seeks to expand its market
share in the markets it currently serves and to introduce and sell new products.
Cypress will remain competitive with respect to its pricing to prevent a further
decline in sales.
COST OF REVENUES
Cost of revenues for fiscal 1998 were 75.5% of revenues, compared to 65.6%
of revenues for fiscal 1997 and 57.8% of revenues during fiscal 1996. Cost of
revenues for fiscal 1998 included one-time non-recurring charges totaling $21.7
million. These charges included $15.8 million related to the write-down of
inventory, $3.8 million for the write-off of pre-operating costs and $2.1
million for the write-off of certain equipment. The $15.8 million charge for
incremental inventory reserves arose due to market conditions resulting in the
ongoing, over-supply and continued inventory corrections by end-user customers.
The write-off of pre-operating costs included $2.9 million related to
Cypress's wafer fabrication operation in Bloomington, Minnesota and $0.9 million
related to its assembly and test operations in the Philippines. As a result of
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 totalling $3.8 million, net of
accumulated amortization were included in other assets at December 29, 1997.
The write-off of equipment was related to equipment identified as obsolete
during Cypress's periodic review of equipment and was no longer considered
usable. Excluding these one-time non-recurring charges, cost of revenues as a
percent of revenues for fiscal 1998 would have been 71.0%. The increase in
manufacturing costs as a percent of revenues from fiscal 1996 through to fiscal
1998 continued to be a reflection of lower revenues due to a combination of
declining ASPs and lower unit sales volumes.
Revenues have continued to decline due primarily to lower ASPs. Should ASPs
continue to erode at a rate greater than anticipated, gross margins could be
materially adversely affected. Cypress continues to introduce new products and
new methods of reducing manufacturing costs in order to mitigate the effects of
declining ASPs on its gross margin. In March 1998, Cypress announced
restructuring activities for its domestic wafer fabrication facilities and
offshore back-end manufacturing operations. Activities completed to date have
increased Cypress's manufacturing efficiencies and as a result, its gross margin
has been increasing since the first quarter of fiscal 1998. Cypress expects to
benefit from these restructuring activities in the future.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenditures for fiscal 1998 were $104.9
million or 21.5% of revenues, compared with $93.8 million or 17.2% of revenues
for fiscal 1997 and $84.3 million or 16.0% of revenues for fiscal 1996. R&D
expenditures in fiscal 1998 increased $11.0 million or 11.8% compared to fiscal
1997 and $20.6 million or 24.4% compared to fiscal 1996. $5.4 million of the R&D
spending increase in 1998 from 1997 pertains to incremental depreciation
incurred to reflect the revised useful lives of certain assets impacted by the
decision to upgrade Fab 1 to an eight-inch facility. Increased salaries,
benefits and maintenance expenses account for the rest of the R&D spending
increase. The increase in R&D costs from fiscal 1996 to fiscal 1998 related to
increases in salary and benefit costs, expenses incurred for supplies, equipment
repair and maintenance expenses and amortization and depreciation charges.
R&D expenditures increased from fiscal 1996 through fiscal 1998 as Cypress
continued its effort to accelerate the development of new products and migration
to more advanced process technologies. During 1998, Cypress began utilizing the
0.25 micron process technology for manufacturing purposes and started
development of the 0.18 micron process technology. Even with Cypress's
commitment to increase design capabilities in its design centers, R&D spending
as a percent of revenues is projected to remain relatively constant in the
future. Cypress is continuing to explore new markets and improve its design and
process technologies in an effort to increase revenues and reduce costs.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses for fiscal 1998 were
$83.0 million or 17.0% of revenues, compared to $75.3 million or 13.8% of
revenues for fiscal 1997 and $64.3 million or 12.2% of revenues for fiscal 1996.
SG&A expenses for fiscal 1998 increased by $7.7 million or 10.2% as compared to
fiscal 1997 and by $18.7 million or 29.1% when compared to fiscal 1996. SG&A
spending increased from fiscal 1997 to fiscal 1998 principally because of $2.5
million in costs incurred to reimburse a customer for certain product expenses
incurred, a new sales force training program and higher marketing communication
expenditures. The increase in SG&A spending from fiscal 1996 to fiscal 1998 was
due primarily to additional headcount, increased expenditures resulting from
increased efforts in strategic marketing and customer service and the
implementation of system enhancements. With the exception of variable spending,
such as incentive bonuses and commissions, Cypress expects to keep SG&A spending
relatively constant.
1998 RESTRUCTURING AND OTHER NON-RECURRING COSTS
The semiconductor industry has experienced a significant downturn as a
result of over-capacity from sharply higher manufacturing efficiencies, large
capital investments in production capacity and semiconductor customers moving
towards a "just in time" mode of operating. Cypress has experienced a severe
price-orientated recession, which resulted in declining sales for most of 1996
and during the fourth quarter of 1997, although demand showed signs of recovery.
In the first quarter of 1998, Cypress experienced a further decline in demand
and eventually posted a drop in revenues as well as a significant decrease in
unit shipments. During this first quarter, the semiconductor industry overall
recorded its first quarterly revenue decline after several quarters of improving
demand. Cypress had also experienced a decline in its capacity utilization. In
view of these developments, Cypress determined that a major and rapid move away
from six-inch to eight-inch manufacturing capability was required, as well as
consolidation of its manufacturing operations.
During 1998, Cypress implemented an overall cost reduction plan and
recorded a $58.9 million restructuring reserve. The restructuring entailed:
- The shutdown of Fab 3, located in Bloomington, Minnesota and
consolidation of parts of Fab 3 operations with other operations of
Cypress.
- The discontinuance of the 0.6 micron 256k SRAM production in Fab 2
located in Texas.
- The conversion of an existing research and development fab located in San
Jose (Fab 1) to eight-inch capability in order to be compatible with the
state of the art eight-inch Minnesota manufacturing facility.
- The transfer of Cypress's test operations from its subcontractor,
Alphatec, in Thailand to Cypress's production facility in the
Philippines.
- The restructuring activities described above include the termination of
approximately 850 personnel, primarily from manufacturing both at Cypress
and at Alphatec.
FAB 3 -- The charge related to the shutdown of Fab 3 was $30.2 million. Of
this amount, $26.0 million related to the write-down of equipment held for sale,
$1.7 million related to incremental third party costs expected to be incurred in
the eventual physical removal of the written down assets ("other fixed asset
related charges"), $1.1 million related to severance and other employee related
costs and $1.4 million related to inventory.
Fab 3 assets, which were not upgradable to 8-inch capability, were written
down based on the estimated useful lives of the assets and the salvage value of
the assets. The estimated useful lives were generally two months as a result of
the decision to discontinue production in Fab 3 and the salvage value was
determined based on the estimated sales value of used semiconductor equipment.
Non-upgradable Fab 3 assets were depreciated to their salvage value during the
production phase-down period. Fab 3 assets, which were upgradable to 8-inch
capability, were transferred to Fab 4 production during the third quarter of
1998.
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Beginning in the second quarter of 1998, production was phased down in Fab
3 and in accordance with the restructuring plan, production ceased in July 1998.
From this time, Cypress has held the non-upgradable equipment for sale. However,
due to the over-supply of used semiconductor equipment, a substantial amount of
the equipment remains on hand. Cypress expects to recover the originally
determined salvage value for such equipment, however, no assurance can be given
as to the amount of proceeds which will ultimately be collected.
FAB 2 -- The decision to discontinue manufacturing SRAM products on
Cypress's 0.6 micron 256K SRAM process in Texas resulted in excess equipment and
employee redundancy. Charges related to this decision totaled $21.3 million, of
which $18.0 million related to the write-down of equipment held for sale, $0.3
million related to the write-down of inventory, $1.7 million related to
severance and other employee related costs and $1.3 million of other fixed asset
related charges for incremental third party costs expected to be incurred in the
eventual physical removal of the written down assets and the resolution of
certain related tax matters.
Excess equipment in Fab 2 was written down based on the estimated useful
lives of the assets and the estimated salvage value of the assets. The salvage
value was determined based on the estimated sales value of used semiconductor
equipment. Cypress had the ability and intention to sell all the equipment
immediately, but due to the semiconductor industry slow-down, Cypress recognized
immediate sale of the equipment would be difficult. The equipment was kept in
the fab, ready for demonstration and testing by a willing buyer. Cypress used
the equipment during the production phase-down period through May 1998.
Similar to Fab 3 equipment, some of this equipment remains on hand due to
the over-supply of used semiconductor equipment on the market. Cypress expects
to recover the originally determined salvage value for such equipment, however,
no assurance can be given as to the amount of proceeds which will ultimately be
collected.
FAB 1 AND SAN JOSE OPERATIONS -- The restructuring plan included the
upgrade of Fab 1 to an eight-inch facility to ensure compatibility with
Cypress's Fab 4 manufacturing facility in Minnesota. Fab 1 is used for research
and development purposes. The plan assumed commencement of Fab 1 restructuring
activities during the middle of 1998 with completion by the end of January 1999.
The plan included the disposal of six-inch manufacturing equipment in January
1999 which was not upgradable to eight-inch capability. The remaining net book
value of $6.1 million of such assets is being written off over the estimated
useful life through January 1999. Incremental depreciation charges of $5.4
million, to reflect the revised useful lives of this equipment were included in
research and development costs for 1998 and will continue through January 1999.
Cypress also reserved $1.0 million to write-down the value of certain other
equipment and assets and reserved $1.3 million related to severance and other
employee related costs.
ALPHATEC -- Cypress reserved $5.1 million to provide for the consolidation
of Thailand test activities from Alphatec, Cypress's subcontractor, with
Cypress's Philippines facility. Of this $5.1 million reserve, $1.5 million was
related to production inventories which were no longer useable as a result of
this consolidation, $1.3 million was related to severance costs at the
subcontractor, $1.3 million related to excess equipment and leasehold
improvements which are no longer used and $1.0 million for other fixed asset
related charges for incremental third party costs expected to be incurred in the
eventual physical removal of the written down assets. The assets were considered
held for sale and were written down to their revised carrying value. The
transfer of production from Alphatec to the Philippines facility began during
the second quarter of 1998 and was completed in January 1999, one month later
than originally planned.
RESTRUCTURING STATUS -- Fabs 2 and 3 restructuring activities were
completed in May and July 1998, respectively, consistent with our restructuring
schedule except for the disposal of the equipment. Fab 1 restructuring was not
completed in January 1999 as originally planned. Cypress is evaluating
alternatives to achieve its eight-inch conversion plan and should have
resolution in the first half of 1999. The Alphatec consolidation and transfer
activity was completed in January 1999, one month later than originally planned.
Cypress continues its effort to dispose of assets held for sale, impacted by
these restructuring activities, and expects to recover the originally determined
salvage value for those assets.
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OTHER -- Separate from the restructuring charge, Cypress recorded an
additional $27.3 million, which were recorded as operating expenses. These
charges resulted from changes in market conditions and were considered as part
of ongoing operations. They included 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). These charges are discussed under the respective
captions ("Cost of Sales", "Selling, General and Administrative" and "Interest
and Other Income"), where the charges were recorded.
1996 RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the third quarter of 1996, Cypress announced a restructuring of its
San Jose, California wafer fabrication facility, from a production wafer
fabrication plant to predominantly a research and development wafer fabrication
facility. As a result of this restructuring, Cypress recorded a pre-tax charge
totaling $9.1 million. The charge included $5.9 million for the write-down of
certain excess equipment and $3.2 million for severance and other related
restructuring charges. Substantially all of the reserve has been used as of the
end of 1998.
In the third quarter of 1996, Cypress recorded a non-recurring benefit of
$17.8 million. The benefit was derived from the reversal of the reserve
established in 1995 related to the Texas Instruments ("TI") patent infringement
lawsuit. In July 1996, the Federal Circuit Court of Appeals ("Court") affirmed
the earlier decision of the trial court that Cypress did not infringe on either
of the patents in the suit. In September 1996, the court decided that it would
not hear any appeal filed by the plaintiff regarding this matter and as a result
of this ruling, Cypress reversed the reserve established in 1995. In 1996, TI
filed a petition of certiorari in the United States Supreme Court. In June 1997,
the United States Supreme Court denied TI's petition of certiorari. Accordingly,
adjudication of the case was determined to be final.
In September 1996, Cypress recorded a one-time, pre-tax credit of $3.3
million related to the insurance reimbursement of defense costs incurred in
conjunction with the securities class-action lawsuit. This credit was offset by
$5.0 million of other non-recurring charges related to agreements with certain
companies regarding cross-licensing and other matters.
INTEREST EXPENSE
Interest expense was $10.9 million for fiscal 1998, compared to $7.2
million for fiscal 1997 and $6.9 million for fiscal 1996. Interest expense
incurred during fiscal 1998 is primarily associated with the 6.0% Convertible
Subordinated Notes ("Notes"), which were issued in September 1997 and are due in
2002. The increase in fiscal 1998 is primarily attributable to a full year of
interest related to the Notes during fiscal 1998 compared to three months of
interest incurred during fiscal 1997. Interest incurred during fiscal 1997 also
included expenses from the convertible bond redeemed in March 1997 and the
revolving line of credit. Interest incurred during fiscal 1996 comprised
primarily of interest costs related to the 3.15% Convertible Subordinated Notes
redeemed March 1997 and the revolving line of credit.
INTEREST AND OTHER INCOME
Net interest and other income was $13.3 million for fiscal 1998 compared to
$12.9 million for fiscal 1997 and $8.8 million for fiscal 1996. Net interest and
other income for fiscal 1998 includes 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 amount is offset by a non-recurring, pre-tax charge of $3.1 million recorded
to reflect the decline in value of a certain investment and $1.0 million in
amortization of bond issuance costs. Net interest and other income for fiscal
1997 relates primarily to interest income and a $3.8 million gain from the sale
of Cypress's remaining investment in Vitesse Corporation. Net interest and other
income for fiscal 1996 comprises of interest income of $7.2 million, a credit
for minority interest of $1.5 million, gain from the sale of a portion of
Cypress's investment in Vitesse Corporation of $0.6 million and other
miscellaneous credits and charges.
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TAXES
Cypress's effective tax rates for fiscal years 1998, 1997 and 1996 were
11.2%, 23.4% and 36.5%, respectively. A tax benefit of $14.0 million was
realized during fiscal 1998 compared to expenses of $5.6 million and $30.5
million during fiscal 1997 and fiscal 1996, 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. The decrease in the effective tax rate from fiscal 1996 to
fiscal 1997 was primarily as a result of R&D tax credits and certain tax
benefits related to Cypress's operations in the Philippines.
During 1998, the United States Internal Revenue Service began an
examination of tax returns for fiscal years 1994 through 1996. The examination
is expected to continue through December 1999. Management believes that no
potential adjustments will ultimately result from this examination.
STOCK BASED COMPENSATION
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by Statement of Accounting Standards No. 123 (SFAS 123). As
permitted by SFAS 123, Cypress discloses pro-forma net income (loss) and
pro-forma net income (loss) per share as if it had recorded compensation cost.
The pro-forma effect on net income (loss) and net income (loss) per share is
based on the estimated grant date fair value, as defined by SFAS 123 for awards
granted under the Cypress's 1994 Stock Option Plan and its Employee Stock
Purchase Plan. Inclusive of the pro-forma effect, basic and diluted net loss was
$(141,536) and $(6,431) for 1998 and 1997, respectively. For 1996, pro-forma
basic and diluted net income was $32,490 and $36,190, respectively. Pro-forma
basic and diluted net income (loss) per share was $(1.58), $(0.07) and $0.40 for
fiscal years 1998, 1997 and 1996, respectively. The pro forma net income (loss)
reported for fiscal years 1998, 1997 and 1996 were impacted by a variety of
factors including the number of options granted and the exercise price
associated with these options. The pro forma effect on fiscal year 1998 was also
impacted by the repricing of existing options. The repricing and the option
grants caused an increase in pro forma net loss for fiscal 1998 over the actual
loss reported for fiscal 1998.
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.
MARKET RISK DISCLOSURE
Cypress is exposed to financial market risks, including changes in foreign
currency exchange (FX) rates and interest rates. To mitigate risks associated
with FX rates, Cypress utilizes derivative financial instruments. Cypress does
not use derivative financial instruments for speculative or trading purposes.
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.
Cypress attempts to limit its exposure to changing FX rates through both
operational and financial market instruments. Cypress manufactures its products
in a number of locations around the world, and hence has a cost base that is
well diversified over a number of European and Asian currencies as well as the
U.S. dollar (USD). This diverse base of local currency costs serves to partially
counterbalance the earnings effect of potential changes in value of Cypress's
local currency-denominated revenues. Also, Cypress denominates its third-party
export sales in U.S. dollars, whenever possible.
Short-term exposures to changing FX rates are managed by financial market
transactions, principally through the purchase of forward FX contracts (with
maturities of three months or less) to offset the earnings and cash-flow impact
of the nonfunctional currency-denominated receivables. Forward FX contracts are
denominated in the same currency as the receivable being covered, and the term
of the forward FX contract matches the term of the underlying receivable.
Cypress covers all known and measurable exposed receivables
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denominated in currencies that have a liquid, cost-effective forward foreign
exchange market. The receivables being covered arise from trade transactions and
other firm commitments affecting Cypress.
Cypress does not hedge its foreign currency exposure in a manner that would
entirely eliminate the effects of changes in FX rates on its operations.
Accordingly, Cypress's reported revenues and results of operations have been,
and in the future may be, affected by changes in the FX rates. Cypress has
utilized a sensitivity analysis for the purpose of identifying its market risk,
in relation to underlying transactions that are sensitive to FX rates including
foreign currency forward exchange contracts and nonfunctional
currency-denominated receivables. The net amount that is exposed to changes in
foreign currency rates was subject to a 10% change in the value of the foreign
currency versus the U.S. dollar. Cypress believes it has no material sensitivity
to changes in foreign currency rates on its net exposed derivative financial
instrument position.
A 52 basis-point move in interest rates (10% of Cypress's weighted average
interest rate in 1998) affecting Cypress's floating-rate financial instruments
as of January 3, 1999 would have an immaterial effect on Cypress's pretax
results of operations over the next fiscal year. An increase in interest rates
would not significantly increase interest expense due to the fixed nature of
Cypress's debt obligation.
All of the potential changes noted above are based on sensitivity analyses
performed on Cypress's balances as of January 3, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cypress's cash, cash equivalents and short-term investments totaled $152.2
million at the end of fiscal year 1998, a $49.3 million decrease from the end of
1997.
In 1998, Cypress retired a total of $15.0 million principal of its $175.0
million, 6.0% Convertible Subordinated Notes ("Notes") for $12.9 million,
resulting in a pre-tax net gain of $1.7 million. The net gain was recorded as
interest and other income. The Notes, which were issued in September 1997, are
due October 1, 2002 and contain a coupon rate of 6.0%. The remaining outstanding
Notes are convertible into approximately 6,772,000 shares of common stock and
are callable by Cypress on or after October 2, 2000.
A portion of the proceeds from the notes were used to repay the $49.0
million balance outstanding under the revolving credit facility, acquire
equipment, purchase a building in Woodinville, Washington and for stock
repurchases in 1997. The remaining proceeds have been invested in
interest-bearing investment grade securities and have been used for general
corporate purposes, including capital expenditures to add manufacturing capacity
and capability, development and commercialization of products, working capital
and potential strategic acquisitions or investments.
During 1998, Cypress purchased $82.2 million in capital equipment, a
significant decrease from the $142.3 million purchased in 1997. Cypress
purchased equipment for its domestic wafer fabrication plants, its test and
assembly facility in the Philippines, its backend manufacturing subcontractors
and its San Jose design and technology groups. Equipment purchased for its fabs
is expected to improve wafer manufacturing capacity and capabilities as Cypress
implements new technologies, including its 0.18 and 0.25 micron processes. A
majority of the equipment purchased was for Fab 4 equipment located in Minnesota
to increase the capacity and capability of Fab 4. Equipment purchased for the
Philippines and its subcontractors was used to increase manufacturing capacity
and tool certain packaging capabilities. Capital equipment purchases for the
technology group are expected to enhance and accelerate research and development
capabilities. Capital expenditures in 1999 are expected to be approximately
$122.0 million as Cypress continues its efforts to increase its manufacturing
capabilities and capacity and to enhance its research and development
capabilities. Commitments for purchases beyond the year 1999 are not considered
to be significant.
During 1997, the Board of Directors authorized the repurchase of up to 4.0
million shares of Cypress's common stock. In September 1998, the Board of
Directors authorized the repurchase of up to an additional 10.0 million shares
under the stock repurchase program. Through January 3, 1999, 8.1 million shares
have been repurchased under this entire program for $67.5 million. The
repurchased shares are expected to be used in conjunction with Cypress's 1994
Stock Option Plan and Employee Stock Purchase Plan. During 1998, Cypress
reissued 1,782,000 shares of common stock under such plans. In conjunction with
the authorized
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stock repurchase program, Cypress sold put warrants through private placements
for which Cypress received a net amount of $9.4 million through January 3, 1999.
Cypress has a maximum potential obligation to purchase 4.5 million shares of its
common stock at an aggregate price of $44.5 million as of January 3, 1999. The
puts have various expiration periods through May 1999. Cypress has the right to
settle the put warrants with cash or settle the difference between the exercise
price and the fair market value at the exercise date with stock or cash. It is
Cypress's intent to settle these put warrants with stock and therefore, no
amount was classified out of stockholders' equity in the accompanying
consolidated balance sheets. On February 25, 1999, the Board of Directors
terminated the stock repurchase program.
In February 1997, Cypress called for redemption of all of the 3.15%
Convertible Subordinated Notes which was effective as of March 26, 1997. At the
time of conversion, approximately 85% of the holders elected to convert their
notes into Cypress's common stock, increasing the amount of common stock
outstanding by 6.8 million shares. As a result of holders electing the cash
settlement, Cypress paid out $14.3 million.
In April 1997, Cypress sold capital equipment located in its Minnesota
wafer fabrication facility to Fleet Capital Leasing ("Fleet") in a
sale-leaseback agreement. In October 1997, Cypress entered into a similar
agreement with Comdisco, Inc. ("Comdisco") for other capital equipment located
in Minnesota. Cypress received a total of $28.2 million from Fleet and Comdisco
in exchange for the capital equipment and as a result of the transactions,
recorded an immaterial gain that will be amortized over the life of the leases.
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
the line of credit.
In 1994 and 1995, Cypress entered into three operating lease agreements
with respect to its office and manufacturing facilities in San Jose and
Minnesota, respectively. In April 1996, Cypress entered into an additional lease
agreement for two office facilities in San Jose. These agreements require that
Cypress maintain a specific level of restricted cash or investments to serve as
collateral for these leases and maintain compliance with certain financial
covenants. Cypress's restricted investment balance as of January 3, 1999 and
December 29, 1997 was $59.7 million and $60.1 million, respectively, and is
recorded as other assets on the Balance Sheet. Cypress was in compliance with
its covenants at January 3, 1999.
Cypress believes that existing cash and cash equivalents and cash from
operations will be sufficient to meet present and anticipated working capital
requirements and other cash needs for at least the next twelve months. In the
event that ASPs continue to decline at rates above normal industry levels and
demand continues to be insufficient to offset the effects of such declines,
Cypress's operating results may be adversely impacted causing Cypress to raise
additional capital through debt or equity financing. Although additional
financing may be required, there can be no assurance that it would be available
to Cypress or available at terms Cypress deems satisfactory.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
ASSETS
JANUARY 3, DECEMBER 29,
1999 1997
---------- ------------
Current assets:
Cash and cash equivalents................................. $ 133,772 $ 151,725
Short-term investments.................................... 18,459 49,836
--------- ---------
Total cash, cash equivalents and short-term
investments..................................... 152,231 201,561
Accounts receivable, net (Note 2)......................... 58,692 67,854
Inventories (Note 2)...................................... 58,823 76,925
Other current assets...................................... 13,943 51,740
--------- ---------
Total current assets.............................. 283,689 398,080
--------- ---------
Property, plant and equipment, net (Note 2)................. 347,746 442,661
Assets held for sale........................................ 2,021 --
Other assets (Note 2)....................................... 122,843 115,529
--------- ---------
$ 756,299 $ 956,270
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 50,172 $ 60,857
Accrued compensation and employee benefits................ 19,244 15,967
Other accrued liabilities................................. 4,521 5,505
Deferred income on sales to distributors.................. 12,081 9,636
Income taxes payable...................................... 13,591 1,088
--------- ---------
Total current liabilities......................... 99,609 93,053
--------- ---------
Convertible subordinated notes.............................. 160,000 175,000
Deferred income taxes....................................... -- 36,070
Other long-term liabilities, including minority interest.... 7,589 8,671
--------- ---------
Total liabilities................................. 267,198 312,794
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized;
none issued and outstanding............................ -- --
Common stock, $.01 par value, 250,000 shares authorized;
98,147 issued; 84,859 and 90,684 outstanding........... 981 981
Additional paid-in-capital................................ 437,336 430,716
Retained earnings......................................... 215,422 333,910
--------- ---------
653,739 765,607
Less shares of common stock held in treasury, at cost;
13,288 shares at January 3, 1999 and 7,463 shares at
December 29, 1997...................................... (164,638) (122,131)
--------- ---------
Total stockholders' equity........................ 489,101 643,476
--------- ---------
$ 756,299 $ 956,270
========= =========
See accompanying notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
YEAR ENDED
----------------------------------------
JANUARY 3, DECEMBER 29, DECEMBER 30,
1999 1997 1996
---------- ------------ ------------
Revenues................................................... $ 486,841 $544,356 $528,385
--------- -------- --------
Cost of revenues........................................... 367,352 356,919 305,174
Research and development................................... 104,887 93,842 84,334
Selling, general and administrative........................ 82,970 75,282 64,301
Restructuring and other non-recurring costs (benefits)..... 58,940 -- (7,018)
--------- -------- --------
Total operating costs and expenses............... 614,149 526,043 446,791
--------- -------- --------
Operating income (loss).................................... (127,308) 18,313 81,594
Interest expense........................................... (10,853) (7,197) (6,895)
Interest income and other.................................. 13,305 12,916 8,806
--------- -------- --------
Income (loss) before income taxes.......................... (124,856) 24,032 83,505
(Provision) benefit for income taxes....................... 14,006 (5,613) (30,476)
--------- -------- --------
Net income (loss).......................................... $(110,850) $ 18,419 $ 53,029
========= ======== ========
Net income (loss) per share:
Basic.................................................... $ (1.24) $ 0.21 $ 0.66
Diluted.................................................. $ (1.24) $ 0.21 $ 0.62
Weighted average common and common equivalent shares
outstanding:
Basic.................................................... 89,338 87,888 80,241
Diluted.................................................. 89,338 94,648 91,604
See accompanying notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- -------- --------- -------------
BALANCES AT JANUARY 1,
1996...................... 81,501 $889 $292,713 $262,462 $ (83,965) $472,099
------ ---- -------- -------- --------- --------
Issuance of common stock
under employee stock plans
and other................. 2,434 25 14,577 14,602
Tax benefit resulting from
stock option
transactions.............. 3,894 3,894
Repurchase of common stock
under stock repurchase
program................... (2,837) (32,878) (32,878)
Net income for the year..... 53,029 53,029
------ ---- -------- -------- --------- --------
BALANCES AT DECEMBER 30,
1996...................... 81,098 914 311,184 315,491 (116,843) 510,746
------ ---- -------- -------- --------- --------
Re-issuance of treasury
shares under employee
stock plans and other..... 3,313 26,777 26,777
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)
Net income for the year..... 18,419 18,419
------ ---- -------- -------- --------- --------
BALANCES AT DECEMBER 29,
1997...................... 90,684 981 430,716 333,910 (122,131) 643,476
------ ---- -------- -------- --------- --------
Re-issuance of treasury
shares under employee
stock plans and other..... 1,782 (7,638) 19,767 12,129
Premiums received from put
option issuances.......... 6,620 6,620
Repurchase of common stock
under stock repurchase
program................... (7,607) (62,274) (62,274)
Net loss for the year....... (110,850) (110,850)
------ ---- -------- -------- --------- --------
BALANCES AT JANUARY 3,
1999...................... 84,859 $981 $437,336 $215,422 $(164,638) $489,101
====== ==== ======== ======== ========= ========
See accompanying notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
----------------------------------------
JANUARY 3, DECEMBER 29, DECEMBER 30,
1999 1997 1996
---------- ------------ ------------
Cash flow from operating activities:
Net income (loss)....................................... $(110,850) $ 18,419 $ 53,029
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 112,702 111,361 97,606
Non-cash interest and amortization of debt issuance
costs................................................ 1,034 3,978 2,774
Net gain on early retirement of debt.................... (1,734) -- --
Loss on sale of fixed assets............................ 1,069 -- --
Restructuring costs..................................... 58,940 -- --
Other non-recurring costs............................... 8,827 -- (12,943)
Deferred income taxes................................... (797) 14,782 6,216
Changes in operating assets and liabilities:
Receivables.......................................... 11,166 9,035 36,811
Inventories.......................................... 18,102 (23,818) (24,129)
Other assets......................................... 35,256 (8,239) (7,130)
Accounts payable and accrued liabilities............. (13,483) (11,946) (28,604)
Deferred income...................................... 2,445 (5,266) 1,712
Income taxes payable................................. (22,770) 15,870 (13,117)
--------- --------- ---------
Net cash flow generated from operating activities......... 99,907 124,176 112,225
--------- --------- ---------
Cash flow from investing activities:
Purchase of investments................................. (110,718) (112,185) (198,342)
Sale or maturities of investments....................... 127,195 93,870 276,806
Acquisition of property, plant and equipment............ (82,205) (142,305) (195,280)
Proceeds from sale of equipment......................... 5,390 28,183 --
--------- --------- ---------
Net cash flow used for investing activities............... (60,338) (132,437) (116,816)
--------- --------- ---------
Cash flow from financing activities:
Borrowing from (repayment of) line of credit............ -- (49,000) 49,000
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........................................... -- -- (22,355)
Repurchase of common stock.............................. (62,274) (5,288) (32,878)
Issuance of common stock................................ -- -- 18,496
Re-issuance of treasury shares.......................... 12,130 33,735 --
Premiums received from put options...................... 6,620 2,760 --
Other long-term liabilities, including minority
interest............................................. (1,082) 1,804 2,960
--------- --------- ---------
Net cash flow generated (used) for financing activities... (57,522) 139,867 15,223
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (17,953) 131,606 10,632
Cash and cash equivalents, beginning of year.............. 151,725 20,119 9,487
--------- --------- ---------
Cash and cash equivalents, end of year.................... $ 133,772 $ 151,725 $ 20,119
========= ========= =========
Supplemental disclosures:
Cash paid during the year for:
Interest............................................. $ 10,045 $ 4,585 $ 4,982
Income taxes......................................... $ 98 $ 1,550 $ 45,271
See accompanying notes to Consolidated Financial Statements.
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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 39%, 36% and 27% of
total revenues in 1998, 1997 and 1996, respectively. As of January 3, 1999, all
of Cypress's subsidiaries were wholly owned except for Cypress Semiconductor
(Texas) Inc. ("CTI"), Cypress's wafer fabrication facility in Texas, which is
approximately 17% owned by Altera Corporation ("Altera"). Altera receives a
fixed amount of wafer fab capacity for its investment.
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
1998, 1997 and 1996 ended January 3, 1999, December 29, 1997 and December 30,
1996, respectively. Fiscal year 1998 was a 53-week year ending on the Sunday
closest to December 31 while fiscal years 1997 and 1996 were 52-week years
ending on the Monday closest to December 31. Operating results for this
additional week were considered immaterial to Cypress's consolidated operating
results for the year ended January 3, 1999.
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.
Financial Instruments -- For certain of Cypress's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
other current liabilities, the carrying amounts approximate their fair value due
to the relatively short maturity of these items. The estimated fair market value
of Cypress's investments reasonably estimate their fair values based on market
information. At January 3, 1999, the estimated fair value of the Convertible
Subordinated Notes was $141.8 million.
Cypress has foreign subsidiaries which operate and sell Cypress's products
in various global markets. As a result, Cypress is exposed to changes in foreign
currency exchange rates. Cypress utilizes hedge instruments, primarily forward
contracts to manage its exposure associated with firm third-party transactions
and net asset positions denominated in non-functional currencies. Cypress does
not hold derivative financial instruments for speculative purposes. Forward
contracts are considered identifiable hedges and realized and unrealized gains
and losses are deferred until settlement of the underlying commitments. They are
recorded as other gains or losses when a hedged transaction is no longer
expected to occur. Deferred gains and losses were not significant at January 3,
1999 and December 29, 1999. Foreign currency transaction gains and losses
included in interest and other income were insignificant for the years ended
January 3, 1999, December 29, 1997 and December 30, 1996. At January 3, 1999,
total outstanding purchased forward contracts were immaterial.
The estimated fair values have been determined by Cypress, using available
market information. However, considerable judgement is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented are not necessarily indicative of the amounts that Cypress could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies could have a material effect on the estimated
fair value amounts.
Cash Equivalents and Investments -- Highly liquid investments purchased
with an original maturity of ninety days or less are considered to be cash
equivalents. All Cypress investments are classified as available-
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for-sale. Investments in available-for-sale securities are reported at fair
value with unrealized gains and losses net of related tax, if any, included as a
component of stockholders' equity.
Inventories -- Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market. Market is
based on estimated net realizable value.
Property, Plant and Equipment -- Property, plant and equipment are stated
at cost. Depreciation is computed for financial reporting purposes using the
straight-line method over the estimated useful lives of the assets as presented
below. Leasehold improvements and leasehold interests are amortized over the
shorter of the estimated useful lives of the assets or the remaining term of the
lease. Accelerated methods of computing depreciation are used for tax purposes.
USEFUL LIVES
IN YEARS
------------
Equipment................................................ 3 to 7
Buildings and leasehold improvements..................... 7 to 10
Furniture and fixtures................................... 5
Pre-operating Costs -- Incremental costs incurred in connection with
developing major production capability at new manufacturing plants, including
depreciation, amortization and cost of qualification of equipment and production
processes were capitalized up to December 1997. Pre-operating costs totalling
$3.8 million, net of accumulated amortization were included in other assets at
December 29, 1997. Such costs were being amortized over five years at a rate
based on estimated units to be manufactured during that period. In fiscal 1998,
these costs were written off and at January 3, 1999, no pre-operating costs are
remaining.
Long-Lived Assets -- Long-lived assets held and used by Cypress are
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, all long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
market value, less selling costs.
Revenue Recognition -- Revenues from product sales are generally recognized
upon shipment and a reserve is provided for estimated returns. A portion of
Cypress's sales are made to domestic distributors under agreements which allow
certain rights of return and price protection on products unsold by domestic
distributors. Accordingly, Cypress defers recognition of revenues and profit on
such sales until distributors resell the products.
Cypress sells to certain international distributors with a provision for
price adjustments on certain products. Cypress reserves for all anticipated
price adjustments. 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.
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35
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.
Accounting for Stock-Based Compensation -- Cypress accounts for its stock
option plans and its employee stock purchase plan in accordance with provisions
of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". In accordance with Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", Cypress
provides additional pro-forma disclosures in Note 6.
Comprehensive Income -- In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). Cypress adopted this statement as of the
first quarter of 1998 and has determined that it does not have any changes in
equity (net assets) from non-owner sources.
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 supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for disclosures about products and
services, geographic areas and major customers (see Note 10).
Recent Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes a new model for accounting for derivatives and hedging
activities and supersedes and amends a number of existing accounting standards.
SFAS 133 requires that all derivatives be recognized in the balance sheet at
their fair market value. In addition, corresponding derivative gains and losses
should be either reported in the statement of operations or stockholders equity,
depending on the type of hedging relationship that exists with respect to such
derivatives. Adopting the provisions of SFAS 133, which will be effective in
fiscal year 2000, are not expected to have a material effect on Cypress's
consolidated financial statements.
NOTE 2: BALANCE SHEET COMPONENTS
AVAILABLE-FOR-SALE SECURITIES
Cypress's portfolio of available-for-sale securities consists of the
following:
JANUARY 3, DECEMBER 29,
1999 1997
---------- ------------
(IN THOUSANDS)
Corporate debt securities............................ $101,042 $ 89,557
State and municipal obligations...................... 73,607 94,675
Other................................................ 23,341 48,042
-------- --------
Total available-for-sale securities........ $197,990 $232,274
======== ========
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At January 3, 1999 and December 29, 1997, the net unrealized holding gains and
losses on securities were immaterial. The securities at January 3, 1999 and
December 29, 1997 by contractual maturity are shown below.
JANUARY 3, DECEMBER 29,
1999 1997
---------- ------------
(IN THOUSANDS)
Due in one year or less.............................. $140,944 $190,128
Due after one year through two years................. 57,046 42,146
-------- --------
Total available-for-sale securities........ $197,990 $232,274
======== ========
ACCOUNTS RECEIVABLE, NET
JANUARY 3, DECEMBER 29,
1999 1997
---------- ------------
(IN THOUSANDS)
Accounts receivable, gross........................... $60,310 $71,378
Allowance for doubtful accounts and customer
returns............................................ (1,619) (3,524)
------- -------
Accounts receivable, net................... $58,692 $67,854
======= =======
INVENTORIES, NET
JANUARY 3, DECEMBER 29,
1999 1997
---------- ------------
(IN THOUSANDS)
Raw materials........................................ $ 8,939 $17,900
Work-in-process...................................... 33,096 35,281
Finished goods....................................... 16,788 23,744
------- -------
Total...................................... $58,823 $76,925
======= =======
PROPERTY, PLANT AND EQUIPMENT
JANUARY 3, DECEMBER 29,
1999 1997
---------- ------------
(IN THOUSANDS)
Land................................................ $ 13,533 $ 12,922
Equipment........................................... 620,233 726,363
Buildings and leasehold improvements................ 96,386 69,340
Furniture and fixtures.............................. 6,292 6,543
--------- ---------
Total property, plant and equipment................. 740,944 815,168
Accumulated depreciation and amortization........... (388,698) (372,507)
--------- ---------
Net property, plant and equipment......... $ 347,746 $ 442,661
========= =========
OTHER ASSETS
JANUARY 3, DECEMBER 29,
1999 1997
---------- ------------
(IN THOUSANDS)
Restricted investments............................... $ 59,742 $ 60,112
Long-term investments................................ 57,046 42,146
Other................................................ 6,055 13,271
-------- --------
Total...................................... $122,843 $115,529
======== ========
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NOTE 3: RESTRUCTURING AND OTHER NON-RECURRING COSTS
1998 RESTRUCTURING AND OTHER NON-RECURRING COSTS
During 1998, Cypress implemented an overall cost reduction plan and
recorded a $58.9 million restructuring reserve. The restructuring entailed:
- The shutdown of Fab 3, located in Bloomington, Minnesota and
consolidation of parts of Fab 3 operations with other operations of
Cypress.
- The discontinuance of the 0.6 micron 256k SRAM production in Fab 2
located in Texas.
- The conversion of an existing research and development fab located in San
Jose (Fab 1) to eight-inch capability in order to be compatible with the
state of the art eight-inch Minnesota manufacturing facility.
- The transfer of Cypress's test operations from its subcontractor,
Alphatec, in Thailand to Cypress's production facility in the
Philippines.
- The restructuring activities described above include the termination of
approximately 850 employees primarily from manufacturing both at Cypress
and at Alphatec.
The following table sets forth Cypress's 1998 restructuring expense and
charges taken from the date the restructuring commenced through January 3, 1999.
1998 BALANCE
RESTRUCTURING JANUARY 3,
EXPENSE UTILIZED 1999
------------- -------- -----------
(IN THOUSANDS)
Write-down of inventory(1).................................. $ 3,250 $(3,250) $ --
Severance and other employee related charges(1)............. 5,334 (3,025) 2,309
Other fixed asset related charges(1)........................ 3,030 -- 3,030
Provision for phase-down and consolidation of manufacturing
facilities(1)............................................. 976 (637) 339
------- ------- ------
Total............................................. $12,590 $(6,912) $5,678
======= ======= ======
- ---------------
(1) Classified on the Balance Sheet as part of accrued liabilities.
FAB 3 -- The charge related to the shutdown of Fab 3 was $30.2 million. Of
this amount, $26.0 million related to the write-down of equipment held for sale,
$1.7 million of other fixed asset related charges for incremental third party
costs expected to be incurred in the eventual physical removal of the written
down assets, $1.1 million related to severance and other employee related costs
and $1.4 million related to inventory.
Fab 3 assets, which were not upgradable to 8-inch capability, were written
down based on the estimated useful lives of the assets and the salvage value of
the assets. The estimated useful lives were generally two months as a result of
the decision to discontinue production in Fab 3 and the salvage value was
determined based on the estimated sales value of used semiconductor equipment.
Non-upgradable Fab 3 assets were depreciated down to their salvage value during
the production phase-down period. Fab 3 assets, which were upgradable to 8-inch
capability, were transferred to Fab 4 production during the third quarter of
1998.
In accordance with the restructuring plan, Fab 3 production was phased down
beginning in the second quarter of 1998 and ceased in July 1998. From this time,
Cypress has held the non-upgradable equipment for sale. However, due to the
over-supply of used semiconductor equipment, a substantial amount of the
equipment remains on hand. Cypress expects to recover the originally determined
salvage value for such equipment.
FAB 2 -- The decision to discontinue manufacturing SRAM products on
Cypress's 0.6 micron 256K SRAM process in Texas resulted in excess equipment and
employee redundancy. Charges with this decision totaled $21.3 million, of which
$18.0 million related to the write-down of equipment, $0.3 million related to
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the write-down of inventory, $1.7 million related to severance and other
employee related costs and $1.3 million of other fixed asset related charges for
incremental third party costs expected to be incurred in the eventual physical
removal of the written down assets and the resolution of certain related tax
matters.
Excess equipment in Fab 2 was written down based on the useful lives of the
assets and the estimated salvage value of the assets. Cypress had the ability
and intention to sell all the equipment immediately but due to the semiconductor
industry slow-down, Cypress recognized immediate sale of the equipment would be
difficult. The equipment was kept in the fab, ready for demonstration and
testing by a willing buyer. Cypress used the equipment during the production
phase-down period through May 1998.
Similar to Fab 3 equipment, some of this equipment remains on hand due to
the over-supply of used semiconductor equipment on the market. Cypress expects
to recover the originally determined salvage value for such equipment, however,
no assurance can be given as to the amount of proceeds which will ultimately be
collected.
FAB 1 AND SAN JOSE OPERATIONS -- The restructuring plan included the
upgrade of Fab 1 to an eight-inch facility to ensure compatibility with
Cypress's Fab 4 manufacturing facility in Minnesota. Fab 1 is used for research
and development purposes. The plan assumed commencement of Fab 1 restructuring
activities during the middle of 1998 with completion by the end of January 1999.
The plan included the disposal and write-down of six-inch manufacturing
equipment which was not upgradable to eight-inch capability. The remaining net
book value of $6.1 million of such assets is being written off over the
estimated useful life through January 1999. Incremental depreciation charges of
$5.4 million, to reflect the revised useful lives of this equipment were
included in research and development costs for 1998 and will continue through
January 1999. Cypress also reserved $1.0 million to write-down the value of
certain other equipment and reserved $1.3 million related to severance and other
employee related costs.
ALPHATEC -- Cypress reserved $5.1 million to provide for the consolidation
of Thailand test activities from Alphatec, Cypress's subcontractor, with
Cypress's Philippines facility. Of this $5.1 million reserve, $1.5 million was
related to production inventories which were no longer useable as a result of
this consolidation, $1.3 million was related to severance costs at the
subcontractor and $2.3 million was related to excess equipment and leasehold
improvements which were no longer used. The assets were considered held for sale
and were written down to their salvage 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.
RESTRUCTURING STATUS -- Fabs 2 and 3 restructuring activities were
completed in May and July 1998, respectively, consistent with our restructuring
schedule except for the disposal of the equipment. Fab 1 restructuring was not
completed in January 1999 as originally planned. Cypress is evaluating
alternatives to achieve its eight-inch conversion plan and should have
resolution in the first half of 1999. The Alphatec consolidation and transfer
activity was completed in January 1999, one month later than originally planned.
Cypress continues its effort to dispose of assets held for sale, impacted by
these restructuring activities, and expects to recover the originally determined
salvage value for those assets.
OTHER -- Separate from the restructuring charge, Cypress recorded an
additional charge of $27.3 million, which were recorded as operating expenses.
These charges resulted from changes in market conditions and were considered as
part of ongoing operations. They included 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 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.
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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.
1996 RESTRUCTURING AND OTHER NON-RECURRING COSTS
During 1996, Cypress recorded a pre-tax restructuring and other
non-recurring benefit as detailed below:
1996
--------
Restructuring............................................. $ 9,100
Non-recurring benefit..................................... (17,800)
Other..................................................... 1,682
--------
Total........................................... $ (7,018)
========
The $9.1 million pre-tax charge was a result of Cypress's decision to
restructure its San Jose, California wafer fabrication facility, from a
production wafer fabrication plant to predominantly a research and development
wafer fabrication facility. The charge included $5.9 million for the write-down
of certain excess equipment and $3.2 million for severance and other related
restructuring charges. Substantially all of the reserve has been used as of the
end of 1998.
The $17.8 million benefit was derived from the reversal of the reserve
established in 1995 related to the Texas Instruments ("TI") patent infringement
lawsuit. In July 1996, the Federal Circuit Court of Appeals ("Court") affirmed
the earlier decision of the trial court that Cypress did not infringe on either
of the patents in the suit. In September 1996, the Court decided that it would
not hear any appeal filed by the plaintiff regarding this matter and as a result
of this ruling, Cypress reversed the reserve established in 1995. In 1996, TI
filed a petition of certiorari in the United States Supreme Court. In June 1997,
the United States Supreme Court denied TI's petition of certiorari. Accordingly,
adjudication of the case was determined to be final.
In September 1996, Cypress recorded a one-time, pre-tax credit of $3.3
million related to the insurance reimbursement of defense costs incurred in
conjunction with the securities class-action lawsuit. This credit was offset by
$5.0 million of other non-recurring charges related to agreements with certain
companies regarding cross-licensing and other matters.
NOTE 4: 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.
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NOTE 5: EARNINGS (LOSS) PER SHARE
As required by SFAS 128, following is a reconciliation of the numerators
and the denominators of the basic and diluted per share computation:
1998 1997 1996
------------------------------ ---------------------------- ----------------------------
PER-SHARE PER-SHARE PER-SHARE
LOSS SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- ------ --------- ------- ------ --------- ------- ------ ---------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Basic EPS:
Net income (loss)................ $(110,850) 89,338 $(1.24) $18,419 87,888 $0.21 $53,029 80,241 $0.66
Effects of dilutive securities:
Stock options.................... -- -- -- 4,885 -- 3,423
Convertible debentures........... -- -- 1,130 1,875 3,700 7,940
--------- ------ ------ ------- ------ ----- ------- ------ -----
Diluted EPS:
Net income (loss)................ $(110,850) 89,338 $(1.24) $19,549 94,648 $0.21 $56,729 91,604 $0.62
========= ====== ====== ======= ====== ===== ======= ====== =====
At January 3, 1999 and December 29, 1997, options to purchase 24,774,000
and 5,696,000 shares, respectively, of common stock were outstanding, but were
excluded in the computation of diluted EPS as their effect was anti-dilutive. At
December 30, 1996, no outstanding options to purchase common stock were excluded
in the computation of diluted EPS. Convertible debentures outstanding at January
3, 1999 and December 29, 1997 convertible to 6,772,000 and 7,408,000 shares,
respectively, of common stock were also excluded from diluted EPS as their
effect was anti-dilutive. No shares related to convertible debentures were
excluded at December 30, 1996.
NOTE 6: COMMON STOCK OPTION AND OTHER EMPLOYEE BENEFIT PLANS
1994 STOCK OPTION PLAN
In 1994, Cypress adopted the 1994 Stock Option Plan, which replaced
Cypress's 1985 Incentive Stock Option Plan and the 1988 Directors' Stock Option
Plan (the "Terminated Plans") with respect to future option grants. Under the
terms of the 1994 Stock Option Plan, options may be granted to qualified
employees, consultants, officers and directors of Cypress or its majority-owned
subsidiaries. Options become exercisable over a vesting period as determined by
the Board of Directors and expire over terms not exceeding twenty years from the
date of grant. The option price for shares granted under the 1994 Stock Option
Plan is typically equal to the fair market value of the common stock at the date
of grant. The 1994 Stock Option Plan includes shares that remained available
under the Terminated Plans and provides for an annual increase in shares
available for issuance pursuant to non-statutory stock options equal to 4.5% of
Cypress's outstanding common stock at the end of each fiscal year.
In October 1996, substantially all outstanding options with a share price
in excess of $11.00 per share were cancelled and replaced with new options
having an exercise price of $11.00 per share. A total of 7,083,000 options were
repriced. In January 1998, substantially all outstanding stock options with an
exercise price in excess of $9.75 per share were cancelled and replaced with new
options having an exercise price of $9.75 per share, the fair market value on
the date that the employees accepted the repricing. A total of 10,464,000 shares
were repriced. This repricing excluded the Board of Directors, the Chief
Executive Officer and the Executive staff of Cypress.
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The following table summarizes Cypress's stock option activity and related
weighted average exercise price for each category for the years ended January 3,
1999, December 29, 1997 and December 30, 1996. The weighted average exercise
price for each category presented is also shown in the table below.
SHARES UNDER THE 1994 STOCK OPTION PLAN
1998 1997 1996
----------------- ---------------- ----------------
SHARES PRICE SHARES PRICE SHARES PRICE
------- ------ ------ ------ ------ ------
(IN THOUSANDS EXCEPT PER-SHARE AMOUNTS)
Options outstanding, beginning of year........ 22,277 $ 9.86 21,013 $ 8.94 19,448 $ 9.81
Options cancelled............................. (13,582) 11.44 (1,461) 11.13 (8,855) 14.71
Options granted............................... 16,971 9.40 5,497 12.64 12,202 11.23
Options exercised............................. (892) 6.52 (2,772) 7.62 (1,782) 5.38
------- ------ ------
Options outstanding, end of year.............. 24,774 8.80 22,277 9.86 21,013 8.94
======= ====== ====== ====== ====== ======
Options exercisable at January 3, 1999........ 12,984 $ 8.14
======= ======
All options were granted at an exercise price equal to the market value of
Cypress's stock at the date of grant. The weighted average estimated fair value
at the date of grant, as defined by SFAS 123, for options granted in 1998, 1997
and 1996 was $3.92, $6.07 and $3.14 per option, respectively. The estimated
grant date fair value disclosed by Cypress is calculated using the Black-Scholes
model. The Black-Scholes model, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from Cypress's stock option awards. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated grant date fair value.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for Cypress's stock option awards:
1998 1997 1996
------- ------- -------
Expected life........................................... 7 years 6 years 6 years
Risk-free interest rate................................. 5.41% 6.63% 6.04%
Volatility.............................................. .5467 .5529 .5582
Dividend yield.......................................... 0.00% 0.00% 0.00%
Significant option groups outstanding as of January 3, 1999 and the related
weighted average exercise price and contractual life information, are as
follows:
OUTSTANDING EXERCISABLE
OPTIONS WITH EXERCISE ---------------- ---------------- REMAINING
PRICES RANGE FROM SHARES PRICE SHARES PRICE LIFE (YEARS)
--------------------- ------ ------ ------ ------ ------------
(IN THOUSANDS EXCEPT PER-SHARE AMOUNTS)
$1.00 - $ 8.38....................... 7,754 $ 6.46 4,605 $ 5.27 6.29
$8.39 - $ 9.25....................... 3,673 $ 8.67 2,294 $ 8.57 6.89
$9.26 - $ 9.75....................... 9,314 $ 9.75 4,737 $ 9.75 7.62
$9.76 - $17.56....................... 4,033 $11.24 1,348 $11.50 8.32
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
In 1986, Cypress approved an Employee Qualified Stock Purchase Plan
("ESPP"), which allows eligible employees of Cypress and its subsidiaries to
purchase shares of common stock through payroll deductions. The ESPP consists of
consecutive 24-month offering periods composed of four 6-month exercise periods.
The shares can be purchased at the lower of 85% of the fair market value of the
common stock at the date of commencement of this two-year offering period or at
the last day of each 6-month exercise period. Purchases are limited to 10% of an
employee's eligible compensation, subject to a maximum annual employee
contribution limited to a $25,000 market value (calculated as the employee's
enrollment price multiplied by the number of purchased shares). Of the
10,100,000 shares authorized under the ESPP, 7,320,000 shares were issued
through 1998 including 890,000, 541,000 and 652,000 shares in 1998, 1997, and
1996, respectively.
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Compensation costs (included in pro forma net income and net income per
share amounts) for the grant date fair value, as defined by SFAS 123, of the
purchase rights granted under the ESPP were calculated using the Black-Scholes
model. The following weighted average assumptions are included in the estimated
grant date fair value calculations for rights to purchase stock under the ESPP:
1998 1997 1996
-------- -------- --------
Expected life..................................... 6 months 6 months 6 months
Risk-free interest rate........................... 4.96% 5.80% 5.98%
Volatility........................................ .5371 .5861 .5882
Dividend yield.................................... 0.00% 0.00% 0.00%
The weighted average estimated grant date fair value, as defined by SFAS
123, or rights to purchase stock under the ESPP granted in 1998, 1997 and 1996
were $2.56, $5.49 and $5.37 per share, respectively.
PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
If Cypress had recorded compensation costs based on the estimated grant
date fair value, as defined by SFAS 123, for awards granted under its 1994 Stock
Option Plan and its Employee Stock Purchase Plan, Cypress's pro forma net income
(loss) and earnings per share for the years ended January 3, 1999, December 29,
1997 and December 30, 1996 would have been as follows:
1998 1997 1996
------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Pro forma net income (loss):
Basic............................................. $(141,536) $(6,431) $32,490
Diluted........................................... $(141,536) $(6,431) $36,190
Pro forma net income (loss) per share:
Basic............................................. $ (1.58) $ (0.07) $ 0.40
Diluted........................................... $ (1.58) $ (0.07) $ 0.40
The pro forma effect on net income (loss) and net income (loss) per share
for 1998, 1997 and 1996 is not representative of the pro forma effect on net
income in the future years because it does not take into consideration pro forma
compensation expense related to grants prior to 1995.
TREASURY STOCK
During 1997, the Board of Directors authorized the repurchase of up to 4.0
million shares of Cypress's common stock. In September 1998, the Board of
Directors authorized the repurchase of up to an additional 10.0 million shares
under the stock repurchase program. Through January 3, 1999, 8.1 million shares
have been repurchased under this entire program for $67.5 million. The
repurchased shares are expected to be used in conjunction with Cypress's 1994
Stock Option Plan and Employee Stock Purchase Plan. During 1998, Cypress
reissued 1,782,000 shares of common stock under such plans. In conjunction with
the authorized stock repurchase program, Cypress sold put warrants through
private placements for which Cypress received a net amount of $9.4 million
through January 3, 1999. Cypress has a maximum potential obligation to purchase
4.5 million shares of its common stock at an aggregate price of $44.5 million as
of January 3, 1999. The puts have various expiration periods through May 1999.
Cypress has the right to settle the put warrants with cash or settle the
difference between the exercise price and the fair market value at the exercise
date with stock or cash. It is Cypress's intent to settle these put warrants
with stock and therefore, no amount was classified out of stockholders' equity
in the accompanying consolidated balance sheets. On February 25, 1999, the Board
of Directors terminated the stock repurchase program.
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
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accumulate funds for retirement and hardship. Eligible participants may
contribute up to 15% of their eligible earnings to the Plan Trust. Cypress does
not make contributions to the plan.
Under the New Product Bonus Plan effective for 1997, all qualified
employees are provided bonus payments, which are based on Cypress attaining
certain levels of new product revenue, plus attaining certain levels of
profitability. In 1998 and 1997, $0.7 million and $0.5 million, respectively
were charged to operations in connection with the New Product Bonus Plan. In
1996, under the Profit Sharing Plan, all qualified employees were provided an
equal share of bonus payments, which were based on Cypress achieving a targeted
level of earnings per share. In 1996, no charges to operations were made in
connection with the profit sharing plan.
In 1994, a Key Employee Bonus Plan was established, which provides for
bonus payments to selected employees upon achievement of certain Cypress and
individual performance targets. In 1998, $4.1 million was charged to operations
in connection with this Plan. In 1997 and 1996, there were no charges to
operations in connection with this Plan. Employees eligible under the Key
Employee Bonus Plan can elect to participate in the Deferred Compensation Plan,
which allows eligible employees to defer their salary, bonus and other related
payments. Costs incurred by Cypress for the Deferred Compensation Plan during
fiscal years 1998, 1997 and 1996 were insignificant.
NOTE 7: INCOME TAXES
The components of the provision for income taxes are summarized below.
Income before taxes is principally attributed to domestic operations.
COMPONENTS OF THE PROVISION FOR INCOME TAXES
JANUARY 3, DECEMBER 29, DECEMBER 30,
1999 1997 1996
---------- ------------ ------------
(IN THOUSANDS)
Income (loss) before provision for taxes....... $(124,793) $ 24,032 $83,505
--------- -------- -------
Current tax expense:
U.S. Federal................................. (13,720) $(10,483) $21,481
State and local.............................. -- 1,418 1,706
Foreign...................................... 511 500 1,073
--------- -------- -------
Total current............................. (13,209) (8,565) 24,260
--------- -------- -------
Deferred tax expense (benefit):
U.S. Federal................................. (4,210) 16,033 5,559
State and local.............................. 3,413 (1,855) 657
--------- -------- -------
Total deferred............................ (797) 14,178 6,216
--------- -------- -------
Total................................ $ (14,006) $ 5,613 $30,476
========= ======== =======
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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 3, DECEMBER 29, DECEMBER 30,
1999 1997 1996
---------- ------------ ------------
(IN THOUSANDS)
Statutory rate.................................. 35% 35% 35%
Tax at U.S. statutory rate...................... $(42,810) $ 8,411 $29,227
Foreign earnings................................ (4,153) (1,151) --
State income taxes, net of federal benefit...... 3,413 922 1,536
Tax credits..................................... (3,700) (2,274) --
Net Foreign Sales Corporation (FSC) benefit..... -- (78) (1,548)
Benefit of tax free investments................. (350) (482) (998)
Current year loss with no benefit............... 18,498 -- --
Future benefits not recognized.................. 15,900 -- --
Other, net...................................... (804) 265 2,259
-------- ------- -------
Total......................................... $(14,006) $ 5,613 $30,476
======== ======= =======
The components of the net deferred tax assets at January 3, 1999 and
December 29, 1997, under SFAS 109 were as follows:
JANUARY 3, DECEMBER 29,
1999 1997
---------- ------------
(IN THOUSANDS)
Deferred tax assets:
Deferred income on sales to distributors.................. $ 11,024 $ 9,773
Inventory reserves and basis differences.................. 13,765 12,596
Restructuring and legal reserves.......................... 2,161 9
Asset valuation and other reserves........................ 25,725 12,670
State tax, net of federal tax............................. 420 421
Research and development tax credits...................... 7,377 4,177
Net operating loss........................................ 30,015 --
Other, net................................................ 903 1,122
-------- --------
Total deferred tax assets.............................. 91,390 40,768
-------- --------
Deferred tax liabilities:
Excess of tax over book depreciation...................... (40,709) (40,355)
Other, net................................................ (1,209) (1,210)
-------- --------
Total deferred tax liabilities......................... (41,918) (41,565)
-------- --------
Net deferred tax assets (liabilities)....................... 49,472 $ (797)
Valuation allowance......................................... (49,472) --
-------- --------
Net deferred tax assets (liabilities) after valuation
allowance................................................. $ -- $ (797)
======== ========
Other current assets include current deferred tax assets of $35,573,000 at
December 29, 1997.
No tax benefits associated with disqualifying dispositions of stock options
or employee stock purchase plan shares were 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 December 1999. Management believes that no
potential adjustments will ultimately result from this examination.
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NOTE 8: COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
Cypress leases most of its manufacturing and office facilities under
non-cancelable operating lease agreements that expire at various dates through
2012. These leases require Cypress to pay taxes, insurance, and maintenance
expenses, and provide for renewal options at the then fair market rental value
of the property.
In April 1997, Cypress sold capital equipment located in its Minnesota
wafer fabrication facility to Fleet Capital Leasing ("Fleet") in a
sale-leaseback agreement. In October 1997, Cypress entered into a similar
agreement with Comdisco, Inc. ("Comdisco") for other capital equipment located
in Minnesota. Cypress received a total of $28.2 million from Fleet and Comdisco
in exchange for the capital equipment and as a result of the transactions,
recorded an immaterial gain that is being amortized over the life of the leases.
In 1994 and 1995, Cypress entered into three operating lease agreements
with respect to its office and manufacturing facilities, in San Jose and
Minnesota, respectively. In April 1996, Cypress entered into an additional lease
agreement related to two office facilities in San Jose. These agreements require
quarterly payments that vary based on the London Interbank Offering Rate
("LIBOR"), plus a spread. All leases provide Cypress with the option of either
acquiring the property at its original cost or arranging for the property to be
acquired at the end of the respective lease terms. Cypress is contingently
liable under certain first-loss clauses for up to $52.7 million at January 3,
1999. First loss clauses state that Cypress is potentially liable for any
decline in the value of the property up to a specified percentage. The purchase
option then permits Cypress to acquire the property at the lower value. Based on
management's estimate of the fair value of the properties, no liability was
required to be recorded at January 3, 1999 or December 29, 1997. Furthermore,
Cypress is required to maintain a specific level of restricted cash or
investments to serve as collateral for these leases and maintain compliance with
certain financial covenants. As of January 3, 1999, the amount of restricted
investments recorded was $59.7 million, which is in compliance with these
agreements. These restricted cash or investments are classified as non-current
on the balance sheet.
The aggregate annual rental commitments under non-cancelable operating
leases as of January 3, 1999 are as follows:
FISCAL YEAR (IN THOUSANDS)
----------- --------------
1999................................................... $16,838
2000................................................... 9,522
2001................................................... 4,890
2002................................................... 3,315
2003................................................... 2,720
2004 and thereafter.................................... 4,949
-------
Total................................................ $42,234
=======
Rental expense was approximately $17.7 million in 1998, $14.0 million in
1997 and $7.7 million in 1996.
LITIGATION AND ASSERTED CLAIMS
The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. From time to
time, Cypress has received, and may receive in the future, communications
alleging that its products or its processes may infringe on product or process
technology rights held by others. Cypress is currently and may in the future be
involved in litigation with respect to alleged infringement by Cypress of
another party's patents, or may in the future be involved in litigation to
enforce its patents or other intellectual property rights, to protect its trade
secrets and know-how, to determine the validity or scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Such litigation has in the past and could in the future result in substantial
costs and diversion of management resources and payment of substantial damages
and/or royalties or prohibitions against utilization of essential technologies,
and could have a material adverse effect Cypress's business, financial condition
and results of operations.
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During 1998, EMI Group of North America, Inc. ("EMI") filed suit against
Cypress in the Federal Court in Delaware, claiming that Cypress has infringed on
four patents owned by EMI. Cypress and EMI have entered into a license agreement
in February 1999, for one of the four patents in the lawsuit. In return, EMI has
agreed to withdraw two of the four patents from the lawsuit, including the
patent related to the licensing agreement. Cypress has reviewed the charges
related to the remaining two patents and believes that these charges are without
merit, that it does not infringe the patents in question and that the patents
are invalid and/or unenforceable. While no assurance can be given regarding the
outcome of this action, Cypress believes that the final outcome of the matters
will not have a material effect on Cypress's consolidated financial position or
results of operations. Cypress will vigorously defend itself in these matters.
However, because of the nature and inherent uncertainties of litigation, should
the outcome of this action be unfavorable, Cypress may be required to pay
damages and other expenses, which could have a material adverse effect on
Cypress's financial position and results of operations.
In January 1998, Cypress was contacted by an attorney representing the
estate of Mr. Jerome Lemelson, charging that Cypress infringes certain patents
owned by Mr. Lemelson. On February 26, 1999, the estate filed suit against
Cypress and 87 other companies. Cypress is in the process of reviewing the
claims to determine their validity, and at this time, Cypress believes that the
patents are invalid and/or unenforceable.
While no assurance can be given regarding the outcome of this action,
Cypress believes that the final outcome of the matters will not have a material
effect on Cypress's consolidated financial position or results of operations.
Cypress will vigorously defend itself in this matter; however, because of the
nature and inherent uncertainties of litigation, should the outcome of this
action be unfavorable, Cypress may be required to pay damages and other
expenses, which could have a material adverse effect on Cypress's financial
position and results of operations.
In June 1997, Cypress commenced a declaratory judgment action in the United
States District Court for the District of Nevada against the Li Second Family
Trust ("the Trust"), asking for declaratory relief to the effect that a U.S.
patent relating to a part of the process for manufacturing semiconductors is
unenforceable, invalid and not infringed by Cypress. The Trust has
counter-claimed for patent infringement on the same patent, alleging such patent
covers oxide-isolated integrated circuits. In December 1997, in a related case,
the United States District Court for the Eastern District of Virginia
preliminarily ruled that the patent is unenforceable due to unequitable conduct
by Dr. Li and his attorneys in obtaining the patent. Dr. Li has the right to
file an appeal, although no such appeal had been filed as of March 12, 1999.
Cypress believes it has meritorious defenses to the counter-claim and intends to
defend itself vigorously. While no assurance can be given regarding the outcome
of this action, Cypress believes that the final outcome of the matters will not
have a material effect on Cypress's consolidated financial position or results
of operations. However, should the outcome of this action be unfavorable,
Cypress's business, financial condition and results of operations could be
materially and adversely affected.
On October 2, 1997, Cypress filed an action against Kevin Yourman, Joseph
Weiss, and their associated law offices in the Superior Court of California in
Santa Clara County for malicious civil prosecution in the underlying securities
fraud actions initiated by Messrs. Yourman and Weiss in 1992. The underlying
securities fraud actions were dismissed because no officer of Cypress made any
actionable false or misleading statements or omissions. An appeal affirmed the
lower court's finding that Messrs. Yourman and Weiss failed to put forth
evidence showing a genuine issue of fact with regard to any statements by the
Cypress's officers. A motion by Messrs. Yourman and Weiss to dismiss Cypress's
malicious prosecution action was denied, and was also subsequently denied by the
Supreme Court of California. This action has gone forward into discovery and the
defendants have offered a settlement, which has been refused by Cypress.
Although the results of litigation are unpredictable, Cypress believes it will
prevail. Cypress believes that this action, regardless of its outcome, will have
little, if any effect on Cypress's consolidated financial position or results of
operations.
In June 1998, Cypress was contacted by Lucent Technologies ("Lucent")
regarding the infringement of four or more patents owned by Lucent.
Subsequently, Cypress has notified Lucent that Lucent has infringed on one of
Cypress's patents. Cypress believes that a new cross-licensing agreement will be
finalized with
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Lucent by the end of March 1999. Cypress believes the outcome of this action
will have little, if any effect on Cypress's consolidated financial position or
results of operations.
PURCHASE COMMITMENTS
At January 3, 1999, Cypress had purchase commitments aggregating $55.7
million, principally for manufacturing equipment and facilities. These
commitments relate to purchases to be made in 1999. Purchase commitments beyond
1999 are not considered to be significant. Commitments for 1999 purchases will
be funded through a combination of cash resources, retirement of investments and
the $160.0 million, 6.0% Convertible Subordinated Notes.
NOTE 9: RELATED PARTIES
Between 1992 and 1995, Cypress made cost-basis investments in QuickLogic
Corporation ("QuickLogic") Series D and Series E preferred stock. In June 1996,
Cypress received $4.5 million from QuickLogic, the original intent of which was
to obtain a minority interest in CTI and to secure guaranteed fab capacity.
Cypress classified the $4.5 million as other long-term liabilities in 1996,
awaiting final negotiation of the terms and transaction approval from Altera, an
existing minority interest shareholder. In March 1997, Cypress signed a
definitive agreement with QuickLogic Corporation involving termination of an
existing joint development, licensing and foundry agreement for antifuse Field
Programmable Gate Array ("FPGA") products and the execution of a new foundry
agreement. Under the new agreement, Cypress ceased development, marketing and
selling of antifuse-based FPGA products. In return, QuickLogic paid $4.5
million, which represented $3.5 million of NRE revenue related to the sale of
technology rights and $1.0 million of compensation for inventory and other
assets, and issued shares of QuickLogic common stock that increased Cypress's
equity position in the privately-held QuickLogic to greater than 20%. The $4.5
million cash consideration represented the payment Cypress received in June
1996. Cypress also entered into a five-year wafer-supply agreement to provide
FPGA products to QuickLogic. Revenues and net income contributed by the FPGA
product line during 1997 and 1996 were not significant.
In the first quarter of 1998, Cypress determined that its investment in
QuickLogic had declined in value and the decline in value was not temporary.
Accordingly, Cypress wrote-off its investment in QuickLogic to reflect this
decline.
Cypress recorded sales to QuickLogic of $2.3 million, $11.7 million and
$8.2 million in 1998, 1997 and 1996, respectively. At fiscal year-ends 1998 and
1997, Cypress had a receivable due from QuickLogic of $0.6 million and $1.5
million, respectively.
During 1990, Cypress made a cost-basis investment of $1.0 million in
Vitesse Semiconductor stock. Cypress sold its remaining investment in February
1997 and recorded a gain of $3.8 million in other income.
NOTE 10: SEGMENT INFORMATION
Cypress has two reportable segments, Memory Products and Non-memory
Products. The Memory Products segment includes Static Random Access Memories
("SRAMs") and multichip modules. The Non-memory Products segment includes
programmable logic products, data communication devices, 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 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
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(Fab 4). Memory Products are used by a variety of end-users but the product is
used specifically for the storage and retrieval of information. In contrast to
Memory Products, unit sales of non-Memory Products are generally lower than
Memory Products, but sell at higher gross margins. Some Non-memory Products are
manufactured utilizing less technologically advanced processes. A majority of
wafers for Non-memory Products are manufactured at Cypress's less
technologically advanced six-inch Fab located in Texas (Fab 2). Products in the
Non-memory segment perform non-memory functions such as floating-point
mathematics, store fixed data that is not to be altered during normal machine
operations and data transfer and routing functions of signals throughout a
computer system.
The tables below set forth information about the reportable segments for
fiscal years 1998, 1997 and 1996. Cypress does not allocate income taxes or
non-recurring items to segments. In addition, segments do not have significant
non-cash items other than depreciation and amortization in reported profit or
loss.
BUSINESS SEGMENT NET REVENUES
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Memory............................................. $195,929 $226,566 $271,192
Non-memory......................................... 290,912 317,790 257,193
-------- -------- --------
Total consolidated revenues...................... $486,841 $544,356 $528,385
======== ======== ========
BUSINESS SEGMENT PROFIT (LOSS)
1998 1997 1996
--------- -------- -------
(IN THOUSANDS)
Memory............................................. $ (94,781) $(35,742) $61,384
Non-memory......................................... 26,413 54,055 13,192
Restructuring and other non-recurring (costs)
benefits......................................... (58,940) -- 7,018
Interest income and other.......................... 13,305 12,916 8,806
Interest expense................................... (10,853) (7,197) (6,895)
--------- -------- -------
Income (loss) before provision for income taxes.... $(124,856) $ 24,032 $83,505
========= ======== =======
BUSINESS SEGMENT ASSETS
The following illustrates total assets by segment for the respective years.
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Memory............................................. $301,565 $348,536 $316,369
Non-memory......................................... 93,898 146,905 159,844
Corporate and other................................ 360,836 460,829 317,834
-------- -------- --------
Total consolidated assets........................ $756,299 $956,270 $794,047
======== ======== ========
The Memory and Non-memory segment assets include only those assets that are
reported to the chief operating decision maker for purposes of making decisions
about allocating resources to the segments and assessing their performance.
Assets utilized solely by the Memory or Non-memory segments have been recorded
under the appropriate segment asset category. Assets utilized jointly by both
segments were allocated to the segments based on depreciation charges taken by
the respective segments. Assets that could not be attributed directly to either
segment have been reported under the Corporate and other category.
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BUSINESS SEGMENT DEPRECIATION
The following illustrates depreciation by segment for the respective years.
1998 1997 1996
-------- -------- -------
(IN THOUSANDS)
Memory.............................................. $ 86,905 $ 77,420 $63,121
Non-memory.......................................... 25,797 33,941 34,485
-------- -------- -------
Total consolidated depreciation................... $112,702 $111,361 $97,606
======== ======== =======
GEOGRAPHIC AREA
The following illustrates revenues by geographic locations. Revenues are
attributed to countries based on the customer location.
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
United States...................................... $295,621 $348,228 $346,200
Europe............................................. 87,869 91,203 92,976
Japan.............................................. 49,384 50,507 51,444
Other foreign countries............................ 53,967 54,418 37,765
-------- -------- --------
Total consolidated revenues...................... $486,841 $544,356 $528,385
======== ======== ========
The following illustrates property, plant and equipment by geographic
locations.
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
United States...................................... $275,580 $372,155 $380,309
Philippines........................................ 69,996 67,629 54,980
Other foreign countries............................ 2,170 2,877 2,277
-------- -------- --------
Total consolidated property, plant and
equipment..................................... $347,746 $442,661 $437,566
======== ======== ========
No one end user accounted for greater than 10% of revenues in 1998, 1997 or
1996. Sales to one distributor accounted for greater than 10% of total revenues
in 1998 and 1997. No one distributor accounted for greater than 10% of revenues
in 1996.
NOTE 11: SUBSEQUENT EVENTS
On January 21, 1999, Cypress announced the signing of a definitive
agreement to acquire privately held IC Works, Inc. (ICW). The agreement provides
for Cypress to issue up to 13.7 million shares in exchange for all outstanding
stock and options of ICW. The merger is intended to be accounted for as a
pooling of interests. Completion of the merger is subject to ICW shareholder
approval and other closing conditions. Revenues for ICW during fiscal years
ending March 31, 1998, 1997 and 1996, were $54.1 million, $41.6 million and
$40.0 million, respectively. Net income (loss) for ICW during fiscal years
ending March 31, 1998, 1997 and 1996, were $(10.9) million, $(27.9) million and
$2.5 million, respectively. Revenues and net income for ICW during the nine
months ended December 26, 1998 were $52.8 million and $7.6 million,
respectively.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Cypress Semiconductor Corporation.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 51 present fairly, in all material
respects, the financial position of Cypress Semiconductor Corporation and its
subsidiaries at January 3, 1999 and December 29, 1997 and the results of its
operations and its cash flows for each of the three years in the period ended
January 3, 1999, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
January 25, 1999
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QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
------------------------------------------------------
JANUARY 3, SEPTEMBER 28, JUNE 29, MARCH 30,
1999 1998 1998 1998
------------ ------------- -------- ---------
Revenues................................... $124,165 $126,048 $119,675 $ 116,953
Gross profit............................... 40,993 39,642 36,282 2,571
Net income (loss).......................... (5,558) (1,228) (10,091) (93,973)
======== ======== ======== =========
Net income (loss) per share
Basic.................................... $ (0.07) $ (0.01) $ (0.11) $ (1.03)
======== ======== ======== =========
Diluted.................................. $ (0.07) $ (0.01) $ (0.11) $ (1.03)
======== ======== ======== =========
THREE MONTHS ENDED
------------------------------------------------------
DECEMBER 29, SEPTEMBER 29, JUNE 30, MARCH 31,
1997 1997 1997 1997
------------ ------------- -------- ---------
Revenues................................... $134,134 $146,081 $138,142 $ 125,999
Gross profit............................... 39,596 52,736 51,455 43,650
Net income (loss).......................... 109 7,210 6,140 4,960
======== ======== ======== =========
Net income (loss) per share
Basic.................................... $ 0.07 $ 0.08 $ 0.07 $ 0.06
======== ======== ======== =========
Diluted.................................. $ 0.00 $ 0.08 $ 0.07 $ 0.06
======== ======== ======== =========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The members of our Board of Directors, who are elected annually by a vote
of the stockholders, are as follows:
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
--------------- --- -------------------- --------
T.J. Rodgers........................... 51 President and Chief Executive Officer of 1982
Cypress
Fred B. Bialek......................... 65 Business Consultant 1991
Eric A. Benhamou....................... 43 Chairman of the Board and Chief Executive 1993
Officer of 3COM Corporation
John C. Lewis.......................... 63 Chairman of the Board of Amdahl Corporation 1993
Alan F. Shugart........................ 68 Former Chief Executive Officer of Seagate 1998
Technology Inc.
There are no family relationships between or among any directors or
executive officer of the Company.
T.J. Rodgers is a co-founder of Cypress and has been its President and
Chief Executive Officer since 1982. Mr. Rodgers serves as a director of C-Cube
Corporation.
Fred B. Bialek has been an independent business consultant since November
1986, during which time he has been active in the negotiation and execution of
merger and acquisition transactions for semiconductor and other technology
companies. Mr. Bialek has acted as a consultant to Cypress in certain of its
acquisitions, including Cypress Semiconductor (Minnesota) Inc. ("CMI"),
Cypress's third wafer fabrication facility. Mr. Bialek, who was a founder of
National Semiconductor Corporation, has over 30 years operating experience in
semiconductor and related technology industries.
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Eric A. Benhamou was Vice President and General Manager of 3COM Corporation
("3COM"), a data networking company, from September 1987 to April 1990. From
April 1990 to September 1990, he was Chief Operating Officer of 3COM. In
September 1990, he was promoted to and has since served as Chairman of the
Board, President and Chief Executive Officer of 3COM Corporation. Since August
1998, Mr. Benhamou has served as Chairman of the Board and Chief Executive
Officer of 3COM Corporation. Mr. Benhamou also serves as a director of Netscape
Communications Corporation and Legato Systems Inc.
John C. Lewis has been Chairman of the Board of Amdahl Corporation, a
computer manufacturer, since 1987. He was President of Amdahl from 1977 until
1987, and Chief Executive Officer of Amdahl from 1983 until 1992 and from 1996
through 1997. Mr. Lewis also serves as a director of Vitesse Semiconductor
Corporation, Pinnacle Systems, Inc. and Cygnus Inc.
Alan F. Shugart founded Seagate Technology Inc., a manufacturer of computer
disk drives, in 1979 and served as Chief Executive Officer until July 1998. In
1998, he established Al Shugart International, a management consulting company.
Mr. Shugart also serves as a director of San Disk Corporation, Valence
Technology, Inc., Inktomi Corporation, Siros Technologies, Inc., Sarnoff Digital
Communications, Sierra Imaging, Inc. and Blue Sky Research.
The executive officers of Cypress, who are elected by and serve at the
discretion of the Board of Directors are as follows:
EXECUTIVE
OFFICER
NAME AGE POSITION SINCE
---- --- -------- ---------
T.J. Rodgers........................... 51 President and Chief Executive Officer 1982
Antonio R. Alvarez..................... 42 Vice President, Memory Products Division and 1993
Research and Development
Emmanuel T. Hernandez.................. 43 Vice President, Finance and Administration, 1993
Chief Financial Officer
J. Daniel McCranie..................... 55 Vice President, Marketing and Sales 1993
Lothar Maier........................... 44 Vice President, Worldwide Wafer Manufacturing 1994
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.
Antonio R. Alvarez joined Cypress in May 1987 as a Senior Technical
Engineers. Mr. Alvarez was transferred to the Company's subsidiary, Aspen
Semiconductor Corporation, in April 1988 as the Manager of BiCMOS Technology. In
October 1989, Mr. Alvarez returned to Cypress 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. In January
1998, Mr. Alvarez also became Vice President of Memory Products. 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 T. 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, from 1976
to 1993, Mr. Hernandez held various financial positions with National
Semiconductor Corporation.
J. Daniel McCranie joined Cypress in October 1993 as Vice President of
Marketing and Sales. Prior to joining Cypress, from 1989 to 1993, Mr. McCranie
was President and CEO of SEEQ Technology. 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.
Lothar Maier joined Cypress in July 1983 as Manufacturing Engineering
Manager. Mr. Maier assumed full responsibility for Fab I in February of 1988,
and held this position until the end of December 1990.
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Mr. Maier was transferred to Cypress's subsidiary, Cypress Semiconductor
(Minnesota), Inc. in January 1991 as subsidiary President. In addition, Mr.
Maier was promoted to Vice President of Wafer Fabrication of Cypress in
September, 1994 and relocated back to San Jose in the first half of 1996.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires Cypress's
officers and directors, and persons who own more than ten percent of a
registered class of the Cypress's 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 Cypress with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
Cypress believes that, during the fiscal year ended January 3, 1999, all Section
16(a) filing requirements applicable to its officers, directors and 10%
stockholders were satisfied.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows, as to (i) the Chief Executive Officer, and (ii)
each of the four other most highly compensated executive officers whose salary
plus bonus exceeded $100,000 in fiscal year 1998 (the "Named Executive
Officers"), information concerning all reportable compensation awarded to,
earned by or paid to each such individual for services to Cypress in all
capacities during the three fiscal years ended January 3, 1999,
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES ALL
--------------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) OTHER OPTIONS(#) COMPENSATION
--------------------------- ---- --------- -------- ------- ------------ ------------
T.J. Rodgers...................... 1998 $344,453 $58,238 $ 1,000(3) 200,000 --
President, Chief Executive 1997 $327,626 $ 1,151 $12,199(4) 200,000 $ 1,200(7)
Officer and Director 1996 $278,976 $ 1,250 $ 2,500(3) 300,000 --
J. Daniel McCranie................ 1998 $321,054 $57,937 -- 192,000 $229,165(8)
Vice President, Marketing and 1997 $288,263 $ 1,175 -- 70,000 $ 392(7)
Sales 1996 $259,345 $ 1,250 -- 52,500 $ 600(7)
Antonio R. Alvarez................ 1998 $281,538 $39,680 -- 135,000 --
Vice President, Memory 1997 $228,261 $ 993 -- 52,000 --
Products Division and Research 1996 $196,285 $ 1,250 -- 94,500 --
and Development
Lothar Maier...................... 1998 $238,000 $45,728 $ 8,846(5) 128,000 $ 230(7)
Vice President, Worldwide 1997 $215,818 $ 952 $17,808(6) 60,000 $ 623(7)
Wafer Manufacturing 1996 $180,265 $ 1,250 $88,027 52,500 $ 454(7)
Emmanuel T. Hernandez............. 1998 $246,192 $86,485 -- 233,000 --
Vice President, Finance and 1997 $219,670 $ 993 -- 200,000 $ 577(7)
Administration, and 1996 $180,265 $ 1,250 -- 52,500 $ 600(7)
Chief Financial Officer
- ---------------
(1) Compensation is included in the year earned.
(2) Includes cash bonus awarded to each employee under Cypress's New Product
Bonus Plan in fiscal 1998. Fiscal 1998 bonuses include amounts earned under
Cypress's 1998 Key Employee Bonus Plan by virtue of the success in
accomplishing certain group- and individual-specific goals, in fiscal 1998.
No bonuses were earned under the 1996 Key Employee Bonus Plan or 1997 Key
Employee Bonus Plan; however,
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54
bonuses earned in the fourth quarter of fiscal 1995 were paid in fiscal 1996
and 1997 and were dependent upon each employee's continuous status as an
employee of Cypress at the time of such payment.
(3) Represents cash bonuses of $1,000 and $2,500 earned and paid to Mr. Rodgers
under Cypress's Patent Award Program in fiscal 1998 and 1996 respectively.
(4) Represents cash bonus of $1,500 earned and paid to Mr. Rodgers under
Cypress's Patent Award Program as well as a 14-year service award of $10,699
paid to Mr. Rodgers in fiscal 1997.
(5) Represents cash payout of PTO earned by Mr. Maier of $8,846.
(6) Includes a cash bonus of $1,000 earned and paid to Mr. Maier under Cypress's
Patent Award Program, a 14-year service award of $8,846 paid to Mr. Maier in
fiscal 1997, and a cash payout of PTO earned by Mr. Maier of $7,962.
(7) Represents that portion of Cypress's contribution toward the purchase of
computers made pursuant to its Computer Purchase Program, which is available
to all employees.
(8) Represents forgiveness of a promissory note payable by Mr. McCranie to
Cypress pursuant to the terms of the promissory note.
The following tables set forth information with respect to the stock
options granted to the Named Executive Officers under our stock option plan and
the options exercised by such Named Executive Officers during the fiscal year
ended January 3, 1999 and the options held by the Named Executive Officers at
January 3, 1999.
The Option Grants Table sets forth hypothetical gains or "option spreads"
for the options at the end of their respective ten-year terms, as calculated in
accordance with the rules of the Securities and Exchange Commission. Each gain
is based on an arbitrarily assumed annualized rate of compound appreciation of
the market price of 5% and 10% from the date the option was granted to the end
of the option term and does not represent our projection of future stock price
performance. Actual gains, if any, on option exercises are dependent on the
future performance of our common stock and overall market conditions.
OPTION GRANTS IN FISCAL 1998
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATE OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR(2) PRICE(3) DATE(4) 5%(5) 10%(5)
---- ----------- -------------- -------- ---------- ---------- ----------
T.J. Rodgers................... 200,000 3.24% $ 8.3750 9/17/08 1,053,398 2,669,519
J. Daniel McCranie............. 160,000 3.11% 9.8750 1/30/08 1,162,197 2,945,236
32,000 8.3750 9/17/08
Antonio R. Alvarez............. 100,000 2.19% 8.9375 1/22/08 746,419 1,891,573
35,000 8.3750 9/17/08
Lothar Maier................... 50,000 2.07% 10.0000 2/12/08 725,273 1,837,983
78,000 8.3750 9/17/08
Emmanuel T. Hernandez(6)....... 200,000 3.78% 8.7500 5/15/08 1,274,376 3,229,520
33,000 8.3750 9/17/08
- ---------------
(1) Options granted under Cypress's 1994 Stock Option Plan typically have a
ten-year term, vest over a five-year period of employment and have an
exercise price equal to market value on the date of grant.
(2) Options to purchase an aggregate of 6,162,000 shares of Common Stock of
Cypress were granted to employees during the fiscal year ended January 3,
1999.
(3) The exercise price may be paid by check, cash or delivery of shares that are
already owned.
(4) Options may terminate before their expiration dates if the optionee's status
as an employee or consultant is terminated, upon the optionee's death or
upon an acquisition of Cypress.
(5) Potential realizable value is based on an assumption that the market price
of the stock appreciates at the stated rate, compounded annually, from the
date of grant until the end of the ten-year option term. These values are
calculated based on requirements promulgated by the Securities and Exchange
Commission
54
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and do not reflect Cypress's estimate of future stock price appreciation.
Annual compounding results in total appreciation of 63% (at 5% per year) and
159% (at 10% per year). If the price of Cypress's Common Stock were to
increase at such rates from the price at 1998 fiscal year end ($8.3125 per
share) over the next ten years, the resulting stock prices at 5% and 10%
appreciation would be $13.54 and $21.53, respectively.
(6) Mr. Hernandez was granted options to purchase 200,000 shares of Common Stock
on October 23, 1997 with vesting over 8 years at the rate of 25,000 shares
annually. In 1998, the stock option grant was cancelled and a replacement
option to purchase 200,000 shares of Common Stock was issued with vesting
every quarter beginning in July 1998 at the rate of 12,500 shares per
quarter through October 2001. In addition to the 12,500 shares vesting
quarterly, 25,000 shares vested in October 1998 and 75,000 shares will vest
in October 2001.
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND
FISCAL 1998 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END(1):
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
T.J. Rodgers................ 0 $ 0 1,495,928 605,000 $2,348,419 $0
J. Daniel McCranie.......... 0 $ 0 257,756 281,220 $ 103,347 $0
Antonio R. Alvarez.......... 0 $ 0 229,047 285,651 $ 162,798 $0
Lothar Maier................ 46,108 $184,404 197,488 263,996 $ 15,506 $0
Emmanuel T. Hernandez....... 0 $ 0 251,472 238,486 $ 56,532 $0
- ---------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the options at January 3, 1999 ($8.3125) and the
exercise price of the options.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Overview and Philosophy
The Compensation Committee of the Board of Directors has the responsibility
to review compensation programs and benefits for Cypress's employees generally,
and specifically for the executive officers of Cypress, and has exclusive
authority to grant stock options to the executive officers of Cypress. Cypress
applies a consistent philosophy to compensation for all employees including its
executive officers, based on the premise that the achievements of Cypress result
from the coordinated efforts of all individuals working toward common
objectives. Cypress strives to achieve those objectives through teamwork that is
focused on meeting the defined expectations of customers and stockholders.
Goals of the Company's Compensation Program
The goals of the Compensation Committee are to align executive compensation
with business objectives and performance, and to enable Cypress to attract,
retain and reward executive officers who contribute to the long-term success of
Cypress. Cypress's compensation program for executive officers is based on the
same principles applicable to compensation decisions for all employees of
Cypress:
Competitive Levels of Compensation. Cypress is committed to providing
a compensation program that helps attract and retain the best people in the
industry. To ensure that pay is competitive, Cypress periodically reviews
the compensation practices of other leading companies in the semiconductor
industry. Cypress believes that its compensation levels fall within the
median of industry compensation levels.
Performance-Driven Rewards. Executive officers are rewarded based upon
corporate performance, business unit performance and individual
performance. Corporate performance and business unit
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performance are evaluated by reviewing the extent to which strategic and
business plan goals are met, including such factors as sales, operating
profit, performance relative to competitors and timely new product
introductions. Individual performance is evaluated by measuring
organization progress against set objectives.
Performance and Compensation Feedback. At the beginning of the
performance cycle, key quarterly and annual objectives are set for each
officer. The CEO gives ongoing feedback on performance to each officer. At
the end of the performance cycle, the Compensation Committee evaluates the
extent to which the key objectives have been accomplished, which evaluation
affects decisions on merit increases and stock option grants.
Components of Cypress's Compensation Program
Cypress's compensation program, which consists of cash- and equity-based
compensation, allows Cypress to attract and retain highly skilled officers,
provide useful products and services to customers, enhance stockholder value,
motivate technological innovation and adequately reward its executive officers
and other employees. The components are:
CASH-BASED COMPENSATION:
The Committee sets base salary for officers on the basis of level of
responsibility, prior performance and other factors after reviewing the
compensation levels for competitive positions in the market.
Cypress has a New Product Bonus Plan under which it distributes to all
employees, including executive officers, payments based on Cypress's
achieving certain levels of new product revenue, plus attaining certain
levels of profitability. Cypress believes that all employees share the
responsibility of achieving revenue and profit levels. Under the New
Product Bonus Plan, specific Cypress performance criteria must be met in
each fiscal quarter for employees to be eligible for bonuses. For 1997,
Cypress met these criteria only for the third quarter of fiscal year 1997.
For 1998, Cypress met these criteria only for the third quarter of fiscal
year 1998.
Cypress adopted a Key Employee Bonus Plan effective at the beginning
of fiscal year 1998, in which the Chief Executive Officer, Cypress's Vice
Presidents and certain other key employees participated. Plan participants
would earn bonuses (in each case a percentage of the participant's base
salary) based on Cypress's achievement of a targeted level of sales and
earnings per share, as well as success in accomplishing certain group and
individual specific goals. In 1998 bonuses were paid for quarterly goal
accomplishments, but there were no bonuses paid under the sales and
earnings portions of the plans.
EQUITY-BASED COMPENSATION:
Stock options provide additional incentives to officers to work to
maximize stockholder value. The options become exercisable over a defined
period of employment with Cypress to encourage officers to continue in the
employ of Cypress. In line with its compensation philosophy, Cypress grants
stock options to all employees, commensurate with their potential
contributions to Cypress. Stock options are included as part of the initial
employment compensation package, and are also awarded for promotions and
pursuant to the annual Evergreen Stock Program, which provides long-term
incentives to virtually all employees based on performance and potential
contributions.
Compensation of the Chief Executive Officer
T.J. Rodgers has been President and Chief Executive Officer of Cypress
since its incorporation in 1982. In determining Mr. Rodgers' compensation, the
Committee evaluates corporate performance, individual performance, compensation
paid to other executive officers of Cypress and total compensation (including
salary, bonus and equity compensation) paid to chief executive officers of
comparable companies. In 1998, Mr. Rodgers' annualized salary was $344,453, and
he received cash bonuses of $3,072 under the New Product Bonus Plan, a cash
bonus of $1,000 under Cypress's Patent Award Program and a payment under the Key
56
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Employee Bonus Plan of $40,069. A fundamental tenet of Cypress' compensation
policy, particularly with respect to compensation of the CEO, is to link the
level of compensation obtained to Cypress's performance as measured by
profitability and long-term growth. One way that Cypress establishes this link
is to award Mr. Rodgers with compensation in the form of options to purchase
stock, since the market will reward superior Company performance by increasing
the value of his equity and penalize unsatisfactory performance by diminishing
or eliminating such value. Through his equity ownership in Cypress, which
consisted of 828,946 shares of Common Stock and options to purchase 1,542,594
shares of Common Stock as of the Record Date, Mr. Rodgers shares with the other
stockholders of Cypress a significant stake in the success of Cypress's
business. A second way that Cypress establishes the link between Company
performance and level of compensation is by its bonus plan, which awards
variable compensation based to a substantial degree on an objective measure of
Cypress's profitability and long-term growth. It is the philosophy of Cypress
and this Committee to bias compensation toward this kind of variable
compensation as well as equity awards, meaning that when Cypress performs well,
as principally indicated by profitability, employees, and in particular the CEO,
will be very well compensated, to a level which may exceed the median of
industry compensation levels. When Cypress's performance is below target levels,
however, variable compensation will be limited or non-existent and equity
compensation will not attain the same value, meaning that the CEO's overall
compensation package may well be below industry median levels. During fiscal
year 1998, Cypress failed to achieve its targeted levels of sales and earnings
per share as set forth in the fiscal year 1998 key employee bonus plan.
Consistent with these objectives in 1998, Mr. Rodgers was not awarded a bonus
under the Sales and EPS portions of the Plan. Mr. Rodgers did receive bonuses in
fiscal year 1998 for accomplishments under the quarterly goals portion of the
plan.
COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS
-- John E. Lewis
-- Eric A. Benhamou
Compensation Committee Interlocke and Insider Participation
No member of the Compensation Committee was or is an officer or employee of
Cypress.
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COMPANY STOCK PRICE PERFORMANCE
The following graph shows a five-year comparison of cumulative total return
for Cypress's stock, the Standard & Poor's 500 Stock Index and the S&P
Electronic Index for Semiconductor and Component Manufacturers.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN*
CYPRESS SEMICONDUCTOR
CORP. S&P 500 S&P ELECTRONICS
--------------------- ------- ---------------
JAN-94 100 100 100
JAN-95 171 101 120
JAN-96 187 139 163
DEC-96 215 171 298
DEC-97 128 229 316
JAN-99 123 294 528
-
* Assumes $100 invested on January 3, 1994 in each investment. Total return
assumes reinvestment of dividends. Past results are not an indication of
future investment returns.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Cypress's Common Stock as of March 15, 1999 (the most recent
practicable date) by (i) each person who is known by Cypress to own beneficially
more than 5% of Cypress's Common Stock, (ii) each of Cypress's directors, (iii)
Cypress's Chief Executive Officer and each of the four other most highly
compensated individuals who served as executive officers of Cypress at fiscal
year end (the "Named Officers") and (iv) all individuals who served as directors
or executive officers at fiscal year end as a group:
SHARES BENEFICIALLY OWNED
--------------------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT
--------------------------------------- ----------- ---------
DIRECTORS
T.J. Rodgers(1)........................................... 2,418,101 2.46%
Fred B. Bialek(2)......................................... 345,836 *
Eric A. Benhamou(3)....................................... 112,000 *
John C. Lewis(4).......................................... 124,000 *
Alan F. Shugart(5)........................................ -0- *
NAMED OFFICERS
J. Daniel McCranie(6)..................................... 339,215 *
Antonio R. Alvarez(7)..................................... 254,141 *
Emmanuel T. Hernandez(8).................................. 290,671 *
Lothar Maier(9)........................................... 279,439 *
All directors and executive officers at fiscal year end as a
group
(9 persons)(10)........................................... 4,163,423 4.24%
- ---------------
* Less than 1%.
(1) Mr. Rodgers is also President and Chief Executive Officer of Cypress.
Includes 828,946 shares held directly and options to purchase 1,542,594
shares of Common Stock exercisable within 60 days of the Record Date. Also
includes 46,561 shares of Common Stock issuable upon conversion of
$1,100,000 of Cypress's 6% Convertible Subordinated Notes due 2002.
(2) Represents options to purchase 345,836 shares of Common Stock exercisable
within 60 days of the Record Date.
(3) Represents options to purchase 112,000 shares of Common Stock exercisable
within 60 days of the Record Date.
(4) Represents options to purchase 124,000 shares of Common Stock exercisable
within 60 days of the Record Date.
(5) Mr. Shugart was granted options to purchase 80,000 shares of Common Stock
upon joining Cypress's Board of Directors on September 2, 1998 and does not
have any options exercisable within 60 days of the Record Date.
(6) Includes 48,049 shares held directly. Also includes options held by Mr.
McCranie to purchase 291,166 shares of Common Stock exercisable within 60
days of the Record Date.
(7) Represents options to purchase 254,141 shares of Common Stock exercisable
within 60 days of the Record Date.
(8) Includes 1,003 shares held directly and 12,232 shares transferred to his
children. Also includes options held by Mr. Hernandez to purchase 277,436
shares of Common Stock exercisable within 60 days of the Record Date.
(9) Includes 60,081 shares held directly. Also includes options held by Mr.
Maier to purchase 219,358 shares of Common Stock exercisable within 60 days
of the Record Date.
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(10) Includes 950,331 shares held directly by executive officers and directors
of Cypress. Also includes options to purchase an aggregate of 3,166,531
shares of Common Stock exercisable within 60 days of the Record Date and
46,561 shares of Common Stock issuable upon conversion of T.J. Rodger's
holdings of $1,100,000 of Cypress's 6% Convertible Subordinated Notes due
2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1993, J. Daniel McCranie, Vice President of Marketing and Sales,
incurred $210,000 of indebtedness to Cypress, which indebtedness bore interest
at 4% per annum and was unsecured. In 1995, Cypress and Mr. McCranie agreed to
extend the length of time that such indebtedness was payable by two years, such
that the indebtedness was due on October 7, 1998, provided that in the event Mr.
McCranie was still employed by Cypress on October 7, 1998, the promissory note
would be canceled and the indebtedness forgiven. Consistent with its terms, the
promissory note was cancelled on October 7, 1998 as Mr. McCranie was and still
continues to serve as employee of Cypress.
On April 1, 1998 Cypress entered into a one-year consulting agreement with
Fred B. Bialek, a member of Cypress's Board of Directors. In addition to his
compensation as a member of the Board, Mr. Bialek will be paid an annualized
fixed retainer of $290,000. Prior to its expiration, the consulting agreement is
terminable by either Cypress or Mr. Bialek 30 days following written notice of
such termination.
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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 3, 1999 and
December 29, 1997..................................... 29
Consolidated Statements of Operations for the three
years ended January 3, 1999........................... 30
Consolidated Statements of Stockholders' Equity for the
three years ended January 3, 1999..................... 31
Consolidated Statements of Cash Flows for the three
years ended January 3, 1999........................... 32
Notes to Consolidated Financial Statements............. 33
Report of Independent Accountants...................... 50
(2) FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and qualifying accounts and
reserves.............................................. S-1
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(8) Amendment and Plan of Reorganization by and among Cypress
Semiconductor, CY Acquisition Corporation and IC WORKS.
3.1(1) Restated Certificate of Incorporation, as amended.
3.2(2) Certificate of Amendment of Restated Certificate of
Incorporation, as amended.
3.3(1) Bylaws, as amended.
4.1(5) Lease dated April 12, 1996 between Cypress Semiconductor and
BNP Leasing Corporation.
4.2(5) Credit Agreement dated July 24, 1996 between Cypress
Semiconductor and Bank of America National Trust.
4.3(5) First Amendment to Credit Agreement dated October 10, 1996
between Cypress Semiconductor and Bank of America National
Trust.
4.4(5) Second Amendment to Credit Agreement dated October 10, 1996
between Cypress Semiconductor and Bank of America National
Trust.
4.5(6) Indenture dated as of September 15, 1997, between Cypress
Semiconductor and State Street Bank and Trust Company of
California, N.A. as Trustee, including the form of note.
10.1(1)(7) Form of Indemnification Agreement.
10.2(3)(7) 1994 Stock Option Plan.
10.3(9) Employee Qualified Stock Purchase Plan, as amended.
10.4(7) Bialek Consulting Agreement.
10.5(7) Cypress Semiconductor Corporation 1998 Key Employee Bonus
Plan Agreement.
21.1 Subsidiaries of Cypress Semiconductor.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 62).
27.1 Financial Data Schedule.
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- ---------------
(1) Previously filed as an exhibit to Registration Statement on Form S-1 (No.
33-12153) which became effective on March 4, 1987 and incorporated herein by
reference.
(2) Previously filed as an exhibit to Cypress's Annual Report on Form 10-K for
the fiscal year ended December 28, 1992.
(3) Previously filed as an exhibit to Cypress's Annual Report on Form 10-K for
the fiscal year ended January 3, 1994.
(4) Previously filed as an exhibit to Cypress's Annual Report on Form 10-K for
the fiscal year ended January 2, 1995.
(5) Previously filed as an exhibit to Cypress's Annual Report on Form 10-K for
the fiscal year ended December 30, 1996.
(6) Previously filed as an exhibit to Cypress's Registration Statement on Form
S-3 dated December 19, 1997.
(7) Management compensatory plan, contract or arrangement.
(8) Previously filed as an exhibit to Cypress's Report on Form 8-K dated
February 12, 1999
(9) Previously filed as an exhibit to Cypress's Registration statement on Form
S-8 dated December 10, 1998.
(b) REPORTS ON FORM 8-K
Item Reported ITEM 5. Other Events
Financial Statements Filed None
Date of Filing November 23, 1998
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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
15th day of March 1999.
CYPRESS SEMICONDUCTOR CORPORATION
By: /s/ EMMANUEL HERNANDEZ
------------------------------------
Emmanuel Hernandez,
Chief Financial Officer, Vice
President,
Finance and Administration
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 March 24, 1999
- ------------------------------------- and Director (Principal Executive
T. J. Rodgers Officer)
/s/ EMMANUEL HERNANDEZ Chief Financial Officer Vice March 24, 1999
- ------------------------------------- President, Finance and
Emmanuel Hernandez Administration (Principal Financial
and Accounting Officer)
/s/ ERIC BENHAMOU Chairman of the Board of Directors March 24, 1999
- -------------------------------------
Eric Benhamou
/s/ FRED B. BIALEK Director March 24, 1999
- -------------------------------------
Fred B. Bialek
/s/ JOHN C. LEWIS Director March 24, 1999
- -------------------------------------
John C. Lewis
/s/ AL SHUGART Director March 24, 1999
- -------------------------------------
Al Shugart
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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
----------- ---------- ------------ ---------- ----------- ----------
1996
Allowance for sales returns and
doubtful accounts.................. $2,828,000 $1,779,000 $ -- $ (720,000) $3,887,000
1997
Allowance for sales returns and
doubtful accounts.................. $3,887,000 $ -- $ -- $ (363,000) $3,524,000
1998
Allowance for sales returns and
doubtful accounts.................. $3,524,000 $ -- $410,000 $(2,316,000) $1,618,000
S-1
65
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
2.1(8) Amendment and Plan of Reorganization by and among Cypress
Semiconductor, CY Acquisition Corporation and IC WORKS.
3.1(1) Restated Certificate of Incorporation, as amended.
3.2(2) Certificate of Amendment of Restated Certificate of
Incorporation, as amended.
3.3(1) Bylaws, as amended.
4.1(5) Lease dated April 12, 1996 between Cypress Semiconductor and
BNP Leasing Corporation.
4.2(5) Credit Agreement dated July 24, 1996 between Cypress
Semiconductor and Bank of America National Trust.
4.3(5) First Amendment to Credit Agreement dated October 10, 1996
between Cypress Semiconductor and Bank of America National
Trust.
4.4(5) Second Amendment to Credit Agreement dated October 10, 1996
between Cypress Semiconductor and Bank of America National
Trust.
4.5(6) Indenture dated as of September 15, 1997, between Cypress
Semiconductor and State Street Bank and Trust Company of
California, N.A. as Trustee, including the form of note.
10.1(1)(7) Form of Indemnification Agreement.
10.2(3)(7) 1994 Stock Option Plan.
10.3(9) Employee Qualified Stock Purchase Plan, as amended.
10.4(7) Bialek Consulting Agreement.
10.5(7) Cypress Semiconductor Corporation 1998 Key Employee Bonus
Plan Agreement.
21.1 Subsidiaries of Cypress Semiconductor.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 62).
27.1 Financial Data Schedule.
- ---------------
(1) Previously filed as an exhibit to Registration Statement on Form S-1 (No.
33-12153) which became effective on March 4, 1987 and incorporated herein by
reference.
(2) Previously filed as an exhibit to Cypress's Annual Report on Form 10-K for
the fiscal year ended December 28, 1992.
(3) Previously filed as an exhibit to Cypress's Annual Report on Form 10-K for
the fiscal year ended January 3, 1994.
(4) Previously filed as an exhibit to Cypress's Annual Report on Form 10-K for
the fiscal year ended January 2, 1995.
(5) Previously filed as an exhibit to Cypress's Annual Report on Form 10-K for
the fiscal year ended December 30, 1996.
(6) Previously filed as an exhibit to Cypress's Registration Statement on Form
S-3 dated December 19, 1997.
(7) Management compensatory plan, contract or arrangement.
(8) Previously filed as an exhibit to Cypress's Report on Form 8-K dated
February 12, 1999
(9) Previously filed as an exhibit to Cypress's Registration Statement on Form
S-8 dated December 10, 1998.