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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 28, 2003
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________.
Commission File Number: 1-10079
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CYPRESS SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2885898
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3901 North First Street, San Jose, California 95134-1599
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 943-2600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
Common Stock, $.01 par value New York Stock Exchange
3.75% Convertible Subordinated Notes due 2005 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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): [X] Yes No [ ]
At March 1, 2004, 123,032,476 shares of the registrant's common stock were
outstanding. The market value of voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on June 29,
2003 on the New York Stock Exchange, was approximately $1,400,592,000. Shares of
Common Stock held by each executive officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded from the
foregoing calculation 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 2004 Annual Meeting of
Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of
Part III of this Annual Report on Form 10-K.
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INDEX
PART I ....................................................................................3
ITEM 1. BUSINESS............................................................................3
ITEM 2. PROPERTIES.........................................................................18
ITEM 3. LEGAL PROCEEDINGS..................................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................19
PART II ...................................................................................20
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...........20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...............................................20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..........................35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.......................................................................79
ITEM 9A. CONTROLS AND PROCEDURES............................................................79
PART III ...................................................................................79
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................80
ITEM 11. EXECUTIVE COMPENSATION.............................................................80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................80
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................................80
PART IV ...................................................................................80
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....................80
SIGNATURES ..................................................................................114
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PART I
ITEM 1. BUSINESS
The discussion in 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 that involve risks and uncertainties, including,
but not limited to, statements as to future operating results and business
plans, our prospects and the prospects of the semiconductor industry generally,
and statements as to the cost savings and productivity improvements, the
proportion of parts assembled in our Philippines factory, pressure on and trends
for average selling prices, investments by competitors in manufacturing capacity
and productivity yields, entering into licensing arrangements with third
parties, capital expenditures, future acquisitions, the financing of SunPower
Corporation, the impact of SunPower Corporation on future financial results, the
general economy and its impact to the market segments we serve, changing
environment and the cycles of the semiconductor industry, competitive pricing
and the rate at which new products are introduced, our expected product revenue
in the automotive sector, our outlook for fiscal 2004, our expected revenue for
fiscal 2004, our expected improvements in gross margin in fiscal 2004, our
expectations to generate positive cash flow from operations in fiscal 2004,
successful integration and achieving the objectives of the acquired businesses,
cost goals emanating from manufacturing efficiencies, adequacy of cash and
working capital, our intention with respect to terminating the conversion rights
associated with our $600 million convertible subordinated notes, and other
liquidity risks. We use words such as "anticipates," "believes," "expects,"
"future," "intends" and similar expressions to identify forward-looking
statements. Our actual results could differ materially from those projected in
the forward-looking statements for any reason, including the factors set forth
in Risk Factors and elsewhere in this Report.
GENERAL
We design, develop, manufacture and market a broad line of
high-performance digital and mixed-signal integrated circuits for a broad range
of markets including networking, wireless infrastructure and handsets,
computation, consumer, automotive, and industrial. We have four product
divisions and four subsidiaries organized into two business segments -- Memory
and Non-Memory. Our product divisions -- Memory, Data Communications, Timing
Technology and Personal Communications -- and our four subsidiaries -- Silicon
Light Machines, Cypress MicroSystems, Silicon Magnetic Systems and SunPower
Corporation -- are the core internal reporting entities, with all product
divisions except Memory, and all subsidiaries aggregated into our Non-Memory
business. In addition, we report on our product offerings by market segment in
order to sharpen our focus on serving end markets. These four market segments
are: Wide Area Networks and Storage Area Networks, which focus on networking and
telecommunications applications; Wireless Infrastructure and Wireless Terminals,
which focus on wireless base stations and handsets; Computation and Consumer,
which focus on gaming, video, personal computer, and other consumer
applications; and Cypress subsidiaries, which focus on emerging technologies and
related market development. Refer to Note 20 of our Consolidated Financial
Statements for further information related to our business and market segments.
Cypress was incorporated in California in December 1982. The initial
public offering of our common stock occurred in May 1986, at which time our
common stock commenced trading on the NASDAQ National Market. In February 1987,
we reincorporated in Delaware and on October 17, 1988, we listed our common
stock on the New York Stock Exchange.
Cypress makes available its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or Section 15 (d) of the
Securities Exchange Act of 1934 free of charge on our website, www.cypress.com,
as soon as reasonably practicable after we electronically file such material
with or furnish such material to the Securities and Exchange Commission.
PRODUCTS
Cypress focuses on the design and manufacture of higher-margin,
proprietary products with advanced features and functions, which tend to be more
resistant to market volatility and trends than commodity type products. Cypress
develops proprietary and higher-value products both in its Memory and Non-Memory
businesses. Cypress also designs, manufactures and sells commodity type
products. We sell wireless, wireline and other products to leading manufacturers
in networking, wireless infrastructure and handsets, computation, consumer,
automotive, industrial and other business segments.
A significant number of the wafers we produce for memory products are
manufactured at our technologically advanced, 8-inch wafer fabrication facility
in Bloomington, Minnesota, which we refer to as Fab 4. A majority of the wafers
we produce for non-memory products are manufactured at our 6-inch production
facility in Round Rock, Texas, which we refer to as Fab 2. For non-core
technologies, Cypress purchases wafers from outside facilities, or foundries, a
practice that is known as outsourcing. Outsourcing enables Cypress to quickly
bring to market products manufactured with processes that are different than the
high-volume processes needed to maximize the profitability of its fabrication
facilities. These products generally target markets where fast time-to-market
and leading-edge feature sets are the primary criteria for success.
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Please refer to Note 20 of the consolidated financial statements
included in this report for detailed information about the composition of
revenues from our Memory and Non-Memory products business segments.
MEMORY PRODUCTS
Our Memory business--driven by our Memory Products Division--designs and
produces static random access memories (SRAMs). These memories are used to store
and retrieve data in networking, wireless infrastructure and handsets,
computation, consumer, automotive, industrial and other electronic systems. Many
Cypress SRAMs are manufactured with leading-edge process technology. Migrating
to advanced processes and reducing manufacturing costs continue to be important
criteria for success in the memory business, particularly in commodity products.
The SRAM market is characterized by the need for many different
combinations of density (number of bits per memory circuit), organization
(number of bits available to the user in a single access of the RAM),
performance characteristics (number of bits transferred per cycle) and levels of
power consumption (low-power and ultra-low-power devices required for portable,
battery-operated equipment). Cypress offers a broad selection of SRAM products,
including high-speed synchronous SRAMs, high-performance MicroPower(TM) SRAMs
and fast asynchronous SRAMs. Cypress's memory portfolio includes the following
devices:
Double Data Rate (DDR) SRAMs. DDR SRAMs target network applications and
servers that operate at data rates up to 400 MHz. Initial product densities
include 18-Mbit devices with a variety of input/output (I/O) voltages, bus
widths and package options.
Fast Asynchronous SRAMs. Cypress markets a wide selection of fast
asynchronous SRAMs with densities ranging from 16 Kbits to 16 Mbits. Our fast
asynchronous portfolio includes the high-performance 16-bit-wide and 24-bit-wide
families, which are optimized for the latest generation of fast digital signal
processors. These memories are available in many combinations of bus widths,
packages and temperature ranges.
More Battery Life(TM) (MoBL(R)) and MicroPower SRAMs. Cypress's More
Battery Life SRAMs, the flagship of our low-power memory product line,
significantly increase battery life and talk time in wireless products such as
cellular phones. MoBL and other Cypress MicroPower devices rank among the
industry's lowest-power devices. An increasing share of Cypress's micropower
business comes from pseudo-SRAM (PSRAM) products with a one-transistor (1T)
architecture. These products offer higher density than standard six-transistor
cells at a lower cost. The demand for 1T products is being driven by
next-generation wireless devices with more robust features. Cypress also has
partnered with Micron Technology Inc. and Infineon Technology AG in the
CellularRAM(TM) consortium to develop multiple generations of low-power PSRAMs
for wireless devices.
No Bus Latency(TM) (NoBL(TM)) and Synchronous Burst SRAMs. NoBL
synchronous SRAMs are optimized for high-speed applications that require maximum
bus bandwidth, including those in the networking, instrumentation, video and
simulation businesses. Synchronous Burst SRAMs are ideally suited for processor
cache applications. Both types of devices come in a variety of densities and I/O
configurations. In 2003, Cypress introduced a 72-Mbit NoBL SRAM, the industry's
largest, manufactured on our proprietary 90-nanometer technology.
Quad Data Rate(TM)(QDR(TM)) SRAMs. QDR products are targeted toward
next-generation networking applications, particularly switches and routers that
operate at data rates beyond 300 MHz. Cypress, Micron Technology Inc, Samsung
Electronics Co Ltd., Hitachi Ltd., IDT Corp. and NEC Corp. worked closely
together to create the QDR standard to ensure that customers will have multiple
pin and function-compatible sources for these products.
NON-MEMORY PRODUCTS
Our Non-Memory business targets the networking, wireless infrastructure
and handsets, computation, consumer, automotive, industrial and other markets.
The category includes products from Cypress's Timing Technology Division (TTD),
Personal Communications Division (PCD) and Data Communications Division (DCD),
along with products from several Cypress subsidiaries. Cypress's Non-Memory
products portfolio includes the following:
Dual-Port Memories. Dual-ports, which can be accessed by two different
processors or buses simultaneously, target shared-memory and switching
applications, including networking switches and routers, cellular base stations,
mass storage devices and telecommunications equipment. Our family of synchronous
and asynchronous Dual-Port RAMs range in density from 8 Kbits to 18 Mbits in x8,
x9, x16, x18 and x36 configurations. Cypress broadened its portfolio in 2003
with the introduction of the 18-Mbit Dual-Port.
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First-In, First-Out (FIFO) Memories. FIFOs are used as a buffer between
systems operating at different frequencies. Cypress offers FIFO memories in a
variety of high-bandwidth synchronous and asynchronous architectures with
industry-standard pinouts.
Framers. Our high-performance Synchronous Optical Network/Synchronous
Digital Hierarchy (SONET/SDH) framers transport SONET or SDH frames at the data
rates of 2.488 Gbps and 9.952 Gbps. This family includes our POSIC2GVC(TM)
framer, one of the industry's first devices to offer both generic framing
procedures and virtual concatenation. These innovations enable the efficient
transport of multiple data protocols over existing SONET/SDH networks. POSIC(TM)
framers are compatible with protocols including Ethernet, Fibre Channel,
Enterprise System Connection, Digital Video Broadcast and a commercial video
standard for the Society for Motion Pictures and Television Engineers. We are
developing the next generation of framers to include enhanced features such as
Link Capacity Adjustment Scheme and Low-Order Virtual Concatenation, which will
enable dynamic bandwidth changes and the ability to provide scalable data
services from 1.5 Mbps to 1 Gbps.
Grating Light Valve(TM) (GLV(TM)). The GLV was designed by Silicon Light
Machines(TM) (SLM), a Cypress subsidiary. GLV technology switches, modulates and
attenuates light in a variety of applications. The GLV is used for applications
in the communications, digital imaging, simulation, display and direct-to-print
markets.
High-Speed Optical Transceiver Link (HOTLink(R)) Physical Layer Devices
(PHYs). Our HOTLink and HOTLink II(TM) family of PHYs are physical-layer
products for moving serial data at rates from 50 Mbps to 1.5 Gbps. These
products support a variety of applications and industrial protocols including
Gigabit Ethernet, 10-Gbps Ethernet, Fibre Channel, Enterprise System Connection,
Asynchronous Transfer Mode, Digital Video Broadcast, Advanced Micro Devices
Inc.'s TAXI(TM) protocol, and generic backplane and point-to-point applications.
The newest HOTLink PHYs, including the HOTLink II PHY, move up to four channels
of serial data at up to 1.5 Gbps. The newest addition to this family is a
single-chip solution for professional-quality video.
Link-Layer Devices (LLDs). Cypress LLDs help to map packet-based
transport protocols such as Gigabit Ethernet, Fibre Channel, and Enterprise
Systems Connection over optical SONET/SDH backbones. Cypress's MetroLink(TM)
product works in conjunction with our POSIC2GVC packet-over-SONET IC framer
described above.
Neuron(R) Chips. Neuron chips are very-large-scale-integrated (VLSI)
devices that implement low-cost control networking applications. They provide
all the key functions necessary to intelligently process inputs from sensors and
control-actuator devices, and to propagate control information across a variety
of wireline and fiber-optic networking media. Neuron chips provide the logic for
LONWORKS(R) networks, an open, interoperable control networking standard widely
used in building automation, industrial control, transportation and utility
automation controllers. Each Neuron device contains three 8-bit central
processing units (CPUs), on-board memory, 11 general-purpose input/output (GPIO)
pins, and a complete, interoperable implementation of the ANSI/EIA 709.1-A-1999
Control Network Protocol.
Physical Layer Devices. Our family of high-performance SONET/SDH and
Serializer/Deserializer (SERDES) devices move SONET or SDH frames between
equipment at SONET/SDH data rates of 51.85 Mbps (OC-1), 155.52 Mbps (OC-3/STM-1)
and 2.488 Gbps (OC-48/STM-16). Cypress's OC-48 products meet the requirements of
Wide Area Network (WAN) switches and routers with stringent, Bellcore-compliant
jitter specifications.
QuadPort(R) Datapath Switching Elements (DSEs). QuadPort DSEs are
non-blocking switch devices that allow four independent buses, processors or
backplanes to access the DSE simultaneously in separate time domains.
Applications for these devices include 4 x 4 switching, packet-header
manipulation, and datapath transport that can reduce the need for large
field-programmable gate array (FPGA) devices. QuadPort DSEs are used in
redundant arrays of independent disks (RAID) and storage switches, Metropolitan
Area Network (MAN)/ Wide Area Network (WAN) switches and routers, and wireless
base station applications. We have recently expanded our product offerings to
include 16 Kbit x 18-bit-wide and 32 Kbit x 18-bit-wide versions of these
devices.
Programmable Clocks. Programmable timing solutions combine the
flexibility and fast time to market of field-programmable devices with high
performance at a cost that is competitive against custom clocks at equivalent
volumes. Working with our easy-to-use CyClocks(TM) and CyberClocks(TM) software,
designers can select custom frequencies for a variety of applications. Cypress
is the only supplier offering true field-programmable clocks. All our clocks
have the desired characteristics of high drive, low jitter, low electromagnetic
interference and low skew.
Programmable Logic Devices (PLDs). System logic performs non-memory
functions such as floating-point mathematics or the organization and routing of
signals throughout a computer system. Cypress manufactures several types of
PLDs, which facilitate the replacement of multiple standard logic devices with a
single programmable device, increasing flexibility and reducing time to market.
Cypress's flagship product is the Delta39K(TM) Complex Programmable Logic
Device, which operates at high speed (233 MHz) and has more than 3,000
macrocells. All our products are supported by the Warp(R) software tool set,
which enables designers to work in either
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very high-speed integrated circuit hardware description language, an industry
standard developed by Cypress, or in Verilog, another industry standard.
Programmable System-on-Chip(TM) (PSoC(TM)) Configurable Mixed-Signal
Arrays. PSoC products are configurable mixed-signal arrays with an on-board
controller, providing a low-cost, single-chip solution for a variety of
consumer, industrial and control applications, and taking the place of multiple
custom controllers. The PSoC family integrates programmable blocks of analog and
digital logic, a fast 8-bit processor, 8 to 16 KBytes of flash memory and 256
bytes of SRAM. PSoC provides designers with a flexible architecture that can be
configured for a broad range of embedded applications and dynamically
reconfigured to extend the capabilities and value of designers' product.
Registered Buffers. As processor and signal speeds in systems increase,
buffers are required to move data to and from memory more quickly. To meet the
demands of high-capacity memory modules in servers and workstations, Cypress
registered buffers operate at clock frequencies up to 280 MHz, exceeding the
standards for chip-to-chip communication established by the Joint Electronic
Device Engineering Council organization.
RoboClock(R) Clock Buffers. Our RoboClock family of high-performance
programmable-skew clock buffers, the flagship product of our Timing Technology
Division, offers features including zero propagation delay, 50/50 duty cycle,
multiply/divide functions and programmable skew. These features allow customers
to compensate for timing differences caused by different circuit board trace
lengths and device set-up and hold times. The RoboClock II(TM) programmable
clock skew buffer family operates at speeds up to 200 MHz, supports 18 outputs,
and adds more multiply, divide and programmable-skew options.
Solar Cells. SunPower Corporation ("SunPower") is a Cypress subsidiary
that recently sampled the A-300 cell, an efficient, commercial low-cost silicon
solar cell. Based on a rear-contact design which maximizes the working cell
area, hides unsightly wires and makes automated production easier, the A-300
achieves over 20% efficiency, compared with currently available cells in the
12%-15% range. SunPower products have powered solar systems such as that of
NASA's Helios, a solar-powered airplane that set an altitude record of 96,863
feet in 2001. Cypress is currently working with SunPower to establish a
high-volume manufacturing plant in the Philippines to increase cost-efficiency
in manufacturing the solar cells.
USB Controllers. USB is a four-wire connection between a PC and
peripherals, including keyboards, mice, printers, joysticks, scanners and modems
and among various non-PC systems. The USB standard facilitates a "plug-and-play"
architecture that enables instant recognition and interoperability when a
USB-compatible peripheral is hooked into a system. Cypress offers a full range
of USB solutions, including low-speed (1.5 Mbps), full-speed (12 Mbps) and
high-speed (480 Mbps) USB products. We also offer a variety of USB hubs,
transceivers, serial interface engines and embedded-host products for a broad
range of applications.
WirelessUSB(TM) (WUSB) Controllers. WirelessUSB is a wireless,
radio-frequency solution that enables designers of PC mice, keyboards, games and
other systems to minimize development time, cost, and power requirements without
sacrificing performance. Operating at 2.4 GHz, WirelessUSB can connect multiple
devices to a single receiver at ranges of up to 30 feet apart or more.
Cypress, the Cypress logo, MoBL, QuadPort, HOTLink, Warp and RoboClock are
registered trademarks of Cypress Semiconductor Corporation. HOTLink II,
MicroPower, More Battery Life, NoBL, No Bus Latency, MetroLink, POSIC,
POSIC2GVC, RoboClock II, WirelessUSB, CyClocks, CyberClocks and Delta39K are
trademarks of Cypress Semiconductor Corporation.
Programmable System-on-Chip and PSoC are trademarks of Cypress MicroSystems, a
subsidiary of Cypress.
Silicon Light Machines, Grating Light Valve and GLV are trademarks of Silicon
Light Machines, a subsidiary of Cypress.
Quad Data Rate(TM) SRAM and QDR(TM) SRAM comprise a new family of products
developed by Cypress, IDT Corp, Micron Technology Inc, NEC Corp and Samsung
Electronics Co Ltd.
Neuron and LONWORKS are registered trademarks of Echelon Corporation in the US
and other countries.
CellularRAM is a trademark of Micron Technology Inc in the United States and is
a trademark of Infineon Technology AG outside the United States.
TAXI is a trademark of Advanced Micro Devices Inc.
All other trademarks or registered trademarks are the property of their
respective owners.
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RESEARCH AND DEVELOPMENT
We place great emphasis on research and development ("R&D"). This is
partially reflected by our commitment of significant management resources to
continuously improve process and product design development cycle time. Our
current product strategy requires rapid development of new products using
emerging process technologies while minimizing R&D costs. We perform R&D for
both process technology and for new product design. We spent $251.4 million,
$287.9 million and $267.5 million on R&D in fiscal 2003, fiscal 2002 and fiscal
2001, respectively.
Our process technology research focuses primarily on the continuous
migration to smaller geometries. Currently, we are ramping our latest
90-nanometer technology in manufacturing. We also started initial development
activity on the 65-nanometer technology in our eight-inch R&D facility in San
Jose, California (Fab 1).
We continued MRAM (magnetic RAM) process development for memory products
and embedded non-volatile applications in our Fab 1 in 2003. MRAM technology
will offer customers an improvement in read-write times, endurance and data
retention over currently available non-volatile memory products (Flash, EEPROM,
FERAM). Initial markets to be served include servers, high-end disk drives, and
industrial control systems.
During fiscal 2003 we continued our joint development program with
Honeywell to develop a 0.13-micron Silicon-On-Insulator process technology in
our wafer fabrication facility in Minnesota (Fab 4).
We have a central design group that focuses on new product creation and
improvement of design methodologies. This group has ongoing efforts to reduce
design cycle time and increase first pass yield through structured re-use of
intellectual property ("IP") blocks from a controlled IP library, development of
computer-aided design tools and improved design business processes. We currently
have 43 design teams in place working on new product designs. Design and related
software development work primarily occurs at centers located in the United
States, Ireland, India and Turkey.
MANUFACTURING
In fiscal 2003, we manufactured approximately 77% of our products at our
two sub-micron wafer fabrication facilities, Fab 2, located in Texas and Fab 4,
located in Minnesota. These fabrication facilities utilize our proprietary 0.13
through 0.8-micron CMOS, 0.25 and 0.8-micron BiCMOS, and 0.35-micron Silicon
Nitride Oxide Silicon (SONOS) processes. Wafer foundries manufactured the
balance of our products.
In fiscal 2003, we continued our transition to more advanced process
technologies in Fab 4: our 0.13-micron and 0.15-micron CMOS process
technologies. In 2003 these processes accounted for approximately 65% of the
output of Fab 4. This transition to processes with smaller line widths results
in more die per wafer thereby reducing die costs.
We conduct assembly and test operations at our highly automated assembly
and test facility in the Philippines. This facility accounted for approximately
48% of our total assembly output and approximately 71% of our total test output
in fiscal 2003. Various offshore subcontractors performed the balance of the
assembly and test operations.
Our Philippines facility manufactures primarily volume products and
packages where our ability to leverage manufacturing costs is high. This
facility has four fully integrated, automated manufacturing lines (autolines)
enabling complete assembly and test operations with minimal human intervention.
These autolines have shorter manufacturing cycle times than conventional
assembly/test operations, which enable us to respond more rapidly to changes in
demand.
MARKETING AND SALES
We use four channels to sell our products: direct OEM sales by our sales
force; sales by manufacturing representative firms; sales through domestic
distributors; and sales through international trading companies and
representative firms. Our marketing and sales efforts are organized around four
regions: North America, Europe, Japan and Asia/Pacific. We also have a global
accounts group and a contract-manufacturing group which are responsible for
specific customers with worldwide operations. We augment our sales effort with
field application engineers, specialists in our products, technologies and
services who work with customers to design our products into their systems.
Field application engineers also help us to identify emerging markets and new
products.
International revenues accounted for 63% of our total revenues in fiscal
2003 compared with 57% of our total revenues in fiscal 2002 and 50% in fiscal
2001. For additional information on our geographic revenue split, please refer
to Note 20 of our Consolidated Financial Statements included with this report.
No individual customer accounted for greater than 10% of total revenues in
fiscal
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2003 or 2001. Sales to Motorola Inc accounted for 10.2% of total revenues in
fiscal 2002. Our customer list includes Cisco Systems Inc, EMC Corp, Epson,
Logitech International SA, Motorola Inc, Primax Electronics Ltd, Sony Corp. and
ST Microelectronics NV.
We typically warrant our products against defects in materials and
workmanship for a period of one year and that product warranty is generally
limited to a refund of the original purchase price of the product.
BACKLOG
Our sales typically rely upon standard purchase orders for delivery of
catalog products. Customer relationships are generally not subject to long-term
contracts. However, Cypress has entered into long-term supply agreements with
certain customers. These long-term supply agreements generally do not contain
minimum purchase commitments. Products to be delivered and the related delivery
schedules are frequently revised to reflect changes in customer needs. For these
reasons, our backlog at any particular date is not representative of actual
sales for any succeeding period and we believe that our backlog is not a
meaningful indicator of future revenues.
COMPETITION
We face competition from domestic and foreign high-performance
integrated circuit manufacturers, many of which have advanced technological
capabilities and have increased their participation in the markets in which we
operate. We compete with a large number of companies primarily in the
telecommunications, data communications, computation and consumer markets.
Competitors, including Altera Corp, Applied Micro Circuits Corporation, Hitachi
Ltd., Integrated Device Technology Inc, Integrated Circuit Systems Inc, Motorola
Inc, National Semiconductor Corporation, PMC-Sierra Inc, Samsung Electronics Co
Ltd, STMicroelectronics NV, Texas Instruments Inc, Vitesse Semiconductor, and
Xilinx, Inc, target certain markets and compete directly with some of our
products. Competition is based on factors that can vary among products and
markets, including product design and quality, product performance, price and
service.
The semiconductor industry is intensely competitive. This intense
competition results in a challenging operating environment for most companies in
the industry, including Cypress. This environment is characterized by potential
erosion of product sale prices over the life of each product, rapid
technological change, limited product life cycles and strong domestic and
foreign competition in many markets. Our ability to compete successfully in a
rapidly evolving high performance end of the semiconductor technology spectrum
depends on many factors, including:
. 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 that we currently compete effectively in the above areas to
the extent they are within our control; however, given the pace at which events
change in the industry, our current abilities are not a guarantee of future
success. If we are not able to compete successfully in this environment, our
business, operating results and financial condition will be harmed.
PATENTS, LICENSES AND TRADEMARKS
We currently have over 900 patents and approximately 800 additional
patent applications on file with the United States Patent and Trademark Office.
We are preparing to file more than 120 new patent applications in fiscal 2004.
In addition to factors such as innovation, technological expertise and
experienced personnel, we believe that patents are increasingly important to
remain competitive in our industry. We have an active program to obtain
additional patent and other intellectual property protection.
We have entered into, and in the future may continue to enter into,
technology license agreements with third parties that give those parties the
right to use patents and other technology developed by us. Some of these
agreements also give us the right to use patents and other technologies
developed by such other parties, some of which involve payment of royalties.
Cypress also vigorously defends its product and service marks. For a
list of Cypress trademarks and registered trademarks, please visit the "Terms
and Conditions" section of our website, which is located at www.cypress.com.
Page 8
ACQUISITIONS
Cypress made no acquisitions during 2003. Cypress gained effective
control over SunPower in the first quarter of fiscal 2003. As a result,
effective the beginning of fiscal 2003, Cypress consolidated the results of
SunPower, which was previously accounted for under the equity method in fiscal
2002 due to the existence of substantive participating rights of the minority
shareholders.
EMPLOYEES
As of December 28, 2003, we had 4,033 employees. None of our employees
are represented by a collective bargaining agreement, nor have we ever
experienced work stoppages.
RISK FACTORS
The discussion in 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 that involve risks and uncertainties, including,
but not limited to, statements as to future operating results and business
plans, our prospects and the prospects of the semiconductor industry generally,
and statements as to the cost savings and productivity improvements, the
proportion of parts assembled in our Philippines factory, pressure on and trends
for average selling prices, investments by competitors in manufacturing capacity
and productivity yields, entering into licensing arrangements with third
parties, capital expenditures, future acquisitions, the financing of SunPower
Corporation, the impact of SunPower Corporation on future financial results, the
general economy and its impact to the market segments we serve, changing
environment and the cycles of the semiconductor industry, competitive pricing
and the rate at which new products are introduced, our expected product revenue
in the automotive sector, our outlook for fiscal 2004, our expected revenue for
fiscal 2004, our expected inprovements in gross margin in fiscal 2004, our
expectations to generate positive cash flow from operations in fiscal 2004,
successful integration and achieving the objectives of the acquired businesses,
cost goals emanating from manufacturing efficiencies, adequacy of cash and
working capital, our intention with respect to terminating the conversion rights
associated with our $600 million convertible subordinated notes, and other
liquidity risks. We use words such as "anticipates," "believes," "expects,"
"future," "intends" and similar expressions to identify forward-looking
statements. Our actual results could differ materially from those projected in
the forward-looking statements for any reason, including the factors set forth
in Risk Factors and elsewhere in this Report.
We are exposed to the risks associated with the slowdown in the U.S. and
worldwide economy.
Among other factors, concerns about inflation, decreased consumer
confidence and spending and reduced corporate profits and capital spending
resulted in a downturn in the U.S. economy generally and in the semiconductor
industry in particular in 2001 and 2002. As a result of the downturn, our
volumes initially declined and were followed by significant reductions in our
average selling prices. As a consequence of the continued economic downturn in
fiscal 2002, during the fourth quarter of fiscal 2002, we announced a
restructuring plan that resized our manufacturing facilities, reduced our
workforce and combined facilities. In the first quarter of fiscal 2003, we took
an additional charge for personnel related to the Fiscal 2002 Restructuring
Plan. In fiscal 2003, we recorded impairment of certain other investments in
development stage companies. In fiscal 2002, we recorded a charge for the
impairment of goodwill and intangibles related to our subsidiary Silicon Light
Machines, as well as the impairment of certain other investments in development
stage companies. While our average selling prices declined at a slower rate in
fiscal 2003 as compared to fiscal 2002, we cannot be certain that an industry
growth cycle has begun or will begin. The reduced rate of price decline is often
one of the signs of the start of an industry growth cycle. However, should
economic conditions worsen, additional restructuring of operations may be
required, and our business, financial condition and results of operations may be
seriously harmed.
We face periods of industry-wide semiconductor over-supply that harm our
results.
The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, semiconductors. These
fluctuations have helped produce many occasions when supply and demand for
semiconductors have not been in balance. In the past, these industry-wide
fluctuations in demand, which have resulted in under-utilization of our
manufacturing capacity, have seriously harmed our operating results. In some
cases, industry downturns with these characteristics have lasted more than a
year. Prior experience has shown that restructuring of the operations, resulting
in significant restructuring charges, may become necessary if an industry
downturn persists. In response to the downturn that began in early 2001, we
restructured our manufacturing operations and administrative areas in third
quarter of fiscal 2001 and fourth quarter of fiscal 2002 to increase cost
efficiency while
Page 9
still maintaining an infrastructure that will enable us to grow when sustainable
economic recovery begins. When these cycles occur, however, they will likely
seriously harm our business, financial condition and results of operations and
we may need to take further action to respond to them.
Our future operating results are likely to fluctuate and therefore may fail to
meet expectations.
Our operating results have varied widely in the past and may continue to
fluctuate in the future. In addition, our operating results may not follow any
past trends. Our future operating results will depend on many factors and may
fluctuate and fail to meet our expectations or those of others for a variety of
reasons, including the following:
. 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; and
. the need for constant, rapid, new product introductions present
an ongoing design and manufacturing challenge, which can be
significantly impacted by even relatively minor errors, and
which may result in products never achieving expected market
demand.
As a result of these or other factors, we could fail to achieve our
expectations as to future revenues, gross profit and income from operations. Any
downward fluctuation or failure to meet expectations will likely adversely
affect the value of your investment in Cypress.
In addition, because we recognize revenues from sales to certain
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 and we can fail to meet expectations
if we are not accurate in our estimates.
Our financial results could be seriously harmed if the markets in which we sell
our products do not grow.
Our continued success depends in large part on the continued growth of
various electronics industries that use our semiconductors, including the
following industries:
. networking equipment;
. wireless telecommunications equipment;
. computers and computer-related peripherals; and
. consumer electronics, automotive electronics and industrial
controls.
Many of our products are incorporated into data communications and
telecommunications end products. Any reduction in the growth of, or decline in
the demand for, networking applications, mass storage, telecommunications,
cellular base stations, cellular handsets and other personal communication
devices that incorporate our products could seriously harm our business,
financial condition and results of operations. In addition, certain of our
products, including Universal Serial Bus microcontrollers and high-frequency
clocks, are incorporated into computer and computer-related products, which have
historically and may in the future experience significant fluctuations in
demand. We may also be seriously harmed by slower growth in the other markets in
which we sell our products. We are affected by a general pattern of product
price decline and fluctuations, which can harm our business.
Even in the absence of an industry downturn, the average selling prices
of our products have historically decreased during the products' lives and we
expect this trend to continue. In order to offset selling price decreases, we
attempt to decrease the manufacturing costs of our products and to introduce
new, higher priced products that incorporate advanced features. If these efforts
are not successful or do not occur in a timely manner, or if our newly
introduced products do not gain market acceptance, our business, financial
condition and results of operations could be seriously harmed.
In addition to following the general pattern of decreasing average
selling prices, the selling prices for certain products, particularly commodity
products, fluctuate significantly with real and perceived changes in the balance
of supply and demand for these products. In the event we are unable to decrease
per unit manufacturing costs at a rate equal to or faster than the rate at which
selling prices continue to decline, our business, financial condition and
results of operations will be seriously harmed. Furthermore, we expect our
competitors to invest in new manufacturing capacity and achieve significant
manufacturing yield improvements in the future. These
Page 10
developments could dramatically increase the worldwide supply of competitive
products and result in further downward pressure on prices.
We may face automotive product liability claims that are disproportionately
higher than the value of the products involved.
Although all of our products sold in the automotive market are covered
by our standard warranty, we could incur costs not covered by our warranties
including, but not limited to, labor and other costs of replacing defective
parts, lost profits and other damages. These costs could be disproportionately
higher than the revenue and profits we receive from the products involved. If we
are required to pay for damages resulting from quality or performance issues of
our automotive products, our business, financial condition and results of
operations could be adversely affected.
We may be unable to protect our intellectual property rights adequately and may
face significant expenses as a result of ongoing or future litigation.
Protection of our intellectual property rights is essential to keep
others from copying the innovations that are central to our existing and future
products. Consequently, we may become involved in litigation to enforce our
patents or other intellectual property rights, to protect our trade secrets and
know-how, to determine the validity or scope of the proprietary rights of others
or to defend against claims of invalidity. This type of litigation can be
expensive, regardless of whether we win or lose.
We are now and may again become involved in litigation relating to
alleged infringement by us of others' patents or other intellectual property
rights. This type of litigation is frequently expensive to both the winning
party and the losing party and could take up significant amounts of management's
time and attention. In addition, if we lose such a lawsuit, a court could
require us to pay substantial damages and/or royalties or prohibit us from using
essential technologies. For these and other reasons, this type of litigation
could seriously harm our business, financial condition and results of
operations. Also, although in certain instances 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.
For a variety of reasons, we have entered into technology license
agreements with third parties that give those parties the right to use patents
and other technology developed by us and that gives us the right to use patents
and other technology developed by them. We anticipate that we will continue to
enter into these kinds of licensing arrangements in the future. It is possible,
however, that licenses we want will not be available to us on commercially
reasonable terms or at all. If we lose existing licenses to key technology, or
are unable to enter into new licenses that we deem important, our business,
financial condition and results of operations could be seriously harmed.
It is critical to our success that we are able to prevent competitors
from copying our innovations. We, therefore intend to continue to seek patent,
trade secret and mask work protection for our semiconductor manufacturing
technologies. The process of seeking patent protection can be long and expensive
and we cannot be certain that any currently pending or future applications will
actually result in issued patents, or that, even if patents are issued, they
will be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to us. Furthermore, others may develop technologies that
are similar or superior to our technology or design around the patents we own.
We also rely on trade secret protection for our technology, in part
through confidentiality agreements with our employees, consultants and third
parties. However, these parties may breach these agreements and we may not have
adequate remedies for any breach. Also, others may come to know about or
determine our trade secrets through a variety of methods. In addition, the laws
of certain countries in which we develop, manufacture or sell our products may
not protect our intellectual property rights to the same extent as the laws of
the United States.
Our financial results could be adversely impacted if we fail to develop,
introduce and sell new products or fail to develop and implement new
manufacturing technologies.
Like many semiconductor companies, which frequently operate in a highly
competitive, quickly changing environment marked by rapid obsolescence of
existing products, our future success depends on our ability to develop and
introduce new products that customers choose to buy. We introduce significant
numbers of products each year, which are important sources of revenue for us.
For example, we are introducing one-transistor PSRAM products to replace our
six-transistor products. If the revenues from our one-transistor products do not
equal or exceed the revenues from our six-transistor products, our business,
financial condition and results of operations could be seriously harmed. If we
fail to introduce new product designs in a timely manner or are unable to
manufacture products according to the requirements of these designs, or if our
customers do not successfully introduce new systems or products incorporating
our or market demand for our new products does not exist as anticipated, our
business, financial condition and results of operations could be seriously
harmed.
Page 11
For us and many other semiconductor companies, introduction of new
products is a major manufacturing challenge. The new products the market
requires tend to be increasingly complex, incorporating more functions and
operating at faster speeds than prior products. Increasing complexity generally
requires smaller features on a chip. This makes manufacturing new generations of
products substantially more difficult than prior generations. Ultimately,
whether we can successfully introduce these and other new products depends on
our ability to develop and implement new ways of manufacturing semiconductors.
If we are unable to design, develop, manufacture, market and sell new products
successfully, our business, financial condition and results of operations would
be seriously harmed.
Our ability to meet our cash requirements depends on a number of factors, many
of which are beyond our control.
Our ability to meet our cash requirements (including our debt service
obligations) is dependent upon our future performance, which will be subject to
financial, business and other factors affecting our operations, many of which
are beyond our control. We cannot guarantee that our business will generate
sufficient cash flows from operations to fund our cash requirements. If we were
unable to meet our cash requirements from operations, we would be required to
fund these cash requirements by alternative financing. The degree to which we
may be leveraged could materially and adversely affect our ability to obtain
financing for working capital, acquisitions or other purposes, could make us
more vulnerable to industry downturns and competitive pressures or could limit
our flexibility in planning for, or reacting to changes and opportunities in our
industry, which may place us at a competitive disadvantage compared to our
competitors. There can be no assurance that we will be able to obtain
alternative financing, that any such financing would be on acceptable terms or
that we will be permitted to do so under the terms of our existing financing
arrangements. In the absence of such financing, our ability to respond to
changing business and economic conditions, make future acquisitions, react to
adverse operating results, meet our debt service obligations or fund required
capital expenditures or increased working capital requirements may be adversely
affected.
Interruptions in the availability of raw materials can seriously harm our
financial performance.
Our semiconductor manufacturing operations require raw materials that
must meet exacting standards. We generally have more than one source available
for these materials, but for certain of our products there are only a limited
number of suppliers capable of delivering the raw materials that meet our
standards. If we need to use other companies as suppliers, they must go through
a qualification process, which can be difficult and lengthy. In addition, the
raw materials we need for certain of our products could become scarcer as
worldwide demand for semiconductors increases. Interruption of our sources of
raw materials could seriously harm our business, financial condition and results
of operations.
Problems in the performance or availability of other companies we hire to
perform certain manufacturing tasks can seriously harm our financial
performance.
A high percentage of our products are fabricated in our manufacturing
facilities located in Texas and Minnesota. However, we do rely on independent
contractors to manufacture some of our products. If market demand for our
products suddenly exceeds our internal manufacturing capacity, we may seek
additional foundry manufacturing arrangements. A shortage in foundry
manufacturing capacity could hinder our ability to meet demand for our products
and therefore adversely affect our operating results.
A high percentage of our products are assembled, packaged and tested at
our manufacturing facility located in the Philippines. We rely on independent
subcontractors to assemble, package and test the balance of our products. This
reliance involves certain risks, because we have less control over manufacturing
quality and delivery schedules, whether these companies have adequate capacity
to meet our needs and whether or not they discontinue or phase-out assembly
processes we require. We cannot be certain that these subcontractors will
continue to assemble, package and test products for us and it might be difficult
for us to find alternatives if they do not do so.
The complex nature of our manufacturing activities makes us highly susceptible
to manufacturing problems and these problems can have substantial negative
impact on us when they occur.
Making semiconductors is a highly complex and precise process, requiring
production in a tightly controlled, clean environment. Even very small
impurities in our manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer or other factors
can cause a substantial percentage of wafers to be rejected or numerous chips on
each wafer to be nonfunctional. We may experience problems in achieving an
acceptable success rate in the manufacture of wafers and the
Page 12
likelihood of facing such difficulties is higher in connection with the
transition to new manufacturing methods. The interruption of wafer fabrication
or the failure to achieve acceptable manufacturing yields at any of our
facilities would seriously harm our business, financial condition and results of
operations. We may also experience manufacturing problems in our assembly and
test operations and in the introduction of new packaging materials.
We may not be able to use all of our existing or future manufacturing capacity,
which can negatively impact our business.
We have in the past spent, and will continue to spend, significant
amounts of money to upgrade and increase our wafer fabrication, assembly and
test manufacturing capability and capacity. If we do not need some of this
capacity and capability for a variety of reasons, such as inadequate demand or a
significant shift in the mix of product orders that makes our existing capacity
and capability inadequate or in excess of our actual needs, our fixed costs per
semiconductor produced will increase, which will harm our business, financial
condition and results of operations. In addition, if the need for more advanced
products requires accelerated conversion to technologies capable of
manufacturing semiconductors having smaller features or requires the use of
larger wafers, we are likely to face higher operating expenses and may need to
write-off capital equipment made obsolete by the technology conversion, either
of which could seriously harm our business, financial condition and results of
operations. For example, in response to various downturns and changes in our
business, we have not been able to use all of our existing equipment and we have
restructured our operations. These restructurings have resulted in material
charges, which have negatively affected our business.
Our operations and financial results could be severely harmed by certain natural
disasters.
Our headquarters, some manufacturing facilities and some of our major
vendors' facilities are located near major earthquake faults. We have not been
able to maintain earthquake insurance coverage at reasonable costs. Instead, we
rely on self-insurance and preventative/safety measures. If a major earthquake
or other natural disaster occurs, we may need to spend significant amounts to
repair or replace our facilities and equipment and we could suffer damages that
could seriously harm our business, financial condition and results of
operations.
Our business, financial condition and results of operations will be seriously
harmed if we fail to compete successfully in our highly competitive industry and
markets.
The semiconductor industry is intensely competitive. This intense
competition results in a difficult operating environment for us and most other
semiconductor companies that is marked by erosion of average selling prices over
the lives of each product, rapid technological change, limited product life
cycles and strong domestic and foreign competition in many markets. A primary
cause of this highly competitive environment is the strength of our competitors.
The industry consists of major domestic and international semiconductor
companies, many of which have substantially greater financial, technical,
marketing, distribution and other resources than we do. We face competition from
other domestic and foreign high-performance integrated circuit manufacturers,
many of which have advanced technological capabilities and have increased their
participation in markets that are important to us.
Our ability to compete successfully in the rapidly evolving high
performance portion of the semiconductor technology industry 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;
. our customer service;
. our customer satisfaction;
. the pace at which customers incorporate our products into their
systems;
. the number and nature of our competitors and general economic
conditions; and
. our access to and the availability of capital.
Page 13
Although we believe we currently compete effectively in the above areas
to the extent they are within our control, given the pace of change in the
industry, our current abilities are not a guarantee of future success. If we are
unable to compete successfully in this environment, our business, financial
condition and results of operations will be seriously harmed.
We must build semiconductors based on our forecasts of demand, and if our
forecasts are inaccurate, we may have large amounts of unsold products or we may
not be able to fill all orders.
We order materials and build semiconductors based primarily on our
internal forecasts and secondarily on existing orders, which may be cancelled
under many circumstances. Consequently, we depend on our forecasts as a
principal means to determine inventory levels for our products and the amount of
manufacturing capacity that we need. Because our markets are volatile and
subject to rapid technological and price changes, our forecasts may be wrong and
we may make too many or too few of certain products or have too much or too
little manufacturing capacity. Also, our customers frequently place orders
requesting product delivery almost immediately after the order is made, which
makes forecasting customer demand even more difficult, particularly when supply
is abundant. These factors also make it difficult to forecast quarterly
operating results. If we are unable to predict accurately the appropriate amount
of product required to meet customer demand, our business, financial condition
and results of operations could be seriously harmed, either through missed
revenue opportunities because inventory for sale was insufficient or through
excessive inventory that would require write-offs.
We must spend heavily on equipment to stay competitive and will be adversely
impacted if we are unable to secure financing for such investments.
In order to remain competitive, semiconductor manufacturers generally
must spend heavily on equipment to maintain or increase technology and design
development and manufacturing capacity and capability. We currently plan for
approximately $144.1 million in expenditures on equipment in fiscal 2004 and
anticipate significant continuing capital expenditures in subsequent years. In
the past, we have reinvested a substantial portion of our cash flow from
operations in technology, design development and capacity expansion and
improvement programs.
If we are unable to decrease costs for our products at a rate at least
as fast as the rate of the decline in selling prices for such products, we may
not be able to generate enough cash flow from operations to maintain or increase
manufacturing capability and capacity as necessary. In such a situation, we
would need to seek financing from external sources to satisfy our needs for
manufacturing equipment and, if cash flow from operations declines too much, for
operational cash needs as well. Such financing, however, may not be available on
terms that are satisfactory to us or at all, in which case our business,
financial condition and results of operations would be seriously harmed.
We compete with others to attract and retain key personnel, and any loss of, or
inability to attract, such personnel would harm us.
To a greater degree than most non-technology companies, we depend on the
efforts and abilities of certain key management and technical personnel. Our
future success depends, in part, upon our ability to retain such personnel and
to attract and retain other highly qualified personnel, particularly product and
process engineers. We compete for these individuals with other companies,
academic institutions, government entities and other organizations. Competition
for such personnel is intense and we may not be successful in hiring or
retaining new or existing qualified personnel.
We believe that stock option grants are critical to our ability to
attract and retain personnel. The New York Stock Exchange implemented rules
effective June 30, 2003 that would require, subject to certain exceptions,
stockholder approval for equity compensation plans, including stock option
plans. Our stockholder approved 1994 Stock Option Plan expires in April 2004. We
will be seeking a new stockholder approved stock option plan at our 2004 Annual
Shareholder's Meeting. Our ability to hire or retain highly qualified personnel
may be seriously impacted due to an inability to grant stock options and other
equity-based compensation if we are unable to obtain stockholder approval for
such plans in a timely manner or at all.
If we lose existing qualified personnel or are unable to hire new
qualified personnel as needed, our business, financial condition and results of
operations could be seriously harmed.
We face additional problems and uncertainties associated with international
operations that could seriously harm us.
International revenues accounted for 63% of our total revenues in fiscal
2003. At the end of fiscal 2003, long-lived assets were held primarily in the
United States with approximately 10% held in the Philippines and 1% in other
foreign countries. Our Philippine
Page 14
assembly and test operations, as well as our international sales offices, face
risks frequently associated with foreign operations including:
. currency exchange fluctuations;
. the devaluation of local currencies;
. political instability;
. changes in local economic conditions;
. 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 seriously harmed.
We are subject to many different environmental regulations and compliance with
them may be costly.
We are subject to many different governmental regulations related to the
storage, use, discharge and disposal of toxic, volatile or otherwise hazardous
chemicals used in our manufacturing process. Compliance with these regulations
can be costly. In addition, over the last several years, the public has paid a
great deal of attention to the potentially negative environmental impact of
semiconductor manufacturing operations. This attention and other factors may
lead to changes in environmental regulations that could force us to purchase
additional equipment or comply with other potentially costly requirements. If we
fail to control the use of, or to adequately restrict the discharge of,
hazardous substances under present or future regulations, we could face
substantial liability or suspension of our manufacturing operations, which could
seriously harm our business, financial condition and results of operations.
We depend on third parties to transport our products.
We rely on independent carriers and freight haulers to move our products
between manufacturing plants and our customers. 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, terrorism,
natural disasters and accidents could seriously harm our business, financial
condition and results of operations and ultimately impact our relationship with
our customers.
We may fail to integrate our business and technologies with those of companies
that we have recently acquired and that we may acquire in the future.
We completed no acquisitions in 2003, one acquisition in fiscal 2002,
six acquisitions in fiscal 2001 and four acquisitions in fiscal 2000 and may
pursue additional acquisitions in the future. If we fail to integrate these
businesses successfully or properly, our quarterly and annual results may be
seriously harmed. Integrating these businesses, people, products and services
with our existing business could be expensive, time-consuming and a strain on
our resources. Specific issues that we face with regard to prior and future
acquisitions include:
. integrating acquired technology or products;
. integrating acquired products into our manufacturing facilities;
. assimilating the personnel of the acquired companies;
. coordinating and integrating geographically dispersed
operations;
. our ability to retain customers of the acquired company;
. the potential disruption of our ongoing business and distraction
of management;
. the maintenance of brand recognition of acquired businesses;
. the failure to successfully develop acquired in-process
technology, resulting in the impairment of amounts currently
capitalized as intangible assets;
. unanticipated expenses related to technology integration;
Page 15
. the development and maintenance of uniform standards, corporate
cultures, controls, procedures and policies;
. the impairment of relationships with employees and customers as
a result of any integration of new management personnel;
. the potential unknown liabilities associated with acquired
businesses; and
. migration of 6T Pseudo SRAM to 1T Pseudo SRAM technology.
We may incur losses in connection with loans made under our stock purchase
assistance plan.
We have outstanding loans, consisting of principal and cumulative
accrued interest, of $80.5 million as of December 28, 2003 to employees and
former employees under the shareholder-approved 2001 Employee Stock Purchase
Assistance Plan. (See Note 14 to our consolidated financial statements included
in this report for a further description of this plan.) We made the loans to
employees for the purpose of purchasing Cypress common stock. Each loan is
evidenced by a full recourse promissory note executed by the employee in favor
of Cypress and is secured by a pledge of the shares of Cypress's common stock
purchased with the proceeds of the loan. The primary benefit to us from this
program is increased employee retention. In accordance with the plan, the CEO
and the Board of Directors do not participate in this program. To date, there
have been immaterial write-offs. As of December 28, 2003, we have a loss reserve
against these loans of $16.2 million. In determining this reserve requirement,
management considered various factors, including an independent fair value
analysis of these loans and the underlying collateral. At December 28, 2003, the
carrying value of the loans exceeded the underlying common stock collateral by
$6.4 million. While the loans are secured by the shares of our stock purchased
with the loan proceeds, the value of this collateral would be adversely affected
if our stock price declined significantly.
Our results of operations would be adversely affected if a significant
amount of these loans were not repaid. Similarly, if our stock price were to
decrease, our employees bear greater repayment risk and we would have increased
risk to our results of operations. However, we are willing to pursue every
available avenue, including those covered under the Uniform Commercial Code, to
recover these loans by pursuing employees' personal assets should the employees
not repay these loans.
In October 2003, we announced a program aimed at minimizing any losses
to employees as a result of our common stock price fluctuations. Under this
program, either a limit sale order or a stop loss order is placed on the common
stock purchased by each employee with the loan proceeds once the common stock
price exceeds that employee's break-even point. If the common stock price
reaches the sale limit order or declines to the stop loss price, the common
stock purchased by the employee under the Plan will be automatically sold and
the proceeds utilized to repay the employee's outstanding loan.
We maintain self-insurance for certain liabilities of our officers and
directors.
Our certificate of incorporation, by-laws and indemnification agreements
require us to indemnify our officers and directors for certain liabilities that
may arise in the course of their service to us. We self-insure with respect to
potential indemnifiable claims. If we were required to pay a significant amount
on account of these liabilities for which we self-insure, our business,
financial condition and results of operations could be seriously harmed.
Page 16
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding each of our current executive officers is
set forth below:
EXECUTIVE
OFFICER
NAME AGE POSITION SINCE
---- --------- ------------ -----------
T. J. Rodgers 56 President, Chief Executive Officer and Director 1982
Antonio R. Alvarez 47 Executive Vice President, Memory Products Division 1993
Emmanuel T. Hernandez 48 Executive Vice President, Finance and Administration
Chief Financial Officer 1994
Ralph H. Schmitt 43 Executive Vice President, Sales and Marketing 2000
Christopher Seams 41 Executive Vice President, Worldwide Manufacturing &
Research and Development 2002
Christopher Norris 41 Vice President, Data Communications Division 2003
Cathal Phelan 40 Vice President, Personal Communications Division 2003
Ilhan Refioglu 55 Vice President, Timing Technology Division 2003
Except as set forth below, each of our executive officers has been
engaged in his principal occupation described above during the past five years.
There is no family relationship between any of our directors or executive
officers.
T.J. Rodgers is a co-founder of Cypress Semiconductor Corporation and
has been a Director and its President and Chief Executive Officer since 1982.
Mr. Rodgers serves as a director of SolarFlare Communications Inc, Infinera, ION
America, and SunPower Corporation.
Antonio R. Alvarez joined Cypress in May 1987 as a senior technical
engineer. Mr. Alvarez was transferred to our 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 1998, Mr. Alvarez also became responsible for the
Memory Products Division. Mr. Alvarez was named Executive Vice President in
April 1999.
Emmanuel T. Hernandez joined Cypress in June 1993 as Corporate
Controller. In January 1994, Mr. Hernandez was promoted to Senior 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. Mr. Hernandez was named
Executive Vice President in May 1998. Mr. Hernandez serves as a board member of
Xicor Inc, ON Semiconductor, and SunPower Corporation.
Ralph H. Schmitt joined Cypress in 1987 as our first account manager. In
1991 he became responsible for the Mid-Atlantic sales region. In 1993 he was
named Director of Worldwide Strategic Accounts. In 1995 Mr. Schmitt left Cypress
to found GroupTec LLC, a Manufacturers' Representative. He was a Partner and
President of this firm. Mr. Schmitt rejoined Cypress in January 1998 as Sales
Director with responsibility for transitioning the sales and marketing
organization to align with Cypress's shift to a market-based strategy. He was
appointed Vice President, Segment Sales and Marketing in September 1999 and
named Vice President, Sales and Marketing in June 2000. Mr. Schmitt was named an
Executive Vice President in July 2000. He serves as a board member to Azanda
Network Devices.
Christopher Seams joined Cypress in 1990 and held a variety of positions
in process and assembly technology research and development and manufacturing
operations. In 2001, Mr. Seams became responsible for Research and Development.
He was appointed Executive Vice President, Manufacturing and Research and
Development in November 2002. He serves as a board member of 1ST Silicon, Ronal
Systems Corporation and SunPower Corporation.
Christopher Norris joined Cypress in 1988 as a senior design engineer.
He has held a number of positions within Cypress including design manager,
director of new product development, and general manager of the programmable
logic division. In 1996, Mr. Norris was promoted to Vice President, Programmable
Logic Division and in 2000 became responsible for the Data Communications
Division where he is responsible for developing Cypress's products for the
wide-area networking, storage networking, and wireless infrastructure markets.
Cathal Phelan joined Cypress in 1991 as a senior design engineer. He has
held a number of positions within Cypress including design director, new
products director, and business unit manager. In 1999, Mr. Phelan was promoted
to Vice President, Personal Communications Division where he is responsible for
developing products for the Universal Serial Bus market.
Page 17
Ilhan Refioglu joined Cypress in February 2001 as Vice President of the
Timing Technology Division. Prior to joining Cypress, he was the president and
CEO of International Microcircuits, Inc., which Cypress acquired in 2001, for
five years. He served as vice president at Exar Corp from 1984 to 1995, where he
was responsible for all business divisions of the company.
ITEM 2. PROPERTIES
Our executive offices are located in a wholly owned approximately
111,000 square-foot building at 198 Champion Court, San Jose, California. The
table below sets out our principal owned and leased properties at December 28,
2003:
BUILDING
LOCATION SQ. FT. USE
------------ ---------- -----------
OWNED
San Jose, CA 111,000 Office
Bloomington, MN 170,000 8" Fab
Round Rock, TX 100,000 6" Fab
Cavite, The Philippines 162,000 Assembly & test
Lynwood, WA 69,000 Office, light manufacturing
Laguna, The Philippines 216,000 Office, labs, manufacturing (SunPower)
Woodinville, WA 58,000 Held for Sale
LEASED
San Jose, CA (1) 200,000 Office, labs, light manufacturing
San Jose, CA (1) 61,000 R&D, Labs, Office
Bloomington, MN (1) 100,000 8" Fab
Manila, The Philippines 5,600 Office (Shared Service Center)
(1) Synthetic Lease. See Note 19 of our Consolidated Financial Statements
for more discussion of synthetic lease transactions.
We lease additional space for sales and design centers in the United
States, Belgium, Canada, China, Finland, France, Germany, India, Ireland, Italy,
Japan, Korea, Singapore, Sweden, Taiwan, Turkey and the United Kingdom.
As of the end of fiscal 2003, we believe that our current properties are
suitable for our foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
In January 2002, Cypress was contacted by Syndia Corporation ("Syndia"),
which alleged that Cypress infringed two patents on which Jerome Lemelson was
named as the inventor (see the Lemelson Partnership discussion below). These two
patents are related to three of the non-stayed patents in the Lemelson
Partnership litigation in Arizona. In the first quarter of fiscal 2003, Cypress
was informed that the United States Patent and Trademark Office is reexamining
these two patents. In the fourth quarter of fiscal 2003, Cypress was informed
that one of the two patents (U.S. Patent No. 4,702,808) had completed
reexamination and many of the original claims, as well as some new and amended
claims, have been allowed. Furthermore, Cypress was informed in the second
quarter of fiscal 2003 that Syndia had been sued by Taiwan Semiconductor
Manufacturing Corporation ("TSMC") in the United States District Court of the
Northern District of California, in a declaratory judgment action alleging these
two Syndia patents are invalid, unenforceable and not infringed. Cypress has
been informed that this case has settled and the terms of the settlement are
confidential. Cypress has reviewed and investigated the allegations by Syndia.
Cypress believes that it has meritorious defenses to these allegations, and will
vigorously defend itself in this matter. However, because of the nature and
inherent uncertainties of litigation, should Syndia sue Cypress and should the
outcome of the action be unfavorable, Cypress's business, financial condition,
results of operations and cash flows could be materially and adversely affected.
In January 1998, an attorney representing the estate of Mr. Jerome
Lemelson contacted Cypress and charged that Cypress infringed certain patents
owned by Mr. Lemelson and/or a partnership controlled by Mr. Lemelson's estate.
On February 26, 1999, the Lemelson Partnership sued Cypress and 87 other
companies in the United States District Court for the District of Arizona for
infringement of 16 patents. In May 2000, the Court stayed litigation on 14 of
the 16 patents in view of concurrent litigation in the United States District
Court, District of Nevada on the same 14 patents. On January 23, 2004, the
Nevada court held in favor of plaintiffs, that all asserted claims of the 14
patents are unenforceable, invalid, and not infringed. We are in the process of
determining the next steps in this litigation based on the Nevada ruling. In
October 2001, the Lemelson Partnership amended its Arizona
Page 18
complaint to add allegations that two more patents were infringed. Thus, there
are currently four patents that are not stayed in this litigation. A bench trial
(i.e. a trial with no jury) on only the defenses relating to Lemelson's alleged
fraud in obtaining the four non-stayed patents was held on February 4, 2003. In
the fourth quarter of fiscal 2003, the Judge's ruling on the trial was issued,
ruling that none of the four patents was unenforceable due to fraud. The case is
proceeding in the "claim construction" (i.e. patent claim interpretation) phase
on the four non-stayed patents, and the date for conclusion of the claim
construction briefing is expected to be in the first or second quarter of fiscal
2004. After the claim construction briefing has concluded, the judge may request
a claim construction hearing or may take the matter under submission on the
briefs. Cypress has reviewed and investigated the allegations in both Lemelson's
original and amended complaints. Cypress believes that it has meritorious
defenses to these allegations and 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's business, financial
condition, results of operations and cash flows could be materially and
adversely affected.
In February 2002, Cypress was contacted by an attorney representing Mr.
Peng Tan, alleging that Cypress infringed a patent owned by Mr. Tan. Cypress was
informed in the second quarter of fiscal 2003 that Mr. Tan was sued by Ramtron
International Corporation in the United States District Court of the District of
Colorado, in a declaratory judgment action alleging that Mr. Tan's patent is
invalid and not infringed. Cypress has reviewed and investigated Mr. Tan's
allegations. Cypress believes it has meritorious defenses to these allegations,
and will vigorously defend itself in this matter. However, because of the nature
and inherent uncertainties of litigation, should Mr. Tan sue Cypress and should
the outcome of the action be unfavorable, Cypress's business, financial
condition, results of operations and cash flows could be materially and
adversely affected.
Cypress is currently a party to various other legal proceedings, claims,
disputes and litigation arising in the ordinary course of business, including
those noted above. Cypress currently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect on Cypress's financial position, results of operation or cash flows.
However, because of the nature and inherent uncertainties of litigation, should
the outcome of these actions be unfavorable, Cypress's business, financial
condition, results of operations and cash flows could be materially and
adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended December 28, 2003.
Page 19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange under the
trading symbol "CY". The following table sets forth, for the periods indicated,
the low, high and closing price for the common stock. We have not paid cash
dividends and have no present plans to do so. As of March 1, 2004, there were
approximately 74,313 holders of record of our Common Stock.
PRICE RANGE OF COMMON STOCK ($)
--------------------------------------
LOW HIGH CLOSE
-------- --------- ----------
Fiscal Year ended December 28, 2003:
First Quarter................................. 4.91 7.75 7.34
Second Quarter................................ 6.80 13.79 12.00
Third Quarter................................. 11.49 19.68 17.89
Fourth Quarter................................ 17.36 23.70 20.95
Fiscal Year ended December 29, 2002:
First Quarter................................. 18.04 25.48 23.00
Second Quarter................................ 13.40 24.25 15.18
Third Quarter................................. 6.77 15.54 6.88
Fourth Quarter................................ 3.60 9.50 5.70
See Note 17 in the consolidated financial statements included in this report for
equity compensation plan information.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED
----------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(In thousands, except per share)
Operating results:
Revenues............................... $ 836,756 $ 774,746 $ 819,192 $ 1,287,787 $ 745,042
Restructuring, acquisition and other
costs 27,530 123,127 293,366 55,729 34,091
Operating income (loss)................ (8,304) (231,344) (459,618) 328,839 51,607
Income (loss) before income taxes...... (2,509) (246,260) (437,196) 370,170 95,169
Net income (loss)...................... $ (5,331) $ (249,098) $ (407,412) $ 277,308 $ 88,130
Net income (loss) per share:
Basic................................ $ (0.04) $ (2.02) $ (3.28) $ 2.29 $ 0.81
Diluted.............................. $ (0.04) $ (2.02) $ (3.28) $ 2.03 $ 0.76
Weighted average common shares
outstanding:
Basic................................ 121,509 123,112 124,135 121,126 108,156
Diluted.............................. 121,509 123,112 124,135 144,228 115,527
Balance sheet data:
Cash, cash equivalents and short-term
investments........................... $ 198,617 $ 127,937 $ 205,422 $ 884,601 $ 280,947
Working capital........................ 307,716 314,187 372,333 983,359 360,639
Total assets........................... 1,567,497 1,552,912 1,886,436 2,361,754 1,146,958
Long term debt and capital lease
obligations (excluding current
portion).............................. 684,260 468,900 524,058 631,055 170,884
Stockholders' equity................... $ 569,188 $ 673,623 $ 868,428 $ 1,327,668 $ 718,620
(1) We operate on a 52- or 53-week fiscal year. Fiscal years 2003, 2002,
2001 and 2000 were 52-week fiscal years ending on the Sunday closest to
December 31. 1999 was a 53-week fiscal year ending on the Sunday closest
to December 31.
(2) The preceding table presents financial information including the seven
acquisitions completed in fiscal 2002 and 2001. See Note 6 of the
consolidated financial statements included in this report for
discussions of the acquisitions, which may affect the comparability of
the data.
Page 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in 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 that involve risks and uncertainties, including,
but not limited to, statements as to future operating results and business
plans, our prospects and the prospects of the semiconductor industry generally,
and statements as to the cost savings and productivity improvements, the
proportion of parts assembled in our Philippines factory, pressure on and trends
for average selling prices, investments by competitors in manufacturing capacity
and productivity yields, entering into licensing arrangements with third
parties, capital expenditures, future acquisitions, the financing of SunPower
Corporation, the impact of SunPower Corporation on future financial results, the
general economy and its impact to the market segments we serve, changing
environment and the cycles of the semiconductor industry, competitive pricing
and the rate at which new products are introduced, our expected product revenue
in the automotive sector, our outlook for fiscal 2004, our expected revenue for
fiscal 2004, our expected inprovements in gross margin in fiscal 2004, our
expectations to generate positive cash flow from operations in fiscal 2004,
successful integration and achieving the objectives of the acquired businesses,
cost goals emanating from manufacturing efficiencies, adequacy of cash and
working capital, our intention with respect to terminating the conversion rights
associated with our $600 million convertible subordinated notes , and other
liquidity risks. We use words such as "anticipates," "believes," "expects,"
"future," "intends" and similar expressions to identify forward-looking
statements. Our actual results could differ materially from those projected in
the forward-looking statements for any reason, including the factors set forth
in Risk Factors and elsewhere in this Report.
EXECUTIVE SUMMARY
We design, develop, manufacture and market a broad line of
high-performance digital and mixed-signal integrated circuits for a broad range
of markets including networking, wireless infrastructure and handsets,
computation, consumer, automotive, and industrial. We have four product
divisions and four subsidiaries, organized into two business segments: our
Memory products and Non-memory products groups. In addition, in order to enhance
our focus on the communications market and our end customers, we report
information by the following market segments: Wide Area Networks and Storage
Area Networks (WAN/SAN); Wireless Infrastructure and Wireless Terminal
(WIN/WIT); Computation and consumer; and our Cypress Subsidiaries.
The semiconductor industry continued its recovery in 2003, which
translated into a broad market improvement for us. We had sequential
improvements in revenue, gross margin and operating results during all quarters
of fiscal 2003. This resulted in a reduction of our net loss to $5.3 million in
fiscal 2003 compared to a net loss of $249.1 million in fiscal 2002. We
experienced improvements in our operational results in fiscal 2003, a result of
both the semiconductor industry recovery as well as us realizing the benefits of
our restructuring activities in fiscal 2001 and fiscal 2002.
Our revenues for fiscal 2003 were $836.8 million, an increase of $62.0
million or 8.0% compared to revenues for fiscal 2002, and an increase of $17.6
million or 2.1% compared to revenues for fiscal 2001. The revenue increase in
2003 is attributable primarily to an increase in unit shipments, offset to a
lesser degree by lower average selling price ("ASP") degradation. We have seen a
reduction in the rate of decline in pricing during 2003 and have been able to
raise prices on selected products. In addition, our revenues have improved
across our market segments. In general, as we look ahead to 2004, we believe the
outlook to be a growth year both for the semiconductor industry and ourselves.
Our belief is based upon signs we are seeing in the communications recovery and
the already strong consumer and wireless markets. We expect revenue for fiscal
2004 to be up approximately 25% over 2003 fiscal revenue as a result of
increased unit shipments and lower ASP degradation.
Our gross margins improved to 47.9% in fiscal 2003 compared to 42.8% in
fiscal 2002 due to factors discussed above relating to revenue increases. We
expect gross margin to improve approximately 4.0%, plus or minus a few
percentage points, for fiscal 2004.
Research and development and Selling, general and administrative
expenses for fiscal 2003 were $36.5 million and $21.3 million lower than fiscal
2002 primarily as a result of our restructuring activities in fiscal 2001 and
fiscal 2002.
From a liquidity and capital resources standpoint, management has
emphasized generating positive cash flows for 2003, which was achieved as a
result of improved business conditions, the impact of the restructuring of our
operations during fiscal 2001 and fiscal 2002, and a decline in our spending on
capital expenditures. During fiscal 2003, our total cash, cash equivalents,
short-term investments, long-term investments, and restricted cash increased
$173.0 million, primarily as a result of cash from operations of $99.2 million
with the balance primarily a result of our refinancing of our long-term debt
during 2003. Including restricted cash, our total liquid cash position was $
379.9 million at the end of fiscal 2003. During fiscal 2003, we issued $600
million in principal amount of 1.25% convertible subordinated notes due June
2008, and used a portion of the proceeds to redeem in full our 4.0% convertible
subordinated notes due January 2005, and to redeem $117.2 million in principal
amount of our 3.75% convertible subordinated notes due June 2005, leaving $68.7
million in principal amount of these notes outstanding at the end of fiscal
2003.
Page 21
RESULTS OF OPERATIONS
BUSINESS SEGMENT NET REVENUES
Year Ended
========================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
------------------------------------------------------------------------
Memory $ 334,779 $ 303,388 $ 350,908
Non-memory 501,977 471,358 468,284
------------------------------------------------------------------------
Total consolidated revenues $ 836,756 $ 774,746 $ 819,192
========================================================================
Revenues for the sale of Memory products for fiscal 2003 increased $31.4
million or 10.3% versus revenues from the sale of these products for fiscal
2002. Memory product revenues increased as compared to fiscal 2002 due to
increased demand for our Synchronous SRAM products and an increase in our ASPs
of 3.2%. Cypress uses average ASP/Mbit as an indication of the magnitude of
price change for Memory products. This metric reflects changes in product mix
and density as well as market price. ASP/Mbit declined by 30.1% from fiscal 2002
to fiscal 2003 and 55% from fiscal 2001 to fiscal 2002.
Revenues from the sale of Memory products for fiscal 2002 decreased
$47.5 million or 13.5% versus revenues from the sale of these products for
fiscal 2001. A 25.3% increase in unit demand for semiconductor products,
particularly in the wireless markets, was more than offset by a decline in ASPs
although the average density (Mbits/unit) of SRAMs products sold continued to
increase.
Revenues in fiscal 2003 from the sale of Non-memory products increased
$30.6 million or 6.5% when compared to revenues from the sale of these products
for fiscal 2002. The increase in Non-memory product revenues, as compared to
fiscal 2002, was driven by revenue growth from our network search engines,
programmable logic devices, physical layer devices, Multi-ports devices and
universal serial bus family of products. Our subsidiary companies SLM, Cypress
Microsystems and SunPower also contributed to the revenue growth. In fiscal
2003, ASPs decreased 6.0% as compared to fiscal 2002 for Non-Memory products.
Revenues in fiscal 2002 from the sale of Non-memory products increased
$3.1 million or 0.7% when compared to revenues from the sale of these products
for fiscal 2001. The increase in Non-memory product revenues, as compared to
fiscal 2001, resulted primarily from a 32.0% increase in unit sales. The
increase in unit sales resulted from increases in unit demand primarily from our
USB family of products, Neuron, and programmable clocks.
MARKET SEGMENT REVENUES
Years Ended
===========================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
---------------------------------------------------------------------------
Wide area networks/storage area
networks $ 268,978 $ 253,205 $ 335,773
Wireless terminals/wireless
infrastructure 249,150 246,800 244,797
Computation and consumer 284,572 254,615 219,795
Cypress subsidiaries 34,056 20,126 18,827
---------------------------------------------------------------------------
Total consolidated revenues $ 836,756 $ 774,746 $ 819,192
===========================================================================
Revenues from the sale of Wide-area networks/storage area networks
(WAN/SAN) products for fiscal 2003 increased $15.8 million or 6.2% compared to
fiscal 2002. Improvement in the overall enterprise networking market has been
followed by increases in broader-based networking sales. WAN/SAN product
revenues increased as compared to fiscal 2002 due to increased demand for our
network search engines. This segment also experienced growth due to our
acquisition of Micron Technology, Inc.'s high- performance communications
orientated synchronous static random access memory ("SRAM") product portfolio
inventory in the second quarter of fiscal 2003.
Revenues from the sale of WAN/SAN products for fiscal 2002 decreased
$82.6 million or 24.6% compared to fiscal 2001. The revenue declines in 2002
were primarily driven by lower sales from the networking markets, although our
entire product portfolio experienced declines. The revenue declines were a
result of both the general and industry economic downturn.
Revenues from the sale of Wireless networks/wireless infrastructure
(WIT/WIN) products for fiscal 2003 increased $2.4 million or 1.0% compared to
fiscal 2002. The revenue increase is attributable in part to strength in the
handset business and a continued shift to a higher-density SRAM product mix.
Revenue in this segment is dominated by our MoBL and MicroPower SRAMs product
families.
Revenues from the sale of WIT/WIN products for fiscal 2002 increased
$2.0 million or 0.8% compared to fiscal 2001. Revenue increases were primarily
due to the improved sales of our low-power memory products.
Page 22
Revenues from the sale of Computation and consumer products for fiscal
2003 increased $30.0 million or 11.8% compared to fiscal 2002. In the
computation sector, PC-related demand grew due to the increase in the adoption
rate of USB 2.0 technology, a serial plug-and-play connection standard for PCs
and peripherals. Growth in the consumer sector was driven by sales of our
programmable clocks.
Revenues from the sale of Computation and consumer products for fiscal
2002 increased $34.8 million or 15.8% compared to fiscal 2001. Growth in this
market segment was primarily a result of increases in unit demand from our USB
family of products and programmable clocks.
Revenues from the Cypress subsidiaries for fiscal 2003 increased $13.9
million or 69.2% compared to fiscal 2002. The growth was driven by increased
PSoC product revenue from Cypress MicroSystems (CMS), and increased
non-recurring engineering revenue, product revenue, and license revenue from
Silicon Light Machines (SLM). In addition, revenue increased as a result of the
consolidation of SunPower Corporation (SunPower), effective at the beginning of
fiscal 2003.
Revenues from the Cypress subsidiaries for fiscal 2002 increased $1.3
million or 6.9% compared to fiscal 2001. The growth was primarily attributable
to the introduction of PSoC product revenue from CMS.
As is typical in the semiconductor industry, ASPs of our products
generally decline over the lifetime of the products. To increase revenues,
Cypress seeks to expand its market share in the markets it currently serves and
to introduce and sell new products with higher ASPs. Cypress will seek to remain
competitive with respect to its pricing to prevent a further decline in sales.
COST OF REVENUES /GROSS MARGIN
Cost of revenues was $435.7 million, $443.4 million and $552.3 million
in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
Although our overall ASPs declined 2.8% during fiscal 2003, we were
generally able to offset this effect and increase our gross margin percentage by
5.1% as compared with fiscal 2002. This increase in gross margin is attributable
to the continued reduction of manufacturing cycle times, reduced die size,
improved labor productivity, more efficient use of capital resources, improved
defect densities, improved yields and ultimately lower manufacturing costs.
Wafer fabrication utilization increased from 2002 as die per wafer increased due
to the ramp of our 0.15-micron CMOS and 0.13-micron CMOS manufacturing
processes. In fiscal 2003, our gross margin increased by $15.3 million or 1.8 %
due to the sale of inventory previously reserved during the third quarter of
fiscal 2001 (which is further described below). Our future results could be
favorably impacted if we continue to sell fully reserved inventory. The amount
of that reserved inventory on hand at December 28, 2003 was $17.8 million.
Although our overall ASPs declined significantly during fiscal 2002, we
were generally able to offset this effect on our gross margin by implementing
cost cutting measures including reducing manufacturing capacity and related
headcount. In addition, we continued to reduce manufacturing cycle times, reduce
die size, improve labor productivity, improve efficient use of capital
resources, improve defect densities, improve yields and ultimately lower
manufacturing costs. Wafer fabrication utilization degraded slightly from 2001
as die per wafer increased due to the ramp of our 0.15-micron CMOS and
0.13-micron CMOS manufacturing processes. In fiscal 2002, our gross margin
increased by $20.3 million or 2.6% due to the sale of inventory reserved during
the third quarter of fiscal 2001. The amount of that reserved inventory on hand
at December 29, 2002 was $44.3 million.
During the third quarter of fiscal 2001, we received feedback from our
customers that indicated that the downturn in sales would last longer than
previously anticipated. Accordingly, we increased inventory reserves during the
quarter for inventory that we did not expect to sell. Cost of revenues in the
third quarter of fiscal 2001 included an unusual charge of $93.1 million for
inventory reserves. Property, plant and equipment with a net book value of $3.1
million were also written off to cost of revenues as a result of a periodic
physical count of property, plant and equipment completed during the third
quarter of fiscal 2001.
Given the cyclical and volatile nature of the semiconductor industry in
which we operate, significant judgments are made by us in assessing our reserve
requirements for inventory, as discussed in this report under "Critical
Accounting Policies". As a result, reserve requirements can fluctuate
significantly from period to period due to shifts in end customer demand and
other factors. In fiscal 2003 and 2002, total inventory reserves declined $36.6
million and $46.7 million respectively. In fiscal 2001, including the $93.1
million unusual charge, total net charges for inventory reserves were $125.4
million.
We are continuing our strong emphasis on new product development and
improvements in manufacturing technologies and yields, which we expect to reduce
manufacturing costs and help offset some of the impact of near term margin
declines.
Page 23
SEGMENT COST OF REVENUES/GROSS MARGIN
Our gross margin improved 5.1% to 47.9% in fiscal 2003 compared to 42.8%
in fiscal 2002. Our gross margin improved 10.2% to 42.8% in fiscal 2002 compared
to 32.6% in fiscal 2001. Following is gross margin discussion by our segments:
Business segments - Our gross margin improvement in fiscal 2003 compared
to fiscal 2002 was primarily attributable to the improvement in the Non-memory
segment. Our gross margin improvement in fiscal 2002 compared to fiscal 2001 was
equally attributable to the Memory and Non-memory segments.
Market segments - Our gross margin improvement in fiscal 2003 compared
to fiscal 2002 and in fiscal 2002 compared to fiscal 2001 was primarily
attributable to improvements in the Computation and consumer segment.
RESEARCH AND DEVELOPMENT
Year Ended
========================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
------------------------------------------------------------------------
Revenues $ 836,756 $ 774,746 $ 819,192
Research and development $ 251,432 $ 287,909 $ 267,522
R&D as percent of revenues 30.0% 37.2% 32.7%
========================================================================
Research and development ("R&D") expenditures in fiscal 2003 decreased
from fiscal 2002 and fiscal 2001 due to closing down of design centers,
headcount reductions in existing locations and a reduction in non-cash deferred
stock compensation. To keep pace with changing business conditions and with our
customers' needs, we have scaled back on some of our process and design projects
and refocused our attention on fewer projects that are critical to our success.
We believe that our future success will depend on our ability to develop
and introduce new products that will compete effectively on the basis of price,
performance, and ability to address customer needs. Our process technology
research focuses primarily on the continuous migration to smaller geometries. We
are ramping our latest 90-nanometer technology in manufacturing. We also started
initial development activity on the 65-nanometer technology in our eight-inch
R&D facility in San Jose, California.
We continued MRAM (magnetic RAM) process development for memory products
and embedded non-volatile applications in our Fab 1 in 2003. MRAM technology
will offer customers an improvement in read-write times, endurance and data
retention over currently available non-volatile memory products (Flash, EEPROM,
FERAM). Initial markets to be served include servers, high-end disk drives, and
industrial control systems.
We continued our joint development program with Honeywell to develop a
0.13-micron Silicon-On-Insulator ("SOI") process technology in Fab 4 in
Minnesota.
During fiscal 2003, we recorded $12.6 million in non-cash deferred stock
compensation and contingent cash compensation related to prior acquisitions.
These charges were primarily related to the In-System Design, Lara Networks,
Silicon Packets and Sahasra acquisitions. During fiscal 2002, we recorded $38.3
million in non-cash deferred stock compensation and contingent cash compensation
related to acquisitions. The decrease in non-cash deferred stock compensation
and contingent cash compensation in fiscal 2003 compared to fiscal 2002 was due
to employee terminations, non-achievement of milestones and accelerated
amortization in accordance with FASB Interpretation No. 28. During fiscal 2001,
we recorded $25.4 million in non-cash deferred stock compensation and contingent
cash compensation related to acquisitions. The increase in non-cash deferred
stock compensation and contingent cash compensation in fiscal 2002 compared to
fiscal 2001 is due to the full year effect in 2002 of our 2001 acquisitions.
We recorded charges of $5.5 million in the third quarter of fiscal 2001
upon reaching an agreement to settle a patent infringement suit for $8.0
million, of which $5.5 million pertained to prior periods. The remainder relates
to future product shipments and has been recorded as a prepaid asset that will
be expensed over three years. Property, plant and equipment with a net book
value of $1.5 million was written off to R&D as a result of a periodic physical
count of property, plant and equipment completed during the third quarter of
fiscal 2001.
Page 24
SELLING, GENERAL AND ADMINISTRATIVE
Year Ended
=============================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
-----------------------------------------------------------------------------
Revenues $ 836,756 $ 774,746 $ 819,192
Selling, general and administrative $ 130,349 $ 151,689 $ 165,655
-----------------------------------------------------------------------------
SG&A as percent of revenues 15.6% 19.6% 20.2%
=============================================================================
Selling, general and administrative ("SG&A") expenses in fiscal 2003
decreased from fiscal 2002 due to continuing cost cutting measures including the
tight control on outside services and discretionary spending. SG&A also
benefited compared to the prior year due to the charge incurred as we increased
our loss reserve by $14.8 million for loans outstanding to employees and former
employees under the stockholder-approved 2001 Employee Stock Purchase Assistance
Plan. (See "Employee Stock Purchase Assistance Plan," Note 14 in the
consolidated financial statements for additional information.)
SG&A expenses in fiscal 2002 decreased from fiscal 2001 due primarily to
the effects of the reduction in force from the third quarter of fiscal 2001
restructuring plan described below and continuing cost cutting measures. During
fiscal 2002, we also realized the cost benefits of transferring certain
administrative functions to our shared services center in the Philippines.
Commission and bonus expenses were lower due to the decline in our sales. In
addition, SG&A decreased as a result of significant declines in acquisition
related deferred compensation and contingent cash compensation costs. The
decline in such costs was a result of reduced amortization of compensation
charges and non-achievement of milestones. These improvements were partially
offset as we increased our loss reserve by $14.8 million in 2002 for loans
outstanding to employees and former employees under the stockholder-approved
2001 Employee Stock Purchase Assistance Plan.
Included in SG&A are non-cash deferred compensation and contingent cash
compensation charges related to our acquisitions. For the fiscal years ended
2003, 2002 and 2001, we recorded $0.5 million, $3.9 million and $11.1 million,
respectively, for these costs.
ACQUISITION AND OTHER COSTS
Year Ended
===========================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
---------------------------------------------------------------------------
Amortization of intangibles $ 37,716 $ 41,945 $ 39,730
Impairment of intangibles -- 20,303 36,848
Amortization of goodwill -- -- 32,895
Impairment of goodwill -- 14,409 29,062
In-process research and
development charge -- 2,166 22,718
Other charges (credits) (3,501) 6,053 --
---------------------------------------------------------------------------
Total acquisition and other costs $ 34,215 $ 84,876 $ 161,253
===========================================================================
Amortization of intangibles in fiscal 2003 relates to acquisitions made
prior to 2003.
During fiscal 2002, we acquired Sahasra Networks, Inc. and made an
equity investment in SunPower. In-process research and development charges and
amortization of intangibles in fiscal 2002 relate to current and prior
acquisitions.
The amortization of intangibles decreased in fiscal 2003 versus fiscal
2002 due mainly to a $20.3 million impairment of SLM intangibles at the end of
2002. The SLM impairment charge for fiscal 2002 was precipitated by further
changes in SLM's business plan that was completed in the fourth quarter of
fiscal 2002. The amortization of intangibles increased in fiscal 2002 versus
fiscal 2001 due to the acquisition of Sahasra and the full year effect of the
amortization of intangibles from the International Microcircuits, Lara Networks,
Inc. ("Lara"), Silicon Packets, Inc. ("Silicon Packets"), In-System Design, Inc.
("ISD") and ScanLogic Corporation ("ScanLogic") acquisitions, all companies
acquired in 2001. The SLM impairment charge for fiscal 2001 of $36.8 million was
precipitated by a severe economic downturn in the optical market in which SLM
participates. As a result, we reviewed SLM's long-lived assets, in accordance
with Statement of Financial Accounting Standards No. 121 "Accounting for the
impairment of long-lived assets and for long-lived assets disposed of" ("SFAS
No. 121"), for impairment and recognized in fiscal 2001 an impairment loss of
$36.8 million for existing technology impairment, representing the amount by
which the carrying value of the acquired existing technology exceeded the
estimated future cash flows of SLM.
Page 25
In fiscal 2001, amortization of goodwill related largely to our
acquisitions of Lara, ISD, ScanLogic, HiBand, IMI, SLM and Silicon Packets. In
accordance with Financial Accounting Standards Board ("FASB"), Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), we ceased amortizing goodwill at the end of fiscal 2001
and have not amortized goodwill for acquisitions subsequent to June 30, 2001.
In fiscal 2002, Cypress also recorded a goodwill impairment charge of
$14.4 million related to SLM in accordance with its annual impairment review
under SFAS 142. In fiscal 2001, Cypress recorded a goodwill impairment charge of
$29.1 million in accordance with SFAS No. 121 as a result of the severe downturn
in the optical market discussed above. The goodwill impairment charge recorded
represented the excess of the pro rata share of goodwill over the future
estimated cash flows of SLM.
The in-process research and development charges for fiscal 2002 relate
to our equity method investment in SunPower. In-process research and development
charges during fiscal 2001 relate to the acquisitions of IMI, HiBand, ScanLogic,
Lara, ISD and Silicon Packets, which were completed during fiscal 2001. For the
fiscal 2001 acquisitions, the valuation method used to value in-process
technology is a form of discounted cash flow method commonly known as the
"percentage of completion" approach. This approach is a widely recognized
appraisal method and is commonly used to value technology assets. The value of
the in-process technology is the sum of the discounted expected future cash
flows attributable to the in-process technology, taking into consideration the
percentage of completion of products utilizing this technology, utilization of
pre-existing technology, the risks related to the characteristics and
applications of the technology, existing and future markets and the
technological risk associated with completing the development of the technology.
The cash flows derived from the in-process technology projects were discounted
at rates ranging from 25% to 45%. Cypress believes these rates were appropriate
given the risks associated with the technologies for which commercial
feasibility had not been established. The percentage of completion for each
in-process project was determined by identifying the elapsed time invested in
the project as a ratio of the total time required to bring the project to
technical and commercial feasibility. The percentage of completion for
in-process projects acquired ranged from 77% for SunPower, 6% for Sahasra, 10%
to 90% for IMI, 5% to 75% for HiBand, 28% to 79% for ScanLogic, 1% to 89% for
Lara, 10% to 70% for ISD and 9% to 87% for Silicon Packets. Schedules were based
on management's estimate of tasks completed and the tasks to be completed to
bring the project to technical and commercial feasibility. In-process R&D
relating to the SunPower, IMI, ScanLogic, and ISD acquisitions resulted in the
completed development of products. In-process R&D projects relating to the
Hiband and Silicon Packets acquisitions were terminated before completion.
Other credits recorded during fiscal 2003 relates to the reversal of
accruals that were originally established in connection with potential penalties
we could incur as a result of our decision not to construct a second fabrication
facility in our Texas location. During fiscal 2002, we recorded other charges of
$6.1 million for obsolete design software that is no longer being used.
RESTRUCTURING
The semiconductor industry has historically been characterized by wide
fluctuations in demand for, and supply of, semiconductors. In some cases,
industry downturns have lasted more than a year. Prior experience has shown that
restructuring of operations, resulting in significant restructuring charges, may
become necessary if an industry downturn persists. During the three years ended
December 28, 2003, we had two restructuring events that were in various stages
of completion. The first was initiated in the third quarter of fiscal 2001
("Fiscal 2001 Restructuring Plan"), and the second was initiated in the fourth
quarter of fiscal 2002 ("Fiscal 2002 Restructuring Plan"). At the end of
December 28, 2003, both restructuring events had been substantially completed
with reserves remaining only for leases and employee benefits. The reserves will
decrease over time as we make lease payments and payments for employee benefits,
which will be paid through the second quarter of fiscal 2004.
The cumulative charge to operations for the Fiscal 2001 Restructuring
Plan and the Fiscal 2002 Restructuring Plan was $116.2 million and $47.5
million, respectively. For detailed information on these events, refer to Note 7
in the Consolidated Financial Statements.
Page 26
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME AND (EXPENSE), NET
Total interest income (expense) and other was $5.8 million for fiscal
2003 compared to $(14.9) million for fiscal 2002 and $22.4 million for fiscal
2001. Interest income and other, net includes interest income, amortization of
bond issuance costs, foreign exchange gains and losses and other non-operating
items.
Year Ended
===========================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
---------------------------------------------------------------------------
Interest income $ 14,936 $ 21,212 $ 48,231
Interest expense (15,613) (19,197) (22,398)
Other income and (expense), net 6,472 (16,931) (3,411)
---------------------------------------------------------------------------
Total interest income (expense)
and other $ 5,795 $ (14,916) $ 22,422
===========================================================================
Interest income for all three fiscal years consists primarily of
interest income on Cypress's cash equivalents, short- and long-term investments.
Also, included in Interest income were amounts earned from employees related to
our Employee Stock Purchase Assistance Plan (see Note 14 to the consolidated
financial statements). These amounts were $3.9 million, $5.2 million and $2.1
million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
Interest expense was $15.6 million for fiscal 2003, compared to $19.2
million in fiscal 2002 and $22.4 million in fiscal 2001. Interest expense for
each of the fiscal years is primarily associated with the 4.0% Convertible
Subordinated Notes due February 1, 2005 ("4.0% Notes"), issued in January 2000,
the 3.75% Convertible Subordinated Notes due July 1, 2005 ("3.75% Notes"),
issued in June 2000 and the 1.25% Convertible Subordinated Notes plus cash due
June 15, 2008 ("1.25% Notes"), issued in June 2003. Interest expense decreased
in fiscal 2003 compared to fiscal 2002 due to the full redemption of our 4.0%
convertible subordinated notes on July 8, 2003 and the partial redemption of our
3.75% convertible subordinated notes on July 1, 2003. The decrease in interest
expense in fiscal 2002 compared to fiscal 2001 is attributable to the repurchase
of $101.6 million in principal of the 3.75% Notes that occurred between November
2001 and June 2002.
Other income and (expense), net was $6.5 million for fiscal 2003,
compared to $(16.9) million in fiscal 2002 and $(3.4) million in fiscal 2001.
Below is a summary of the major components:
Year Ended
=============================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
-----------------------------------------------------------------------------
Amortization of bond issuance costs $ (3,686) $ (2,834) $ (3,353)
Gain (loss) on repurchase of bonds (7,524) 5,946 7,241
Gain on sale of investment in NVE
Corporation 17,126 -- --
Investment impairment charges 554 (18,992) (8,900)
Foreign exchange gain (loss) 473 915 287
Minority interest 1,045 -- --
Other (1,516) (1,966) 1,314
-----------------------------------------------------------------------------
$ 6,472 (16,931) $ (3,411)
=============================================================================
Other income and (expense), net of $6.5 million for fiscal 2003
primarily reflects our gain on sale of an investment in NVE Corporation of $17.1
million offset by our loss on repurchase of our 4.0% Notes and 3.75% Notes of
$(7.5) million and amortization of deferred financing costs of $(3.7) million.
As of December 28, 2003, we hold warrants to purchase 400,000 shares of NVE
common stock at $15.00 per share. The closing price of NVE common stock at
December 28, 2003 was $50.06 per share. Other income and (expense), net of
$(16.9) million for fiscal 2002 primarily reflects write-downs of $19.0 million
of investments in development stage companies and other investments, and the
amortization of deferred financing costs of $2.8 million. These were partially
offset by gains of $5.9 million recognized on the repurchase of our 3.75% Notes.
In fiscal 2001, other income and (expense), primarily reflects a $8.9 million
write-down of long-term investments and $3.4 million related to the amortization
of deferred financing costs. These costs were somewhat offset by gains on the
repurchase of convertible notes of $7.2 million. The gain on the repurchase of
our convertible subordinated notes was previously classified as extraordinary,
but has been reclassified to other income and (expense), net in accordance with
SFAS No. 145, "Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and
Technical Corrections" ("SFAS 145").
Page 27
TAXES
A tax expense of $2.8 million was recognized in fiscal 2003 compared to
tax expense of $2.8 million in fiscal 2002 and tax benefit of $29.8 million in
fiscal 2001. The expense in fiscal 2003 and 2002 was largely attributable to
foreign income taxes in certain jurisdictions. No tax benefit was recognized in
fiscal 2003 and 2002 for the future tax benefit of operating losses, as
management believes it is more likely than not that the benefit will not be
realized. The fiscal 2001 tax benefit was attributable primarily to current year
net operating losses; however, the tax benefit of these losses was limited to
the amount of prior taxes that could be recovered. Our effective tax rate varies
from the U.S. statutory rate primarily due to our assessment of the utilization
of loss carryovers and earnings of foreign subsidiaries taxed at different
rates. The net deferred tax assets of $171.0 million at December 28, 2003 were
fully reserved due to uncertainty of realization in accordance with the
accounting procedures as established by SFAS No. 109, "Accounting for Income
Taxes." (See Note 18 to consolidated financial statements for more details).
LIQUIDITY AND CAPITAL RESOURCES
Year Ended
=========================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
-------------------------------------------------------------------------
Cash, cash equivalents and
short-term investments $ 198,617 $ 127,937 $ 205,422
Restricted Cash 62,814 62,380 74,968
Long-term investments (1) 118,437 16,574 134,495
Working capital 307,716 314,187 372,333
Long-term debt (excluding
current portion) 684,260 468,900 524,058
=========================================================================
(1) Includes a liquid investment in a limited liability partnership
(see Note 3 to the consolidated financial statements for
details).
During fiscal 2003, our total cash, cash equivalents and investments
including restricted cash, increased by $173.0 million. The increase was
primarily due to an operating cashflow of $99.2 million, with the remaining
increase mainly provided by our long term debt refinancing.
Long-term debt increased $215.4 million in fiscal 2003 compared to
fiscal 2002 as a result of our restructuring of our debt obligations, as
described below under Key Components of Cash Flow and Liquidity.
KEY COMPONENTS OF CASH FLOW
Year Ended
-------------------------------------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
-------------------------------------------------------------------------
Net cash flow generated from
operating activities......... $ 99,152 $ 23,788 $ 109,838
Net cash flow used for
investing activities......... (94,567) (13,646) (328,977)
Net cash flow generated from
(used for) financing
activities................... 91,923 (32,941) (221,887)
-------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents.... $ 96,508 $ (22,799) $ (441,026)
=========================================================================
During fiscal 2003, cash generated from operations was $99.2 million,
which included an increase in working capital of $51.0 million. Inventory
reductions due to increased sales were more than offset by a significant
increase in accounts receivable and a significant decrease in accounts payable.
The sale of investments, net of purchases, used cash of $75.7 million in
fiscal 2003, as we made additional investments due to our improved cash
position. The acquisition of property, plant, and equipment used an additional
$78.5 million in cash. These reductions in cash were partially offset by an
increase from sale of investments in other companies of $23.4 million and the
collection of Employee Stock Purchase Assistance Plan loans from employees of
$29.9 million.
During fiscal 2003, we completed a convertible subordinated debt
financing of $600.0 million in aggregate principal amount. Of the proceeds
received, we used $400.2 million to retire all of our 4% Notes and $68.7 million
of our 3.75% Notes, $95.3 million to repurchase 9.0 million shares of our common
stock, $18.5 million for debt issuance costs and $49.3 million to purchase a
call spread option on our common stock to mitigate the potential dilution of the
convertible debt.
During fiscal 2002, cash generated from operations was $23.8 million,
which included an increase in working capital of $33.3 million. With continued
weak sales, manufacturing capacity was reduced to avoid additional inventory
builds. Accounts payable
Page 28
declined as we significantly slowed purchases of capital equipment in the latter
part of fiscal 2002. These changes were partially offset by a decline in net
accounts receivable commensurate with the change in revenues.
Net of purchases, the sale of investments generated $149.8 million in
cash in fiscal 2002, as we liquidated investments to fund capital expenditures
and business acquisitions. This was offset by the acquisition of $158.5 million
in property, plant and equipment and $24.8 million in investments in other
companies.
In fiscal 2002, the issuance of common shares net of repurchases
generated $19.7 million while the purchase by us of our 3.75% convertible
subordinated notes consumed $48.8 million.
During fiscal 2001, cash provided by operating activities of $109.8
million was primarily attributed to changes in operating assets and liabilities
of $77.4 million and net loss adjusted for non-cash items.
Net cash flows used in investing activities of $329.0 million for fiscal
2001 related primarily to the use of $352.1 million in cash for acquisitions,
net of cash acquired, $176.8 million for the purchases of property, plant and
equipment and $116.3 million for loans made by Cypress to employees under the
Employee Stock Purchase Assistance Plan. Purchases of investments totaled $183.2
million during fiscal 2001, while investments, which were sold or matured,
totaled $502.7 million.
Net cash flows used for financing activities were $221.9 million during
fiscal 2001. Repurchases of common stock were $190.5 million, redemption of
convertible debt was $53.6 million and purchases of private placement equity
options, net were $13.9 million. These cash outflows were offset by cash inflows
of $10.6 million related to the premiums received from the writing of stock put
options and $30.9 million related to the issuance of common shares from the
exercise of options or purchases through the ESPP.
LIQUIDITY
Based on our current plan, we expect to generate positive cash flow from
operations in the fiscal year ending January 2, 2005. Our expected significant
investment and financing cash outlays for the fiscal year ending January 2, 2005
include capital expenditures of approximately $144.1 million for investment in
our product development and infrastructure initiatives. Our board of directors
has approved programs authorizing the repurchase of our common stock or
convertible subordinated notes (the "subordinated notes") in the open market at
anytime. However, the timing and actual number of shares or principal amount to
be repurchased is limited to $15.0 million, is at the discretion of management
and is contingent on numerous factors including cash flows. We have $668.7
million of aggregate principal amount in convertible subordinated notes that are
due in July 2005 and June 2008 in the amount of $68.7 million and $600.0
million, respectively. In connection with the $600.0 million of 1.25% Notes, we
may at any time prior to maturity, elect to terminate the holders' conversion
rights if the closing price of Cypress's common stock exceeds $21.75 (subject to
certain adjustments) for 20 days out of a 30 consecutive trading day period. If
we issue a notice of termination of conversion rights prior to June 20, 2006, we
will pay additional interest in an amount equal to three years of interest, less
any interest actually paid prior to the conversion date, to holders who convert
their 1.25% Notes. Had we been allowed to terminate the conversion rights at
December 28, 2003 and all holders converted their notes, we would have been
required to pay $18.8 million in additional interest plus either $180.0 million
of cash or $189.5 million in value of Cypress equivalent shares to satisfy the
$300 cash payable upon conversion. Our current intention, should we terminate
the conversion rights, would be to satisfy the obligation in cash and not shares
of our common stock. The 1.25% Notes are subject to compliance with certain
covenants that do not contain financial ratios. As of December 28, 2003, Cypress
was in compliance with these covenants. If we failed to be in compliance with
these covenants beyond any applicable grace period, the trustee of the
subordinated notes, or the holders of a specific percentage thereof, would have
the ability to demand immediate payment of all amounts outstanding.
As more fully discussed in Note 19 to our consolidated financial
statements included in this report, we have entered into several synthetic
operating lease agreements for manufacturing and office facilities. Each of
these leases requires us to purchase the property or to arrange for the property
to be acquired by a third party at lease expiration. If Cypress had exercised
its right to purchase all the properties subject to these leases at December 28,
2003, it would have been required to make a payment and record assets totaling
$54.5 million. We are required to maintain restricted cash or investments to
serve as collateral for these leases. As of December 28, 2003, the amount of
restricted cash recorded was $62.8 million, which was classified as a
non-current asset on the consolidated balance sheet.
In September 2003, we entered into a $50.0 million, twenty-four month
revolving line of credit with Silicon Valley Bank. As of the end of December 28,
2003, there was no amount outstanding under the line of credit. Loans made under
the line of credit bear interest based upon the Wall Street Journal Prime Rate
or LIBOR plus 175 basis points at our election. The line of credit agreement
includes a variety of covenants including restrictions on the incurrence of
indebtedness, incurrence of loans, the payment of dividends or distributions on
our capital stock, and transfers of assets and financial covenants with respect
to tangible net worth and a quick
Page 29
ratio. Our obligations under the line of credit are guaranteed and secured by
the stock of certain of its subsidiaries. We intend to use the line of credit on
an as needed basis to fund working capital and capital expenditures including
future obligations under the SunPower agreements currently being negotiated.
On May 24, 2002 we entered into a Preferred Stock Purchase Agreement
with SunPower and certain other investors named therein, pursuant to which the
investors and we agreed to acquire SunPower's Series One Preferred Stock.
In connection with the transactions contemplated by the Preferred Stock
Purchase Agreement, we entered into a note purchase and line of credit agreement
with SunPower and as consideration therefore, Cypress received a warrant to
purchase up to 16,000,000 shares of SunPower's Series Two Preferred Stock at an
exercise price of $1 per share, for cash. In accordance with the note purchase
and line of credit agreement, as we did not exercise the warrant by April 1,
2003, we became obligated to fund SunPower up to $5.6 million through May 2004
at a rate of up to $0.4 million per month. As of December 28, 2003, we had
loaned SunPower $3.2 million bearing interest at the applicable federal rate in
accordance with this obligation. We allowed the warrant to expire unexercised on
January 31, 2004. We are currently in negotiations with SunPower for future
funding of their operations. We currently expect the outcome of these
negotiations to result in cash outlays of approximately $50 million by us to
SunPower in fiscal 2004. At December 28, 2003, we and our CEO own approximately
57% and 6% of SunPower respectively. The remaining 37% of SunPower is owned by
minority shareholders.
In June 1997, Cypress borrowed 700.0 million yen at 2.1% from Sumitomo
Bank Japan. The outstanding principal, including accrued interest, amounting to
approximately $3.9 million was repaid on June 20, 2003.
Our acquisition agreements obligate us to pay certain contingent cash
compensation based on continued employment and meeting certain revenue or
project milestones. As of December 28, 2003, total cash contingent compensation
that could be paid under our acquisition agreements assuming all contingencies
are met is $4.7 million.
CONTRACTUAL OBLIGATIONS
Below is a summary of fixed payments related to certain contractual
obligations. Payment timing may be subject to change.
CONTRACTUAL OBLIGATIONS Payments due by period
--------------------------------------------------------------------------------------------------------------------
Total Less than 1 year 1-3 years 3-5 years More than 5 years
--------------------------------------------------------------------------------------------------------------------
Long-Term Debt
Convertible Subordinated Notes
1.25% Notes - Principal $ 600,000 $ -- $ -- $ 600,000 $ --
1.25% Notes - Interest 33,750 7,500 15,000 11,250 --
3.75% Notes - Principal 68,652 -- 68,652 -- --
3.75% Notes - Interest 5,148 2,574 2,574 -- --
Other - Principal 20,675 7,017 12,270 1,388 --
Other - Interest 1,969 985 875 109 --
Note to minority shareholder-
Principal 1,950 -- -- 1,950 --
Note to minority shareholder-
Interest 313 -- -- 313 --
Operating Leases
Synthetic leases 8,403 1,225 3,612 3,566 --
Other 31,141 13,132 12,001 3,127 2,881
Purchase Obligations (1) 129,607 60,561 23,927 45,119 --
Customer advances (2) 25,081 25,081 -- -- --
--------------------------------------------------------------------------------------------------------------------
Total $ 926,689 $ 118,075 $ 138,911 $ 666,822 $ 2,881
--------------------------------------------------------------------------------------------------------------------
(1) Purchase obligations are principally for manufacturing equipment,
facilities and bulk gas and chemicals.
(2) The customer advance is related to a financing and supply agreement into
which Cypress entered with a specific customer in October 2000.
OFF-BALANCE SHEET ARRANGEMENTS
On June 27, 2003, Cypress entered into a synthetic operating lease
agreement for manufacturing and office facilities located in Minnesota and
California. (See Note 19 of the Notes to Financial Statements for a description
of this lease arrangement.) The synthetic lease enables us to lease rather than
acquire the facilities. This results in improved cash flow through lower lease
payments compared to expending much more cash in a direct acquisition of the
properties.
Page 30
As of December 28, 2003, Cypress had outstanding a series of equity
options on Cypress common stock with an initial cost of $26.0 million, which is
classified in stockholders' equity in the accompanying condensed consolidated
balance sheet. (See Note 10 of the Notes to Financial Statements for a
description of this equity options arrangement.) We entered into the equity
options as part of our 2001 stock repurchase program. Depending upon our common
stock price at the maturity date of the equity options, we either take delivery
of our common stock resulting in a reduction to our outstanding common stock or
receive cash resulting in a return on the cash expended.
In conjunction with the 1.25% convertible subordinated notes offering in
June 2003, Cypress purchased a call spread option (the "Option") on 32 million
Cypress common shares expiring in July 2004 for $49.3 million. (See Note 10 of
the Notes to Financial Statements for a description of the Option). The Option
is designed to mitigate stock dilution from conversion of the 1.25% Notes. The
Option has value if the average market price per share of Cypress's common stock
upon exercise or expiration of the Option is greater than $15 per share. The
Option may be settled at Cypress's election in either net shares or in cash.
Settlement of the Option in net shares on the expiration date would result in
Cypress receiving a number of shares, not to exceed 12.4 million shares, of our
common stock with a value equal to the amount otherwise receivable on cash
settlement. The cash receivable on settlement is determined by two factors: (1)
the average value of Cypress's trading price per share over a twenty day trading
period beginning July 1, 2004 and ending July 29, 2004 and (2) whether such
average value is within, above or below the range of the lower and upper
strikes. If within, then the cash settlement is determined by subtracting the
lower strike ($15) from the average value (determined above) multiplied by 32
million. If above the range, then the cash settlement is limited to the range
($9.50) multiplied by 32 million or $304 million. If below the lower strike
($15.00) then there would be no cash settlement as the call spread would be
worthless. Should there be an early unwind of the Option the amount of cash or
net shares potentially received by Cypress will be dependent upon then existing
overall market conditions, on Cypress stock price, the volatility of Cypress
stock and the amount of time remaining on the Option. As at December 28, 2003,
the amount of cash Cypress would receive should it have chosen to unwind the
Option was $161.4 million.
CAPITAL RESOURCES AND FINANCIAL CONDITION
Our long-term strategy is to maintain a minimum amount of cash and cash
equivalents for operational purposes and to invest the remaining amount of our
cash in interest bearing and highly liquid cash equivalents and marketable debt
securities. Accordingly, in addition to the $183.7 million in cash and cash
equivalents that we had at the end of fiscal 2003 for short-term requirements,
we had at fiscal year end approximately $133.4 million in marketable debt and
equity securities that are available for future operating, financing and
investing activities, for a total liquid cash and investment position of $317.1
million. Cypress has an additional $62.8 million of restricted cash (as more
fully discussed in Note 19 to our consolidated financial statements included in
this report) for a total cash, investment and restricted cash position of $379.9
million. As of December 28, 2003, Cypress had outstanding $68.7 million in
principal amount of its 3.75% Notes and $600 million in 1.25% Notes. We also
maintain the ability to issue an aggregate of approximately $112.5 million in
debt, equity and other securities under a U.S. Securities and Exchange Commision
shelf registration statement we filed in fiscal 2000.
We believe that liquidity provided by existing cash, cash equivalents,
investments, and our borrowing arrangements described above and cash generated
from operations, will provide sufficient capital to meet our requirements for at
least the next twelve months. However, should prevailing economic conditions
and/or financial, business and other factors beyond our control adversely affect
our estimates of our future cash requirements (including our debt obligations),
we would be required to fund our cash requirements by alternative financing.
There can be no assurance that additional financing, if needed, would be
available on terms acceptable to us or at all.
We may choose at any time to raise additional capital to strengthen our
financial position, facilitate growth, and provide us with additional
flexibility to take advantage of business opportunities that arise.
SUBSEQUENT EVENTS
On January 6, 2004, Cypress acquired all of the outstanding common and
preferred stock of Cascade Semiconductor Corporation ("Cascade"), a company
specializing in one transistor (1T) Pseudo-SRAM products for wireless
applications, including cell phones.
Cypress acquired Cascade for total consideration of $18.5 million in
cash and stock to be paid over three years, of which approximately half is
expected to be future compensation charges as some of the amounts are tied to
future employment
Page 31
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and the results
of our operations are based upon our consolidated financial statements included
in this report and the data used to prepare them. Our consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States and we are required to make estimates, judgments
and assumptions in the course of such preparation. Note 1 to the consolidated
financial statements describes the significant accounting policies and methods
used in the preparation of the consolidated financial statements. On an ongoing
basis, we re-evaluate our judgments and estimates including those related to
revenue recognition, product returns, allowances for doubtful accounts
receivable and employee loans, inventories, valuation of long-lived assets
including intangibles, investment impairments, restructuring charges, goodwill
impairments, income taxes, litigation and contingencies. We base our estimates
and judgments on our historical experience, knowledge of current conditions and
our beliefs of what could occur in the future considering available information.
Actual results may differ from these estimates under different assumptions or
conditions. We believe the following are our critical accounting policies that
are affected by significant estimates, assumptions and judgments used in the
preparation of our consolidated financial statements.
Revenue Recognition
We generate revenue by selling our products to original equipment
manufacturers and distributors. Our policy is to recognize revenue from sales to
customers when title and the rights and risks of ownership have passed to the
customer, when persuasive evidence of an arrangement exists, the product has
been delivered, the price is fixed and determinable and collection of the
resulting receivable is reasonably assured.
We allow certain global distributors, primarily based in the United
States, rights of return and other credits for price protection. Given the
uncertainties associated with the levels of returns and other credits issuable
to these distributors, we defer recognition of revenue from sales to these
distributors until they have resold our products. Our method of deferral is
based on certain assumptions, including average gross margins. Reserves are
provided for estimated returns relating to rights of return and other credits
for price protection. If actual results differ from our estimates,
future-operating results could be adversely affected.
Sales to certain other primarily non-U.S. based distributors carry
either no or very limited rights of return. We have historically been able to
estimate returns and other credits from these distributors and accordingly have
historically recognized revenue from sales to these distributors on shipment,
with a related allowance for potential returns established at the time of our
sale. We must make estimates of potential future product returns and revenue
adjustments related to current period product revenue. Management analyzes
historical returns, current economic trends in the semiconductor industry,
changes in customer demand and acceptance of our products when evaluating the
adequacy of our allowance for sales returns. If management made different
judgments or utilized different estimates, material differences in the amount of
our reported revenue may result. We provide for these situations based on our
experience with specific customers and our expectations for revenue adjustments
based on economic conditions within the semiconductor industry. At December 28,
2003, December 29, 2002 and December 30, 2001 our reserves for sales returns
were $2.4 million, $1.8 million and $3.6 million, respectively.
Allowance for doubtful accounts and employee loans
We maintain an allowance for doubtful accounts for losses that we
estimate will arise from our customers' inability to make required payments. We
make our estimates of the collectibility of our accounts receivable by analyzing
historical bad debts, specific customer creditworthiness and current economic
trends. At December 28, 2003, the allowance for doubtful accounts was $0.9
million, at December 29, 2002, the allowance for doubtful accounts was $1.7
million and at December 30, 2001 it was $3.7 million.
As of December 28, 2003, Cypress has outstanding loans, consisting of
principal and cumulative accrued interest, of $80.5 million to employees and
former employees under the shareholder-approved 2001 Employee Stock Purchase
Assistance Plan. Each loan is evidenced by a full recourse promissory note
executed by the employee in favor of Cypress and is secured by a pledge of the
shares of Cypress's common stock purchased with the proceeds of the loan. As of
December 28, 2003, Cypress has a loss reserve against these accounts of $16.2
million. In determining the reserve, management considered various factors,
including an independent fair value analysis of these employee and former
employee loans and the underlying collateral. At December 28, 2003, the carrying
value of the loan exceeded the underlying common stock collateral by $6.4
million. If the underlying assumptions supporting our reserve requirements
change, including the value of our stock price, future-operating results could
be adversely affected.
Page 32
Accounting for income taxes
Our global operations involve manufacturing, R&D and selling activities.
Profit from non-US activities are subject to local country taxes but are not
subject to U.S. tax until repatriated back to the U.S. It is our intention to
permanently reinvest these earnings outside the U.S. We record a valuation
allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. We consider historical levels of income, expectations
and risks associated with estimates of future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance. In the future, should we determine that we would be able to realize
deferred tax assets in the future in excess of the net recorded amount, we would
record an adjustment to the deferred tax asset valuation allowance. This
adjustment would increase income in the period such determination was made.
The calculation of tax liabilities involves dealing with uncertainties
in the application of complex global tax regulations. We recognize potential
liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer
necessary. If the estimate of tax liabilities proves to be less than the
ultimate assessment, a further charge to expense would result.
Valuation of Inventory
We write down our inventory for "lower of cost or market" reserves, aged
inventory reserves and obsolescence reserves. Inventory reserves are generally
recorded when the inventory for a device exceeds nine months of demand for that
device and/or when individual parts have been in inventory for greater than six
months. Our inventories represent high-technology parts that may be subject to
rapid technological obsolescence and which are sold in a highly competitive
industry. If actual product demand or selling prices are less favorable than we
estimate, we may be required to take additional inventory write-downs.
Conversely, if demand comes back for devices that have been fully reserved, our
future margins may be higher.
Valuation of Long-Lived Assets
Our business requires heavy investment in manufacturing facilities that
are technologically advanced but can quickly become significantly under-utilized
or rendered obsolete by rapid changes in demand for semiconductors produced in
those facilities. In addition, we have recorded intangible assets related to our
acquisitions.
We evaluate our long-lived assets and intangible assets in accordance
with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). We review our other long-lived assets, including property and
equipment and other identifiable finite intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable. Factors considered important that could
result in an impairment review include significant underperformance relative to
expected historical or projected future operating results, significant changes
in the manner of use of acquired assets or the strategy for its business,
significant negative industry or economic trends, and a significant decline in
our stock price for a sustained period of time. Impairments are recognized based
on the difference between the fair value of the asset and its carrying value,
and fair value is generally measured based on discounted cash flow analyses.
We recorded no impairment charges on indefinite useful lived intangibles
in the fourth quarter of fiscal 2003 but did record an impairment charge in the
fourth quarter of fiscal 2002 of $20.3 million related to SLM.
If there is a significant decrease in our business in the future, we may
be required to record impairment charges in the future.
Goodwill Impairments
We perform goodwill impairment tests on an annual basis and between
annual tests in certain circumstances for each reporting unit. See Note 5 in the
consolidated financial statements included in this report.
The process of evaluating the potential impairment of goodwill is highly
subjective and requires significant judgment at many points during the analysis.
In estimating the fair value of the businesses with recognized goodwill for the
purposes of our fiscal 2003 consolidated financial statements, we made estimates
and judgments about the future cash flows of these businesses. Our cash flow
forecasts were based on assumptions that are consistent with the plans and
estimates we are using to manage the underlying businesses. In addition, we made
certain judgments about allocating shared assets such as accounts receivable and
inventory to the
Page 33
estimated balance sheet for those businesses. We also considered our market
capitalization on the dates of our impairment tests under SFAS 142, in
determining the fair value of the respective businesses.
In connection with the adoption of SFAS 142, effective the beginning of
fiscal 2002, we completed the required transitional analysis in the first
quarter of fiscal 2002 with no impairment charge required. In addition, as
required by SFAS 142, we performed our annual goodwill impairment test. We
performed this test in the fourth quarter of fiscal 2003 and determined that no
goodwill impairment was required. However, changes in these estimates, including
projected cash flows of our market capitalization, could cause one or more of
the businesses to be valued differently, which could result in a future
impairment of our remaining goodwill.
Investments in privately-held companies
At December 28, 2003, the carrying value of our portfolio of strategic
investments in non-marketable equity securities (privately held companies)
totaled $4.3 million. Our ability to recover our investments in private,
non-marketable equity securities and to earn a return on these investments is
primarily dependent on how successfully these companies are able to execute to
their business plans and how well their products are accepted, as well as their
ability to obtain venture capital funding to continue operations and to grow. In
the current equity market environment, their ability to obtain additional
funding as well as to take advantage of liquidity events, such as initial public
offerings, mergers and private sales, is significantly constrained.
Under our accounting policy, the carrying value of a non-marketable
investment is the amount paid for the investment unless it has been determined
to be other than temporarily impaired, in which case we write the investment
down to its impaired value. We review all of our investments periodically for
impairment; however, for non-marketable equity securities, the impairment
analysis requires significant judgment. This analysis includes assessment of
each investee's financial condition, the business outlook for its products and
technology, its projected results and cash flows, the likelihood of obtaining
subsequent rounds of financing and the impact of any relevant contractual equity
preferences held by us or others. If an investee obtains additional funding at a
valuation lower than our carrying amount, we presume that the investment is
other than temporarily impaired, unless specific facts and circumstances
indicate otherwise, for example, when we hold contractual rights that give us a
preference over the rights of other investors. As the equity markets have
declined significantly over the past few years, we have experienced substantial
impairments in our portfolio of non-marketable equity securities. If equity
market conditions do not improve, as companies within our portfolio attempt to
raise additional funds, the funds may not be available to them, or they may
receive lower valuations, with more onerous investment terms than in previous
financings, and the investments will likely become impaired. However, we are not
able to determine at the present time which specific investments are likely to
be impaired in the future, or the extent or timing of individual impairments. We
recorded impairments of non-marketable equity investments of $1.8 million in
fiscal 2003 and $18.1 million in fiscal 2002.
Restructuring costs
We currently have two active restructuring plans - one initiated in the
third quarter of fiscal 2001 and the other initiated in the fourth quarter of
fiscal 2002 after it became clear that actions taken in the previous year would
not be sufficient to return the company to profitability. Both plans were
designed to reduce costs and expenses in order to return the company to
profitability.
The current accounting for restructuring costs requires us to record
provisions and charges when we have a formal and committed plan. In connection
with these plans, we have recorded estimated expenses for severance and
outplacement costs, lease cancellations, asset write-offs and other
restructuring costs. Given the significance of, and the timing of the execution
of such activities, this process is complex and involves periodic reassessments
of estimates made at the time the original decisions were made. We continually
evaluate the adequacy of the remaining liabilities under our restructuring
initiatives. Although we believe that these estimates accurately reflect the
costs of our restructuring plans, actual results may differ, thereby requiring
us to record additional provisions or reverse a portion of such provisions.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), was issued in January
2003. FIN 46 requires that if an entity is the primary beneficiary of a variable
interest entity, the assets, liabilities and results of operations of the
variable interest entity should be included in the consolidated financial
statements of the entity. The provisions of FIN 46 are effective immediately for
all arrangements entered into after January 31, 2003. Cypress has not invested
in any variable interest entities after January 31, 2003. For those arrangements
entered into prior to January 31, 2003, the FASB recently delayed the required
implementation date such that the provisions of FIN 46 are required to be
adopted no later than the end of the first reporting period that ends after
March 15, 2004. On June 27, 2003, Cypress entered into a new operating lease to
refinance its then existing operating leases with respect to certain
manufacturing and office facilities located in Minnesota and California (see
Note 19). Cypress refinanced these leases in a manner that best met its
financing strategy. The new operating lease is
Page 34
not subject to the consolidation provisions of FIN 46. Cypress does not expect
the finalization of FIN 46 by the FASB relating to variable interest entities
created prior to January 31, 2003 to impact the consolidated financial
statements as the issues currently under discussion do not impact Cypress.
On December 17, 2003, the Staff of the Securities and Exchange
Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 104 ("SAB
104"), Revenue Recognition, which supercedes SAB 101, Revenue Recognition in
Financial Statements. SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). Additionally, SAB 104
rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers (the "FAQ") issued with SAB 101 that had been codified in
SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. While the wording of SAB 104 has changed to reflect
the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. EITF 00-21 was effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. There was no impact to the consolidated financial statements related to
SAB 104 for fiscal 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST AND FOREIGN CURRENCY EXCHANGE RATES
Cypress is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To mitigate these risks,
Cypress utilizes derivative financial instruments. Cypress does not use
derivative financial instruments for speculative or trading purposes.
The fair value of Cypress's investment portfolio would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of
Cypress's investment portfolio. An increase in interest rates would not
significantly increase interest expense due to the fixed nature of Cypress's
debt obligations.
A majority of Cypress's revenue and capital spending is transacted in
U.S. dollars. However, Cypress does enter into these transactions in other
currencies, primarily Japanese Yen and Euro. To protect against reductions in
value and the volatility of future cash flows caused by changes in foreign
exchange rates, Cypress has established revenue and balance sheet hedging
programs. Cypress's hedging programs reduce, but do not always eliminate, the
impact of foreign currency exchange rate movements. Cypress had no Euro exposure
as of December 28, 2003.
All of the potential changes noted above are based on sensitivity
analyses performed on Cypress's balances as of December 28, 2003.
EQUITY OPTIONS
At December 28, 2003, Cypress had outstanding a series of equity options
on Cypress Common Stock with an initial cost of $26.0 million, which is
classified in stockholders' equity. The contracts require physical settlement
and were extended in January 2004 to February 2004. Upon expiration of the
options, if Cypress's stock price is above the threshold price of $21 per share,
Cypress will receive a settlement value totaling $30.3 million. If Cypress's
stock price is below the threshold price of $21 per share, Cypress will receive
1.4 million shares of its common stock. Alternatively, the contract may be
renewed and extended. During fiscal 2003, the contracts resulted in net cash
inflows of $0.7 million.
In conjunction with the 1.25% Notes offering in June 2003, Cypress
purchased a call spread option on Cypress's common stock (the "Option") maturing
on July 15, 2004 for $49.3 million. The Option, including fees and costs, has
been accounted for as an equity transaction in accordance with Emerging Issues
Task Force No. 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock." The Option covers 32
million shares of Cypress common stock. The Option is designed to mitigate
dilution from conversion of the 1.25% Notes in the event that the market price
per share of Cypress's common stock upon exercise of the Option is greater than
$15 per share and is less than or equal to $24.50 per share. The Option may be
settled at Cypress's election in either net shares or in cash. Settlement of the
Option in net shares on the expiration date would result in Cypress receiving a
number of shares, not to exceed 12.4 million shares, of its common stock with a
value equal to the amount otherwise receivable on cash settlement. The amount
receivable on cash settlement will be determined based upon a twenty day
averaging period beginning on July 1, 2004. Should there be an early unwind of
the Option, the amount of cash or net shares potentially received by Cypress
will be dependent upon then existing overall market conditions, on the Cypress's
stock price, the volatility of Cypress's stock and the amount of time remaining
on the Option.
Page 35
INVESTMENTS IN PRIVATELY-HELD COMPANIES
Cypress has also invested in several privately held companies, all of
which can be considered in the startup or development stages. These investments
are inherently risky as the market for the technologies or products they have
under development are typically in the early stages and may never materialize.
As of December 28, 2003, Cypress had invested $25.9 million in development stage
companies. The carrying value of these investments at December 28, 2003, was
$4.3 million.
As our equity investments generally do not permit us to exert
significant influence or control over the entity in which we are investing,
these amounts generally represent our cost of the investment, less any
adjustments we make when we determine that an investment's net realizable value
is less than its carrying cost.
The process of assessing whether a particular equity investment's net
realizable value is less than its carrying cost requires a significant amount of
judgment. In making this judgment, we carefully consider the investee's cash
position, projected cash flows (both short- and long-term), financing needs,
most recent valuation data, the current investing environment, management/
ownership changes, and competition. This evaluation process is based on
information that we request from these privately held companies. This
information is not subject to the same disclosure and audit requirements as the
reports required of U.S. public companies, and as such, the reliability and
accuracy of the data may vary. Based on our evaluation, we recorded impairment
charges related to our investments in privately held companies of $1.8 million
in fiscal 2003, $18.3 million in fiscal 2002 and $1.5 million in fiscal 2001.
Estimating the net realizable value of investments in privately held
early-stage technology companies is inherently subjective and may contribute to
volatility in our reported results of operations and we may in the future incur
additional impairments to our equity investments in privately held companies.
STOCK PURCHASE ASSISTANCE PLAN
Included in other current assets at the end of fiscal 2003, is $80.5
million of principal and cumulative accrued interest, relating to employees and
former employees under the shareholder-approved 2001 Employee Stock Purchase
Assistance Plan. As of December 29, 2002, the outstanding principal and
cumulative accrued interest totaled $106.6 million. Cypress made the loans to
employees for the purpose of purchasing Cypress common stock. Each loan is
evidenced by a full recourse promissory note executed by the employee in favor
of Cypress and is secured by a pledge of the shares of Cypress's common stock
purchased with the proceeds of the loan. The primary benefit to Cypress from
this program is increased employee retention. In accordance with the plan, the
CEO and the Board of Directors do not participate in this program. To date,
there have been immaterial write-offs. As of December 28, 2003, Cypress has a
loss reserve against these loans of $16.2 million. In determining the reserve,
management considered various factors, including an independent fair value
analysis of these employee and former employee loans and the underlying
collateral. At December 28, 2003, the carrying value of the loan exceeded the
underlying common stock collateral by $6.4 million.
In October 2003, we announced a program aimed at minimizing any losses
to employees as a result of our common stock price fluctuations. Under this
program, either a limit sale order or a stop loss order is placed on the common
stock purchased by each employee with the loan proceeds once the common stock
price exceeds that employee's break-even point. If the common stock price
reaches the sale limit order or declines to the stop loss price, the common
stock purchased by the employee under the Plan will be automatically sold and
the proceeds utilized to repay the employee's outstanding loan to us.
Page 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS................................................38
CONSOLIDATED STATEMENTS OF OPERATIONS......................................39
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............................40
CONSOLIDATED STATEMENTS OF CASH FLOWS......................................41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................42
REPORT OF INDEPENDENT AUDITORS.............................................78
QUARTERLY FINANCIAL DATA...................................................79
Page 37
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
DECEMBER 28, DECEMBER 29,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 183,708 $ 87,200
Short-term investments..................................................... 14,909 40,737
------------ ------------
Total cash, cash equivalents and short-term investments................ 198,617 127,937
Accounts receivable, net................................................... 113,568 89,355
Inventories................................................................ 72,085 92,721
Other current assets....................................................... 134,125 210,235
------------ ------------
Total current assets................................................... 518,395 520,248
------------ ------------
Property, plant and equipment, net........................................... 442,887 496,566
Intangible assets............................................................ 53,275 89,615
Goodwill..................................................................... 322,208 321,669
Other assets................................................................. 230,732 124,814
------------ ------------
Total assets................................................................. $ 1,567,497 $ 1,552,912
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 60,601 $ 59,431
Accrued compensation and employee benefits................................. 39,704 39,151
Other current liabilities.................................................. 87,594 84,112
Deferred income on sales to distributors................................... 20,104 22,075
Income taxes payable....................................................... 2,676 1,292
------------ ------------
Total current liabilities.............................................. 210,679 206,061
------------ ------------
Convertible subordinated notes............................................... 668,652 468,900
Deferred income taxes and other tax liabilities.............................. 101,254 151,367
Other long-term liabilities.................................................. 17,724 52,961
------------ ------------
Total liabilities...................................................... 998,309 879,289
------------ ------------
Commitments and contingencies (See Note 19)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized; none
issued and outstanding.................................................... -- --
Common stock, $.01 par value, 650,000 and 650,000 shares authorized;
139,164 and 139,164 issued; 120,483 and 123,743 outstanding
at December 28, 2003 and December 29, 2002, respectively.................. 1,391 1,391
Additional paid-in-capital................................................... 1,115,684 1,172,654
Deferred stock compensation.................................................. (5,950) (25,283)
Accumulated other comprehensive income....................................... 1,393 2,376
Accumulated deficit.......................................................... (260,723) (155,916)
------------ ------------
851,795 995,222
Less: shares of common stock held in treasury, at cost; 18,681 shares and
15,421 shares at December 28, 2003 and December 29, 2002.................... (282,607) (321,599)
------------ ------------
Total stockholders' equity............................................. 569,188 673,623
------------ ------------
Total liabilities and stockholders' equity................................... $ 1,567,497 $ 1,552,912
============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 38
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
YEAR ENDED
-------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2003 2002 2001
------------ ------------ -------------
Revenues ..................................... $ 836,756 $ 774,746 $ 819,192
Cost of revenues ............................. 435,749 443,365 552,267
------------ ------------ -------------
Gross margin ............................... 401,007 331,381 266,925
Research and development ..................... 251,432 287,909 267,522
Selling, general and administrative .......... 130,349 151,689 165,655
Acquisition and other costs .................. 34,215 84,876 161,253
Restructuring ................................ (6,685) 38,251 132,113
------------ ------------ -------------
Total operating costs and expenses ......... 409,311 562,725 726,543
------------ ------------ -------------
Operating loss ............................... (8,304) (231,344) (459,618)
Interest income .............................. 14,936 21,212 48,231
Interest expense ............................. (15,613) (19,197) (22,398)
Other income and (expense), net .............. 6,472 (16,931) (3,411)
------------ ------------ -------------
Loss before income taxes ................... (2,509) (246,260) (437,196)
(Provision) benefit for income taxes ......... (2,822) (2,838) 29,784
------------ ------------ -------------
Net loss ................................... $ (5,331) $ (249,098) $ (407,412)
============ ============ =============
Net loss per share:
Basic and diluted .......................... $ (0.04) $ (2.02) $ (3.28)
============ ============ =============
Weighted average common shares outstanding:
Basic and diluted .......................... 121,509 123,112 124,135
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 39
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
ACCUM. RETAINED
COMMON STOCK ADDITIONAL OTHER EARNINGS/ TOTAL
---------------- PAID-IN DEFERRED STOCK TREASURY COMP. (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STOCK INCOME DEFICIT) EQUITY
------- ------- ----------- -------------- ---------- ------- ------------ -------------
Balances at December 31, 2000 ..... 125,659 $ 1,369 $ 1,008,211 $ (10,360) $ (185,201) $ -- $ 513,649 $ 1,327,668
Comprehensive income(loss):
Net loss for the year ............. -- -- -- -- -- -- (407,412) (407,412)
Change in net unrealized gain on
available for sale investments,
net of tax ....................... -- -- -- -- -- 2,722 -- 2,722
------------
Total comprehensive loss ........ -- -- -- -- -- -- -- (404,690)
------------
Issuance of common stock and
provision for deferred stock
compensation in relation to
acquisitions ..................... 2,157 22 142,195 (76,769) -- -- -- 65,448
Repurchase of common stock under
stock repurchase program ......... (9,534) -- -- -- (190,459) -- -- (190,459)
Stock compensation charge -
extension of option exercise
period ........................... -- -- 8,873 -- -- -- -- 8,873
Re-issuance of treasury shares and
issuance of common stock under
employee stock plans and other ... 3,213 -- 6,604 -- 26,614 -- (2,377) 30,841
Provision for and amortization of
deferred stock compensation ...... -- -- (826) 33,988 -- -- -- 33,162
Repayment from (issuance to)
stockholders for notes
receivable ....................... -- -- 871 -- -- -- -- 871
Premiums received from issuance of
put options ...................... -- -- 10,648 -- -- -- -- 10,648
Structured purchase of options,
net .............................. -- -- (13,934) -- -- -- -- (13,934)
------- ------- ----------- -------------- ---------- ------- ------------ ------------
Balances at December 30, 2001 ..... 121,495 1,391 1,162,642 (53,141) (349,046) 2,722 103,860 868,428
Comprehensive income (loss):
Net loss for the year ............. -- -- -- -- -- -- (249,098) (249,098)
Change in net unrealized gain on
available for sale investments,
net of tax ....................... -- -- -- -- -- (1,689) -- (1,689)
Change in net unrealized gain on
derivatives, net of tax .......... -- -- -- -- -- 1,343 -- 1,343
------------
Total comprehensive loss ........ -- -- -- -- -- -- -- (249,444)
------------
Issuance of common stock and
provision for deferred stock
compensation in relation to
acquisition ...................... 112 -- 6,271 (6,606) -- -- -- (335)
Repurchase of common stock under
stock put program ................ (250) -- -- -- (4,925) -- -- (4,925)
Re-issuance of treasury shares and
issuance of common stock under
employee stock plans and other ... 2,386 -- 3,537 -- 32,372 -- (10,678) 25,231
Provision for and amortization of
deferred stock compensation ...... -- -- (2,007) 34,464 -- -- -- 32,457
Repayment from (issuance to)
stockholders for notes
receivable ....................... -- -- 439 -- -- -- -- 439
Premiums received from issuance of
put options ...................... -- -- 198 -- -- -- -- 198
Structured purchase of options,
net .............................. -- -- 1,574 -- -- -- -- 1,574
------- ------- ----------- -------------- ---------- ------- ------------ -------------
Balances at December 29, 2002 ..... 123,743 1,391 1,172,654 (25,283) (321,599) 2,376 (155,916) 673,623
Comprehensive income (loss):
Net loss for the year ............. -- -- -- -- -- -- (5,331) (5,331)
Change in net unrealized gain on
available for sale investments,
net of tax ....................... -- -- -- -- -- (698) -- (698)
Change in net unrealized gain on
derivatives, net of tax .......... -- -- -- -- -- (285) -- (285)
------------
Total comprehensive loss ........ -- -- -- -- -- -- -- (6,314)
------------
Repurchase of common stock ........ (9,300) -- -- -- (98,903) -- -- (98,903)
Cash paid for call-spread option .. -- -- (49,300) -- -- -- -- (49,300)
Re-issuance of treasury shares and
issuance of common stock under
employee stock plans and other ... 6,040 -- 1,283 -- 137,895 -- (99,476) 39,702
Provision for and amortization of
deferred stock compensation ...... -- -- (9,159) 19,333 -- -- -- 10,174
Repayment from (issuance to)
stockholders for notes
receivable ....................... -- -- (445) -- -- -- -- (445)
Structured purchase of options,
net .............................. -- -- 651 -- -- -- -- 651
----------------------------------------------------------------------------------------------
Balances at December 28, 2003 ..... 120,483 $ 1,391 $ 1,115,684 $ (5,950) $ (282,607) $ 1,393 $ (260,723) $ 569,188
======= ======= =========== ============== ========== ======= ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 40
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED
-----------------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2003 2002 2001
--------------- --------------- ---------------
Cash flow from operating activities:
Net income (loss) .................................................. $ (5,331) $ (249,098) $ (407,412)
Adjustments to reconcile net income (loss) to net cash generated
by operating activities:
Depreciation and amortization ...................................... 169,054 178,296 216,296
Amortization of deferred stock compensation ........................ 10,174 32,457 33,162
Stock compensation charge - exercise date extension ................ -- -- 8,873
(Gain) loss on sales of property, plant and equipment, net ......... 492 495 (455)
Employee stock purchase assistance plan interest ................... (3,874) (5,231) (2,100)
Acquired in-process research and development ....................... -- 2,666 23,200
Net loss on early retirement of debt ............................... 3,864 754 959
Equity in losses of SunPower ....................................... -- 1,159 --
Asset impairments and other ........................................ (16,394) 72,205 81,603
Unrealized (gains) losses on foreign currency derivatives .......... 954 (368) --
Restructuring costs (credits) ...................................... (8,485) 20,335 106,460
Deferred income taxes .............................................. (296) 3,408 (28,189)
Changes in operating assets and liabilities, net
of affects of acquisitions:
Accounts receivable, net ......................................... (23,871) 8,462 102,262
Inventories, net ................................................. 20,636 (19,453) 40,718
Other assets ..................................................... 6,874 7,107 226
Accounts payable, accrued and other liabilities .................. (54,058) (37,224) (43,454)
Deferred income .................................................. (1,971) 7,826 (22,158)
Income taxes payable ............................................. 1,384 (8) (153)
--------------- --------------- ---------------
Net cash flow generated from operating activities .................... 99,152 23,788 109,838
--------------- --------------- ---------------
Cash flow from investing activities:
Purchase of investments ............................................ (141,514) (48,014) (183,168)
Sale or maturities of investments .................................. 65,809 197,777 502,658
Acquisition of property, plant and equipment ....................... (78,450) (158,532) (176,793)
Cash (paid)/ refunded for acquisitions ............................. 1,247 (582) (352,096)
Sale (purchase) of NVE investment .................................. 23,354 (8,319) --
Other investments .................................................. (1,537) (16,513) (7,423)
Issuance (collection) of notes to employees, net ................... 29,942 17,017 (116,287)
Proceeds from sale of equipment .................................... 6,582 3,520 4,132
--------------- --------------- ---------------
Net cash flow used for investing activities .......................... (94,567) (13,646) (328,977)
--------------- --------------- ---------------
Cash flow from financing activities:
Proceeds from borrowings ........................................... 24,678 -- --
Repayment of borrowings ............................................ (8,729) -- --
Proceeds for issuance of convertible debt .......................... 600,000 -- --
Debt issuance costs ................................................ (18,450) -- --
Retirement of convertible debt ..................................... (400,248) (48,824) (53,606)
Issuance (repurchase) of common shares, net ........................ (59,201) 19,657 (159,618)
Purchase of call spread on common stock ............................ (49,300) -- --
(Issuance) repayment of notes to stockholders, net ................. (445) 439 871
Premiums received from put options ................................. -- 198 10,648
Structured purchase of options, net ................................ 651 1,574 (13,934)
Other liabilities, including minority interest ..................... 2,967 (5,985) (6,248)
--------------- --------------- ---------------
Net cash flow generated from (used for) financing activities ......... 91,923 (32,941) (221,887)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents ................. 96,508 (22,799) (441,026)
Cash and cash equivalents, beginning of year ......................... 87,200 109,999 551,025
--------------- --------------- ---------------
Cash and cash equivalents, end of year ............................... $ 183,708 $ 87,200 $ 109,999
=============== =============== ===============
Supplemental disclosures:
Cash paid (received) during the year for:
Interest ......................................................... $ 22,227 $ 21,877 $ 23,559
Income taxes ..................................................... $ 2,110 $ (7,993) $ (9,778)
Non-cash flow items:
Common stock and options issued for acquisitions ................. $ -- $ 2,300 $ 107,588
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Cypress Semiconductor Corporation ("Cypress")
designs, develops, manufactures and markets a broad line of high-performance
digital and mixed-signal integrated circuits for a broad range of markets
including networking, wireless infrastructure and handsets, computation,
consumer, automotive, and industrial. Cypress has four product divisions and
four subsidiaries, organized into two business segments; Memory products and
Non-memory products groups. In addition, in order to enhance the focus on the
communications market and our end customers, Cypress reports information by the
following market segments, Wide Area Networks and Storage Area Networks
(WAN/SAN), Wireless Infrastructure and Wireless Terminal (WIN/WIT), Computation
and Consumer, and Cypress Subsidiaries.
Cypress's operations outside of the U.S. include its assembly and test
plant and regional headquarters in the Philippines and several sales offices and
design centers located in various parts of the world. Revenues from
international customers were 63%, 57% and 50% of total revenues in 2003, 2002
and 2001, respectively.
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and include the
accounts of Cypress and all of its subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
Fiscal Year -- Cypress's fiscal year ends on the Sunday closest to
December 31. Fiscal years 2003, 2002 and 2001 ended December 28, 2003, December
29, 2002 and December 30, 2001, respectively, and each included 52 weeks.
Cypress's fiscal quarters end on the Sunday closest to the end of the applicable
calendar quarter, except in a 53-week fiscal year, in which case the additional
week falls into the fourth quarter of that fiscal year. Fiscal 2004 will be a
53-week year.
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. Significant estimates in these financial
statements include reserves for inventory, reserves for deferred income,
reserves for price adjustment on sales to distributors, the sales return
reserve, restructuring charges, allowances for doubtful accounts receivable,
estimates for future cash flows associated with assets, asset impairments,
reserves for loans under the 2001 Employee Stock Purchase Assistance Program,
certain accrued liabilities and income taxes and tax valuation allowances.
Actual results could differ from those estimates.
Reclassifications -- Certain prior year amounts have been reclassified
to conform to current year presentations.
Fair Value of Financial Instruments -- For certain of Cypress's
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and other current liabilities, the carrying amounts approximate
their fair value due to the relatively short maturity of these items.
Investments in debt and equity securities and the forward contract (see Notes 3
and 17) are carried at fair value based on quoted market prices. Foreign
currency derivative financial instruments are carried at fair value based on
changes in forward rate from quoted market sources (see Note 12, Foreign
Currency Derivatives). See Note 3 for the fair value of debt instruments.
Cash and Cash Equivalents -- Highly liquid investments with original or
remaining maturities of ninety days or less at the date of purchases are
considered cash equivalents.
Investments -- Substantially all of Cypress's investments in debt
securities are classified as available-for-sale. Investments in
available-for-sale securities are reported at fair value with unrealized gains
and losses, net of related tax, as a component of accumulated other
comprehensive income (loss). Refer to Note 3 for details related to
available-for-sale securities.
Investments in Privately Held Companies -- Cypress also has other
minority equity investments in non-publicly traded companies. These investments
are included in other assets on the balance sheet and are generally carried at
cost. Cypress monitors these investments for impairment and makes appropriate
reductions in carrying values when declines are deemed to be other than
temporary.
Equity Accounting - Cypress uses equity accounting for investments where
it has voting control in accordance with Accounting Principles Board Opinion No.
18. In addition, Cypress equity accounts for investments in limited liability
partnerships as appropriate.
Page 42
Refer to Note 2 relating to SunPower equity accounting and consolidation
accounting. Refer to Note 3 for equity accounting of limited liability
partnerships.
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. Cypress establishes "lower of
cost or market" reserves, aged inventory reserves and obsolescence reserves.
Inventory reserves are generally recorded when the inventory for a device
exceeds nine months of demand for that device or when slow-moving parts have not
been sold for more than six months.
Goodwill and Purchased Intangibles -- Effective the beginning of fiscal
2002, Cypress adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 requires goodwill to be tested for impairment on
an annual basis and between annual tests in certain circumstances, and written
down when impaired, rather than being amortized as previous accounting standards
required. Furthermore, SFAS 142 requires purchased intangible assets, other than
goodwill to be amortized over their useful lives unless these lives are
determined to be indefinite. The impairment test for intangible assets with
indefinite useful lives consists of a comparison of fair value to carrying
value, with any excess of carrying value over fair value being recorded as an
impairment loss. Intangible assets with finite useful lives will continue to be
amortized over their useful lives which range from 2 to 5 years and will be
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). See Note 5 for
further discussion.
Property, Plant and Equipment -- Property, plant and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed for
financial reporting purposes using the straight-line method over the estimated
useful lives of the assets as presented below. Leasehold improvements and
leasehold interests are amortized over the shorter of the estimated useful lives
of the assets or the remaining term of the lease. Accelerated methods of
computing depreciation are used for tax purposes.
----------------------------------------------------------
Useful Lives
in Years
----------------------------------------------------------
Equipment 3 to 7
Buildings and leasehold improvements 5 to 20
Furniture and fixtures 5 to 7
----------------------------------------------------------
Pre-operating Costs -- Pre-operating costs incurred in connection with
developing major production capability at new manufacturing plants are expensed
as incurred.
Long-Lived Assets -- Cypress currently evaluates its long-lived assets
for impairment in accordance with the provisions of SFAS 142 for Goodwill and
SFAS 144 for all other long-lived assets, including property and equipment and
other identifiable intangible assets, for impairment whenever events or changes
in circumstances indicate that the carrying value of such assets may not be
recoverable. Factors considered important that could result in an impairment
review include significant underperformance relative to expected historical or
projected future operating results, significant changes in the manner of use of
acquired assets or the strategy of its business, significant negative industry
or economic trends, and a significant decline in Cypress' stock price for a
sustained period of time. Impairments are recognized based on the difference
between the fair value of the asset and its carrying value. Fair value is
generally measured based on either quoted market prices, if available, or
discounted cash flow analyses. If there is a significant decrease in Cypress's
business in the future, Cypress may be required to record additional impairment
charges in the future.
Revenue Recognition -- Cypress generates revenue by selling products to
original equipment manufacturers and distributors. Cypress's policy is to
recognize revenue from sales to customers when title and the rights and risks of
ownership have passed to the customer, when persuasive evidence of an
arrangement exists, the product has been delivered, the price is fixed and
determinable and collection of the resulting receivable is reasonably assured.
Cypress allows certain global distributors, primarily based in the
United States, rights of return and other credits for price protection. Given
the uncertainties associated with the levels of returns and other credits
issuable to these distributors, Cypress defers recognition of revenue, cost of
sales and profit on such sales until these distributors resell these products.
Inventory is relieved, accounts receivable are recorded and reserves for
deferred income and price adjustments are provided at the time the products are
shipped to these distributors.
Sales to certain other primarily non-U.S. based distributors carry
either no or very limited rights of return. Cypress has historically been able
to estimate returns and other credits from these distributors and accordingly
has historically recognized revenue from sales
Page 43
to these distributors on shipment, with a related allowance for potential
returns established at the time of sale. Cypress must make estimates of
potential future product returns and revenue adjustments related to current
period product revenue. In that regard, Cypress analyzes historical returns,
current economic trends in the semiconductor industry, changes in customer
demand and acceptance of Cypress' products when evaluating the adequacy of
allowance for sales returns.
Earnings Per Share -- Basic earnings per share ("EPS") is computed using
the 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 other income and (expense), net in the accompanying statement of
operations. Sales to customers are primarily denominated in U.S. dollars.
Translation gains and losses have not been material in any year.
Concentration of Credit Risk -- Financial instruments that potentially
subject Cypress to concentrations of credit risk are primarily investments and
trade accounts receivable. Cypress's investment policy requires cash investments
to be placed with high-credit quality institutions and to limit the amount of
credit risk 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. Arrow Electronics (at 13.5%) was the only customer to represent
greater than 10% of accounts receivable at December 28, 2003. No individual
customer accounted for greater than 10% of accounts receivable at December 29,
2002. No individual customer accounted for greater than 10% of total revenues in
fiscal 2003 and fiscal 2001. Sales to Motorola, Inc. accounted for 10.2% of
total revenues in fiscal 2002. Write-offs of accounts receivable have been
immaterial for the fiscal years 2003, 2002 and 2001.
Accounting for Stock-Based Compensation -- Cypress has a number of
stock-based employee compensation plans. Cypress accounts for those plans under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and the related Interpretation. In
certain instances, Cypress reflects stock-based employee compensation cost in
net income (loss). If there is any compensation under the rules of APB 25, the
expense is amortized using an accelerated method prescribed under the rules of
FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans" ("FIN 28"). The following table
illustrates the effect on net loss and related per share amounts if Cypress had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to all stock-based employee awards.
Year Ended
===============================================================================================================
(In thousands, except per share amounts) 2003 2002 2001
---------------------------------------------------------------------------------------------------------------
Net loss, as reported $ (5,331) $ (249,098) $ (407,412)
Add: Total stock-based employee compensation expense
reported in net loss, net of related tax effects 10,174 32,457 33,162
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects (62,590) (130,953) (113,241)
--------------------------------------
Pro forma net loss $ (57,747) $ (347,594) $ (487,491)
======================================
Loss per share:
Basic and diluted--as reported $ (0.04) $ (2.02) $ (3.28)
Basic and diluted--pro forma $ (0.48) $ (2.82) $ (3.93)
---------------------------------------------------------------------------------------------------------------
Shipping and Handling Costs -- Cypress records costs related to shipping
and handling in cost of sales.
Advertising Costs -- Advertising costs consist of development and
placement costs of our advertising campaigns and are charged to expense when
incurred. Advertising expense was $3.7 million, $6.1 million and $6.2 million
for fiscal years 2003, 2002 and 2001, respectively.
Income Taxes -- The provision for income taxes is determined using the
asset and liability approach of accounting for income taxes. Under this
approach, deferred taxes represent the future tax consequences expected to occur
when the reported amounts of assets and liabilities are recovered or paid. The
provision for income taxes represents income taxes paid or payable for the
current year plus the change in deferred taxes during the year. Deferred taxes
result from differences between the financial and tax bases of
Page 44
the company's assets and liabilities and are adjusted for changes in tax rates
and tax laws when changes are enacted. Valuation allowances are recorded to
reduce deferred tax assets when it is more likely than not that a tax benefit
will not be realized.
Provision is made for income taxes on un-remitted earnings of
subsidiaries and affiliates, except for subsidiaries in which earnings are
deemed to be permanently invested.
The calculation of tax liabilities involves dealing with uncertainties
in the application of complex global tax regulations. Cypress recognizes
potential liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on its estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when Cypress determines the liabilities are no
longer necessary. If the estimate of tax liabilities proves to be less than the
ultimate assessment, a further charge to expense would result.
Recent Accounting Pronouncements -- FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), was issued in January
2003. FIN 46 requires that if an entity is the primary beneficiary of a variable
interest entity, the assets, liabilities and results of operations of the
variable interest entity should be included in the consolidated financial
statements of the entity. The provisions of FIN 46 are effective immediately for
all arrangements entered into after January 31, 2003. Cypress has not invested
in any variable interest entities after January 31, 2003. For those arrangements
entered into prior to January 31, 2003, the FASB recently delayed the required
implementation date such that the provisions of FIN 46 are required to be
adopted no later than the end of the first reporting period that ends after
March 15, 2004. However, a public entity shall apply FIN 46 to entities
considered to be special-purpose entities no later than as of the end of the
first reporting period that ends after December 15, 2003. On June 27, 2003,
Cypress entered into a new operating lease to refinance its then existing
operating leases with respect to certain manufacturing and office facilities
located in Minnesota and California (see Note 19). Cypress refinanced these
leases in a manner that best met its financing strategy. The new operating lease
is not subject to the consolidation provisions of FIN 46. Cypress does not
expect the finalization of FIN 46 by the FASB relating to variable interest
entities created prior to January 31, 2003 to impact the consolidated financial
statements as the issues currently under discussion do not impact Cypress.
On December 17, 2003, the Staff of the Securities and Exchange
Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 104 ("SAB
104"), "Revenue Recognition", which supercedes SAB 101, "Revenue Recognition in
Financial Statements". SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the
SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition. Selected portions of the FAQ have been incorporated into
SAB 104. While the wording of SAB 104 has changed to reflect the issuance of
EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. EITF 00-21 was effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
application of SAB 104 had no impact to the consolidated financial statements
for fiscal 2003.
NOTE 2--CONSOLIDATION OF SUNPOWER CORPORATION ("SUNPOWER")
Cypress gained effective control over SunPower in the first quarter of
fiscal 2003. As a result, effective the beginning of fiscal 2003, Cypress
consolidated the results of SunPower, which was previously accounted for under
the equity method in fiscal 2002 due to the existence of substantive
participating rights of the minority shareholders. Cypress and its Chief
Executive Officer ("CEO"), own preferred stock of SunPower, which is convertible
into common stock. As of December 28, 2003, Cypress and its CEO own
approximately 57% and 6%, respectively, of SunPower on an as-converted basis.
The total purchase price paid in May 2002 was allocated to the estimated
fair value of assets and liabilities as of the date of acquisition as follows:
--------------------------------------------------------------------
(In thousands)
--------------------------------------------------------------------
Fair value of tangible assets and liabilities $ 4,846
In-process research and development 2,166
Current technology 1,082
Other assets 400
Deferred tax liability (524)
Minority Interest (2,083)
Goodwill 2,883
--------------------------------------------------------------------
Total $ 8,770
====================================================================
Page 45
Minority interest in the losses of SunPower of $1.0 million is included
in Other income and (expense), net. The minority shareholder's investment in
SunPower, which was included in Other long-term liabilities, had been reduced to
zero at the end of the second quarter of fiscal 2003. Losses attributable to the
minority shareholders' of SunPower, subsequent to Q2 2003, were borne solely by
Cypress. Pro forma statement of operations information has not been presented
because the effect of the SunPower consolidation was not material.
In connection with Cypress's original investment in SunPower in May
2002, Cypress entered into a Preferred Stock Purchase Agreement with SunPower
and certain other investors named therein, pursuant to which the investors and
Cypress agreed to acquire shares of SunPower's Series One Preferred Stock.
In connection with the transactions contemplated by the Preferred Stock
Purchase Agreement, Cypress entered into a note purchase and line of credit
agreement with SunPower and as consideration, Cypress received a warrant to
purchase up to 16,000,000 shares of SunPower's Series Two Preferred Stock at an
exercise price of $1 per share, for cash. In accordance with the note purchase
and line of credit agreement, as Cypress did not exercise the warrant by April
1, 2003, Cypress became obligated to fund SunPower up to $5.6 million through
May 2004 at a rate of up to $0.4 million per month. As of December 28, 2003, we
had loaned SunPower $3.2 million bearing interest at the applicable federal rate
in accordance with this obligation. Cypress allowed the warrant to expire
unexercised on January 31, 2004. Cypress is currently in negotiations with
SunPower for future funding of their operations.
In a separate first quarter of fiscal 2003 transaction, Cypress loaned
SunPower $2.5 million. The loan bears interest at 7% and SunPower is obligated
to repay the loan monthly through 2008.
All SunPower intercompany loans and transactions have been eliminated
from the Consolidated Financial Statements.
Page 46
NOTE 3: FINANCIAL INSTRUMENTS
Available-for-sale securities held by the Company as of December 28,
2003 and December 29, 2002 are as follows:
------------------------------------------------------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED FAIR MARKET
(In thousands) COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------------------------------------------
2003
Cash equivalents:
Commercial paper $ 18,995 $ -- $ -- $ 18,995
Federal agency notes 20,095 -- (2) 20,093
Money market funds 105,267 -- -- 105,267
Municipal bonds 9,754 -- -- 9,754
Corporate bonds 3,996 -- -- 3,996
Auction rate certificates 21,930 -- -- 21,930
------------------------------------------------------------------------------------------------------------------------
Total cash equivalents $ 180,037 $ -- $ (2) $ 180,035
------------------------------------------------------------------------------------------------------------------------
Short-term investments:
Corporate notes/bonds $ 12,708 $ 37 $ (13) $ 12,732
Federal agency notes 2,175 2 -- 2,177
------------------------------------------------------------------------------------------------------------------------
Total short-term investments $ 14,883 $ 39 $ (13) $ 14,909
------------------------------------------------------------------------------------------------------------------------
Long-term marketable securities:
Corporate notes/bonds $ 66,096 $ 196 $ (112) $ 66,180
Federal agency notes 47,415 91 (45) 47,461
------------------------------------------------------------------------------------------------------------------------
Total long-term marketable securities $ 113,511 $ 287 $ (157) $ 113,641
------------------------------------------------------------------------------------------------------------------------
Total $ 308,431 $ 326 $ (172) $ 308,585
------------------------------------------------------------------------------------------------------------------------
2002
Cash equivalents:
Money market funds $ 68,275 $ -- $ -- $ 68,275
Auction rate certificates 6,302 -- -- 6,302
------------------------------------------------------------------------------------------------------------------------
Total cash equivalents $ 74,577 $ -- $ -- $ 74,577
------------------------------------------------------------------------------------------------------------------------
Short-term investments:
Corporate notes/bonds $ 28,898 $ 636 $ -- $ 29,534
Federal agency notes 10,911 292 -- 11,203
------------------------------------------------------------------------------------------------------------------------
Total short-term investments $ 39,809 $ 928 $ -- $ 40,737
------------------------------------------------------------------------------------------------------------------------
Long-term marketable securities:
Corporate notes/bonds $ 7,917 $ 345 $ -- $ 8,262
Federal agency notes 4,965 91 -- 5,056
------------------------------------------------------------------------------------------------------------------------
Total long-term marketable securities $ 12,882 $ 436 $ -- $ 13,318
------------------------------------------------------------------------------------------------------------------------
Total $ 127,268 $ 1,364 $ -- $ 128,632
------------------------------------------------------------------------------------------------------------------------
Proceeds from available-for-sale securities were $65.8 million, $197.8
million and $502.7 million for the years ended December 28, 2003, December 29,
2002 and December 30, 2001. Realized gains and (losses) for the years ended
December 28, 2003, December 29, 2002 and December 30, 2001 were $0.6 million,
$1.8 million and $2.0 million, respectively.
In addition, to the above available for sale investments, Cypress has
liquid investments in two limited liability partnerships. The limited
partnerships invest primarily in securities traded on a national securities
exchange. The limited liability partnerships account for those investments using
mark-to-market accounting in accordance with generally accepted accounting
principles in the United States. At December 28, 2003, our investment in each of
the partnerships represented an ownership interest of approximately 9.5% and
13.2% and amounted to $4.8 million in total. At the end of fiscal 2002, our
ownership interest in the two limited liability partnerships amounted to $3.3
million in total. The partnerships are not significant to Cypress's operations
and effectively represent investments primarily in equity securities by Cypress.
We classify these investments in Other assets in the consolidated financial
statements (refer to Note 4).
Total assets, partnership capital and net income of the two limited
liability partnerships for fiscal 2003 were $58.0 million, $46.7 million and
$15.0 million, respectively. Total assets, partnership capital and net loss of
the two limited liability partnerships for fiscal 2002 were $47.8 million, $31.5
million and $34.0 million, respectively. Total assets, partnership capital and
net loss of the two limited liability partnerships for fiscal 2001 were $95.6
million, $72.0 million and $61.8 million, respectively.
Page 47
FAIR VALUE OF DEBT INSTRUMENTS
The estimated fair values of debt instruments have generally been
determined using available market information. However, considerable judgment 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.
Cypress determines the fair value of the subordinated convertible debt
based on quoted market prices and the fair value of non-traded collateralized
debt using a discounted cash flow analysis. The discounted cash flow analysis is
based on estimated interest rates for similar types of currently available
borrowing arrangements with similar remaining maturities. The carrying amounts
and estimated fair values of Cypress's long-term debt are as follows:
-----------------------------------------------------------------------------------------
DECEMBER 28, 2003 DECEMBER 29, 2002
-----------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATE FAIR
(In thousands) AMOUNT FAIR VALUE AMOUNT VALUE
-----------------------------------------------------------------------------------------
Convertible subordinated notes $ 668,652 $ 942,200 $ 468,900 $ 396,000
Collateralized debt instruments 20,675 20,675 4,212 4,212
-----------------------------------------------------------------------------------------
Total debt $ 689,327 $ 962,875 $ 473,112 $ 400,212
-----------------------------------------------------------------------------------------
NOTE 4: BALANCE SHEET COMPONENTS
ACCOUNTS RECEIVABLE, NET
--------------------------------------------------------------------------------------
December 28, December 29,
(In thousands) 2003 2002
--------------------------------------------------------------------------------------
Accounts receivable, gross $ 116,877 $ 92,868
Allowance for doubtful accounts and customer
returns (3,309) (3,513)
--------------------------------------------------------------------------------------
Accounts receivable, net $ 113,568 $ 89,355
======================================================================================
INVENTORIES
--------------------------------------------------------------------------------------
December 28, December 29,
(In thousands) 2003 2002
--------------------------------------------------------------------------------------
Raw materials $ 3,007 $ 3,185
Work-in-process 43,669 54,668
Finished goods 25,409 34,868
--------------------------------------------------------------------------------------
Inventories $ 72,085 $ 92,721
======================================================================================
OTHER CURRENT ASSETS
--------------------------------------------------------------------------------------
December 28, December 29,
(In thousands) 2003 2002
--------------------------------------------------------------------------------------
Employee stock purchase assistance plan, net $ 64,311 $ 90,636
Deferred tax assets 35,109 85,041
Prepaid expenses 22,818 24,962
Other current assets 11,887 9,596
--------------------------------------------------------------------------------------
Other current assets $ 134,125 $ 210,235
======================================================================================
Page 48
PROPERTY, PLANT AND EQUIPMENT, NET
--------------------------------------------------------------------------------------
December 28, December 29,
(In thousands) 2003 2002
--------------------------------------------------------------------------------------
Land $ 17,613 $ 14,430
Equipment 1,034,218 1,013,013
Buildings and leasehold improvements 201,381 191,285
Furniture and fixtures 11,077 12,466
--------------------------------------------------------------------------------------
Total property, plant and equipment 1,264,289 1,231,194
Accumulated depreciation and amortization (821,402) (734,628)
--------------------------------------------------------------------------------------
Property, plant and equipment, net $ 442,887 $ 496,566
======================================================================================
OTHER ASSETS
--------------------------------------------------------------------------------------
December 28, December 29,
(In thousands) 2003 2002
--------------------------------------------------------------------------------------
Restricted cash (See Note 19) $ 62,814 $ 62,380
Key employee deferred compensation plan 18,700 15,574
Long-term marketable securities 113,641 13,318
Limited liability partnership investments (See Note 3) 4,796 3,256
Other 30,781 30,286
--------------------------------------------------------------------------------------
Other assets $ 230,732 $ 124,814
======================================================================================
OTHER CURRENT LIABILITIES
--------------------------------------------------------------------------------------
December 28, December 29,
(In thousands) 2003 2002
--------------------------------------------------------------------------------------
Customer advances $ 25,081 $ 3,950
Accrued interest payable 1,783 8,216
Sales representative commissions 4,786 4,291
Accrued royalties 3,426 4,098
Current portion of long-term debt 7,017 4,212
Key employee deferred compensation plan 23,828 22,240
Other 21,673 37,105
--------------------------------------------------------------------------------------
Other current liabilities $ 87,594 $ 84,112
======================================================================================
DEFERRED INCOME TAXES AND OTHER TAX LIABILITIES
--------------------------------------------------------------------------------------
December 28, December 29,
(In thousands) 2003 2002
--------------------------------------------------------------------------------------
Deferred income taxes $ 35,109 $ 85,041
Non-current tax liabilities 66,145 66,326
--------------------------------------------------------------------------------------
Total deferred income taxes and other tax
liabilities $ 101,254 $ 151,367
======================================================================================
NOTE 5: GOODWILL AND INTANGIBLE ASSETS
In connection with the adoption of SFAS 142, Cypress ceased amortizing
goodwill as of the beginning of fiscal 2002, and performed the required
transitional goodwill impairment assessment in the first quarter of 2002 and
determined that there was no impairment of goodwill.
In addition, upon adoption of SFAS 142, workforce-in-place no longer
meets the definition of an identifiable asset. As a result, the balance of
workforce-in-place previously classified as purchased intangible assets was
reclassified to goodwill in 2002.
Page 49
A reconciliation of previously reported net loss and net loss per share
to the amounts adjusted for the exclusion of goodwill and workforce-in-place
amortization had SFAS 142 been in effect for 2001, net of the related income tax
effect, is as follows:
Year Ended
------------------------------------------------------
December 30,
(In thousands, except per share amounts) 2001
------------------------------------------------------
Reported net loss $ (407,412)
Adjustments:
Amortization of goodwill 33,033
Amortization of acquired workforce
previously classified as purchased
intangibles 4,696
------------
Net adjustments 37,729
------------
Adjusted net loss $ (369,683)
============
Net loss per share:
Basic $ (2.98)
Diluted $ (2.98)
------------------------------------------------------
SFAS 142 requires Cypress to perform an annual impairment test. The
impairment test is a two-step process. Step one consists of a comparison of the
fair value of a reporting unit with its carrying amount, including the goodwill
allocated to each reporting unit. If the carrying amount is in excess of the
fair value, step two requires the comparison of the implied fair value of the
reporting unit with the carrying amount of the reporting unit's goodwill. Any
excess of the carrying value of the reporting unit goodwill over the implied
fair value of the reporting units goodwill will be recorded as an impairment
loss.
Cypress performed its annual SFAS 142 goodwill impairment assessment in
the fourth quarter of 2003 and determined that there was no impairment. However,
Cypress could be required to record impairment charges in future periods if
business conditions deteriorate.
Cypress' goodwill is in the Non-memory business segment. The following
is a roll-forward for the goodwill balance in this segment in 2003:
- -------------------------------------------------------------------------------
BALANCE AT BALANCE AT
DECEMBER 29, DECEMBER 28,
(In Thousands) 2002 RECLASSIFIED OTHER 2003
- -------------------------------------------------------------------------------
Non-memory $ 321,669 $ 2,883 $ (2,344) $ 322,208
===============================================================================
As a result of Cypress's consolidation of SunPower during the first
quarter of fiscal 2003, a total of $2.9 million was reclassified from Other
assets to Goodwill. Other represents other miscellaneous adjustments to Goodwill
primarily as a result of Cypress's prior acquisition escrow closings.
The following table presents details of the Cypress's total purchased
finite lived intangible assets. Cypress does not have any recorded indefinite
lived intangible assets:
AS OF DECEMBER 28, 2003
----------------------------------------------------------------------
ACCUMULATED
(In thousands) GROSS AMORTIZATION NET
----------------------------------------------------------------------
Purchased technology $ 192,656 $ (148,234) $ 44,422
Non-compete agreements 18,650 (14,436) 4,214
Patents, licenses and
trademarks 6,704 (3,788) 2,916
Other 4,600 (2,877) 1,723
----------------------------------------------------------------------
Total $ 222,610 $ (169,335) $ 53,275
======================================================================
Page 50
AS OF DECEMBER 29, 2002
----------------------------------------------------------------------
ACCUMULATED
(In thousands) GROSS AMORTIZATION NET
----------------------------------------------------------------------
Purchased technology $ 191,700 $ (119,133) $ 72,567
Non-compete agreements 18,650 (8,243) 10,407
Patents, licenses and
trademarks 6,350 (2,233) 4,117
Under market leases 1,850 (1,850) --
Other 4,600 (2,076) 2,524
----------------------------------------------------------------------
Total $ 223,150 $ (133,535) $ 89,615
======================================================================
Amortization expense of finite lived intangible assets was $37.6
million, $41.9 million and $39.7 million for the fiscal years ended December 28,
2003, December 29, 2002 and December 30, 2001, respectively.
The estimated future amortization expense of all intangibles, the
majority of which is purchased intangible assets, as of December 28, 2003 is as
follows :
-----------------------------------------
(In thousands) AMOUNT
-----------------------------------------
2004 $ 33,046
2005 14,635
2006 2,912
2007 561
2008 312
Thereafter 1,809
-----------------------------------------
Total $ 53,275
-----------------------------------------
NOTE 6: ACQUISITIONS USING PURCHASE ACCOUNTING
Cypress made no new acquisitions in fiscal 2003. However, Cypress did
start consolidating SunPower Corporation, which was previously accounted for
under the equity method. Refer to Note 2 for more details on SunPower
Corporation.
2002 ACQUISITIONS
SAHASRA NETWORKS, INC.
On February 28, 2002, Cypress acquired 100% of the outstanding capital
stock of Sahasra Networks, Inc. ("Sahasra"), a company working on a
software-based method of making large-entry, next generation network search
engines, for $3.2 million in cash and Cypress common stock. Sahasra is part of
the Non-memory business segment and the Wide Area Network/Storage Area Network
("WAN/SAN") market segment. The acquisition resulted in identifiable intangible
assets of $2.7 million and a charge for in-process research and development of
$0.5 million.
The agreement with Sahasra includes provisions for additional contingent
cash payments to employees and third parties of up to $2.3 million through
December 2005 based on the amount of revenues generated by certain products in
future periods. Additional provisions are included for the contingent issuance
to employees of up to 0.3 million shares of Cypress common stock through
December 2004 based on the achievement of certain product development
milestones. Cash payments for achievement of revenue targets or the issuance of
shares contingent upon product milestones require that payees remain employed by
Cypress and will be accounted for as compensation for services and expensed in
the appropriate periods. Cash payments to third parties based solely on product
revenues will be recorded as an increase in the purchase price, if paid. No
revenue or product milestones were achieved in fiscal 2003 and fiscal 2002;
therefore no compensation charge and purchase price adjustment was recorded. As
of December 28, 2003, employees and third parties could still earn the full
amount of the contingencies over the remaining contingency period. There were no
significant differences between the accounting policies of Cypress and Sahasra.
Pro forma results of operations have not been presented because the
historical results of operations of Sahasra are not material to Cypress's
consolidated results of operations.
Page 51
2001 ACQUISITIONS
ACQUISITION OF SILICON PACKETS, INC.
On December 27, 2001, Cypress acquired 100% of the outstanding common
and preferred stock of Silicon Packets, Inc. ("Silicon Packets"), a company that
specializes in designing 10 Gigabit-per-second framers for OC-192/STM-64
Synchronous Optical Network/Synchronous Digital Hierarchy and 10G Ethernet
transport solutions. Silicon Packets is part of the Non-memory business segment
and the WAN/SAN market segment. The acquisition was made in order to assist
Cypress in the development of 10 Gigabit-per-second solutions for Metropolitan
Area Networks, which is part of the WAN/SAN market segment, and WAN
infrastructure equipment such as switches and routers. The acquisition was
accounted for using the purchase method of accounting per SFAS 141. Accordingly,
the estimated fair value of assets acquired and liabilities assumed were
included in Cypress's consolidated balance sheet as of December 30, 2001, the
effective date of the purchase. Other than the charge for in-process research
and development, Silicon Packet's results of operations from the date of
purchase to the end of the fiscal year were not significant because the
acquisition was completed during the last week of the fiscal year and are
therefore not included in Cypress's consolidated results of operations for the
year ended December 30, 2001. There were no significant differences between the
accounting policies of Cypress and Silicon Packets.
Cypress acquired Silicon Packets for total consideration of $27.3
million, including 0.7 million shares of Cypress common stock valued at $14.2
million, $7.1 million in cash, options for 0.2 million shares of Cypress common
stock valued at $3.2 million and direct acquisition costs of $2.8 million for
underwriting, legal, valuation, accounting and regulatory fees. The total
purchase price was allocated to the estimated fair value of assets acquired and
liabilities assumed as set forth in the following table:
-------------------------------------------------
(In thousands)
-------------------------------------------------
Current assets $ 968
Property, plant and equipment, net 951
Deferred tax asset 2,110
Other assets 58
Goodwill 9,751
Current technology 4,300
Non-compete agreements 800
---------
Total assets acquired 18,938
Current liabilities (745)
Long term liabilities (509)
Deferred tax liabilities (2,040)
---------
Total liabilities assumed (3,294)
Deferred stock compensation 6,589
---------
Net assets acquired 22,233
In-process research and development 5,100
-------------------------------------------------
Total consideration $ 27,333
=================================================
The amounts allocated to current technology and non-compete agreements
have weighted average useful lives of 4 years and 3 years, respectively. These
intangible assets are amortized using the straight-line method over their
respective estimated useful lives. None of the $9.8 million in goodwill recorded
is expected to be deductible for tax purposes, and, in accordance with SFAS 142,
is not being amortized. In addition, Cypress granted in-the-money options to
certain Silicon Packets employees in January 2002, which resulted in additional
deferred compensation of $2.0 million in 2003 and $5.0 million in 2002. There
were no significant differences between the accounting policies of Cypress and
Silicon Packets.
ACQUISITION OF IN-SYSTEM DESIGN, INC.
On September 14, 2001, Cypress acquired 100% of the outstanding capital
stock of In-System Design, Inc. ("ISD"), a system-on-a-chip design company
specializing in personal communications solutions. ISD is part of the Non-memory
business segment and the Computation and Other market segment. The immediate
benefit to Cypress related to ISD's 300A product, a USB 2.0 to ATA/ATAPI bridge
device that enables PCs and other information appliances to connect to external
mass storage devices including hard disk drives, CD-ROMs, CD-RWs, DVD-Rams, and
ZIP drives. The acquisition also brought a veteran development team, with an
average of eight years of experience, and a wide range of engineering
competencies, including system-on-a-chip expertise, software design, board-level
design, test and validation, that are expected to accelerate Cypress's current
and future development projects. The acquisition was accounted for using the
purchase method of accounting per SFAS 141. Accordingly, the estimated fair
value of assets acquired and liabilities assumed were included in Cypress's
consolidated balance sheet as of September 14, 2001, the effective date of
Page 52
the purchase. The results of operations are included in Cypress's consolidated
results of operations as of and since the effective date of the purchase. There
were no significant differences between the accounting policies of Cypress and
ISD.
Cypress acquired ISD for total consideration of $43.0 million, including
$36.7 million in cash, options for 0.3 million shares of Cypress common stock
valued at $5.4 million and direct acquisition costs of $0.9 million for legal,
appraisal and accounting fees. The total purchase price was allocated to the
estimated fair value of assets acquired and liabilities assumed as set forth in
the following table:
-------------------------------------------------
(In thousands)
-------------------------------------------------
Current assets $ 4,554
Property, plant and equipment, net 632
Deferred tax asset 5,378
Goodwill 19,922
Current technology 17,200
Non-compete agreements 12,350
Trademarks 2,400
Customer purchase orders 450
---------
Total assets acquired 62,886
Current liabilities (9,445)
Deferred tax liabilities (12,960)
---------
Total liabilities assumed (22,405)
Deferred stock compensation 1,679
---------
Net assets acquired 42,160
In-process research and development 800
-------------------------------------------------
Total consideration $ 42,960
=================================================
The amounts allocated to current technology, non-compete and customer
purchase orders and trademarks have weighted average useful lives of 4 years, 3
years, 1 year and 4 years, respectively. These intangible assets are amortized
using the straight-line method over their respective estimated useful lives.
None of the $19.9 million in goodwill recorded is expected to be deductible for
tax purposes, and, in accordance with SFAS 142, is not being amortized.
The agreement with ISD includes provisions for contingent cash payments
of up to the maximum amount of $27.5 million through September 2004 based on USB
product revenues achieving specific revenue targets between October 2001 and
December 2002. These revenue targets are measured in two revenue pools.
Compensation for the first revenue pool is based on USB product revenue
achieving specific revenue targets between October 2001 and March 2002.
Compensation for the second revenue pool is based on USB product revenue
achieving specific revenue targets between October 2001 and December 2002.
Cypress paid $1.9 million of this contingent compensation in fiscal 2002 based
on meeting certain revenue targets for the first revenue pool. The remaining
contingent amount of $25.6 million will not be paid because the required revenue
targets for the second revenue pool were not met. The agreement with ISD also
provides for additional contingent cash payments of up to $12.0 million through
September 2004 based on continuing employment of ISD employees with Cypress.
Cypress paid $3.6 million in fiscal 2003 and $4.3 million in fiscal 2002 in
employment based contingent compensation. As of December 28, 2003, Cypress
expects to pay an additional $2.4 million of employment based contingent
compensation in fiscal 2004. Cypress will not pay the remaining $1.7 million due
to the discontinued employment of some former ISD employees.
ACQUISITION OF LARA NETWORKS, INC.
On July 3, 2001, Cypress acquired 100% of the outstanding common and
preferred stock of Lara Networks, Inc. ("Lara"), a provider of high-performance,
silicon-based packet processing solutions for WAN infrastructure equipment. Lara
is part of the Non-memory business segment and the WAN/SAN market segment. The
Lara acquisition enabled Cypress to leverage its core competencies in data
communications and specialty memories. Lara was acquired to expand Cypress's
portfolio of solutions across the linecard and enabled Cypress to address the
core functionality of packet processing. The acquisition was accounted for using
the purchase method of accounting per SFAS 141. Accordingly, the estimated fair
value of assets acquired and liabilities assumed were included in Cypress's
consolidated balance sheet as of July 3, 2001, the effective date of the
purchase. The results of operations are included in Cypress's consolidated
results of operations as of and since the effective date of the purchase. There
were no significant differences between the accounting policies of Cypress and
Lara.
Page 53
Cypress acquired Lara for total consideration of $200.1 million,
including $185.3 million in cash, options for 0.4 million shares of Cypress
common stock valued at $8.1 million and direct acquisition costs of $6.7 million
for underwriting, legal, valuation, accounting and regulatory fees. The total
purchase price was allocated to the estimated fair value of assets acquired and
liabilities assumed as follows:
-------------------------------------------------
(In thousands)
-------------------------------------------------
Current assets $ 11,234
Property, plant and equipment, net 4,789
Deferred tax asset 17,016
Other assets 1,222
Goodwill 158,322
Current technology 14,850
Trademarks 2,250
Non-compete agreements 1,550
Customer purchase orders 150
---------
Total assets acquired 211,383
Current liabilities (13,969)
Deferred tax liabilities (7,520)
---------
Total liabilities assumed (21,489)
Deferred stock compensation 5,662
---------
Net assets acquired 195,556
In-process research and development 4,550
-------------------------------------------------
Total consideration $ 200,106
=================================================
The amounts allocated to current technology, trademarks, non-compete and
customer purchase orders have weighted average useful lives of 5 years, 5 years,
3 years and 0.5 years, respectively. These intangible assets are amortized using
the straight-line method over their respective estimated useful lives. None of
the $158.3 million in goodwill recorded is expected to be deductible for tax
purposes, and, in accordance with SFAS 142, will not be amortized.
The agreement with Lara included provisions for contingent cash payments
of up to $80.0 million through December 2003 based on certain Lara products
achieving specific revenue targets in future periods. The Lara revenue targets
were not met and thus no contingent payments were made.
The agreement with Lara also provided for contingent cash payments of
$3.9 million based on continued employment of Lara employees with Cypress. As of
December 28, 2003, Cypress had paid $3.6 million in employment based contingent
compensation. Cypress will not pay the remaining $0.3 million due to the
discontinued employment of some former Lara employees.
ACQUISITION OF SCANLOGIC CORPORATION
On May 29, 2001, Cypress completed its acquisition of ScanLogic
Corporation ("ScanLogic"), a provider of USB controllers for embedded and PC
applications. ScanLogic is part of the Non-memory business segment and the
Computation and Consumer market segments. The acquisition was accounted for
using the purchase method of accounting per APB Opinion No. 16, "Business
Combinations" ("APB 16"). Accordingly, the estimated fair value of assets
acquired and liabilities assumed were included in Cypress's consolidated balance
sheet as of May 29, 2001, the effective date of the purchase. The results of
operations are included in Cypress's consolidated results of operations as of
and since the effective date of the purchase. There were no significant
differences between the accounting policies of Cypress and ScanLogic.
Cypress acquired ScanLogic for total consideration of $30.1 million,
including $15.6 million in cash, options for 0.5 million shares of Cypress
common stock valued at $11.7 million, notes payable to ScanLogic shareholders
of $1.9 million and direct acquisition costs of $0.9 million for legal and
accounting fees and broker commissions. The total purchase price was allocated
to the estimated fair value of assets acquired and liabilities assumed as
follows:
----------------------------------------------------------------
(In thousands)
----------------------------------------------------------------
Fair value of tangible assets and liabilities $ (1,446)
In-process research and development 1,450
Current technology 11,950
Assembled workforce and non-compete agreements 1,400
Deferred stock compensation 7,330
Goodwill 9,419
----------------------------------------------------------------
Total $ 30,103
================================================================
Page 54
The amounts allocated to intangible assets are being amortized using the
straight-line method over their respective estimated useful lives, which range
from three to four years.
ACQUISITION OF HIBAND SEMICONDUCTORS, INC.
On March 27, 2001, Cypress acquired all of the outstanding capital stock
of HiBand Semiconductors, Inc. ("HiBand"). HiBand is part of the Non-memory
business segment and the WAN, Computation and Consumer market segments. HiBand
is a provider of mixed-signal integrated circuits for high-speed communications
markets. The acquisition was accounted for using the purchase method of
accounting pursuant to APB 16. Accordingly, the estimated fair value of assets
acquired and liabilities assumed were included in Cypress's consolidated balance
sheet as of March 27, 2001, the effective date of the purchase.
Cypress acquired HiBand for total consideration of $34.0 million,
including 1.4 million shares of Cypress common stock valued at $28.2 million,
options for 0.2 million shares of Cypress common stock valued at $4.0 million,
an existing $1.3 million cash advance and direct acquisition costs of $0.5
million for legal and accounting fees. The total purchase price was allocated to
the estimated fair value of assets acquired and liabilities assumed as follows:
----------------------------------------------------------------
(In thousands)
----------------------------------------------------------------
Fair value of tangible assets and liabilities $ (181)
In-process research and development 6,450
Current technology 2,800
Assembled workforce and non-compete agreements 2,650
Deferred tax liability (2,180)
Deferred stock compensation 1,793
Goodwill 22,634
----------------------------------------------------------------
Total $ 33,966
================================================================
The amounts allocated to intangible assets are being amortized using the
straight-line method over their respective estimated useful lives, which range
from three to six years.
ACQUISITION OF INTERNATIONAL MICROCIRCUITS, INC.
On February 23, 2001, Cypress completed its acquisition of International
Microcircuits Inc. ("IMI"), a company specializing in timing technology
integrated circuits. IMI is a part of the Non-memory business segment and the
Computation and Consumer market segment. IMI's product portfolio includes
programmable clocks, clock distribution products, electromagnetic interference
suppression devices, and application-specific products. The acquisition was
accounted for using the purchase method of accounting pursuant to APB 16.
Accordingly, the estimated fair value of assets acquired and liabilities assumed
were included in Cypress's consolidated balance sheet as of February 23, 2001,
the effective date of the purchase. The results of operations are included in
Cypress's consolidated results of operations as of and since the effective date
of the purchase. There were no significant differences between the accounting
policies of Cypress and IMI.
Cypress acquired IMI for total consideration of $150.3 million,
including $111.2 million in cash, options for 1.3 million shares of Cypress
common stock valued at $32.8 million, notes payable to IMI shareholders of $3.3
million, and direct acquisition costs of $3.0 million for investment banking,
legal and accounting fees. The total purchase price was allocated to the
estimated fair value of assets acquired and liabilities assumed as follows:
----------------------------------------------------------------
(In thousands)
----------------------------------------------------------------
Fair value of tangible assets $ 14,847
Fair value of liabilities assumed (11,517)
In-process research and development 4,850
Current technology 14,700
Assembled workforce and non-compete agreements 7,450
Other intangibles 7,550
Deferred tax liability (11,880)
Deferred stock compensation 19,087
Goodwill 105,179
----------------------------------------------------------------
Total $ 150,266
================================================================
The amounts allocated to intangible assets are being amortized using the
straight-line method over their respective estimated useful lives, which range
from three to five years.
Page 55
VALUATION METHODOLOGY
The valuation method used to value in-process technology is a form of
discounted cash flow method commonly known as the "percentage of completion"
approach. This approach is a widely recognized appraisal method and is commonly
used to value technology assets. The value of the in-process technology is the
sum of the discounted expected future cash flows attributable to the in-process
technology, taking into consideration the percentage of completion of products
utilizing this technology, utilization of pre-existing technology, the risks
related to the characteristics and applications of the technology, existing and
future markets and the technological risk associated with completing the
development of the technology. The cash flows derived from the in-process
technology projects were discounted at a rate of 27% for IMI, 30% for HiBand,
25% for ScanLogic, 30% for Lara, 29% for ISD, 30% for Silicon Packets and 45%
for SunPower (see Note 2). Cypress believes these rates were appropriate given
the risks associated with the technologies for which commercial feasibility had
not been established. The percentage of completion for each in-process project
was determined by identifying the elapsed time invested in the project as a
ratio of the total time required to bring the project to technical and
commercial feasibility. The percentage of completion for in-process projects
acquired ranged from 10% to 90% for IMI, 5% to 75% for HiBand, 28% to 79% for
ScanLogic, 1% to 89% for Lara, 10% to 70% for ISD, 9% to 87% for Silicon Packets
and 77% for SunPower. Schedules were based on management's estimate of tasks
completed and the tasks to be completed to bring the project to technical and
commercial feasibility. In-process research and development relating to the
SunPower, IMI, ScanLogic, and ISD acquisitions, resulted in the completed
development of products. In-process research and development projects relating
to the Hiband and Silicon Packets acquisitions, were terminated before
completion.
The value of current technology was determined by estimating the future
cash flows to be derived from products based on existing commercially feasible
technologies at the date of the acquisition and discounting associated cash
flows using discount rates ranging from 20% to 27%. Cypress believes these rates
were appropriate given the business risks inherent in manufacturing and
marketing these products. Factors considered in estimating the discounted cash
flows to be derived from the existing technology include risks related to the
characteristics and applications of the technology, existing and future markets
and an assessment of the age of the technology within its life span.
The value of non-compete agreements was based on the estimated loss of
cash flow that would be suffered due to a loss of members of the workforce to a
competitor in the absence of the non-compete agreements. The value of the
assembled workforce was based on estimated costs to replace the existing staff,
including recruiting, hiring and training costs for employees in all categories,
and fully deploy a work force of similar size and skill to the same level of
productivity as the existing work force.
Other intangibles include the value of an existing customer base,
existing customer orders, existing trademarks and a facility lease with below
market rental rates. These intangible assets were valued using discount rates
ranging from 15% to 28%.
Development of in-process technology remains a substantial risk to
Cypress due to a variety of factors including the remaining effort to achieve
technical feasibility, rapidly changing customer requirements and competitive
threats from other companies and technologies. Additionally, the value of other
intangible assets acquired may become impaired. The in-process research and
development valuation, as well as the valuation of other intangible assets was
prepared by management or an independent appraisal firm, based on input from
Cypress and the acquired companies' management, using valuation methods that are
recognized by the United States SEC staff. However, there can be no assurance
that the SEC staff will not take issue with assumptions used in the appraiser's
valuation model and require Cypress to revise the amount allocated to in-process
research and development or other intangible assets.
Page 56
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Summarized below are the unaudited pro forma results of Cypress as
though IMI, HiBand, ScanLogic, Lara, ISD and Silicon Packets had been acquired
at the beginning of the periods indicated. Adjustments have been made for the
estimated increases in amortization of intangibles, amortization of stock-based
compensation and other appropriate pro forma adjustments. The charges for
purchased in-process research and development are not included in the pro forma
results, because they are non-recurring. The pro forma results do not include
goodwill amortization for the Lara, ISD and Silicon Packets acquisitions.
Year Ended
==================================================================
(In thousands, except per share December 30, December 31,
amounts) 2001 2000
------------------------------------------------------------------
Total revenue $ 842,634 $ 1,402,617
Net income (loss) $ (478,647) $ 162,838
Net income (loss) per share:
Basic $ (3.79) $ 1.35
Diluted $ (3.79) $ 1.19
==================================================================
The above amounts are based upon certain assumptions and estimates,
which Cypress believes are reasonable and do not reflect any benefit from
economies, which might be achieved from combined operations. The pro forma
financial information presented above is not necessarily indicative of either
the results of operations that would have occurred had the acquisitions taken
place at the beginning of the periods indicated or of future results of
operations of the combined companies.
NOTE 7: RESTRUCTURING
The semiconductor industry has historically been characterized by wide
fluctuations in demand for, and supply of, semiconductors. In some cases,
industry downturns have lasted more than a year. Prior experience has shown that
restructuring of operations, resulting in significant restructuring charges, may
become necessary if an industry downturn persists. Cypress had two active
restructuring plans--one initiated in the third quarter of fiscal 2001 ("Fiscal
2001 Restructuring Plan") and the other initiated in the fourth quarter of
fiscal 2002 ("Fiscal 2002 Restructuring Plan"). Cypress recorded initial
restructuring charges in fiscal 2002 and fiscal 2001 based on assumptions that
it deemed appropriate for the economic environment that existed at the time
these estimates were made. However, due to continued changes in the
semiconductor industry and in specific business conditions, Cypress took
additional actions and made appropriate adjustments to both the Fiscal 2001
Restructuring Plan and the Fiscal 2002 Restructuring Plan for property, plant
and equipment, leased facilities and personnel costs.
At the end of December 28, 2003, both restructuring events had been
substantially completed with reserves remaining only for leases and employee
benefits. The reserves will decrease over time as Cypress makes lease payments
and payments for employee benefits, which will be paid through the second
quarter of fiscal 2004.
FISCAL 2002 RESTRUCTURING PLAN:
On October 17, 2002, Cypress announced a restructuring plan that
included the resizing of Cypress's manufacturing facilities and the reduction of
operating expenses, including research and development and selling, general and
administrative. In the fourth quarter of fiscal 2002 ("Q4 2002"), Cypress
recorded a charge of $45.4 million which consisted of $36.0 million related to
equipment removed from service and held for sale, $8.2 million for workforce
reductions for approximately 380 employees, including severance and benefits
costs, and $1.2 million for leased facilities. At December 28, 2003, all
equipment had been disposed, scrapped or placed back in service. The majority of
the workforce reduction affected the United States, with some reductions in
Europe and the Philippines and sales offices that were closed in Europe and the
United States. As of the end of the second quarter of fiscal 2003 ("Q2 2003"),
all of these employees had left Cypress.
A restructuring charge of $3.4 million was recorded in the first quarter
of fiscal 2003 for additional opportunities identified as part of the personnel
portion of the Fiscal 2002 Restructuring Plan. The charge relates to the
severance and related employee benefit costs for the termination of
approximately 150 additional employees, the majority of who were located in the
United States at Cypress's facilities in San Jose, Texas and Minnesota. As of
the end of Q2 2003, all of these employees had left Cypress.
In Q2 2003, Cypress placed back into service certain of the equipment
previously recorded as held for sale. The assets were needed to meet increased
production requirements resulting from a substantial increase in unit demand
versus Cypress's initial assumptions at the time of the restructuring in Q4
2002. When the assets were put back into service, they were recorded at the
lower of their fair value or original net book value less depreciation for the
period they were held for sale in accordance with SFAS 144 and the related
impairment reserve of $3.2 million was reversed. This resulted in an excess
recovery of the reserves initially established for these assets. This amount was
not material.
Page 57
A net restructuring charge of $2.5 million was recorded in the third
quarter of fiscal 2003 ("Q3 2003"). This charge consisted of $2.4 million for
additional opportunities identified as part of the personnel and leased facility
portion of the Fiscal 2002 Restructuring Plan, in addition to a net $0.1 million
charge for additional costs resulting from prior quarters change in estimate. Of
the $2.4 million charge for additional opportunities identified, the personnel
portion of the charge relates to severance and related employee benefit costs
for the termination of approximately 62 additional employees, the majority of
who were located in the United States at Cypress's facilities in San Jose, and
Europe. As of the end of Q3 2003, all of these employees had left Cypress. The
net leased facility charge of $0.8 million consisted of $0.9 million resulting
from the cessation of use of Cypress's U.K. Design Center facility offset by
$0.1 million reversal of a Q4 2002 restructuring charge for the U.K. sales
facility that was vacated in Q4 2002. The termination of employees in the U.K.
resulted in the need for a smaller facility and the U.K. sales facility was
accordingly put back into use.
In Q3 2003, Cypress placed back into service assets previously recorded
as held for sale. The assets were needed to meet increased production
requirements resulting from an increase in customer unit demand forecast, versus
Cypress's initial assumptions at the time of the restructuring in Q4 2002, which
resulted in a credit of $4.1 million. When the assets were put back into
service, they were recorded at the lower of their fair value or original net
book value less depreciation for the period they were held for sale in
accordance with SFAS 144.
In the fourth quarter of fiscal 2003 ("Q4 2003"), Cypress finalized the
disposition of all remaining assets under the Fiscal 2002 Restructuring Plan and
recorded a credit of $1.7 million associated with the release of prior reserves.
Cypress also placed back into service equipment needed for increased production,
which resulted in a credit of $7.2 million. When the assets were put back into
service, they were recorded at the lower of their fair value or original net
book value less depreciation for the period they were held for sale in
accordance with SFAS 144.
The following table summarizes the activity associated with the
restructuring liabilities and asset write-downs since the inception of the
Fiscal 2002 Restructuring Plan:
PROPERTY, PLANT LEASED
(In thousands) & EQUIPMENT FACILITIES PERSONNEL TOTAL
-------------------------------------------------------------------------------------------------
Q4 2002 Provision $ 35,959 $ 1,211 $ 8,188 $ 45,358
Non-cash charges (39) -- (40) (79)
Cash charges (50) (524) (5,276) (5,850)
-------------------------------------------------------------------------------------------------
Balance at December 29, 2002 35,870 687 2,872 39,429
Q1 2003 Provision -- -- 3,360 3,360
Non-cash charges (2,413) -- -- (2,413)
Cash charges (98) (2) (2,263) (2,363)
-------------------------------------------------------------------------------------------------
Balance at March 30, 2003 33,359 685 3,969 38,013
Non-cash charges (3,161) -- -- (3,161)
Cash charges (225) (51) (3,224) (3,500)
Assets placed back into service (3,191) -- -- (3,191)
-------------------------------------------------------------------------------------------------
Balance at June 29, 2003 26,782 634 745 28,161
Q3 2003 Provision -- 788 1,752 2,540
Non-cash charges (2,740) 113 -- (2,627)
Cash charges (137) (123) (688) (948)
Assets placed back into service (4,138) -- -- (4,138)
-------------------------------------------------------------------------------------------------
Balance at September 28, 2003 19,767 1,412 1,809 22,988
Q4 2003 Provision (benefit) (1,271) (223) (194) (1,688)
Non-cash charges (10,892) -- -- (10,892)
Cash charges (389) (62) (1,063) (1,514)
Assets placed back into service (7,215) 1 2 (7,212)
-------------------------------------------------------------------------------------------------
Balance at December 28, 2003 $ -- $ 1,128 $ 554 $ 1,682
-------------------------------------------------------------------------------------------------
FISCAL 2001 RESTRUCTURING PLAN:
On July 16, 2001, Cypress announced a restructuring plan that involved
resizing its manufacturing facilities, reducing its workforce and combining
facilities. The restructuring was precipitated by the worldwide economic
slowdown, particularly in the business areas in which Cypress operates. The
intended effect of the plan was to size the manufacturing operations and
facilities to meet future demand and reduce expenses in all operations areas.
During the third quarter of fiscal 2001 ("Q3 2001"), Cypress recorded
restructuring charges of $132.1 million related to property, plant and
equipment, leased facilities and personnel.
In connection with the July 16, 2001 announcement, in Q3 2001, Cypress
removed from service and held for sale equipment with a net book value of $116.9
million, resulting in a charge of $113.4 million. Cypress has actively marketed
the equipment. Through Q4 2003, Cypress has disposed of equipment with a net
book value of $74.0 million. In the second quarter of fiscal 2002 ("Q2 2002")
and the third quarter of fiscal 2002 ("Q3 2002"), Cypress placed back into
service certain of these assets previously recorded as held for sale. The assets
were needed to meet increased production requirements resulting from a
substantial increase in unit demand versus Cypress's initial assumptions at the
time of the restructuring in Q3 2001. When the assets were put back into
service, they were written up to their prior cost basis (an adjustment of $13.2
million and $9.6 million in Q2 2002 and Q3 2002, respectively), reduced
Page 58
for depreciation expense that would have been recorded during the period the
asset was removed from service (an adjustment of $2.9 million and $2.6 million
in Q2 2002 and Q3 2002, respectively), as required by SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of" ("SFAS 121"). The net effect of the restructuring adjustment was a credit to
the Restructuring line on the consolidated statement of operations of $10.3
million and $7.0 million in Q2 2002 and Q3 2002, respectively. In the first
quarter of fiscal 2002 ("Q1 2002"), Cypress also sold and then leased back
certain other pieces of equipment classified as held for sale. The proceeds from
the sales of the assets approximated their net carrying values. In Q1 2002,
Cypress recorded an additional charge of $1.6 million for additional cost
reductions identified as part of the personnel portion of the Fiscal 2001
Restructuring Plan. The charge related to severance and related employee benefit
costs for the termination of employees, the majority of whom were located in the
Philippines facility.
In Q3 2002, as a result of the continued drive to lower Cypress's cost
structure and break-even sales, Cypress further expanded the scope of the
restructuring and recorded net restructuring costs of $2.4 million, which was
comprised of a charge of $9.4 million offset by a $7.0 million reversal for
previously written-down equipment put back into service discussed above. The
charge of $9.4 million consisted of $3.3 million for work force reductions, and
included severance, benefit costs and stock compensation, $3.4 million for
capital equipment removed from service and held for sale and $2.7 million for
the exiting of facility leases.
In Q4 2002, Cypress recorded a credit of $0.7 million related to the
revised estimate of personnel costs. All the personnel related charges and
actions taken by Cypress in Q3 2001, Q1 2002 and Q3 2002 resulted in the
termination of approximately 890 employees, all of whom had left Cypress as of
the end of Q2 2003.
In Q3 2003, Cypress held a bid sale on the remaining equipment held for
sale under the Fiscal 2001 Restructuring Plan. As a result, an $8.1 million
credit was recorded associated with the adjustment of prior reserves. At the end
of Q3 2003, all but one piece of equipment with a carrying value of $0.5 million
remained unsold.
In Q4 2003, Cypress finalized the disposition of all remaining assets
under the Fiscal 2001 Restructuring Plan and recorded an additional credit of
$2.1 million, consisting of an additional charge for leased facilities of $0.6
million due to a slower than anticipated turn around in the leasing market,
offset by higher than anticipated proceeds on items held for sale and the final
adjustment of the equipment reserves of $2.7 million. Cypress also placed back
into service equipment needed for increased production, which resulted in a
credit of $1.5 million.
Page 59
The following table summarizes the activity associated with the
restructuring liabilities and asset write-downs since the inception of the
Fiscal 2001 Restructuring Plan:
PROPERTY, PLANT LEASED
(In thousands) & EQUIPMENT FACILITIES PERSONNEL TOTAL
-------------------------------------------------------------------------------------------------
Initial provision in September 30, 2001 $ 113,350 $ 4,079 $ 14,684 $ 132,113
Non-cash charges (5,145) -- (8,970) (14,115)
Cash charges (380) (53) (3,836) (4,269)
-------------------------------------------------------------------------------------------------
Balance at September 30, 2001 107,825 4,026 1,878 113,729
Non-cash charges (2,124) -- (86) (2,210)
Cash charges (1,239) (160) (407) (1,806)
-------------------------------------------------------------------------------------------------
Balance at December 30, 2001 104,462 3,866 1,385 109,713
Provision -- -- 1,595 1,595
Non-cash charges (5,096) -- -- (5,096)
Cash charges (147) (375) (1,581) (2,103)
-------------------------------------------------------------------------------------------------
Balance at March 31, 2002 99,219 3,491 1,399 104,109
Cash charges (151) (503) (553) (1,207)
Assets placed back into service (13,217) -- -- (13,217)
-------------------------------------------------------------------------------------------------
Balance at June 30, 2002 85,851 2,988 846 89,685
Provision 3,378 2,761 3,251 9,390
Non-cash charges (12,316) -- (924) (13,240)
Cash charges (484) (502) (1,039) (2,025)
Assets placed back into service (9,545) -- -- (9,545)
-------------------------------------------------------------------------------------------------
Balance at September 29, 2002 66,884 5,247 2,134 74,265
Provision (benefit) -- -- (701) (701)
Non-cash charges (12,786) -- -- (12,786)
Cash charges (419) (582) (799) (1,800)
-------------------------------------------------------------------------------------------------
Balance at December 29, 2002 53,679 4,665 634 58,978
Non-cash charges (16,046) -- -- (16,046)
Cash charges (862) (674) (540) (2,076)
-------------------------------------------------------------------------------------------------
Balance at March 30, 2003 36,771 3,991 94 40,856
Non-cash charges (1,206) -- -- (1,206)
Cash charges (471) (739) (115) (1,325)
Assets placed back into service (64) -- 21 (43)
-------------------------------------------------------------------------------------------------
Balance at June 29, 2003 35,030 3,252 -- 38,282
Provision (benefit) (8,063) -- -- (8,063)
Non-cash charges (10,915) -- -- (10,915)
Cash charges (74) (520) -- (594)
-------------------------------------------------------------------------------------------------
Balance at September 28, 2003 15,978 2,732 -- 18,710
Provision (benefit) (2,696) 645 -- (2,051)
Non-cash charges (11,549) -- -- (11,549)
Cash charges (233) (631) -- (864)
Assets placed back into service (1,500) -- -- (1,500)
-------------------------------------------------------------------------------------------------
Balance at December 28, 2003 $ -- $ 2,746 $ -- $ 2,746
-------------------------------------------------------------------------------------------------
NOTE 8: PROVISIONS FOR INVENTORY
During the quarter ended September 30, 2001, Cypress recorded a
provision of $93.1 million to cost of sales for excess inventory and related
purchase commitments, which Cypress did not expect to sell. The excess was a
result of the continuing decline in revenue, greater uncertainty with respect to
the timing of the recovery, which then appeared later than previously
anticipated and the slower rate of expected recovery. During the fiscal year
2003, Cypress realized revenue on the sale of a portion of the inventory for
which the 2001 provision was taken. The sale of this previously reserved
inventory improved fiscal 2003, fiscal 2002 and fiscal 2001 gross margins by
$15.3 million, $20.3 million and $0.0 million, respectively.
Page 60
NOTE 9: ACQUISITION AND OTHER COSTS
Year Ended
===========================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
---------------------------------------------------------------------------
Amortization of intangibles $ 37,648 $ 41,945 $ 39,730
Impairment of intangibles -- 20,303 36,848
Amortization of goodwill -- -- 32,895
Impairment of goodwill -- 14,409 29,062
In-process research and
development charge -- 2,166 22,718
Other charges (credits) (3,433) 6,053 --
---------------------------------------------------------------------------
Total acquisition and other costs $ 34,215 $ 84,876 161,253
===========================================================================
Amortization of intangibles in fiscal 2003 relate to acquisitions made
prior to 2003.
During fiscal 2002, Cypress acquired Sahasra and made an equity
investment in SunPower. In-process research and development charges and
amortization of intangibles in fiscal 2002 relate to current and prior
acquisitions.
The amortization of intangibles decreased in fiscal 2003 versus fiscal
2002 due mainly to a $20.3 million impairment of Silicon Light Machines ("SLM")
intangibles at the end of 2002. The SLM impairment charge for fiscal 2002 was
precipitated by further changes in SLM's business plan that was completed in the
fourth quarter of fiscal 2002. The amortization of intangibles increased in
fiscal 2002 versus fiscal 2001 due to the acquisition of Sahasra and the full
year effect of the amortization of intangibles from the IMI, Lara, Silicon
Packets, ISD and ScanLogic acquisitions, all companies acquired in 2001. The SLM
impairment charge for fiscal 2001 of $36.8 million was precipitated by a severe
economic downturn in the optical market in which SLM participates. As a result,
Cypress reviewed SLM's long-lived assets, in accordance with SFAS 121, for
impairment and recognized in fiscal 2001 an impairment loss of $36.8 million for
existing technology impairment, representing the amount by which the carrying
value of the acquired existing technology exceeded the estimated future cash
flows of SLM.
In fiscal 2001, amortization of goodwill relates largely to Cypress's
acquisitions of Lara, ISD, ScanLogic, HiBand, IMI, SLM and Silicon Packets. In
accordance with SFAS 142, Cypress ceased amortizing goodwill at the end of
fiscal 2001 and has not amortized goodwill for acquisitions subsequent to June
30, 2001.
In fiscal 2002, Cypress also recorded a goodwill impairment charge of
$14.4 million related to SLM in accordance with its annual impairment review
under SFAS 142. In fiscal 2001, Cypress recorded a goodwill impairment charge of
$29.1 million in accordance with SFAS 121 as a result of the severe downturn in
the optical market discussed above. The goodwill impairment charge recorded
represented the excess of the pro rata share of goodwill over the future
estimated cash flows of SLM.
The in-process research and development charges for fiscal 2002 relate
to Cypress's equity method investment in SunPower. In-process research and
development charges during fiscal 2001 relate to the acquisitions of IMI,
HiBand, ScanLogic, Lara, ISD and Silicon Packets, which were completed during
fiscal 2001.
Other credits recorded during fiscal 2003 relates to the reversal of
accruals that were originally established in connection with potential penalties
Cypress could incur as a result of its decision not to construct a second
fabrication facility in its Texas location. Other charges of $6.1 million were
recorded during fiscal 2002 for obsolete design software that is no longer being
used.
NOTE 10: EQUITY
OPTION CONTRACTS
At December 28, 2003, Cypress had outstanding a series of equity options
on Cypress common stock with an initial cost of $26.0 million, that were
originally entered into in 2001, which is classified in stockholders' equity in
the accompanying consolidated balance sheet. The contracts require physical
settlement and were extended in January 2004 to February 2004. Upon expiration
of the options, if Cypress's stock price is above the threshold price of $21.00
per share, Cypress will receive a settlement value totaling $30.3 million in
cash. If Cypress's stock price is below the threshold price of $21.00 per share,
Cypress will receive 1.4 million shares of its common stock. Alternatively, the
contract may be renewed and extended. As a result of extending the equity
options, Cypress received cash of $0.7 million, $1.6 million and $13.9 million
in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
Page 61
In conjunction with Cypress's offering in June 2003 of its 1.25%
convertible subordinated notes due June 15, 2008 (the "1.25% Notes"), Cypress
purchased a call spread option on Cypress's common stock ("Call Spread Option")
maturing on July 15, 2004 for $49.3 million. The Call Spread Option, including
fees and costs, has been accounted for as an equity transaction in accordance
with Emerging Issues Task Force No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". The
Call Spread Option covers 32.0 million shares of Cypress common stock. The Call
Spread Option is designed to mitigate dilution from conversion of the 1.25%
Notes in the event that the 1.25% Notes are converted to common stock and the
market price per share of Cypress's common stock upon exercise of the Call
Spread Option is greater than $15.00 per share and is less than or equal to
$24.50 per share. The Call Spread Option may be settled at Cypress's election,
in either net shares or in cash. Settlement of the Call Spread Option in net
shares on the expiration date would result in Cypress receiving a number of
shares, not to exceed 12.4 million of Cypress's common stock with a value equal
to the amount otherwise receivable on cash settlement. The amount receivable on
cash settlement will be determined based upon a twenty-day averaging period
beginning on July 1, 2004. Should there be an early unwind of the Call Spread
Option, the amount of cash or net shares potentially received by Cypress will be
dependent upon the then existing overall market conditions, on Cypress's stock
price, the volatility of Cypress's stock and the amount of time remaining on the
Call Spread Option.
In fiscal 2001 and 2000, the Board of Directors of Cypress authorized
the repurchase of 15 million shares of Cypress's outstanding common stock and
the sale of put options of up to 2.5 million shares. In fiscal 2001, Cypress
sold put warrants through private placements for which Cypress received $10.6
million. In fiscal 2002, Cypress sold put warrants through private placements
for which Cypress received $0.2 million. The put options expired in April 2002.
The put option purchases were recorded in stockholders equity.
DEFERRED STOCK-BASED COMPENSATION
Cypress records provisions for deferred stock compensation related to
acquisitions. There was no such provision recorded in fiscal 2003. Deferred
stock compensation expense is amortized over the vesting period of the
individual stock options or restricted stock, generally a period of four to five
years. Deferred stock compensation expense, included in Cost of revenues,
Selling, general and administrative expense and Research and development expense
in the consolidated statements of operations, totaled approximately $10.2
million, $32.5 million and $33.2 million for fiscal 2003, fiscal 2002 and fiscal
2001, respectively. Deferred compensation expense is lower in fiscal 2003
compared to fiscal 2002 as a result of employee terminations and accelerated
amortization in accordance with FIN 28.
The following table presents details of the deferred stock compensation
expense:
Year Ended
===========================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
---------------------------------------------------------------------------
Cost of revenues $ 506 $ 1,509 $ 4,534
Selling, general and administrative 440 3,811 11,035
Research and development 9,228 27,137 17,593
---------------------------------------------------------------------------
Total deferred stock compensation
expense $ 10,174 $ 32,457 $ 33,162
===========================================================================
NOTE 11: DEBT AND OTHER LONG-TERM LIABILITIES
CONVERTIBLE SUBORDINATED NOTES
================================================================
December 28, December 29,
(In thousands) 2003 2002
----------------------------------------------------------------
1.25% convertible subordinated notes $ 600,000 $ --
3.75% convertible subordinated notes 68,652 185,900
4.00% convertible subordinated notes -- 283,000
----------------------------------------------------------------
Total convertible
subordinated notes $ 668,652 $ 468,900
================================================================
During the second quarter of fiscal 2003, Cypress issued $600.0 million
in principal amount of its 1.25% Notes with interest payable on June 15 and
December 15 beginning December 15, 2003. Each note, which may be converted at
anytime by the holders prior to maturity, is convertible into 55.172 shares of
Cypress stock, subject to certain adjustments, plus a cash payment of $300.00.
Cypress, at its option, may satisfy the $300.00 cash payment by issuing common
stock if the then current stock price exceeds $11.65. The 1.25% Notes are
callable at anytime on or after June 20, 2006. At anytime prior to maturity,
Cypress may, at its option, elect to
Page 62
terminate the holders' conversion rights if the closing price of Cypress's
common stock exceeds $21.75 (subject to certain adjustments) for 20 days out of
a 30 consecutive trading day period. If Cypress issues a notice of termination
of conversion rights prior to June 20, 2006, Cypress will pay additional
interest in an amount equal to three years of interest, less any interest
actually paid prior to the conversion date, to holders who convert their 1.25%
Notes. Had Cypress been allowed to terminate and had terminated the conversion
rights at December 28, 2003, and all holders converted their 1.25% Notes,
Cypress would have been required to pay $18.8 million additional interest plus
either $180.0 million of cash or $189.5 million in value of Cypress equivalent
shares to satisfy the $300.00 cash payment.
As of the end of the third quarter of fiscal 2003, of the $600.0 million
of 1.25% Note proceeds, Cypress had used approximately $400.2 million to retire
its 4.0% convertible subordinated notes (the "4.0% Notes") and to repurchase
portions of its 3.75% convertible subordinated notes (the "3.75% Notes"), $95.3
million to repurchase 9.3 million shares of Cypress common stock, $49.3 million
to purchase the Call Spread Option and $18.5 million for transaction costs. The
Call Spread Option was recorded in stockholders' equity.
Outstanding at December 28, 2003, were $68.7 million of 3.75% Notes and
$600.0 million of the 1.25% Notes, all classified as long-term debt. The 3.75%
Notes are due in 2005. The notes outstanding at December 28, 2003 are
convertible into approximately 1.1 million shares of common stock and are
callable by Cypress at any time prior to maturity. In fiscal 2003, Cypress
recorded losses of $7.5 million related to the redemption of an aggregate of
$400.2 million in principal amount of the 4.0% Notes and 3.75% Notes, consisting
of premiums paid and the write-off of a proportionate share of the related
issuance costs.
On June 30, 2003, Cypress filed a resale shelf registration statement on
Form S-3 for the registration of the 1.25% Notes and the shares of Cypress
common stock underlying the 1.25% Notes, which was declared effective by the
Securities and Exchange Commission on September 10, 2003.
OTHER LONG-TERM LIABILITIES
========================================================================
December 28, December 29,
(In thousands) 2003 2002
------------------------------------------------------------------------
Collateralized debt instruments $ 20,675 $ 4,212
Lease guarantee (See synthetic lease
Note 19) 2,000 --
Notes payable to minority shareholders
of SunPower 1,950 --
Customer advances 25,081 55,936
Other long-term liabilities 116 975
Less: current portion of collateralized
debt instruments (7,017) (4,212)
Less: current portion of customer
advances (25,081) (3,950)
------------------------------------------------------------------------
Total other long-term liabilities $ 17,724 $ 52,961
========================================================================
COLLATERALIZED DEBT INSTRUMENTS
During the first quarter of fiscal 2003, Cypress entered into long-term
loan agreements with two lenders with an aggregate principal amount equal to
$24.7 million. These agreements are collateralized by specific equipment located
at Cypress's U.S. manufacturing facilities. Principal amounts are to be repaid
in monthly installments inclusive of accrued interest, over a three to four year
period. The applicable interest rates are variable based on changes to LIBOR
rates. Both loans are subject to a minimum cash financial covenant. As of the
end of December 28, 2003, the aggregate principal outstanding was $20.7 million
and Cypress was in compliance with the financial covenant.
Maturities related to the 1.25% Notes, 3.75% Notes and the
collateralized debt instruments over the next 5 years are as follows:
-------------------------------------------------------------
Convertible Collateralized
(In thousands) debt debt Total
-------------------------------------------------------------
2004 $ -- $ 7,017 $ 7,017
2005 68,652 7,293 75,945
2006 -- 4,977 4,977
2007 -- 1,388 1,388
2008 600,000 -- 600,000
-------------------------------------------------------------
Total $ 668,652 $ 20,675 $ 689,327
-------------------------------------------------------------
Page 63
LINE OF CREDIT
In September 2003, Cypress entered into a $50.0 million twenty-four
month revolving line of credit with Silicon Valley Bank. As of the end of
December 28, 2003, there was no amount outstanding under the line of credit.
Loans made under the line of credit bear interest based upon the Wall Street
Journal Prime Rate or LIBOR plus 175 basis points at Cypress's election. The
line of credit agreement includes a variety of covenants including restrictions
on the incurrence of indebtedness, incurrence of loans, the payment of dividends
or distribution on its capital stock, and transfers of assets and financial
covenants with respects to tangible net worth and a quick ratio. Cypress
obligations under the line of credit are guaranteed and secured by the stock of
certain of its subsidiaries. Cypress intends to use the line of credit on an as
needed basis to fund working capital and capital expenditures including
Cypress's obligations under the SunPower agreements.
CUSTOMER ADVANCES
As of December 28, 2003, Cypress has recorded $25.1 million in customer
advances, all of which is recorded in Other current liabilities. The customer
advance is related to a financing and supply agreement into which Cypress
entered with a specific customer in October 2000. The agreement called for the
customer to provide funding to Cypress for the purpose of purchasing equipment
and increasing fabrication capacity in order to supply product at future dates
according to the supply agreement. The customer maintains a security interest in
the equipment purchased. The supply agreement calls for Cypress to make
available to the customer a minimum quantity of wafers each year. Cypress
expects to be able to satisfy its minimum supply requirements under this
agreement.
NOTE 12: FOREIGN CURRENCY DERIVATIVES
Cypress has foreign subsidiaries that operate and sell Cypress's
products in various global markets. As a result, Cypress is exposed to risks
associated with changes in foreign currency exchange rates. At any point in
time, Cypress might use various hedge instruments, primarily forward contracts,
to manage the exposures associated with forecasted purchases of equipment, and
net asset or liability positions. Cypress does not enter into derivative
financial instruments for speculative or trading purposes.
On January 1, 2001, Cypress adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. SFAS
133 requires that all derivatives be recorded at fair value. The adoption of
SFAS 133 did not have a material effect on Cypress's financial condition or
results of operations. Cypress estimates the fair value of its forward contracts
based on changes in forward rates from published sources.
Under SFAS 133, Cypress accounts for its unrealized hedges of committed
purchases of equipment as cash flow hedges, such that changes in fair value for
the effective portion of hedge contracts, if material, are recorded in Other
comprehensive income in stockholders' equity. Changes in the fair value of the
effective portion of hedge contracts are recognized in Other comprehensive
income until the hedged item is recognized in operations. The ineffective
portion of the derivatives change in fair value is immediately recognized in
operations. There were no open Euro forward contracts as of December 28, 2003.
Ineffective amounts are recorded in Other income and (expense), net and totaled
$0.8 million, $1.0 million and $0.3 million for the fiscal year 2003, fiscal
2002 and fiscal 2001, respectively.
Cypress records its hedges of foreign currency denominated assets and
liabilities at fair value with the related gains or losses recorded in other
income. Transaction losses and gains on the underlying balances being hedged
substantially offset the gains and losses on these contracts. As of December 28,
2003, Cypress held forward contracts with an aggregate notional value of $2.1
million to hedge the risks associated with Yen foreign currency denominated
assets and liabilities. Aggregate foreign exchange gains and (losses) on these
hedging transactions and foreign currency remeasurement gains and (losses) of
$0.5 million, $0.9 million and $0.3 million are included in Other income and
(expense), net during fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
NOTE 13: ACCUMULATED OTHER COMPREHENSIVE INCOME AND COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of tax,
were as follows:
---------------------------------------------------------------------------
December 28, December 29,
(In thousands) 2003 2002
---------------------------------------------------------------------------
Accumulated net unrealized gain on
available for sale investments (net of
taxes of $465 in 2003 and $1,126 in 2002) $ 335 $ 1,033
Accumulated net unrealized gain on
derivatives (net of taxes of $142 in 2003
and $895 in 2002) 1,058 1,343
---------------------------------------------------------------------------
Total accumulated other comprehensive income $ 1,393 $ 2,376
---------------------------------------------------------------------------
Page 64
Comprehensive income is defined as the change in equity during a period
from non-owner sources. Cypress's comprehensive income is comprised of net
income and unrealized gains and losses (net of taxes) on investments classified
as available-for-sale, and the effective portion of gains and losses on cash
flow hedges. We estimate that we will realize a gain of approximately $0.4
million in fiscal 2004 relating to the Accumulated net unrealized gain on
derivatives that exists at the end of fiscal 2003. Comprehensive Income is shown
in the Consolidated Statements of Stockholders Equity.
NOTE 14: EMPLOYEE STOCK PURCHASE ASSISTANCE PLAN
On May 3, 2001, Cypress stockholders approved the adoption of the 2001
Employee Stock Purchase Assistance Plan (the "Plan"). The Plan allowed for loans
to employees to purchase shares of Cypress common stock on the open market.
Employees of Cypress and its subsidiaries, including executive officers but
excluding the CEO and the Board of Directors of Cypress, were allowed to
participate in the Plan. Each loan was evidenced by a full recourse, promissory
note executed by the employee in favor of Cypress and was secured by a pledge of
the shares of Cypress's common stock purchased with the proceeds of the loan
("Collateral Stock"). If a participant sells the Collateral Stock, the proceeds
of the sale are applied first to repay the interest, then the principal on the
loan(s) before any proceeds are received by the Plan participant. The loans are
currently callable and bear interest at a minimum rate of 4.0% compounded
annually, except for loans to executive officers whose loans bear interest at
the rate of 5.0% per annum, compounded annually. As the loans are at interest
rates below the estimated market rate, Cypress recorded compensation expense of
$4.2 million in fiscal 2003 and $3.9 million in fiscal 2002 to reflect the
difference between the rate charged and an estimated market rate for each loan
outstanding. In addition, Cypress is recording interest income on the
outstanding loan balances. Accrued interest outstanding at December 28, 2003
totaled $7.3 million. As of December 28, 2003, loans (including accrued
interest) outstanding under the plan net of loss reserve were $64.3 million, as
compared to the year-end 2002 balance of $90.6 million. This amount is
classified on the consolidated balance sheet within other current assets.
Cypress has established the loss reserve with a charge to operating expenses for
estimated uncollectible balances. In calculating this loss reserve, management
has considered a methodology utilized by an independent party to estimate the
fair value of these employee and former employee loans and the underlying
collateral. To date, there have been immaterial write-offs. At December 28, 2003
and December 29, 2002, the reserve was $16.2 million and $16.0 million,
respectively. However, Cypress is willing to pursue every available avenue,
including those covered under the Uniform Commercial Code, to recover these
loans by pursuing employees' personal assets should the employees not repay
these loans.
The plan became effective on May 3, 2001 and will terminate on the
earlier of May 3, 2011, or such time as determined by the Board of Directors. In
October 2003, Cypress announced a program aimed to minimize losses resulting
from these employee loans. Under this program, either a sell limit order or a
stop loss order is placed on the Collateral Stock once the common stock price
exceeds the employee's break-even point. If the common stock price declines to
the stop loss price, the Collateral Stock will be sold and the proceeds utilized
to repay the employee's outstanding loan to Cypress.
NOTE 15: EARNINGS (LOSS) PER SHARE
As we were in a net loss position in fiscal 2003, fiscal 2002 and fiscal
2001, there is no difference between our basic and diluted earnings per share
amounts.
For the year's ended December 28, 2003, December 29, 2002, and December
30, 2001, options outstanding to purchase 43.8 million shares, 42.4 million
shares and 36.9 million shares, respectively, of common stock were outstanding,
but were excluded from the computation of diluted EPS, as their effect was
anti-dilutive. Convertible notes outstanding at December 28, 2003, December 29,
2002, and December 30, 2001, were convertible to 34,200,789 shares, 9,091,036
shares, 9,871,000 shares, respectively, of common stock but were also excluded
from diluted EPS, as their effect was anti-dilutive.
NOTE 16: INTEREST EXPENSE, INTEREST INCOME, AND OTHER INCOME (EXPENSE), NET
(In thousands) 2003 2002 2001
---------------------------------------------------------------
Interest expense $ 15,613 $ 19,197 $ 22,398
===============================================================
In fiscal 2003, fiscal 2002 and fiscal 2001 interest expense primarily
consisted of interest incurred on Cypress's 1.25% Notes, 3.75% Notes and 4.00%
Notes.
(In thousands) 2003 2002 2001
---------------------------------------------------------------
Interest income $ 14,936 $ 21,212 $ 48,231
===============================================================
Interest income for all three fiscal years consists primarily of
interest income on Cypress's cash equivalents, short- and long-term investments.
Also, included in Interest income were amounts earned from employees related to
the Employee Stock Purchase
Page 65
Assistance Plan loans. These amounts were $3.9 million, $5.2 million and $2.1
million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
Year ended
===================================================================================
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
-----------------------------------------------------------------------------------
Amortization of bond issuance costs $ (3,686) $ (2,834) $ (3,353)
Gain (loss) on repurchase of bonds (7,524) 5,946 7,241
Gain on sale of investment in NVE
Corporation 17,126 -- --
Investment impairment charges 554 (18,992) (8,900)
Foreign exchange gain (loss) 473 915 287
Minority interest 1,045 -- --
Other (1,516) (1,966) 1,314
-----------------------------------------------------------------------------------
Other income and (expense), net $ 6,472 $ (16,931) $ (3,411)
===================================================================================
Other income and (expense), net of $6.5 million for fiscal 2003
primarily reflects our gain on sale of investment in NVE Corporation of $17.1
million offset by our loss on repurchase of our 4.0% Notes and 3.75% Notes of
$(7.5) million and amortization of deferred financing costs of $(3.7) million.
As at December 28, 2003, we hold warrants to purchase 400,000 shares of NVE
common stock at $15.00 per share. The closing price of NVE common stock at
December 28, 2003 was $50.06 per share. Other income and (expense), net of
$(16.9) million for fiscal 2002 primarily reflects write-downs of $19.0 million
in its investments in development stage companies and other investments, and the
amortization of deferred financing costs of $2.8 million. These were partially
offset by gains of $5.9 million recognized on the repurchase of our 3.75% Notes.
In fiscal 2001, other income and (expense), primarily reflects an $8.9 million
write-down of long-term investments and $3.3 million related to the amortization
of deferred financing costs. These costs were somewhat offset by gains on the
repurchase of convertible notes of $7.2 million. The gain on the repurchase of
our convertible subordinated notes was previously classified as extraordinary,
but has been reclassified to other income and (expense), net in accordance with
SFAS No. 145, "Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and
Technical Corrections" ("SFAS 145").
NOTE 17: COMMON STOCK OPTION AND OTHER EMPLOYEE BENEFIT PLANS
CYPRESS STOCK OPTION PLANS
Cypress has two stock option plans: the 1999 Stock Option Plan and the
1994 Stock Option Plan.
In fiscal 1999, Cypress adopted the 1999 Stock Option Plan. Under the
terms of the 1999 Stock Option Plan, which is a non-shareholder approved plan,
options may be granted to qualified employees, including those of acquired
companies and consultants of Cypress or its majority-owned subsidiaries, but
options may not be granted to executive officers or directors. Options become
exercisable over a vesting period as determined by the Board of Directors and
expire over terms not exceeding ten years from the date of grant. The plan
allows for the granting of options at exercise prices less than fair market
value of the common stock at grant date.
In fiscal 1994, Cypress adopted the 1994 Stock Option Plan (a
shareholder approved plan), which replaced Cypress's 1985 Incentive Stock Option
Plan and the 1988 Directors Stock Option Plan with respect to future option
grants. The plan expires April 2004. 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 ten years from the date of grant. The option
price for shares granted, under the 1994 Stock Option Plan, is equal to the fair
market value of the common stock at the date of grant. The 1994 Stock Option
Plan provides for an annual increase in shares available for issuance equal to
4.5% of Cypress's outstanding common stock at the end of each fiscal year plus
shares repurchased during that year.
In March 2001, Cypress employees were offered the opportunity to
exchange stock options for a promise to receive new options six months and one
day after the cancellation of the forfeited options. The new options were
granted on October 8, 2001 with an exercise price equal to the New York Stock
Exchange closing price on the same day. Any remaining grant issued prior to
April 4, 2000 was eligible for this program. The new options were issued with 12
months vested. The balance will vest 1/48th per month regardless of how many
options were vested at the time of the cancellation election. Employees canceled
4,563,800 options with exercise prices between $16.73 and $54.19 per share.
Page 66
SHARES UNDER CYPRESS STOCK OPTION PLANS
The following table summarizes Cypress's stock option activity and
related weighted average exercise price for each category for the years ended
December 28, 2003, December 29, 2002 and December 30, 2001.
=======================================================================================================================
2003 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
(In thousands, except per share Exercise Exercise Exercise
amounts) Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 42,400 $ 14.07 36,946 $ 15.08 24,382 $ 16.93
Options granted 10,601 12.46 9,785 10.27 21,117 16.29
Options exercised (3,395) 7.78 (1,631) 6.84 (2,412) 7.62
Options forfeited (5,820) 15.51 (2,700) 17.25 (6,141) 27.80
---------- ---------- ----------
Options outstanding, end of year 43,786 13.98 42,400 14.07 36,946 15.08
Options exercisable at end of year 21,759 $ 14.41 19,701 $ 13.96 13,584 $ 12.96
=======================================================================================================================
Cypress has, in connection with the acquisitions of various companies,
assumed the stock option plans of each acquired company. During fiscal 2002 and
2001, respectively, a total of approximately 2.5 million and 2.9 million shares
of Cypress's common stock have been reserved for issuance under the assumed
plans and the related options are included in the preceding table. In the second
quarter of fiscal 2003, the Cypress Board of Directors approved an increase of
20.0 million shares for issuance under the 1999 Plan. At December 28, 2003, 23.0
million options were available for grant.
Significant option groups outstanding as of December 28, 2003 and the
related weighted average exercise price and contractual life information, are as
follows:
==================================================================================================
Outstanding Exercisable
--------------------------------------------------------------------------------------------------
Weighted
Weighted Average
Average Exercise Exercise Remaining
Range of Option Exercise Prices Shares Price Shares Price Life(years)
(In thousands, except per-share amounts)
--------------------------------------------------------------------------------------------------
$ 0.01 -- 5.42 2,002 $ 3.88 1,266 $ 3.71 7.2
5.43 -- 10.84 18,055 7.83 8,528 8.65 7.0
10.85 -- 16.26 3,089 12.80 1,790 12.87 6.3
16.27 -- 21.68 14,432 18.61 6,536 18.43 7.9
21.69 -- 27.09 5,566 23.52 3,207 23.59 7.4
27.10 -- 32.51 107 30.43 83 30.31 6.2
32.52 -- 37.93 379 35.82 241 35.79 6.8
37.94 -- 43.35 67 40.84 51 40.84 6.1
43.36 -- 48.77 62 45.10 40 45.10 6.6
48.78 -- 54.19 27 49.82 17 49.86 6.4
==================================================================================================
$ 0.01 -- 54.19 43,786 $ 13.98 21,759 $ 14.41 7.3
==================================================================================================
Page 67
EQUITY COMPENSATION PLAN INFORMATION FOR CYPRESS PLAN
The following table summarizes information, at December 28, 2003 with
respect to shares of Cypress's common stock that may be issued under Cypress's
existing equity compensation plans.
==============================================================================================================================
(In thousands except per share amount)
NUMBER OF SECURITIES REMAINING
AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES WEIGHTED-AVERAGE UNDER EQUITY COMPENSATION
TO BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING SECURITIES
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
------------------------------------------------------------------------------------------------------------------------------
Equity Compensation plans approved by
shareholders 35,217 $ 14.27 5,140 (1)
Equity compensation plans not approved
by shareholders 7,253 14.10 22,940 (2)
------------------------------------------------------------------------------------------------------------------------------
Total 42,470 (3) $ 14.24 28,080
==============================================================================================================================
(1) Includes 90 thousand shares available for future issuance under
Cypress's 1994 Stock Option Plan as amended, generally used for grants to
all employees including officers and directors. Also, includes 5.1 million
shares available under Cypress' Employee Stock Purchase Plan.
(2) Includes shares available under Cypress's 1999 Stock Option Plan used
for grants to employees other than officers and directors.
(3) Total does not include 1.3 million shares issuable under outstanding
options, with a weighted average exercise price of $5.49, originally granted
under plans assumed by Cypress in connection with acquisitions.
SUBSIDIARY STOCK OPTION PLANS
In fiscal 2001, Cypress's subsidiaries Silicon Magnetic Systems ("SMS")
and SLM each adopted a stock option plan. SMS made available for grant 25
million shares under the terms of its plan. SLM made available for grant 11
million shares under the terms of its plan. The plans allow the subsidiaries to
grant options to qualified employees and consultants. Options become exercisable
over a five-year period and expire over terms not exceeding ten years from the
date of grant. The exercise price for options granted under the plans have been
the estimated fair value of each subsidiary's common stock at the date of grant.
SunPower has two shareholders and Board of Directors approved stock
option plans, the 1988 Incentive Stock Plan (the "1988 Plan") and the 1996
Incentive Stock Plan (the "1996 Plan"). Under the terms of the plans, SunPower
may issue incentive or non-statutory stock options or stock purchase rights to
employees and consultants. As of December 28, 2003, the maximum number of shares
of common stock authorized for issuance under the 1988 Plan was 850,000 shares
and under the 1996 Plan was 2,650,000 shares. Options become exercisable over a
5-year period and expensed over terms not exceeding 10 years from date of grant.
SunPower has the right to repurchase shares sold to its employees upon the
termination of employment. The repurchase price shall be the price originally
paid by the employee.
The following table summarizes SMS, SLM and SunPower stock option
activity and related weighted average exercise price for each category for the
year ended December 28, 2003. All exercise prices are weighted average.
===============================================================================================================
SMS SLM SunPower
---------------------------------------------------------------------------------------------------------------
Exercise Exercise Exercise
(In thousands, except per share amounts) Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 2000 -- -- -- --
Options granted 19,550 $ 0.058 3,263 $ 0.65 -- --
Options cancelled -- -- -- -- -- --
Options exercised -- -- -- -- -- --
--------- --------
Options outstanding, December 30, 2001 19,550 0.058 3,263 0.65 -- --
Options granted 8,488 0.062 4,756 0.50 -- --
Options exercised (17,155) 0.058 -- -- -- --
Options cancelled (3,900) 0.058 (1,295) 0.54 -- --
--------- --------
Options outstanding, December 29, 2002 6,983 0.059 6,724 0.56 1,002 $ 0.26
Options granted 4,350 0.073 1,397 0.15 2,709 0.25
Options exercised -- -- -- (41) 0.20
Options cancelled (1,689) 0.068 (465) 0.53 (223) 0.28
--------- -------- --------
Options outstanding, December 28, 2003 9,644 0.064 7,656 0.49 3,447 0.23
Options exercisable at December 28, 2003 2,473 $ 0.059 2,585 $ 0.57 736 $ 0.26
---------------------------------------------------------------------------------------------------------------
Page 68
SUBSIDIARY RESTRICTED STOCK PURCHASE PLAN
Cypress MicroSystems, Inc. ("CMS") 1999 Stock Purchase Plan allows
eligible employees of CMS, a subsidiary of Cypress, to purchase restricted CMS
stock. This stock has a vesting period of five years. Of the 26,200,000 shares
authorized under the plan, 23,430,248 shares were issued through fiscal 2003.
The purchase price of the restricted shares has a range of $0.01 to $0.10 per
share, which equals the estimated grant date fair value.
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
In fiscal 1998, Cypress amended and re-stated its Employee Qualified
Stock Purchase Plan ("ESPP"). The plan allows eligible employees of Cypress and
its subsidiaries to purchase shares of Cypress 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 limit of $25,000. Of the
18,831,041 shares authorized under the ESPP, 13,970,919 shares were issued
through 2003 including 2,614,000 in fiscal 2003, 975,000 in fiscal 2002 and
801,000 in fiscal 2001. The plan provides for an annual increase in shares
available for issuance equal to 1.5% of the number of outstanding Cypress common
stock on the last day of the fiscal year.
PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
As noted in Note 1, Cypress accounts for stock-based employee
compensation using the intrinsic value method of APB 25. Cypress is required to
disclose pro-forma net income (loss) under SFAS 123 and SFAS 148. The
assumptions utilized for valuing Cypress's stock option plans are as follows:
2003 2002 2001
-----------------------------------------------------------------
Expected life 4.4 years 4 years 3.5 years
Risk-free interest rate 2.78% 3.38% 4.40%
Volatility 0.7814 0.7201 0.6724
Dividend yield 0.00% 0.00% 0.00%
The weighted average estimated fair value at the date of grant, as
defined by SFAS 123, for options granted in fiscal 2003, fiscal 2002 and fiscal
2001 was $7.54, $6.15 and $10.38 per option, respectively. The estimated grant
date fair value is calculated using the Black-Scholes model. The Black-Scholes
model, as well as other currently accepted option valuation models, was
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from Cypress's
stock option awards. These models also require highly subjective assumptions,
including future stock price volatility and expected time until exercise, which
greatly affect the calculated grant date fair value.
In addition, the assumptions utilized in valuing shares under Cypress's
ESPP are as follows:
2003 2002 2001
----------------------------------------------------------------
Expected life 6 months 6 months 6 months
Risk-free interest rate 1.40% 2.33% 5.33%
Volatility 0.6086 0.5847 0.9232
Dividend yield 0.00% 0.00% 0.00%
The weighted average estimated grant date fair value, as defined by SFAS
123, for rights to purchase stock under the ESPP granted in fiscal 2003, fiscal
2002 and fiscal 2001 were $2.28, $5.67 and $10.13 per share, respectively.
OTHER EMPLOYEE BENEFIT PLANS
Cypress maintains a Section 401(k) Plan, New Product Bonus Plan, Key
Employee Bonus Plan and Executive Deferred Compensation Plan. The 401(k) Plan
provides participating employees with an opportunity to accumulate funds for
retirement and hardship. Cypress does not make contributions to the plan.
Under the New Product Bonus Plan, which was adopted in fiscal 1997, all
qualified employees are provided bonus payments based on Cypress attaining
certain levels of new product revenue, meeting design deadlines, and attaining
certain levels of profitability. In fiscal 2003, $3.3 million in bonuses paid
under this plan were charged to operations. In fiscal 2002, there were no
charges under this plan. In fiscal 2001 $1.0 million in bonuses paid under this
plan were charged to operations.
Page 69
In fiscal 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 fiscal 2003, $4.8 million in
bonus payments made under this plan were charged to operations. In fiscal 2002
and 2001, there were no charges under this plan.
In fiscal 1995, Cypress adopted a deferred compensation plan, which
provides certain key employees with the option to defer the receipt of
compensation in order to accumulate funds for retirement. Amounts earned by the
key employees are invested primarily in mutual funds and individual company
stock (other than Cypress stock). During 2002 the Board of Directors approved
changes to the existing plan and the creation of a new plan that includes the
option for the key employees to invest their deferred compensation in Cypress
stock. Cypress does not make contributions to any of the deferred compensation
plans. Participant deferrals and investment gains and losses remain an asset of
Cypress and are subject to claims of general creditors. The deferred
compensation plan assets and liabilities are recorded on the balance sheet in
Other assets and Other current liabilities, respectively.
Cypress accounts for the Key Employee Deferred Compensation Plan in
accordance with EITF 97-14. In accordance with EITF 97-14, the liability
associated with the other diversified assets and the investment in the Cypress
stock is being marked to market, with the offset being recorded as compensation
expense to the extent there is an increase in the value or a reduction of
operating expense to the extent there is a decrease in the value. The other
diversified assets are marked to market with the offset being recorded as other
income and expense, net. No entries are recorded for the amounts invested in the
Cypress stock since this is accounted for in treasury stock.
The net impact on the consolidated statement of operations as a result
of all changes recorded for the deferred compensation plans was insignificant
during fiscal 2002 and 2001. However, changes recorded for the increased market
value of Cypress stock during fiscal 2003 unfavorably impacted the statement of
operations by approximately $4.0 million.
During 2003 Cypress took two actions to minimize the impact on the
statement of operations as a result of changes to the market value of Cypress
stock held in the deferred compensation plans. First, a restriction on the
purchase of additional shares of Cypress stock by plan participants was
implemented during the third quarter of 2003. Secondly, during December 2003
Cypress entered into an arrangement with a financial institution, which expires
in November, 2004, wherein Cypress purchased a forward contract to hedge the
impact of market changes of Cypress stock currently held by the plan. Cypress
paid the financial institution $5.0 million for the right to receive in cash at
the end of the contract period the fair value of 222,000 shares of Cypress
stock, which approximates the share count of Cypress stock held by the
participants. The forward contract is marked to market with any changes recorded
as a compensation expense or benefit. The forward contract is recorded in Other
current assets on the Consolidated balance sheet. The mark to market income
statement impact of the forward contract will approximately offset the change in
the liability to deferred compensation participants. During the fourth quarter
of fiscal 2003, Cypress recorded a mark-to-market expense amount of $0.3 million
related to the forward contract.
NOTE 18: INCOME TAXES
The geographic distribution of loss and the components of the provision
for income taxes are summarized below:
Year Ended
----------------------------------------------------------------------------------------------
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
----------------------------------------------------------------------------------------------
Geographic distribution of income (loss)
before provision (benefit) for income taxes
Domestic $ (29,942) $ (209,698) $ (406,589)
Foreign 27,433 (36,562) (30,607)
-----------------------------------------
Loss before provision (benefit) for taxes $ (2,509) $ (246,260) $ (437,196)
-----------------------------------------
Provision (benefit) for Income Taxes
Current tax expense (benefit):
Federal $ 264 $ -- $ --
State (201) 37 137
Foreign 2,759 2,801 1,164
-----------------------------------------
Total current $ 2,822 $ 2,838 $ 1,301
-----------------------------------------
Deferred tax expense:
Federal -- -- (25,652)
State -- -- (5,433)
-----------------------------------------
Total deferred -- -- (31,085)
----------------------------------------------------------------------------------------------
Total $ 2,822 $ 2,838 $ (29,784)
==============================================================================================
Page 70
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.
=============================================================================================
Year Ended
---------------------------------------------------------------------------------------------
December 28, December 29, December 30,
(In thousands) 2003 2002 2001
---------------------------------------------------------------------------------------------
Tax at U.S. statutory rate of 35% $ (878) $ (86,247) $ (142,347)
Foreign income at other than U.S. rates (6,748) 1,596 55
State income taxes, net of federal benefit (130) 37 137
Nondeductible restructuring -- 17,119 24,652
Nondeductible acquisition costs and charges 4,636 21,289 34,802
Future benefits not recognized 5,784 48,842 52,756
Other, net 158 202 161
---------------------------------------------------------------------------------------------
Total $ 2,822 $ 2,838 $ (29,784)
=============================================================================================
The components of deferred tax assets and liabilities at December 28,
2003 and December 29, 2002, under SFAS No. 109 "Accounting for Income Taxes"
("SFAS No. 109") were as follows:
======================================================================
December 28, December 29,
(In thousands) 2003 2002
----------------------------------------------------------------------
Deferred tax assets:
Credits and loss carryover $ 169,088 $ 120,296
Reserves and accruals 77,754 98,413
Deferred income 4,302 2,594
---------- ----------
Total deferred tax assets 251,144 221,303
---------- ----------
Deferred tax liabilities:
Depreciation (62,400) (81,370)
Intangibles arising from acquisitions (17,717) (29,707)
---------- ----------
Total deferred tax liabilities (80,117) (111,077)
---------- ----------
Net deferred tax assets 171,027 110,226
Valuation allowance (171,027) (110,226)
----------------------------------------------------------------------
Net deferred tax assets after
valuation allowance $ -- $ --
======================================================================
At December 28, 2003, the net deferred tax assets of $171.0 million were
fully reserved due to uncertainty of realization in accordance with the
accounting procedures as established by SFAS No. 109. In compliance with SFAS
No. 109, current and long-term net deferred taxes have been netted to the extent
they are in the same tax jurisdiction.
Deferred tax assets of approximately $21.2 million as of December 28,
2003 pertain to certain net operating loss carryforwards resulting from the
exercise of employee stock options. When recognized, the tax benefit of these
loss carryforwards will be accounted for as a credit to additional paid-in
capital rather than a reduction of the income tax provision.
At December 28, 2003, Cypress had United States federal net operating
loss carryovers of approximately $410.5 million, which, if not utilized, will
expire from 2016 through 2023. A portion of these net operating loss carryovers
relates to recent acquisitions and are subject to certain limitations under the
U.S. Internal Revenue Code. Tax benefits related to pre-acquisition losses of
acquired entities aggregating $18.3 million will be utilized first to reduce any
associated intangibles and goodwill. In addition, Cypress had U.S. federal and
state tax credit carryforwards of approximately $24.5 million, which, if not
utilized, will expire in 2023.
U.S. income taxes and foreign withholding taxes have not been provided
on a cumulative total of $247.9 million of undistributed earnings for certain
non-U.S. subsidiaries. Cypress intends to reinvest these earnings indefinitely
in operations outside the United States. It is not practicable to determine the
amount of tax liability that might be payable upon remittance of such earnings.
Cypress's global operations involve manufacturing, research and development, and
selling activities. Cypress's operations outside the U.S. are in certain
countries that impose a statutory tax rate both higher and lower than the United
States. Cypress is subject to tax holidays in the Philippines and India where it
manufactures and designs certain of its products, respectively. These tax
holidays are scheduled to expire at varying times within the next two and six
years, respectively. Overall, Cypress expects its foreign earnings to be taxed
at rates lower than the statutory tax rate in the United States.
The tax returns of the Company and its subsidiaries could be subject to
examination by various tax authorities in the many countries in which the
Company operates. As of December 28, 2003, the Company had no material audits in
progress.
Page 71
NOTE 19: COMMITMENTS AND CONTINGENCIES
GUARANTEES AND PRODUCT WARRANTIES
Cypress applies the disclosure provisions of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45") to its agreements that
contain guarantee or indemnification clauses. These disclosure provisions expand
those required by SFAS No. 5, "Accounting for Contingencies," by requiring that
guarantors disclose certain types of guarantees, even if the likelihood of
requiring the guarantor's performance is remote. As of December 28, 2003,
Cypress has accrued its estimate of liability incurred under these
indemnification arrangements and guarantees, as applicable. Cypress maintains
self-insurance for certain liabilities of its officers and directors.
INDEMNIFICATION OBLIGATIONS
Cypress is a party to a variety of agreements pursuant to which it may
be obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in the context of contracts entered into by
Cypress, under which Cypress customarily agrees to hold the other party harmless
against losses arising from a breach of representations and covenants related to
such matters as title to assets sold, certain intellectual property rights,
specified environmental matters and certain income taxes. In these
circumstances, payment by Cypress is customarily conditioned on the other party
making a claim pursuant to the procedures specified in the particular contract,
which procedures typically allow Cypress to challenge the other party's claims.
Further, Cypress's obligations under these agreements may be limited in terms of
time and/or amount, and in some instances, Cypress may have recourse against
third parties for certain payments made by it under these agreements.
It is not possible to predict the maximum potential amount of future
payments under these or similar agreements due to the conditional nature of
Cypress's obligations and the unique facts and circumstances involved in each
particular agreement. Historically, payments made by Cypress under these
agreements did not have a material effect on its business, financial condition
or results of operations. Cypress believes that if it were to incur a loss in
any of these matters, such loss would not have a material effect on its
business, financial condition, cash flows or results of operations.
PRODUCT WARRANTIES
Cypress estimates its warranty costs based on historical warranty claim
experience and applies this estimate to the revenue stream for products under
warranty. Included in Cypress's warranty accrual are costs for limited
warranties and extended warranty coverage. Future costs for warranties
applicable to revenue recognized in the current period are charged to Cost of
revenues. The warranty accrual is reviewed quarterly to verify that it properly
reflects the remaining obligations based on the anticipated expenditures over
the balance of the obligation period. Adjustments are made when actual warranty
claim experience differs from estimates. As of December 28, 2003, warranty
reserves were $2.14 million. Warranty costs have not historically been
significant as a percentage of revenue.
However, for products sold in the automotive sector, Cypress may face
product liability claims that are disproportionately higher than the value of
the products involved. These costs might include, but are not limited to, labor
and other costs of replacing defective parts, lost profits and other damages. If
Cypress is required to pay for damages resulting from quality or performance
issues in Cypress's automotive products, Cypress's results of operations and
business could be adversely affected. Cypress's revenue for products sold in the
automotive sector was $9.9 million in fiscal 2003.
=====================================================================
December 28, December 29,
(In thousands) 2003 2002
---------------------------------------------------------------------
Warranty Reserve:
Beginning balance $ 1,839 $ 3,610
Warranties paid (8,021) (14,611)
Provision for warranty reserve 8,546 12,840
---------------------------------------------------------------------
Ending balance $ 2,364 $ 1,839
=====================================================================
SUNPOWER CORPORATION
See Note 2 for discussion of Cypress's funding obligations to SunPower.
Page 72
OPERATING LEASE COMMITMENTS
Cypress leases most of its manufacturing facilities, office facilities
and some equipment under non-cancelable operating lease agreements that expire
at various dates through fiscal 2073. Some leases include renewal options, which
would permit extensions of the expiration dates at rates approximating fair
market rental values.
The aggregate gross annual rental commitments under non-cancelable
operating leases (including synthetic leases), as of December 28, 2003, are as
follows:
Fiscal Year (In thousands)
--------------------------------------
2004 $ 14,356
2005 9,909
2006 5,704
2007 4,432
2008 2,261
2009 and thereafter 2,882
--------------------------------------
Total $ 39,544
======================================
Such rental expenses totaled approximately $15.9 million in fiscal 2003,
$18.2 million in fiscal 2002 and $20.9 million in fiscal 2001. In addition,
these leases require us to pay taxes, insurance, maintenance and other expenses
with respect to the properties. Included in the above table are leases that we
have fully reserved as part of our third quarter of fiscal 2001 and fourth
quarter of fiscal 2002 restructuring events (as described in Note 7).
CONTINGENT MILESTONES AND REVENUE BASED COMPENSATION
Contingent milestone/revenue-based compensation charges tied to
continued employment related to acquisitions were $3.9 million, $11.4 million
and $7.9 million, for fiscal 2003, 2002 and 2001, respectively, and are included
in research and development in the consolidated statements of operations. The
aggregate amount of contingent cash compensation that could be paid under all
acquisition agreements assuming all milestones are met is $4.7 million as of
December 28, 2003. In addition, Cypress could pay out contingent compensation in
the form of Cypress stock. The maximum number of shares that Cypress can pay out
under all acquisitions assuming all milestones are met is 0.3 million shares at
December 28, 2003.
SYNTHETIC LEASE TRANSACTIONS
On June 27, 2003, Cypress entered into a synthetic operating lease
agreement for manufacturing and office facilities located in Minnesota and
California. This transaction, which qualifies for operating lease accounting
treatment, replaced the three existing synthetic leases associated with these
two facilities. There was no impact to Cypress's results of operations as a
result of terminating the former leases and entering into the new lease. Lease
obligations related to the replaced synthetic leases, totaling $61.4 million,
were extinguished with existing restricted cash collateral and a new synthetic
lease obligation of $62.7 million was established as of the end of Q2 2003. The
new synthetic lease requires Cypress to purchase the property or to arrange for
the property to be acquired by a third party at lease expiration, which is in
June 2008. If Cypress had exercised its right to purchase all the properties
subject to the new synthetic lease at December 28, 2003, Cypress would have been
required to make a payment and record assets totaling $62.7 million. Cypress's
management believes that proceeds from the sale of properties under the new
synthetic lease would equal or exceed the payment obligation and therefore no
liability to Cypress currently exists. Cypress is required to maintain
restricted cash or investments to serve as collateral for this lease. As of
December 28, 2003, the amount of restricted cash recorded was $62.8 million and
was classified within Other assets in the consolidated balance sheet. The
comparable restricted cash balances at December 29, 2002 and December 30, 2001
associated with the previous synthetic lease arrangements were $62.4 million and
$75.0 million, respectively; and the balances were also classified on the
balance sheet as a non-current asset.
As of December 28, 2003, Cypress was in compliance with the financial
covenant required by the new lessor. As of December 28, 2003, the maximum
potential exposure to residual value guarantees was approximately $54.5 million
and Cypress does not expect to have a loss on such guarantees.
In accordance with FIN 45, Cypress determined that the fair value
associated with the residual value guarantee imbedded in the synthetic operating
lease was $2.0 million, an amount that is recorded in Other assets and Other
long-term liabilities at December 28, 2003.
The synthetic lease agreements require periodic payments that vary based
on the London Interbank Offered Rate ("LIBOR"), plus a spread. The total amount
of such payments (which reflect payments under our existing synthetic lease and
prior synthetic leases
Page 73
which have been terminated) were $1.7 million, $2.2 million and $3.7 million in
fiscal 2003, fiscal 2002 and fiscal 2001, respectively. All synthetic leases
require Cypress to acquire the property for the lease balance or to arrange for
the property to be acquired by a third party at lease expiration.
If Cypress does not purchase the properties subject to the synthetic
leases on the lease termination date (including any acceleration of such date
due to a default) and the property is sold to a third party at a price below
lessor's cost, then Cypress is liable for such shortfall in an aggregate amount
of up to $54.5 million as of December 28, 2003. Based on management's estimate
of the fair value of the properties, no liability was required to be recorded at
December 28, 2003.
LITIGATION AND ASSERTED CLAIMS
In January 2002, Cypress was contacted by Syndia Corporation ("Syndia"),
which alleged that Cypress infringed two patents on which Jerome Lemelson was
named as the inventor (see the Lemelson Partnership discussion below). These two
patents are related to three of the non-stayed patents in the Lemelson
Partnership litigation in Arizona. In Q1 2003, Cypress was informed that the
United States Patent and Trademark Office is reexamining these two patents. In
Q4 2003, Cypress was informed that one of the two patents (U.S. Patent No.
4,702,808) had completed reexamination and many of the original claims, as well
as some new and amended claims, have been allowed. Furthermore, Cypress was
informed in Q2 2003 that Syndia had been sued by Taiwan Semiconductor
Manufacturing Corporation ("TSMC") in the United States District Court of the
Northern District of California, in a declaratory judgment action alleging these
two Syndia patents are invalid, unenforceable and not infringed. Cypress has
been informed that this case has settled and the terms of the settlement are
confidential. Cypress has reviewed and investigated the allegations by Syndia.
Cypress believes that it has meritorious defenses to these allegations, and will
vigorously defend itself in this matter. However, because of the nature and
inherent uncertainties of litigation, should Syndia sue Cypress and should the
outcome of the action be unfavorable, Cypress's business, financial condition,
results of operations and cash flows could be materially and adversely affected.
In January 1998, an attorney representing the estate of Mr. Jerome
Lemelson contacted Cypress and charged that Cypress infringed certain patents
owned by Mr. Lemelson and/or a partnership controlled by Mr. Lemelson's estate.
On February 26, 1999, the Lemelson Partnership sued Cypress and 87 other
companies in the United States District Court for the District of Arizona for
infringement of 16 patents. In May 2000, the Court stayed litigation on 14 of
the 16 patents in view of concurrent litigation in the United States District
Court, District of Nevada on the same 14 patents. On January 23, 2004, the
Nevada court held in favor of plaintiffs, that all asserted claims of the 14
patents are unenforceable, invalid, and not infringed. We are in the process of
determining the next steps in this litigation based on the Nevada ruling. In
October 2001, the Lemelson Partnership amended its Arizona complaint to add
allegations that two more patents were infringed. Thus, there are currently four
patents that are not stayed in this litigation. A bench trial (i.e. a trial with
no jury) on only the defenses relating to Lemelson's alleged fraud in obtaining
the four non-stayed patents was held on February 4, 2003. In Q4 2003, the
Judge's ruling on the trial was issued, ruling that none of the four patents was
unenforceable due to fraud. The case is proceeding in the "claim construction"
(i.e. patent claim interpretation) phase on the four non-stayed patents, and the
date for conclusion of the claim construction briefing is expected to be in Q1
or Q2 2004. After the claim construction briefing has concluded, the judge may
request a claim construction hearing or may take the matter under submission on
the briefs. Cypress has reviewed and investigated the allegations in both
Lemelson's original and amended complaints. Cypress believes that it has
meritorious defenses to these allegations and 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's
business, financial condition, results of operations and cash flows could be
materially and adversely affected.
In February 2002, Cypress was contacted by an attorney representing Mr.
Peng Tan, alleging that Cypress infringed a patent owned by Mr. Tan. Cypress was
informed in the second quarter of fiscal 2003 that Mr. Tan was sued by Ramtron
International Corporation in the United States District Court of the District of
Colorado, in a declaratory judgment action alleging that Mr. Tan's patent is
invalid and not infringed. Cypress has reviewed and investigated Mr. Tan's
allegations. Cypress believes it has meritorious defenses to these allegations,
and will vigorously defend itself in this matter. However, because of the nature
and inherent uncertainties of litigation, should Mr. Tan sue Cypress and should
the outcome of the action be unfavorable, Cypress's business, financial
condition, results of operations and cash flows could be materially and
adversely affected.
Cypress is currently a party to various other legal proceedings, claims,
disputes and litigation arising in the ordinary course of business, including
those noted above. Cypress currently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
effect on Cypress's financial position, results of operation or cash flows.
However, because of the nature and inherent uncertainties of litigation, should
the outcome of these actions be unfavorable, Cypress's business, financial
condition, results of operations and cash flows could be materially and
adversely affected.
Page 74
PURCHASE COMMITMENT
At December 28, 2003, Cypress had purchase commitments aggregating
$129.6 million, principally for manufacturing equipment, facilities and bulk gas
and nitrogen. These commitments relate to purchases to be made in fiscal 2004 of
$60.6 million and the remainder is committed through fiscal 2009.
NOTE 20: SEGMENT INFORMATION
Historically, Cypress has disclosed two reportable business segments,
Memory Products and Non-memory Products. The Memory Products business segment
includes Static Random Access Memories ("SRAMs") and is characterized by high
unit sales volume and generally subject to greater pricing pressures. The
Non-memory Products business segment includes data communication devices,
programmable logic products, specialty memories, timing and interface products.
In October 2000, Cypress announced the formation of new divisions in
order to enhance its focus on communications market segments. The Wide Area
Networks ("WAN") and Storage Area Networks ("SAN") divisions help to provide
product definition in the networking arena. Similarly, the Wireless Terminals
("WIT") and Wireless Infrastructure ("WIN") divisions help focus Cypress's
efforts in the wireless space. The Computation and Consumer market segment
includes products used in computers, peripherals and other applications. Cypress
periodically reviews its customer and product portfolio and makes corresponding
changes to its segment data alignment as appropriate. Based on that review,
during the first quarter of fiscal 2003, Cypress began disclosing its
subsidiaries Silicon Light Machines, Silicon Magnetic Systems, Cypress
Microsystems and SunPower Corporation as a separate segment called Cypress
Subsidiaries. The prior year market segment data has been restated to conform to
current presentation. The market focus is expected to provide systems knowledge,
cross-product-line product portfolio definition, early engagement with strategic
accounts and added management of research and development ("R&D") spending.
Cypress evaluates the performance of its segments based on profit or
loss from operations before income taxes, excluding acquisition-related costs,
restructuring costs, interest income, interest expense and other income and
(expense), net.
MARKET SEGMENT INFORMATION
Cypress does not allocate interest income and expense, income taxes,
acquisition-related costs or restructuring charges to segments. Cypress does not
allocate assets to segments. In addition, market segments do not have
significant non-cash items other than depreciation and amortization in reported
profit or loss.
MARKET SEGMENT NET REVENUES
------------------------------------------------------------------------------
(In thousands) 2003 2002 2001
------------------------------------------------------------------------------
Wide area networks/storage area networks $ 268,978 $ 253,205 $ 335,773
Wireless terminals/wireless infrastructure 249,150 246,800 244,797
Computation and consumer 284,572 254,615 219,795
Cypress subsidiaries 34,056 20,126 18,827
------------------------------------------------------------------------------
Total consolidated revenues $ 836,756 $ 774,746 $ 819,192
------------------------------------------------------------------------------
MARKET SEGMENT INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
-------------------------------------------------------------------------------
(In thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Wide area networks/storage area networks $ (4,389) $ (49,500) $ (32,722)
Wireless terminals/wireless
infrastructure 9,911 (26,693) (65,145)
Computation and consumer 38,390 (7,246) (47,253)
Cypress subsidiaries (24,686) (24,778) (21,132)
Restructuring and acquisition costs (27,530) (123,127) (293,366)
Interest income 14,936 21,212 48,231
Interest expense (15,613) (19,197) (22,398)
Other income and (expense), net 6,472 (16,931) (3,411)
-------------------------------------------------------------------------------
Income (Loss) before provision for
income taxes $ (2,509) $ (246,260) $ (437,196)
-------------------------------------------------------------------------------
International revenues accounted for 63% of our total revenues in fiscal
2003 compared with 57% of our total revenues in fiscal 2002 and 50% in fiscal
2001.
Page 75
No individual customer accounted for greater than 10.0% of total
revenues in fiscal 2003 and fiscal 2001. Sales to Motorola, Inc accounted for
10.2% of total revenues in fiscal 2002.
For fiscal 2003, 2002 and 2001, no individual distributor accounted for
greater than 10.0% of total revenues.
BUSINESS SEGMENT INFORMATION
Cypress's reportable business segments are business units that offer
different products. Products that fall under the two business segments differ in
nature, are manufactured utilizing different technologies and have a different
end-purpose. As such, they are managed separately. Memory Products are generally
subject to greater pricing pressures. 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. Memory Products are used by a
variety of end-users generally for the storage and retrieval of information. In
contrast to Memory Products, Non-memory Products generally 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 six-inch wafer production facility located in
Texas, while some wafers are procured from foundries. Products in the Non-memory
segment perform functions such as timing management, data transfer and routing
in computer, communications and storage systems. Products range from high volume
Universal Serial Bus ("USB") interfaces for personal computers to high value
products such as Cypress's OC-48 Serializer/Deserializer ("SERDES") device for
optical communications systems.
The tables below set forth information about the reportable business
segments for fiscal 2003, fiscal 2002 and fiscal 2001. Cypress does not allocate
interest income and expense, income taxes, acquisition-related costs or
restructuring charges to its segments. Cypress does not allocate assets to
segments. In addition, business segments do not have significant non-cash items
other than depreciation and amortization in reported profit or loss.
BUSINESS SEGMENT NET REVENUES
=====================================================================
(In thousands) 2003 2002 2001
---------------------------------------------------------------------
Memory $ 334,779 $ 303,388 $ 350,908
Non-memory 501,977 471,358 468,284
---------------------------------------------------------------------
Total consolidated revenues $ 836,756 $ 774,746 $ 819,192
=====================================================================
BUSINESS SEGMENT INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
=====================================================================
(In thousands) 2003 2002 2001
---------------------------------------------------------------------
Memory $ (8,304) $ (23,061) $ (71,503)
Non-memory 27,530 (85,156) (94,749)
Restructuring and acquisition
costs (27,530) (123,127) (293,366)
Interest income 14,936 21,212 48,231
Interest expense (15,613) (19,197) (22,398)
Other income and (expense), net 6,472 (16,931) (3,411)
---------------------------------------------------------------------
Income (Loss) before provision
for income taxes $ (2,509) $(246,260) $(437,196)
=====================================================================
BUSINESS SEGMENT DEPRECIATION AND AMORTIZATION
=====================================================================
(In thousands) 2003 2002 2001
---------------------------------------------------------------------
Memory $ 52,401 $ 56,227 $ 50,162
Non-memory 116,653 122,069 166,134
---------------------------------------------------------------------
Total consolidated depreciation
and amortization $ 169,054 $ 178,296 $ 216,296
=====================================================================
GEOGRAPHIC AREA
Revenues are attributed to countries based on the customer location.
Revenues by geographic locations were:
=====================================================================
(In thousands) 2003 2002 2001
---------------------------------------------------------------------
United States $ 305,930 $ 329,598 $ 406,692
Europe 150,621 117,172 131,578
Japan 88,492 90,272 105,998
Other foreign countries 291,713 237,704 174,924
---------------------------------------------------------------------
Total revenues $ 836,756 $ 774,746 $ 819,192
=====================================================================
Page 76
Long-lived assets (property, plant and equipment, net) by geographic
locations were:
==========================================================
(In thousands) 2003 2002
----------------------------------------------------------
United States $ 396,737 $ 439,477
Philippines 43,547 52,968
Other foreign countries 2,603 4,121
----------------------------------------------------------
Total long-lived assets $ 442,887 $ 496,566
==========================================================
NOTE 21: SUBSEQUENT EVENT
On January 6, 2004, Cypress acquired 100% of the outstanding common and
preferred stock of Cascade Semiconductor Corporation ("Cascade"), a company
specializing in one-transistor (1T) Pseudo-SRAM products for wireless
applications, including cell phones.
Cypress acquired Cascade for total consideration of $18.5 million in
cash and stock to be paid over three years, of which approximately half is
expected to be future compensation charges as some of the amounts are tied to
future employment
Page 77
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Cypress Semiconductor Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Cypress Semiconductor Corporation and its subsidiaries at December 28, 2003 and
December 29, 2002, and the results of their operations and their cash flows for
each of the three years in the period ended December 28, 2003 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
As discussed in Note 1 to the consolidated financial statements,
effective December 31, 2001, the Company changed its method of accounting for
goodwill in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
San Jose, California
February 27, 2004
Page 78
QUARTERLY FINANCIAL DATA
(In thousands, except per share amounts)
THREE MONTHS ENDED
--------------------------------------------------
DEC. 28, SEP. 28, JUN. 29, MAR. 30,
2003(1) 2003(1) 2003(1) 2003(1)
---------- ---------- ---------- ----------
Revenues.............................. $ 236,031 $ 216,642 $ 203,116 $ 180,967
========== ========== ========== ==========
Gross Margin.......................... $ 120,802 $ 105,143 $ 96,668 $ 78,394
========== ========== ========== ==========
Net Income (loss)..................... $ 23,163 $ 17,267 $ (12,438) $ (33,323)
========== ========== ========== ==========
Basic net income (loss) per share:.... $ 0.19 $ 0.15 $ (0.10) $ (0.27)
Diluted net income (loss) per share:.. $ 0.15 $ 0.12 $ (0.10) $ (0.27)
THREE MONTHS ENDED
--------------------------------------------------
DEC. 29, SEP. 29, JUN. 30, MAR. 31,
2002(2) 2002(2) 2002(2) 2002(2)
---------- ---------- ---------- ----------
Revenues.............................. $ 174,449 $ 205,021 $ 202,121 $ 193,155
========== ========== ========== ==========
Gross Margin.......................... $ 71,298 $ 93,925 $ 91,269 $ 74,889
========== ========== ========== ==========
Net loss.............................. $ (126,157) $ (55,089) $ (28,061) $ (39,791)
========== ========== ========== ==========
Basic and diluted net loss per share:. $ (1.01) $ (0.45) $ (0.23) $ (0.33)
(1) Includes restructuring charges (credits) of $(4.3), $(5.5),
$(0.2) and $3.3 for the December, September, June, and March
fiscal 2003 quarters, respectively.
(2) Includes restructuring charges (credits) of $44.5, $2.4, $(10.3)
and $1.7 for the December, September, June, and March fiscal 2002
quarters, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Cypress's management has evaluated, under the direction and with the
participation of the Cypress's Chief Executive Officer and Chief Financial
Officer, the effectiveness of Cypress's disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), as of the end of the period covered by this report. Based
on the foregoing evaluation, Cypress's Chief Executive Officer and Chief
Financial Officer have concluded that as of the end of the period covered by
this report, Cypress's disclosure controls and procedures are effective to
ensure that information required to be disclosed by Cypress in reports that
Cypress files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There were no changes in Cypress's internal control over financial
reporting identified in management's evaluation during the fourth quarter of
fiscal 2003 that have materially affected or are reasonably likely to materially
affect Cypress's internal control over financial reporting.
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.
Page 79
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning Cypress's directors is
incorporated by reference from the information set forth in the sections
entitled "Proposal One-Election of Directors" and "Compliance with Section 16(a)
of the Exchange Act" in Cypress's Proxy Statement for the 2004 Annual Meeting of
Stockholders (the "Proxy Statement") to be filed with the Commission within 120
days after the end of Cypress's fiscal year ended December 28, 2003, except that
the information required by this item concerning the executive officers of
Cypress is incorporated by reference to the information set forth in the section
entitled "Executive Officers of the Registrant" at the end of Item 1, Part I of
this Annual Report on Form 10-K.
Cypress has adopted a code of ethics that applies to all of its
directors, officers (including its chief executive officer, chief financial
officer, controller and any person performing similar functions) and employees.
Cypress has made the Code of Ethics available on its website at www.cypress.com.
The information required by this item concerning our audit committee
financial expert is incorporated by reference from the information set forth in
the section titled "Board Structure and Compensation" of our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item concerning executive compensation
is incorporated by reference from the information set forth in the section
entitled "Executive Compensation" in our Proxy Statement. The information
required by this item concerning compensation of directors is incorporated by
reference from the information set forth in the section entitled "Compensation
of Directors" in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
our Proxy Statement.
See Note 17, "Common Stock Option and Other Employee Benefit Plans," in
the consolidated financial statements included in this report for equity
compensation plan information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding security ownership of
certain beneficial owners, directors, and executive officers is incorporated by
reference from the information set forth in the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in our Proxy Statement.
Information required by this item regarding transactions with certain persons is
incorporated by reference from the information set forth in the section "Certain
Relationships and Related Transactions" in our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from
the information set forth in the sections of our Proxy Statement titled "Board
Structure and Compensation", "Report of the Audit Committee" and "Ratification
of Selection of Independent Auditors".
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets at December 28, 2003 and
December 29, 2002 ................................................ 38
Consolidated Statements of Operations for the three years ended
December 28, 2003 ................................................ 39
Consolidated Statements of Stockholders' Equity for the three years
ended December 28, 2003 .......................................... 40
Consolidated Statements of Cash Flows for the three years ended
December 28, 2003 ................................................ 41
Notes to Consolidated Financial Statements ........................ 42
Report of Independent Auditors .................................... 78
Page 80
(2) FINANCIAL STATEMENT SCHEDULE
Financial statement schedules required to be filed by Item 8 of this
form, and by Item 15(d) below:
Schedule I Condensed financial information of the registrant
Schedule II Valuation and qualifying accounts
All other financial statements schedules are not required under the related
instructions or are inapplicable and therefore have been omitted.
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Cypress Semiconductor Corporation:
Our audits of the consolidated financial statements referred to in our report
dated February 27, 2004 appearing in the 2003 Annual Report to Stockholders of
Cypress Semiconductor Corporation (which report and consolidated financial
statements are included in this Annual Report on Form 10-K) also included an
audit of financial statement Schedule II listed in Item 15(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
San Jose, California
February 27, 2004
Page 81
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
--------- --------------------------------------------------------------
2.1 (1) Agreement and Plan of Reorganization dated as of
January 16, 2001 by and among Cypress Semiconductor
Corporation, Clock Acquisition Corporation, International
Microcircuits, Inc. and with respect to Article VII only,
U.S. Bank Trust, N.A., as Escrow Agent, and Kurt R. Jaggers,
as Securityholder Agent.
2.2 (1) Agreement and Plan of Reorganization dated as of
January 26, 2001 by and among Cypress Semiconductor
Corporation, Hilo Acquisition Corporation, HiBand
Semiconductors, Inc., certain shareholders party thereto and
with respect to Article VII thereof only, U.S. Bank Trust,
National Association, as Escrow Agent, and Rich Bowers, as
Securityholder Agent.
2.3 (2) Stock Purchase Agreement as of May 29, 2001 by and among
Cypress Semiconductor Corporation, ScanLogic Holding Company,
ScanLogic Corporation, certain shareholders party thereto,
U.S. Bank Trust, N.A., as Escrow Agent, and Israel Zilberman,
as Securityholder Agent.
2.4 (3) Agreement and Plan of Reorganization dated as of June 2, 2001
by and among Cypress Semiconductor Corporation, Lion
Acquisition Corporation, Lara Networks, Inc., with respect to
Article VII only, U.S. Bank Trust, N.A., as Escrow Agent and
with respect to Articles I and VII thereof only,
Kenneth P. Lawler, as Securityholder Agent.
2.5 (3) First Amendment to Agreement and Plan of Reorganization dated
as of July 3, 2001 by and among Cypress Semiconductor
Corporation, Lion Acquisition Corporation,
Lara Networks, Inc., U.S. Bank Trust, N.A., as Escrow Agent,
and Kenneth P. Lawler, as Securityholder Agent.
2.6 (3) Agreement and Plan of Reorganization dated as of
August 19, 2001 by and among Cypress Semiconductor
Corporation, In-System Design, Inc., and with respect to
Articles VII and IX thereof only, U.S. Bank Trust, N.A., as
Escrow Agent, and Lynn Watson, as Securityholder Agent.
2.7 (3) First Amendment to Agreement and Plan of Reorganization dated
as of September 10, 2001 by and among Cypress Semiconductor
Corporation, Idaho Acquisition Corporation, In-System Design,
Inc., U.S. Bank Trust, N.A., as Escrow Agent, and Lynn Watson,
as Securityholder Agent.
2.8 (4) Agreement and Plan of Reorganization dated as of
November 17, 2001 by and among Cypress Semiconductor
Corporation, Steelers Acquisition Corporation, Silicon
Packets, Inc., and with respect to Article VII only, U.S. Bank
Trust, N.A., as Escrow Agent, and Robert C. Marshall, as
Securityholder Agent.
3.1 (5) Second Restated Certificate of Incorporation.
3.2 (6) Bylaws, as amended.
4.1 (7) Subordinated Indenture, dated as of January 15, 2000,
between Cypress Semiconductor Corporation and State Street
Bank and Trust Company of California, N.A., as Trustee.
4.2 (8) Supplemental Trust Indenture, dated as of June 15, 2000,
between Cypress Semiconductor Corporation and State Street
Bank and Trust Company of California, N.A., as Trustee.
4.4 (9) Indenture, dated as of June 3, 2003, between Cypress
Semiconductor Corporation and U.S. Bank National Association,
as trustee.
10.1 (10) Form of Indemnification Agreement.
10.2 (M) (11) Cypress Semiconductor Corporation 1994 Stock Option Plan.
10.3 (M) (12) Cypress Semiconductor Corporation Employee Qualified Stock
Purchase Plan, as amended.
10.4 (M) (13) Cypress Semiconductor Corporation 1998 Key Employee
Bonus Plan.
10.5 (M) (14) Cypress Semiconductor Corporation 1999 Non-statutory Stock
Option Plan.
10.6 (M) (15) Cypress Semiconductor Corporation Non-Qualified Deferred
Compensation Plan I.
10.7 (M) (15) Cypress Semiconductor Corporation Non-Qualified Deferred
Compensation Plan II.
10.8 (16) Amendment to 1999 Nonstatutory Stock Option Plan.
10.9 (16) Lease Agreement dated as of June 27, 2003 between Wachovia
Development Corporation and Cypress Semiconductor Corporation.
10.10 (16) Participation Agreement, dated as of June 27, 2003, by and
among Cypress Semiconductor Corporation, Wachovia Development
Corporation, the holders of credit notes from time to time
party thereto, the mortgage lenders from time to time party
thereto, the Wachovia Bank, National Association, as agent.
10.11 (16) Call Spread Option Confirmation, dated May 29, 2003, among
Cypress Semiconductor Corporation, Credit Suisse First Boston
International, and Credit Suisse First Boston.
Page 82
10.12 (17) Loan and Security Agreement, dated as of September 25, 2003,
by and between Silicon Valley Bank and Cypress Semiconductor
Corporation.
21.1 * Subsidiaries of Cypress Semiconductor Corporation.
23.1 * Consent of Independent Accountants.
23.2 * Consent of Independent Accountants.
24.1 * Power of Attorney (reference is made to page 78 of this
report).
31.1 * Certification of Chief Executive Officer Pursuant to Exchange
Act Rule 13a-14(a).
31.2 * Certification of Chief Financial Officer Pursuant to Exchange
Act Rule 13a-14(a).
32.1 * Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 * Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended April 1, 2001.
(2) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended July 1, 2001.
(3) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended September 30, 2001.
(4) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended December 30, 2001.
(5) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended December 31, 2000.
(6) Previously filed as an exhibit to our current report on Form 8-K filed
March 17, 2000.
(7) Previously filed as an exhibit to our annual report on form 10-K for the
fiscal year ended December 29, 2002.
(8) Previously filed as an exhibit to our current report on Form 8-K filed
July 11, 2000.
(9) Previously filed as an exhibit to our registration statement on Form S-3
(SEC file number 333-106667).
(10) Previously filed as an exhibit to our registration statement on Form
S-1, which was declared effective on March 4, 1987 (SEC file number
33-12153).
(11) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended January 2, 2000.
(12) Previously filed as an exhibit to our registration statement on Form S-8
dated December 10, 1998 (SEC file number 333-68703).
(13) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended January 3, 1999.
(14) Previously filed as an exhibit to our registration statement on Form S-8
dated April 20, 1999 (SEC file number 333-76665).
(15) Previously filed as an exhibit to our registration statement on Form S-8
dated September 5, 2002 (SEC file number 333-99221).
(16) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended June 29, 2003
(17) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended September 28, 2003.
(M) Management compensatory plan, contract or arrangement.
* Filed as an exhibit to this annual report.
(b) REPORTS ON FORM 8-K:
Form 8-K, dated October 14, 2003. Item reported on Item 12. We furnished
a copy of our press release announcing our results for the fiscal quarter ending
June 29, 2003, including a reconciliation between GAAP and non-GAAP measures
discussed in the press release.
Page 83
(d) DIGITAL CENTURY CAPITAL, L.P. FINANCIAL STATEMENTS
Information in this section is being filed to reflect additional
information relating to Digital Century Capital, L.P. ("Digital"), which
entity's fiscal year end was December 31, 2003. Separate financial statements of
Digital are required to be filed in accordance with section 3-09 of Regulation
S-X for fifty percent or less owned entities that are significant to Cypress
Semiconductor Corporation's financial statements, as significance is defined in
the applicable Regulation. An entity is defined as significant to a registrant
if the registrant's share of the entity's assets or income from continuing
operations before income taxes, extraordinary items and cumulative effect of a
change in accounting principle ("income") exceed 20% of a registrants'
consolidated assets or income for the most recently completed fiscal year. As
Cypress's pre-tax loss for fiscal 2003 was near break-even at $2.6 million, the
significance test at 20% was triggered for Digital as Cypress's share of
Digital's net income was $1.5 million. Cypress has investments in two limited
liability partnerships, one of which triggers the significance tests contained
within section 3-09 of regulation S-X (Digital) and therefore requiring the
filing of its financial statements.
Digital, a New York limited partnership was formed for the purpose of
seeking long-term capital growth through investments in publicly traded
securities, private placements and investment funds of technology-related
companies. Digital invests in securities and performs mark-to-market accounting
on these securities in accordance with generally accepted accounting principles
in the United States.
As at December 31, 2003, Cypress had a limited partnership interest of
9.5% in Digital.
Information relating to Digital, as of and for the year ended December
31, 2003, are audited and included herein. Information relating to Digital, as
of and for the year ended December 31, 2002, and 2001, are unaudited. Cypress's
share of Digital's net income for all three years is included in the audited
financial statements contained in Item 8 "Financial Statements and Supplemental
Data" of this Annual Report on Form 10-K. Refer to Note 3 of the Consolidated
Financial Statements for further information.
December 31, 2003 Financial Statements (Audited) Page
- ------------------------------------------------ ----
Independent auditors' report 87
Statement of financial condition as of December 31, 2003 88
Statement of operations for the year ended December 31, 2003 89
Statement of changes in partnership capital for the year ended December 31, 2003 90
Statement of cash flows for the year ended December 31, 2003 91
Condensed schedule of investments as of December 31, 2003 95
December 31, 2002 Financial Statements (Unaudited) Page
- -------------------------------------------------- ----
Statement of financial condition as of December 31, 2002 98
Statement of operations for the year ended December 31, 2002 99
Statement of changes in partnership capital for the year ended December 31, 2002 100
Statement of cash flows for the year ended December 31, 2002 101
Page 84
December 31, 2001 Financial Statements (Unaudited) Page
- -------------------------------------------------- ----
Statement of financial condition as of December 31, 2001 106
Statement of operations for the year ended December 31, 2001 107
Statement of changes in partnership capital for the year ended December 31, 2001 108
Statement of cash flows for the year ended December 31, 2001 109
Page 85
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
FINANCIAL STATEMENTS
DECEMBER 31, 2003
Page 86
SCHEDULE I
INDEPENDENT AUDITORS' REPORT
To the Partners of
Digital Century Capital, L.P.
We have audited the accompanying statement of financial condition of Digital
Century Capital, L.P. (the "Partnership"), including the schedule of investments
as of December 31, 2003, and the related statements of operations, changes in
partnership capital, cash flows and financial highlights for the year then
ended. These financial statements and financial highlights are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights enumerated
above present fairly, in all material respects, the financial position of
Digital Century Capital, L.P. as of December 31, 2003, and the results of its
operations, changes in its partnership capital, its cash flows and financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Eisner LLP
New York, New York
February 1, 2004
Page 87
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 2003
ASSETS
Cash and cash equivalents $ 26,181
Securities owned at fair value (cost of $34,842,474) 40,834,140
Due from broker 3,648,678
Other assets 9,824
---------------
$ 44,518,823
===============
LIABILITIES
Securities sold, but not yet purchased, at fair value (proceeds of $5,195,402) $ 8,692,210
Due to limited partners 42,908
Accrued liabilities 20,411
---------------
8,755,529
PARTNERSHIP CAPITAL 35,763,294
---------------
$ 44,518,823
===============
See notes to financial statements
Page 88
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
INVESTMENT INCOME:
Interest and dividends (net of withholding tax of $2,504) $ 144,896
---------------
OPERATING EXPENSES:
Management fees 239,296
Professional fees 60,700
Interest 71,708
Other 23,986
---------------
395,690
---------------
Net investment loss (250,794)
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (3,154,595)
Net change in unrealized appreciation on investments 14,992,074
---------------
11,837,479
---------------
Net income $ 11,586,685
===============
See notes to financial statements
Page 89
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF CHANGES IN PARTNERSHIP CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2003
GENERAL LIMITED
PARTNER PARTNERS TOTAL
---------------- ---------------- ---------------
Partnership capital - January 1, 2003 $ 2,781,140 $ 21,484,006 $ 24,265,146
Partners' contributions 750,000 750,000
Partners' withdrawals (838,537) (838,537)
Special reallocation to General Partner 28,709 (28,709)
Net income available for pro rata distribution 1,377,685 10,209,000 11,586,685
---------------- ---------------- ---------------
Partnership capital - December 31, 2003 $ 4,187,534 $ 31,575,760 $ 35,763,294
================ ================ ===============
See notes to financial statements
Page 90
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
CASH FLOWS FROM OPERATING AND INVESTING ACTIVITIES:
Net income $ 11,586,685
Adjustments to reconcile net income to net cash provided by operating and
investing activities:
Changes in:
Due from broker 5,226,895
Other assets 5,772
Securities owned (13,045,230)
Securities sold, but not yet purchased (2,794,630)
Due to limited partners (868,365)
Accrued expenses and other liabilities (43,589)
---------------
Net cash provided by operating and investing activities 67,538
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' contributions 750,000
Partners' withdrawals (838,537)
---------------
Net cash used in financing activities (88,537)
---------------
Net decrease in cash and cash equivalents (20,999)
Cash and cash equivalents - January 1, 2003 47,180
---------------
Cash and cash equivalents - December 31, 2003 $ 26,181
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 71,708
===============
See notes to financial statements
Page 91
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE A - ORGANIZATION
Digital Century Capital, L.P. (the "Partnership"), a New York limited
partnership, was formed for the purpose of seeking long-term capital growth,
generally through investments in publicly traded securities, private placements
and investment funds of technology-related companies. The Partnership may also
from time to time engage in fixed income transactions, short selling and employ
leverage. Digital Century LLC (the "General Partner") serves as general partner
to the Partnership. The Partnership will continue through December 31, 2017 and
thereafter from year to year, unless terminated sooner.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
[1] USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
[2] SECURITIES TRANSACTIONS AND VALUATION:
The Partnership records securities transactions on the trade-date basis.
Realized gains and losses from securities transactions are calculated
using the first-in, first-out or the specific identification method.
Dividends are recorded on the ex-dividend date. Interest is recorded on
all accrual basis when earned.
Investments in marketable securities and securities sold, but not yet
purchased are valued on the last business day of the year at the last
available reported price with resultant unrealized gains and losses
included in the statement of operations. Securities not so listed are
valued at their last reported bid price if held long and last reported
asked price if sold short. The fair values of other investments
(principally an interest in another fund and private placements) are
estimated by the General Partner after considering the type of
investment, restrictions on disposition, marketability (or absence
thereof), cost and other factors.
[3] DUE FROM BROKER:
Due from broker includes cash and amounts receivable for securities
transactions that have not yet settled.
[4] INCOME TAXES:
No federal, state or local income taxes have been provided on profits of
the Partnership since the partners are individually liable for the taxes
on their share of the Partnership's income or loss.
[5] CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents include
money market funds.
Page 92
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE C - CERTAIN FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
In the normal course of its business, the Partnership trades various financial
instruments and enters into various financial transactions where the risk of
potential loss due to changes in the market (market risk) or failure of the
other party to the transaction to perform (credit risk) exceeds the related
amounts recorded. The Partnership is also subject to market concentration risk
since it has a limited number of investments within the portfolio many of which
share similar characteristics and therefore are affected similarly by changes in
economic conditions.
Securities sold, but not yet purchased, represent obligations of the Partnership
to deliver the specified security at the contracted price and thereby create a
liability to repurchase the security at prevailing future market prices.
Accordingly, these transactions result in off-balance-sheet risk, as the
Partnership's ultimate obligation to satisfy the sale of securities sold, but
not yet purchased, may exceed the amount recognized in the financial statements.
The clearing and custodial operations of the Partnership's security transactions
are provided by one broker. At December 31, 2003, all of the marketable
securities owned and the amount due from broker reflected in the statement of
financial condition are positions with this clearing broker. The Partnership's
custodian broker is highly capitalized and a member of major securities
exchanges.
The Partnership has an investment in another technology fund (the "Fund") with a
fair value at December 31, 2003 of $338,830. The Partnership collectively with
Digital Century Capital II, L.P., owns the Fund in its entirety. The Fund was
created for the Partnership and Digital Century Capital II, L.P. for the purpose
of investing in certain technology companies that were introduced to the
Partnership by the investment manager of the Fund. The Partnership has an
investment in three nonpublic technology-based companies. The Partnership pays
management fees to the Fund, which amounted to $43,760 for the year ended
December 31, 2003.
The General Partner is not limited in terms of concentration of investments.
Consequently, the Partnership may own securities that are individually in excess
of 5% of partnership capital.
NOTE D - PARTNERS' CAPITAL
[1] ADMISSION AND WITHDRAWAL OF PARTNERS:
The General Partner may admit additional limited partners and accept
additional capital contributions to the Partnership as of the beginning
of each calendar month and any other date selected by the General Partner
from time to time at its discretion.
A limited partner may withdraw all or any part of his Capital Account (i)
as of the end of each calendar quarter; provided, however, that a limited
partner may not make any withdrawals from his capital account until he
has been a partner for at least one year or (ii) at other times upon a
showing of special circumstances as determined in the sole discretion of
the General Partner. Any limited partner desiring to make a withdrawal
from his capital account shall, not less than 45 days before the date of
such withdrawal, give written notice to the Partnership of (i) such
limited partner's intention to make such withdrawal and (ii) the amount
thereof or the basis on which the amount thereof is to be determined;
however, the General Partner, in its sole and absolute discretion, may
waive such notice in writing.
Page 93
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE D - PARTNERS' CAPITAL (continued)
[2] ALLOCATION OF NET INCOME:
In accordance with the partnership agreement, at the close of each
accounting period, as defined, income and expenses are allocated among
the partners in proportion to their respective capital interests as of
the beginning of such accounting period. In addition, at the end of each
year, the General Partner will receive an incentive allocation equal to
20% of the net profits allocated to each limited partner's capital
account to the extent the net profits allocated for a particular fiscal
year are greater than the prior years' net loss, if any (subject to
reduction at the discretion of the General Partner). As of December 31,
2003, the Partnership has a net loss carryforward balance of $44,403,292.
Participation by partners in any gain or loss arising from securities
acquired in certain public offerings ("hot issues") is limited to those
partners who are eligible to participate in such investments.
NOTE E - MANAGEMENT FEES
The General Partner provides management and administration services to the
Partnership. The Partnership is charged a quarterly fee of .25% (1% annually) of
all limited partners' capital accounts at the beginning of each quarter adjusted
on a pro rata basis for any additional capital contributions and withdrawals
made during the quarter. The Partnership bears direct expenses such as
investment, legal and accounting. The General Partner may waive all or part of
the management fee with respect to certain limited partners.
NOTE F - FINANCIAL HIGHLIGHTS
The following table summarizes the total return for the limited partners and the
Partnership's ratios of net investment loss and expenses to average net assets
for the year ended December 31, 2003:
Total return before incentive fee reallocation 48.01 %
Incentive allocation (0.12)%
--------
Total return after incentive fee reallocation 47.89 %
========
Ratio to average net assets:
Net investment loss (exclusive of incentive allocation) (1.01)%
========
Operating expenses 1.54 %
Incentive reallocation 0.12 %
--------
Total expenses and incentive fee reallocation 1.66 %
========
Total return is calculated for the limited partners taken as a whole. An
individual investor's return, and his net investment loss and expense
ratios, may vary from these percentages based on incentive arrangements
and the timing of capital transactions.
NOTE G - SUBSEQUENT EVENTS
Additional capital contributions of $1,000,000 and withdrawals of $2,663,425
were made by limited partners in January 2004.
Page 94
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
PERCENT OF
FAIR PARTNERSHIP
QUANTITY VALUE CAPITAL
---------- --------------- -----------
SECURITIES OWNED:
COMMON STOCKS - UNITED STATES:
Internet:
Ebay, Inc. 57,000 $ 3,682,770 10.30%
Interactive Corp. 50,000 1,696,500 4.74%
Time Warner, Inc. 180,000 3,238,200 9.05%
Yahoo, Inc. 64,000 2,881,920 8.06%
--------------- -----------
11,499,390 32.15%
--------------- -----------
Networking:
Amdocs Limited 55,000 1,236,400 3.46%
Cisco Systems, Inc. 112,000 2,713,760 7.59%
Juniper Networks, Inc. 67,000 1,251,560 3.50%
--------------- -----------
5,201,720 14.55%
--------------- -----------
Semiconductor:
Taiwan Semiconductor Manufacturing 137,000 1,402,880 3.92%
--------------- -----------
Services:
Affiliated Computer Services 24,000 1,307,040 3.65%
IBM 7,000 648,760 1.82%
--------------- -----------
1,955,800 5.47%
--------------- -----------
Software:
Adobe Systems, Inc. 45,000 1,758,600 4.92%
Bea Systems, Inc. 202,000 2,484,600 6.95%
Mercury Interactive Corp. 24,000 1,167,360 3.26%
Network Associates, Inc. 70,000 1,052,800 2.94%
--------------- -----------
6,463,360 18.07%
--------------- -----------
Storage:
Brocade Communications Systems, Inc. 47,000 271,660 .76%
EMC Corporation 150,000 1,938,000 5.42%
Veritas Software Corporation 58,000 2,147,160 6.00%
--------------- -----------
4,356,820 12.18%
--------------- -----------
Wireless:
Motorola, Inc. 88,000 1,232,000 3.44%
Nokia Corporation 78,000 1,326,000 3.71%
Qualcomm, Inc. 50,000 2,696,500 7.54%
Research In Motion 25,000 1,670,750 4.67%
--------------- -----------
6,925,250 19.36%
--------------- -----------
Total Common Stocks - United States 37,805,220 105.70%
--------------- -----------
COMMON STOCKS - FOREIGN:
SAP Aktiengesellschaft 57,000 2,368,920 6.62%
--------------- -----------
NON-PUBLICLY TRADED INVESTMENTS:
United States 410,000 1.15%
Foreign 250,000 .70%
--------------- -----------
Total Non-Publicly Traded Investments 660,000 1.85%
--------------- -----------
Total Securities Owned (cost $34,842,474) $ 40,834,140 114.17%
=============== ===========
Page 95
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
(continued)
PERCENT OF
FAIR PARTNERSHIP
QUANTITY VALUE CAPITAL
---------- --------------- -----------
SECURITIES SOLD, BUT NOT YET PURCHASED:
COMMON STOCKS - UNITED STATES:
Semiconductor:
Applied Materials, Inc. 82,000 $ 1,840,080 5.15%
Cymer, Inc. 34,000 1,570,460 4.39%
KLA-Tencor Corporation 28,000 1,639,120 4.58%
Lam Research Corp 62,000 2,002,600 5.60%
Novellus Systems, Inc. 39,000 1,639,950 4.59%
--------------- -----------
Total Securities Sold, but not yet Purchased
(proceeds $5,195,402) $ 8,692,210 24.31%
=============== ===========
Page 96
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
FINANCIAL STATEMENTS (unaudited)
DECEMBER 31, 2002
Page 97
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
ASSETS
Cash $ 47,180
Due from broker 8,875,573
Securities owned, at market value (cost $40,070,280) 27,788,910
Dividends and interest receivable 15,596
---------------
$ 36,727,259
===============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Securities sold, but not yet purchased, at market
value (proceeds $11,270,994) $ 11,486,840
Withdrawals due to Limited Partners 911,273
Accrued expenses 64,000
---------------
12,462,113
Partners' capital 24,265,146
---------------
Total liabilities and partners' capital $ 36,727,259
===============
The accompanying notes are an integral part of these financial statements.
Page 98
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
Investment income (loss)
Revenue
Dividends and interest $ 271,972
Other income 15,144
---------------
287,116
---------------
Expenses
Dividends and interest 77,682
Management fees 372,396
Professional fees 70,174
Other expenses 63,806
---------------
584,058
---------------
Net investment loss (296,942)
---------------
Realized and unrealized gain (loss) on investments
Net realized loss (62,739,752)
Net change in unrealized depreciation 37,276,885
---------------
(25,462,867)
---------------
Net loss $ (25,759,809)
===============
The accompanying notes are an integral part of these financial statements.
Page 99
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
LIMITED GENERAL
PARTNERS PARTNER TOTAL
Partners' capital, December 31, 2001 $ 67,188,341 $ 4,830,670 $ 72,019,011
Contributions - - -
Withdrawals (21,989,056) (5,000) (21,994,056)
Pro-rata allocation of net loss (23,715,279) (2,044,530) (25,759,809)
-------------- -------------- --------------
Partners' capital, December 31, 2002 $ 21,484,006 $ 2,781,140 $ 24,265,146
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
Page 100
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (25,759,809)
(Increase)/decrease in operating assets
Decrease in due from broker 4,635,557
Decrease in securities owned 53,977,060
Decrease in dividend and interest receivable 11,357
Decrease in other assets 3,073
Increase/(decrease) in operating liabilities
Decrease in securities sold, but not yet purchased (10,257,360)
Decrease in accrued expenses and other liabilities (36,605)
Decrease in Due to Limited Partners (800,573)
---------------
Net cash provided by operating activities 21,772,700
---------------
Cash flows from financing activities
Withdrawals (21,994,056)
---------------
Net cash used in financing activities (21,994,056)
---------------
Net decrease in cash and cash equivalents (221,356)
Cash, beginning of year 268,536
---------------
Cash, end of year $ 47,180
===============
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 52,900
===============
The accompanying notes are an integral part of these financial statements.
Page 101
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS
Digital Century Capital, L.P. (the "Partnership"), a New York limited
partnership, was formed for the purpose of seeking long-term capital
growth, generally through investments in publicly traded securities,
private placements and investment funds of technology-related companies.
The Partnership may also from time to time engage in fixed income
transactions, short selling and employ leverage. Digital Century LLC
serves as general partner to the Partnership (the "General Partner").
The Partnership will continue through December 31, 2017 and thereafter
from year to year, unless terminated sooner.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
the General Partner to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
amounts of revenues and expenses during the reported period. Actual
results could differ from these estimates.
Securities owned and securities sold, but not yet purchased (primarily
U.S. common stock, which are listed on a national securities exchange)
are valued at their last sales price as of the last business day of the
year. Securities not so listed are valued at their last reported bid
price if held long and last reported asked price if sold short. The fair
value of other investments (primarily an interest in another fund and
private placements) are estimated by the General Partner, after
considering the type of investment, restrictions on disposition,
marketability (or absence thereof), cost, and other factors. At December
31, 2002, securities valued by the General Partner in this manner
amounted to $440,160. Such amounts may not represent the amounts
ultimately realized and the differences may be material.
Purchases and sales of securities and the related revenues and expenses
are recorded on a trade-date basis. Realized gains and losses are
recognized based on the first-in, first-out or the specific
identification method.
Dividend income and dividends on securities sold, but not yet purchased,
are recognized on the ex-dividend date. Interest is recorded on an
accrual basis when earned.
No provision for federal, state and local income taxes has been made, as
partners are individually responsible for their own tax payments.
Cash is maintained at a major U.S. financial institution.
3. FINANCIAL INSTRUMENTS
In the normal course of its business, the Partnership trades various
financial instruments and enters into various financial transactions
where the risk of potential loss due to changes in the market (market
risk) or failure of the other party to the transaction to perform
(credit risk) exceeds the related amounts recorded. The Partnership is
also subject to market concentration risk since it has a limited number
of investments within the portfolio many of which share similar
characteristics and therefore are affected similarly by changes in
economic conditions.
Page 102
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
Securities sold, but not yet purchased, represent obligations of the
Partnership to deliver the specified security at the contracted price
and thereby create a liability to repurchase the security at prevailing
future market prices. Accordingly, these transactions result in
off-balance-sheet risk, as the Partnership's ultimate obligation to
satisfy the sale of securities sold, but not yet purchased, may exceed
the amount recognized in the financial statements.
The clearing and custodial operations for the Partnership's security
transactions are provided by one broker. This broker is a member of
major securities exchanges. At December 31, 2002, all of the securities
owned reflected in the statement of financial condition (other than an
interest in another fund and private placements) are positions with this
broker. The Partnership is subject to credit risk to the extent that the
broker may be unable to fulfill its obligation to return the
Partnership's securities or repay amounts owed. The risk is mitigated by
the fact that the Partnership's accounts are carried by the broker as
customer accounts, as defined, and are therefore afforded certain
protection under Securities and Exchange Commission rules with regard
thereto and under the Securities Investor Protection Corporation's
insurance program and supplemental insurance programs maintained by the
broker. Securities owned and securities sold, but not yet purchased, are
subject to margin requirements. Securities owned and securities sold
consist of common stock and equity option positions. The fair value of
the options is disclosed below.
The Partnership's net trading gain relating to options held is included
as a component of unrealized gain (loss) on investments and amounted to
$(434,139) for the year ended December 31, 2002. The notional value of
options purchased at December 31, 2002 is $5,895,000 with a fair value
at December 31, 2002 of $945,000.
The General Partner is not limited in terms of concentration of
investments. Consequently, the Partnership may own securities that are
individually in excess of 5% of partners' capital.
At December 31, 2002, the Partnership has 12 investments, measured on
the basis of year-end value, that individually exceed 5% of partners'
capital. Of these 12 investments, 6 are greater than 8% of partners'
capital with no individual investment exceeding 15.4% of partners'
capital.
The Partnership has an investment in another technology fund (the
"Fund") with a fair value at December 31, 2002 of $291,820. The
Partnership owns 47% of the Fund and, collectively with Digital Century
Capital II, L.P., owns the Fund in its entirety. The Fund was created
for the Partnership and Digital Century Capital II, L.P. for the purpose
of investing in certain technology companies that were introduced to the
Partnership by the investment manager of the Fund. The Partnership has
an investment in one public and three non-public technology-based
companies. The Partnership pays management fees to the Fund, which
amounted to $52,583 for the year ended December 31, 2002. For the year
ended December 31, 2002, the net loss on this investment included as a
component of unrealized gain/(loss) and realized gain/(loss) on
investment was $235,779, consisting of an unrealized gain of $2,593,399
and a realized loss of $2,829,178.
4. PARTNERSHIP TERMS
Under the terms of the limited partnership agreement, the Partnership
pays the General Partner, a quarterly management fee equal to, on an
annual basis, 1% of the limited partners' capital accounts, as defined,
for services rendered in connection with the management and operation of
the Partnership.
Page 103
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
Under the terms of the limited partnership agreement, at the close of
each accounting period, as defined, income and expenses are allocated
among the partners in proportion to their respective capital interests
as of the beginning of such accounting period. In addition, at the end
of each year, the General Partner will receive an incentive allocation
equal to 20% of the net profits allocated to each limited partner's
capital account to the extent the net profits allocated for a particular
fiscal year are greater than the prior years' net loss, if any (subject
to reduction at the discretion of the General Partner). As of December
31, 2002, the Partnership has a loss carryforward balance of
$60,071,289.
Participation by partners in so-called "hot issues" is limited to those
partners who are eligible to participate in such investments.
In the normal course of business the Partnership enters into contracts;
that contain a variety of representations and warranties and which
provide general indemnifications. The Partnership's maximum exposure
under these arrangements is unknown as this would involve future claims
that may be made against the Partnership that have not yet occurred.
However, based on experience, the Partnership expects the risk of loss
to be remote.
5. FINANCIAL HIGHLIGHTS
The Partnership is required to disclose financial highlights, which
consist of net investment income and expense ratios, and total return.
The following summarizes the Partnership's financial highlights during
the year:
LIMITED
PARTNERS
Total Return (43.01)%
===========
Expense Ratio 1.55%
===========
Net Investment Income/(Loss) Ratio (0.82)%
===========
Total return is calculated based on a time-weighted rate of return
methodology. Monthly rates of return are compounded to derive the total
return reflected above. Total return is reflected after all
investment-related and operating expenses, including the management fee.
The expense and net investment income (loss) ratios are calculated based
upon the average of monthly net assets during the year. Such financial
ratios are presented after the effects of the management fee.
Individual investors' results may vary due to their eligibility to
participate in hot issues and the timing of capital activity.
6. SUBSEQUENT EVENTS
At January 1, 2003, partners' capital was $23,954,411 as a result of
withdrawals of $310,735.
Page 104
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
FINANCIAL STATEMENTS (unaudited)
DECEMBER 31, 2001
Page 105
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 2001 (unaudited)
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 268,536
Due from broker 13,511,130
Securities owned, at market value (cost $129,689,007) 81,765,970
Interest receivable 26,953
Other assets 3,073
--------------
$ 95,575,662
==============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Securities sold, but not yet purchased, at market
value (proceeds $20,001,424) $ 21,744,200
Withdrawals due to Limited Partners 1,711,846
Accrued expenses and other liabilities 100,605
--------------
23,556,651
Partners' capital 72,019,011
--------------
Total liabilities and partners' capital $ 95,575,662
==============
The accompanying notes are an integral part of these financial statements.
Page 106
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001 (unaudited)
- --------------------------------------------------------------------------------
Investment income (loss)
Revenue
Dividends and interest $ 1,555,552
--------------
Expenses
Dividends and interest 1,805,389
Management fees 1,003,205
Professional fees 178,458
Other expenses 160,859
--------------
3,147,911
--------------
Net investment loss (1,592,359)
--------------
Realized and unrealized gain (loss) on investments
Net realized loss (20,082,245)
Net change in unrealized depreciation (40,172,956)
--------------
(60,255,201)
--------------
Net loss $ (61,847,560)
==============
The accompanying notes are an integral part of these financial statements.
Page 107
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2001 (unaudited)
LIMITED GENERAL
PARTNERS PARTNER TOTAL
Partners' capital, December 31, 2000 $ 151,904,386 $ 8,438,365 $ 160,342,751
Contributions 8,250,000 - 8,250,000
Withdrawals (34,228,359) (497,821) (34,726,180)
Allocation of net loss
Pro-rata allocation (58,737,686) (3,109,874) (61,847,560)
-------------- -------------- -------------
Partners' capital, December 31, 2001 $ 67,188,341 $ 4,830,670 $ 72,019,011
============== ============== =============
The accompanying notes are an integral part of these financial statements.
Page 108
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001 (unaudited)
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (61,847,560)
(Increase)/decrease in operating assets
Increase in due from broker $ (6,135,517)
Decrease in securities owned 151,623,789
Decrease in interest receivable 399,957
Decrease in other assets 4,080
Increase/(decrease) in operating liabilities
Decrease in securities sold, but not yet purchased (60,027,569)
Decrease in accrued expenses and other liabilities (32,355) 85,832,385
-------------- -------------
Net cash provided by operating activities 23,984,825
-------------
Cash flows from financing activities
Contributions 8,250,000
Withdrawals (33,014,334)
-------------
Net cash used in financing activities (24,764,334)
-------------
Net decrease in cash and cash equivalents (779,509)
Cash and cash equivalents, beginning of year 1,048,045
=============
Cash and cash equivalents, end of year $ 268,536
=============
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 1,748,278
=============
The accompanying notes are an integral part of these financial statements.
Page 109
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS
Digital Century Capital, L.P. (the "Partnership"), a New York limited
partnership, was formed for the purpose of seeking long-term capital
growth, generally through investments in publicly traded securities,
private placements and investment funds of technology-related companies.
The Partnership may also from time to time engage in fixed income
transactions, short selling and employ leverage. Digital Century LLC
serves as general partner to the Partnership (the "General Partner").
The Partnership will continue through December 31, 2017 and thereafter
from year to year, unless terminated sooner.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
the General Partner to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
amounts of revenues and expenses during the reported period. Actual
results could differ from these estimates.
Securities owned and securities sold, but not yet purchased (primarily
U.S. common stock, which are listed on a national securities exchange)
are valued at their last sales price as of the last business day of the
year. Securities not so listed are valued at their last reported bid
price if held long and last reported asked price if sold short. The fair
value of other investments (primarily an interest in another fund and
private placements) are estimated by the General Partner, after
considering the type of investment, restrictions on disposition,
marketability (or absence thereof), cost, and other factors. At December
31, 2001, securities valued by the General Partner in this manner
amounted to $2,103,223. Such amounts may not represent the amounts
ultimately realized.
Purchases and sales of securities and the related revenues and expenses
are recorded on a trade-date basis. Realized gains and losses are
recognized based on the first-in, first-out or the specific
identification method.
Dividend income and dividends on securities sold, but not yet purchased,
are recognized on the ex-dividend date. Interest is recorded on an
accrual basis when earned.
No provision for federal, state and local income taxes has been made, as
partners are individually responsible for their own tax payments.
Cash and cash equivalents consists of cash maintained at a major U.S.
financial institution and a money market account.
3. FINANCIAL INSTRUMENTS
In the normal course of its business, the Partnership trades various
financial instruments and enters into various financial transactions
where the risk of potential loss due to changes in the market (market
risk) or failure of the other party to the transaction to perform
(credit risk) exceeds the related amounts recorded. The Partnership is
also subject to market concentration risk since a significant number of
investments within the portfolio share similar characteristics and
therefore are affected similarly by changes in economic conditions.
Page 110
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
Securities sold, but not yet purchased, represent obligations of the
Partnership to deliver the specified security at the contracted price
and thereby create a liability to repurchase the security at prevailing
future market prices. Accordingly, these transactions result in
off-balance-sheet risk, as the Partnership's ultimate obligation to
satisfy the sale of securities sold, but not yet purchased, may exceed
the amount recognized in the financial statements.
The clearing and custodial operations for the Partnership's security
transactions are provided by one broker. This broker is a member of
major securities exchanges. At December 31, 2001, all of the securities
owned reflected in the statement of financial condition are positions
with this broker. The Partnership is subject to credit risk to the
extent that the broker may be unable to fulfill its obligation to return
the Partnership's securities or repay amounts owed. The risk is
mitigated by the fact that the Partnership's accounts are carried by the
broker as customer accounts, as defined, and are therefore afforded
certain protection under Securities and Exchange Commission rules with
regard thereto and under the Securities Investor Protection
Corporation's insurance program and supplemental insurance programs
maintained by the broker. Securities owned and securities sold, but not
yet purchased, are subject to margin requirements.
The Partnership's net trading gain relating to options held is included
as a component of realized gain (loss) on investments and amounted to
$569,519 for the year ended December 31, 2001. The notional value of
options written at December 31, 2001 is $1,128,000. As a writer of
options, the Partnership receives premiums in exchange for bearing the
risk of unfavorable changes in the market values of the underlying
instruments.
At December 31, 2001, the Partnership has 9 investments, measured on the
basis of year-end value, that individually exceed 5% of partners'
capital.
4. PARTNERSHIP TERMS
Under the terms of the limited partnership agreement, the Partnership
pays the General Partner, a quarterly management fee equal to, on an
annual basis, 1% of the limited partners' capital accounts, as defined,
for services rendered in connection with the management and operation of
the Partnership.
Under the terms of the limited partnership agreement, at the close of
each accounting period, as defined, income and expenses are allocated
among the partners in proportion to their respective capital interests
as of the beginning of such accounting period. In addition, at the end
of each year, the General Partner will receive an incentive allocation
equal to 20% of the net profits allocated to each limited partner's
capital account to the extent the net profits allocated for a particular
fiscal year are greater than the prior year's net loss, if any (subject
to reduction at the discretion of the General Partner). As of December
31, 2001, the Partnership has a loss carryforward balance of
$79,875,078.
The General Partner is not limited in terms of concentration of
investments. Consequently, the Partnership may own securities that are
individually in excess of 5% of partners' capital.
Participation by partners in so-called "hot issues" is limited to those
partners who are eligible to participate in such investments.
Page 111
SCHEDULE I
DIGITAL CENTURY CAPITAL, L.P.
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
5. FINANCIAL HIGHLIGHTS
The Partnership is required to disclose financial highlights, which
consist of net investment income and expense ratios, and total return.
The following summarizes the Partnership's financial highlights during
the year:
LIMITED
PARTNERS
Total Return (37.44)%
========
Expense Ratio 2.91%
========
Net Investment Income/(Loss) Ratio (1.47)%
========
Total return is calculated based on a time-weighted rate of return
methodology. Monthly rates of return are compounded to derive the total
return reflected above. Total return is reflected after all
investment-related and operating expenses, including the management fee.
The expense and net investment income ratios are calculated based upon
the average of monthly net assets during the year. Such financial ratios
are presented after the effects of the management fee.
Individual investors' results may vary due to their eligibility to
participate in hot issues and the timing of capital activity.
6. SUBSEQUENT EVENTS
At January 1, 2002, partners' capital was $61,706,118 as a result of
withdrawals of $10,312,893.
Page 112
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 28, 2003, December 29, 2002, and December 30, 2001
- -----------------------------------------------------------------------------------------------
Balance at Additions/charges Balance at
Beginning to End of
(In thousands) of Period Expenses/Revenues Deductions Period
- -----------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
2003 $ 1,674 $ 82 $ (811) $ 945
2002 $ 3,729 $ 1,246 $ (3,301) $ 1,674
2001 $ 2,038 $ 2,664 $ (973) $ 3,729
Sales returns and allowances:
2003 $ 1,839 $ 8,546 $ (8,021) $ 2,364
2002 $ 3,610 $ 12,840 $ (14,611) $ 1,839
2001 $ 4,167 $ 25,738 $ (26,295) $ 3,610
2001 Employee loan program reserve:
2003 $ 15,964 $ 257 $ -- $ 16,221
2002 $ 1,167 $ 14,797 $ -- $ 15,964
2001 $ -- $ 1,167 $ -- $ 1,167
- -----------------------------------------------------------------------------------------------
Page 113
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant, has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of San
Jose, State of California, on the 9th day of March 2004.
CYPRESS SEMICONDUCTOR CORPORATION
By: /s/ Emmanuel Hernandez
--------------------------
Emmanuel Hernandez,
Chief Financial Officer,
Executive Vice President,
Finance and Administration
POWER OF ATTORNEY
Know all persons by their presents, that 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, his 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 annual 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 on behalf of the registrant
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------- -------------
/s/ T.J. Rodgers President, Chief Executive
- ------------------------------ Officer and Director March 9, 2004
T. J. Rodgers (Principal Executive Officer)
/s/ Emmanuel Hernandez Chief Financial Officer
- ------------------------------ Executive Vice President, Finance March 9, 2004
Emmanuel Hernandez and Administration (Principal
Financial and Accounting Officer)
/s/ W. Steve Albrecht
- ------------------------------ Director March 9, 2004
W. Steve Albrecht
/s/ Eric A. Benhamou
- ------------------------------ Director March 9, 2004
Eric A. Benhamou
/s/ Fred B. Bialek
- ------------------------------ Director March 9, 2004
Fred B. Bialek
/s/ John C. Lewis
- ------------------------------ Director March 9, 2004
John C. Lewis
/s/ James R. Long
- ------------------------------ Director March 9, 2004
James R. Long
/s/ Alan F. Shugart
- ------------------------------ Director March 9, 2004
Alan F. Shugart
Page 114
CYPRESS SEMICONDUCTOR
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
--------- --------------------------------------------------------------
2.1 (1) Agreement and Plan of Reorganization dated as of
January 16, 2001 by and among Cypress Semiconductor
Corporation, Clock Acquisition Corporation, International
Microcircuits, Inc. and with respect to Article VII only, U.S.
Bank Trust, N.A., as Escrow Agent, and Kurt R. Jaggers, as
Securityholder Agent.
2.2 (1) Agreement and Plan of Reorganization dated as of
January 26, 2001 by and among Cypress Semiconductor
Corporation, Hilo Acquisition Corporation, HiBand
Semiconductors, Inc., certain shareholders party thereto and
with respect to Article VII thereof only, U.S. Bank Trust,
National Association, as Escrow Agent, and Rich Bowers, as
Securityholder Agent.
2.3 (2) Stock Purchase Agreement as of May 29, 2001 by and among
Cypress Semiconductor Corporation, ScanLogic Holding Company,
ScanLogic Corporation, certain shareholders party thereto,
U.S. Bank Trust, N.A., as Escrow Agent, and Israel Zilberman,
as Securityholder Agent.
2.4 (3) Agreement and Plan of Reorganization dated as of June 2, 2001
by and among Cypress Semiconductor Corporation, Lion
Acquisition Corporation, Lara Networks, Inc., with respect to
Article VII only, U.S. Bank Trust, N.A., as Escrow Agent and
with respect to Articles I and VII thereof only,
Kenneth P. Lawler, as Securityholder Agent.
2.6 (3) First Amendment to Agreement and Plan of Reorganization dated
as of July 3, 2001 by and among Cypress Semiconductor
Corporation, Lion Acquisition Corporation, Lara Networks,
Inc., U.S. Bank Trust, N.A., as Escrow Agent, and
Kenneth P. Lawler, as Securityholder Agent.
2.6 (3) Agreement and Plan of Reorganization dated as of
August 19, 2001 by and among Cypress Semiconductor
Corporation, In-System Design, Inc., and with respect to
Articles VII and IX thereof only, U.S. Bank Trust, N.A., as
Escrow Agent, and Lynn Watson, as Securityholder Agent.
2.7 (3) First Amendment to Agreement and Plan of Reorganization dated
as of September 10, 2001 by and among Cypress Semiconductor
Corporation, Idaho Acquisition Corporation, In-System Design,
Inc., U.S. Bank Trust, N.A., as Escrow Agent and Lynn Watson,
as Securityholder Agent.
2.8 (4) Agreement and Plan of Reorganization dated as of
November 17, 2001 by and among Cypress Semiconductor
Corporation, Steelers Acquisition Corporation, Silicon
Packets, Inc., and with respect to Article VII only, U.S.
Bank Trust, N.A., as Escrow Agent, and Robert C. Marshall, as
Securityholder Agent.
3.1 (5) Second Restated Certificate of Incorporation.
3.2 (6) Bylaws, as amended.
4.1 (7) Subordinated Indenture, dated as of January 15, 2000, between
Cypress Semiconductor Corporation and State Street Bank and
Trust Company of California, N.A., as Trustee.
4.2 (8) Supplemental Trust Indenture, dated as of June 15, 2000,
between Cypress Semiconductor Corporation and State Street
Bank and Trust Company of California, N.A., as Trustee.
4.4 (9) Indenture, dated as of June 3, 2003, between Cypress
Semiconductor Corporation and U.S. Bank National Association,
as trustee.
10.1 (10) Form of Indemnification Agreement.
10.2 (M) (11) Cypress Semiconductor Corporation 1994 Stock Option Plan.
10.3 (M) (12) Cypress Semiconductor Corporation Employee Qualified Stock
Purchase Plan, as amended.
10.4 (M) (13) Cypress Semiconductor Corporation 1998 Key Employee
Bonus Plan.
10.5 (M) (14) Cypress Semiconductor Corporation 1999 Non-statutory Stock
Option Plan.
10.6 (M) (15) Cypress Semiconductor Corporation Non-Qualified Deferred
Compensation Plan I.
10.7 (M) (15) Cypress Semiconductor Corporation Non-Qualified Deferred
Compensation Plan II.
10.8 (16) Amendment to 1999 Nonstatutory Stock Option Plan.
10.9 (16) Lease Agreement dated as of June 27, 2003 between Wachovia
Development Corporation and Cypress Semiconductor Corporation.
10.10 (16) Participation Agreement, dated as of June 27, 2003, by and
among Cypress Semiconductor Corporation, Wachovia Development
Corporation, the holders of credit notes from time to time
party thereto, the mortgage lenders from time to time party
thereto, the Wachovia Bank, National Association, as agent.
10.11 (16) Call Spread Option Confirmation, dated May 29, 2003, among
Cypress Semiconductor Corporation, Credit Suisse First Boston
International, and Credit Suisse First Boston.
10.12 (17) Loan and Security Agreement, dated as of September 25, 2003,
by and between Silicon Valley Bank and Cypress Semiconductor
Corporation.
Page 115
21.1 * Subsidiaries of Cypress Semiconductor Corporation.
23.1 * Consent of Independent Accountants.
23.2 * Consent of Independent Accountants.
24.1 * Power of Attorney (Reference is made to page 80 of this
report).
31.1 * Certification of Chief Executive Officer Pursuant to Exchange
Act Rule 13a-14(a).
31.2 * Certification of Chief Financial Officer Pursuant to Exchange
Act Rule 13a-14(a).
32.1 * Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 * Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended April 1, 2001.
(2) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended July 1, 2001.
(3) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended September 30, 2001.
(4) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended December 30, 2001.
(5) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended December 31, 2000.
(6) Previously filed as an exhibit to our current report on Form 8-K filed
March 17, 2000.
(7) Previously filed as an exhibit to our annual report on form 10-K for the
fiscal year ended December 29, 2002.
(8) Previously filed as an exhibit to our current report on Form 8-K filed
July 11, 2000.
(9) Previously filed as an exhibit to our registration statement on Form S-3
(SEC file number 333-106667).
(10) Previously filed as an exhibit to our registration statement on Form
S-1, which was declared effective on March 4, 1987 (SEC file number
33-12153).
(11) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended January 2, 2000.
(12) Previously filed as an exhibit to our registration statement on Form S-8
dated December 10, 1998 (SEC file number 333-68703).
(13) Previously filed as an exhibit to our annual report on Form 10-K for the
fiscal year ended January 3, 1999.
(14) Previously filed as an exhibit to our registration statement on Form S-8
dated April 20, 1999 (SEC file number 333-76665).
(15) Previously filed as an exhibit to our registration statement on Form S-8
dated September 5, 2002 (SEC file number 333-99221).
(16) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended June 29, 2003
(17) Previously filed as an exhibit to our quarterly report on Form 10-Q for
the fiscal quarter ended September 28, 2003.
(M) Management compensatory plan, contract or arrangement.
* Filed as an exhibit to this annual report.
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