================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------
Commission file number 1-10079
CYPRESS SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2885898
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3901 North First Street, San Jose, California 95134-1599
(Address of principal executive offices and zip code)
(408) 943-2600
(Registrant's telephone number, including area code)
- ----------
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 whether the registrant is an accelerated filer (as
outlined in Rule 12b-2 of the Exchange Act): Yes [X] No [ ]
The total number of shares of the registrant's common stock outstanding as of
April 30, 2004, was 123,388,982.
================================================================================
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
Item 4. Controls and Procedures 40
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 2. Changes in Securities; Use of Proceeds and Issuer Purchases of
Equity Securities 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 42
Signatures 43
Page 2
ITEM 1. FINANCIAL STATEMENTS
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
MARCH 28, DECEMBER 28,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 227,473 $ 183,708
Short-term investments ..................................................... 22,505 14,909
------------ ------------
Total cash, cash equivalents and short-term investments ................ 249,978 198,617
Accounts receivable, net ................................................... 142,961 113,568
Inventories, net ........................................................... 67,720 72,085
Other current assets ....................................................... 112,090 134,125
------------ ------------
Total current assets ................................................... 572,749 518,395
------------ ------------
Property, plant and equipment, net ........................................... 431,122 442,887
Goodwill ..................................................................... 322,208 322,208
Other intangible assets ...................................................... 49,539 53,275
Other assets ................................................................. 237,373 230,732
------------ ------------
Total assets ........................................................... $ 1,612,991 $ 1,567,497
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 60,761 $ 60,601
Accrued compensation and employee benefits ................................. 42,222 39,704
Other current liabilities .................................................. 85,388 87,594
Deferred income ............................................................ 19,641 20,104
Income taxes payable ....................................................... 1,902 2,676
------------ ------------
Total current liabilities .............................................. 209,914 210,679
------------ ------------
Convertible subordinated notes ............................................... 668,652 668,652
Deferred income taxes and other tax liabilities .............................. 97,567 101,254
Other long-term liabilities .................................................. 15,934 17,724
------------ ------------
Total liabilities ...................................................... 992,067 998,309
------------ ------------
Commitments and contingencies (see Note 8)
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;
139,455 and 139,164 issued; 123,042 and 120,483 outstanding at
March 28, 2004 and December 28, 2003, respectively ........................ 1,395 1,391
Additional paid-in-capital ................................................. 1,124,823 1,115,684
Deferred stock compensation ................................................ (4,728) (5,950)
Accumulated other comprehensive income ..................................... 1,771 1,393
Accumulated deficit ........................................................ (259,687) (260,723)
------------ ------------
863,574 851,795
------------ ------------
Less: shares of common stock held in treasury, at cost; 16,413 shares and
18,681 shares at March 28, 2004 and December 28, 2003 ..................... (242,650) (282,607)
------------ ------------
Total stockholders' equity ............................................. 620,924 569,188
------------ ------------
Total liabilities and stockholders' equity ............................... $ 1,612,991 $ 1,567,497
============ ============
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
Page 3
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED
----------------------
MARCH 28, MARCH 30,
2004 2003
--------- ---------
Revenues ............................................. $ 254,393 $ 180,967
Cost of revenues ..................................... 123,360 102,573
--------- ---------
Gross margin ......................................... 131,033 78,394
--------- ---------
Operating expenses:
Research and development ........................... 63,158 64,406
Selling, general and administrative ................ 28,797 31,129
Restructuring ...................................... (81) 3,360
Acquisition-related costs .......................... 10,090 9,484
--------- ---------
Total operating expenses ......................... 101,964 108,379
--------- ---------
Operating income (loss) .............................. 29,069 (29,985)
Interest income ...................................... 2,709 3,193
Interest expense ..................................... (2,868) (4,676)
Other income and (expense), net ...................... (589) (359)
--------- ---------
Income (loss) before income taxes .................... 28,321 (31,827)
Provision for income taxes ........................... (1,841) (1,496)
--------- ---------
Net income (loss) .............................. $ 26,480 $ (33,323)
========= =========
Basic net income (loss) per share .................... $ 0.22 $ (0.27)
========= =========
Diluted net income (loss) per share .................. $ 0.16 $ (0.27)
========= =========
Shares used in calculation of net income (loss):
Basic ............................................ 122,417 125,005
Diluted .......................................... 171,832 125,005
The accompanying notes are an integral part of
these Condensed Consolidated Financial Statements.
Page 4
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
---------------------------
MARCH 28, MARCH 30,
2004 2003
------------ ------------
Cash flow from operating activities:
Net income (loss) .......................................................... $ 26,480 $ (33,323)
Adjustments to reconcile net income (loss) to net cash generated from
operating activities:
Depreciation and amortization ............................................ 43,432 41,913
Amortization of deferred stock compensation .............................. 1,232 4,958
Loss on sales of property, plant and equipment ........................... 87 1
Employee stock purchase assistance plan loan interest .................... (695) (896)
Unrealized gain on foreign currency derivatives .......................... (158) (65)
Asset impairment and other ............................................... (612) 844
Employee stock purchase assistance plan loan receivable reserve increase
(decrease) .............................................................. (7,752) 100
Restructuring costs (credits) ............................................ (81) --
Services recognized for stock ............................................ (1,250) --
Minority interest ........................................................ 7 (979)
Deferred income taxes .................................................... 326 422
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ...................................................... (24,097) (3,224)
Inventories .............................................................. 6,062 8,832
Other assets ............................................................. 1,396 4,599
Accounts payable, accrued liabilities and other liabilities .............. (7,142) (8,713)
Deferred income .......................................................... (462) (7,555)
Income taxes payable ..................................................... (1,554) 382
------------ ------------
Net cash flow generated from operating activities ...................... 35,219 7,296
------------ ------------
Cash flow from investing activities:
Purchase of investments .................................................... (36,036) (5,995)
Proceeds from sale or maturities of investments ............................ 24,023 24,247
Acquisition of property, plant and equipment ............................... (20,685) (25,326)
Proceeds from collection of employee stock purchase assistance plan loans,
net ....................................................................... 24,960 402
Proceeds from the sale of equipment ........................................ -- 1,125
Other investments .......................................................... (488) (109)
Cash acquired from Cascade acquisition ..................................... 956 --
------------ ------------
Net cash flow used for investing activities ............................ (7,270) (5,656)
------------ ------------
Cash flow from financing activities:
Proceeds from borrowings ................................................... -- 24,678
Repayment of borrowings .................................................... (1,818) --
Proceeds from issuance of stock under employee stock plans ................. 15,747 7,224
Extension of structured options, net ....................................... 1,747 --
Proceeds from repayments of stockholder notes receivable, net .............. 140 --
------------ ------------
Net cash flow generated from financing activities ...................... 15,816 31,902
------------ ------------
Net increase in cash and cash equivalents .................................... 43,765 33,542
Cash and cash equivalents, beginning of period ............................... 183,708 87,200
------------ ------------
Cash and cash equivalents, end of period ..................................... $ 227,473 $ 120,742
============ ============
Supplemental disclosure of non-cash information
Common stock issued for acquisitions ....................................... $ 6,011 $ --
Customer prior advances used for equipment sale ............................ $ -- $ 5,500
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
Page 5
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 28, 2004 (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Cypress Semiconductor Corporation ("Cypress") reports on a fiscal basis and
ends its quarters 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. The three-month periods ended March 28, 2004 ("Q1 2004") and March 30,
2003 ("Q1 2003") each included thirteen weeks.
BASIS OF PRESENTATION
In the opinion of the management of Cypress, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (consisting
solely of normal recurring adjustments) necessary to present fairly the
financial information included therein. Certain prior year amounts have been
reclassified to conform to current year presentation. Cypress believes that the
disclosures are adequate to make the information not misleading. However, this
financial data should be read in conjunction with the audited consolidated
financial statements and related notes thereto included in Cypress's Annual
Report on Form 10-K for the fiscal year ended December 28, 2003.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The results of operations for Q1 2004 are not necessarily indicative of the
results to be expected for the full year.
Page 6
ACCOUNTING FOR STOCK-BASED COMPENSATION
Cypress has a number of stock-based employee compensation plans. Cypress
accounts for these plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and 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
income (loss) and earnings (loss) per share if Cypress had applied the fair
value recognition provisions SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), to stock-based employee compensation.
THREE MONTHS ENDED
---------------------------
MARCH 28, MARCH 30,
(In thousands, except per share amounts) 2004 2003
- -------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 26,480 $ (33,323)
Add: Total stock-based compensation expense reported in net income
(loss), net related tax effect of zero 1,232 4,958
Deduct: Total stock-based compensation expense determined under fair
value based method for all awards, net of related tax effect of
zero (20,062) (9,368)
------------ ------------
Pro forma net income (loss) $ 7,650 $ (37,733)
============ ============
Income (loss) per share:
Basic--as reported $ 0.22 $ (0.27)
Diluted--as reported $ 0.16 $ (0.27)
Basic--pro forma $ 0.06 $ (0.30)
Diluted--pro forma $ 0.06 $ (0.30)
NOTE 2 - BUSINESS COMBINATIONS
There was one acquisition in Q1 2004 and no acquisitions in Q1 2003.
ACQUISITION OF CASCADE SEMICONDUCTOR CORPORATION ("CASCADE")
On January 6, 2004, Cypress acquired 100% of the outstanding common and
preferred stock of Cascade Semiconductor Corporation, a company specializing in
one-transistor (1T) Pseudo SRAM products for wireless applications, including
cell phones. Cascade is part of Cypress's Memory business segment and Wireless
Terminals market segment. The estimated fair value of assets acquired and
liabilities assumed were included in Cypress's condensed consolidated balance
sheet as of January 6, 2004, the effective date of the acquisition. The results
of operations are included in Cypress's condensed consolidated results of
operations subsequent to January 6, 2004. There were no significant differences
between the accounting policies of Cypress and Cascade. Supplemental pro forma
results of operations of Cascade for prior periods are not presented as they are
not material.
The total consideration for Cascade will be up to approximately $19.0
million in a combination of Cypress shares and cash. The purchase consideration
related to the acquisition in Q1 2004 was $9.6 million consisting of initial
shares issued upon closing (290,360 valued at $6.0 million) plus an additional
$3.0 million in share consideration, to be issued in the fourth quarter of
fiscal 2004, to former stockholders as a result of the achievement of the first
milestone in Q1 2004, and $0.6 million in acquisition and related expenses. The
remaining $9.4 million of consideration represents contingent consideration
payable to employees based on either milestone achievement and employment
conditions or employment conditions alone, through January 2007. Where the
contingency is based on milestone achievements and employment conditions, no
charge is recognized until the milestone condition has been reached at which
point any contingent consideration will be recognized over the employment
vesting period. Employment only contingent consideration is recognized over the
employment vesting period. In Q1 2004, Cypress recorded a charge of $1.0 million
related to the achievement of revenue milestones and employment service periods.
Page 7
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 $ 7,960
Current technology 6,289
Non-compete agreements 65
----------
Total assets acquired 14,314
Current liabilities (4,719)
----------
Net assets acquired 9,595
----------
Total purchase consideration $ 9,595
==========
The intangible assets are amortized using the straight-line method over
their respective estimated useful lives of 24 months.
ACQUISITION COSTS
Acquisition costs for Q1 2004 and Q1 2003 consisted of amortization of
intangibles related to acquisitions.
NOTE 3 - CONSOLIDATION OF SUNPOWER CORPORATION ("SUNPOWER")
Cypress gained effective control over SunPower in Q1 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 2002 due
to the existence of substantive participating rights of the minority
shareholders. Cypress and its CEO own preferred stock of SunPower, which is
convertible into common stock. As of March 28, 2004, Cypress and its CEO own
approximately 57% and 6%, respectively, of SunPower on an as converted basis.
As of March 28, 2004 and December 28, 2003, Cypress had loaned SunPower
$36.2 million and $26.7 million, respectively, under various agreements. The
amounts outstanding include Cypress's funding of SunPower's capital asset
additions. Cypress is currently in negotiations with SunPower regarding future
funding of its operations. In connection with current negotiations between
Cypress and SunPower, Cypress has advanced SunPower $4.0 million. At March 28,
2004, Cypress is obligated under current agreements to fund SunPower $2.0
million through May 2004 at SunPower's option.
All SunPower intercompany loans and transactions have been eliminated from
the Consolidated Financial Statements.
NOTE 4 - GOODWILL AND INTANGIBLES
GOODWILL
Cypress's goodwill is reported in the Non-memory business segment. The
total value of goodwill reported as of March 28, 2004, in the Non-memory
business segment was $322.2 million. There was no change to goodwill during the
first quarter of fiscal 2004.
PURCHASED INTANGIBLES
In Q1 2004, Cypress acquired Cascade Semiconductor Corporation (see Note 2
for further details on the acquisition). The acquisition resulted in a $6.3
million increase in gross value of purchased technology and a $0.1 million
increase in gross value of non-compete agreements. The following table presents
details of Cypress's total purchased finite lived intangible assets. Cypress
does not have any recorded indefinite lived intangible assets other than
goodwill.
Page 8
AS OF MARCH 28, 2004
ACCUMULATED
(In thousands) GROSS AMORTIZATION NET
---------------------------------------------------------------------------
Purchased technology $ 198,945 $ (156,227) $ 42,718
Non-compete agreements 18,715 (15,958) 2,757
Patents, licenses and trademarks 6,704 (4,173) 2,531
Other 4,600 (3,067) 1,533
---------------------------------------
Total $ 228,964 $ (179,425) $ 49,539
=======================================
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
=======================================
Amortization expense for Q1 2004 of $10.1 million associated with these
acquired intangibles is included in acquisition-related costs in the statement
of operations.
The estimated annual amortization expense of purchased intangible assets is
as follows:
(In thousands) AMOUNT
------------------------------------------------------------
2004 (remaining nine months) $ 26,149
2005 17,796
2006 2,912
2007 561
2008 312
Thereafter 1,809
----------
Total $ 49,539
==========
NOTE 5 - 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.
Both restructuring events had been substantially completed at the end of
fiscal 2003, with reserves remaining only for leases and employee benefits. The
reserves will decrease over time for any estimated changes and as Cypress makes
lease payments and employee benefit payments, which will be paid through the
second quarter of fiscal 2004.
Page 9
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
Q1 2004 Provision (benefit) -- (56) -- (56)
Cash charges -- (68) (299) (367)
--------------- ---------- --------- ---------
Balance at March 28, 2004 $ -- $ 1,004 $ 255 $ 1,259
--------------- ---------- --------- ---------
In Q1 2004, restructuring credits in the condensed statement of operations
are eighty-one thousand dollars. This is comprised of a fifty-six thousand
dollar benefit for an adjustment to lease facility accruals and a twenty-five
thousand dollar adjustment to fixed assets decommission cost accruals.
Page 10
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
Cash charges -- (328) -- (328)
--------------- ---------- --------- ---------
Balance at March 28, 2004 $ -- $ 2,418 $ -- $ 2,418
--------------- ---------- --------- ---------
Page 11
NOTE 6 - BALANCE SHEET COMPONENTS
ACCOUNTS RECEIVABLE, NET
MARCH 28, DECEMBER 28,
(In thousands) 2004 2003
----------------------------------------------------------------------
Accounts receivable, gross $ 146,638 $ 116,877
Allowance for doubtful accounts and
customer returns (3,677) (3,309)
-----------------------------
Accounts receivable, net $ 142,961 $ 113,568
=============================
INVENTORIES
MARCH 28, DECEMBER 28,
(In thousands) 2004 2003
----------------------------------------------------------------------
Raw materials $ 2,481 $ 3,007
Work-in-process 37,147 43,669
Finished goods 28,092 25,409
-----------------------------
Inventories $ 67,720 $ 72,085
=============================
OTHER CURRENT ASSETS
MARCH 28, DECEMBER 28,
(In thousands) 2004 2003
----------------------------------------------------------------------
Employee stock purchase assistance
plan, net $ 47,798 $ 64,311
Deferred tax assets 31,096 35,109
Prepaid expenses 20,731 22,818
Other current assets 12,465 11,887
-----------------------------
Other current assets $ 112,090 $ 134,125
=============================
OTHER ASSETS
MARCH 28, DECEMBER 28,
(In thousands) 2004 2003
----------------------------------------------------------------------
Restricted cash $ 63,005 $ 62,814
Key employee deferred compensation plan 18,804 18,700
Long-term marketable securities 118,686 113,641
Limited liability partnership
investments (see Note 7) 5,217 4,796
Other 31,661 30,781
-----------------------------
Other assets $ 237,373 $ 230,732
=============================
OTHER CURRENT LIABILITIES
MARCH 28, DECEMBER 28,
(In thousands) 2004 2003
----------------------------------------------------------------------
Customer advances $ 16,040 $ 25,081
Accrued interest payable 3,088 1,783
Sales representative commissions 5,744 4,786
Accrued royalties 4,142 3,426
Current portion of long-term debt 7,017 7,017
Key employee deferred compensation plan 24,024 23,828
Other 25,333 21,673
-----------------------------
Other current liabilities $ 85,388 $ 87,594
=============================
DEFERRED INCOME TAXES AND OTHER TAX LIABILITIES
MARCH 28, DECEMBER 28,
(In thousands) 2004 2003
----------------------------------------------------------------------
Deferred income taxes $ 31,347 $ 35,109
Non-current tax liabilities 66,220 66,145
-----------------------------
Total deferred income taxes and other
tax liabilities $ 97,567 $ 101,254
=============================
Page 12
NOTE 7 - FINANCIAL INSTRUMENTS
Available-for-sale securities held by Cypress as of March 28, 2004 and
December 28, 2003 are as follows:
GROSS UNREALIZED GROSS UNREALIZED
(In thousands) COST GAINS LOSSES FAIR MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------
MARCH 28, 2004
Cash equivalents:
Commercial paper $ 8,740 $ -- $ -- $ 8,740
Federal agency notes 7,998 1 -- 7,999
Money market funds 151,713 -- -- 151,713
Municipal bonds 1,000 -- -- 1,000
Corporate bonds 16,820 -- -- 16,820
Auction rate certificates 21,675 -- -- 21,675
Preferred Stock 1,325 -- -- 1,325
---------------------------------------------------------------------
Total cash equivalents $ 209,271 $ 1 $ -- $ 209,272
---------------------------------------------------------------------
Short-term investments:
Corporate notes/bonds $ 16,274 $ 48 $ (5) $ 16,317
Federal agency notes 5,169 22 -- 5,191
Commercial paper 997 -- -- 997
---------------------------------------------------------------------
Total short-term investments $ 22,440 $ 70 $ (5) $ 22,505
---------------------------------------------------------------------
Long-term marketable securities:
Corporate notes/bonds $ 69,405 $ 505 $ (10) $ 69,900
Federal agency notes 48,562 234 (10) 48,786
---------------------------------------------------------------------
Total long-term marketable
securities $ 117,967 $ 739 $ (20) $ 118,686
---------------------------------------------------------------------
---------------------------------------------------------------------
Total $ 349,678 $ 810 $ (25) $ 350,463
---------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
(In thousands) COST GAINS LOSSES FAIR MARKET VALUE
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 28, 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
---------------------------------------------------------------------
Proceeds from or maturities of available-for-sale securities were $24.0
million and $24.2 million, respectively, for the fiscal quarters ended March 28,
2004 and March 30, 2003. Realized gains and (losses) for the fiscal quarters
ended March 28, 2004 and March 30, 2003 were zero and $0.6 million,
respectively.
In addition to the above available-for-sale investments, Cypress has liquid
investments in two limited liability partnerships. Cypress is a limited partner
in the partnerships and as does not participate in the management or control of
the partnerships. The limited liability partnerships invest primarily
Page 13
in securities traded on a national securities exchange and the general partner
in the partnership controls the operating and financial policies of the
partnership. The limited liability partnerships account for those investments
using mark-to-market accounting in accordance with generally accepted accounting
principles in the United States. Cypress's investments in the partnerships are
not significant to Cypress's operations and effectively represent investments
primarily in equity securities by Cypress.
At March 28, 2004, Cypress's investment in each of the partnerships
represented an ownership interest of approximately 9.8% and 13.8% and amounted
to $5.2 million in total. While our investment percentage in the partnerships is
not significant, generally accepted accounting principles require that we
account for the investment using the equity method of accounting when the
investment represents more than 3% of the limited liability partnership, without
regard to the limited partners influence over the partnerships operating and
financial policies.
At the end of fiscal 2003, Cypress ownership interest in the two limited
liability partnerships amounted to $4.8 million in total with the increase of
$0.4 million in Q1 2004 being a result of an unrealized gain on the investments.
We classify these investments in Other assets in the condensed consolidated
financial statements (see Note 6). The net income of the two limited liability
partnerships for Q1 2004 was $4.6 million.
NOTE 8 - 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 March 28, 2004, Cypress
has accrued its estimate of liability incurred under these indemnification
arrangements and guarantees, as applicable. The following is a description of
significant arrangements to which Cypress is a guarantor:
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 each of these
circumstances, payment by Cypress is 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 Cypress's business, financial
condition or results of operations. Cypress believes that if it were to incur a
loss in any of these matters, such loss should 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 March 28, 2004 and December 28,
2003, warranty reserves were $2.7 million and $2.4 million, respectively.
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
Page 14
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 from products sold in the automotive sector was $2.2
million in Q1 2004.
THREE MONTHS ENDED
-------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
-------------------------------------------------------------
Warranty Reserve:
Beginning balance $ 2,364 $ 1,839
Warranties paid (2,336) (1,796)
Provision for warranty reserve 2,704 1,821
-------------------------
Ending balance $ 2,732 $ 1,864
=========================
SUNPOWER CORPORATION
See Note 3 for discussion of Cypress's funding obligations to SunPower.
CONTINGENT MILESTONES AND REVENUE BASED COMPENSATION
For the fiscal quarters ended March 28, 2004 and March 30, 2003, contingent
milestone/revenue-based compensation charges tied to continued employment
related to acquisitions were $1.5 million and $1.6 million, respectively. These
charges are included primarily in research and development in the condensed
consolidated statements of operations. The aggregate amount of future contingent
cash compensation that could be paid under all acquisition agreements assuming
all milestones are met is $11.0 million as of March 28, 2004. Included in the
$11.0 million aggregate contingent cash compensation is a $6.3 million
contingency, relating to an acquisition, that could be paid at Cypress's
discretion, in equivalent Cypress common stock instead of cash. In addition,
Cypress could be required to pay amounts in Cypress common shares with the
maximum equivalent share payout based in dollar amounts being $3.1 million and
the maximum share based payout being 0.3 million shares.
LITIGATION AND ASSERTED CLAIMS
In January 2002, Cypress was contacted by Syndia Corporation ("Syndia"),
which alleged that Cypress infringed two patents on which Mr. 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 the second quarter of fiscal 2003 ("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; these 14 patents remain stayed in our
case until a non-appealable judgment is entered on the patents. 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
Page 15
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 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
second or third 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 Q2 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.
NOTE 9 - DEBT AND EQUITY TRANSACTIONS
OPTION CONTRACTS
At March 28, 2004, 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 are classified in stockholders' equity in the
accompanying condensed consolidated balance sheet. The contracts require
physical settlement. During Q1 2004, the contracts were extended, resulting in
net cash inflows of $1.7 million. Currently the contracts are scheduled to
expire in May 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.
Page 16
DEFERRED STOCK-BASED COMPENSATION
Cypress records provisions for deferred stock compensation related to
acquisitions. There was no such provision recorded in Q1 2004. Stock
compensation expense is recognized over the vesting period of the individual
stock options or restricted stock, generally a period of four to five years.
The following table presents details of the deferred stock compensation
expense:
THREE MONTHS ENDED
--------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
--------------------------------------------------------------------------
Cost of revenues $ -- $ 404
Selling, general and administrative -- 131
Research and development 1,232 4,423
--------------------------
Total deferred stock compensation expense $ 1,232 $ 4,958
==========================
NOTE 10 - COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of tax, were
as follows:
MARCH 28, DECEMBER 28,
(In thousands) 2004 2003
--------------------------------------------------------------------------
Accumulated net unrealized gain on
available-for-sale investments $ 470 $ 92
Accumulated net unrealized gain on
derivatives 1,301 1,301
--------------------------
Total accumulated other
comprehensive income $ 1,771 $ 1,393
==========================
The components of comprehensive income (loss) for the three months ended,
net of tax, were as follows:
THREE MONTHS ENDED
--------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
--------------------------------------------------------------------------
Net income (loss) $ 26,480 $ (33,323)
Unrealized gain (loss) on
available-for-sale securities 378 (1,291)
Unrealized gain (loss) on derivatives -- (237)
--------------------------
Comprehensive income (loss) $ 26,858 $ (34,851)
==========================
NOTE 11 - FOREIGN CURRENCY DERIVATIVES
Cypress purchases capital equipment from time to time using foreign
currencies and 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.
Cypress estimates the fair value of its forward contracts based on changes
in forward rates from published sources. Cypress accounts for its 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. Amounts deferred in other
comprehensive income will be recorded in the statement of operations in the
period in which the underlying transactions impact earnings. At March 28, 2004,
the effective portion of unrealized gains on cash flow hedges recorded in other
comprehensive income was $1.3 million net of tax. Ineffective hedges are
recorded in other income and (expense), net and were zero for the three months
ended March 28, 2004 and ($0.3) million for the three months ended March 30,
2003.
Page 17
Cypress records its hedges of foreign currency denominated assets and
liabilities at fair value with the related gains or losses recorded in other
income and (expense), net. The gains and losses on these contracts are
substantially offset by transaction losses and gains on the underlying balances
being hedged. As of March 28, 2004, Cypress held forward contracts with an
aggregate notional value of $2.6 million to hedge the risks associated with Yen
foreign currency denominated assets and liabilities. Aggregate foreign exchange
gains (losses) on these hedging transactions and foreign currency remeasurement
gains (losses) were $0.4 million for Q1 2004 compared to zero for Q1 2003. The
amounts are included in other income and (expense), net in the condensed
consolidated statements of operations.
NOTE 12 - INCOME TAXES
Cypress's effective income tax rate for Q1 2004 was 6.5% resulting in a tax
provision of $1.8 million, as compared with a 4.7% effective income tax rate and
a tax provision of $1.5 million for Q1 2003. The tax provision for both periods
is attributable to income earned in certain countries that is not offset by
current year net operating losses in other countries, and alternative minimum
taxes. The future tax benefit of certain losses is not currently recognized due
to management's assessment of the likelihood of realization of these benefits.
On an ongoing basis, Cypress's effective tax rate may vary from the U.S.
statutory rate primarily due to utilization of future benefits, the earnings of
foreign subsidiaries taxed at different rates, tax credits, and other business
factors.
NOTE 13 - 2001 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 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. 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. The
loans were granted to executive officers prior to Section 402 of the
Sarbanes-Oxley Act of 2002, effective July 30, 2002, which prohibits loans to
executive officers of public corporations. Loans to executive officers
represented approximately 4.3% of the total original loans granted. 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. If a participant sells the shares
of Cypress common stock purchased with the proceeds from the loan(s), the
proceeds of the sale must first be used to repay the interest and then the
principal on the loan(s) before being received by the Plan participant. The
loans are callable and currently bear interest at a minimum rate of 4.0% per
annum compounded annually, except for loans to executive officers, who are also
named corporate 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 $0.5 million in Q1 2004 and $1.3 million in Q1
2003 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 March
28, 2004 totaled $5.7 million. As of March 28, 2004, loans (including accrued
interest) outstanding under the Plan net of loss reserve were $47.8 million, as
compared to $64.3 million at December 28, 2003. This balance is classified on
the consolidated balance sheet within other current assets. Cypress has
established a loss reserve representing an amount for estimated uncollectible
balances, with changes in the loss reserve recognized in Selling, general and
administrative expenses. In determining this loss reserve, management considered
various factors, including an independent fair value analysis of these employee
and former employee loans and the underlying collateral. To date, there have
been immaterial write-offs. At March 28, 2004 and December 28, 2003, the loss
reserve was $8.4 million and $16.2 million, respectively.
In Q1 2004, Cypress instituted a program, announced in October 2003, aimed
at minimizing losses resulting from these employee loans. Under this program,
employees other than executive officers were required to execute either a sell
limit order or a stop loss order on the collateral stock once common stock price
exceeds the employee's break-even point. Executive officers were precluded from
participating in the stop loss program as a result of Section 402 of the
Sarbanes-Oxley Act of 2002, which prohibits material modifications to any term
of a loan to an executive officer. If the common stock price declines to the
stop loss price, the collateral stock is sold and the proceeds utilized to repay
the employee's outstanding loan to Cypress. The employee loans remain callable
and 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.
Page 18
NOTE 14 - EARNINGS (LOSS) PER SHARE
Basic net income (loss) per common share is computed using the
weighted-average common shares outstanding for the period. Diluted net income
(loss) per common share is computed as though all potential dilutive common
shares were outstanding during the period. Dilutive securities include stock
options and shares issuable upon the conversion of convertible debt. The
following table sets forth the computation of basic and diluted net income per
share:
THREE MONTHS ENDED
--------------------------
MARCH 28, MARCH 30,
(In thousands, except per share amounts) 2004 2003
--------------------------------------------------------------------------
BASIC:
Net income (loss) attributable to common
shareholders $ 26,480 $ (33,323)
--------------------------
Weighted-average common shares 122,417 125,005
--------------------------
Basic net income (loss) per share $ 0.22 $ (0.27)
--------------------------
DILUTIVE:
Net income (loss) attributable to common
shareholders $ 26,480 $ (33,323)
Interest on 1.25% Notes, net of taxes 1,315 --
Bond issuance costs on 1.25% Notes, net of
taxes 651 --
Other (119) --
--------------------------
Net income (loss) for diluted computation $ 28,327 $ (33,323)
--------------------------
Weighted-average common shares 122,417 125,005
Effect of dilutive securities:
1.25% Notes 33,103 --
Stock options 16,091 --
Other 221 --
--------------------------
Adjusted weighted average common shares and
assumed conversions 171,832 125,005
==========================
Diluted net income (loss) per share $ 0.16 $ (0.27)
==========================
For the three months ended Q1 2004, diluted earnings per share included
approximately 33.1 million shares assuming conversion of the 1.25% Convertible
Subordinated Notes ("1.25% Notes") and payment of the $300 portion of each note
in cash rather than common stock. Each $1,000 principal value 1.25% Notes issued
in June 2003, is convertible at any time prior to maturity into 55.172 shares of
common stock, subject to certain adjustments, plus $300 of cash. Cypress, at its
option may pay the $300 in shares of common stock, subject to certain
conditions. Cypress currently intends to pay the $300 in cash rather than shares
of common stock. As a result, for purposes of determining Cypress's diluted
earnings per share calculation, it is presumed that the $300 payment will be
settled in cash. Therefore, earnings in the diluted earnings per share
calculation are adjusted by 70% of the interest expense and bond issuance costs.
For a detailed description of our 1.25% Notes refer to our Annual Report on Form
10-K for the year ended December 28, 2003.
For the three months ended Q1 2004, the shares of common stock issuable
upon the assumed conversion of Cypress convertible 3.75% subordinated notes were
excluded from the calculation of diluted net loss per share as the effect was
anti-dilutive.
For the three months ended Q1 2003, outstanding options were excluded from
the calculation of diluted net loss per share, as the effect was anti-dilutive.
Total outstanding options to purchase common stock at the end of Q1 2003 were
39.4 million shares at a weighted-average exercise price of $13.82.
For the three months ended Q1 2003, the shares of common stock issuable
upon the assumed conversion of all our convertible subordinated notes were
excluded from the calculation of diluted net loss per share as the effect was
anti-dilutive.
Page 19
NOTE 15 - SEGMENT REPORTING
Cypress has 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 addition, Cypress reports its product offerings by market segment in
order to provide enhanced focus on serving end markets. 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 spending. The Wide Area Networks ("WAN") and Storage
Area Networks ("SAN") segment helps to provide product definition in the
networking arena. The Wireless Terminals ("WIT") and Wireless Infrastructure
("WIN") segment helps focus Cypress's efforts in the wireless space. The
Computation and Consumer market segment includes products used in computers,
peripherals and other applications. The Cypress Subsidiaries segment includes
the operations of Cypress's subsidiaries; Silicon Light Machines, Silicon
Magnetic Systems, Cypress Microsystems and SunPower Corporation.
Cypress evaluates the performance of its segments based on profit or loss
from operations before income taxes, excluding acquisition-related restructuring
costs and interest and other income and (expense), net.
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
characterized by high unit sales volume and 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 ("Fab 4"). Memory Products are used by a variety of
end-users generally for the storage and retrieval of information. In contrast to
Memory Products, unit sales of Non-memory Products are generally lower than
Memory Products, but sell at higher gross margins. Some Non-memory Products are
manufactured utilizing less technologically advanced processes. A majority of
wafers for Non-memory Products are manufactured at Cypress's six-inch wafer
production facility located in Texas ("Fab 2"), 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 the three months ended March 28, 2004 and March 30, 2003. Cypress
does not allocate interest income and expense, income taxes or
acquisition-related costs and 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
THREE MONTHS ENDED
--------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
--------------------------------------------------------------------------
Memory $ 105,630 $ 67,810
Non-memory 148,763 113,157
--------------------------
Total consolidated revenues $ 254,393 $ 180,967
==========================
Page 20
Business Segment Income (Loss) before Provision for Income Taxes
THREE MONTHS ENDED
--------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
--------------------------------------------------------------------------
Memory $ 11,006 $ (7,254)
Non-memory 28,173 (9,887)
Restructuring and acquisition costs (10,110) (12,844)
Interest income 2,709 3,193
Interest expense (2,868) (4,676)
Other income and (expense), net (589) (359)
--------------------------
Income (loss) before provision for income
taxes $ 28,321 $ (31,827)
==========================
MARKET SEGMENT INFORMATION
Cypress does not allocate interest income and expense, income taxes,
acquisition costs or non-recurring items 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
THREE MONTHS ENDED
--------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
--------------------------------------------------------------------------
Wide area networks / storage area networks $ 83,928 $ 55,617
Wireless terminals / wireless infrastructure 77,959 57,491
Computation and consumer 82,377 60,365
Cypress subsidiaries 10,129 7,494
--------------------------
Total consolidated revenues $ 254,393 $ 180,967
==========================
Market Segment Income (Loss) Before Provision for Income Taxes
THREE MONTHS ENDED
--------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
--------------------------------------------------------------------------
Wide area networks / storage area networks $ 13,313 $ (10,709)
Wireless terminals / wireless infrastructure 14,219 (2,146)
Computation and consumer 18,429 2,429
Cypress subsidiaries (6,782) (6,715)
Restructuring and acquisition costs (10,110) (12,844)
Interest income 2,709 3,193
Interest expense (2,868) (4,676)
Other income and (expense), net (589) (359)
--------------------------
Income (loss) before provision for income
taxes $ 28,321 $ (31,827)
==========================
International revenues accounted for 64.2% for the three months ended Q1
2004 compared to 61.1% for the three months ended Q1 2003.
Sales to Arrow Electronics, Inc., one of Cypress's distributors, accounted
for 14.6% of total revenues for the three months ended Q1 2004. No individual
distributors accounted for greater than 10.0% of total revenues for the three
months ended Q1 2003.
Page 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CYPRESS SEMICONDUCTOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 28, 2004
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 (including
expectations for revenues and gross margin in 2004) and business plans, our
prospects and the prospects of the semiconductor industry generally, the impact
of new product development and improvements in manufacturing technologies and
yields on variances, pressure on and trends for average selling prices, our
intention to seek intellectual property protection for our manufacturing
processes, capital expenditures, future acquisitions, the financing of SunPower
Corporation, the dependence of future success on our ability to develop and
introduce new products, 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,
successful integration and achieving the objectives of the acquired businesses,
cost goals emanating from manufacturing efficiencies, expected financing and
investment cash outlays, adequacy of cash and working capital, when we expect to
generate positive cash flow from operations, 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" below 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 the first quarter of
2004, which translated into a broad market improvement for us. We had sequential
improvements in revenue, gross margin and operating results compared to the
fiscal quarter ended March 30, 2003 ("Q1 2003"). This resulted in net income of
$26.5 million in the fiscal quarter ended March 28, 2004 ("Q1 2004") compared to
a net loss of $33.3 million in Q1 2003.
Our revenues for Q1 2004 were $254.4 million, an increase of $73.4 million
or 40.6% compared to revenues for Q1 2003. The revenue increase in Q1 2004
compared to Q1 2003 is primarily attributable to an increase in unit shipments.
Our revenues have improved across all of our market segments. In general, as we
look ahead for the rest of 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 30%
over 2003 fiscal revenue as a result of increased unit shipments and stable
ASPs.
As is typical in the semiconductor industry, ASPs of products generally
decline over the lifetime of the products. To increase revenues, we seek to
expand our market share in the markets we currently serve and to introduce and
sell new products with higher ASPs. We will seek to remain competitive with
respect to our pricing to prevent a further decline in sales.
Our gross margin improved to 51.5% in Q1 2004 compared to 43.3% in Q1 2003.
The improvement in gross margin as a percentage of sales was primarily due to a
decrease in unit manufacturing costs, which was driven by
Page 22
increased unit sales and improved efficiencies of our manufacturing facilities.
We expect gross margin percentage to increase to 54.0% in the ensuing quarter,
due to changes in product mix and additional manufacturing efficiencies, and
continue at that level for the remainder of fiscal 2004.
Research and development and Selling, general and administrative expenses
for Q1 2004 were $3.7 million lower than Q1 2003 primarily due to a $7.8 million
reduction in reserves related to our 2001 Employee Stock Purchase Assistance
Plan ("SPAP") loans receivable, as a result of significant reductions in
outstanding balances due to collection of loans from employees. This reduction
was partially offset by an increase in labor costs and sales commissions.
Our total cash, cash equivalents, short-term investments, long-term
investments, and restricted cash increased $57.0 million during Q1 2004. The
increase was primarily due to operating cashflow of $35.2 million and cash
received from employee stock purchases and option exercises of $15.7 million.
RESULTS OF OPERATIONS
BUSINESS SEGMENT NET REVENUES
THREE MONTHS ENDED
-------------------------------------
MARCH 28, MARCH 30, %
(In thousands) 2004 2003 CHANGE
---------------------------------------------------------------------
Memory $ 105,630 $ 67,810 55.8%
Non-memory 148,763 113,157 31.5%
-------------------------------------
Total consolidated revenues $ 254,393 $ 180,967 40.6%
=====================================
Revenues from the sale of Memory products for Q1 2004 increased $37.8
million or 55.8% versus revenues from the sale of these products for Q1 2003.
Memory product units increased 36.6% in Q1 2004 compared to Q1 2003. The
increase in unit sales was driven primarily by two of our Static Random Access
Memory ("SRAM") products, Synchronous SRAMs and Micropower SRAMs. In Q1 2004,
ASPs increased due to an increase in the average density (Mbits/unit) of SRAM
products sold compared to Q1 2003. We use 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 33.0%
in Q1 2004 compared to Q1 2003, while total megabits sold increased by 133.8% in
the same period. These changes were primarily due to our sales of 1T products in
Q1 2004 of $16.1 million compared to zero sales in Q1 2003.
Revenues from the sale of Non-memory products for Q1 2004 increased $35.6
million or 31.5% versus revenues from the sale of these products for Q1 2003.
Non-memory product unit sales increased 45.9% compared to Q1 2003, reflecting an
increase in unit sales from our Universal Serial Bus ("USB") family of products,
Programmable Clocks, Timing Distribution Products, Programmable-Logic Devices
("PLDs") and adoption of our Network Search Engine ("NSEs") products offset by
reduced demand for our Neuron products.
MARKET SEGMENT REVENUES
THREE MONTHS ENDED
----------------------------------
March 28, March 30, %
(In thousands) 2004 2003 CHANGE
- -------------------------------------------------------------------------------
Wide area networks/storage area networks $ 83,928 $ 55,617 50.9%
Wireless terminals/wireless
infrastructure 77,959 57,491 35.6%
Computation and consumer 82,377 60,365 36.5%
Cypress subsidiaries 10,129 7,494 35.2%
----------------------------------
Total consolidated revenues $ 254,393 $ 180,967 40.6%
==================================
Revenues from the sale of WAN/SAN products for Q1 2004 increased $28.3
million or 50.9% compared to Q1 2003. 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 Q1 2003 due primarily
to increased
Page 23
demand for our network search engines. This segment also experienced growth due
to our acquisition of Micron Technology, Inc.'s high-performance communications
orientated SRAM product portfolio inventory in the second quarter of 2003.
Revenues from the sale of WIT/WIN products for Q1 2004 increased $20.5
million or 35.6% compared to Q1 2003. 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
More Battery Life ("MoBL") and MicroPower SRAM product families.
Revenues from the sale of Computation and consumer products for Q1 2004
increased $22.0 million or 36.5% compared to Q1 2003. 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 primarily by sales of our programmable
clocks.
Revenues from the Cypress subsidiaries for Q1 2004 increased $2.6 million
or 35.2% compared to Q1 2003. The growth was driven by increased Programmable
System on a Chip ("PsoC") product revenue from Cypress MicroSystems ("CMS"), and
increased non-recurring engineering revenue, product revenue, and license
revenue from Silicon Light Machines ("SLM").
COST OF REVENUES/GROSS MARGIN
Costs of revenues were $123.4 million and $102.6 million in Q1 2004 and Q1
2003, respectively. This resulted in gross margins of 51.5% in Q1 2004 and 43.3%
in Q1 2003.
The 8.2% increase in Q1 2004 gross margin percentage compared to Q1 2003 is
attributable to the continued ramp of our 0.15-micron CMOS and 0.13-micron CMOS
manufacturing processes resulting in lower unit costs, and the increased
utilization of our wafer fabs.
During Q1 2004, our gross margin benefited as a result of the sale of Q3
2001 previously reserved inventory. The incremental gross profit benefit was
1.2% in Q1 2004, compared to an incremental gross profit benefit of 1.5% in Q1
2003. The amount of Q3 2001 previously reserved inventory that remained on hand
at March 28, 2004, was $14.3 million.
We had gross margin improvements in all of our business and market segments
in Q1 2004 compared to Q1 2003 as a result of improved revenues in Q1 2004
compared to Q1 2003.
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.
RESEARCH AND DEVELOPMENT
THREE MONTHS ENDED
------------------------------------
MARCH 28, MARCH 30, %
(In thousands) 2004 2003 CHANGE
-------------------------------------------------------------------------
Revenues $ 254,393 $ 180,967 40.6%
Research and development 63,158 64,406 (1.9)%
------------------------------------
R&D as a percent of revenues 24.8% 35.6%
====================================
Research and Development ("R&D") expenditures in Q1 2004 were essentially
flat in total dollars versus Q1 2003 although down by 10.8% as a percent of
revenue. This is consistent with Cypress's strategy of continuing to invest in
R&D at consistent dollar levels but driving down spending as a percentage of
revenue through revenue growth.
R&D expenditures on process technology focus primarily on the continuous
migration to smaller geometries. We made steady progress ramping our
90-nanometer technology in our Minnesota Fab in Q1 2004. We also launched a
65-nanometer development program in our eight-inch R&D facility in San Jose.
Page 24
During Q1 2004, we recorded in R&D $2.7 million in non-cash deferred stock
compensation and cash and equity compensation related to milestone/revenue-based
compensation from acquisitions as compared to $6.0 million in Q1 2003.
SELLING, GENERAL AND ADMINISTRATIVE
THREE MONTHS ENDED
------------------------------------
MARCH 28, MARCH 30, %
(In thousands) 2004 2003 CHANGE
-------------------------------------------------------------------------
Revenues $ 254,393 $ 180,967 40.6%
Selling, general and administrative 28,797 31,129 (7.5)%
------------------------------------
SG&A as a percent of revenues 11.3% 17.2%
====================================
Selling, general and administrative ("SG&A") expenses in Q1 2004 decreased
$2.3 million compared to Q1 2003. The decrease in SG&A was primarily a result of
a reduction in the SPAP reserve of $7.8 million. The decrease in the reserve was
due to a decline in the employee loan receivable balance under this plan at
March 28, 2004 compared to December 28, 2003 as a result of significant
repayments by employees during Q1 2004. This decrease was partially offset by an
increase in expenditures of $5.5 million as a result of the elimination of
employee salary cuts, higher commission costs from increased sales and increased
expenditures for regulatory requirements of the Sarbanes-Oxley Act.
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"). As 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.
For additional information on these events, refer to Note 5 in the
Condensed Consolidated Financial Statements.
ACQUISITION COSTS
THREE MONTHS ENDED
-------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
----------------------------------------------------------------------
Amortization of intangibles $ 10,090 $ 9,484
-------------------------
Total acquisition and other costs $ 10,090 $ 9,484
=========================
Acquisition costs consist of the amortization of acquired intangible
assets. Amortization of intangible assets was $10.1 million and $9.5 million in
Q1 2004 and Q1 2003, respectively. The Q1 2004 amortization of intangible assets
includes $0.8 million relating to Cascade Semiconductor Corporation, a company
Cypress acquired in Q1 2004. Refer to Note 2 of the Condensed Consolidated
Financial Statements for further information on this acquisition. The remaining
amount of Q1 2004 amortization and all of the Q1 2003 amortization relates to
acquisitions made prior to fiscal 2003.
Page 25
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME AND (EXPENSE), NET
THREE MONTHS ENDED
-------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
--------------------------------------------------------------------------
Interest income $ 2,709 $ 3,193
Interest expense (2,868) (4,676)
Other income and (expense), net (589) (359)
-------------------------
Interest and other income and (expense), net $ (748) $ (1,842)
=========================
Interest income decreased $0.5 million or 15.2% in Q1 2004 versus Q1 2003.
This is due mainly to approximately $1 million less interest income earned on
SPAP loans. Less interest was earned as a result of significant employee loan
repayments in Q4 2003 and Q1 2004. This decrease is partially offset by an
increase in interest income earned on cash and investments. This increase in
interest income on cash and investments was due to an increase in average cash
and investment balances during Q1 2004 compared to Q1 2003.
Interest expense decreased by $1.8 million or 38.7% in Q1 2004 versus Q1
2003. Interest expense during Q1 2004 is primarily associated with the $600.0
million principal amount of our 1.25% Convertible Subordinated Notes ("1.25%
Notes") and the $68.7 million principal amount of our 3.75% Convertible
Subordinated Notes ("3.75% Notes"). The decrease in interest expense in Q1 2004
compared to Q1 2003 is primarily associated with the July 2003 repurchases of
$117.2 million in principal of our 3.75% Notes and the entire $283.0 million in
principal of our 4% Convertible Subordinated Notes.
Other income and (expense), net was ($0.6) million in Q1 2004, an increase
in expenses of $0.2 million from the ($0.4) million recorded in 2003. Below is a
summary of the major components of other income and (expense), net:
THREE MONTHS ENDED
-------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
----------------------------------------------------------------------
Amortization of bond issuance costs $ (1,024) $ (690)
Equity in net income of partnership
investment (see Note 7) 422 --
Foreign exchange gain (loss) (53) (290)
Minority interest -- 979
Other 66 (358)
-------------------------
Other income and (expense), net $ (589) $ (359)
=========================
INCOME TAXES
Our effective income tax rate for Q1 2004 was 6.5%, resulting in a tax
provision of $1.8 million, as compared with a 4.7% effective income tax rate and
a tax provision of $1.5 million for Q1 2003. The tax provision for both periods
is attributable to income earned in certain countries that is not offset by
current year net operating losses in other countries, and alternative minimum
taxes. The future tax benefit of certain losses is not currently recognized due
to management's assessment of the likelihood of realization of these benefits.
On an ongoing basis, our effective tax rate may vary from the U.S. statutory
rate primarily due to utilization of future benefits, the earnings of foreign
subsidiaries taxed at different rates, tax credits, and other business factors.
Page 26
LIQUIDITY AND CAPITAL RESOURCES
MARCH 28, DECEMBER 28,
(In thousands) 2004 2003
----------------------------------------------------------------------
Cash, cash equivalents and short-term
investments $ 249,978 $ 198,617
Restricted cash 63,005 62,814
Long-term investments (1) 123,903 118,437
--------------------------
Subtotal 436,886 379,868
Working capital 362,835 307,716
Long-term debt (excluding current portion) 682,519 684,260
==========================
(1) Includes liquid investments in limited liability partnerships (see
Note 7 to the condensed consolidated financial statements for
details).
During Q1 2004, our total cash, cash equivalents and investments, including
restricted cash, increased by $57.0 million. The increase was primarily due to
operating cashflow of $35.2 million and cash received from employee stock
purchases and option exercises of $15.7 million.
During Q1 2004, working capital increased $55.1 million due mainly to
increases in cash and accounts receivable, offset partially by a decrease in
SPAP loans.
KEY COMPONENTS OF CASH FLOW
THREE MONTHS ENDED
------------------------
MARCH 28, MARCH 30,
(In thousands) 2004 2003
-----------------------------------------------------------------------------
Net cash flow generated from operating activities $ 35,219 $ 7,296
Net cash flow used for investing activities (7,270) (5,656)
Net cash flow generated from financing activities 15,816 31,902
------------------------
Net increase in cash and cash equivalents $ 43,765 $ 33,542
========================
Cash generated from operations was $35.2 million in Q1 2004 compared to
$7.3 million in Q1 2003. The largest contributor to the change was an increase
in net income of $59.8 million. This increase was partially offset by an
increase in net operating assets of $20.1 million.
Investment activities used cash of $7.3 million in Q1 2004 compared to $5.7
million in Q1 2003. Additional purchases of available-for-sale investments of
$30.0 million and a reduction in capital purchases of $4.6 million, contributed
to the change. This net increase of $25.4 million was partially offset by a
$24.5 million increase in proceeds from repayments of SPAP loans.
Net cash from financing activities was $15.8 million in Q1 2004 compared to
$31.9 million in Q1 2003. During Q1 2004 we received proceeds of $15.7 million
related to employee stock purchases under our employee stock purchase program
and stock option exercises. During Q1 2003 we obtained $24.7 million (net) of
long-term secured equipment financing and $7.2 million from the issuance of our
common shares related to employee stock purchases under our employee stock
purchase program and stock option exercises.
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 for investment in our product development and
technology initiatives, including capital expenditures for our SunPower
subsidiary. Total capital expenditures, including capital expenditures by
SunPower, are estimated at $192 million for the remainder of fiscal year 2004.
Cypress has financed SunPower's capital expenditures and these amounts are
included in the outstanding SunPower loan balances (refer to Note 3 in the
Condensed Consolidated Financial Statements). The Board of Directors has
approved programs authorizing the repurchase of our common stock or convertible
subordinated notes (the "Subordinated Notes") in the open market or in privately
negotiated transactions at anytime. The actual total amount that can be
repurchased is limited to $15.0 million. We have $668.6 million of aggregate
principal amount in subordinated notes that are due in July 2005 and June 2008
in the amount of $68.6 million
Page 27
and $600.0 million, respectively. The Subordinated Notes are subject to
compliance with certain covenants that do not contain financial ratios. As of
March 28, 2004, we were 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.
We have entered into a synthetic operating lease agreement for U.S.
manufacturing and office facilities. The lease agreement requires us to purchase
the properties or to arrange for the properties to be acquired by a third party
at lease expiration. If we had exercised our right to purchase all the
properties subject to these leases at March 28, 2004, we would have been
required to make a payment and record assets totaling $62.7 million. We are
required to maintain restricted cash or investments to serve as collateral for
these leases. As of March 28, 2004, the amount of restricted cash recorded was
$63.0 million, which was classified as a non-current asset on the consolidated
balance sheet.
In conjunction with the 1.25% Notes offering in June 2003, we 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 in our Annual Report on Form 10-K for the fiscal year ended December
28, 2003, 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 our common stock upon exercise or expiration
of the Option is greater than $15 per share. The Option may be settled at our
election in either net shares or in cash. Settlement of the Option in net shares
on the expiration date would result in us 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 our 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. At maturity, or should there be an early unwind of
the Option, the amount of cash or net shares potentially received by us will be
dependent upon then existing overall market conditions, on our stock price, the
volatility of our stock and the amount of time remaining on the Option. As of
March 28, 2004, the call spread option was in the money in the amount of $163.2
million.
We gained effective control over SunPower in Q1 2003. As a result,
effective the beginning of fiscal 2003, we consolidated the results of SunPower,
which was previously accounted for under the equity method in 2002 due to the
existence of substantive participating rights of the minority shareholders. We
and our CEO own preferred stock of SunPower, which is convertible into common
stock. As of March 28, 2004, we and our CEO own approximately 57% and 6%,
respectively, of SunPower on an as converted basis.
As of March 28, 2004 and December 28, 2003, we had loaned SunPower $36.2
million and $26.7 million, respectively, under various agreements. The amounts
outstanding include Cypress's Funding of SunPower's capital additions. We are
currently finalizing negotiations with SunPower for future funding of their
operations. In connection with current negotiations between SunPower, and us we
have advanced SunPower $4.0 million. At March 28, 2004, we are obligated under
current agreements to fund SunPower $2.0 million through May 2004 at SunPower's
option.
We have long-term loan agreements with two lenders with remaining aggregate
principal equal to $18.4 million at March 28, 2004. These agreements are
collateralized with specific equipment located at our U.S. manufacturing
facilities. Principal amounts to be repaid with monthly installments inclusive
of accrued interest, over a 3 to 4 year period. The applicable interest rates
are variable based on changes to LIBOR rates. Both loans are subject to
financial and non-financial covenants and we were in compliance with these
covenants as of March 28, 2004.
We have entered into a $50.0 million, twenty-four month revolving line of
credit with Silicon Valley Bank. As of March 28, 2004, 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 ratio. Our obligations under the line of credit are
Page 28
guaranteed and secured by the stock of certain of our subsidiaries. We intend to
use the line of credit on an as-needed basis to fund working capital and capital
expenditures, including any future obligations resulting from negotiations with
SunPower agreements currently being finalized.
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 $250.0 million in cash and cash
equivalents that we currently have for short-term requirements, we have
approximately $123.9 million in marketable debt securities that are available
for future operating, financing and investing activities, for a total liquid
cash and investment position of $373.9 million. We have an additional $63.0
million of restricted cash for off balance sheet financing, for a total cash,
investments, restricted cash and restricted securities position of $436.9
million. As of March 28, 2004, we maintain the ability to issue an aggregate of
$112.5 million in debt, equity and other securities under a shelf registration
statement we filed with the Securities and Exchange Commission in fiscal 2000.
We believe that liquidity provided by existing cash, cash equivalents,
investments, 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, including capital expenditures of $192 million.
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, refinance and/or restructure our debt and
provide us with additional flexibility to take advantage of business
opportunities that arise.
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 (including
expectations for revenues and gross margin in 2004) 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.
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
Page 29
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 how
long the trend will continue. 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 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;
.. 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; and
.. Our inability to ramp production on a timely basis in response to customer
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
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.. 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 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.
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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 products, or market demand for our new products does not exist as
anticipated, our business, financial condition and results of operations could
be seriously harmed.
For 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
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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 A 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 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
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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.
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
Page 34
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 $213.1 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.
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 64% of our total revenues in Q1 2004.
At the end of Q1 2004, 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 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
Page 35
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 one acquisition in Q1 2004, no acquisitions in fiscal 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;
.. 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
.. the migration of 6T PSRAM to 1T PSRAM 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 $56.3 million as of March 28, 2004, to employees and former
employees under the shareholder-approved 2001 Employee Stock Purchase Assistance
Plan (see Note 13 to our condensed 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
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March 28, 2004, we have a loss reserve against these loans of $8.4 million. In
determining this reserve requirement, management considered various factors,
including an independent fair value analysis of these loans and the underlying
collateral. 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 Q1 2004, we instituted a program, announced in October 2003, 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. Executive
officers were precluded from participating in the stop loss program as a result
of Section 402 of the Sarbanes-Oxley Act of 2002, which prohibits material
modifications to loans made to executive officers. 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.
CHANGES IN STOCK OPTION ACCOUNTING RULES MAY ADVERSELY IMPACT OUR REPORTED
OPERATING RESULTS PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES, OUR STOCK PRICE AND OUR COMPETITIVENESS IN THE EMPLOYEE MARKETPLACE.
Technology companies like ours have a history of using broad based employee
stock option programs to hire, incentivize and retain our workforce in a
competitive marketplace. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") allows companies the
choice of either using a fair value method of accounting for options, which
would result in expense recognition for all options granted, or using an
intrinsic value method, as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), with a pro forma
disclosure of the impact on net income (loss) of using the fair value option
expense recognition method. We have elected to apply APB 25 and accordingly we
generally do not recognize any expense with respect to employee stock options as
long as such options are granted at exercise prices equal to the fair value of
our common stock on the date of grant.
During March 2004 the FASB issued a proposed Statement, "Share-Based
Payment, an amendment of FASB Statements No. 123 and 95". The proposed statement
eliminates the treatment for share-based transactions using APB 25 and generally
would require share-based payments to employees be accounted for using a
fair-value-based method and recognized as expenses in our statements of
operations. The proposed standard would require the modified prospective method
be used, which would require that the fair value of new awards granted from the
beginning of the year of adoption plus unvested awards at the date of adoption
be expensed over the vesting term. In addition, the proposed statement
encourages companies to use the "binomial" approach to value stock options, as
opposed to the Black-Scholes option pricing model that we currently use for the
fair value of our options under SFAS 123 disclosure provisions.
The effective date the proposed standard is recommending is for fiscal
years beginning after December 15, 2004. Should this proposed statement be
finalized, it will have a significant impact on our consolidated statement of
operations as we will be required to expense the fair value of our stock options
rather than disclosing the impact on our consolidated result of operations
within our footnotes in accordance with the disclosure provisions of SFAS 123
(see Note 1 of the Notes to the condensed consolidated financial statements).
This will result in lower reported earnings per share, which could negatively
impact our future stock price. In addition, should the proposal be finalized,
this could impact our ability to utilize broad based employee stock plans to
reward employees and could result in a competitive disadvantage to us in the
employee marketplace.
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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.
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ITEM 3. 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. 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 the Japanese Yen and the Euro.
To protect against reductions in value and the volatility of future cash flows
caused by changes in foreign exchange rates, Cypress has established hedging
programs for balance sheet exposures and exposures to exchange rate changes for
purchases of capital equipment. Cypress's hedging programs reduce, but do not
always eliminate, the impact of foreign currency exchange rate movements. To
mitigate these risks, Cypress utilizes derivative financial instruments. Based
on Cypress's overall currency rate exposure at March 28, 2004, a near-term 10%
appreciation or depreciation in the U.S. dollar, relative to the Japanese Yen or
the Euro, would have an immaterial effect on Cypress's financial position,
results of operations and cash flows over the next fiscal year. Cypress does not
use derivative financial instruments for speculative or trading purposes.
The fair value of Cypress's investment portfolio, which is primarily
invested in commercial paper and other similar instruments, 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 a majority of
Cypress's debt obligations.
EQUITY OPTIONS
At March 28, 2004, 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 are classified in stockholders' equity in the
accompanying condensed consolidated balance sheet. The contracts require
physical settlement. During Q1 2004, the contracts were extended, resulting in
net cash inflows of $1.7 million. Currently the contracts are scheduled to
expire in May 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.
INVESTMENTS IN DEVELOPMENT STAGE 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
March 28, 2004, Cypress had invested $27.6 million in development stage
companies, all of which could be lost if the companies are not successful.
As Cypress's equity investments generally do not permit Cypress to exert
significant influence or control over the entity in which Cypress is investing,
these amounts generally represent Cypress's cost of the investment, less any
adjustments Cypress makes when it determines 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, Cypress carefully considers 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 Cypress requests 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 its evaluation, Cypress previously
recorded impairment charges related to Cypress's investments in privately held
companies in the aggregate of $21.6 million in fiscal years 2003, 2002, and
2001. Cypress has recorded no impairment charges in Q1 2004. At the end of Q1
2004, we continued to hold a
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warrant to purchase 0.4 million shares of common stock of Nonvolatile
Electronics, Inc. with an aggregate exercise price of $6.0 million.
Estimating the net realizable value of investments in privately held
early-stage technology companies is inherently subjective and may contribute to
volatility in Cypress's reported results of operations. For example, if the
current weak investing environment continues throughout fiscal 2004, Cypress may
incur additional impairments to its equity investments in privately held
companies.
STOCK PURCHASE ASSISTANCE PLAN
Included in other current assets at March 28, 2004, Cypress has outstanding
loans, consisting of principal and cumulative accrued interest, of $56.3
million, before reserves of $8.4 million, to employees and former employees
under the shareholder-approved 2001 Employee Stock Purchase Assistance Plan. As
of the end of fiscal 2003, the outstanding principal and cumulative accrued
interest totaled $80.5 million, before reserves of $16.2 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 did not participate in this program. To date,
there have been immaterial write-offs. As of March 28, 2004, Cypress had a loss
reserve against these loans of $8.4 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.
If there were an additional 10% decline in the stock price, the difference
between the carrying value of the loans and the underlying common stock
collateral would be $3.4 million. If the stock continues at the same level, or
does not increase, Cypress may have to further evaluate the reserve. However,
Cypress is willing to pursue every available avenue, including those covered
under the Uniform Commercial Code, to recover these loans by pursuing employee's
personal assets should the employees not repay these loans.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Cypress's management has evaluated, under the direction and with the
participation of 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 fiscal quarter covered
by this Quarterly Report on Form 10-Q. Based on the foregoing evaluation,
Cypress's Chief Executive Officer and Chief Financial Officer have
concluded that as of the end of the fiscal quarter covered by this
Quarterly Report on Form 10-Q, 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.
(b) Changes in internal control over financial reporting.
There were no changes in Cypress's internal control over financial
reporting identified in connection with the evaluation required by Exchange
Act Rule 13a-15(d) that occurred during the most recent fiscal quarter that
has materially affected or is reasonably likely to materially affect
Cypress's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this item is included in Part I in Note 8 to
the Condensed Consolidated Financial Statements and is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES; USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
During the first quarter of fiscal 2004, Cypress issued approximately 0.3
million unregistered shares of its common stock in connection with the
acquisition of Cascade Semiconductor Corporation. The issuances were exempt from
registration under the Securities Act of 1933, as amended, by virtue of Section
3(a)(10) thereof. No underwriters were used in connection with the transaction.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth information with respect to repurchases by
Cypress of common stock during the first quarter of fiscal 2004:
Total number of Total dollar value of
shares purchased as shares that may yet
Total number of Average price part of publicly be purchased under
Period shares purchased paid per share announced programs the programs (1)
- -----------------------------------------------------------------------------------------------------
December 29, 2003
- - January 25, 2004 - $ - - $ 15,000,000
January 26, 2004 -
February 22, 2004 - - - 15,000,000
February 23, 2004 -
March 28, 2004 - - - 15,000,000
===============
Total - $ - - $ 15,000,000
===============
(1) On October 14, 2002, Cypress's board of directors authorized a discretionary
repurchase program to acquire shares of Cypress's common stock in the open
market at any time. The actual total amount that can be repurchased is limited
to $15.0 million. This program does not have an expiration date. This was the
only active stock repurchase program that Cypress had during the first quarter
of fiscal 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Exchange Act Rule 13a-14(a).
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Exchange Act Rule 13a-14(a).
Exhibit 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.
Exhibit 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.
(2) Reports on Form 8-K
Filing Date Item Reported On
January 22, Item 9. We furnished a copy of our press release
2004 announcing our results for the fiscal year ended December
28, 2003, including a reconciliation between GAAP and
non-GAAP measures discussed in the press release.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYPRESS SEMICONDUCTOR CORPORATION
By /s/ Emmanuel Hernandez
------------------------------------------
Emmanuel Hernandez
Vice President, Finance and Administration
and Chief Financial Officer
Dated: May 7, 2004
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