================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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)
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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
May 6, 2003 was 125,992,667.
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INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.................................................. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................19
Item 3. Quantitative and Qualitative Disclosures
about Market Risk....................................................34
Item 4. Controls and Procedures...............................................36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................36
Item 2. Changes in Securities and Use of Proceeds.............................36
Item 3. Defaults Upon Senior Securities.......................................36
Item 4. Submission of Matters to a Vote of Security
Holders..............................................................36
Item 5. Other Information.....................................................36
Item 6. Exhibits and Reports on Form 8-K......................................36
Signatures....................................................................37
Certifications of Quarterly Report............................................38
2
ITEM 1. FINANCIAL STATEMENTS
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
ASSETS
March 30, December 29,
2003 2002
----------- -----------
Current assets:
Cash and cash equivalents .................................... $ 120,742 $ 87,200
Short-term investments ....................................... 29,510 40,737
----------- -----------
Total cash, cash equivalents and
short-term investments............................... 150,252 127,937
Accounts receivable, net ..................................... 86,148 83,054
Inventories, net ............................................. 83,889 92,721
Other current assets ......................................... 208,481 210,235
----------- -----------
Total current assets .................................... 528,770 513,947
----------- -----------
Property, plant and equipment, net ............................. 485,886 496,566
Goodwill ....................................................... 324,352 321,669
Other intangible assets ........................................ 81,478 89,615
Other assets ................................................... 135,176 150,851
----------- -----------
Total assets ................................................... $ 1,555,662 $ 1,572,648
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 62,929 $ 59,431
Accrued compensation and employee benefits ................... 38,188 39,151
Other current liabilities .................................... 113,201 84,112
Deferred income on sales to distributors ..................... 7,747 15,774
Income taxes payable ......................................... 1,674 1,292
----------- -----------
Total current liabilities ............................... 223,739 199,760
----------- -----------
Convertible subordinated notes ................................. 468,900 468,900
Deferred income taxes and other tax liabilities ................ 174,179 177,404
Other long-term liabilities .................................... 37,705 52,961
----------- -----------
Total liabilities ....................................... 904,523 899,025
----------- -----------
Commitments and contingencies (See Note 6)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized; none issued and outstanding ........................ -- --
Common stock, $.01 par value, 650,000 and 650,000
shares authorized;
139,164 and 139,164 issued; 125,337 and
123,743 outstanding at March 30, 2003
and December 29, 2002 ....................................... 1,391 1,391
Additional paid-in-capital ..................................... 1,170,946 1,172,654
Deferred stock compensation .................................... (18,400) (25,283)
Accumulated other comprehensive income ......................... 848 2,376
Accumulated deficit ............................................ (217,443) (155,916)
----------- -----------
937,342 995,222
Less: shares of common stock held in treasury,
at cost; 13,827 shares and 15,421 shares at
March 30, 2003 and December 29, 2002 ......................... (286,203) (321,599)
----------- -----------
Total stockholders' equity .............................. 651,139 673,623
----------- -----------
Total liabilities and stockholders' equity ................... $ 1,555,662 $ 1,572,648
=========== ===========
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
------------------------
March 30, March 31,
2003 2002
--------- ---------
Revenues ......................................... $ 180,967 $ 193,155
Cost of revenues ................................. 102,573 118,266
--------- ---------
Gross margin ..................................... 78,394 74,889
Operating expenses:
Research and development ..................... 64,406 73,482
Selling, general and administrative .......... 31,129 35,383
Restructuring costs .......................... 3,360 1,595
Acquisition-related costs .................... 9,484 11,692
--------- ---------
Total operating expenses ................. 108,379 122,152
--------- ---------
Operating loss ................................... (29,985) (47,263)
Interest income .................................. 3,193 8,524
Interest expense ................................. (4,676) (4,945)
Other income and (expense), net .................. (359) 2,704
--------- ---------
Loss before income taxes ......................... (31,827) (40,980)
(Provision) benefit for income taxes ............. (1,496) 1,189
--------- ---------
Net loss ......................................... $ (33,323) $ (39,791)
========= =========
Basic and diluted loss per share ................. $ (0.27) $ (0.33)
========= =========
Weighted average common and common equivalent shares
outstanding:
Basic and diluted ........................ 125,005 122,122
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
4
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
---------------------------
March 30, March 31,
2003 2002
--------- ---------
Cash flow from operating activities:
Net loss ................................................ $ (33,323) $ (39,791)
Adjustments to reconcile net loss to net cash
generated from (used for) operating activities:
Depreciation and amortization ........................... 46,871 51,574
Acquired in-process research and development ............ -- 500
Net gain (loss) on early retirement of debt ............. -- (4,704)
Asset impairment and other .............................. 916 1,534
Minority interest ....................................... (979) --
Deferred income taxes ................................... 422 12,607
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable ................................. (2,752) (14,097)
Inventories ......................................... 8,832 6,832
Other assets ........................................ 4,105 (16,741)
Accounts payable, accrued liabilities and
other liabilities ............................... (1,227) (26,976)
Deferred income ..................................... (8,027) 9,754
Income taxes payable ................................ 382 457
--------- ---------
Net cash flow generated from (used for)
operating activities ........................... 15,220 (19,051)
--------- ---------
Cash flow from investing activities:
Purchase of investments ................................. (5,995) (27,951)
Sale or maturities of investments ....................... 24,247 58,243
Cash paid for acquisitions, net ......................... -- (582)
Acquisition of property, plant and equipment ............ (25,326) (33,992)
(Issuance) repayment of notes to employees, net ......... -- 13,058
Proceeds from the sale of equipment ..................... 1,125 2,695
Other Investment ........................................ (109) --
--------- ---------
Net cash flow generated from (used for)
investing activities ........................... (6,058) 11,471
--------- ---------
Cash flow from financing activities:
Proceeds from borrowings, net of issuance costs ......... 24,678 --
Redemption of convertible debt .......................... -- (30,739)
Issuance of common shares ............................... 7,188 8,118
Maturity (purchase) of structured options, net .......... -- 578
Repayment of stockholder notes receivable, net .......... -- 384
Other long-term liabilities ............................. (7,486) (908)
--------- ---------
Net cash flow generated from (used for)
financing activities ........................... 24,380 (22,567)
--------- ---------
Net increase (decrease) in cash and cash equivalents ........ 33,542 (30,147)
Cash and cash equivalents, beginning of period .............. 87,200 109,999
--------- ---------
Cash and cash equivalents, end of period .................... $ 120,742 $ 79,852
========= =========
Supplemental Disclosure of Non-Cash Information
Common stock issued for acquisitions ........................ $ -- $ 2,318
Customer prior advances used for equipment sale ............. $ 5,500 $ --
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
5
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 30, 2003
(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. The three-month periods ended March 30, 2003 ("Q1 2003") and March 31,
2002 ("Q1 2002") 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 29, 2002.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates, although such differences are
not expected to be material to the financial statements.
The results of operations for Q1 2003 are not necessarily indicative of the
results to be expected for the full year.
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
This interpretation expands the disclosure requirements of guarantee obligations
and requires the guarantor to recognize a liability for the fair value of the
obligation assumed under a guarantee. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument
that is related to an asset, liability, or equity security of the guaranteed
party. Other guarantees are subject to the disclosure requirements of FIN 45 but
not to the recognition provisions and include, among others, a guarantee
accounted for as a derivative instrument under Statement of Financial Accounting
Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), a parent's guarantee of debt owed to a third party by
its subsidiary or vice versa, and a guarantee which is based on performance. The
disclosure requirements of FIN 45 were effective as of December 31, 2002, and
require information as to the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. Significant guarantees that Cypress has entered are disclosed in Note 6
Commitments and Contingencies.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual
6
period beginning after June 15, 2003. Cypress is evaluating the effect of FIN 46
on its consolidated financial statements which includes considerations related
to Cypress's synthetic leases (See Note 6).
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of "underlying" and the characteristics of a derivative that contains
financing components. The amendments set forth in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. Cypress will apply the provisions
of SFAS 149 prospectively to transactions entered into and or modified after
June 30, 2003.
Accounting for Stock-Based Compensation
Cypress has a number of stock-based employee compensation plans. Cypress
accounts for those plans under the recognition and measurement principles of
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 and earnings 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 30, March 29,
(In thousands, except per share amounts) 2003 2002
----------------------------------------------------------------------------
Net loss, as reported $(33,323) $(39,791)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards,
net of related tax effect of zero 2,101 3,016
-------- --------
Pro forma net income (loss) $(35,424) $ 42,807
======== ========
Loss per share:
Basic and diluted--as reported $ (0.27) $ (0.33)
Basic and diluted--pro forma $ (0.28) $ (0.35)
----------------------------------------------------------------------------
Note 2 - 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 30, 2003, Cypress and its CEO own
approximately 57% and 6%, respectively, of SunPower on an as converted basis.
Minority interest in the losses of SunPower of approximately $1.0 million has
been included in the statement of operations within other income and (expense),
net. The minority interest in SunPower at March 30, 2003 of approximately $0.1
million has been included in the balance sheet within other long-term
liabilities. Any future losses attributable to the minority shareholders in
excess of their interest of $0.1 million in SunPower will be borne solely by
Cypress. Pro forma statement of operations information has not been presented
because the effect of the SunPower consolidation was not material.
7
Cypress owns a warrant to purchase an additional $16.0 million in convertible
preferred stock ("Preferred Stock Warrant") of SunPower. Since Cypress did not
exercise the warrant by April 1, 2003, it is obligated to fund SunPower up to
$5.6 million through May 2004 at a rate of up to $0.4 million per month.
SunPower expects to repay this amount from either the $16.0 million in proceeds
received from the Preferred Stock Warrant or the additional financing discussed
below. Subject to certain product qualification tests, Cypress intends to
exercise the Preferred Stock Warrant in the first half of fiscal 2003.
In Q1 2003, Cypress loaned SunPower $2.5 million and in April 2003 Cypress
loaned an additional $1.9 million to SunPower. These loans will be applied to
the exercise price of the Preferred Stock Warrants. In addition, Cypress intends
to secure financing for a loan of up to $30.0 million on behalf of SunPower in
fiscal 2003.
Note 3 - Goodwill and Intangibles
Goodwill
Cypress's goodwill is reported in the Non-memory business segment. The following
is a rollforward for the goodwill balance in this segment in fiscal 2003:
Balance
at December Balance at
(in thousands) 29, 2002 Reclassified March 30, 2003
----------------------------------------------
Non-memory $321,669 $2,683 $324,352
As a result of Cypress's consolidation of SunPower during Q1 2003, a total of
$2.7 million was reclassified from other assets to goodwill.
Purchased Intangibles
The following tables present details of Cypress's total purchased intangible
assets:
As of March 30, 2003
--------------------------------------------------------------------------------
Accumulated
(In thousands) Gross Amortization Net
--------------------------------------------------------------------------------
Purchased technology $192,656 $(126,434) $66,222
Non-compete agreements 18,650 (9,798) 8,852
Patents, licenses and trademarks 6,703 (2,622) 4,081
Under market leases 1,850 (1,850) --
Other 4,600 (2,277) 2,323
--------------------------------------------------------------------------------
Total $224,459 $(142,981) $81,478
--------------------------------------------------------------------------------
As of December 29, 2002
--------------------------------------------------------------------------------
Accumulated
(In thousands) Gross Amortization Net
--------------------------------------------------------------------------------
Purchased technology $191,700 $(119,133) $72,567
Non-compete agreements 18,650 (8,243) 10,407
Patents, licenses and trademarks 6,350 (2,233) 4,117
Under market leases 1,850 (1,850) --
Other 4,600 (2,076) 2,524
--------------------------------------------------------------------------------
Total $223,150 $(133,535) $89,615
--------------------------------------------------------------------------------
Amortization expense for Q1 2003 of $9.5 million associated with these acquired
intangibles is included in acquisition costs in the statement of operations. The
estimated annual amortization expense of purchased intangible assets is as
follows:
---------------------------------------------------------
(In thousands) Amount
---------------------------------------------------------
2003 (remaining nine months) $ 28,698
2004 32,827
2005 14,725
2006 2,635
2007 2,446
2008 and beyond 147
---------------------------------------------------------
Total 81,478
---------------------------------------------------------
8
Note 4 - 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 the operations, resulting in significant restructuring charges,
may become necessary if an industry downturn persists. Cypress currently has 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 for property, plant and equipment, leased facilities and
personnel costs and the Fiscal 2002 Restructuring Plan for personnel costs.
Fiscal 2002 Restructuring Plan:
On October 17, 2002, Cypress announced a restructuring plan that included the
resizing of Cypress's manufacturing facilities and the reduction of operating
expenses, including research and development and selling, general and
administrative. In the fourth quarter of fiscal 2002 ("Q4 2002"), Cypress
recorded a charge of $45.4 million which consisted of $36.0 million related to
equipment removed from service and held for sale, $8.2 million for workforce
reductions for approximately 380 employees, including severance and benefits
costs, and $1.2 million for leased facilities. To date, Cypress has sold
equipment with a net book value of $3.3 million. The proceeds from the sales of
the assets approximated their carrying values. The majority of the workforce
reduction affected the United States, with some reductions in Europe and the
Philippines, and sales offices that were closed in Europe and the United States.
To date, 365 of these employees had left Cypress as part of the restructuring
plan. The remaining employees are expected to leave by June 2003.
A restructuring charge of $3.4 million was recorded in Q1 2003 for additional
opportunities identified as part of the personnel portion of the Fiscal 2002
Restructuring Plan. The charge relates to the severance and related employee
benefit costs for the termination of approximately 150 additional employees, the
majority of whom are located in the United States at Cypress's facilities in San
Jose, Texas and Minnesota. As of the end of Q1 2003, 143 of these employees had
left Cypress.
The following table summarizes the activity associated with the restructuring
liabilities and asset write-downs since the inception of the restructuring plan
in the fourth quarter of fiscal 2002:
--------------------------------------------------------------------------------
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, $ 33,359 $ 685 $ 3,969 $ 38,013
2003
================================================================================
Fiscal 2001 Restructuring Plan:
On July 16, 2001, Cypress announced a restructuring plan that involved resizing
its manufacturing facilities, reducing its workforce and combining facilities.
The restructuring was precipitated by the worldwide economic
9
slowdown, particularly in the business areas in which Cypress operates. The
intended effect of the plan was to size the manufacturing operations and
facilities to meet future demand and reduce expenses in all operations areas.
During the third quarter of fiscal 2001, Cypress recorded restructuring charges
of $132.1 million related to property, plant and equipment, leased facilities
and personnel.
In connection with the July 16, 2001 announcement, in the third quarter of
fiscal 2001, Cypress removed from service and held for sale equipment with a net
book value of $116.9 million, resulting in a charge of $113.4 million. Cypress
has actively marketed the equipment. Through March 30, 2003, Cypress has sold
equipment with a net book value of $54.4 million. The proceeds from the sales of
the assets generally approximated their carrying values. In the second and third
quarters of fiscal 2002 ("Q2 2002" and "Q3 2002," respectively), Cypress placed
back into service certain of these assets previously recorded as held for sale.
The assets were needed to meet increased production requirements resulting from
a substantial increase in unit demand versus Cypress's initial assumptions at
the time of the restructuring in the third quarter of 2001 ("Q3 2001"). When the
assets were put back into service, they were written up to their prior cost
basis (an adjustment of $13.2 million and $9.6 million in Q2 2002 and Q3 2002,
respectively), reduced for depreciation expense that would have been recorded
during the period the asset was removed from service (an adjustment of $2.9
million and $2.6 million in Q2 2002 and Q3 2002, respectively), as required by
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Asset to Be Disposed of." The net effect of the asset adjustment was
a credit to the restructuring costs on the statement of operations of $10.3
million and $7.0 million in Q2 2002 and Q3 2002, respectively. In Q1 2002,
Cypress also sold and then leased back certain other pieces of equipment
classified as held for sale. The proceeds from the sales of the assets
approximated their net carrying values. Cypress continues to actively market the
remaining assets held for sale.
In Q1 2002, Cypress recorded an additional charge of $1.6 million for additional
cost reductions identified as part of the personnel portion of the Fiscal 2001
Restructuring Plan. The charge related to severance and related employee benefit
costs for the termination of employees, the majority of whom were located in the
Philippines facility.
In Q3 2002, as a result of the continued business slowdown, Cypress further
restructured its operations and recorded net restructuring costs of $2.4
million, which comprised a charge of $9.4 million offset by a $7.0 million
reversal for previously written-down equipment put back into service discussed
above. The charge of $9.4 million consisted of $3.3 million for work force
reductions, and included severance, benefit costs and stock compensation, $3.4
million for capital equipment removed from service and held for sale and $2.7
million for the exiting of facility leases.
In Q4 2002, Cypress recorded a credit of $0.7 million related to the revised
estimate of personnel costs. In connection with the Fiscal 2001 Restructuring
Plan Cypress has accrued costs related to an estimated 890 employees to be
terminated. At the end of Q1 2003, approximately 884 employees have left
Cypress.
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 in Q3 2001:
-------------------------------------------------------------------------------------------
Property,plant Leased Personnel Total
(In thousands) & equipment Facilities
-------------------------------------------------------------------------------------------
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)
Other adjustments (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)
Other adjustments (9,545) -- -- (9,545)
-------------------------------------------------------------------------------------------
Balance at September 29, 2002 66,884 5,247 2,134 74,265
Provision -- -- (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
Provision -- -- -- --
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
-------------------------------------------------------------------------------------------
Note 5 - Balance Sheet Components
Inventories, Net
-------------------------------------------------------------------------
March 30, December 29,
(In thousands) 2003 2002
-------------------------------------------------------------------------
Raw materials $ 3,192 $ 3,185
Work-in-process 54,713 54,668
Finished goods 25,984 34,868
-------------------------------------------------------------------------
Inventories, net $ 83,889 $ 92,721
-------------------------------------------------------------------------
Other Current Assets
-------------------------------------------------------------------------
March 30, December 29,
(In thousands) 2003 2002
-------------------------------------------------------------------------
Employee stock purchase assistance
plan, net $ 91,030 $ 90,636
Deferred tax assets 81,918 85,041
Prepaid assets 25,914 24,962
Other current assets 9,619 9,596
-------------------------------------------------------------------------
Other current assets $ 208,481 $ 210,235
-------------------------------------------------------------------------
11
Other Assets
-------------------------------------------------------------------------
March 30, December 29,
(In thousands) 2003 2002
-------------------------------------------------------------------------
Long-term investments (1) $ 24,185 $ 32,148
Restricted investments 62,232 62,380
Deferred tax asset 26,284 26,037
Other 22,475 30,286
-------------------------------------------------------------------------
Other assets $ 135,176 $ 150,851
-------------------------------------------------------------------------
(1) Includes restricted securities, not available for operations, of $15.4
million and $15.6 million at March 30, 2003 and December 29, 2002,
respectively, related to Cypress's key employee deferred compensation
plan.
Other Current Liabilities
-------------------------------------------------------------------------
March 30, December 29,
(In thousands) 2003 2002
-------------------------------------------------------------------------
Customer advances $ 32,111 $ 3,950
Interest payable 3,644 8,216
Deferred employee compensation 22,124 22,240
Accrued royalties 4,500 4,098
Short-term debt 11,491 4,212
Accrued rep commissions 4,038 4,291
Other 35,293 37,105
------------------------------------------------------------------------
Other current liabilities $ 113,201 $ 84,112
------------------------------------------------------------------------
Note 6 - Commitments and Contingencies
As more fully discussed in Note 1, Cypress applies the disclosure provisions of
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 30, 2003, Cypress has accrued its estimate of liability
incurred under these indemnification arrangements and guarantees, as applicable.
Cypress maintains self insurance for certain liabilities of its officers and
directors. The following is a description of significant arrangements in 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 its business, financial condition or results of
operations. Cypress believes that if it were to incur a loss in any of these
matters, such loss should not have a material effect on its business, financial
condition, cash flows or results of operations.
12
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. Warranty costs have historically been
insignificant.
SunPower Corporation
See Note 2 for discussion of Cypress's funding obligations to SunPower.
Synthetic Lease Transactions
Cypress has entered into three synthetic operating lease agreements for
manufacturing and office facilities. Each of these leases requires Cypress to
purchase the property or to arrange for the property to be acquired by a third
party at lease expiration. If Cypress had exercised its right to purchase all
the properties subject to these leases at March 30, 2003, Cypress would have
been required to make a payment and record assets totaling $61.5 million.
Cypress's management believes that proceeds from the sale of properties under
operating leases would exceed the payment obligation and therefore no liability
to Cypress currently exists. Cypress is required to maintain restricted cash or
investments to serve as collateral for these leases. As of March 30, 2003, the
amount of restricted cash recorded was $62.2 million, which was classified as a
non-current asset on the consolidated balance sheet.
At December 29, 2002 Cypress was in violation of one covenant related to one
synthetic lease agreement for buildings located on the main campus in San Jose,
California. Retroactive to December 2002, Cypress received waivers from this
lessor. Furthermore, the lessor has waived compliance by Cypress with all
covenants through the balance of the lease period. In consideration, Cypress has
agreed to an accelerated lease maturity date of July 15, 2003 for both synthetic
lease agreements with that lessor. The end-of-lease options described above will
apply. Cypress is currently negotiating with a new lessor to step in and
purchase these buildings during the second quarter of fiscal 2003. If Cypress is
able to complete this transaction prior to the new lease maturity date, the
buildings will remain off the balance sheet and be accounted for as operating
leases. However, if this transaction cannot be completed, Cypress will purchase
the buildings for the outstanding lease balance, utilizing the applicable
restricted cash, which is 100% of this obligation.
Legal Matters
In January 2002, Cypress was contacted by Syndia Corporation ("Syndia"), which
alleged that Cypress infringed two patents on which Jerome Lemelson was named as
the inventor (see the Lemelson Partnership discussion below). These two patents
are related to three of the non-stayed patents in the Lemelson Partnership
litigation in Arizona. In Q1 2003, Cypress was informed that the United States
Patent and Trademark Office has commenced reexamination of these two patents.
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, in which the plaintiffs allege that the
patents are invalid, unenforceable and not infringed. The Nevada trial
proceedings concluded in January 2003, but a final decision will not be rendered
until after post-trial briefing has concluded in May 2003. In October 2001, the
Lemelson Partnership amended its Arizona complaint to add allegations that two
more patents were infringed. Thus, there are currently four patents that are not
stayed in this litigation. A bench trial (i.e. a trial with no jury) on only the
defenses relating to Lemelson's alleged inequitable conduct in obtaining the
four non-stayed patents was held on February 4, 2003. The parties submitted
post-trial briefs on April 3, 2003. The judge has ordered the
13
Plaintiff to submit a response to certain issues raised in the post-trial briefs
of Cypress and Taiwan Semiconductor Manufacturing Corporation due on May 9,
2003. Once the response is submitted, the judge will consider the papers, may
ask for further briefing and/or an oral hearing, and then make his ruling. A
ruling is not expected until summer 2003. Cypress has reviewed and investigated
the allegations in both the 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 has
reviewed and investigated the 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
affect 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 7 - Debt and Equity Transactions
At March 30, 2003, Cypress had outstanding a series of equity options on Cypress
common stock with an initial cost of $26.0 million, which is classified in
stockholders' equity. The contracts require physical settlement and expire in
June 2003. Upon expiration of the options, if Cypress's stock price is above the
threshold price of $20 per share, Cypress will receive a settlement value
totaling $28.9 million. If Cypress's stock price is below the threshold price of
$20 per share, Cypress will receive 1.4 million shares of its common stock.
Alternatively, the contract may be renewed and extended. The transaction is
recorded in stockholders' equity in the accompanying consolidated balance sheet.
Cypress recorded provisions for deferred stock compensation related to
acquisitions and certain other grants of approximately $5.0 million in Q1 2002
related to the issuance of stock options below fair value in connection with the
Silicon Packets acquisition. There was no provision in Q1 2003. This amount is
being amortized over the vesting period of the individual stock options or
restricted stock, generally a period of four to five years. Deferred stock
compensation expense, included in selling, general and administrative expense
and research and development expense in the statements of operations, totaled
approximately $5.0 million in Q1 2003 and $10.0 million in Q1 2002.
Convertible Subordinated Notes
Cypress's Board of Directors authorized the repurchase from time to time of up
to $143.8 million of 3.75% Convertible Subordinated Notes ("3.75% Notes"). Since
November 2001, Cypress has repurchased $101.6 million in principal of the 3.75%
notes for $86.7 million. The authorization has been amended to limit the timing
and the actual number of shares or principal amount to be repurchased to an
additional $15.0 million. The timing and repurchase amount are at the discretion
of management and are contingent on numerous factors including cash flow.
Management, at its discretion, may purchase either the 3.75% Notes or its 4.00%
Convertible Subordinated Notes. There were no repurchases during Q1 2003.
Collateralized Debt Instruments
During Q1 2003 Cypress entered into long-term loan agreements with two lenders
with an aggregate principal amount equal to $27.7 million. These agreements are
collateralized by specific equipment located at Cypress's U.S. manufacturing
facilities. Principal amounts are to be repaid in monthly installments inclusive
of accrued interest, over a 3 to 4 year period. The applicable interest rates
are variable based on changes to LIBOR rates. Both loans are subject to
financial covenants. Cypress was in compliance with these covenants as of March
30, 2003.
14
Note 8 - Comprehensive Income and Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, net of tax, were as
follows:
March 30, December 29,
(In thousands) 2003 2002
-------------- --------------
Accumulated net unrealized gain (loss)
on available for sale investments $ (258) $1,033
Accumulated net unrealized gain on derivatives 1,106 1,343
-----------------------------------------------------------------------------------
Total accumulated other comprehensive income $ 848 $2,376
-----------------------------------------------------------------------------------
The components of comprehensive income (loss) for the three months ended, net of
tax, were as follows:
March 30, March 29,
(In thousands) 2003 2002
-------------- -------------
Net loss $(33,323) $(39,791)
Unrealized gain (loss) on available
for sale securities (1,291) (1,291)
Unrealized gain (loss) on derivatives (237) --
--------------------------------------------------------------------------
Comprehensive loss $(34,851) $(41,082)
--------------------------------------------------------------------------
Note 9 - Foreign Currency Derivatives
Cypress purchases capital equipment 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 30, 2003,
the effective portion of unrealized gains on cash flow hedges recorded in other
comprehensive income was $1.1 million net of tax. Ineffective hedges are
recorded in other income and (expense), net and were $(0.3) million for the
three months ended March 30, 2003 and none for the three months ended March 31,
2002. As of March 30, 2003, such forward contracts for Euro exposures had an
aggregate notional value of $14.6 million.
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 30, 2003, Cypress held forward contracts with an
aggregate notional value of $3.1 million to hedge the risks associated with yen
foreign currency denominated assets and liabilities. Aggregate net foreign
exchange gains (losses) on these hedging transactions and foreign currency
remeasurement gains (losses) were zero for Q1 2003 compared to $(1.3) million
for the comparable fiscal 2002 period. The amounts are included in other income
and (expense), net in the condensed consolidated statements of operations.
Note 10 - Income Taxes
Cypress's effective rates of income tax expense or (benefit) for Q1 2003 and Q1
2002 were 4.7% and (2.9%), respectively. A tax provision of $1.5 million was
recorded during Q1 2003 compared to a tax benefit of $1.2 million during Q1
2002. The Q1 2003 tax provision was attributable to income earned in certain
countries that is not offset by current year net operating losses in other
countries. 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.
15
Note 11 - 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 allowed for loans to
employees to purchase shares of Cypress common stock on the open market.
Employees of Cypress and its subsidiaries, including executive officers but
excluding the CEO and the Board of Directors of Cypress, were allowed to
participate in the Plan. Each loan was evidenced by a full recourse, promissory
note executed by the employee in favor of Cypress and was secured by a pledge of
the shares of Cypress's common stock purchased with the proceeds of the loan. 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 $1.3 million in Q1 2003 and $1.0 million in Q1 2002 to reflect the
difference between the rate charged and an estimated market rate for each loan
outstanding. In addition, Cypress is recording interest income on the
outstanding loan balances. Accrued interest outstanding at March 30, 2003
totaled $6.9 million. 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. As of March 30, 2003, loans (including accrued interest)
outstanding under the Plan net of loss reserve were $91.0 million, as compared
to $90.6 million at December 29, 2002. This balance is classified on the
consolidated balance sheet within other current assets. Cypress has established
a loss reserve which represents an amount for estimated uncollectible balances,
with changes in the loss reserve recognized Selling, general and administrative.
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 30, 2003 and December 29, 2002, the loss reserve
was $16.1 million and $16.0 million, respectively. However, Cypress is willing
to pursue every available avenue, including those covered under the Uniform
Commercial Code, to recover these loans by pursuing employees' personal assets
should the employees not repay these loans.
Note 12 - Segment Reporting
Historically, Cypress has disclosed two reportable business segments, Memory
Products and Non-memory Products. The Memory Products business segment includes
Static Random Access Memories ("SRAMs") and is characterized by high unit sales
volume and generally subject to greater pricing pressures. The Non-memory
Products business segment includes data communication devices, programmable
logic products, specialty memories, timing and interface products.
In October 2000, Cypress announced the formation of new divisions in order to
enhance its focus on communications market segments. The Wide Area Networks
("WAN") and Storage Area Networks ("SAN") divisions help to provide product
definition in the networking arena. Similarly, the Wireless Terminals ("WIT")
and Wireless Infrastructure ("WIN") divisions help focus Cypress's efforts in
the wireless space. The Computation and Consumer market segment includes
products used in computers, peripherals and other applications. Cypress
periodically reviews its customer and product portfolio and makes corresponding
changes to its segment data alignment as appropriate. Based on that review,
during Q1 2003, Cypress began disclosing its subsidiaries, Silicon Light
Machines, Silicon Magnetic Systems, Cypress Microsystems, and SunPower
Corporation, as a separate segment called Cypress Subsidiaries. The prior year
market segment data has been restated to conform with current presentation. The
market focus is expected to provide systems knowledge, cross-product-line
product portfolio definition, early engagement with strategic accounts and added
management of research and development ("R&D") spending.
Cypress evaluates the performance of its segments based on profit or loss from
operations before income taxes, excluding acquisition-related 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
16
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 30, 2003 and March 31, 2002. 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 30, March 31,
(In thousands) 2003 2002
---------------------------------------------------------------------
Memory $ 67,810 $ 73,037
Non-memory 113,157 120,118
---------------------------------------------------------------------
Total consolidated revenues $ 180,967 $ 193,155
---------------------------------------------------------------------
Business Segment Income (Loss) before Provision for Income Taxes
Three months ended
--------------------------------------------------------------------
March 30, March 31,
(In thousands) 2003 2002
--------------------------------------------------------------------
Memory $ (7,254) $ (8,699)
Non-memory (9,887) (25,277)
Restructuring and acquisition costs (12,844) (13,287)
Interest income 3,193 8,524
Interest expense (4,676) (4,945)
Other income and (expense), net (359) 2,704
--------------------------------------------------------------------
Income (loss) before provision for
income taxes $(31,827) $(40,980)
--------------------------------------------------------------------
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 30, March 31,
(In thousands) 2003 2002
-------------------------------------------------------------------------
Wide area networks/storage area networks $ 55,617 $ 61,012
Wireless terminals/wireless infrastructure 57,491 59,126
Computation and consumer 60,365 69,168
Cypress subsidiaries 7,494 3,849
-------------------------------------------------------------------------
Total consolidated revenues $180,967 $193,155
-------------------------------------------------------------------------
17
Market Segment Income (Loss) Before Provision for Income Taxes
Three months ended
-------------------------------------------------------------------------------
March 30, March 31,
(In thousands) 2003 2002
-------------------------------------------------------------------------------
Wide area networks/storage area networks $(10,710) $(16,839)
Wireless terminals/wireless infrastructure (2,146) (10,259)
Computation and consumer 2,430 (50)
Cypress subsidiaries (6,715) (6,828)
Restructuring and acquisition costs (12,844) (13,287)
Interest income 3,193 8,524
Interest expense (4,676) (4,945)
Other income and (expense), net (359) 2,704
-------------------------------------------------------------------------------
Income (loss) before provision for income taxes $(31,827) $(40,980)
===============================================================================
Note 13 - 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.
For the three months ended March 30, 2003 and March 31, 2002 common stock
issuable upon the assumed conversion of convertible subordinated notes of 9.1
million and 9.3 million shares, respectively, were excluded from the calculation
of diluted net loss per share as the effect would be anti-dilutive. In addition,
at March 30, 2003 and March 31, 2002, options to purchase 39.4 million shares of
common stock with a weighted-average exercise price of $13.82, and 37.8 million
shares of common stock with a weighted-average exercise price of $15.25,
respectively, were excluded from the calculation of diluted net loss per share,
as the effect would be anti-dilutive.
18
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 30, 2003
The discussion in this report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that involve risks and uncertainties, including,
but not limited to, statements as to future operating results and business
plans, our prospects and the prospects of the semiconductor industry generally,
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.
Results of Operations
Business Segment Net Revenues
Revenues for the fiscal quarter ended March 30, 2003 ("Q1 2003") were $181.0
million, a decrease of $12.2 million or 6.3% compared to revenues for the fiscal
quarter ended March 31, 2002 ("Q1 2002") of $193.2 million. We derive our
revenues from the sale of Memory products and Non-memory products, which are
targeted primarily to the data communications, wireless, computation and
consumer markets. Revenues in both markets were adversely affected in Q1 2003
and Q1 2002 by the economic slowdown in both the semiconductor market and the
global economy in general.
Three months ended
--------------------------------------------------------------------------------
(In thousands) March 30, March 31, %
2003 2002 Change
--------------------------------------------------------------------------------
Memory $ 67,810 $ 73,037 -7.2%
Non-memory 113,157 120,118 -5.8%
--------------------------------------------------------------------------------
Total consolidated revenues $ 180,967 $ 193,155 -6.3%
--------------------------------------------------------------------------------
Revenues from the sale of Memory products for Q1 2003 decreased $5.2 million or
7.2% versus revenues from the sale of these products for Q1 2002. Memory product
units decreased 3.8% in Q1 2003 compared to Q1 2002 with all of the decrease
coming from our Fast Asynchronous Static Random Access Memory ("SRAM") family of
products. In Q1 2003 average selling prices ("ASPs") decreased although the
average density (Mbits/unit) of SRAM products sold continued to increase from
both Q4 2002 and Q1 2002. We use average ASP/Mbit as an indication of the
magnitude of price change for Memory products. This metric reflects changes
19
in product mix and density as well as market price. ASP/Mbit declined by 37.9%
in Q1 2003 compared to Q1 2002, while total megabits sold increased by 33.0% in
the same period.
Revenues from the sale of Non-memory products for Q1 2003 decreased $7.0 million
or 5.8% versus revenues from the sale of these products for Q1 2002. Non-memory
product unit sales remained flat compared to Q1 2002 reflecting an increase in
unit sales from our Universal Serial Bus ("USB") family of products, Neuron, and
adoption of our multi-PORT and network search engine ("NSEs") products offset by
reduced demand for our programmable-logic devices ("PLDs") and Programmable
Clocks.
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.
Cost of Revenues/Gross Margin
Costs of revenues were $102.6 million and $118.3 million in Q1 2003 and Q1 2002
respectively. This equates to gross margins of 43.3% in Q1 2003 and 38.8% in Q1
2002.
The gross margin of Memory products of 24.7% in Q1 2003 increased from 21.3% in
Q1 2002. The gross margin of Non-memory products of 54.5% in Q1 2003 increased
from 49.4% in Q1 2002.
For Memory Products, revenue from the sale of products manufactured on our 0.15
micron technology increased from 6% of revenue in Q1 2002 to 49% in Q1 2003.
Gross margins increased as cost reduction programs and the shift to more
advanced technologies more than offset the decline in ASPs.
The Non-memory products gross margin also improved due to a shift to higher
margin multi-Port and physical layer ("PHY") product sales in Q1 2003 as
compared to Q1 2002.
In Q1 2003 compared to Q1 2002, although our ASPs declined significantly, we
were able to offset this effect on our gross margin by implementing cost cutting
measures including reducing manufacturing capacity and related headcount. In
addition, we continued to reduce manufacturing cycle times, reduce die size,
improve labor productivity, improve efficient use of capital resources, improve
defect densities, improve yields and ultimately lower manufacturing costs.
During Q1 2003, our gross margin benefited as a result of the sale of the Q3
2001 previously reserved inventory in an amount representing the reserves
previously recognized. The incremental gross profit benefit of 2.0%, recognized
in Q1 2003, is equivalent to the original cost basis of the inventory sold.
In January 2002, the Department of Commerce revoked a 1998 antidumping order
that had been imposed on SRAMs fabricated in Taiwan and imported into the United
States. The United States Customs Service was ordered to refund, with interest,
all duties deposited under the 1998 antidumping order. Between 1998 and 2001, we
charged $10.3 million to cost of revenues for such duties. During Q1 2002, we
received $11.8 million in refunds, of which $9.9 million was recorded as an
offset to cost of revenues for Memory products and $1.9 million was recorded in
interest income. This benefit to our gross margin was substantially offset by
certain other items, including a change in estimate for deferred income on sales
to distributors.
Research and Development
Three months ended
------------------------------------------------------------------------
March 30, March 31, %
(In thousands) 2003 2002 Change
------------------------------------------------------------------------
Revenues $180,967 $193,155 -6.3%
Research and development 64,406 73,482 -12.4%
R&D as a percent of revenues 35.6% 38.0%
Research and development ("R&D") expenditures in Q1 2003 decreased from the same
quarter in fiscal 2002 due to closing down of design centers in Scotts Valley,
Boston, Georgia and Minnesota and also design and technology related headcount
reductions in San Jose, Texas, Colorado, and the United Kingdom. We believe that
our future success will depend on our ability to develop and introduce new
products that will compete
20
effectively on the basis of price, performance, and ability to address customer
needs. Our process technology research focuses primarily on the continuous
migration to smaller geometries. During Q1 2003 we continued ramping our latest
0.13-micron technology in manufacturing. We are simultaneously transferring our
90 nanometer technology from our eight-inch R&D facility in San Jose, California
("Fab 1") to our eight-inch manufacturing facility in Minnesota ("Fab 4").
During Q1 2003, we recorded $6.0 million in non-cash deferred stock compensation
and cash compensation related to milestone/revenue-based compensation from
acquisitions as compared to $11.9 million in Q1 2002. The decrease in
acquisition related compensation charges is attributed to the reduction in
deferred compensation amortization and milestones not being achieved in Q1 2003.
Selling, General and Administrative
Three months ended
--------------------------------------------------------------------------
March 30, March 31, %
(In thousands) 2003 2002 Change
--------------------------------------------------------------------------
Revenues $180,967 $193,155 -6.3%
Selling, general and administrative 31,129 35,383 -12.0%
SG&A as a percent of revenues 17.2% 18.3%
Selling, general and administrative ("SG&A") expenses in Q1 2003 decreased from
Q1 2002 due to reduced labor charges, decreased commission and travel expenses
and decreases in general spending levels. The reduction is the result of both
the effects of the restructuring efforts in fiscal 2003 and fiscal 2002 and the
decline in the revenue.
During Q1 2003, we recorded $0.1 million in non-cash deferred compensation and
cash compensation related to milestone/revenue-based compensation from
acquisitions compared to $2.0 million in Q1 2002. Acquisition-related
compensation charges are primarily attributed to the Silicon Light Machines,
International Microcircuits, Inc. and ScanLogic Corporation acquisitions. The
reduction is generally due to fewer personnel eligible for deferred
compensation.
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 the operations, resulting in significant restructuring charges,
may become necessary if an industry downturn persists. We currently have 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"). We recorded initial
restructuring charges in fiscal 2002 and fiscal 2001 based on assumptions that
we 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, we took additional
actions and made appropriate adjustments to both the Fiscal 2001 Restructuring
Plan for property, plant and equipment, leased facilities and personnel costs
and the Fiscal 2002 Restructuring Plan for personnel costs.
Fiscal 2002 Restructuring Plan:
On October 17, 2002, we announced a restructuring plan that included the
resizing of our manufacturing facilities and the reduction of operating
expenses, including research and development and selling, general and
administrative. In the fourth quarter of fiscal 2002, we recorded a charge of
$45.4 million which consisted of $36.0 million related to equipment removed from
service and held for sale, $8.2 million for workforce reductions for
approximately 380 employees, including severance and benefits costs, and $1.2
million for leased facilities. To date, we have sold equipment with a net book
value of $3.3 million. The proceeds from the sales of the assets approximated
their carrying values. The majority of the workforce reduction affected the
United States, with some reductions in Europe and the Philippines, and sales
offices that were closed in Europe and the United States. To date, 365 of these
employees had left Cypress as part of the restructuring plan. The remaining
employees are expected to leave by June 2003.
A restructuring charge of $3.4 million was recorded in Q1 2003 for additional
opportunities identified as part of the personnel portion of the Fiscal 2002
Restructuring Plan. The charge relates to the severance and related
21
employee benefit costs for the termination of approximately 150 additional
employees, the majority of whom are located in the United States at our
facilities in San Jose, Texas and Minnesota. As of the end of Q1 2003, 143 of
these employees had left Cypress.
The following table summarizes the activity associated with the restructuring
liabilities and asset write-downs since the inception of the restructuring plan
in the fourth quarter of fiscal 2002:
Property, plant Leased
(In thousands) & equipment Facilities Personnel Total
----------------------------------------------------------------------------
Q4 02 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 03 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
============================================================================
Fiscal 2001 Restructuring Plan:
On July 16, 2001, we announced a restructuring plan that involved resizing our
manufacturing facilities, reducing our workforce and combining facilities. The
restructuring was precipitated by the worldwide economic slowdown, particularly
in the business areas in which we operate. The intended effect of the plan was
to size the manufacturing operations and facilities to meet future demand and
reduce expenses in all operations areas. During the third quarter of fiscal
2001, we recorded restructuring charges of $132.1 million related to property,
plant and equipment, leased facilities and personnel.
In connection with the July 16, 2001 announcement, in the third quarter of
fiscal 2001, we removed from service and held for sale equipment with a net book
value of $116.9 million, resulting in a charge of $113.4 million. we have
actively marketed the equipment. Through March 30, 2003, we have sold equipment
with a net book value of $54.4 million. The proceeds from the sales of the
assets generally approximated their carrying values. In the second and third
quarters of fiscal 2002, we placed back into service certain of these assets
previously recorded as held for sale. The assets were needed to meet increased
production requirements resulting from a substantial increase in unit demand
versus our initial assumptions at the time of the Q3 2001 restructuring. When
the assets were put back into service, they were written up to their prior cost
basis (an adjustment of $13.2 million and $9.6 million in Q2 2002 and Q3 2002,
respectively), reduced for depreciation expense that would have been recorded
during the period the asset was removed from service (an adjustment of $2.9
million and $2.6 million in Q2 2002 and Q3 2002, respectively), as required by
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The net effect of the asset adjustment was a credit to the restructuring line on
the Statement of Operations of $10.3 million and $7.0 million in Q2 2002 and Q3
2002, respectively. In Q1 2002, we also sold and then leased back certain other
pieces of equipment classified as held for sale. The proceeds from the sales of
the assets approximated their net carrying values. We continue to actively
market the remaining assets held for sale.
In Q1 2002, we recorded an additional charge of $1.6 million for additional cost
reductions identified as part of the personnel portion of the Q3 2001
restructuring plan. The charge related to severance and related employee benefit
costs for the termination of employees, the majority of whom were located in the
Philippines facility.
In the third quarter of fiscal 2002, as a result of the continued business
slowdown, we further restructured our operations and recorded net restructuring
costs of $2.4 million, which comprised a charge of $9.4 million offset by a $7.0
million reversal for previously written-down equipment put back into service
discussed above. The charge of $9.4 million consisted of $3.3 million for work
force reductions, and included severance, benefit costs and stock compensation,
$3.4 million for capital equipment removed from service and held for sale and
$2.7 million for the exiting of facility leases.
In Q4 2002, we recorded a credit of $0.7 million related to the revised estimate
of personnel costs. In connection with the 2001 Restructuring Plan we have
accrued costs related to an estimated 890 employees to be terminated. At the end
of Q1 2003, approximately 884 employees have left the company.
22
The following table summarizes the activity associated with the restructuring
liabilities and asset write-downs since the inception of the restructuring plan
in the third quarter of fiscal 2001:
---------------------------------------------------------------------------------------------
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)
Other adjustments (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)
Other adjustments (9,545) -- -- (9,545)
---------------------------------------------------------------------------------------------
Balance at September 29, 2002 66,884 5,247 2,134 74,265
Provision -- -- (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
Provision -- -- -- --
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
---------------------------------------------------------------------------------------------
Acquisition Costs
Acquisition costs consist primarily of the amortization of acquired intangible
assets and expensed in-process research and development charges. Amortization of
intangible assets was $9.5 million and $10.6 million in Q1 2003 and Q1 2002,
respectively. We expensed in-process research and development of $0.5 million in
Q1 2002 related to the acquisition of Sahasra Networks.
Interest Income, Interest Expense and Other Income and (Expense), Net
--------------------------------------------------------------------------------
March 31, March 31, %
(In thousands) 2003 2002 Change
--------------------------------------------------------------------------------
Interest income $ 3,193 $ 8,524 -62.5%
Interest expense (4,676) (4,945) -5.4%
Other income and (expense), net (359) 2,704 -113.3%
--------------------------------------------------------------------------------
Interest and other income and (expense), net $(1,842) $ 6,283 -129.3%
--------------------------------------------------------------------------------
Interest income, interest expense and other income and (expense), net, was
($1.8) million in Q1 2003 compared to $6.3 million in Q1 2002. The decline was
predominantly due to lower interest income. Other income and (expense), net
includes amortization of bond issuance costs, foreign exchange gains and losses,
other non-operating items and, in Q1 2002, gain on the repurchase of our 3.75%
Convertible Subordinated Notes ("3.75% Notes").
Interest income decreased $5.3 million or 62.5% for Q1 2003 versus Q1 2002 due
to lower average cash and investment balances and decreased yields in Q1 2003.
Our cash and investments balance (which includes cash, cash equivalents,
short-term investments, long-term investments, restricted securities and
restricted cash) declined $117.4 million from $354.1 million as of March 31,
2002 to $236.7 million as of March 30, 2003. Interest income in Q1 2002 included
interest income related to duty refunds from the United States Customs Service.
Interest expense was $4.7 million for Q1 2003, compared to $4.9 million for Q1
2002. Interest expense is primarily associated with our 4.0% Convertible
Subordinated Notes ("4.0% Notes"), issued in January 2000,
23
due in 2005, and the 3.75% Notes, issued in June 2000, due in 2005. The decrease
in interest expense in Q1 2003 compared to Q1 2002 is primarily associated with
the repurchase of $12.8 million in principal of the 3.75% Notes that occurred in
April 2002.
Other income and (expense), net was ($0.4) million in Q1 2003, a decline of $3.1
million from the $2.7 million recorded in 2002. In Q1 2003, Other income and
(expense), net included bond amortization costs of $0.7 million, foreign
exchange losses related to derivatives of $0.3 million, SunPower minority
interest in SunPower net loss of $1.0 million and other miscellaneous charges of
$0.4 million. The comparable fiscal 2002 period included a gain on the
repurchase of bonds of $4.7 million, foreign exchange losses of $1.4 million,
and bond amortization costs of $0.7 million.
Income Taxes
Our effective rates of income tax expense or (benefit) for Q1 2003 and Q1 2002
were 4.7% and (2.9%), respectively. A tax provision of $1.5 million was recorded
during Q1 2003 compared to a tax benefit of $1.2 million during Q1 2002. The Q1
2003 tax provision was attributable to income earned in certain countries that
is not offset by current year net operating losses in other countries. 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.
Liquidity and Capital Resources
During the quarter ending March 30, 2003 our cash and cash equivalents increased
by $33.5 million compared to a decrease of $30.1 in the same time period last
year.
--------------------------------------------------------------------------
March 30, March 31,
(In thousands) 2003 2002
--------------------------------------------------------------------------
Cash, cash equivalents and short-tem investments $150,252 $ 155,249
Restricted cash 62,232 76,739
Long-term marketable securities (1) 24,185 122,078
Working capital 305,031 332,175
Long-term debt and capital lease obligations
(excluding current portion) 490,098 488,785
Net cash flow generated from (used for)
operating activities 15,220 (19,051)
--------------------------------------------------------------------------
(1) Includes restricted securities, not available for operations, of $15.4
million and $15.6 million at March 30, 2003 and December 29, 2002,
respectively, related to Cypress's key employee deferred compensation
plan.
Key Components of Cash Flow
Cash generated from operations was $15.2 million in Q1 2003 compared to a use of
cash of $19.1 million in Q1 2002. Most of this improvement was driven by changes
in working capital.
Net cash flow from investing activities was a use of cash of $6.1 million in Q1
2003 compared to a $11.5 million source of cash in Q1 2002. This was driven by
$12.0 million of lower proceeds from net investment transactions and the $13.1
million of lower proceeds from repayment of employee loans. This was offset by a
decrease of capital expenditures of $8.7 million.
Net cash from financing activities was $24.4 million in the current quarter
compared to ($22.6) in the same quarter of last year. During Q1 2003 we obtained
$24.7 million (net) of long-term secured equipment financing due over a 3 to 4
year period. During Q1 2002 we purchased $30.7 million of our convertible debt.
Liquidity
Based on our current plan, we expect to generate positive cash flow from
operations in the fiscal year ending December 28, 2003. Our expected significant
investment and financing cash outlays for the fiscal year ending December 28,
2003 include capital expenditures for investment in our product development and
technology initiatives and investments in SunPower. 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. However, the timing and actual number of
shares or principal amount to be repurchased is limited to $15.0 million, is at
the discretion of management and is contingent on numerous factors including
cash flow. We have $468.9 million of aggregate principal amount in
24
subordinated notes that are due in February 2005 and July 2005 in the amount of
$283.0 million and $185.9 million, respectively. The Subordinated Notes are
subject to compliance with certain covenants that do not contain financial
ratios. As of March 30, 2003, 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 three synthetic operating lease agreements for
manufacturing and office facilities. Each of these leases requires us to
purchase the property or to arrange for the property to be acquired by a third
party at lease expiration. If we had exercised our right to purchase all the
properties subject to these leases at March 30, 2003, we would have been
required to make a payment and record assets totaling $61.5 million. We are
required to maintain restricted cash or investments to serve as collateral for
these leases. As of March 30, 2003, the amount of restricted cash recorded was
$62.2 million, which was classified as a non-current asset on the consolidated
balance sheet.
At December 29, 2002 we were in violation of one covenant related to one
synthetic lease agreement for buildings located on the main campus in San Jose,
California. During Q1 2003, we received waivers from this lessor. Furthermore,
the lessor has waived compliance with all covenants through the balance of the
lease period. In consideration, we agreed to an accelerated lease maturity date
of July 15, 2003 for two synthetic lease agreements (San Jose main campus). The
end-of-lease options described above will apply. We are currently negotiating
with a new lessor to step in and purchase these buildings during the second
quarter of fiscal 2003. If we are able to complete this transaction prior to the
new lease maturity date, the buildings will remain off the balance sheet and be
accounted for as operating leases. However, if this transaction can not be
completed, we will purchase the buildings for the outstanding lease balance,
utilizing the applicable restricted cash that is 100% of this obligation.
In June 1997, we borrowed 700 million yen at 2.1% from Sumitomo Bank Japan. The
outstanding principal, including accrued interest, amounts to $3.9 million at
March 30, 2003 and is due June 30, 2003.
In May 2002, we invested $8.7 million in convertible preferred stock of
privately held SunPower Corporation ("SunPower"), a manufacturer of
ultra-high-efficiency silicon solar cells. We currently own approximately 57% of
SunPower on an as converted basis. We own a warrant to purchase an additional
$16.0 million in convertible preferred stock in SunPower. Since we did not
exercise the warrant by April 1, 2003, we are obligated to fund SunPower up to
$5.6 million through May 2004 at a rate of up to $400 thousand per month.
Subject to certain product qualification tests, we expect to exercise the
warrant in the second quarter of fiscal 2003. In Q1 2003, we loaned SunPower
$2.5 million and in April 2003 we loaned an additional $1.9 million. These
advances will be applied to the exercise of the warrants. SunPower will repay
this amount from either the $16.0 million in proceeds received from the
preferred stock or the additional financing discussed below. In addition,
Cypress intends to secure financing for a loan of up to $30.0 million on behalf
of SunPower in fiscal 2003. During Q1 2003 we obtained effective control and now
include SunPower in our consolidated financial results.
As disclosed in Note 7, we entered into long-term loan agreements with two
lenders with an aggregate principal equal to $24.7 million in Q1 2003. These
agreements are collateralized by 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 30, 2003.
We currently plan for approximately $68 million in expenditures on equipment in
fiscal 2003 and anticipate significant continuing capital expenditures in
subsequent years.
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 $120.7 million in cash and cash
equivalents that we currently have for short-term requirements, we have
approximately $38.3 million in marketable debt securities that are available for
future operating, financing and investing activities, for a total liquid cash
and investment position of $159.0 million. We have an additional $62.2 million
of restricted cash for off balance sheet financing and $15.4 million of
restricted securities not available for operations (which securities are set
aside in a trust for a key employee deferred compensation plan) for a total
cash, investments, restricted cash and
25
restricted securities position of $236.6 million. As of March 30, 2003 we have
an unutilized shelf registration balance of $112.5 million in convertible
subordinated securities from the $400.0 million shelf registration statement
filed 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. 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.
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
This interpretation expands the disclosure requirements of guarantee obligations
and requires the guarantor to recognize a liability for the fair value of the
obligation assumed under a guarantee. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument
that is related to an asset, liability, or equity security of the guaranteed
party. Other guarantees are subject to the disclosure requirements of FIN 45 but
not to the recognition provisions and include, among others, a guarantee
accounted for as a derivative instrument under Statement of Financial Accounting
Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities", a parent's guarantee of debt owed to a third party by its
subsidiary or vice versa, and a guarantee which is based on performance. The
disclosure requirements of FIN 45 are effective as of December 31, 2002, and
require information as to the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. Significant guarantees that we have entered are disclosed in Note 6
Commitments and Contingencies.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We are evaluating the effect of
FIN 46 on our consolidated financial statements.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of "underlying" and the characteristics of a derivative that contains
financing components. The amendments set forth in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. We will apply the provisions of
SFAS 149 prospectively to transactions entered into and or modified after June
30, 2003.
26
Risk Factors
The discussion in this report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that involve risks and uncertainties, including,
but not limited to, statements as to future operating results and business
plans, our prospects and the prospects of the semiconductor industry generally,
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.
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 have resulted in a
downturn in the U.S. economy generally and in the semiconductor industry in
particular. As a result of the downturn, our volumes initially declined and were
followed by significant reductions in our average selling prices. We expect
continued pressure on average selling prices in the future. As a consequence of
the continued economic downturn in fiscal 2002, during the fourth quarter of
fiscal 2002 we announced a restructuring plan that resized our manufacturing
facilities, and reduced our workforce and combined facilities. In Q1 2003 we
took an additional charge for personnel related to the Fiscal 2002 Restructuring
Plan. In fiscal 2002, we recorded a charge for the impairment of goodwill and
intangibles related to Silicon Light Machines as well as the impairment of
certain other investments in development stage companies. If the adverse
economic conditions continue or 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 current significant downturn, we
restructured our manufacturing operations and administrative areas in Q4 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:
o the intense competitive pricing pressure to which our products are
subject, which can lead to rapid and unexpected declines in average
selling prices;
o the complexity of our manufacturing processes and the sensitivity of our
production costs to declines in manufacturing yields, which make yield
problems both possible and costly when they occur; and
27
o the need for constant, rapid, new product introductions which present an
ongoing design and manufacturing challenge, which can be significantly
impacted by even relatively minor errors, and which may result in products
never achieving expected market demand.
As a result of these or other factors, we could fail to achieve our expectations
as to future revenues, gross profit and income from operations. Any downward
fluctuation or failure to meet expectations will likely adversely affect the
value of your investment in Cypress.
In addition, because we recognize revenues from sales to 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:
o networking equipment;
o wireless telecommunications equipment;
o computers and computer-related peripherals; and
o 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 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.
28
We are now and may again become involved in litigation relating to alleged
infringement by us of others' patents or other intellectual property rights.
This type of litigation is frequently expensive to both the winning party and
the losing party and could take up significant amounts of management's time and
attention. In addition, if we lose such a lawsuit, a court could require us to
pay substantial damages and/or royalties or prohibit us from using essential
technologies. For these and other reasons, this type of litigation could
seriously harm our business, financial condition and results of operations.
Also, although in certain instances we may seek to obtain a license under a
third party's intellectual property rights in order to bring an end to certain
claims or actions asserted against us, we may not be able to obtain such a
license on reasonable terms or at all.
For a variety of reasons, we have entered into technology license agreements
with third parties that give those parties the right to use patents and other
technology developed by us, and that give us the right to use patents and other
technology developed by them. We anticipate that we will continue to enter into
these kinds of licensing arrangements in the future. It is possible however,
that licenses we want will not be available to us on commercially reasonable
terms 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 be able to prevent competitors from
copying our innovations. We therefore intend to continue to seek patent, trade
secret and mask work protection for our semiconductor manufacturing
technologies. The process of seeking patent protection can be long and
expensive, and we cannot be certain that any currently pending or future
applications will actually result in issued patents, or that, even if patents
are issued, they will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to us. Furthermore, others may develop
technologies that are similar or superior to our technology or design around the
patents we own.
We also rely on trade secret protection for our technology, in part through
confidentiality agreements with our employees, consultants and third parties.
However, these parties may breach these agreements, and we may not have adequate
remedies for any breach. Also, others may come to know about or determine our
trade secrets through a variety of methods. In addition, the laws of certain
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 an important source of revenue for us.
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
ours, or market demand for our new products does not exist as anticipated, our
business, financial condition and results of operations could be seriously
harmed.
For 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 assure that our business will generate
sufficient cash flows from operations to fund our cash requirements. If we are
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
29
or other purposes, could make us more vulnerable to industry downturns and
competitive pressures, or could limit our flexibility in planning for, or
reacting to, changes and opportunities in our industry, which may place us at a
competitive disadvantage compared to our competitors. There can be no assurance
that we will be able to obtain alternative financing, that any such financing
would be on acceptable terms, or that we will be permitted to do so under the
terms of our existing financing arrangements. In the absence of such financing,
our ability to respond to changing business and economic conditions, make future
acquisitions, react to adverse operating results, meet our debt service
obligations or fund required capital expenditures or increased working capital
requirements may be adversely affected.
Interruptions in the availability of raw materials can seriously harm our
financial performance.
Our semiconductor manufacturing operations require raw materials that must meet
exacting standards. We generally have more than one source available for these
materials, but for certain of our products there are only a limited number of
suppliers capable of delivering the raw materials that meet our standards. If we
need to use other companies as suppliers, they must go through a qualification
process, which can be difficult and lengthy. In addition, for certain of our
products the raw materials we need for our business could become more scarce as
worldwide demand for semiconductors increases. Interruption of our sources of
raw materials could seriously harm our business, financial condition and results
of operations.
Problems in the performance of other companies we hire to perform certain
manufacturing tasks can seriously harm our financial performance.
A high percentage of our products are assembled, packaged and tested at our
manufacturing facility located in the Philippines. We rely on independent
subcontractors to assemble, package and test the balance of our products. This
reliance involves certain risks, because we have less control over manufacturing
quality and delivery schedules, whether these companies have adequate capacity
to meet our needs and whether or not they discontinue or phase-out assembly
processes we require. We cannot be certain that these subcontractors will
continue to assemble, package and test products for us, and it might be
difficult for us to find alternatives if they do not do so.
The complex nature of our manufacturing activities makes us highly susceptible
to manufacturing problems and these problems can have substantial negative
impact on us when they occur.
Making semiconductors is a highly complex and precise process, requiring
production in a tightly controlled, clean environment. Even very small
impurities in our manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer or other factors
can cause a substantial percentage of wafers to be rejected or numerous chips on
each wafer to 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 spend, significant amounts of money to upgrade
and increase our wafer fabrication, assembly and test manufacturing capability
and capacity. If we do not need some of this capacity and capability for any of
a variety of reasons, including inadequate demand or a significant shift in the
mix of product orders that makes our existing capacity and capability inadequate
or in excess of our actual needs, our fixed costs per semiconductor produced
will increase, which will harm our business, financial condition and results of
operations. In addition, if the need for more advanced products requires
accelerated conversion to technologies capable of manufacturing semiconductors
having smaller features, or requires the use of larger wafers, we are likely to
face higher operating expenses and may need to write-off capital equipment made
obsolete by the technology conversion, either of which could seriously harm our
business, financial condition and results of operations. For example, in
response to various downturns and changes in our business, we have not been able
to use all of our existing equipment and we have restructured our operations.
These restructurings have resulted in material charges, which have negatively
affected our business. If the downturn continues, we could incur additional
restructuring charges, which could further negatively affect our business.
Our operations and financial results could be severely harmed by certain natural
disasters.
30
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:
o our success in developing new products and manufacturing technologies;
o the quality and price of our products;
o the diversity of our product line;
o the cost effectiveness of our design, development, manufacturing and
marketing efforts;
o our customer service;
o our customer satisfaction;
o the pace at which customers incorporate our products into their systems;
o the number and nature of our competitors and general economic conditions;
and
o 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 principle means to
determine inventory levels for our products and the amount of manufacturing
capacity that we need. Because our markets are volatile and subject to rapid
technological and price changes, our forecasts may be wrong, and we may make too
many or too few of certain products or have too much or too little manufacturing
capacity. Also, our customers frequently place orders requesting product
delivery almost immediately after the order is made, which makes forecasting
customer demand even more difficult, particularly when supply is abundant. These
factors also make it difficult to forecast quarterly operating results. If we
are unable to predict accurately the appropriate amount of product required to
meet customer demand, our business, financial condition and results of
operations could be seriously harmed, either through missed revenue
opportunities because inventory for sale was insufficient or through excessive
inventory that would require write-offs.
We must spend heavily on equipment to stay competitive, and will be adversely
impacted if we are unable to secure financing for such investments.
In order to remain competitive, semiconductor manufacturers generally must spend
heavily on equipment to maintain or increase technology and design development
and manufacturing capacity and capability. We currently plan for approximately
$68.0 million in expenditures on equipment in fiscal 2003 and anticipate
significant continuing capital expenditures in subsequent years. In the past, we
have reinvested a substantial
31
portion of our cash flow from operations in technology, design development and
capacity expansion and improvement programs.
If we are unable to decrease costs for our products at a rate at least as fast
as the rate of the decline in selling prices for such products, we may not be
able to generate enough cash flow from operations to maintain or increase
manufacturing capability and capacity as necessary. In such a situation, we
would need to seek financing from external sources to satisfy our needs for
manufacturing equipment and, if cash flow from operations declines too much, for
operational cash needs as well. Such financing, however, may not be available on
terms that are satisfactory to us or at all, in which case our business,
financial condition and results of operations would be seriously harmed.
We compete with others to attract and retain key personnel, and any loss of, or
inability to attract, such personnel would harm us.
To a greater degree than most non-technology companies, we depend on the efforts
and abilities of certain key management and technical personnel. Our future
success depends, in part, upon our ability to retain such personnel, and to
attract and retain other highly qualified personnel, particularly product and
process engineers. We compete for these individuals with other companies,
academic institutions, government entities and other organizations. Competition
for such personnel is intense and we may not be successful in hiring or
retaining new or existing qualified personnel.
We believe that stock option grants are critical to our ability to attract and
retain personnel. The New York Stock Exchange has proposed rules effective June
30, 2003 that would require, subject to certain exceptions, stockholder approval
for equity compensation plans, including stock option plans. If these rules go
into effect, our ability to hire or retain highly qualified personnel may be
seriously impacted due to an inability to grant stock options and other equity
based compensation if we are unable to obtain stockholder approval for such new
plans in a timely manner or at all.
If we lose existing qualified personnel or are unable to hire new qualified
personnel as needed, our business, financial condition and results of operations
could be seriously harmed.
We face additional problems and uncertainties associated with international
operations that could seriously harm us.
International revenues accounted for 61% of our total revenues in Q1 2003.
Long-lived assets are held primarily in the United States with 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:
o currency exchange fluctuations;
o the devaluation of local currencies;
o political instability;
o changes in local economic conditions;
o import and export controls; and
o changes in tax laws, tariffs and freight rates.
To the extent any such risks materialize, our business, financial condition and
results of operations could be seriously harmed.
We are subject to many different environmental regulations, and compliance with
them may be costly.
We are subject to many different governmental regulations related to the
storage, use, discharge and disposal of toxic, volatile or otherwise hazardous
chemicals used in our manufacturing process. Compliance with these regulations
can be costly. In addition, over the last several years, the public has paid a
great deal of attention to the potentially negative environmental impact of
semiconductor manufacturing operations. This attention and other factors may
lead to changes in environmental regulations that could force us to purchase
additional equipment or comply with other potentially costly requirements. If we
fail to control the use of, or to adequately restrict the discharge of,
hazardous substances under present or future regulations, we could face
substantial liability or suspension of our manufacturing operations, which could
seriously harm our business, financial condition and results of operations.
32
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 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:
o integrating acquired technology or products;
o integrating acquired products into our manufacturing facilities;
o assimilating the personnel of the acquired companies;
o coordinating and integrating geographically dispersed operations;
o our ability to retain customers of the acquired company;
o the potential disruption of our ongoing business and distraction of
management;
o the maintenance of brand recognition of acquired businesses;
o the failure to successfully develop acquired in-process technology,
resulting in the impairment of amounts currently capitalized as intangible
assets;
o unanticipated expenses related to technology integration;
o the development and maintenance of uniform standards, corporate cultures,
controls, procedures and policies;
o the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
o the potential unknown liabilities associated with acquired businesses.
We 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 $107.1 million to employees and former employees under the
shareholder-approved 2001 Employee Stock Purchase Assistance Plan. (See Note 11
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 March 30, 2003, we have a loss reserve against
these loans of $16.1 million, including an increase to the reserve of $0.1
million recorded during Q1 2003. In determining this reserve requirement,
management considered various factors, including an independent fair value
analysis of these employee and former employee loans and the underlying
collateral. At March 30, 2003, the difference between the carrying value of the
loans and the underlying common stock collateral was $53.9 million. While the
loans are secured by the shares of our stock purchased with the loan proceeds,
the value of this collateral would be adversely affected if our stock price
declined significantly. Our liquidity and 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 liquidity. 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.
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.
33
ITEM III. 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 30, 2003, 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 31, 2003, Cypress had outstanding a series of equity options on Cypress
common stock with an initial cost of $26.0 million, which is classified in
stockholders' equity. The contracts require physical settlement and expire in
June 2003. Upon expiration of the options, if Cypress's stock price is above the
threshold price of $20 per share, Cypress receives a settlement value totaling
$28.9 million. If Cypress's stock price is below the threshold price of $20 per
share, Cypress will receive 1.4 million shares of its common stock.
Alternatively, the contract may be renewed and extended. During Q1 2003, the
contracts resulted in no net cash inflow.
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 30, 2003, Cypress had invested $25.2 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 of $19.6 million in
fiscal years 2002 and 2001. Cypress recorded no impairment charges to date in
fiscal 2003.
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 2003, Cypress may incur
additional impairments to its equity investments in privately held companies.
34
Stock Purchase Assistance Plan
Included in other current assets at March 30, 2003, Cypress has outstanding
loans, consisting of principal and cumulative accrued interest, of $107.1
million to employees and former employees under the shareholder-approved 2001
Employee Stock Purchase Assistance Plan. As of the end of fiscal 2002, the
outstanding principal and cumulative accrued interest totaled $106.6 million.
Cypress made the loans to employees for the purpose of purchasing Cypress common
stock. Each loan is evidenced by a full recourse promissory note executed by the
employee in favor of Cypress and is secured by a pledge of the shares of
Cypress's common stock purchased with the proceeds of the loan. The primary
benefit to Cypress from this program is increased employee retention. In
accordance with the plan, the CEO and the Board of Directors do not participate
in this program. To date, there have been immaterial write-offs. As of March 30,
2003 Cypress had a loss reserve against these loans of $16.1 million. In
determining the reserve, management considered various factors, including an
independent fair value analysis of these employee and former employee loans and
the underlying collateral. At March 30, 2003, the difference between the
carrying value of the loans and the underlying common stock collateral was $53.9
million.
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 $57.5 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.
35
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, Cypress's principal executive officer and
principal financial officer have concluded that Cypress's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to
ensure that information required to be disclosed by Cypress in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities
and Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in
Cypress's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation. Cypress
has not identified any significant deficiencies or material weaknesses in
such controls, and therefore there were no corrective actions taken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this item is included in Part I in Note 6 to the
Condensed Consolidated Financial Statements and is incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 99.2 Certification 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
None.
36
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 12, 2003
37
CERTIFICATION OF QUARTERLY REPORT
I, T.J. Rodgers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cypress
Semiconductor Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: May 12, 2003
By /s/ T.J. Rodgers
-------------------------------------
President and Chief
Executive Officer
38
CERTIFICATION OF QUARTERLY REPORT
I, Emmanuel Hernandez, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cypress
Semiconductor Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: May 12, 2003
By /s/ Emmanuel Hernandez
-------------------------------------
Vice President, Finance and
Administration and
Chief Financial Officer
39