UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


(Mark One)

|X|          Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 29, 2002

OR

|_|          Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________.

Commission File Number: 1-10079


Cypress Semiconductor Corporation

(Exact name of registrant as specified in its charter)


 Delaware
(State or other jurisdiction of
incorporation or organization)
 94-2885898
(I.R.S. Employer
Identification No.)
 

3901 North First Street, San Jose, California 95134-1599
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (408) 943-2600

Securities registered pursuant to Section 12(b) of the Act:

   
Title Of Each Class
Common Stock, $.01 par value
4.00% Convertible Subordinated Notes due 2005
3.75% Convertible Subordinated Notes due 2005
 Name of Each Exchange
On Which Registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
 

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_ |

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this form 10-K. |X|

At March 10, 2003, registrant had outstanding 125,396,161 shares of Common Stock.

Indicate by check mark whether the registrant is an accelerated filer (as outlined in Rule 12b-2 of the Act): |X| Yes No |_ |


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The market value of voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on March 10, 2003 on the New York Stock Exchange, was approximately $572,000,000. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from the foregoing calculation in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for registrant’s 2003 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12 and 13 of Part III of this Annual Report on Form 10-K.

 


INDEX

 

 

 

 

PART I

 

    

3

 

 

 

 

ITEM 1.

 

BUSINESS

3

ITEM 2.

 

PROPERTIES

17

ITEM 3.

 

LEGAL PROCEEDINGS

18

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

18

 

 

 

 

PART II

 

    

19

 

 

 

 

ITEM 5.

 

MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

19

ITEM 6.

 

SELECTED CONSOLIDATED FINANCIAL DATA

19

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

20

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

32

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

34

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

74

 

 

 

 

PART III

 

    

75

 

 

 

 

ITEM 10.

 

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

75

ITEM 11.

 

EXECUTIVE COMPENSATION

75

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

75

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

75

 

 

 

 

PART IV

 

    

76

 

 

 

 

ITEM 14.

 

CONTROLS AND PROCEDURES

76

ITEM 15.

 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

76

  

SIGNATURES

79

 

 

CERTIFICATIONS

80



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PART I

ITEM I.          BUSINESS

The discussion in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties, including, but not limited to, statements as to future operating results and business plans, our prospects and the prospects of the semiconductor industry generally, and statements as to the use of autolines for factory output, cost savings and productivity improvements and other benefits from information systems, the proportion of parts assembled in our Philippines factory, pressure on and trends for average selling prices, investments by competitors in manufacturing capacity and productivity yields, entering into licensing arrangements with third parties, capital expenditures, future acquisitions, the financing of SunPower Corporation, the impact of SunPower Corporation on future financial results, our expected effective control of SunPower Corporation, 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” and elsewhere in this Report.

General

Cypress Semiconductor Corporation (“Cypress”) designs, develops, manufactures and markets a broad line of high-performance digital and mixed-signal integrated circuits for a range of markets, including data communications, telecommunications, computing, consumer and instrumentation systems. We have four product lines organized into two business segments—Memory and Non-memory. Our product divisions—Memory, Datacom, Timing Technology and Personal Communication—are the core internal reporting entities. In addition, Cypress views its product offerings by market segment in order to enhance our focus on serving end markets. These market segments include the Wide Area Networks (“WAN”) and Storage Area Networks (“SAN”) which focus on networking applications, Wireless Infrastructure (“WIN”) and Wireless Terminal (“WIT”) which focus on wireless connectivity, and Computation and Consumer which focuses on personal computers, gaming and video applications. Refer to Note 19 of our consolidated financial statements for further information related to our business and market segments.

Cypress was incorporated in California in December 1982. The initial public offering of our common stock occurred in May 1986, at which time our common stock commenced trading on the NASDAQ National Market. In February 1987, we reincorporated in Delaware and on October 17, 1988 listed our common stock on the New York Stock Exchange.

Cypress makes available its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15 (d) of the Securities Exchange Act of 1934 free of charge on our website, www.cypress.com, as soon as reasonably practicable after we electronically file such material with or furnish such material to the Securities and Exchange Commission.

Products

In recent years, Cypress has shifted its focus from the design and manufacture of commodity-type products—with a significant exposure to fluctuations in supply and demand, average selling price and gross margin—to the development of higher-margin, proprietary products, which tend to be more resistant to market volatility and trends. Cypress has developed higher-value products in both its Memory and Non-memory businesses.

Our Memory product segment includes integrated circuits on silicon wafers manufactured using leading-edge process technology. A significant portion of the wafers we produce for memory products are manufactured at our technologically advanced, eight-inch wafer production facility in Bloomington, Minnesota, which we refer to as Fab 4. Sales of Memory products may be driven by higher volumes and operational results improved through migration to advanced technology and the attainment of lower manufacturing costs. But our Memory portfolio also includes next-generation memories with advanced functionality and features in demand by leading manufacturers in wireless, wireline, computation, consumer and other businesses.


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A majority of the wafers we produce for Non-memory products are manufactured at our six-inch production facility located in Round Rock, Texas, which we refer to as Fab 2. For non-core technologies, we purchase wafers fabricated from outside foundries because the semiconductor industry is characterized by rapid technology and manufacturing-process improvements—resulting in products with greater speed, densities and performance capabilities—and future sales and operational results of these products will continue to be driven primarily by the timely introduction of new products with a technology advantage and customer design wins.

In fiscal 2002, Cypress invested approximately $8.7 million for a 57% ownership interest in SunPower Corporation, a developer of ultra high efficiency solar cells. SunPower was not a significant part of our fiscal 2002 financial results, but we anticipate that SunPower and its technology could have a material impact in future years. (See Note 6 in the consolidated financial statements in this report for additional information.)

Please refer to Note 19 of the consolidated financial statements included in this report for detailed information about the composition of revenues from our Memory and Non-memory product business segments.

Memory Products

Static random access memory (“SRAM”) is used for storage and retrieval of data in data communication, telecommunication, computation, consumer, automotive, and other electronic systems. The overall SRAM market is characterized by the need for many different densities (number of bits per memory circuit), organizations (number of bits available to the user in a single access of the RAM), performance (number of bits transferred per cycle) and levels of power consumption (low power and ultra-low-power devices are required for portable battery operated equipment). We offer a broad selection of SRAM products, including high-speed synchronous SRAMs, high-performance micropower SRAMs and fast asynchronous SRAMs. Cypress’s portfolio offerings include the following:

QDR™ (Quad Data Rate™) SRAMs represent a new architecture for emerging, high-performance communications applications. These SRAMs target switches and routers that operate at data rates beyond 300- MHz. Cypress, Micron Technology Inc., Samsung, Hitachi, IDT and NEC worked closely together to create the QDR standard to ensure that customers will have multiple pin- and function-compatible sources for these next-generation SRAMs.

NoBL™ (No Bus Latency™) and Synchronous Burst SRAMs. NoBL synchronous SRAMs have an architecture optimized for high-speed applications requiring maximum bus bandwidth, such as networking, instrumentation, video and simulation. Synchronous Burst SRAMs have a broad selection of varying densities and input/output configurations well suited for processor cache applications.

Fast Asynchronous SRAMs. Cypress markets a wide selection of fast asynchronous SRAMs with densities ranging from 16Kb to 4Mb and a wide array of bus widths, packages and temperature ranges. This portfolio includes the high-performance 16-bit-wide and 24-bit-wide families, which are optimized for the latest generation of fast digital signal processors (“DSPs”).

Micropower SRAMs. Cypress’s MoBL® (More Battery Life™) SRAMs have one of the industry’s lowest rates of power consumption, using less power than current standard, low-power SRAMs. They significantly increase battery life and talk time in wireless products such as cellular phones.

Non-memory Products

Non-memory products include a variety of devices that serve the networking, telecommunications, computation, and consumer markets. Our Non-memory portfolio includes physical-layer (“PHY”) devices, framers and network search engines for datacommunications linecards, along with a broad selection of clocks, Universal Serial Bus (“USB”) controllers, specialty memories, optical products, mixed-signal arrays with embedded microcontroller capabilities and programmable-logic devices (“PLDs”).

Physical Layer devices. Our family of high-performance Synchronous Optical Network/Synchronous Digital Hierarchy (“SONET/SDH”) and Serializer/Deserializer (“SERDES”) devices move SONET or SDH frames between equipment at the SONET/SDH data rates of 51.85 Mbps (OC-1), 155.52 Mbps (OC-3/STM-1), and 2.488 Gbps (OC-48/STM-16). Our latest addition to this family meets the stringent requirements of WAN switches and routers by having Bellcore-compliant jitter specifications.

Framers. Our high-performance SONET/SDH framers transport SONET or SDH frames at the data rates of 2.488 Gbps and 9.952 Gbps (OC-192/STM-64). This family includes our POSIC2GVC™, one of the first devices on the market to offer both generic framing procedure and virtual concatenation, which enables efficient transport of data protocols such as Ethernet FibreChannel, ESCON, DVB and SMPTE over existing SONET/SDH networks.


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HOTLink® (High-speed Optical Transceiver Link) PHYs. Our HOTLink serial transceivers are industry-leading products for moving serial data at rates from 50 Mbps to 1.5 Gbps. These products support a variety of applications and industrial protocols, including Gigabit Ethernet (“GbE”), 10 Gbps Ethernet (“XAUI”), Fibre-Channel (“FC”), Enterprise System Connection (“ESCON”), Asynchronous Transfer Mode (“ATM”), Digital Video Broadcast (“DVB”), Advanced Micro Devices, Inc.’s TAXITM protocol, generic backplane and point-to-point applications. In the past several years, we have introduced new families of HOTLink PHYs, including the HOTLink II™ PHY, which moves up to four channels of serial data at up to 1.5 Gbps.

QuadPort® Datapath Switching Elements (“DSEs”). QuadPort DSEs are non-blocking switch devices that allow four independent busses, processors, or backplanes to access the DSE simultaneously in separate time domains. The applications for the devices include 4x4 switching, packet-header manipulation, and datapath transport that can reduce the need for large field programmable gate array (“FPGA”) devices. QuadPort DSEs are used in redundant array of independent disks (“RAID”) and storage switches, Metropolitan Area Network/Wide Area Network (“MAN/WAN”) switches and routers and wireless base station applications. We have recently expanded our product offering to include 16 Kbits x 18 and 32 Kbits x 18 versions of these devices.

Network Search Engines (“NSEs”). NSEs are used in high-performance routers and switches to provide deterministic wirespeed table lookups for WAN infrastructure equipment, handling multiple high-speed protocols up to OC-768 and 10-Gigabit Ethernet. The Cypress family of NSEs and network coprocessors are widely used by leading networking original equipment manufacturers, referred to as OEMs.

RoboClock® clock buffers. OurRobo Clock family of high-performance, programmable-skew clock buffers—the flagship product of our Timing Technology Division (TTD)—offers features, including zero propagation delay, 50/50 duty cycle, multiply/divide functions, and programmable skew—which allows customers to compensate for timing differences arising from varying circuit board trace lengths and device set-up and hold times. We recently introduced the RoboClock IITM programmable clock skew buffer, which doubles the performance of the original family by operating up to 200 MHz, supports 18 outputs, and adds more multiply, divide and programmable-skew options. TTD also offers a broad array of programmable timing products (see below), timing distribution products and frequency timing generators, targeting markets including consumer, communications and computation. These devices are widely used in personal computers, disk drives, modems, small office/home office (“SOHO”) network routers and hubs, digital video disks and home video games.

Dual-Port Memories. Dual-Ports are memories that can be accessed by two different processors or busses simultaneously. Dual-Ports are designed to be memory solutions for shared-memory and switching applications, including networking switches and routers, cellular base stations, mass storage devices and telecommunication equipment. Our family of synchronous and asynchronous Dual-Port RAMs range in density from 8 Kbit to 9 Mbit in x8, x9, x16, x18 and x36 configurations. Cypress broadened its portfolio recently with the introduction of the world’s first true 9 Mbit Dual-Port.

First-in, First-out (“FIFO”) Memories. FIFOs are used as an elasticity buffer between systems operating at different frequencies. We offer FIFO memories in a variety of high-bandwidth synchronous and asynchronous architectures with industry-standard pinouts.

Programmable Clocks. Programmable timing solutions combine the convenience of field programming with high performance at a cost that is competitive against custom clocks at equivalent volumes. Working with our easy-to-use CyClocks™ and CyberClocks™ software, designers can select custom frequencies for a variety of applications. We are the only supplier offering true field-programmable clocks, and all our clock outputs have the desired characteristics of high drive, low jitter, low electro-magnetic interference and low skew.

Neuron Chips. Neuron Chips are very-large-scale-integrated (“VLSI”) devices that make it possible to implement low-cost control networking applications. They provide all the key functions necessary to intelligently process inputs from sensors and control-actuator devices, and to propagate control information across a variety of wireline and fiber-optic networking media. Neuron chips provide the logic for LonWorks networks, an open, interoperable control networking standard widely used in building automation, industrial control, transportation, and utility automation controllers. Each Neuron device contains three 8-bit central processing units (“CPUs”), on-board memory, 11 general-purpose input/output (“I/O”) pins, and a complete, interoperable implementation of the ANSI/EIA 709.1-A-1999 Control Network Protocol.


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USB Controllers. USB is a four-wire connection between a PC and peripherals, including keyboards, mice, printers, joysticks, scanners and modems, and among various non-PC systems. The standard facilitates an easy-to-use architecture known as “plug and play,” which enables instant recognition and interoperabiliby when a device is hooked into a system. Cypress expanded its original position in low-speed (1.5-Mbps) USB into full-speed (12-Mbps) and high-speed (480-Mbps) USB products, along with a broad array of USB hubs, transceivers, serial interface engines (“SIEs”) and embedded-host products for a broad range of new applications, including DSL modems, digital cameras and mass storage devices.

WirelessUSB™ (“W-USB”) Controllers. WirelessUSB is a wireless, radio frequency (“RF”) solution introduced in fiscal 2002 that enables manufacturers of PC mice, keyboards and gaming systems to minimize development time, cost, and power requirements without sacrificing performance. Operating at 2.4 GHz, WirelessUSB can connect a maximum of seven devices up to 30 feet apart. WirelessUSB is Cypress’s first wireless product, leveraging its strong market position in wired USB solutions into the wireless world.

PLDs. The logic in an electrical system performs the non-memory functions, such as floating-point mathematics or the organization and routing of signals throughout a computer system. Logic constitutes a significant portion of the circuitry in most systems. We manufacture several families of user-programmable logic circuits, which facilitate the replacement of many standard logic devices with a single device, thus reducing package count and cost, improving performance and allowing miniaturization. Our PLD portfolio consists of a wide variety of devices ranging from simple PLDs such as the Flash 22V10, to the very-high-density complex PLDs, such as the Cypress Ultra37000TM, Quantum38KTM and Delta39KTM Complex Programmable Logic Devices (“CPLD”) families. All our products are supported by the Warp™ software tool set, which enables design description in either VHDL (very high-speed integrated circuit hardware description language), an industry standard developed by Cypress, or in Verilog, another industry standard.

PSoC™ (Programmable System-on-Chip™) Configurable Mixed-Signal Arrays. PSoC products are based on a configurable mixed-signal array with an on-board controller, providing a low-cost, single-chip solution for a variety of consumer, industrial, and control applications. The PSoC device family integrates programmable blocks of analog and digital logic, a fast 8-bit processing unit, 8 to 16 Kbytes of flash memory and 256 bytes of SRAM. PSoC provides designers with a flexible architecture that can be configured for a broad range of embedded applications and dynamically reconfigured to extend the capabilities and value of their product.

GLV™ (Grating Light Valve™). Our Silicon Light Machines™ (“SLM”) subsidiary’s GLV technology switches, modulates and attenuates light. The GLV device is a dynamic diffraction grating that can serve as a simple mirror in the static state, or a variable grating in the dynamic state. Its unique combination of speed, accuracy, reliability and manufacturability has been field proven in demanding applications in the simulation, display and direct-to-print markets. SLM has leveraged its experience and expertise in optical microelectromechanical systems (“MEMS”) to create products in the fields of digital imaging and optical telecommunications, and is developing new applications for advanced uses of its technology.

Cypress, the Cypress logo, MoBL, QuadPort, HOTLink, Warp, and RoboClock are registered trademarks of Cypress Semiconductor Corporation.

WirelessUSB, More Battery Life, NoBL, No Bus Latency, POSIC, POSIC2GVC, Programmable Serial Interface, PSI, RoboClock II, Ultra37000, Quantum38K, Delta39K are trademarks of Cypress Semiconductor Corporation.

“Programmable System-on-Chip” and PSoC are trademarks of Cypress MicroSystems, a subsidiary of Cypress.

Silicon Light Machines, Grating Light Valve, and GLV are trademarks of Silicon Light Machines, a subsidiary of Cypress.

Quad Data Rate™ SRAM and QDR™ SRAM comprise a new family of products developed by Cypress, IDT, Micron Technology, Inc., NEC, and Samsung.

Neuron Chip and LonWorks are registered trademarks of Echelon Corporation in the US and other countries.

All other trademarks or registered trademarks are the property of their respective owners.

Research and Development

We place great emphasis on research and development (“R&D”). This is partially reflected by our commitment of significant management resources to continuously improve process and product design development cycle time. Our current product strategy requires rapid development of new products using emerging process technologies while minimizing R&D costs. We perform R&D for both process technology and for new product design. We spent $287.9 million, $267.5 million and $184.5 million on R&D in fiscal 2002, fiscal 2001 and fiscal 2000, respectively.


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Our process technology research focuses primarily on the continuous migration to smaller geometries. Currently, we are ramping our latest 0.13-micron manufacturing technology. We are simultaneously transferring our 90-nanometer (0.9-micron) technology from our eight-inch R&D facility in San Jose, California (“Fab 1”) to our eight-inch manufacturing Fab 4 in Minnesota.

In addition to continuously reducing the geometry of our manufacturing platforms, we are developing value added derivatives for analog and embedded non-volatile memory applications. In fiscal 2002, we completed development of 0.20-micron Silicon Germanium (“SiGe”) Bipolar Complementary Metal Oxide Semiconductor (“BiCMOS”) technology for high speed and analog applications in Minnesota (Fab 4). Finally, we equipped our wafer Fab in San Jose (Fab 1) to develop MRAM (magnetic RAM) wafers for memory and embedded non-volatile application.

In October 2002, we entered into an agreement with Honeywell to jointly develop a 0.13-micron Silicon-On-Insulator (“SOI”) process technology in Fab 4. Under the agreement, Honeywell engineers will work with our R&D team on defining 0.13-micron for SOI and developing this technology in Fab 4.

We have a central design group that focuses on new product creation and improvement of design methodologies. This group has ongoing efforts to reduce design cycle time and increase first pass yield through structured re-use of intellectual property (“IP”) blocks from a controlled IP library, development of computer-aided design tools and improved design business processes. We currently have 44 design teams in place working on new product designs. Design and related software development work primarily occurs at centers located in the United States, the United Kingdom, Ireland and India.

Manufacturing

In fiscal 2002, we continued to manufacture our products at two sub-micron wafer fabrication facilities located in Fab 4 and Fab 2. These fabrication facilities utilize our proprietary 0.13 through 0.8-micron CMOS, 0.25 and 0.8-micron BiCMOS, and 0.35-micron Silicon Nitride Oxide Silicon (SONOS). To enhance our competitive position, we emphasize programs designed 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.

We made significant progress with our Statistical Process Control program. This program fully engages our entire manufacturing workforce thereby making this workforce more productive.

Also in fiscal 2002, we reduced die size by introducing our RAM 8 manufacturing process in Fab 4 and by continuing the production ramps of our RAM 7 process in Fab 4 and our SONOS process in Fab 2. RAM 8 reduced our leading edge line widths from 0.15-micron to 0.13-micron, resulting in more die per wafer. The SONOS process reduced our Fab 2 line width from 0.5-micron to 0.35-micron enabling new embedded non-volatile programmable products and increased die per wafer.

A significant portion of our assembly and test operations is performed by our highly automated assembly and test facility in the Philippines, which accounted for over 40% of our fiscal 2002 assembly output, with the balance being performed by various offshore subcontractors. Our Philippines facility primarily manufactures volume products and packages where our ability to leverage manufacturing costs is high. We expect to increase the proportion of parts assembled in the Philippines factory to 60% during fiscal 2003.

One of our initiatives in fiscal 2002, was to improve the overall quality and cost of our backend manufacturing process by increasing the number of parts assembled and tested in our Philippines factory and consolidating the devices built at subcontractors to a few key suppliers. This included moving the manufacture of more clock products to the Philippines. This strategy has increased the proportion of parts tested in the Philippines factory from 49% at the end of fiscal 2001 to 58% at the end of fiscal 2002.

In fiscal 2002, we invested $3.3 million in one additional fully integrated, automated manufacturing facility (autoline) enabling complete assembly and test operations with minimal human intervention. Currently, less than 10% of our output is processed on these autolines; however, we expect the autolines will provide over 20% of our factory output by the end of 2003 with no additional labor requirement.


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During the fourth quarter of fiscal 2002, we announced and implemented a restructuring plan that resized our manufacturing facilities and reduced our workforce to bring our cost structure in line with future expected demand and to reduce expenses in all operations areas. We took out of service and are holding for sale manufacturing assets with a gross book value of $65.5 million and a net book value of $41.7 million. The restructuring affected assets at our facilities in Minnesota, Texas, and San Jose, California (see further discussion on restructuring included in Management’s Discussion and Analysis and Note 7 of the Consolidated Financial Statements). Refer to Note 1 and Note 19 of our consolidated financial statements included in this report for additional information on long-lived assets.

Marketing and Sales

We use four channels to sell our products: direct OEM sales by our sales force; sales by manufacturing representative firms; sales through domestic distributors; and sales through international trading companies and representative firms. Our marketing and sales efforts are organized around four regions: North America, Europe, Japan and Asia/Pacific. We also have a corporate accounts group and a contract manufacturing group, which are responsible for specific customers with worldwide operations. We augment our sales effort with field application engineers, specialists in our products, technologies and services who work with customers to design our products into their systems. Field application engineers also help us to identify emerging markets and new products.

International revenues accounted for 57% of our total revenues in fiscal 2002 compared with 50% in fiscal 2001 and 49% in fiscal 2000. For additional information on our geographic revenue split, please refer to Note 19 of our Consolidated Financial Statements included with this report. Sales to Motorola, Inc. accounted for 10.2% of total revenues in fiscal 2002. No individual customer accounted for greater than 10% of total revenues in fiscal 2001. Sales to Motorola, Inc. accounted for 10.9% of total revenues in fiscal 2000.

We typically warrant our products against defects in materials and workmanship for a period of one year and that product warranty is generally limited to a refund of the original purchase price of the product.

Backlog

Our sales typically rely upon standard purchase orders for delivery of catalog products. Customer relationships are generally not subject to long-term contracts. However, Cypress has entered into long-term supply agreements with Alcatel, Cisco, Flextronics, Intel, Lucent, Motorola, Nortel, Philips, Solectron and ST Microelectronics N.V. Products to be delivered and the related delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, our backlog at any particular date is not representative of actual sales for any succeeding period and we believe that our backlog is not a meaningful indicator of future revenues.

Competition

We face competition from domestic and foreign high-performance integrated circuit manufacturers, many of which have advanced technological capabilities and have increased their participation in the markets in which we operate. We compete with a large number of companies primarily in the telecommunications, data communications, computation and consumer markets. Competitors, including Altera Corporation, Applied Micro Circuits Corporation, Hitachi Ltd., Integrated Device Technology, Inc., Integrated Circuit Systems, Inc., Motorola, Inc., National Semiconductor Corporation, PMC-Sierra, Inc., Samsung Corporation, ST Microelectronics N.V., Texas Instruments Incorporated, Vitesse Semiconductor Corporation, and Xilinx, Inc., target certain markets and compete directly with some of our products. Competition is based on factors that can vary among products and markets, including product design and quality, product performance, price and service.

The semiconductor industry is intensely competitive. This intense competition results in a challenging operating environment for most companies in the industry, including Cypress. This environment is characterized by potential erosion of product sale prices over the lives of each product, rapid technological change, limited product life cycles and strong domestic and foreign competition in many markets. Our ability to compete successfully in a rapidly evolving high performance end of the semiconductor technology spectrum depends on many factors, including:

          Our success in developing new products and manufacturing technologies;

          The delivery, performance, quality and price of our products;

          The diversity of our product line;

          The cost effectiveness of our design, development, manufacturing and marketing efforts;

          The pace at which customers incorporate our products into their systems; and

          The number and nature of our competitors and general economic conditions.


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We believe that we currently compete effectively in the above areas to the extent they are within our control; however, given the pace at which events change in the industry, our current abilities are not a guarantee of future success. If we are not able to compete successfully in this environment, our business, operating results and financial condition will be harmed.

Patents, Licenses and Trademarks

We currently have over 750 patents and approximately 700 additional patent applications on file with the United States Patent and Trademark Office. We are preparing to file more than 200 new patent applications. In addition to factors such as innovation, technological expertise and experienced personnel, we believe that patents are increasingly important to remain competitive in our industry. We have an active program to obtain additional patent and other intellectual property protection.

We have entered into, and in the future may continue to enter into, technology license agreements with third parties that give those parties the right to use patents and other technology developed by us. Some of these agreements also give us the right to use patents and other technologies developed by such other parties, some of which involve payment of royalties.

Cypress also vigorously defends its product and service marks. For a list of Cypress trademarks and registered trademarks, please visit the “Terms and Conditions” section of our website, which is located at www.cypress.com.

Acquisition and Equity Investment

During fiscal 2002 we acquired Sahasra Networks, Inc. and made an investment in SunPower Corporation, which has been accounted for under the equity method of accounting.

          Sahasra Networks, Inc. is designing a software-based method of making large-entry, next generation network search engines. This acquisition broadens our capability within our Non-memory business segment and the WAN/SAN market segment.

           SunPower Corporation (“SunPower”) designs and manufactures high-efficiency silicon solar cells. Cypress is partnering with SunPower to leverage our expertise in cost-effective, high-volume silicon manufacturing.

Employees

As of December 29, 2002, we had 4,101 employees. Effective December 31, 2002, an additional 311 persons left Cypress as part of the restructuring plan announced in the fourth quarter of 2002. (See Note 7 of the consolidated financial statements included in this report). None of our employees is represented by a collective bargaining agreement, nor have we ever experienced work stoppages.

Risk Factors

 

The discussion in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties, including, but not limited to, statements as to future operating results and business plans, our prospects and the prospects of the semiconductor industry generally, and statements as to the use of autolines for factory output, cost savings and productivity improvements and other benefits from information systems, the proportion of parts assembled in our Philippines factory, pressure on and trends for average selling prices, investments by competitors in manufacturing capacity and productivity yields, entering into licensing arrangements with third parties, capital expenditures, future acquisitions, the financing of SunPower Corporation, the impact of SunPower Corporation on future financial results, our expected effective control of SunPower Corporation, 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” and elsewhere in this Report.


Page 9



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 addition, we recorded a charge for the impairment of goodwill and intangibles related to SLM 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 the fourth quarter of fiscal 2002 to increase cost efficiency while still maintaining an infrastructure that will enable us to grow when sustainable economic recovery begins. When these cycles occur, however, they will likely seriously harm our business, financial condition and results of operations and we may need to take further action to respond to them.

Our future operating results are likely to fluctuate and therefore may fail to meet expectations.

Our operating results have varied widely in the past and may continue to fluctuate in the future. In addition, our operating results may not follow any past trends. Our future operating results will depend on many factors and may fluctuate and fail to meet our expectations or those of others for a variety of reasons, including the following:

          the intense competitive pricing pressure to which our products are subject, which can lead to rapid and unexpected declines in average selling prices;

          the complexity of our manufacturing processes and the sensitivity of our production costs to declines in manufacturing yields, which make yield problems both possible and costly when they occur; and

          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.


Page 10



Our financial results could be seriously harmed if the markets in which we sell our products do not grow.

Our continued success depends in large part on the continued growth of various electronics industries that use our semiconductors, including the following industries:

          networking equipment;

          wireless telecommunications equipment;

          computers and computer-related peripherals; and

          consumer electronics, automotive electronics and industrial controls.

Many of our products are incorporated into data communications and telecommunications end products. Any reduction in the growth of, or decline in the demand for, networking applications, mass storage, telecommunications, cellular base stations, cellular handsets and other personal communication devices that incorporate our products could seriously harm our business, financial condition and operating results. In addition, certain of our products, including USB 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.

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.

 


Page 11



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 financings. The degree to which we may be leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes, could make us more vulnerable to industry downturns and competitive pressures, or could limit our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a competitive disadvantage compared to our competitors. There can be no assurance that we will be able to obtain alternative financing, that any such financing would be on acceptable terms, or that we will be permitted to do so under the terms of our existing financing arrangements. In the absence of such financing, our ability to respond to changing business and economic conditions, make future acquisitions, react to adverse operating results, meet our debt service obligations or fund required capital expenditures or increased working capital requirements may be adversely affected.

Interruptions in the availability of raw materials can seriously harm our financial performance.

 

Our semiconductor manufacturing operations require raw materials that must meet exacting standards. We generally have more than one source available for these materials, but for certain of our products there are only a limited number of suppliers capable of delivering the raw materials that meet our standards. If we need to use other companies as suppliers, they must go through a qualification process, which can be difficult and lengthy. In addition, 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.

 


Page 12



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 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.

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 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, results of operations and financial condition 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.

 


Page 13



Our ability to compete successfully in the rapidly evolving high performance portion of the semiconductor technology industry depends on many factors, including:

          our success in developing new products and manufacturing technologies;

          the quality and price of our products;

          the diversity of our product line;

          the cost effectiveness of our design, development, manufacturing and marketing efforts;

          our customer service;

          our customer satisfaction;

          the pace at which customers incorporate our products into their systems;

          the number and nature of our competitors and general economic conditions, and

          our access to and the availability of capital.

Although we believe we currently compete effectively in the above areas to the extent they are within our control, given the pace of change in the industry, our current abilities are not a guarantee of future success. If we are unable to compete successfully in this environment, our business, operating results and financial condition 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 have budgeted for approximately $57 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 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.

 


Page 14



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 57% of our total revenues in fiscal 2002. Long-lived assets are held primarily in the United States with 11% held in the Philippines and 1% in other foreign countries. (See Note 19 of our consolidated financial statements included in this report). Our Philippine assembly and test operations, as well as our international sales, face risks frequently associated with foreign operations, including:

          currency exchange fluctuations,

          political instability,

          changes in local economic conditions,

          the devaluation of local currencies,

          import and export controls, and

          changes in tax laws, tariffs and freight rates.

To the extent any such risks materialize, our business, financial condition and results of operations could be seriously harmed.

We are subject to many different environmental regulations, and compliance with them may be costly.

We are subject to many different governmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Compliance with these regulations can be costly. In addition, over the last several years, the public has paid a great deal of attention to the potentially negative environmental impact of semiconductor manufacturing operations. This attention and other factors may lead to changes in environmental regulations that could force us to purchase additional equipment or comply with other potentially costly requirements. If we fail to control the use of, or to adequately restrict the discharge of, hazardous substances under present or future regulations, we could face substantial liability or suspension of our manufacturing operations, which could seriously harm our business, financial condition and results of operations.

We depend on third parties to transport our products.

We rely on independent carriers and freight haulers to move our products between manufacturing plants and our customers. Any transport or delivery problems because of their errors, or because of unforeseen interruptions in their activities due to factors such as strikes, political instability, terrorism, natural disasters and accidents, could seriously harm our business, financial condition and results of operations and ultimately impact our relationship with our customers.

We may fail to integrate our business and technologies with those of companies that we have recently acquired and that we may acquire in the future.

We completed one acquisition in fiscal 2002, six acquisitions in fiscal 2001, and four acquisitions in fiscal 2000 and may pursue additional acquisitions in the future. If we fail to integrate these businesses successfully or properly, our quarterly and annual results may be seriously harmed. Integrating these businesses, people, products and services with our existing business could be expensive, time-consuming and a strain on our resources. Specific issues that we face with regard to prior and future acquisitions include:

          integrating acquired technology or products;

          integrating acquired products into our manufacturing facilities;

          assimilating the personnel of the acquired companies;

          coordinating and integrating geographically dispersed operations;

          our ability to retain customers of the acquired company;

          the potential disruption of our ongoing business and distraction of management;

          the maintenance of brand recognition of acquired businesses;

          the failure to successfully develop acquired in-process technology, resulting in the impairment of amounts currently capitalized as intangible assets;

          unanticipated expenses related to technology integration;

          the development and maintenance of uniform standards, corporate cultures, controls, procedures and policies;

          the impairment of relationships with employees and customers as a result of any integration of new management personnel; and

          the potential unknown liabilities associated with acquired businesses.

 


Page 15



We may incur losses in connection with loans made under our stock purchase assistance plan.

Cypress has outstanding loans, consisting of principal and cumulative accrued interest, of $106.4 million to employees and former employees under the shareholder-approved 2001 Employee Stock Purchase Assistance Plan. (See Note 13 to our Consolidated Financial Statements included in this report for a further description of this plan.) Cypress made the loans to employees for the purpose of purchasing Cypress common stock. Each loan is evidenced by a full recourse promissory note executed by the employee in favor of Cypress and is secured by a pledge of the shares of Cypress’s common stock purchased with the proceeds of the loan. The primary benefit to Cypress from this program is increased employee retention. In accordance with the plan, the CEO and the Board of Directors do not participate in this program. To date, there have been immaterial write-offs. As of December 29, 2002, Cypress has a loss reserve against these loans of $16.0 million, including an increase to the reserve of $14.8 million recorded during 2002. In determining the increase to this reserve, management considered various factors, including an independent fair value analysis of these employee and former employee loans and the underlying collateral. At December 29, 2002, the difference between the carrying value of the loans and the underlying common stock collateral was $61.6 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, 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.

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.

Executive Officers of the Registrant

Certain information regarding each of our current executive officers is set forth below:

 

Name

 

Age

 

Position

 

Executive
Officer
Since


 


 


 


 

 

 

 

 

 

 

T. J. Rodgers

 

55

 

President, Chief Executive Officer and Director

 

1982

 

 

 

 

 

 

 

Antonio R. Alvarez

 

46

 

Executive Vice President, Memory Products Division

 

1993

 

 

 

 

 

 

 

Emmanuel T. Hernandez

 

47

 

Executive Vice President, Finance and Administration
Chief Financial Officer

 

1994

 

 

 

 

 

 

 

Ralph H. Schmitt

 

42

 

Executive Vice President, Sales and Marketing

 

2000

 

 

 

 

 

 

 

Christopher Seams

 

40

 

Executive Vice President, Worldwide Manufacturing &
Research and Development

 

2002



Except as set forth below, each of our executive officers has been engaged in his principal occupation described above during the past five years. There is no family relationship between any of our directors or executive officers.

T.J. Rodgers is a co-founder of Cypress Semiconductor Corporation and has been a Director and its President and Chief Executive Officer since 1982. Mr. Rodgers serves as a director of SolarFlare Communications, Infinera, ION America and SunPower.

Antonio R. Alvarez joined Cypress in May 1987 as a senior technical engineer. Mr. Alvarez was transferred to our former subsidiary, Aspen Semiconductor Corporation, in April 1988 as the manager of BiCMOS technology. In October 1989, Mr. Alvarez returned to the corporate office as Vice President, Research and Development. In February 1993, Mr. Alvarez became responsible for Fab 1 when it was merged with the research and development department. In 1998, Mr. Alvarez also became responsible for the Memory Products Division. Mr. Alvarez was named Executive Vice President in April 1999. In 2001, responsibilities for research and development were transferred to Mr. Christopher Seams.


Page 16



Emmanuel T. Hernandez joined Cypress in June 1993 as Corporate Controller. In January 1994, Mr. Hernandez was promoted to Senior Vice President, Finance and Administration, and Chief Financial Officer. Prior to joining Cypress, Mr. Hernandez held various financial positions with National Semiconductor Corporation from 1976 through 1993. Mr. Hernandez was named Executive Vice President in May 1998. Mr. Hernandez serves as a board member of Xicor, Inc. ON Semiconductor and SunPower.

Ralph H. Schmitt joined Cypress in 1987 as our first account manager. In 1991 he became responsible for the Mid-Atlantic sales region. In 1993 he was named Director of Worldwide Strategic Accounts. In 1995 Mr. Schmitt left Cypress to found GroupTec LLC, a Manufacturers’ Representative. He was a Partner and President of this firm. Mr. Schmitt rejoined Cypress in January 1998 as Sales Director with responsibility for transitioning the sales and marketing organization to align with Cypress’s shift to a market-based strategy. He was appointed Vice President, Segment Sales and Marketing in September 1999 and named Vice President, Sales and Marketing in June 2000. Mr. Schmitt was named an Executive Vice President in July 2000.

Christopher Seams joined Cypress in 1990 and held a variety of positions in process and assembly technology research and development and manufacturing operations. In 2001, Mr. Seams became responsible for Research and Development. He was appointed Executive Vice President, Manufacturing and Research and Development in November 2002. He serves as a board member of 1ST Silicon, Ronal Systems and SunPower.

ITEM 2.         PROPERTIES

Our executive offices are located in a wholly-owned approximately 111,000 square-foot building at 198 Champion Court, San Jose, California. The table below sets out our principal owned and leased properties at December 29, 2002:

 

 

 

Location

 

Building
Sq. Ft.

 

Use

 

 

 


 


 


 

 

 

 

 

 

 

 

 

Owned

 

 

 

 

 

 

 

 

 

San Jose, CA

 

111,000

 

Office

 

 

 

Bloomington, MN

 

170,000

 

8” Fab

 

 

 

Round Rock, TX

 

100,000

 

6” Fab

 

 

 

Cavite, The Philippines

 

162,000

 

Assembly & test

 

 

 

Laguna, The Philippines

 

216,000

 

Not in Use

 

 

 

Woodinville, WA

 

 58,000

 

Held for Sale

 

 

 

 

 

 

 

 

 

Leased

 

 

 

 

 

 

 

 

 

San Jose, CA (1)

 

200,000

 

Office, labs, light manufacturing

 

 

 

San Jose, CA (1)

 

 61,000

 

R&D, Labs, Office

 

 

 

Lynwood, WA

 

 69,000

 

Office, light manufacturing

 

 

 

Bloomington, MN (1)

 

100,000

 

8” Fab

 

 

 

Sunnyvale, CA

 

 18,000

 

R&D, Office, light manufacturing

 


   (1)   Synthetic Lease: See Note 18 of our Consolidated Financial Statements for more discussion of synthetic lease transactions.

In order to accommodate the expected growth requirements of the Personal Communication and Timing Technology divisions, we entered into a lease, with an option to purchase, on a 69,000 sq. ft. building in Lynwood, Washington. in November 2002. On December 30, 2002, Cypress exercised its option to purchase that building from the developer for $11.3 million.

We lease additional space for sales and design centers in the United States, Belgium, Canada, China, Finland, France, Germany, India, Ireland, Italy, Japan, Korea, Singapore, Sweden, Taiwan, Turkey and the United Kingdom.

As of the end of fiscal year 2002, we believe that our current properties are suitable for our foreseeable needs.


Page 17



ITEM 3.         LEGAL PROCEEDINGS

In January 2002, Cypress was contacted by Syndia Corporation (“Syndia”), which alleged that Cypress infringed two patents on which Jerome Lemelson was named as the inventor (see the Lemelson Partnership discussion below). These two patents are related to three of the non-stayed patents in the Lemelson Partnership litigation in Arizona described below. 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 Nevada on the same 14 patents, brought against the Lemelson Partnership by manufacturers of machine vision and bar coding equipment. 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 the Arizona litigation. Of the four patents that are not stayed, three are related to each other, and these three are also related to the two patents that Syndia has asserted have been infringed by Cypress (see above). 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. Following that trial, the parties are required to submit no later than April 3, 2003, briefs to the judge, who will review the briefs and then make a 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, including but not limited to the inequitable conduct defenses being tried in February 2003, 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 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.

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the security holders during the quarter ended December 29, 2002.

 


Page 18



PART II

ITEM 5.         MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the New York Stock Exchange under the trading symbol “CY”. The following table sets forth, for the periods indicated, the low, high and closing price for the common stock. We have not paid cash dividends and have no present plans to do so. As of March 10, 2003, there were approximately 66,000 holders of record of our Common Stock.

 

 

 

PRICE RANGE OF
COMMON STOCK ($)

 

 

 


 

 

 

LOW

 

HIGH

 

CLOSE

 

 

 


 


 


 

Fiscal Year ended December 29, 2002:

 

 

 

 

 

 

 

First Quarter

 

18.04

 

25.48

 

23.00

 

Second Quarter

 

13.40

 

24.25

 

15.18

 

Third Quarter

 

6.77

 

15.54

 

6.88

 

Fourth Quarter

 

3.60

 

9.50

 

5.70

 

Fiscal Year ended December 30, 2001:

 

 

 

 

 

 

 

First Quarter

 

16.50

 

29.25

 

17.73

 

Second Quarter

 

13.72

 

25.36

 

23.85

 

Third Quarter

 

14.04

 

28.95

 

14.86

 

Fourth Quarter

 

14.00

 

26.20

 

20.62

 


See Note 16 in the consolidated financial statements included in this report for equity compensation plan information.

ITEM 6.         SELECTED CONSOLIDATED FINANCIAL DATA

 

 

 

Year Ended

 

 

 


 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

 

 


 


 


 


 


 

 

 

(In thousands, except per share)

 

Operating results:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

774,746

 

$

819,192

 

$

1,287,787

 

$

745,042

 

$

588,915

 

Restructuring, acquisition and other costs

 

123,127

 

293,366

 

55,729

 

34,091

 

60,737

 

Operating income (loss)

 

(231,344

)

(459,618

)

328,839

 

51,607

 

(115,559

)

Income (loss) before income taxes

 

(246,260

)

(437,196

)

370,170

 

95,169

 

(112,702

)

Net income (loss)

 

$

(249,098

)

$

(407,412

)

$

277,308

 

$

88,130

 

$

(101,594

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(2.02

)

$

(3.28

)

$

2.29

 

$

0.81

 

$

(0.97

)

Diluted

 

$

(2.02

)

$

(3.28

)

$

2.03

 

$

0.76

 

$

(0.97

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

123,112

 

124,135

 

121,126

 

108,156

 

105,238

 

Diluted

 

123,112

 

124,135

 

144,228

 

115,527

 

105,238

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

127,937

 

$

205,422

 

$

884,601

 

$

280,947

 

$

174,513

 

Working capital

 

314,187

 

372,333

 

983,359

 

360,639

 

250,889

 

Total assets

 

1,572,648

 

1,886,436

 

2,361,754

 

1,146,958

 

850,645

 

Long term debt and capital lease obligations (excluding current portion)

 

469,875

 

525,673

 

631,055

 

170,884

 

170,540

 

Stockholders’ equity

 

$

673,623

 

$

868,428

 

$

1,327,668

 

$

718,620

 

$

517,825

 


(1)       We operate on a 52- or 53-week fiscal year. Fiscal years 2002, 2001, 2000 and 1998 were 52-week fiscal years ending on the Sunday closest to December 31. 1999 was a 53-week fiscal year ending on the Sunday closest to December 31.

(2)       The preceding table presents financial information including the eleven acquisitions completed in fiscal 2002, 2001 and 2000. See Notes 4 and 5 of the consolidated financial statements included in this report for discussions of the acquisitions, which may affect the comparability of the data.

 


Page 19



ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties, including, but not limited to, statements as to future operating results and business plans, our prospects and the prospects of the semiconductor industry generally, and statements as to the use of autolines for factory output, cost savings and productivity improvements and other benefits from information systems, the proportion of parts assembled in our Philippines factory, pressure on and trends for average selling prices, investments by competitors in manufacturing capacity and productivity yields, entering into licensing arrangements with third parties, capital expenditures, future acquisitions, the financing of SunPower Corporation, the impact of SunPower Corporation on future financial results, our expected effective control of SunPower Corporation, 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” and elsewhere in this Report.

Results of Operations

Revenues

Revenues for fiscal 2002 were $774.7 million, a decrease of $44.4 million or 5.4% compared to revenues for fiscal 2001 and a decrease of $513.0 million or 39.8% compared to revenues for fiscal 2000. We derive our revenues from the sale of Memory products and Non-memory products, which are targeted primarily to the data communications, computation and consumer markets. Revenues in both markets were adversely affected in fiscal 2002 and fiscal 2001 by the economic slowdown in both the semiconductor market and the global economy in general.

Business Segment Net Revenues

 

 

Year Ended

 

 

 


 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 

December 31,
2000

 


 


 


 


 

Memory

 

$

303,388

 

$

350,908

 

$

638,111

 

Non-memory

 

471,358

 

468,284

 

649,676

 

 

 


 


 


 

Total consolidated revenues

 

$

774,746

 

$

819,192

 

$

1,287,787

 

 

 



 



 



 


Revenues from the sale of Memory products for fiscal 2002 decreased $47.5 million or 13.5% versus revenues from the sale of these products for fiscal 2001. Memory product revenues decreased as compared to fiscal 2001 despite a 25.3% increase in unit demand for semiconductor products, particularly in the wireless markets. In fiscal 2002, average selling prices (“ASPs”) decreased although the average density (Mbits/unit) of SRAMs products sold continued to increase. Cypress uses average ASP/Mbit as an indication of the magnitude of price change for Memory products. This metric reflects changes in product mix and density as well as market price. ASP/Mbit declined by 55% from fiscal 2001 to fiscal 2002 and 26% from fiscal 2000 to fiscal 2001.

Revenues from the sale of Memory products for fiscal 2001 decreased $287.2 million or 45.0% versus revenues from the sale of these products for fiscal 2000. The decrease in Memory product revenues, as compared to fiscal 2000, resulted from a 52.1% decrease in unit demand for semiconductor products particularly in the wireless and networking markets. In fiscal 2001, ASPs increased as a result of a continuing increase in the average density (Mbits/unit) of SRAMs products sold. This increase was driven by new product revenues, particularly the 4 and 8 Meg MoBL family of parts and the 9 Meg and 18 Meg synchronous family of SRAMs.

Revenues in fiscal 2002 from the sale of Non-memory products increased $3.1 million or 0.7% when compared to revenues from the sale of these products for fiscal 2001. The increase in Non-memory product revenues, as compared to fiscal 2001, resulted primarily from a 32.0% increase in unit sales. The increase in unit sales resulted from increases in unit demand primarily from our USB family of products, Neuron, and Programmable Clocks.


Page 20



Revenues in fiscal 2001 from the sale of Non-memory products decreased $181.4 million or 27.9% when compared to revenues from the sale of these products for fiscal 2000. The decrease in Non-memory product revenues, as compared to fiscal 2000, resulted primarily from a 26.7% decrease in unit sales. The decrease in unit sales resulted from decreases in unit demand in all aspects of the networking end markets, and reduced end customer demand in the personal computer market in the first half of fiscal 2001. Demand for PC-related clock chips and USB related products recovered in the second half of fiscal 2001.

As is typical in the semiconductor industry, ASPs of products generally decline over the lifetime of the products. To increase revenues, Cypress seeks to expand its market share in the markets it currently serves and to introduce and sell new products with higher ASPs. Cypress will seek to remain competitive with respect to its pricing to prevent a further decline in sales.

Cost of Revenues /Gross Margin

Cost of revenues were $443.4 million, $552.3 million and $564.8 million in fiscal 2002, fiscal 2001 and fiscal 2000, respectively.

During fiscal 2002, although our ASPs declined significantly, we were generally able to offset this effect on our gross margin by implementing cost cutting measures including reducing manufacturing capacity and related headcount. In addition, we continued to reduce manufacturing cycle times, reduce die size, improve labor productivity, improve efficient use of capital resources, improve defect densities, improve yields and ultimately lower manufacturing costs. Wafer fabrication utilization degraded slightly from 2001 as die per wafer increased due to the ramp of our RAM 7 and RAM 8 manufacturing processes. Our gross margin also benefited from the sale of inventory reserved during the third quarter of fiscal 2001 (see below). The incremental gross margin benefit of $20.3 million is equivalent to the original cost basis of the inventory sold. The effect was to increase gross margin by 2.6%. Our future results could be favorably affected if we continue to sell fully reserved inventory. The amount of that reserved inventory on hand at December 29, 2002 was $44.3 million.

During the third quarter of fiscal 2001, Cypress received feedback from our customers that indicated that the downturn in sales would last longer than previously anticipated. Accordingly, we increased inventory reserves during the quarter for inventory that we did not expect to sell. Cost of revenues in the third quarter of fiscal 2001 included an unusual charge of $93.1 million for inventory reserves; during fiscal 2001, including the $93.1 million charge, total net charges for inventory reserves were $125.4 million. Additional charges to cost of revenues to increase inventory reserves may be necessary in the future if demand declines.

The decrease in gross margin in fiscal 2001 from fiscal 2000 was caused by increased inventory reserves, under-utilization in our factories and continued declines in the ASPs of memory, USB and clock devices.

Cypress is continuing its strong emphasis on new product development and improvements in manufacturing technologies and yields, which Cypress expects will reduce manufacturing costs and help offset some of the impact of near term margin declines.

Property, plant and equipment with a net book value of $3.1 million was also written off to cost of revenues as a result of a periodic physical count of property, plant and equipment completed during the third quarter of fiscal 2001.

Research and Development

 

 

Year Ended

 

 

 


 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 

December 31,
2000

 


 


 


 


 

Revenues

 

$

774,746

 

$

819,192

 

$

1,287,787

 

Research and development

 

287,909

 

267,522

 

184,471

 

R&D as percent of revenues

 

 

37.2

%

 

32.7

%

 

14.3

%

 

 



 



 



 


Research and development (“R&D”) expenditures in fiscal 2002 increased from fiscal 2001 and fiscal 2000 as Cypress continued its efforts to develop new products and to migrate to more advanced process technologies. R&D charges for fiscal 2002 increased from fiscal 2001 due to increased spending for our Silicon Magnetics Systems (“SMS”) subsidiary and acquisition related compensations costs. Cypress believes that its future success will depend on its ability to develop and introduce new products that will compete effectively on the basis of price, performance, and ability to address customer needs. Our process technology research focuses primarily on the continuous migration to smaller geometries. During fiscal 2002 we were 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 Fab 4 in Minnesota.

During fiscal 2002, we recorded $38.3 million in non-cash deferred stock compensation and contingent cash compensation related to Sahasra and the full year effect of our acquisitions made in fiscal 2001. During fiscal 2001, we recorded $25.4 million in non-cash deferred stock compensation and contingent cash compensation related to acquisitions. Acquisition related compensation charged in fiscal 2001 is primarily attributed to the SLM, IMI, HiBand and Lara acquisitions.


Page 21



We recorded charges of $5.5 million in the third quarter of fiscal 2001 upon reaching an agreement to settle a patent infringement suit for $8.0 million, of which $5.5 million pertained to prior periods. The remainder relates to future product shipments and has been recorded as a prepaid asset that will be expensed over three years.

Property, plant and equipment with a net book value of $1.5 million was written off to R&D as a result of a periodic physical count of property, plant and equipment completed during the third quarter of fiscal 2001.

Selling, General and Administrative

 

 

 

Year Ended

 

 

 


 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 

December 31,
2000

 


 


 


 


 

Revenues

 

$

774,746

 

$

819,192

 

$

1,287,787

 

Selling, general and administrative

 

151,689

 

165,655

 

153,909

 

 

 


 


 


 

SG&A as percent of revenues

 

 

19.6%

 

 

20.2%

 

 

12.0%

 

 

 



 



 



 


Selling, general and administrative (“SG&A”) expenses in fiscal 2002 decreased from fiscal 2001 due primarily to the effects of the reduction in force from the Q3 2001 restructuring plan (see discussion below) and continuing cost cutting measures. During fiscal 2002, we also realized the cost benefits of transferring certain administrative functions to our Philippines’ operation. Commission and bonus expenses were lower due to the decline in our sales. In addition, SG&A decreased as a result of acquisition related deferred compensation and contingent cash compensation costs declining significantly. The decline in such costs was a result of reduced amortization of compensation charges and non-achievement of milestones. These improvements were partially offset as we increased our loss reserve by $14.8 million for loans outstanding to employees and former employees under the stockholder-approved 2001 Employee Stock Purchase Assistance Plan. (See “Stock Purchase Assistance Plan,” Note 13 in the consolidated financial statements for additional information.)

Selling, general and administrative expenses in fiscal 2001 increased from fiscal 2000 due primarily to increased sales and marketing headcount from our acquisitions during the year, acquisition related compensation charges and several major customer support initiatives, including expanded e-business capabilities and improvements to the web infrastructure and site. Expenses for legal and professional services related to patent infringement litigation, patent filing and tax services also contributed to an increase in administrative costs in the periods under comparison. Lower sales commission expenses and employee bonus expenses partially offset these increases. In fiscal 2001, property, plant and equipment with a net book value of $1.0 million was written off to SG&A as a result of a periodic physical count completed during the third quarter of fiscal 2001.

Included in SG&A are non-cash deferred compensation and contingent cash compensation charges related to our acquisitions. In fiscal 2002, we recorded $3.9 million of these costs related to our 2002 acquisition of Sahasra Networks, Inc. (“Sahasra”) as well as continuing costs related to our previous acquisitions including Silicon Packets, ISD and Lara. During fiscal 2001, we recorded $11.1 million in non-cash deferred compensation and contingent cash compensation related to acquisitions. Acquisition-related compensation charged in fiscal 2001 is primarily attributed to the SLM, IMI, and ScanLogic acquisitions, and charges to fiscal 2000 are related to RadioCom Corporation and SLM.

Acquisition and Other Costs

 

 

 

Year Ended

 

 

 


 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 

December 31,
000

 


 


 


 


 

 

 

 

 

 

 

 

 

Amortization of intangibles

 

$

41,945

 

$

39,730

 

$

14,963

 

Impairment of intangibles

 

20,303

 

36,848

 

 

Amortizaton of goodwill

 

 

32,895

 

6,862

 

Impairment of goodwill

 

14,409

 

29,062

 

 

In-process research and development charge

 

2,166

 

22,718

 

32,425

 

Other charges

 

6,053

 

 

1,964

 

 

 


 


 


 

Total acquisition and other costs

 

$

84,876

 

$

161,253

 

$

56,214

 

 

 



 



 



 


 


Page 22



During fiscal 2002, we acquired Sahasra and made an equity investment in SunPower Corporation (“SunPower”). In-process research and development charges and amortization of intangibles in fiscal 2002 relate to current and prior acquisitions.

The amortization of intangibles increased in fiscal 2002 versus fiscal 2001 due to the acquisition of Sahasra and the full year effect of the amortization of intangibles from the IMI, Lara, Silicon Packets, ISD and ScanLogic acquisitions, all companies acquired in 2001. Amortization of intangibles increased by $24.8 million in fiscal 2001 versus fiscal 2000 due to the acquisitions made in fiscal 2001 and the effects of the acquisition of SLM and RadioCom in fiscal 2000. Impairment of intangibles relates to SLM of $20.3 million and $36.8 million in both fiscal 2002 and fiscal 2001, respectively. The SLM impairment charge for fiscal 2002 was precipitated by further changes in SLM’s business plan that was completed in the fourth quarter of fiscal 2002. The SLM impairment charge for fiscal 2001 was precipitated by a severe economic downturn in the optical market in which SLM participates. As a result, Cypress reviewed SLM’s long-lived assets, in accordance with SFAS 121, for impairment and recognized in fiscal 2001an impairment loss of $36.8 million for existing technology impairment, representing the amount by which the carrying value of the acquired existing technology exceeded the estimated future cash flows of SLM.

In fiscal 2001, amortization of goodwill relates largely to our acquisitions of Lara, ISD, ScanLogic, HiBand, IMI, SLM and Silicon Packets. In accordance with Financial Accounting Standards Board (“FASB”), Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we ceased amortizing goodwill at the end of fiscal 2001 and have not amortized goodwill for acquisitions subsequent to June 30, 2001. In fiscal 2000, amortization of goodwill largely relates to our acquisition of SLM.

In fiscal 2002, Cypress also recorded a goodwill impairment charge of $14.4 million related to SLM in accordance with its annual impairment review under SFAS 142. In fiscal 2001, Cypress recorded a goodwill impairment charge of $29.1 million in accordance with SFAS No. 121, “Accounting for the impairment of long lived assets and for long lived assets to be disposed of” (“SFAS 121”) as a result of the severe downturn in the optical market discussed above. The goodwill impairment charge recorded represented the excess of the pro rata share of goodwill over the future estimated cash flows of SLM.

The in-process research and development charges for fiscal 2002 relate to our equity method investment in SunPower. In-process research and development charges during fiscal 2001 relate to the acquisitions of IMI, HiBand, ScanLogic, Lara, ISD and Silicon Packets, which were completed during fiscal 2001. The fiscal 2000 in-process research and development costs relate to our acquisitions of Silicon Light Machines and RadioCom. For the fiscal 2001 and fiscal 2000 acquisitions, the valuation method used to value in-process technology is a form of discounted cash flow method commonly known as the “percentage of completion” approach. This approach is a widely recognized appraisal method and is commonly used to value technology assets. The value of the in-process technology is the sum of the discounted expected future cash flows attributable to the in-process technology, taking into consideration the percentage of completion of products utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and future markets and the technological risk associated with completing the development of the technology. The cash flows derived from the in-process technology projects were discounted at rates ranging from 25% to 45%. Cypress believes these rates were appropriate given the risks associated with the technologies for which commercial feasibility had not been established. The percentage of completion for each in-process project was determined by identifying the elapsed time invested in the project as a ratio of the total time required to bring the project to technical and commercial feasibility. The percentage of completion for in-process projects acquired ranged from 77% for SunPower, 6% for Sahasra, 10% to 90% for IMI, 5% to 75% for HiBand, 28% to 79% for ScanLogic, 1% to 89% for Lara, 10% to 70% for ISD and 9% to 87% for Silicon Packets. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility.

Other charges recorded during fiscal 2002 were $6.1 million for obsolete design software that is no longer being used. Cypress incurred a one-time charge of $2.0 million in the second quarter of fiscal 2000 due to the acceleration of contractual obligations related to the Arcus acquisition.

Restructuring

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”) after it became clear that actions taken in the previous year would not be sufficient to return the company to profitability. 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 our specific business conditions we took additional actions and made appropriate adjustments to the Fiscal 2001 Restructuring Plan for property plant and equipment, leased facilities and personnel costs.


Page 23



Fiscal 2002 Restructuring Plan:

On October 17, 2002, Cypress announced a restructuring plan that included the resizing of Cypress manufacturing facilities and the reduction of operating expenses, including research and development and selling, general and administration. In the fourth quarter of fiscal 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 there have been no significant sales of the equipment removed from service. At the end of Q4 2002, approximately 41 of the employees had left Cypress. 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. During the first week of fiscal 2003, an additional 311 persons left Cypress as part of the restructuring plan.

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:

 

(In thousands)

 

Property, plant &
equipment

 

Leased
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

 

 

 



 



 



 



 


Fiscal 2001 Restructuring Plan:

On July 16, 2001, Cypress announced a restructuring plan that involved resizing its manufacturing facilities, reducing its workforce and combining facilities. The restructuring was precipitated by the worldwide economic slowdown, particularly in the business areas in which Cypress operates. The intended effect of the plan was to size the manufacturing operations and facilities to meet future demand and reduce expenses in all operations areas. During the third quarter of fiscal 2001, 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, but has had limited success to date in selling this equipment. Through December 29, 2002, Cypress has sold equipment with a net book value of $32.4 million. The proceeds from the sales of the assets approximated their carrying values. In the second and third quarters of fiscal 2002, Cypress placed back into service certain of these assets previously recorded as held for sale. The assets were needed to meet increased production requirements resulting from a substantial increase in unit demand versus 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 SFAS 121. 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 the first quarter of fiscal 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, 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, 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.

Page 24



 

In Q402, 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 fiscal 2002, approximately 884 employees have left the company.

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:

 

(In thousands)

 

Property, plant &
equipment

 

Leased
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

 

 

 



 



 



 



 


Interest Income, Interest Expense and Other Income and (Expense), Net

Interest income, interest expense and other income and (expense), net, was $(14.9) million for fiscal 2002 compared to $22.4 million for fiscal 2001 and $41.3 million for fiscal 2000. Interest income and other, net, includes interest income, amortization of bond issuance costs, foreign exchange gains and losses and other non-operating items.

 

 

 

Year Ended

 

 

 


 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 

December 31,
2000

 


 


 


 


 

Interest income

 

$

21,212

 

$

48,231

 

$

59,152

 

Interest expense

 

(19,197

)

(22,398

)

(23,633

)

Other income and (expense), net

 

(16,931

)

(3,411

)

5,812

 

 

 


 


 


 

Total interest income (expense) and other

 

$

(14,916

)

$

22,422

 

$

41,331

 

 

 



 



 



 


Interest income decreased $27.0 million and $10.9 million in fiscal 2002 and fiscal 2001, respectively. The decreases are primarily due to lower average cash and investment balances and lower yields for each fiscal year.

Interest expense was $19.2 million for fiscal 2002, compared to $22.4 million in fiscal 2001 and $23.6 million in fiscal 2000. Interest expense for each of the fiscal years is primarily associated with the 4.00% Convertible Subordinated Notes (“4.00% Notes”), issued in January 2000, due in fiscal 2005, and the 3.75% Convertible Subordinated Notes (“3.75% Notes”), issued in June 2000, due in 2005. The decrease in interest expense in fiscal 2002 compared to fiscal 2001 is attributable to the repurchase of $101.6 million in principal of the 3.75% Notes that occurred between November 2001 and June 2002. The decrease in interest expense in fiscal 2001 compared to fiscal 2000 is primarily associated with a reduction in interest expense due to the conversion on October 2, 2000 of substantially all of the then outstanding 6.00% Convertible Subordinated Notes (“6.00% Notes”), issued in September 1997, due in 2002.

Other income and (expense), net of $(16.9) million for fiscal 2002 primarily reflects write-downs of $18.2 million in its investments in development stage companies, $1.2 million related to our share of SunPower’s net loss, $0.2 million related to amortization of SunPower’s intangible assets and the amortization of deferred financing costs of $2.8 million. These were partially offset by gains of $5.9 million recognized on the repurchase of our 3.75% Notes. In fiscal 2001, other income and (expense), net of $(3.4) million primarily reflects a $8.9 million write-down of long-term investments and $3.3 million related to the amortization of deferred financing costs. These costs were somewhat offset by gains on the repurchase of convertible notes of $7.2 million. The gain on the repurchase of our convertible subordinated notes was previously classified as extraordinary, but has been reclassified to other income and (expense), net in accordance with SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections” (“SFAS 145”). Other income and (expense), net, for fiscal 2000 primarily reflects a $5.0 million gain on the sale of the Fast CMOS Technology product line and a $4.5 million gain on the disposal of assets partially offset by the amortization of deferred financing costs of $5.3 million.


Page 25



Taxes

A tax expense of $2.8 million was recognized during fiscal 2002 compared to tax benefit of $29.8 million and tax expense of $92.9 million during fiscal 2001 and fiscal 2000, respectively. The expense in fiscal 2002 was largely attributable to foreign income taxes in certain jurisdictions. The Company has not recognized a tax benefit in 2002 for its pre-tax loss, as management believes it is more likely than not that the benefit will not be realized. The fiscal 2001 tax benefit was attributable primarily to current year net operating losses; however, the tax benefit of these losses was limited to what we believed was realizable. The tax expense of $92.9 million in fiscal 2000 represented an effective tax rate on earnings of 25.1%. This amount was lower than the U.S. statutory rates due to the utilization of research and development tax credits and lower tax rates in certain foreign jurisdictions. Our effective tax rate varies from the U.S. statutory rate primarily due to our assessment of the utilization of loss carryovers and earnings of foreign subsidiaries taxed at different rates. The valuation allowance against the net deferred tax asset increased from $60.3 million to $108.4 million from fiscal 2001 to fiscal 2002, as management believes that it is more likely than not that the net deferred tax asset will not be realized.

Liquidity and Capital Resources

 

 

 

Year Ended

 

 

 


 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 

December 31,
2000

 


 


 


 


 

Cash, cash equivalents and short-term investments

 

$

127,937

 

$

205,422

 

$

884,601

 

Restricted Cash

 

62,380

 

74,968

 

60,698

 

Long-term marketable securities

 

32,148

 

134,495

 

211,444

 

Working capital

 

314,187

 

372,333

 

983,359

 

Long-term debt and capital lease obligations (excluding current portion)

 

469,875

 

525,673

 

631,055

 

Net cash flow generated from operating activities

 

 

22,492

 

 

103,738

 

 

524,797

 

 

 



 



 



 


During the year ending December 29, 2002, our operating activities generated cash flows of approximately $22.5 million. During the same period our cash and cash equivalents declined by $22.8 million. This decrease is due to the $18.9 million and $26.4 million used for investing activities and financing activities, respectively.

Key Components of Cash Flow

Prior to changes in operating assets and liabilities, we generated $55.8 million in cash during fiscal 2002. Working capital consumed $33.4 million due to inventory builds in the last half of fiscal 2002. With continued weak sales, manufacturing capacity has been reduced to avoid additional inventory builds. Accounts payable declined as we significantly slowed purchases of capital equipment in the latter part of fiscal 2002. These changes were partially offset by a decline in net accounts receivable commensurate with the change in revenues.

Net of purchases, the sale of investments generated $149.8 million in cash in fiscal 2002. This was offset by the acquisition of $158.5 million in property, plant and equipment and $24.8 million in investments in other companies.

In fiscal 2002, the issuance of shares for purchase under our Employee Qualified Stock Purchase Plan (“ESPP”) and exercised employee options generated $25.3 million while the purchase by us of our stock and our 3.75% convertible subordinated notes consumed $42.1 million in fiscal 2002.


Page 26



During fiscal 2001, cash provided by operating activities of $103.7 million was primarily attributed to changes in operating assets and liabilities of $77.4 million and net loss adjusted for non-cash items.

Net cash flows used in investing activities of $315.1 million for fiscal 2001 related primarily to the use of $352.1 million in cash for acquisitions net of cash acquired, $176.8 million for the purchases of property, plant and equipment and $117.2 million for loans made by Cypress to employees under the Employee Stock Purchase Assistance Plan. Purchases of investments totaled $183.2 million during fiscal 2001, while investments, which were sold or matured, totaled $502.7 million.

Net cash flows used for financing activities were $213.7 million during fiscal 2001. Repurchases of common stock were $190.5 million, redemption of convertible debt was $45.4 million and purchases of private placement equity options, net were $13.9 million. These cash outflows were offset by cash inflows of $10.6 million related to the premiums received from the writing of stock put options and $30.8 million related to the issuance of common shares from the exercise of options or purchases through the ESPP.

For the year ended December 31, 2000, cash provided by operation activities of $524.8 million was primarily attributable to earnings of $277.3 million, tax benefits from stock options of $56.7 million, acquired in-process research and development of $32.4 million and depreciation and amortization of $150.7 million offset by changes in operating assets and liabilities of $5.7 million.

Net cash flows used in investing activities of $646.5 million for fiscal 2000 related primarily to purchases of investments, which totaled $492.9 million and purchases of property, plant and equipment of $338.7 million. Investments that were sold or matured totaled $181.0 million in fiscal 2000.

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 infrastructure initiatives. 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 at anytime. However, the timing and actual number of shares or principal amount to be repurchased is limited to $15.0 million and is at the discretion of management and are contingent on numerous factors including cash flow. We have $468.9 million of aggregate principal amount in 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 December 29, 2002, Cypress was in compliance with these covenants. If we failed to be in compliance with these covenants beyond any applicable grace period, the trustee of the Subordinated Notes, or the holders of a specific percentage thereof, would have the ability to demand immediate payment of all amounts outstanding.

As more fully discussed in Note 18 to our consolidated financial statements included in this report, Cypress has entered into several 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 December 29, 2002, it would have been required to make a payment and record assets totaling $61.6 million. Cypress is required to maintain restricted cash or investments to serve as collateral for these leases. As of December 29, 2002, the amount of restricted cash recorded was $62.4 million, which was classified as a non-current asset on the consolidated balance sheet.

At December 29, 2002, Cypress had purchase commitments aggregating $29.7 million, principally for manufacturing equipment, and facilities, bulk gas and nitrogen. These commitments relate to purchases to be made in fiscal 2003 of $27.7 million and the remainder committed through fiscal 2008.

In June 1997, Cypress borrowed 700 million yen at 2.1% from Sumitomo Bank Japan. The outstanding principal, including accrued interest, amounts to $4.2 million at December 29, 2002 and is due in June 2003.

In May 2002, we invested $8.7 million in preferred stock of privately held SunPower a manufacturer of ultra-high-efficiency silicon solar cells. Cypress, at December 29, 2002 owned, and currently owns approximately 57% of SunPower on an as converted basis. We own a warrant to purchase an additional $16 million in preferred stock in SunPower. If we do not exercise the warrant by April 1, 2003, or the warrant expires, we will be obligated, based on our current agreements, to fund SunPower up to $5.6 million through May 2004. In February 2003, we loaned SunPower $2.5 million. SunPower, which was accounted for under the equity method in fiscal 2002 due to the existence of substantive participating rights by the minority shareholders, will be a consolidated subsidiary of Cypress at the time, if any, when we have effective control. Any future funding of SunPower is based upon SunPower achieving its planned business milestones in 2003. If SunPower achieves its milestones in 2003, we anticipate we will burther fund SunPower resulting in us obtaining effective control in fiscal 2003.

 


Page 27



Below is a summary of fixed payments related to certain contractual obligations, including synthetic lease arrangements. Payment timing may be subject to change.

 

 

 

Payments Due by Period

 

 

 


 

(In thousands)

 

Total

 

Years
1 Year

 

2-3
Years

 

4-5+
Years

 

 

 


 


 


 


 

Convertible Subordinated Notes-including interest

 

$

518,114

 

$

18,291

 

$

499,823

 

$

 

Operating leases, including synthetic leases

 

48,958

 

18,367

 

16,742

 

13,849

 

Purchase commitments

 

3,514

 

1,609

 

762

 

1,143

 

Customer advances

 

55,936

 

3,950

 

51,986

 

 

Short Term Borrowing

 

4,212

 

4,212

 

 

 

SunPower commitments

 

8,100

 

6,100

 

2,000

 

 

 

 


 


 


 


 

Total

 

$

638,834

 

$

52,529

 

$

571,313

 

$

14,992

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 


 

As of December 29, 2002, Cypress was in violation of one covenant related to two synthetic lease agreements with one lessor for buildings located on the main campus in San Jose, California. Cypress expects to receive a waiver for this violation during the first quarter of 2003. If Cypress does not receive the waiver, then Cypress will either purchase the building or pursue alternative financing arrangements.

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 $87.2 million in cash and cash equivalents that we currently have for short-term requirements, we have approximately $72.9 million in marketable debt securities that are available for future operating, financing and investing activities, for a total liquid cash and investment position of $160.1 million. Cypress has an additional $62.4 million of restricted cash (as more fully discussed in Note 18 to our consolidated financial statements included in this report) for a total cash, investment and restricted cash position of $222.5 million. As of December 29, 2002 Cypress has issued $287.5 million in convertible subordinated securities from a $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, and provide us with additional flexibility to take advantage of business opportunities that arise.

As disclosed in Note 18, as of December 29, 2002 Cypress was in violation of one covenant related to two synthetic lease agreements with one lessor for buildings located on our main campus in San Jose, California. Cypress expects to receive a waiver for this violation during the first quarter of fiscal 2003. If Cypress does not receive the waiver, then Cypress will purchase the buildings for their lease balance or find another buyer. If Cypress elects the purchase option, then existing restricted cash will be used to purchase the buildings. At the end of fiscal 2002, the restricted cash recorded for these leases was adequate to cover the purchase price. During the first quarter of fiscal 2003, Cypress entered into negotiations with a third party to replace the current lessor on the leases referenced above. Cypress expects to complete this transaction in the second quarter of fiscal 2003.

Subsequent Events

In Q1 2003, we announced that further actions would be taken as part of our restructuring efforts. These actions include a workforce reduction in Q1 2003 that we anticipate will result in a charge of approximately $3.0 million. In addition, on December 30, 2002 we exercised an option to purchase the Lynwood, Washington building from the developer for $11.3 million in cash.


Page 28



Critical Accounting Policies

Our discussion and analysis of our financial condition and the results of our operations are based upon our consolidated financial statements included in this report and the data used to prepare them. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and we are required to make estimates, judgments and assumptions in the course of such preparation. Note 1 to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an ongoing basis, we re-evaluate our judgments and estimates including those related to revenue recognition, product returns, allowances for doubtful accounts receivable and employee loans, inventories, valuation of long-lived assets including intangibles, investment impairments, restructuring charges, goodwill impairments, income taxes, litigation and contingencies. We base our estimates and judgments on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. We believe the following are our critical accounting policies that are affected by significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements.

Revenue Recognition

We generate revenue by selling our products to original equipment manufacturers and distributors. Our policy is to recognize revenue from sales to customers when title and the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection of the resulting receivable is reasonably assured.

We allow certain distributors, primarily based in the United States, rights of return and other credits for price protection. Given the uncertainties associated with the levels of returns and other credits issuable to these distributors, we defer recognition of revenue from sales to these distributors until they have resold our products. Our method of deferral is based on certain assumptions, including average gross margins. If actual results differ from our estimates, future operating results could be adversely affected.

Sales to certain other primarily non-U.S. based distributors carry either no or very limited rights of return. We have historically been able to estimate returns and other credits from these distributors and accordingly have historically recognized revenue from sales to these distributors on shipment, with a related allowance for potential returns established at the time of our sale. We must make estimates of potential future product returns and revenue adjustments related to current period product revenue. Management analyzes historical returns, current economic trends in the semiconductor industry, changes in customer demand and acceptance of our products when evaluating the adequacy of our allowance for sales returns. If management made different judgments or utilized different estimates, material differences in the amount of our reported revenue may result. We provide for these situations based on our experience with specific customers and our expectations for revenue adjustments based on economic conditions within the semiconductor industry. At December 29, 2002, December 30, 2001 and December 31, 2000 our reserves for sales returns were $1.8 million, $3.6 million, and $4.2 million, respectively.

Allowance for doubtful accounts and employee loans

We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers’ inability to make required payments. We make our estimates of the collectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. At December 29, 2002, the allowance for doubtful accounts was $1.7 million at December 30, 2001 it was $3.7 million and at December 31, 2000 it was $2.0 million.

Cypress has outstanding loans, consisting of principal and cumulative accrued interest, of $106.6 million to employees and former employees under the shareholder-approved 2001 Employee Stock Purchase Assistance Plan. Each loan is evidenced by a full recourse promissory note executed by the employee in favor of Cypress and is secured by a pledge of the shares of Cypress’s common stock purchased with the proceeds of the loan. As of December 29, 2002, Cypress has a loss reserve against these accounts of $16.0 million. In determining the reserve, management considered various factors, including an independent fair value analysis of these employee and former employee loans and the underlying collateral. At December 29, 2002, the difference between the carrying value of the loan and the underlying common stock collateral was $61.6 million. If the underlying assumptions supporting our reserve requirements change, including the value of our stock price, future operating results could be adversely affected.


Page 29



Accounting for income taxes

Cypress’s global operations involve manufacturing, R&D and selling activities outside the United States. Profit from non-U.S. sales are tax deferred until repatriated back to the U.S. This lowers our effective tax rate. If management decides to remit these earnings to the U.S. in a future period, our provision for taxes may increase materially in that period. Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of the deferred tax assets will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined not to be realizable. As at December 29, 2002, we have recorded a full valuation allowance against our net deferred tax assets. While we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance. This adjustment would increase income in the period such determination was made. We have recorded valuation allowances against our net deferred tax assets of $108.4 million at December 29, 2002 and $60.3 million at December 30, 2001 and none at December 31, 2000. The valuation allowances relate primarily to deferred tax assets in the U.S., where the realization of tax benefit of such assets is not assured.

Valuation of Inventory

We write down our inventory for “lower of cost or market” reserves, aged inventory reserves and obsolescence reserves. Inventory reserves are generally recorded when the inventory for a device exceeds nine months of demand for that device and/or when individual parts have been in inventory for greater than six months. Our inventories represent high-technology parts that may be subject to rapid technological obsolescence and which are sold in a highly competitive industry. If actual product demand or selling prices are less favorable than we estimate, we may be required to take additional inventory write-downs. Conversely, if demand comes back for devices that have been fully reserved, our future margins may be higher.

Valuation of Long-Lived Assets

Our business requires heavy investment in manufacturing facilities that are technologically advanced but can quickly become significantly under-utilized or rendered obsolete by rapid changes in demand for semiconductors produced in those facilities. In addition, we have recorded intangible assets related to our acquisitions.

We evaluate our long-lived assets and intangible assets in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). We review our other long-lived assets, including property and equipment and other identifiable finite intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for its business, significant negative industry or economic trends, and a significant decline in our stock price for a sustained period of time. Impairments are recognized based on the difference between the fair value of the asset and its carrying value, and fair value is generally measured based on discounted cash flow analyses.

We recorded an impairment charge on indefinite useful lived intangibles in the fourth quarter of fiscal 2002 of $20.3 million related to SLM.

If there is a significant decrease in our business in the future, we may be required to record impairment charges in the future.


Page 30



Goodwill Impairments

We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances for each reporting unit, Refer to Note 3 in the consolidated financial statements included in this report.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the businesses with recognized goodwill for the purposes of our fiscal 2002 consolidated financial statements, we made estimates and judgments about the future cash flows of these businesses. Our cash flow forecasts were based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses. In addition, we made certain judgments about allocating shared assets such as accounts receivable and inventory to the estimated balance sheet for those businesses. We also considered our market capitalization on the dates of our impairment tests under SFAS 142, in determining the fair value of the respective businesses.

In connection with the adoption of SFAS 142, effective the beginning of fiscal 2002, we completed the required transistional analysis in Q1 2002 with no impairment charge required. In addition, as required by SFAS 142, we performed our annual goodwill impairment test. We performed this test in Q4 2002. As a result of this impairment test, we recorded a goodwill impairment charge of $14.4 million related to SLM. However, changes in these estimates, including projected cash flows of our market capitalization, could cause one or more of the businesses to be valued differently, which could result in a future impairment of our remaining goodwill.

Restructuring costs

We currently have two active restructuring plans – one initiated in the third quarter of fiscal 2001 and the other initiated in the fourth quarter of fiscal 2002 after it became clear that actions taken in the previous year would not be sufficient to return the company to profitability. Both plans were designed to reduce costs and expenses in order to return the company to profitability.

The current accounting for restructuring costs requires us to record provisions and charges when we have a formal and committed plan. In connection with these plans, we have recorded estimated expenses for severance and outplacement costs, lease cancellations, asset write-offs and other restructuring costs. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”) which provides accounting and reporting guidance for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction or normal operation of a long-lived asset. The standard is effective the beginning of our fiscal 2003. We are currently evaluating the effect that SFAS 143 will have on our financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS No. 13, and Technical Corrections” (“SFAS 145”). Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. We adopted SFAS 145 in 2002 and have, accordingly, reclassified an Extraordinary gain from fiscal 2001 to other income and expense, net related to the repurchase of convertible subordinated notes.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth in Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees who are involuntarily terminated. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. We do not expect that the adoption of SFAS 146 will have a significant impact on our consolidated financial statements.


Page 31



In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued. We will apply the recognition provisions of FIN 45 prospectively to guarantees issued after December 31, 2002. We are currently in the process of evaluating the potential impact that the adoption of FIN 45 will have on our consolidated financial statements.

In December 2002, the FASB issued SFAS No.148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FAS 123” (“SFAS 148”). SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Since we intend to continue to apply the intrinsic value method of accounting for stock-based compensation, the adoption of SFAS 148 will not have an effect on our consolidated financial statements. However, we will provide the additional disclosures required by SFAS 148 in 2003.

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 currently evaluating the effect that FIN 46 will have on our consolidated financial statements.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest and Foreign Currency Exchange Rates

Cypress is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, Cypress utilizes derivative financial instruments. Cypress does not use derivative financial instruments for speculative or trading purposes.

The fair value of Cypress’s investment portfolio would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of the major portion of Cypress’s investment portfolio. An increase in interest rates would not significantly increase interest expense due to the fixed nature of Cypress’s debt obligations.

A majority of Cypress’s revenue and capital spending is transacted in U.S. dollars. However, Cypress does enter into these transactions in other currencies, primarily Japanese yen and Euro. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, Cypress has established revenue and balance sheet hedging programs. Cypress’s hedging programs reduce, but do not always eliminate, the impact of foreign currency exchange rate movements. Based on Cypress’s overall currency rate exposure at December 29, 2002, 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.

All of the potential changes noted above are based on sensitivity analyses performed on Cypress’s balances as of December 29, 2002.

Equity Options

At December 29, 2002, 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. During fiscal 2002, the contracts resulted in net cash inflows of $1.6 million.


Page 32



Investments in Privately-Held Companies

Cypress has also invested in several privately held companies, all of which can be considered in the startup or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. As of December 29, 2002, Cypress had invested $25.1 million, in development stage companies, all of which could be lost if the companies are not successful.

As our equity investments generally do not permit us to exert significant influence or control over the entity in which we are investing, these amounts generally represent our cost of the investment, less any adjustments we make when we determine that an investment’s net realizable value is less than its carrying cost.

The process of assessing whether a particular equity investment’s net realizable value is less than its carrying cost requires a significant amount of judgment. In making this judgment, we carefully consider the investee’s cash position, projected cash flows (both short and long-term), financing needs, most recent valuation data, the current investing environment, management/ ownership changes, and competition. This evaluation process is based on information that we request from these privately-held companies. This information is not subject to the same disclosure and audit requirements as the reports required of U.S. public companies, and as such, the reliability and accuracy of the data may vary. Based on our evaluation, we recorded impairment charges related to our investments in privately-held companies of $ 18.1 million in fiscal 2002, $1.5 million in fiscal 2001 and none in fiscal 2000.

Estimating the net realizable value of investments in privately-held early-stage technology companies is inherently subjective and may contribute to volatility in our reported results of operations. For example, if the current weak investing environment continues throughout fiscal 2003, we may incur additional impairments to our equity investments in privately-held companies.

Stock Purchase Assistance Plan

Included in other current assets as of the year end of fiscal 2002, Cypress has outstanding loans, consisting of principal and cumulative accrued interest, of $106.6 million to employees and former employees under the shareholder-approved 2001 Employee Stock Purchase Assistance Plan. As of the end of fiscal 2001, the outstanding principal and cumulative accrued interest totaled $118.4 million. Cypress made the loans to employees for the purpose of purchasing Cypress common stock. Each loan is evidenced by a full recourse promissory note executed by the employee in favor of Cypress and is secured by a pledge of the shares of Cypress’s common stock purchased with the proceeds of the loan. The primary benefit to Cypress from this program is increased employee retention. In accordance with the plan, the CEO and the Board of Directors do not participate in this program. To date, there have been immaterial write-offs. As of December 29, 2002 Cypress has a loss reserve against these loans of $16.0 million. In determining the reserve, management considered various factors, including an independent fair value analysis of these employee and former employee loans and the underlying collateral. At December 29, 2002, the difference between the carrying value of the loan and the underlying common stock collateral was $61.6 million.

If there were an additional 10% decline in the stock price, the difference between the carrying value of the loan and the underlying common stock collateral would be $64.6 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 employees’ personal assets should the employees not repay these loans.


Page 33



ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS

35

 

CONSOLIDATED STATEMENTS OF OPERATIONS

36

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

37

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

38

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

39

 

REPORT OF INDEPENDENT ACCOUNTANTS

72

 

QUARTERLY FINANCIAL DATA

73

 


Page 34



CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)

 

 

 

December 29,
2002

 

December 30,
2001

 

 

 


 


 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

87,200

 

$

109,999

 

Short-term investments

 

40,737

 

95,423

 

 

 


 


 

Total cash, cash equivalents and short-term investments

 

127,937

 

205,422

 

Accounts receivable, net

 

83,054

 

97,817

 

Inventories, net

 

92,721

 

73,268

 

Other current assets

 

210,235

 

250,328

 

 

 


 


 

Total current assets

 

513,947

 

626,835

 

 

 


 


 

Property, plant and equipment, net

 

496,566

 

499,795

 

Intangible assets

 

89,615

 

162,196

 

Goodwill

 

321,669

 

324,764

 

Other assets

 

150,851

 

272,846

 

 

 


 


 

Total assets

 

$

1,572,648

 

$

1,886,436

 

 

 



 



 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

59,431

 

$

73,916

 

Accrued compensation and employee benefits

 

39,151

 

62,669

 

Other current liabilities

 

84,112

 

104,691

 

Deferred income on sales to distributors

 

15,774

 

11,926

 

Income taxes payable

 

1,292

 

1,300

 

 

 


 


 

Total current liabilities

 

199,760

 

254,502

 

 

 


 


 

Convertible subordinated notes

 

468,900

 

517,700

 

Deferred income taxes and other tax liabilities

 

177,404

 

203,272

 

Other long-term liabilities

 

52,961

 

42,534

 

 

 


 


 

Total liabilities

 

899,025

 

1,018,008

 

 

 


 


 

Commitments and contingencies (See Note 18)

 

 

 

 

 

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 139,052 issued; 123,743 and 121,495 outstanding at December 29, 2002 and December 30, 2001

 

1,391

 

1,391

 

Additional paid-in-capital

 

1,172,654

 

1,162,642

 

Deferred stock compensation

 

(25,283

)

(53,141

)

Accumulated other comprehensive income

 

2,376

 

2,722

 

Retained earnings/(accumulated deficit)

 

(155,916

)

103,860

 

 

 


 


 

 

 

995,222

 

1,217,474

 

Less: shares of common stock held in treasury, at cost; 15,421 shares and 17,557 shares at December 29, 2002 and December 30, 2001

 

(321,599

)

(349,046

)

 

 


 


 

Total stockholders’ equity

 

673,623

 

868,428

 

 

 


 


 

Total liabilities and stockholders’ equity

 

$

1,572,648

 

$

1,886,436

 

 

 



 



 


The accompanying notes are an integral part of these Consolidated Financial Statements.

 


Page 35



CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)

 

 

 

Year Ended

 

 

 


 

 

 

December 29,
2002

 

December 30,
2001

 

December 31,
2000

 

 

 


 


 


 

Revenues

 

$

774,746

 

$

819,192

 

$

1,287,787

 

Cost of revenues

 

443,365

 

552,267

 

564,839

 

 

 


 


 


 

 

 

 

 

 

 

 

 

Gross margin

 

331,381

 

266,925

 

722,948

 

 

 

 

 

 

 

 

 

Research and development

 

287,909

 

267,522

 

184,471

 

Selling, general and administrative

 

151,689

 

165,655

 

153,909

 

Acquisition and other

 

84,876

 

161,253

 

56,214

 

Restructuring

 

38,251

 

132,113

 

(485

)

 

 


 


 


 

Total operating costs and expenses

 

562,725

 

726,543

 

394,109

 

 

 


 


 


 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(231,344

)

(459,618

)

328,839

 

 

 

 

 

 

 

 

 

Interest income

 

21,212

 

48,231

 

59,152

 

Interest expense

 

(19,197

)

(22,398

)

(23,633

)

Other income and (expense), net

 

(16,931

)

(3,411

)

5,812

 

 

 


 


 


 

Income (loss) before income taxes

 

(246,260

)

(437,196

)

370,170

 

(Provision) benefit for income taxes

 

(2,838

)

29,784

 

(92,862

)

 

 


 


 


 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(249,098

)

$

(407,412

)

$

277,308

 

 

 



 



 



 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

Basic

 

$

(2.02

)

$

(3.28

)

$

2.29

 

 

 



 



 



 

Diluted

 

$

(2.02

)

$

(3.28

)

$

2.03

 

 

 



 



 



 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding:

 

 

 

 

 

 

 

Basic

 

123,112

 

124,135

 

121,126

 

Diluted

 

 

123,112

 

 

124,135

 

 

144,228

 


The accompanying notes are an integral part of these Consolidated Financial Statements.

 


Page 36



CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

  

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Additional
Paid-In
Capital

 

Deferred Stock
Compensation

 

Treasury
Stock

 

Accum.
Other
Comp.
Income

 

Retained
Earnings/
(Accumulated
Deficit)

 

Total
Stockholders’
Equity

 

 

 


 


 


 


 


 


 


 


 

Balances at January 2, 2000

 

 

114,111

 

$

1,191

 

$

524,951

 

$

(1,932

)

$

(41,931

)

$

 

$

236,341

 

$

718,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in relation to acquisitions

 

3,513

 

35

 

186,390

 

(15,053

)

 

 

 

171,372

 

Repurchase of common stock under stock repurchase program

 

(6,256

)

 

 

 

(143,270

)

 

 

(143,270

)

Issuance of common stock under employee stock plans and other

 

7,519

 

75

 

67,891

 

 

 

 

 

67,966

 

Issuance of common stock due to conversion of notes

 

6,772

 

68

 

159,918

 

 

 

 

 

159,986

 

Amortization of deferred compensation

 

 

 

 

6,625

 

 

 

 

6,625

 

Notes receivable from stockholders

 

 

 

6,040

 

 

 

 

 

6,040

 

Premiums received from issuance of put options

 

 

 

6,288

 

 

 

 

 

6,288

 

Tax benefit resulting from stock option transactions

 

 

 

56,733

 

 

 

 

 

56,733

 

Net income and comprehensive income for the year

 

 

 

 

 

 

 

277,308

 

277,308

 

 

 


 


 


 


 


 


 


 


 

Balances at December 31, 2000

 

125,659

 

1,369

 

1,008,211

 

(10,360

)

(185,201

)

 

513,649

 

1,327,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

 

(407,412

)

(407,412

)

Change in net unrealized gain on available for sale investments, net of tax

 

 

 

 

 

 

2,722

 

 

2,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Total comprehensive loss

 

 

 

 

 

 

 

 

(404,690

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Issuance of common stock in relation to acquisitions

 

2,157

 

22

 

107,566

 

(42,140

)

 

 

 

65,448

 

Repurchase of common stock under stock repurchase program

 

(9,534

)

 

 

 

(190,459

)

 

 

(190,459

)

Re-issuance of treasury shares and issuance of common stock under employee stock plans and other

 

3,213

 

 

6,604

 

 

26,614

 

 

(2,377

)

30,841

 

Provision for and amortization of deferred stock compensation

 

 

 

42, 676

 

(641

)

 

 

 

42,035

 

Notes receivable from stockholders

 

 

 

871

 

 

 

 

 

871

 

Premiums received from issuance of put options

 

 

 

10,648

 

 

 

 

 

10,648

 

Structured purchase of options, net

 

 

 

(13,934

)

 

 

 

 

(13,934

)

 

 


 


 


 


 


 


 


 


 

Balances at December 30, 2001

 

121,495

 

1,391

 

1,162,642

 

(53,141

)

(349,046

)

2,722

 

103,860

 

868,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

 

 

(249,098

)

(249,098

)

Change in net unrealized gain on available for sale investments, net of tax

 

 

 

 

 

 

(1,689

)

 

(1,689

)

Change in net unrealized gain on derivatives, net of tax

 

 

 

 

 

 

1,343

 

 

1,343

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

(249,444

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Issuance of common stock in relation to acquisition

 

112

 

 

2,317

 

(6,606

)

 

 

 

(4,289

)

Repurchase of common stock under stock put program

 

(250

)

 

 

 

(4,925

)

 

 

(4,925

)

Re-issuance of treasury shares and issuance of common stock under employee stock plans and other

 

2,386

 

 

3,593

 

 

32,372

 

 

(10,678

)

25,287

 

Provision for and amortization of deferred stock compensation

 

 

 

1,891

 

34,464

 

 

 

 

36,355

 

Notes receivable from stockholders

 

 

 

439

 

 

 

 

 

439

 

Premiums received from issuance of put options

 

 

 

198

 

 

 

 

 

198

 

Structured purchase of options, net

 

 

 

1,574

 

 

 

 

 

1,574

 

 

 


 


 


 


 


 


 


 


 

Balances at December 29, 2002

 

 

123,743

 

$

1,391

 

$

1,172,654

 

$

(25,283

)

$

(321,599

)

$

2,376

 

$

(155,916

)

$

673,623

 

 

 



 



 



 



 



 



 



 



 


The accompanying notes are an integral part of these Consolidated Financial Statements.

 


Page 37



 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 

 

 

Year Ended

 

 

 


 

 

 

December 29,
2002

 

December 30,
2001

 

December 31,
2000

 

 

 


 


 


 

Cash flow from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(249,098

)

$

(407,412

)

$

277,308

 

Adjustments to reconcile net income (loss) to net cash Generated by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

210,753

 

249,003

 

150,704

 

Acquired in-process research and development

 

2,666

 

23,200

 

32,425

 

Net gain on early retirement of debt

 

(5,946

)

(7,241

)

 

Equity in losses of SunPower

 

1,159

 

 

 

Asset impairments and other

 

58,075

 

80,436

 

(3,036

)

Reserve for Stock Purchase Assistance Plan

 

14,798

 

1,167

 

 

Unrealized gains on foreign currency derivatives

 

(368

)

 

 

Restructuring costs (credits)

 

20,335

 

115,333

 

(485

)

Tax benefit resulting from stock option transactions

 

 

 

56,733

 

Deferred income taxes

 

3,408

 

(28,189

)

5,434

 

Changes in operating assets and liabilities, net of affects of acquisitions:

 

 

 

 

 

 

 

Accounts receivable, net

 

14,763

 

102,262

 

(89,166

)

Inventories, net

 

(19,453

)

40,718

 

(7,162

)

Other assets

 

7,107

 

226

 

(10,667

)

Accounts payable, accrued and other liabilities

 

(37,224

)

(43,454

)

71,876

 

Deferred income

 

1,525

 

(22,158

)

13,023

 

Income taxes payable

 

(8

)

(153

)

27,810

 

 

 


 


 


 

Net cash flow generated from operating activities

 

22,492

 

103,738

 

524,797

 

 

 


 


 


 

 

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

 

 

Purchase of investments

 

(48,014

)

(183,168

)

(492,855

)

Sale or maturities of investments

 

197,777

 

502,658

 

181,018

 

Acquisition of property, plant and equipment

 

(158,532

)

(176,793

)

(338,740

)

Cash paid for acquisitions

 

(582

)

(352,096

)

 

Other investments

 

(24,832

)

(7,423

)

(3,700

)

Proceeds from sale of investments

 

 

 

7,500

 

Issuance of notes to employees, net

 

11,786

 

(118,387

)

 

Proceeds from sale of equipment

 

3,520

 

4,132

 

325

 

 

 


 


 


 

Net cash flow used for investing activities

 

(18,877

)

(331,077

)

(646,452

)

 

 


 


 


 

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

 

Issuance of convertible subordinated notes, net of issuance costs

 

 

 

 

 

 

554,812

 

Retirement of convertible debt, including interest

 

(42,124

)

(45,406

)

 

Repurchase of common stock

 

 

(4,925

)

 

(190,459

)

 

(143,270

)


Re-issuance of treasury shares and issuance of common stock

 

 

25,287

 

 

30,841

 

 

63,538

 

(Issuance) repayment of notes to stockholders, net

 

(439

)

871

 

6,040

 

Premiums received from put options

 

198

 

10,648

 

6,288

 

Structured purchase of options, net

 

1,574

 

(13,934

)

 

Other liabilities, including minority interest

 

(5,985

)

(6,248

)

17,566

 

 

 


 


 


 

Net cash flow generated from (used for) financing activities

 

(26,414

)

(213,687

)

504,974

 

 

 


 


 


 

 

 

 

 

 

 

 

 

Net change in cash during the period due to mergers and acquisitions

 

 

 

 

 

 

8,618

 

Net increase (decrease) in cash and cash equivalents

 

(22,799

)

(441,026

)

391,937

 

Cash and cash equivalents, beginning of year

 

109,999

 

551,025

 

159,088

 

 

 


 


 


 

Cash and cash equivalents, end of year

 

$

87,200

 

$

109,999

 

$

551,025

 

 

 



 



 



 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid (received) during the year for:

 

 

 

 

 

 

 

Interest

 

$

21,877

 

$

23,559

 

$

15,734

 

Income taxes

 

$

(7,993

)

$

(9,778

)

$

15,252

 

Non-cash flow items:

 

 

 

 

 

 

 

Common stock and options issued for acquisitions

 

$

2,300

 

$

107,588

 

$

186,425

 


The accompanying notes are an integral part of these Consolidated Financial Statements.


Page 38



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Description of Business and Summary of Significant Accounting Policies

Description of BusinessCypress Semiconductor Corporation (“Cypress”) designs, develops, manufactures and markets a broad line of high-performance digital and mixed-signal integrated circuits for a range of markets, including data communications, telecommunications, computation, consumer products, and industrial control. With a focus on emerging communications applications, Cypress’s product portfolios include: networking-optimized and micro-power static RAMs; high-bandwidth multi-port and FIFO memories; datacom products; high-density programmable logic devices; timing technology for PCs and other digital systems; and controllers for Universal Serial Bus (“USB”).

Cypress’s operations outside of the U.S. include its assembly and test plant in the Philippines and several sales offices and design centers located in various parts of the world. Revenues to international customers were 57%, 50%, and 49% of total revenues in 2002, 2001, and 2000, respectively.

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Cypress and all of its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Fiscal YearThe Cypress fiscal year ends on the Sunday closest to December 31. Fiscal years 2002, 2001, and 2000 ended December 29, 2002, December 30, 2001, and December 31, 2000, respectively, and each included 52 weeks.

Management EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates in these financial statements include reserves for inventory, reserves for deferred income, reserves for price adjustment on sales to distributors, the sales return reserve, restructuring charges, allowances for doubtful accounts receivable, estimates for future cash flows associated with assets, asset impairments, reserves for loans under the 2001 Employee Stock Purchase Assistance Program, net realizable value for inventories, certain accrued liabilities and income taxes and tax valuation allowances. Actual results could differ from those estimates, although such differences are not expected to be material to the financial statements.

ReclassificationsCertain prior year amounts have been reclassified to conform to current year presentation.

Fair Value of Financial InstrumentsFor certain of Cypress’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these items. Investments in debt securities are carried at fair value based on quoted prices. Foreign currency derivative financial instruments are carried at fair value based on changes in forward rate from quoted market sources (see Note 11, Foreign Currency Derivatives).

At December 29, 2002 and December 31, 2001, the estimated fair values of the convertible subordinated notes were approximately $396.0 million and $443.0 million, respectively. These values were based on quoted market prices. Cypress records this obligation at par value. As of December 29, 2002 and December 30, 2001, the par values were $468.9 million and $517.7 million.

The estimated fair values have generally been determined using available market information. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that Cypress could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents Highly liquid investments with original or remaining maturities of ninety days or less at the date of purchases are considered cash equivalents.

Investments Substantially all of Cypress’s investments in debt securities are classified as available-for-sale. Investments in available-for-sale securities are reported at fair value with unrealized gains and losses, net of related tax, as a component of accumulated other comprehensive income (loss). For the year ended December 29, 2002, gross unrealized losses were $2.8 million, and $1.7 million net of related taxes. For the year ended December 30, 2001, gross unrealized gains were $4.5 million and $2.7 million net of related taxes. Unrealized gains and (losses) net of related taxes were immaterial for 2000. Realized gains and losses are recognized in the consolidated statement of operations in the period realized using the specific identification method. For both the years ended December 29, 2002 and December 30, 2001, realized gains were $1.1 million and $1.1 million net of tax. Realized gains and (losses) net of related taxes were immaterial for 2000.


Page 39



Cypress also has other minority equity investments in nonpublicly traded companies. These investments are included in other long-term assets on the balance sheet and are generally carried at cost. Cypress monitors these investments for impairment and makes appropriate reductions in carrying values when declines are deemed to be other than temporary.

Cypress has a 57% equity interest in SunPower Corporation (“SunPower”), but has accounted for this investment under the equity method of accounting because Cypress does not have voting control of SunPower. Cypress includes the investment in other long-term assets on the balance sheet and recognizes its share of SunPower losses in other income/expense. Such losses to date have not been material.

Inventories Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based on estimated net realizable value. Cypress establishes “lower of cost or market” reserves, aged inventory reserves and obsolescence reserves. Inventory reserves are generally recorded when the inventory for a device exceeds nine months of demand for that device or when individual parts have been in inventory for greater than six months.

Goodwill and Purchased IntangiblesEffective the beginning of fiscal 2002, Cypress adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Furthermore, SFAS 142 requires purchased intangible assets, other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. The impairment test for intangible assets with indefinite useful lives consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. Intangible assets with finite useful lives will continue to be amortized over their useful lives which range from 2 to 5 years and will be reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). See Note 3 for further discussion.

Property, Plant and EquipmentProperty, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets as presented below. Leasehold improvements and leasehold interests are amortized over the shorter of the estimated useful lives of the assets or the remaining term of the lease. Accelerated methods of computing depreciation are used for tax purposes.

 

 

 

Useful Lives
in Years

 

 

 


 

Equipment

 

3 to 7

 

Buildings and leasehold improvements

 

5 to 20

 

Furniture and fixtures

 

5 to 7

 

 

 


 


Pre-operating Costs — Pre-operating costs incurred in connection with developing major production capability at new manufacturing plants are expensed as incurred.

Long-Lived Assets Cypress currently evaluates its long-lived assets in accordance with the provisions of SFAS 144 and SFAS 142. Cypress also performs goodwill impairment tests on an annual basis and between annual tests in certain circumstances. It also reviews its other long-lived assets, including property and equipment and other identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for its business, significant negative industry or economic trends, and a significant decline in Cypress’ stock price for a sustained period of time. Impairments are recognized based on the difference between the fair value of the asset and its carrying value, and fair value is generally measured based on discounted cash flow analyses. If there is a significant decrease in Cypress’s business in the future, Cypress may be required to record additional impairment charges in the future.


Page 40



Revenue RecognitionIn December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101,”Revenue Recognition in Financial Statements” (“SAB 101”) which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The adoption of SAB 101 in fiscal 2000 did not have a material effect on Cypress’s results.

Revenues from product sales are generally recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collection is reasonably assured, which is generally upon shipment or delivery. Reserves are provided for estimated returns.

A portion of Cypress’s sales are made to distributors under agreements that allow certain rights of return and price protection on products unsold. Accordingly, Cypress defers recognition of revenues, cost of sales and profit on such sales until these distributors resell these products. Inventory is relieved, accounts receivable are recorded and reserves for deferred income and price adjustments are provided at the time the products are shipped to these distributors.

Cypress also sells to certain international distributors whose contracts generally have provisions for price adjustments on certain products without a right of return. Cypress recognizes revenue upon shipment to these distributors and reserves for estimated price adjustments at that time.

Cypress also has inventory, which is held by certain customers on a consignment basis. Revenues are recorded when title and risk of loss transfers as defined per the respective consignment agreements.

Earnings Per ShareBasic Earnings Per Share (“EPS”) is computed using weighted average common shares outstanding. Diluted EPS is computed using weighted average common shares outstanding plus any potentially dilutive securities, except when their effect is anti-dilutive. Dilutive securities include stock options, convertible debt and put options.

Translation of Foreign CurrenciesCypress uses the U.S. dollar as its functional currency for all foreign subsidiaries. Accordingly, gains and losses from translation of foreign currency financial statements into U.S. dollars are included in results of operations. Sales to customers are primarily denominated in U.S. dollars. Translation gains and losses have not been material in any year.

Concentration of Credit RiskFinancial instruments that potentially subject Cypress to concentrations of credit risk are primarily investments and trade accounts receivable. Cypress’s investment policy requires cash investments to be placed with high-credit quality institutions and to limit the amount of credit risk from any one issuer.

Cypress sells its products to original equipment manufacturers and distributors throughout the world. Cypress performs ongoing credit evaluations of its customers’ financial condition whenever deemed necessary and generally does not require collateral. Cypress maintains an allowance for doubtful accounts receivable based upon the expected collectibility of all accounts receivable. No individual customer represented greater than 10% of accounts receivable at December 29, 2002. Sales to Motorola, Inc. accounted for 10.2% and 10.9% of total revenues in 2002 and 2000, respectively. No individual customer accounted for greater than 10% of total revenues in 2001. Write-offs of accounts receivable have been immaterial for the fiscal years 2002, 2001 and 2000.


Page 41



Accounting for Stock-Based Compensation — Cypress has a number of stock-based employee compensation plans which are described more fully in Note 16. 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.

 

 

 

Year Ended

 

 

 


 

 

 

2002

 

2001

 

2000

 

 

 


 


 


 

Net income (loss), as reported

 

(249,098

)

(407,412

)

277,308

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

98,496

 

80,079

 

75,066

 

Pro forma net income (loss)

 

(347,594

)

(407,412

)

202,242

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

Basic—as reported

 

(2.02

)

(3.28

)

2.29

 

Basic—pro forma

 

(2.82

)

(3.93

)

1.67

 

 

 

 

 

 

 

 

 

Diluted—as reported

 

(2.02

)

(3.28

)

2.03

 

Diluted—pro forma

 

(2.82

)

(3.93

)

1.40

 

 

 


 


 


 


The 2001 pro forma amount has been adjusted to reflect the correction of a previously calculated pro forma option pricing amount. This adjustment is limited to the footnote disclosure of non-cas SFAS No. 123, “Accounting for Stock-Based Compensation” pro forma expense and does not result in any changes or impact to our historically reported statements of income or cash flows. The previously reported diluted pro forma net loss per share was $(4.17) for the year ended December 30, 2001.

Other Comprehensive Income — Comprehensive income is defined as the change in equity during a period from non-owner sources. Cypress’s comprehensive income is comprised of net income and unrealized gains and losses (net of taxes) on investments classified as available-for-sale, and the effective portion of gains and losses on cash flow hedges.

Shipping and Handling Costs — Cypress records costs related to shipping and handling in cost of sales.

Advertising Costs — Advertising costs consist of development and placement costs of our advertising campaigns and are charged to expense when incurred. Advertising expense was $6.1 million, $6.2 million and $4.0 million for fiscal years 2002, 2001 and 2000, respectively.

Recent Accounting Pronouncements — In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”) which provides accounting and reporting guidance for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction or normal operation of a long-lived asset. The standard is effective at the beginning of our fiscal 2003. Cypress is evaluating the effect of SFAS 143 on the consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS No. 13, and Technical Corrections” (“SFAS 145”). Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”) are met. Cypress adopted SFAS 145 in 2002 and has, accordingly, reclassified an extraordinary gain from fiscal 2001 to other income and expense, net related to the repurchase of a portion of its 3.75% convertible subordinated notes. (See further discussion in Note 10.)

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth in Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees who are involuntarily terminated. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. Cypress does not expect the adoption of SFAS 146 will have a significant impact on the consolidated financial statements.


Page 42



 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued. Cypress will apply the recognition provisions of FIN 45 prospectively to guarantees issued after December 31, 2002. Cypress is currently evaluating the potential impact that the adoption of FIN 45 will have on the consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FAS 123” (“SFAS 148”). SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Since Cypress intends to continue to apply the intrinsic value method of accounting for stock-based compensation, the adoption of SFAS 148 will not have an effect on Cypress’ consolidated financial statements. However, Cypress will provide the additional disclosures required by SFAS 148 in 2003.

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. Cypress is evaluating the effect of FIN 46 on its consolidated financial statements.

Note 2: Balance Sheet Components

Available-For-Sale Securities

 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 


 


 


 

Corporate debt securities

 

$

43,004

 

$

164,394

 

Federal, state and municipal obligations

 

18,411

 

77,405

 

Money markets funds

 

66,537

 

60,616

 

Other

 

19,511

 

17,832

 

 

 


 


 

Available-for-sale securities

 

$

147,463

 

$

320,247

 

 

 



 



 


Available-for-sale securities include cash equivalents, short-term investments and long-term investments shown below in Other Assets. Cash of $12.6 million and $19.7 million is excluded from available-for-sale securities as of December 29, 2002 and December 30, 2001 respectively. At December 29, 2002 the net unrealized gains and losses on securities were $1.4 million gross ($0.8 million net of taxes), compared to $4.5 million gross ($2.7 million net of tax) for 2001. The primary reason for the decline in unrealized gains and losses for 2002 compared to 2001 is due to lower investment balances in 2002, as compared to 2001. Realized gains and losses have not been material for any period presented. The securities at December 29, 2002 and December 30, 2001 are shown by contractual maturity date below.

 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 


 


 


 

Due in one year or less

 

$

115,315

 

$

185,752

 

Due after one year

 

32,148

 

134,495

 

 

 


 


 

Available-for-sale securities

 

$

147,463

 

$

320,247

 

 

 



 



 


Accounts Receivable, Net

 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 


 


 


 

Accounts receivable, gross

 

$

86,567

 

$

105,156

 

Allowance for doubtful accounts and customer returns

 

(3,513

)

(7,339

)

 

 


 


 

Accounts receivable, net

 

$

83,054

 

$

97,817

 

 

 



 



 



Page 43



Inventories, Net

 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 


 


 


 

Raw materials

 

$

3,185

 

$

6,708

 

Work-in-process

 

54,668

 

42,624

 

Finished goods

 

 

34,868

 

 

23,936

 

 

 



 



 

Inventories, net

 

$

92,721

 

$

73,268

 

 

 



 



 


Other Current Assets

 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 


 


 


 

Employee stock purchase assistance plan, net

 

$

90,636

 

$

117,220

 

Deferred tax assets

 

85,041

 

104,798

 

Prepaid expenses

 

24,962

 

22,436

 

Other current assets

 

9,596

 

5,874

 

 

 


 


 

Other current assets

 

$

210,235

 

$

250,328

 

 

 



 



 


Property, Plant and Equipment, Net

 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 


 


 


 

Land

 

$

14,430

 

$

14,426

 

Equipment

 

1,013,013

 

956,667

 

Buildings and leasehold improvements

 

191,285

 

165,089

 

Furniture and fixtures

 

12,466

 

11,015

 

 

 


 


 

Total property, plant and equipment

 

1,231,194

 

1,147,197

 

Accumulated depreciation and amortization

 

(734,628

)

(647,402

)

 

 


 


 

Property, plant and equipment, net

 

$

496,566

 

$

499,795

 

 

 



 



 


Other Assets

 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 


 


 


 

Restricted investments

 

$

62,380

 

$

74,968

 

Long-term investments

 

32,148

 

134,495

 

Deferred tax asset

 

26,037

 

36,791

 

Other

 

30,286

 

26,592

 

 

 


 


 

Other assets

 

$

150,851

 

$

272,846

 

 

 



 



 


Other Current Liabilities

 

(In thousands)

 

December 29,
2002

 

December 30,
2001

 


 


 


 

Customer advances

 

$

3,950

 

$

30,497

 

Accrued interest payable

 

8,216

 

9,139

 

Sales representative commissions

 

4,291

 

3,057

 

Accrued royalties

 

4,098

 

3,975

 

Short-term debt

 

4,212

 

 

Accrued deferred compensation

 

22,240

 

19,664

 

Other

 

37,105

 

38,359

 

 

 


 


 

Other current liabilities

 

$

84,112

 

$

104,691

 

 

 



 



 


Note 3 – Goodwill and Intangible Assets

In connection with the adoption of SFAS 142, Cypress ceased amortizing goodwill with a net carrying value of $321.7 million as of the beginning of fiscal 2002, and performed the required transitional goodwill impairment assessment in the first quarter of 2002 and determined that there was no impairment of goodwill.

In addition, upon adoption of SFAS 142, workforce-in-place no longer meets the definition of an identifiable asset. As a result, the net balance of $11.5 million previously classified as purchased intangible assets was reclassified to goodwill.


Page 44



A reconciliation of previously reported net income (loss) and net income (loss) per share to the amounts adjusted for the exclusion of goodwill and workforce-in-place amortization had SFAS 142 been in effect for 2001 and 2000, net of the related income tax effect, is as follows:

 

 

 

Year Ended

 

 

 


 

(In thousands, except per share data)

 

December 29,
2002

 

December 30,
2001

 

December 31,
2000

 


 


 


 


 

Reported net income/(loss)

 

$

(249,098

)

$

(407,412

)

$

277,308

 

Adjustments:

 

 

 

 

 

 

 

Amortization of goodwill

 

 

33,033

 

5,858

 

Amortization of acquired workforce previously classified as purchased intangibles

 

 

4,696

 

1,004

 

 

 


 


 


 

Net adjustments

 

 

37,729

 

6,862

 

 

 


 


 


 

Adjusted net income (loss)

 

$

(249,098

)

$

(369,683

)

$

284,170

 

 

 



 



 



 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(2.02

)

$

(2.98

)

$

2.35

 

Diluted

 

$

(2.02

)

$

(2.98

)

$

1.97

 

 

 



 



 



 


SFAS 142 requires Cypress to perform an annual impairment test. The impairment test is a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit with the carrying amount of the reporting unit’s goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting units goodwill will be recorded as an impairment loss.

Cypress performed its annual SFAS 142 goodwill impairment assessment in the fourth quarter of 2002, which resulted in an impairment charge of $14.4 million related to Silicon Light Machines (SLM). SLM is a wholly-owned subsidiary and a “reporting unit” under SFAS 142 and part of Cypress’s non-memory business segment.

In addition, prior to recognizing this SFAS 142 goodwill impairment charge, Cypress reviewed all of SLM’s other long-lived assets for impairment in accordance with SFAS 144. As a result of this SFAS 144 review, Cypress also recorded an impairment charge for certain existing technology intangible assets, related to SLM, of $20.3 million, for the difference between the estimated fair values and carrying values of these assets. The goodwill and intangible asset impairment charges were precipitated by changes in SLM’s business plan, which was completed in the fourth quarter of 2002. (See also discussion of the charges recorded in 2001 for SLM in Note 9.) The fair value estimates in these impairment reviews were based on discounted cash flow analyses, as well as a comparable market value analysis as part of the SFAS 142 assessment. The goodwill and intangible impairments were charged to acquisition and other costs in the consolidated financial statements (see Note 9).

Based on the annual SFAS 142 assessment, no other reporting units were impaired. However, Cypress could be required to record impairment charges in future periods if business conditions deteriorate.

Cypress’ goodwill is in the Non-Memory business segment. Following is a rollforward for the goodwill balance in this segment in 2002:

 

(in thousands)     

 

 

Balance at
December 30,
2001

 

Acquired

 

Workforce
reclassified

 

Impairment
loss and other

 

Balance at
December 29,
2002

 

 

 

 


 


 


 


 


 

Non-memory

 

$

324,764

 

$

 

$

11,513

 

 

  ($14,608

)

$

321,669

 


Impairment loss and other includes the impairment loss of $14.4 million related to SLM as discussed above.

In addition, as a result of our investment in SunPower Corporation (“SunPower”) during fiscal 2002, a total of $2.2 million was allocated to goodwill as a result of the valuation of SunPower. At December 29, 2002, Cypress’s investment in SunPower includes this $2.2 million of goodwill (see Note 6).


Page 45



The following table presents details of the Cypress’s total purchased finite lived intangible assets. Cypress does not have any recorded indefinite lived intangible assets):

 

    December 29, 2002

 

 

 

 

 

 

 

(In thousands)

 

Gross

 

Accumulated
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

 

 

 


 


 


 

 

 

$

223,150

 

$

(133,535

)

$

89,615

 

 

 



 



 



 


 

    December 30, 2001

 

 

 

 

 

 

 

(In thousands)

 

Gross

 

Accumulated
Amortization

 

Net

 


 


 


 


 

Purchased technology

 

$

213,615

 

$

(87,413

)

$

126,202

 

Non-compete agreements

 

17,100

 

(2,083

)

15,017

 

Patents, licenses and trademarks

 

6,350

 

(758

)

5,592

 

Under market leases

 

1,850

 

(1,622

)

228

 

Other

 

4,600

 

(956

)

3,644

 

Workforce

 

17,523

 

(6,010

)

11,513

 

 

 


 


 


 

 

 

$

261,038

 

$

(98,842

)

$

162,196

 

 

 



 



 



 


In addition, as a result of Cypress’s investment in SunPower during 2002, a total of $1.5 million was allocated to identifiable technology intangibles as a result of the valuation of SunPower. At December 29, 2002, Cypress’s investment in SunPower includes $1.3 of unamortized intangibles. Amortization expense associated with the technology intangible is expected to be $0.3 million for fiscal years 2003 through 2006 and $0.1 million in fiscal 2007. Refer to Note 6 for further discussion of Cypress’s investment in SunPower.

Amortization expense of finite lived intangible assets was $41.9 million, $34.2 million and $12.5 million for the fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively.

The estimated future amortization expense of purchased intangible assets as of December 29, 2002 is as follows (in thousands):

 

Fiscal Year

 

 

Amount

 


 

 


 

2003

 

$

36,124

 

2004

 

31,385

 

2005

 

17,681

 

2006

 

1,991

 

2007

 

312

 

Thereafter

 

2,122

 

 

 


 

 

 

$

89,615

 

 

 



 


The above amortization schedule excludes the effect of intangible amortization of technology related to Cypress’s equity investment in SunPower. The amortization related to SunPower’s intangibles was recorded in other income (expense), net (see Note 15). The estimated future amortization expense of SunPower’s intangible assets will be $0.3 million, $0.3 million, $0.3 million, $0.3 million and $0.1 million for the fiscal years 2003, 2004, 2005, 2006 and 2007 respectively.

Note 4: Acquisitions Using Purchase Accounting

2002 Acquisitions

Sahasra

On February 28, 2002, Cypress acquired 100% of the outstanding capital stock of Sahasra Networks, Inc. (“Sahasra”), a company working on a software-based method of making large-entry, next generation network search engines, for $3.2 million in cash and Cypress common stock. Sahasra is part of the Non-memory business segment and the Wide Area Network/Storage Area Network (“WAN/SAN”) market segment. The acquisition resulted in identifiable intangible assets of $2.7 million and a charge for in-process research and development of $0.5 million.


Page 46



The agreement with Sahasra includes provisions for additional contingent cash payments to employees and third parties of up to $2.3 million through December 2005 based on the amount of revenues generated by certain products in future periods. Additional provisions are included for the contingent issuance of up to 0.3 million shares of Cypress common stock through December 2004 based on the achievement of certain product development milestones. Cash payments or the issuance of shares contingent upon the payees remaining employed by Cypress will be accounted for as compensation for services and expensed in the appropriate periods. Cash payments to third parties based solely on product revenues will be recorded as an increase in the purchase price, if paid.

Pro forma results of operations have not been presented because the historical results of operations of Sahasra are not material to Cypress’s consolidated results of operations.

2001 Acquisitions

Acquisition of Silicon Packets, Inc.

On December 27, 2001, Cypress acquired 100% of the outstanding common and preferred stock of Silicon Packets, Inc. (“Silicon Packets”), a company that specializes in designing 10 Gigabit-per-second framers for OC-192/STM-64 Synchronous Optical Network/Synchronous Digital Hierarchy (“SONET/SDH”) and 10G Ethernet transport solutions. Silicon Packets is part of the Non-memory business segment and the WAN/SAN market segment. The acquisition was made in order to assist Cypress in the development of 10 Gigabit-per-second solutions for Metropolitan Area Networks (“MAN”), which is part of the WAN/SAN market segment, and WAN infrastructure equipment such as switches and routers. The acquisition was accounted for using the purchase method of accounting per SFAS 141. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of December 30, 2001, the effective date of the purchase. Other than the charge for in-process research and development, Silicon Packet’s results of operations from the date of purchase to the end of the fiscal year were not significant because the acquisition was completed during the last week of the fiscal year and are therefore not included in Cypress’s consolidated results of operations for the year ended December 30, 2001. There were no significant differences between the accounting policies of Cypress and Silicon Packets.

Cypress acquired Silicon Packets for total consideration of $27.3 million, including 0.7 million shares of Cypress common stock valued at $14.2 million, $7.1 million in cash, options for 0.2 million shares of Cypress common stock valued at $3.2 million and direct acquisition costs of $2.8 million for underwriting, legal, valuation, accounting and regulatory fees. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as set forth in the following table:

   

(In thousands)

 

 

 

 



 

 

 

Current assets

 

$

968

 

Property, plant and equipment, net

 

951

 

Deferred tax asset

 

2,110

 

Other assets

 

58

 

Goodwill

 

9,751

 

Current technology

 

4,300

 

Non-compete agreements

 

800

 

 

 


 

Total assets acquired

 

18,938

 

Current liabilities

 

(745

)

Long term liabilities

 

(509

)

Deferred tax liabilities

 

(2,040

)

 

 


 

Total liabilities assumed

 

(3,294

)

Deferred stock compensation

 

6,589

 

 

 


 

Net assets acquired

 

22,233

 

In-process research and development

 

5,100

 

 

 


 

Total consideration

 

$

27,333

 

 

 



 


The amounts allocated to current technology and non-compete agreements have weighted average useful lives of 4 years and 3 years, respectively. These intangible assets are amortized using the straight-line method over their respective estimated useful lives. None of the $9.8 million in goodwill recorded is expected to be deductible for tax purposes, and, in accordance with SFAS 142, will not be amortized. In addition, Cypress granted in-the-money options to certain Silicon Packets employees in January 2002, which resulted in additional deferred compensation of $5.0 million in 2002.


Page 47



Acquisition of In-System Design, Inc.

On September 14, 2001, Cypress acquired 100% of the outstanding capital stock of In-System Design, Inc. (“ISD”), a system-on-a-chip design company specializing in personal communications solutions. ISD is part of the Non-memory business segment and the Computation and Other market segment. The immediate benefit to Cypress related to ISD’s 300A product, a USB 2.0 to ATA/ATAPI bridge device that enables PCs and other information appliances to connect to external mass storage devices including hard disk drives, CD-ROMs, CD-RWs, DVD-Rams, and ZIP drives. The acquisition also brought a veteran development team, with an average of eight years of experience, and a wide range of engineering competencies, including system-on-a-chip (“SoC”) expertise, software design, board-level design, test and validation, that are expected to accelerate Cypress’s current and future development projects. The acquisition was accounted for using the purchase method of accounting per SFAS 141. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of September 14, 2001, the effective date of the purchase. The results of operations are included in Cypress’s consolidated results of operations as of and since the effective date of the purchase. There were no significant differences between the accounting policies of Cypress and ISD.

Cypress acquired ISD for total consideration of $43.0 million, including $36.7 million in cash, options for 0.3 million shares of Cypress common stock valued at $5.4 million and direct acquisition costs of $0.9 million for legal, appraisal and accounting fees. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as set forth in the following table:

   

(In thousands)

 

 

 

 


 

 

 

 

Current assets

 

$

4,554

 

Property, plant and equipment, net

 

632

 

Deferred tax asset

 

5,378

 

Goodwill

 

19,922

 

Current technology

 

17,200

 

Non-compete agreements

 

12,350

 

Trademarks

 

2,400

 

Customer purchase orders

 

450

 

 

 


 

Total assets acquired

 

62,886

 

Current liabilities

 

(9,445

)

Deferred tax liabilities

 

(12,960

)

 

 


 

Total liabilities assumed

 

(22,405

)

Deferred stock compensation

 

1,679

 

 

 


 

Net assets acquired

 

42,160

 

In-process research and development

 

800

 

 

 


 

Total consideration

 

$

42,960

 

 

 



 


The amounts allocated to current technology, non-compete and customer purchase orders and trademarks have weighted average useful lives of 4 years, 3 years, 1 year and 4 years, respectively. These intangible assets are amortized using the straight-line method over their respective estimated useful lives. None of the $19.9 million in goodwill recorded is expected to be deductible for tax purposes, and, in accordance with SFAS 142, will not be amortized.

The agreement with ISD includes provisions for contingent cash payments of up to $27.5 million through September 2004 based on USB product revenues achieving specific targets in future periods. These cash payments are also contingent upon the payees remaining employed by Cypress. The agreement with ISD provides for additional contingent cash payments of up to $12.0 million through September 2004 based on continued employment with Cypress. All of these contingent payments will be accounted for as compensation for services and expensed in the appropriate periods.

Acquisition of Lara Networks, Inc.

On July 3, 2001, Cypress acquired 100% of the outstanding common and preferred stock of Lara Networks, Inc. (“Lara”), a provider of high-performance, silicon-based packet processing solutions for WAN infrastructure equipment. Lara is part of the Non-memory business segment and the WAN/SAN market segment. The Lara acquisition enabled Cypress to leverage its core competencies in data communications and specialty memories. Lara was acquired to expand Cypress’s portfolio of solutions across the linecard and enabled Cypress to address the core functionality of packet processing. The acquisition was accounted for using the purchase method of accounting per SFAS 141. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of July 3, 2001, the effective date of the purchase. The results of operations are included in Cypress’s consolidated results of operations as of and since the effective date of the purchase. There were no significant differences between the accounting policies of Cypress and Lara.


Page 48



Cypress acquired Lara for total consideration of $200.1 million, including $185.3 million in cash, options for 0.4 million shares of Cypress common stock valued at $8.1 million and direct acquisition costs of $6.7 million for underwriting, legal, valuation, accounting and regulatory fees. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as follows:

   

(In thousands)

 

 

 


 

 

 

Current assets

 

$

11,234

 

Property, plant and equipment, net

 

4,789

 

Deferred tax asset

 

17,016

 

Other assets

 

1,222

 

Goodwill

 

158,322

 

Current technology

 

14,850

 

Trademarks

 

2,250

 

Non-compete agreements

 

1,550

 

Customer purchase orders

 

150

 

 

 


 

Total assets acquired

 

211,383

 

Current liabilities

 

(13,969

)

Deferred tax liabilities

 

(7,520

)

 

 


 

Total liabilities assumed

 

(21,489

)

Deferred stock compensation

 

5,662

 

 

 


 

Net assets acquired

 

195,556

 

In-process research and development

 

4,550

 

 

 


 

Total consideration

 

$

200,106

 

 

 



 

The amounts allocated to current technology, trademarks, non-compete and customer purchase orders have weighted average useful lives of 5 years, 5 years, 3 years and 0.5 years, respectively. These intangible assets are amortized using the straight-line method over their respective estimated useful lives. None of the $158.3 million in goodwill recorded is expected to be deductible for tax purposes, and, in accordance with SFAS 142, will not be amortized.

The agreement with Lara includes provisions for contingent cash payments of up to $80.0 million through December 2002 based on certain Lara products achieving specific revenue targets in future periods, which will be recorded as an increase in the purchase price if paid. As of December 29, 2002, no payment has been made because the targets were not met.

The agreement with Lara further provides for contingent cash payments of up to $3.9 million to certain Lara employees through December 2004 based on certain conditions including continued employment with Cypress. As such, this contingency will be accounted for as compensation for services and expensed in the appropriate periods.

Acquisition of ScanLogic Corporation

On May 29, 2001, Cypress completed its acquisition of ScanLogic Corporation (“ScanLogic”), a provider of USB controllers for embedded and PC applications. The acquisition was accounted for using the purchase method of accounting per APB Opinion No. 16, “Business Combinations” (“APB 16”). Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of May 29, 2001, the effective date of the purchase. The results of operations are included in Cypress’s consolidated results of operations as of and since the effective date of the purchase. There were no significant differences between the accounting policies of Cypress and ScanLogic.


Page 49



Cypress acquired ScanLogic for total consideration of $30.1 million, including $15.6 million in cash, options for 0.5 million shares of Cypress common stock valued at $11.7 million, notes payable to shareholders of $1.9 million and direct acquisition costs of $0.9 million for legal and accounting fees and broker commissions. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as follows:

   

(In thousands)

 

 

 


 

 

 

Fair value of tangible assets and liabilities

 

$

(1,446

)

In-process research and development

 

1,450

 

Current technology

 

11,950

 

Assembled workforce and non-compete agreements

 

1,400

 

Deferred stock compensation

 

7,330

 

Excess of purchase price over identifiable net assets acquired

 

9,419

 

 

 


 

Total

 

$

30,103

 

 

 



 


The amounts allocated to intangible assets are being amortized using the straight-line method over their respective estimated useful lives, which range from three to four years.

Acquisition of HiBand Semiconductors, Inc.

On March 27, 2001, Cypress acquired all of the outstanding capital stock of HiBand Semiconductors, Inc. (“HiBand”). HiBand is a provider of mixed-signal integrated circuits for high-speed communications markets. The acquisition was accounted for using the purchase method of accounting per APB 16. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of March 27, 2001, the effective date of the purchase.

Cypress acquired HiBand for total consideration of $34.0 million, including 1.4 million shares of Cypress common stock valued at $28.2 million, options for 0.2 million shares of Cypress common stock valued at $4.0 million, an existing $1.3 million cash advance and direct acquisition costs of $0.5 million for legal and accounting fees. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as follows:

   

(In thousands)

 

 

 


 

 

 

Fair value of tangible assets and liabilities

 

$

(181

)

In-process research and development

 

6,450

 

Current technology

 

2,800

 

Assembled workforce and non-compete agreements

 

2,650

 

Deferred tax liability

 

(2,180

)

Deferred stock compensation

 

1,793

 

Excess of purchase price over identifiable net assets acquired

 

22,634

 

 

 


 

Total

 

$

33,966

 

 

 



 


The amounts allocated to intangible assets are being amortized using the straight-line method over their respective estimated useful lives, which range from three to six years.

Acquisition of International Microcircuits, Inc.

On February 23, 2001, Cypress completed its acquisition of International Microcircuits Inc. (“IMI”), a company specializing in timing technology integrated circuits. IMI’s product portfolio includes programmable clocks, clock distribution products, electromagnetic interference suppression devices, and application-specific products. The acquisition was accounted for using the purchase method of accounting per APB 16. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in Cypress’s consolidated balance sheet as of February 23, 2001, the effective date of the purchase. The results of operations are included in Cypress’s consolidated results of operations as of and since the effective date of the purchase. There were no significant differences between the accounting policies of Cypress and IMI.


Page 50



Cypress acquired IMI for total consideration of $150.3 million, including $111.2 million in cash, options for 1.3 million shares of Cypress common stock valued at $32.8 million, notes payable to shareholders of $3.3 million, and direct acquisition costs of $3.0 million for investment banking, legal and accounting fees. The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as follows:

   

(In thousands)

 

 

 


 

 

 

Fair value of tangible assets

 

$

14,847

 

Fair value of liabilities assumed

 

(11,517

)

In-process research and development

 

4,850

 

Current technology

 

14,700

 

Assembled workforce and non-compete agreements

 

7,450

 

Other intangibles

 

7,550

 

Deferred tax liability

 

(11,880

)

Deferred stock compensation

 

19,087

 

Excess of purchase price over identifiable net assets acquired

 

105,179

 

 

 


 

Total

 

$

150,266

 

 

 



 


The amounts allocated to intangible assets are being amortized using the straight-line method over their respective estimated useful lives, which range from three to five years.

Valuation Methodology

The valuation method used to value in-process technology is a form of discounted cash flow method commonly known as the “percentage of completion” approach. This approach is a widely recognized appraisal method and is commonly used to value technology assets. The value of the in-process technology is the sum of the discounted expected future cash flows attributable to the in-process technology, taking into consideration the percentage of completion of products utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and future markets and the technological risk associated with completing the development of the technology. The cash flows derived from the in-process technology projects were discounted at a rate of 27% for IMI, 30% for HiBand, 25% for ScanLogic, 30% for Lara, 29% for ISD, 30% for Silicon Packets and 45% for SunPower (see Note 6). Cypress believes these rates were appropriate given the risks associated with the technologies for which commercial feasibility had not been established. The percentage of completion for each in-process project was determined by identifying the elapsed time invested in the project as a ratio of the total time required to bring the project to technical and commercial feasibility. The percentage of completion for in-process projects acquired ranged from 10% to 90% for IMI, 5% to 75% for HiBand, 28% to 79% for ScanLogic, 1% to 89% for Lara, 10% to 70% for ISD, 9% to 87% for Silicon Packets and 77% for SunPower. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. As of December 29, 2002, the actual development timelines and costs are in line with management’s estimates.

The value of current technology was determined by estimating the future cash flows to be derived from products based on existing commercially feasible technologies at the date of the acquisition and discounting associated cash flows using discount rates ranging from 20% to 27%. Cypress believes these rates were appropriate given the business risks inherent in manufacturing and marketing these products. Factors considered in estimating the discounted cash flows to be derived from the existing technology include risks related to the characteristics and applications of the technology, existing and future markets and an assessment of the age of the technology within its life span.

The value of non-compete agreements was based on the estimated loss of cash flow that would be suffered due to a loss of members of the workforce to a competitor in the absence of the non-compete agreements. The value of the assembled workforce was based on estimated costs to replace the existing staff, including recruiting, hiring and training costs for employees in all categories, and fully deploy a work force of similar size and skill to the same level of productivity as the existing work force.

Other intangibles include the value of an existing customer base, existing customer orders, existing trademarks and a facility lease with below market rental rates. These intangible assets were valued using discount rates ranging from 15% to 28%.

Development of in-process technology remains a substantial risk to Cypress due to a variety of factors including the remaining effort to achieve technical feasibility, rapidly changing customer requirements and competitive threats from other companies and technologies. Additionally, the value of other intangible assets acquired may become impaired. The in-process research and development valuation, as well as the valuation of other intangible assets was prepared by management or an independent appraisal firm, based on input from Cypress and the acquired companies’ management, using valuation methods that are recognized by the United States SEC staff. However, there can be no assurance that the SEC staff will not take issue with assumptions used in the appraiser’s valuation model and require Cypress to revise the amount allocated to in-process research and development or other intangible assets.


Page 51



Unaudited Pro Forma Financial Information

Summarized below are the unaudited pro forma results of Cypress as though IMI, HiBand, ScanLogic, Lara, ISD and Silicon Packets had been acquired at the beginning of the periods indicated. Adjustments have been made for the estimated increases in amortization of intangibles, amortization of stock-based compensation and other appropriate pro forma adjustments. The charges for purchased in-process research and development are not included in the pro forma results, because they are non-recurring. The pro forma results do not include goodwill amortization for the Lara, ISD and Silicon Packets acquisitions.

 

 

 

Year Ended

 

 

 


 

(In thousands, except per share amounts)

 

December 30,
2001

 

December 31,
2000

 


 


 


 

Total revenue

 

$

842,634

 

$

1,402,617

 

Net income (loss)

 

$

(478,647

)

$

162,838

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

Basic

 

$

(3.79

)

$

1.35

 

Diluted

 

$

(3.79

)

$

1.19

 

 

 



 



 


The above amounts are based upon certain assumptions and estimates, which Cypress believes are reasonable and do not reflect any benefit from economies, which might be achieved from combined operations. The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions taken place at the beginning of the periods indicated or of future results of operations of the combined companies.

2000 Acquisitions</