| CYPRESS SEMICONDUCTOR CORP /DE/ ITEM 1A RISK FACTORS We face significant volatility in supply and demand conditions for our products and this volatility, as well as any failure by us to accurately forecast future supply and demand conditions, could materially and negatively impact our business |
| The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, semiconductors |
| Demand for our products depends in large part on the continued growth of various electronics industries that use our products, including: • wireless telecommunications equipment; • computers and computer-related peripherals; • memory and image sensor; • networking equipment; • consumer electronics, automotive electronics and industrial controls; and • solar power products |
| 15 ______________________________________________________________________ [41]Table of Contents In addition, certain of our products, including USB micro-controllers and high-frequency clocks, are incorporated into computer and computer-related products, which have historically experienced, and may in the future experience, significant fluctuations in demand |
| Any downturn or reduction in the growth of these industries could seriously harm our business, financial condition and results of operations |
| We order materials and build our products based primarily on our internal forecasts and secondarily on existing orders, which may be cancelled under many circumstances |
| Because our markets are volatile and subject to rapid technological and price changes, our forecasts may be wrong causing us to make too many or too few of certain products |
| Also, our customers frequently place orders requesting product delivery almost immediately after the order is made, which makes forecasting customer demand even more difficult, particularly when supply is abundant |
| In addition, we have in the past spent, and will continue to spend, significant amounts of money to upgrade and increase our wafer fabrication, assembly and test manufacturing capability and capacity |
| If we experience inadequate demand or a significant shift in the mix of product orders that makes our existing capacity and capability inadequate, our fixed costs per semiconductor produced will increase, which will harm our financial condition and results of operations |
| Alternatively, if we should experience a sudden increase in demand, we will need to quickly ramp our inventory and/or manufacturing capacity to adequately respond to our customers |
| If we are unable to ramp our inventory or manufacturing capacity in a timely manner or at all, we risk losing our customer’s business, which could have a negative impact on our financial performance and reputation |
| In some cases, such downturns have lasted more than a year |
| Prior experience has shown that restructuring of our operations, resulting in significant restructuring charges, may become necessary if an industry downturn persists |
| During the second half of fiscal 2004 and continuing into the first quarter of fiscal 2005, we experienced a rapid decline of demand for our products that may represent a period of industry over-supply |
| While we experienced sequential increase in sales in the second, third and fourth quarters of fiscal 2005, no assurance can be given that such increase is an indication of the beginning of a long-term recovery for us or the semiconductor industry |
| Our business, financial condition and results of operations will be seriously harmed if we fail to compete successfully in our highly competitive industry and markets |
| The semiconductor industry is intensely competitive |
| This intense competition results in a difficult operating environment that is marked by erosion of average selling prices over the lives of each product and rapid technological change resulting in limited product life cycles |
| 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 |
| 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 |
| 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 |
| We believe that there is a variety of competing technologies under development by other companies that could result in lower manufacturing costs than those expected for our products |
| Our development efforts may be rendered obsolete by the technological advances of others, and other technologies may prove more advantageous for the commercialization of solar power products and semiconductors generally |
| Our ability to compete successfully in the rapidly evolving semiconductor technology industry depends on many factors, including: • our success in developing new products and manufacturing technologies; 16 ______________________________________________________________________ [42]Table of Contents • the quality and price of our products; • the diversity of our product line; • the cost effectiveness of our design, development, manufacturing and marketing efforts; • our customer service; • our customer satisfaction; • the pace at which customers incorporate our products into their systems; • the number and nature of our competitors and general economic conditions; and • our access to and the availability of capital |
| Although we believe we currently compete effectively in the above areas to the extent they are within our control, given the pace of change in the industry, our current abilities are not a guarantee of future success |
| If we are unable to compete successfully in this environment, our business, financial condition and results of operations will be seriously harmed |
| Our financial results could be adversely impacted if we fail to develop, introduce and sell new products or fail to develop and implement new technologies |
| Like many semiconductor companies, which frequently operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products, our future success depends on our ability to develop and introduce new products that customers choose to buy |
| We introduce significant numbers of products each year, which are important sources of revenue for us |
| If we fail to introduce new product designs in a timely manner or are unable to manufacture products according to the requirements of these designs, or if our customers do not successfully introduce new systems or products incorporating our products, or market demand for our new products does not exist as anticipated, our business, financial condition and results of operations could be seriously harmed |
| For us and many other semiconductor companies, introduction of new products is a major manufacturing challenge |
| The new products the market requires tend to be increasingly complex, incorporating more functions and operating at faster speeds than prior products |
| Increasing complexity generally requires smaller features on a chip |
| This makes manufacturing new generations of products substantially more difficult than prior generations |
| Ultimately, whether we can successfully introduce these and other new products depends on our ability to develop and implement new ways of manufacturing semiconductors |
| If we are unable to design, develop, manufacture, market and sell new products successfully, our business, financial condition and results of operations would be seriously harmed |
| The complex nature of our manufacturing activities makes us highly susceptible to manufacturing problems and these problems can have a substantial negative impact on us when they occur |
| Making semiconductors is a highly complex and precise process, requiring production in a tightly controlled, clean environment |
| Even very small impurities in our manufacturing materials, difficulties in the wafer fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous chips on each wafer to be non-functional |
| 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 |
| For example, we believe that certain manufacturing limitations on our PSoC, USB and clock businesses negatively affected our performance in fiscal 2005 |
| 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 |
| 17 ______________________________________________________________________ [43]Table of Contents Problems in the performance or availability of other companies we hire to perform certain manufacturing and transport tasks can seriously harm our financial performance |
| A high percentage of our products are currently fabricated in our manufacturing facilities located in Texas, Minnesota and the Philippines |
| However, we also rely on independent contractors to manufacture some of our products |
| If market demand for our products exceeds our internal manufacturing capacity and available capacity from our foundry partners, we may seek additional foundry manufacturing arrangements |
| A shortage in foundry manufacturing capacity, which is more likely to occur at times of increasing demand, could hinder our ability to meet demand for our products and therefore adversely affect our operating results |
| We cannot guarantee that any foundries that supply our wafers will not experience manufacturing problems, including delays in the realization of advanced manufacturing process technologies |
| In addition, greater demand for wafers produced by any such foundries without an offsetting increase in foundry capacity raises the likelihood of potential wafer price increases |
| While 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 |
| We cannot be certain that these subcontractors will continue to assemble, package and test products for us on acceptable economic and quality terms or at all and it might be difficult for us to find alternatives if they do not do so |
| We also rely on independent carriers and freight haulers to move our products between manufacturing plants and our customers |
| Transport or delivery problems due to their error or because of unforeseen interruptions in their business due to factors such as strikes, political instability, terrorism, natural disasters or accidents could seriously harm our business, financial condition and results of operations and ultimately impact our relationship with our customers |
| Our subsidiary SunPower is currently facing an industry-wide shortage of polysilicon |
| The prices that SunPower pays for polysilicon have increased recently and SunPower expects these price increases to continue, which may constrain SunPower’s revenue growth and decrease its gross margins and profitability |
| Polysilicon is an essential raw material in SunPower’s production of photovoltaic, or solar, cells |
| There is currently an industry-wide shortage of polysilicon, which has resulted in significant price increases |
| Based on its experience, SunPower believes that the average price of polysilicon has continued to increase |
| Increases in polysilicon prices have in the past increased SunPower’s manufacturing costs and may impact its manufacturing costs and operating results in the future |
| As demand for solar cells has increased, many of SunPower’s principal competitors have announced plans to add additional manufacturing capacity |
| As this manufacturing capacity becomes operational, it will increase the demand for polysilicon and further exacerbate the current shortage |
| Polysilicon is also used in the semiconductor industry generally and any increase in demand from that sector will compound the shortage |
| The production of polysilicon is capital intensive and adding additional capacity requires significant lead time |
| While SunPower is aware that several new facilities for the manufacture of polysilicon are under construction, it does not believe that the supply imbalance will be remedied in the near term |
| SunPower expects that polysilicon demand will continue to outstrip supply in the foreseeable future |
| There are a limited number of polysilicon suppliers |
| Since SunPower has only been purchasing polysilicon in bulk for approximately one year, its competitors may have longer and perhaps stronger relationships with the suppliers than SunPower does |
| Some of SunPower’s competitors also have inter-locking board members with their polysilicon suppliers |
| In addition, since some of the arrangements are with suppliers who do not themselves manufacture polysilicon but instead purchase their requirements from other vendors, it is possible that these suppliers will not be able to obtain sufficient polysilicon to satisfy their contractual obligations to SunPower |
| Although SunPower has purchase orders and contracts for what it believes will be an adequate supply of silicon ingots through 2006, its estimates regarding the supply needs may not be correct, its purchase orders may be cancelled, or the volume or pricing terms may be changed by the suppliers |
| Based on market conditions, SunPower’s purchase orders are generally non-binding in nature |
| 18 ______________________________________________________________________ [44]Table of Contents The inability to obtain sufficient polysilicon at commercially reasonable prices or at all would adversely affect SunPower’s ability to meet customer demand for its products, which could cause SunPower to lose customers, market share and revenue, thereby seriously harming SunPower’s and our business, financial condition and results of operations |
| If the market for solar power products takes longer to develop than we anticipate or does not develop at all, or if we fail to compete successfully in the solar power market, our revenue and profitability could be adversely affected |
| The market for solar power products manufactured by SunPower is emerging and rapidly evolving |
| If solar power technology proves unsuitable for widespread commercial deployment or if demand for SunPower’s products or solar power products generally fails to develop sufficiently or at all, our revenues and profitability could be affected adversely |
| In addition, demand for solar power products in the markets and geographic regions we target may develop more slowly than we anticipate or not at all |
| The solar cell market has not historically been a part of our core semiconductor business |
| If we are unable to keep pace with this rapidly evolving industry, our results of operations could suffer |
| Many factors will influence the adoption of solar power technology as well as our ability to compete in the solar power products market, including: • cost effectiveness of solar power technologies as compared with conventional and non-solar alternative energy technologies; • performance and reliability of solar power products as compared with conventional and non-solar alternative energy products; • our success in developing new products and manufacturing technologies; • our ability to continue to ramp our manufacturing capacities; • the quality and price of our products; • the availability of the raw materials, including polysilicon, used in the production of solar cell products; • the number and nature of our competitors and general economic conditions; • our access to and the availability of capital; • success of alternative power generation technologies; • fluctuations in economic and market conditions which impact the viability of conventional and non-solar alternative energy sources, such as increases or decreases in the prices of oil and other fossil fuels; • continued deregulation of the electric power industry and broader energy industry; and • availability of, and dependence on, subsidies and other incentives provided by various governmental agencies |
| Because SunPower has fixed-price agreements with two of its largest customers and operate on a purchase order basis with its third largest customer, its financial results, and therefore ours, may suffer if SunPower’s manufacturing costs were to increase or purchase orders were changed or cancelled |
| SunPower’s agreements with PowerLight Corporation and SOLON provide that they will purchase products from SunPower on a fixed-price basis |
| The agreement with SOLON provides for a fixed-price basis for the first two years of the agreement, which expires in 2010 |
| However, SunPower’s manufacturing costs, including the cost of polysilicon, are variable |
| If SunPower’s manufacturing costs increase, SunPower would be unable to raise its prices to these customers, which in turn would negatively impact its operating results |
| SunPower does not have a long-term agreement with Plexus but instead operate on a purchase order basis |
| Although SunPower believes that cancellations to date have been insignificant, its customers may cancel or reschedule purchase orders with SunPower on relatively short notice |
| Cancellations or rescheduling of customer 19 ______________________________________________________________________ [45]Table of Contents orders could result in the delay or loss of anticipated sales without allowing SunPower sufficient time to reduce, or delay the incurrence of, its corresponding inventory and operating expenses |
| In addition, changes in forecasts or the timing of orders from these or other customers expose SunPower to the risks of inventory shortages or excess inventory |
| Our ability to meet our cash requirements depends on a number of factors, many of which are beyond our control |
| Our outstanding debt obligations primarily include dlra600dtta0 million of aggregate principal amount of the 1dtta25prca convertible subordinated notes (“1dtta25prca Notes”) that are due in June 2008 |
| As of January 1, 2006, our total cash, cash equivalents and short-term investments excluding restricted cash were dlra330dtta3 million, which was less than our outstanding indebtedness if it were currently due |
| Each holder of our 1dtta25prca Notes is permitted at any time prior to maturity to convert his or her 1dtta25prca Notes into 55dtta172 shares of our common stock plus a cash payment of dlra300 |
| If all of the holders of our 1dtta25prca Notes were to elect to convert their 1dtta25prca Notes to shares of our common stock and cash, we would be required to issue approximately 33dtta1 million additional shares of common stock, which could have a dilutive impact on any future earnings per share, as well as to make cash payments of approximately dlra180 million |
| We have the right to issue shares in lieu of making cash payments |
| Our ability to meet our cash requirements (including our debt service obligations) is dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control |
| We cannot guarantee that our business will generate sufficient cash flows from operations to fund our cash requirements or to meet our debt service obligations |
| If we are unable to meet our cash requirements from operations, we would be required to fund these cash requirements by alternative financing |
| The degree to which we may be leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions 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 |
| There can be no assurance that we would 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 may be adversely affected |
| Any guidance that we may provide about our business or expected future results may prove to differ from actual results |
| From time to time we have shared our views in press releases or SEC filings, on public conference calls and in other contexts about current business conditions and our expectations as to potential future results |
| Identifying correctly the key factors affecting business conditions and predicting future events is inherently an uncertain process |
| Our analyses and forecasts have in the past and, given the complexity and volatility of our business, will likely in the future, prove to be incorrect |
| We offer no assurance that such predictions or analysis will ultimately be accurate, and investors should treat any such predictions or analyses with appropriate caution |
| 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 |
| We consolidate SunPower’s financial results in the results of operation we report to the public in press releases and our SEC filings |
| SunPower’s financial performance may be affected by a number of factors, including, but not limited to: • the availability and pricing of raw materials, particularly polysilicon; 20 ______________________________________________________________________ [46]Table of Contents • the rate and cost at which it is able to expand its manufacturing capacity to meet customer demand; • timing, availability and changes in government incentive programs; • unplanned additional expenses such as manufacturing failures, defects or downtime; • the loss of one or more key customers or the significant reduction or postponement of orders from these customers; • foreign currency fluctuations, particularly in the Euro or Philippine peso; • its currency hedging activities; • changes in the relative sales mix of its solar cells, solar panels and imaging detectors; • the availability, pricing and timeliness of delivery of other products, such as inverters, necessary for its solar power products to function; • decreases in the overall average selling prices of its solar power products and imaging detectors; • increases or decreases in electric rates due to fossil fuel prices; and • shipping delays |
| Any analysis or forecast that we make which ultimately proves to be inaccurate may adversely affect our stock price |
| 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 keeping 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 |
| We are also from time to time involved in litigation relating to alleged infringement by us of others’ patents or other intellectual property rights |
| Intellectual property 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 find that our intellectual property rights are invalid, enabling our competitors to use our technology, or 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/or give us the right to use patents and other technology developed by them |
| Historically, these arrangements have not been a material source of revenue to the Company |
| We anticipate that we will continue to enter into these kinds of licensing arrangements in the future |
| It is possible, however, that licenses we want will not be available to us on commercially reasonable terms or at all |
| If we lose existing licenses to key technology, or are unable to enter into new licenses that we deem important, our business, financial condition and results of operations could be seriously harmed |
| It is critical to our success that we are able to prevent competitors from copying our innovations |
| Therefore, we intend to continue to seek intellectual property protection for our technologies |
| The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications 21 ______________________________________________________________________ [47]Table of Contents 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 |
| 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 face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances that will apply to specified electronic products put on the market in the European Union as of July 1, 2006 (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the “RoHS Directive”) and similar legislation proposed for China and other countries (including the United States) |
| We are redesigning our products regulated under the RoHS Directive in order to be able to continue to offer them for sale within the European Union |
| Certain electronic products that we maintain in inventory may be rendered obsolete if not in compliance with the RoHS Directive, which could negatively impact our ability to generate revenue from those products |
| Our customers and other companies in the supply chain may require us to certify that our products are RoHS compliant |
| Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs or decreased revenue, and could require that we redesign or change how we manufacture our products |
| We face additional problems and uncertainties associated with international operations that could seriously harm us |
| International revenues accounted for approximately 70prca, 66prca and 63prca of our total revenues during fiscal 2005, 2004 and 2003, respectively |
| Our Philippine fabrication, assembly and test operations, as well as our international sales offices, face risks frequently associated with foreign operations including: • currency exchange fluctuations; • the devaluation of local currencies; • political instability; • changes in local economic conditions; • import and export controls; and • changes in tax laws, tariffs and freight rates |
| To the extent any such risks materialize, our business, financial condition or results of operations could be seriously harmed |
| 22 ______________________________________________________________________ [48]Table of Contents We may face automotive product liability claims that are disproportionately higher than the value of the products involved |
| Although all of our products sold in the automotive market are covered by our standard warranty, we could incur costs not covered by our warranties including, but not limited to, labor and other costs of replacing defective parts, lost profits and other damages |
| These costs could be disproportionately higher than the revenue and profits we receive from the products involved |
| If we are required to pay for damages resulting from quality or performance issues of our automotive products, our business, financial condition and results of operations could be adversely affected |
| We 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 members of management and other technical personnel |
| Our future success depends, in part, upon our ability to retain such personnel and to attract and retain other highly qualified personnel, particularly product and process engineers |
| We compete for these individuals with other companies, academic institutions, government entities and other organizations |
| Competition for such personnel is intense and we may not be successful in hiring or retaining new or existing qualified personnel |
| If we lose existing qualified personnel or are unable to hire new qualified personnel, as needed, our business, financial condition and results of operations could be seriously harmed |
| Our operations and financial results could be severely harmed by certain natural disasters |
| Our headquarters, some manufacturing facilities and some of our major vendors’ facilities are located near major earthquake faults |
| We have not been able to maintain earthquake insurance coverage at reasonable costs |
| 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 |
| Changes in stock option accounting rules may adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, our stock price and our competitiveness in the employee marketplace |
| Technology companies like ours have a history of using broad-based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace |
| Currently, Statement of Financial Accounting Standards (“SFAS”) Nodtta 123, “Accounting for Stock-Based Compensation,” allows companies the choice of either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board (“APB”) Opinion Nodtta 25, “Accounting for Stock Issued to Employees,” with a pro forma disclosure of the impact on our financial results using the fair value recognition method |
| We have in the past elected to apply APB Opinion Nodtta 25 and accordingly, we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant |
| In December 2004, the Financial Accounting Standards Board issued SFAS Nodtta 123(R), “Share-Based Payment,” which replaces SFAS Nodtta 123 and supersedes APB Opinion Nodtta 25 |
| Under SFAS Nodtta 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services |
| Most public companies were initially required to apply SFAS Nodtta 123(R) as of the first interim or annual reporting period beginning after June 15, 2005 |
| In April 2005, the SEC postponed the implementation date to fiscal years beginning after June 15, 2005 |
| 23 ______________________________________________________________________ [49]Table of Contents The implementation of SFAS Nodtta 123(R) beginning in the first quarter of fiscal 2006 will have a significant adverse impact on our financial results as we will be required to expense the fair value of our stock options rather than disclosing the impact within our footnotes in accordance with the disclosure provisions of SFAS Nodtta 123 |
| This will result in lower reported earnings per share, which could negatively impact our future stock price |
| In addition, this could impact our ability to utilize broad-based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace |
| 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 two acquisitions in fiscal 2005 and three in fiscal 2004 |
| We 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 and retaining 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 |
| We may incur losses in connection with loans made under our stock purchase assistance plan |
| We have outstanding loans, consisting of principal and cumulative accrued interest, of dlra54dtta2 million as of January 1, 2006, to employees and former employees under the shareholder-approved 2001 employee stock purchase assistance plan |
| We made the loans to employees for the purpose of purchasing our 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 our common stock purchased with the proceeds of the loan |
| In accordance with the plan, the Chief Executive Officer and the Board of Directors do not participate in this program |
| To date, bad debt write-offs have been negligible |
| As of January 1, 2006, we had an allowance for uncollectible loans of dlra8dtta5 million |
| In determining the allowance for uncollectible loans, management considered various factors, including a review of borrower demographics (including geographic location and job grade), loan quality and an independent fair value analysis of the loans and the underlying collateral |
| While the loans are secured by the shares of our stock purchased with the loan proceeds, the value of this collateral would be adversely affected if our stock price declined significantly |
| 24 ______________________________________________________________________ [50]Table of Contents Our results of operations may be adversely affected if a significant amount of these loans were not repaid |
| Similarly, if our stock price were to decrease, our employees bear greater repayment risk and we would have increased risk to our results of operations |
| Further, it is likely that our ability to recover outstanding loan amounts from current employees will be greater than our ability to recover these amounts from ex-employees who have left Cypress |
| However, we are willing to pursue every available avenue, including those covered under the Uniform Commercial Code, to recover these loans by pursuing employees’ and ex-employees’ personal assets should the borrower not repay these loans |
| We maintain self-insurance for certain indemnities we have made to 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 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 |