Annual Report (Form 10-K), fiscal year 1994




ITEM 2. PROPERTIES
The Company's executive offices, engineering and research and development facilities are located in an approximately 60,000 square foot leased building at 195 Champion Court, San Jose, California. The current annual rental expense is approximately $846,000 under a lease which will expire in 2001.
Immediately adjacent to the Company's executive offices is located the Company's wafer fabrication facility (Fab 1) which also includes certain on-line research and development manufacturing operations. This facility is located in an approximately 61,000 square foot leased building at 3901 North First Street, San Jose, California. The current annual rental expense is approximately $833,000 under a lease which expires in 2001.
Immediately adjacent to the Company's San Jose wafer fabrication facility was located the Company's test operations and support facility. This facility was located in an approximately 62,700 square foot leased building at 3939 North First Street, San Jose, California. The current annual rental expense is approximately $657,000 under a lease which expires in 1994. The Company has vacated the building and does not plan to renew the lease.
Immediately adjacent to the Company's old test operations facility is located research and development and other Company staff functions. This office space is composed of approximately 75,000 square feet in a building located at 4001 North First Street, San Jose, California. The annual rental expense is $702,000 under a lease which expires in 1996.
In December 1988, the Company purchased the two undeveloped industrial lots on either side of its headquarters building. These similarly sized lots, comprising a total of approximately 8.5 acres, will be retained for future expansion of the San Jose building complex.
The Company owns an approximately 65,000 square foot wafer fabrication facility (Fab 2) in Round Rock, Texas, and an approximately 170,000 square foot wafer fabrication facility (Fab 3) on 17 acres of land in Bloomington, Minnesota.
In October 1990, the Company's subsidiary, Multichip Technology Incorporated, entered into a lease for an approximately 27,000 square foot manufacturing facility in San Jose, California. The current annual rent expense for this facility is approximately $364,000 under a lease which expires in October 1994. In December 1992, Multichip vacated this space and relocated to the Company's San Jose wafer fabrication facility. The Company does not plan to renew the lease.
The Company leases additional space for domestic sales and design centers in Huntsville, Alabama; Calabasas, Irvine and San Diego, California; Denver and Colorado Springs, Colorado; Orlando and Tampa, Florida; Roswell, Georgia; Palatine, Illinois; Columbia, Maryland; Minnetonka, Minnesota; Starkville, Mississippi; Nashua, New Hampshire; Laurence Harbor, New Jersey; Poughkeepsie, New York; Raleigh, North Carolina; Portland, Oregon; Trevose, Pennsylvania; Austin, Houston and Richardson, Texas; and Falls Church, Virginia. The Company leases international sales and design centers in La Hupe, Belgium; Les Lilis Cedex, France; Orbassano and Rome, Italy; Tokyo, Japan; Taby, Sweden; Cheshire, Hampshire and Hertfordshire, United Kingdom; and Henstedt-Ulzburg and Zorneding, Germany.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Texas Instruments (TI) has charged Cypress and four other semiconductor companies with infringement of two patents, primarily covering the plastic encapsulation process used to package semiconductor devices. This action was filed before the International Trade Commission (ITC) in Washington, D.C., and in the U.S. District Court in Dallas, Texas. The ITC has ruled that the plastic packaging process known as "bottom gating" does infringe, but that "top gating" used now by Cypress, does not infringe TI's patent. Cypress contends that the patents are invalid. In March of 1993, the U.S. District Court of Appeals for the Federal Circuit affirmed the ITC's ruling. No trial date has been set in the U.S. District Court regarding this matter.
In January and February 1992, the Company and certain of its officers were named defendants in three purported class-action suits filed in the U.S. District Court for the Northern District of California. The suits filed are for alleged violations of the Securities Exchange Act of 1934 and certain provisions of state law regarding disclosure of short-term business prospects. In 1992, the three securities class-action complaints were consolidated by the U.S. District Court for the Northern District of California. The trial date has been scheduled for June 5, 1995.
Cypress will vigorously defend itself in these matters and, subject to the inherent uncertainties of litigation and based upon discovery completed to date, management believes that the possibility of a material adverse impact on the Company's financial position as a result of these matters is remote. However, should the outcome of any of the actions be unfavorable, Cypress may be required to pay damages and other expenses, which could have a material adverse effect on the Company's financial position. In addition, the Company could be required to alter certain of its production processes or products as a result of these matters.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding each of the Company's current executive officers is set forth below:
Except as set forth below, each of the Company's executive officers has been engaged in his principal occupation described above during the past five years. There is no family relationship between any director or executive officer of the Company.
Antonio R. Alvarez joined the Company in May 1987 as a Senior Technical Engineer. Mr. Alvarez was transferred to the Company's subsidiary, Aspen Semiconductor Corporation, in April 1988 as the Manager of BiCMOS Technology. In October 1989, Mr. Alvarez returned to the Company as Vice President, Research and Development. In February 1993, Mr. Alvarez also became responsible for Fab 1 when it was merged with the research and development department. Prior to joining the Company in 1987, Mr. Alvarez worked in various engineering and management positions at Motorola Corporation from September 1979 through July 1987. His last position at Motorola was as a senior member of the technical staff. Mr. Alvarez became an executive officer of the Company in March 1993.
Emmanuel Hernandez joined the Company in June 1993 as Corporate Controller. In January 1994, Mr. Hernandez was promoted to Vice President, Finance and Administration, and Chief Financial Officer. Prior to joining the Company, Mr. Hernandez held financial positions with National Semiconductor.
J. Daniel McCranie joined the Company in October 1993 as Vice President of Marketing and Sales. Prior to joining the Company, Mr. McCranie was President and CEO of SEEQ Technology. Mr. McCranie also held the position of Vice President of Sales and Marketing for SEEQ prior to becoming President and CEO. Previously, he held marketing and sales positions at Harris Semiconductor, AMD, American Microsystems and Signetics.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's 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 sales prices for the Common Stock. The Company has not paid cash dividends and has no present plans to do so. At January 3, 1994 there were approximately 2,681 holders of record of the Company's Common Stock.
ITEM 6.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
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(1) The Company operates on a 52-or 53-week fiscal year, ending on the Monday closest to December 31.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In 1993, the Company reported record revenues of $304.5 million and returned to profitability recording net income of $8.0 million or $0.21 per share compared to a net loss of $21.0 million or $(0.56) per share in 1992. The increases in revenue and net income are the results of the Company's completion of the restructuring initiated in 1992 and its cost-reduction strategy.
The transfer of assembly and test manufacturing to Thailand was completed. Domestic work force reductions continued in 1993, resulting in a year-end headcount of 1,262, as compared to 1,529 at the end of 1992. The Company changed the focus of its San Jose wafer fabrication plant to research and development and increased the output of its other production wafer fabrication plants in Minnesota and Texas. These actions have produced faster cycle times, increased yields and lower costs, allowing the Company to compete effectively in higher-volume markets as well as reducing inventory days from 89 in 1992 to 56 days in 1993. The transfer to Thailand has allowed the Company to consolidate the buildings it occupies in San Jose, California, from five to three.
The Company restructured its subsidiaries in the second quarter of 1993. The Company sold its subsidiary, Ross Technology, Inc., which had recorded recurring operating losses, to Fujitsu Limited for $21.8 million. In addition, the Company acquired the minority interest of the employees of its subsidiaries Aspen Semiconductor Corporation and Multichip Technology Incorporated. The Aspen subsidiary was divided into its two product areas and realigned under the Company's Static Memory and Programmable Products divisions. The Multichip subsidiary was realigned under the Static Memory division. The subsidiary restructuring resulted in a net one-time pre-tax credit of $0.4 million.
In the fourth quarter of 1993, the Company acquired 100% of the outstanding stock of IC Designs, Inc., a timing technology company, for $20.3 million. The acquisition provides the Company inroads into the broad personal computer market. The Company also purchased certain inventory and technology of Performance Semiconductor Corporation's FCT high-speed logic product line for $5.3 million. The FCT acquisition complements the Company's current products and allows the Company to provide systems solutions to its customers. As a result of these purchases, the Company took a one-time pre-tax charge of $18.3 million (see Note 3 of the Notes to Consolidated Financial Statements).
The Company's balance sheet remains strong. Cash and short-term investment balances at the end of 1993 totaled $80.6 million, inclusive of the IC Designs and the FCT product line acquisitions, the Ross sale and a $19.7 million payment for the repurchase of 1.9 million shares of the Company's common stock.
RESULTS OF OPERATIONS
In 1993, revenues increased to a record $304.5 million, compared to $272.2 million in 1992 and $286.8 million in 1991. The most significant revenue growth was experienced in the Static Memory and Data Communications divisions. Increases in these divisions more than offset the decrease in average selling price of 21% from 1992 to 1993 and the loss of revenue due to the sale of Ross Technology, Inc. Lower manufacturing costs allowed the Company to be more price competitive and to compete effectively in high-volume markets, also contributing to higher revenues.
Foreign sales as a percentage of total revenue remained constant at 27% in 1993 and 1992, compared to 25% in 1991.
Cost of revenues as a percent of revenues for 1993 increased to 59% compared to 58% and 45% in 1992 and 1991, respectively. However, the cost of revenues as a percent of revenues improved towards the end of 1993, decreasing from 61% in the fourth quarter of 1992 to 57% in the fourth quarter of 1993. Steady improvement in the gross margin percentage was realized from the Company's restructuring and cost reduction strategy.
Research and development expenses decreased significantly in 1993 dropping to 16% of revenues compared to 24% of revenues in 1992 and 25% of revenues in 1991. The decrease in R&D can be attributed to the sale of Ross Technology, Inc. and the Company's strategy to focus on its Top 10 projects and hold R&D to a slower growth rate than revenue. The Company's program to accelerate new product design has resulted in a 41% improvement in cycle time from the fourth quarter of 1992 to the fourth quarter of 1993.
Marketing, general and administrative expenses decreased to 15% of revenues in 1993 compared to 17% in 1992 and 15% in 1991. By controlling costs and growing sales, the Company achieved its corporate target of 15% of revenues.
Income from operations was $10.7 million in 1993 compared to an operating loss of $35.6 million in 1992 and operating income of $44.8 million in 1991. Included in operating income for 1993 are non-recurring charges of $18.3 million related to the Company's fourth quarter acquisitions. Operating income without the acquisition-related non-recurring charges and the one-time pre-tax credit from restructuring would have been $28.5 million. Included in the 1992 operating income is a charge for restructuring and other non-recurring costs. Operating income without the $39.7 million restructuring and other non-recurring costs charge would have been $4.1 million in 1992.
Net interest income in 1993 decreased to $1.9 million compared to $2.7 million in 1992 and $4.7 million in 1991. Net interest income has decreased from the prior year due primarily to lower rates of return earned on short-term investments, and a reduction in the average balance of investments held.
The Company recorded income tax expense of $4.5 million in 1993 compared to an income tax benefit of $11.9 million in 1992 as a result of the pre-tax loss of $32.9 million. In 1991, the Company recorded an income tax provision of $17.6 million. The effective tax rate for 1993 was 36.0% compared to 36.2% in 1992 and 34.0% in 1991. In 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires use of the liability method for computing deferred income taxes. In 1991, the Company used the deferred method under ABP 11. The impact of adopting FAS 109 was not significant.
1993 net income of $8.0 million was an increase from the 1992 net loss of $21.0 million, and a decrease from the 1991 net income of $34.2 million. 1993 net income without the acquisition-related non-recurring charges and the one-time pre-tax credit from restructuring would have been $19.5 million. Net income in 1992 without the restructuring and other non-recurring costs charge would have been $4.3 million.
FACTORS AFFECTING FUTURE RESULTS
A number of uncertainties exist that could have an impact on the Company's future, including general economic conditions, the rate of growth of the networking, computer and telecommunications market, and the acceleration of new product introductions. The Company's products continue to experience increased competition and as a result, are subject to decreases in average selling prices. Typically, the Company requires new orders in a quarter to meet that quarter's revenue plan. In addition, the semiconductor industry is generally characterized by a highly competitive, rapidly changing environment, where results are often significantly impacted by the introduction of new products, new manufacturing technologies, and rapid changes in the demand for products which can lead to unpredictability in monthly revenue. Due to the effect of these forces on the Company's future operations, past performance should be only one indicator of future performance and investors should not use historical trends to anticipate results in future periods.
Current pending litigation and claims are set forth in Note 7 of the Notes to Consolidated Financial Statements. Cypress will vigorously defend itself in these matters and, subject to the inherent uncertainties of litigation and based upon discovery completed to date, management believes that the possibility of a material adverse impact on the Company's financial position as a result of these matters is remote. However, should the outcome of any of the actions be unfavorable, Cypress may be required to pay damages and other expenses, which could have a material adverse effect on the Company's financial position. In addition, the Company could be required to alter certain of its production processes or products as a result of these matters.
FINANCIAL CONDITION
The Company's financial condition remained strong throughout 1993. Cash, cash equivalents and short-term investments at the end of fiscal year 1993 were $80.6 million, a decrease of $1.4 million after the acquisitions of IC Designs and the FCT product line, the repurchase of the Company's common stock, and the sale of Ross Technology, Inc. Cash generated from operating activities was $68.9 million in 1993, an increase of $35.2 million from the prior year. Cash generated from operations was $33.7 million in 1992 and $66.4 million in 1991. Improved operating results, coupled with asset management, contributed to the improvement in 1993.
Cash used for investing activities increased to $41.9 million in 1993 compared to $28.0 million in 1992, but decreased in comparison to the $78.2 million invested in 1991. Net capital expenditures for 1993 have risen to $55.5 million compared to $31.9 million in 1992, but have fallen in comparison to 1991 which had expenditures of $64.8 million. The 1993 increase results from the Company's expansion of wafer fabrication capacity in its Minnesota and Texas subsidiaries and conversion of its San Jose R&D wafer fabrication plant from five-inch to six-inch wafers. In addition, in 1993, the Company acquired IC Designs and the FCT product line for net cash outlays of $16.6 million and $5.3 million, respectively. The Company plans to continue capital expenditures in 1994 for increased fabrication capacity for production and research and development. It is also exploring alternatives for an additional back-end manufacturing facility. Additionally, the Company continues to review opportunities for acquiring complementary businesses and technologies.
Net cash used by financing activities was $1.8 million in 1993 compared to $18.4 million in 1992, and a $10.5 million inflow in 1991. The cost of treasury stock repurchased in 1993 decreased to $19.7 million from $26.4 million in 1992. A majority of the treasury stock repurchased in 1993 was made during the first half of the year when the stock price ranged from $9.00 to $10.50 per share. The cash used to repurchase treasury stock was offset by proceeds from the issuance of capital stock. In 1993, $20.5 million of cash was generated from the issuance of capital stock through the exercise of employee stock options, compared to $11.0 million in 1992 and $22.2 million in 1991.
The Company anticipates that existing sources of liquidity and cash flow from operations will be sufficient to satisfy its cash needs for the foreseeable future. The Company may, from time to time, as market conditions warrant, purchase shares of its own common stock on the open market, invest in complementary technologies, products, or businesses, or raise additional capital through public and private markets.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(SHARES AND DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Cypress Semiconductor Corporation (the "Company" or "Cypress") was incorporated in California in December 1982, commenced business activities in January 1983, and reincorporated in Delaware in February 1987. The Company designs, develops and manufactures a broad range of high-performance integrated circuits. The Company sells to the high-performance computer, military, personal computer, telecommunications and instrumentation application markets.
The Company's operations outside the U.S. include eleven foreign sales offices. The assets, liabilities, and results of operations of these entities were not significant for any of the years presented. The Company conducts European operations and imports its products through a subsidiary located in the Netherlands, Cypress Semiconductor International, Incorporated (CSII). Export revenues, principally to customers in Europe, Japan, and Canada, were 27%, 27%, and 25% of total revenues in 1993, 1992, and 1991, respectively. As of January 3, 1994, all of the Company's subsidiaries are wholly owned, except for Cypress Semiconductor (Texas), Inc. (CTI), the Company's wafer fabrication facility in Texas, which is approximately 17% owned by Altera Corporation (Altera). In 1991, Altera exercised its remaining options to acquire additional common shares from CTI, resulting in a gain for Cypress of $2.3 million. Altera receives wafer fab capacity commensurate with its ownership percentage.
In 1992 and 1991, sales to one customer accounted for 12% and 15% of total revenues, respectively. Additionally, sales to one distributor accounted for 11% and 10% of total revenues in 1993 and 1992, respectively.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Fiscal years 1993, 1992, and 1991 ended January 3, 1994, December 28, 1992, and December 30, 1991, respectively. The Company operates on a 52-or 53-week fiscal year, ending on the Monday closest to December 31. Fiscal year 1993 comprised 53 weeks and fiscal years 1992 and 1991 each comprised 52 weeks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
Revenue from product sales direct to customers is recognized upon shipment. Certain of the Company's sales are made to distributors under agreements allowing certain rights of return and price protection on merchandise unsold by the distributors. Accordingly, the Company defers recognition of sales and profit on such sales until the merchandise is sold by the distributors.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments with a maturity at time of purchase of three months or less to be cash equivalents. Cash equivalents and short-term investments are principally composed of time deposits, certificates of deposit, collateralized mortgage obligations, U.S. Government agencies' obligations, loan participations, municipal obligations, and short-term commercial paper, and all are carried at cost plus accrued interest, which approximates market value.
NOTE 1: THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED INVENTORIES
Inventories are valued at standard costs that approximate actual costs, but not in excess of market. Cost is determined on a first-in, first-out basis. Market is based on estimated net realizable value. The components of inventories are as follows:
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and amortization are computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, or lease term if less than useful life. Accelerated methods of computing depreciation are used for tax purposes. The components of property, plant, and equipment are as follows:
INCOME TAXES
Effective the beginning of 1992, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS109), "Accounting for Income Taxes." The adoption of FAS109 changed the Company's method of accounting for income taxes from the deferred method (APB11) to an asset and liability approach. Previously, the Company deferred the past tax effects of timing differences between financial reporting and taxable income. The asset and liability approach requires recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The impact of adopting FAS109 was not significant.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of shares of outstanding common stock and common equivalent shares, when dilutive. Common equivalent shares include shares issuable under the Company's stock option plans and outstanding warrants as determined by the treasury stock method. The effect of minority interests in common equivalent shares of subsidiaries has not been significant.
TRANSLATION OF FOREIGN CURRENCIES
The Company translates accounts denominated in foreign currencies in accordance with Statement of Financial Accounting Standards No. 52, using the United States dollar as the functional currency. Foreign currency transaction gains and losses have not been material in any year.
NOTE 2: RESTRUCTURING AND OTHER NON-RECURRING COSTS
In June of 1993, Cypress continued its restructuring activities by selling its SPARC(TM) microprocessor subsidiary, Ross Technology, Inc. to Fujitsu Limited for $21.8 million. The Company received an aggregate of $16.6 million in 1993, and the remaining proceeds will be received in 1994. In addition to the divestiture of Ross, the Company restructured the equity of two of its subsidiaries, Aspen Semiconductor Corporation and Multichip Technology Incorporated, by acquiring employee minority interests consisting of stock options and stock received from exercised stock options. Aspen Semiconductor was absorbed into two of Cypress' divisions, Static Memory and Programmable Products. Multichip Technology is now integrated as a part of the Static Memory division. These restructuring activities and the divestiture of Ross resulted in a net one-time pre-tax credit of $408,000.
In 1992, the Company committed to several restructuring actions. In the second quarter, the Company committed to transferring a significant portion of its assembly, test, mark, and shipping (back-end production) offshore to Bangkok, together with a reduction in headcount. In the fourth quarter, the Company committed to (1) transfer of the remaining portion of back-end production to Bangkok; (2) consolidation of all wafer production in the Company's six-inch wafer manufacturing plants in Texas and Minnesota with a related shutdown of all wafer production in the five-inch wafer manufacturing plant in San Jose; (3) consolidation of other facilities; and (4) a further reduction of headcount. These actions resulted in pre-tax charges of $2.5 million and $23.7 million in the second and fourth quarters, respectively. Restructuring reserves at December 28, 1992, aggregated $8.3 million and were included in Other Accrued Liabilities. This restructuring was completed in 1993 with no significant adjustments to amounts provided in 1992.
During the fourth quarter of 1992, the Company provided a pre-tax charge of $13.5 million for several legal matters and claims, some of which were resolved in 1993 at amounts approximating charges provided in 1992. Remaining legal reserves at the end of 1993 were $5.1 million and are included in Other Accrued Liabilities.
NOTE 3: ACQUISITIONS AND RELATED CHARGES
In the fourth quarter of 1993, the Company acquired 100% of IC Designs, Inc. (ICD), a manufacturer of timing technology products for the personal computer market, for $16.3 million plus $4 million for certain covenants not to compete. The aggregate purchase price of $20.3 million was allocated to assets purchased and liabilities assumed based on independent appraisal as follows:
The following summarizes the unaudited pro forma results of operations of the Company for 1993 and 1992 assuming the acquisition of IC Designs had occurred at the beginning of 1992 (Dollars in thousands, except per share amounts):
NOTE 3: ACQUISITIONS AND RELATED CHARGES -- CONTINUED In December 1993, the Company acquired the inventory and technology of the high-speed logic product line of Performance Semiconductor for an aggregate cost of $5.3 million. This cost has been allocated based on independent appraisal as follows:
The pro forma effect of this product line is not significant. These acquisitions have been accounted for on the purchase method and the intangible assets acquired, including covenants not to compete, completed technology and goodwill, are being amortized over three to five years.
Acquired R&D in process aggregating $14.1 million was charged to expense in the fourth quarter of 1993. In addition, the Company recorded a non-recurring charge of $4.2 million for certain restructuring activities of Cypress, necessitated by the increased volume requirements associated with these acquisitions. This includes costs of moving a significant portion of back-end manufacturing operations to an additional Cypress facility, including $2.7 million for the write-down of equipment that will be disposed of and $1.5 million for costs of moving certain equipment.
NOTE 4: COMMON STOCK
Shares of the Company's common stock available for future issuance upon exercise of outstanding options and warrants and options to be granted in the future under stock purchase and option plans were as follows at January 3, 1994:
1985 STOCK OPTION PLAN
In 1985, the Company adopted an Incentive Stock Option Plan (the Plan). The Plan is administered and terms of option grants are established by the Board of Directors or a committee of the board. Under terms of the Plan, options may be granted to the Company's qualified employees and consultants to purchase shares of common stock. Options generally become exercisable ratably over a vesting period as determined by the Board of Directors and expire over terms not exceeding ten years from the date of grant. The option price for all shares granted under the Plan is equal to the fair market value of the common stock at the date of grant.
NOTE 4: COMMON STOCK -- CONTINUED Table 1 summarizes information relating to shares under option and shares available for grant under the Plan.
TABLE 1. SHARES UNDER OPTION AND AVAILABLE FOR GRANT
In April 1992, substantially all outstanding options (3,333,685 shares) with exercise prices in excess of $9.50 were cancelled and replaced with new options for a like number of shares having an exercise price of $9.50 per share, the fair market value on the grant date.
DIRECTORS' STOCK OPTION PLAN AND WARRANTS
In October 1988, the Company's Board of Directors adopted the 1988 Directors' Stock Option Plan (the Plan) and 230,000 shares of common stock were reserved for issuance under the Plan.
In October 1988, options to purchase 40,000 shares of common stock were granted to each of the Company's then three non-employee directors, for a total of 120,000 shares, at an exercise price of $9.13, which was the fair market value of the Company's common stock on the date of grant. Such options vest at the rate of 25% per year beginning May 29, 1991, and will be followed by additional automatic grants, providing ongoing vesting at the rate of 10,000 shares per director per year. The initial options become exercisable cumulatively in 10,000 share increments on May 29 in 1991, 1992, 1993, and 1994. Subsequent options will become exercisable four years after date of grant. Options expire three months after termination of status as a director and within six months after death or permanent disability. In 1993, two new non-employees were appointed to the board of directors and were subsequently granted stock options. As of January 3, 1994, no shares remained available for future grant under the Plan.
In October 1987, the Company granted warrants to purchase 40,000 shares of common stock at $6.25 per share (the fair market value of the shares on the date of grant) to each of the Company's then three non-employee Directors, for a total of 120,000 shares, vesting at the rate of 25% per year over a four-year period, beginning in May 1986, subject to continued service on the Board of Directors. The warrants were fully exercised during 1991 prior to their May 1991 expiration.
NOTE 4: COMMON STOCK -- CONTINUED EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
In 1986, the Company approved an Employee Qualified Stock Purchase Plan (the Plan), which allows eligible employees of the Company and its subsidiaries to purchase shares of common stock through payroll deductions. The Plan consists of consecutive 24-month offering periods composed of four 6-month exercise periods. The shares can be purchased at the lower of 85% of the fair market value of the common stock at the date of commencement of this two-year offering period or at the last day of each 6-month exercise period. Purchases are limited to 10% of an employee's eligible compensation, subject to a maximum annual employee contribution limited to a $25,000 market value (calculated as employee's enrollment price multiplied by purchased shares). Of the 2,800,000 shares authorized under the Plan, 1,874,003 shares were issued through 1993 including, 452,507, 693,936, and 304,426 shares in 1993, 1992, and 1991, respectively.
CONTINGENT WARRANTS
During 1992, the Company provided a consultant contingent warrants to purchase up to 500,000 shares of the Company's stock for $8.75 per share. The warrants become exercisable in increasing amounts based upon the Company achieving specified improved performance criteria. At the time when it becomes probable that the contingent warrants will become exercisable, they are valued and charged to expense based on the difference between the then fair market value of the Company's common stock and the exercise price. In 1993, 229,153 shares were earned by the consultant and became exercisable, resulting in an $858,000 charge against earnings. There were no shares earned and no charges against earnings in 1992 related to these contingent warrants.
NOTE 5: OTHER EMPLOYEE BENEFIT PLANS
QUALIFIED INVESTMENT PLAN
In 1986, the Company adopted a Section 401(k) Plan (the Plan), which provides participating employees with an opportunity to accumulate funds for retirement and hardship. Under the terms of the Plan, eligible participants may contribute up to 10% of their eligible earnings to the Plan Trust.
PROFIT SHARING PLAN
Under the 1986 Profit Sharing Plan (the Plan), which commenced in the fiscal quarter ended September 1986, a portion of the Company's quarterly operating profit (as defined) can be allocated to the Company's "Employee Benefit Fund." The nominal contribution is 6% of defined operating profit, divided by the number of qualified employees, which gives each qualified employee an equal share. In October 1990, the Company amended the Plan to allow for the grant of stock options under the 1985 Stock Option Plan in lieu of a cash profit sharing payment, at the option of the employee. In 1993 and 1991, $1,599,000 and $3,509,000, respectively, were charged against operations in connection with this Plan, representing 13.0% and 7.3% of operating profit (before profit sharing expense), respectively. There was no profit sharing expense for fiscal 1992. The Company has no management or executive bonus plans.
NOTE 6: INCOME TAXES
The components of the provision for income taxes are summarized in Table 2. Income (loss) before taxes is principally attributed to domestic operations.
The tax provision differs from the amounts obtained by applying the statutory U.S. federal income tax rate to income before taxes as shown in Table 3.
NOTE 6: INCOME TAXES -- CONTINUED The components of the net deferred tax asset as January 3, 1994 and December 28, 1992 under FAS 109 were as follows:
The net deferred tax asset at January 3, 1994 is substantially realizable through carry-back to prior years' taxable income. Other Current Assets include current deferred tax assets of $17,088,000 at January 3, 1994 and $14,908,000 at December 28, 1992, respectively.
TABLE 2. COMPONENTS OF THE PROVISION FOR INCOME TAXES
TABLE 3. TAX PROVISION DIFFERENCES
NOTE 7: COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
The Company leases most of its manufacturing and office facilities under noncancelable operating lease agreements that expire at various dates through 2001. These leases require the Company to pay taxes, insurance, and maintenance expenses, and provide for renewal options at the then fair market rental value of the property. The aggregate annual rental commitments under noncancelable operating leases as of January 3, 1994, are:
Rental expense was approximately $4,036,000 in 1993, $4,782,000 in 1992, and $4,587,000 in 1991.
LITIGATION AND ASSERTED CLAIMS
In the normal course of business, the Company receives and makes inquiries with regard to possible patent infringement. Where deemed advisable, the Company may seek or extend licenses or negotiate settlements.
Texas Instruments (TI) has charged Cypress and four other semiconductor companies with infringement of two patents, primarily covering the plastic encapsulation process used to package semiconductor devices. This action was filed before the International Trade Commission (ITC) in Washington, D.C., and in the U.S. District Court in Dallas, Texas. The ITC has ruled that the plastic packaging process known as "bottom gating" does infringe, but that "top gating," used now by Cypress, does not infringe TI's patent. Cypress contends that the patents are invalid. In March of 1993, the U.S. District Court of Appeals for the Federal Circuit affirmed the ITC's ruling. No trial date has been set in the U.S. District Court regarding this matter.
In January and February 1992, the Company and certain of its officers were named defendants in three purported class-action suits filed in the United States District Court for the Northern District of California. The suits filed are for alleged violations of the Securities Exchange Act of 1934 and certain provisions of state law regarding disclosure of short-term business prospects. In 1992, the three securities class-action complaints were consolidated by the U.S. District Court for the Northern District of California. The trial date has been scheduled for June 5, 1995.
Cypress will vigorously defend itself in these matters. While the outcome of such litigation and claims cannot be accurately predicted, management believes that recorded reserves are adequate and these actions should not have a material adverse impact on its financial position. However, should the outcome of any of the actions be unfavorable, Cypress may be required to pay damages and other expenses, which could have a material adverse effect on the Company's financial position, although management believes the possibility of such effect is remote.
NOTE 8: RELATED PARTY
During 1990, the Company made a cost-basis investment of $1 million in Vitesse Semiconductor Series E Preferred Stock (which has been converted to common stock since Vitesse's public offering) and guaranteed an equipment lease line of credit for Vitesse, of $3.5 million, maturing on August 31, 1997. The outstanding principal balance related to the lease line at January 3, 1994, is $1.6 million. In exchange for
NOTE 8: RELATED PARTY -- CONTINUED guaranteeing the leases, the Company received a warrant, exercisable at $9.00 per share, for up to 35,000 shares of Vitesse common stock. The warrant for 35,000 shares was exercised in December 1991 and the shares subsequently sold in 1992. As of January 3, 1994, the Company's cost-basis investment is $1,000,000. The Company's chairman, its president and a director, effective October 1993, are members of the Vitesse Board of Directors.
During 1992, the Company made a cost-basis investment of $2 million in QuickLogic Series D preferred stock. An additional $195,000 was invested in 1993. Under certain circumstances, the Company may be required to make additional investments in QuickLogic. The Company's chairman is a member of the Board of Directors of QuickLogic.
During 1993 and 1992, the Company paid approximately $291,000 and $242,000, respectively, to a member of the Board of Directors for consulting services. The Company also guaranteed a loan from a bank to the Company's president and chief executive officer which aggregated $810,000 at January 3, 1994.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Cypress Semiconductor Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Cypress Semiconductor Corporation and its subsidiaries at January 3, 1994 and December 28, 1992, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE San Jose, California January 25, 1994
QUARTERLY FINANCIAL DATA
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the registrant has filed a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference.
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is incorporated by reference to the Company's Proxy Statement.
The information concerning the Company's executive officers required by this Item is included in Part I hereof under the title "Executive Officers of the Registrant".
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Company's Proxy Statement.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the Company's Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the Company's Proxy Statement.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) Exhibits
- --------------- (1) Previously filed as exhibits to Registration Statement on Form S-1 (No. 33-12153) which became effective on March 4, 1987 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1992.
(4) Management compensatory plan, contract or arrangement.
(B) REPORTS ON FORM 8-K
A report on Form 8-K dated November 2, 1993 was filed by the Company for the fourth quarter ended January 3, 1994, reporting the acquisition of IC Designs, Inc. and including audited financial statements for the year ended December 31, 1992 and unaudited financial information for the nine months ended September 30, 1993 and 1992 of IC Designs, Inc.; and unaudited pro forma financial statements for the year ended December 28, 1992 and as of and for the nine months ended September 27, 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, Cypress Semiconductor Corporation, a corporation organized and existing under the laws of the State of Delaware, has duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of San Jose, State of California, on the 14th day of March 1994.
CYPRESS SEMICONDUCTOR CORPORATION
By: /s/ EMMANUEL HERNANDEZ Emmanuel Hernandez, Chief Financial Officer, Vice President, Finance and Administration
POWER OF ATTORNEY
Each of the officers and directors of Cypress Semiconductor Corporation whose signature appears below hereby constitutes and appoints T.J. Rodgers and Emmanuel Hernandez and each of them, their true and lawful attorneys-in-fact and agents, with full power of substitution, each with power to act alone, to sign and execute on behalf of the undersigned any amendment or amendments to this Report on Form 10-K, and to perform any acts necessary to be done in order to file such amendment, and each of the undersigned does hereby ratify and confirm all that said attorneys-in-fact and agents, or their or his substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Cypress Semiconductor Corporation
Our audits of the consolidated financial statements referred to in our report dated January 25, 1994 appearing on page 26 of this Annual Report on Form 10-K also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE San Jose, California January 25, 1994
SCHEDULE I
CYPRESS SEMICONDUCTOR CORPORATION
MARKETABLE SECURITIES
- --------------- (1) The cost, carrying amount and market value of each issue at the balance sheet date are the same amounts as listed.
(2) No individual security issue exceeds 2% of total assets.
SCHEDULE II
CYPRESS SEMICONDUCTOR CORPORATION
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
- --------------- (1) Receivable from Chairman of Ross Technology, Inc. (a subsidiary of the Company), due December 31, 1992 and subsequently extended to May 1993, bearing interest at the rate of 6.15% per annum payable at maturity, and secured by his Cypress Semiconductor stock options.
(2) Receivable from former Chief Operating Officer of Ross Technology, Inc., due March 31, 1992, non-interest bearing and unsecured.
(3) Receivable from former Marketing Manager of Ross Technology, Inc., due June 30, 1993, bearing interest at the rate of 6% per annum payable at maturity, secured by his personal residence.
(4) Receivable from President of Aspen Semiconductor Corporation (a subsidiary of the Company) due on August 30, 1993, bearing interest at the rate of 5% per annum payable at maturity, secured by stock in Aspen Semiconductor.
(5) Receivable from Director of Technology of Aspen Semiconductor Corporation, due April 15, 1994, bearing interest at the rate of 8% per annum payable at maturity, secured by his personal property.
(6) Receivable from Vice President of Marketing and Sales, due October 7, 1996, unsecured and bearing interest at 4% per annum. Principal and interest due at maturity unless Mr. McCranie is still employed by the Company, in which case such indebtedness will be forgiven.
SCHEDULE V
CYPRESS SEMICONDUCTOR CORPORATION
PROPERTY AND EQUIPMENT
- --------------- * Includes fixed assets written off in 1992 in conjunction with the Company's restructuring.
** Represents reclassification resulting from implementation of new asset tracking system.
SCHEDULE VI
CYPRESS SEMICONDUCTOR CORPORATION
ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
SCHEDULE VIII
CYPRESS SEMICONDUCTOR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE X
CYPRESS SEMICONDUCTOR CORPORATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION