-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BL4o8GhWFJAxpNhmZ85cdQsRhiTQRdvH//4mJmtJZAf94+Lsg38kjJquxbeLYB25 guGe30090+zBN3q9/fC6xg== 0000867105-97-000015.txt : 19971114 0000867105-97-000015.hdr.sgml : 19971114 ACCESSION NUMBER: 0000867105-97-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYRIX CORP CENTRAL INDEX KEY: 0000867105 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 752218250 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21904 FILM NUMBER: 97714430 BUSINESS ADDRESS: STREET 1: 2703 N CENTRAL EXPRESSWAY CITY: RICHARDSON STATE: TX ZIP: 75080 BUSINESS PHONE: 2149948387 MAIL ADDRESS: STREET 1: MS 220 STREET 2: PO BOX 853920 CITY: RICHARDSON STATE: TX ZIP: 75085-3920 10-Q 1 10-Q ----------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q --------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 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 0-21904 CYRIX CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-2218250 ---------- ------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2703 NORTH CENTRAL EXPRESSWAY, RICHARDSON, TX 75080 --------------------------------------------------- (Address of principal executive offices, including zip code) 972-968-8387 ------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, $.004 PAR VALUE 19,912,831 ----------------------------- ---------- (Title of Each Class) (Number of Shares Outstanding at October 31, 1997) ----------------------------------------------- CYRIX CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 3-4 Consolidated Statements of Income for the three months and nine months ended September 30, 1997 and 1996 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signature Page 18 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CYRIX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (UNAUDITED) (IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 1997 1996 ----------------------------- Current assets: Cash and cash equivalents $104,460 $65,712 Investments 1,000 22,035 Trade accounts receivable, net of valuation allowances of $3,227 at September 30, 1997 and $4,236 at December 31, 1996 60,981 27,791 Inventories: Raw materials 5,274 9,576 Work in process 16,007 14,204 Finished goods 6,180 652 ---------------------------- Total inventories 27,461 24,432 Prepayment for product purchases (Note 5) 22,799 20,471 Income taxes receivable 2,806 21,033 Deferred taxes 8,200 4,783 Other assets 1,588 1,184 ---------------------------- Total current assets 229,295 187,441 Property and equipment Land 4,964 4,964 Buildings and improvements 11,814 11,154 Machinery and equipment 139,929 132,359 ---------------------------- 156,707 148,477 Accumulated depreciation (82,068) (62,892) ---------------------------- 4,639 85,585 Prepayment for product purchases, less current portion (Note 5) 10,791 22,465 Other assets 3,322 3,851 ---------------------------- Total assets $318,047 $299,342 ============================ CYRIX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------------------------ Current liabilities: Accounts payable $30,056 $17,504 Accrued salaries and benefits 5,194 5,454 Deferred income and distributor reserves 4,839 2,610 Income taxes payable 722 377 Current maturities of long-term debt and capitalized lease obligations (Note 4) 2,368 3,075 Other accrued expenses 8,386 8,034 ------------------------------ Total current liabilities 51,565 37,054 Long-term debt and capitalized lease obligations, less current maturities (Note 4) 134,502 136,156 Deferred income taxes 2,961 3,206 Commitments and contingencies (Notes 5 and 6) Stockholders' equity: Common stock, $.004 par value; authorized 60,000 shares, issued 20,228 at September 30, 1997 and December 31, 1996 81 81 Additional capital 54,521 49,040 Retained earnings 74,446 73,850 Less treasury stock, at cost, 326 shares at September 30, 1997 and 717 shares at December 31, 1996 (29) (45) ----------------------------- Total stockholders' equity 129,019 122,926 ----------------------------- Total liabilities and stockholders' equity $318,047 $299,342 ============================= SEE ACCOMPANYING NOTES. CYRIX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 1997 1996 --------------------------------------------------------------------------- Net product sales $92,122 $31,508 $206,496 $105,775 Royalty revenue (Note 3) 1,071 1,598 2,328 5,992 --------------------------------------------------------------------------- Net revenues 93,193 33,106 208,824 111,767 Cost of sales 70,558 21,811 137,891 74,578 --------------------------------------------------------------------------- 22,635 11,295 70,933 37,189 --------------------------------------------------------------------------- Expenses: Marketing, general and administrative 12,416 13,870 35,307 40,852 Research and development 10,069 8,073 31,014 24,569 --------------------------------------------------------------------------- 22,485 21,943 66,321 65,421 --------------------------------------------------------------------------- Income (loss) from operations 150 (10,648) 4,612 (28,232) Other income and expense: Income from litigation settlement ---- 2,000 ---- 2,000 Interest income 1,212 681 3,866 1,522 Interest expense (2,462) (2,557) (7,587) (6,850) --------------------------------------------------------------------------- (1,250) 124 (3,721) (3,328) --------------------------------------------------------------------------- Income (loss) before provision for income taxes and extraordinary loss from early extinguishment of debt (1,100) (10,524) 891 (31,560) --------------------------------------------------------------------------- Provision (benefit) for income taxes (363) (3,578) 294 (11,210) --------------------------------------------------------------------------- Income (loss) before extraordinary loss from early extinguishment of debt ($737) ($6,946) $597 ($20,350) Extraordinary loss from early extinguishment of debt, net of income tax benefit of $598 ---- ---- ---- ($1,062) --------------------------------------------------------------------------- Net income (loss) ($737) ($6,946) $597 ($21,412) --------------------------------------------------------------------------- Net income (loss) per common and common equivalent share - primary: Income (loss) before extraordinary item ($0.04) ($0.36) $0.03 ($1.05) Extraordinary item ---- ---- ---- ($0.06) --------------------------------------------------------------------------- Net income (loss) per common share ($0.04) ($0.36) $0.03 ($1.11) --------------------------------------------------------------------------- Weighted average common and common equivalent shares outstanding 19,796 19,463 20,408 19,376 ---------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. CYRIX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 ------------------------------ OPERATING ACTIVITIES Net income $597 ($21,412) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 19,840 20,356 Provision for doubtful accounts and OEM customer returns 6,596 13,328 Deferred taxes (3,663) (7,044) Changes in operating assets and liabilities: Receivables (39,786) (2,598) Inventories (3,029) (39,389) Income taxes receivable 18,227 (12,660) Other current assets (405) 12,377 Accounts payable 12,552 6,720 Income taxes payable 344 (464) Accrued expenses 91 3,604 Deferred income and distributor reserves 2,230 (8,400) Other assets 529 (3,260) ------------------------------- Net cash provided by (used in) operating activities 14,123 (38,842) INVESTING ACTIVITIES Prepayments for product purchases (10,000) (10,000) Reduction in prepayments for product purchases 19,347 13,393 Purchases of property and equipment, net (8,894) (9,535) Purchases of investments (28,478) ---- Proceeds from redemption of investments 49,513 ---- ------------------------------- Net cash used in investing activities 21,488 (6,142) FINANCING ACTIVITIES Proceeds from issuance of 5.5% convertible subordinated notes ---- 126,500 Proceeds from issuance of long-term debt ---- 5,500 Repayments of long-term debt and capitalized lease obligations (2,360) (77,492) Tax benefit from stock option exercises 1,556 382 Net proceeds from issuance of common stock 3,941 2,060 ------------------------------- Net cash provided by financing activities 3,137 56,950 ------------------------------- Increase in cash and cash equivalents 38,748 11,966 Cash and cash equivalents at beginning of period 65,712 44,334 ------------------------------- Cash and cash equivalents at end of period $ 104,460 $56,300 ------------------------------- FINANCING AND INVESTING ACTIVITIES NOT AFFECTING CASH Capital lease obligations incurred ---- $3,179 SEE ACCOMPANYING NOTES. CYRIX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1997 1. BASIS OF PRESENTATION The unaudited consolidated financial statements of Cyrix Corporation and subsidiaries ("the Company" or "Cyrix") have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. Results of operations for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 1996, and notes thereto included in the Company's Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 10, 1997 and the Form 10-K/A filed with the SEC on May 16, 1997. The Company uses a 52/53 week fiscal year that ends on or about December 31 and 13/14 week fiscal quarters that end on or about March 31, June 30 and September 30. The accompanying financial statements have been labeled as though the Company's accounting periods ended on the respective calendar year ended December 31 and the fiscal quarter ended September 30. Fiscal year 1996 ended December 29, 1996, the third fiscal quarter of 1997 ended September 28, 1997, and the third fiscal quarter of 1996 ended September 29, 1996. The third fiscal quarters of 1997 and 1996 were each 13-week fiscal quarters. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which becomes effective for the Company's 1997 consolidated financial statements beginning in the fourth quarter of 1997. SFAS No. 128 will eliminate the disclosure of primary earnings per share which includes the dilutive effect of stock options, warrants and other convertible securities ("Common Stock Equivalents") and instead requires reporting of "basic" earnings per share, which will exclude Common Stock Equivalents. Additionally, SFAS No. 128 changes the methodology for fully diluted earnings per share. In the opinion of the Company's management, it is not anticipated that the adoption of this new accounting standard will have a material effect on the reported earnings per share of the Company. 2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per common and common equivalent share are computed by dividing net income by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during each period. During each period presented, common stock options were the only common stock equivalents outstanding. The dilutive effects of common stock equivalents are calculated using the treasury stock method. Common stock equivalents are not included in the computation of earnings per share for any period in which their inclusion would have the effect of increasing the earnings per share amount or decreasing the loss per share amount otherwise computed. 3. ROYALTY REVENUE During the third fiscal quarters ended September 30, 1997 and 1996, the Company received royalty revenue in the amount of $1.1 million and $1.6 million, respectively, from Texas Instruments Incorporated ("TI") and SGS Thomson Microelectronics, Inc. ("SGS") based on sales of licensed products. During the first nine months of fiscal 1997 and 1996, respectively, the Company received royalty revenue of approximately $2.3 million and $6.0 million. 4. LONG-TERM OBLIGATIONS In May 1996, the Company issued $126.5 million of 5.5% convertible subordinated notes ("notes") due June 1, 2001. The notes are convertible into shares of the Company's common stock at the conversion rate of 25.1572 shares per $1,000 principal amount of notes (equivalent to a conversion price of $39.75 per share). The notes are subordinated to present and future senior indebtedness of the Company, and the notes are redeemable at the option of the Company, in whole or in part, on or after June 1, 1999. Interest payments of approximately $3.5 million are due each June 1 and December 1 until maturity. In September 1996, the Company signed a financing agreement whereby its existing 9% note payable with a remaining principal balance of $2.6 million was replaced by a $5.5 million 8.875% note payable collateralized by land and buildings located in Richardson, Texas. The note is being repaid in equal monthly installments of $45,686 through October 1, 2006 with the remaining principal and interest payable on November 1, 2006. The Company has financed certain land, buildings and equipment under financing agreements which contain restrictive covenants including restriction on dividends, additional debt and certain other transactions and which include the maintenance of certain net worth, net income per quarter, working capital and other financial ratios. 5. COMMITMENTS The Company has entered into two manufacturing agreements with IBM. The Company entered into the first of such agreements (the "original" agreement) on April 8, 1994. The original agreement provides for IBM's Microelectronics division to manufacture specified quantities of wafers of Cyrix-designed products for sale to Cyrix through December 1999 at defined prices. Cyrix is responsible for the total production costs (including equipment costs) of such specified quantities of products irrespective of the number of products actually ordered by the Company. Cyrix made a capital equipment investment of approximately $88 million in an IBM manufacturing facility pursuant to the original agreement. The depreciation expense associated with such capital equipment, which Cyrix owns, is reimbursed to the Company by IBM on a monthly basis. In the event of expiration or termination of the original agreement by either party, IBM has the option to purchase this capital equipment from Cyrix at its then net book value, if any. Also, Cyrix made prepayments for product purchases of approximately $30 million during fiscal 1994, $30 million during fiscal 1995, $10 million on January 1, 1996 and $10 million on April 1, 1997. One additional prepayment of $10 million is due on January 1, 1998. Such prepayments will be credited to Cyrix as it purchases wafers from IBM at defined prices during the period from July 1, 1995 through December 31, 1999. In addition to supplying microprocessors to Cyrix, IBM has the right to manufacture an equivalent amount of wafers of Cyrix-designed products for use internally or to sell on an OEM basis. The Company has submitted purchase orders to IBM for further purchases of wafers during the fourth fiscal quarter of 1997 and expects to continue to purchase wafers under this agreement through December 1999. The Company entered into a second agreement (the "foundry" agreement) with IBM on May 17, 1996. The foundry agreement specifies that IBM's Microelectronics division manufacture additional quantities of wafers of Cyrix-designed products for sale to Cyrix through December 1997 at defined prices. The foundry agreement originally provided that the Company purchase wafers totaling approximately $45 million during the second half of 1996. Although the foundry agreement specified significant penalties if the Company did not purchase the entire commitment under the foundry agreement, the Company negotiated a reduction in the commitment due to the lower than expected sales volume in 1996 without incurring significant penalties. At the end of fiscal 1996, the Company had outstanding purchase commitments for 1997; however, such commitments could be canceled without penalty within the terms of the foundry agreement. The Company continued to purchase wafers under the foundry agreement in first fiscal quarter 1997; however, the Company did not purchase wafers under the agreement in the second and third fiscal quarters of 1997 and has no current plans to purchase wafers under the agreement in the fourth fiscal quarter of 1997. 6. CONTINGENCIES MICROPROCESSOR LITIGATION Since March 1992, the Company and Intel Corporation ("Intel") have been engaged in litigation related to certain of the Company's microprocessor products. On January 21, 1994, the United States District Court for the Eastern District of Texas, Sherman Division ruled in favor of the Company with respect to microprocessor products which were made and sold to the Company by certain Intel licensees, SGS-Thomson Microelectronics, Inc. ("SGS") and Texas Instruments ("TI"). Intel appealed the ruling on April 8, 1994. On December 8, 1994, the Court of Appeals for the Federal Circuit affirmed the district court's January 21, 1994 ruling. On December 23, 1994, Intel filed a petition for reconsideration of that decision and a motion for rehearing EN BANC with the Court of Appeals. In February 1995, the Court of Appeals for the Federal Circuit denied Intel's motion for a rehearing EN BANC. On January 24, 1994, the United States District Court for the Eastern District of Texas, Sherman Division began to try the Company's allegations that Intel violated certain antitrust statutes and misused its patents and Intel's allegations that the Company infringed certain Intel patents. Effective January 31, 1994, the Company and Intel entered into a settlement agreement which provides for the dismissal of the claims which were to be litigated in the January 24, 1994 trial. Pursuant to the settlement agreement, Intel granted the Company a fully paid-up, irrevocable license under claims 2 and 6 of Intel's United States patent 4,972,338 ("the Crawford patent") and certain other system patents for products sold after January 31, 1994. Intel also acknowledged that products purchased by the Company from certain licensees exhaust Intel device claims including claim 1 of the Crawford patent. Further, Intel paid $5 million to the Company. The Company and Intel agreed that if the January 21, 1994 ruling, insofar as it relates to SGS, was reversed after final adjudication or was remanded for additional findings and subsequently reversed so that Cyrix did not have a right to use claims 2 and 6 of the Crawford patent based on the SGS license, Cyrix would return the $5 million plus interest to Intel. Cyrix deferred recognition as income of the $5 million settlement payment received in February 1994 until final resolution of this issue. Intel agreed to pay the Company an additional $5 million if the January 21, 1994 SGS ruling was upheld after final adjudication. As noted previously, in December 1994, the Court of Appeals for the Federal Circuit upheld the district court's January 21, 1994 ruling and later denied Intel's motion for a rehearing EN BANC. The time period during which Intel had the right to appeal the case to the United States Supreme Court expired without such appeal, and the Company received the additional $5 million settlement payment in the second quarter of 1995. Therefore, the Company recognized settlement income of $10 million in the second quarter of 1995. As part of the settlement agreement, the Company and Intel agreed to litigate in the United States District Court for the Eastern District of Texas, Sherman Division, whether products manufactured by SGS affiliates under the "have-made" provision in the SGS-Intel license, sold to SGS, and then sold to the Company fall within the scope of the SGS license. On December 30, 1994, the district court ruled that SGS was licensed by Intel to exercise have-made rights by having third parties (including SGS affiliates) manufacture and sell microprocessors to Cyrix free of claims of patent infringement by Intel. Intel appealed the ruling on March 7, 1995. On March 5, 1996, the Court of Appeals for the Federal Circuit affirmed the district court's December 1994 ruling. On March 18, 1996 Intel filed a petition for a rehearing of that decision with the Court of Appeals. In April 1996, the Court of Appeals denied Intel's petition for a rehearing. The time period during which Intel had the right to appeal the case to the United States Supreme Court expired without such appeal, and the Company received a $1 million settlement payment on July 30, 1996. Therefore, the Company recognized settlement income of $1 million in the third quarter of 1996. Similarly, the Company and Intel agreed to litigate in the United States District Court for the Eastern District of Texas, Sherman Division, whether IBM is licensed under claim 1 of the Crawford patent when manufacturing products that are primarily designed by the Company. On April 5, 1994, the district court granted IBM's motion to intervene, and on December 8, 1994, the district court ruled that IBM was licensed by Intel to act as a semiconductor foundry for Cyrix free of claims of patent infringement by Intel. Intel appealed the ruling on March 7, 1995. On March 5, 1996, the Court of Appeals for the Federal Circuit affirmed the district court's December 1994 ruling. The time period during which Intel had the right to appeal the case to the United States Supreme Court expired without such appeal, and the Company received a $1 million settlement payment on July 30, 1996. Therefore, the Company recognized settlement income of $1 million in the third quarter of 1996. CREATIVE LABS LITIGATION On March 17, 1997, Creative Labs, Inc. ("Creative") filed an action against Cyrix Corporation, Compaq Corporation, and Tiger Direct, Inc. ("Tiger") in the US District Court for the Northern District of California, Oakland Division, alleging that each had sold and/or marketed products incorporating the Company's MediaGXTM processor and that such processor, when operated with Microsoft's Windows 95 software, caused the computers in which the products were installed to indicate that a Sound Blaster card was installed in the system when in fact no such card was installed. Additionally, Creative claimed that certain of Creative's proprietary applet software were inappropriately available on Cyrix's internet web page. Creative sought a temporary restraining order to prevent Cyrix and the other companies named in the suit from shipping products which caused systems to identify its sound device as a Sound Blaster sound card and to prevent further use of Creative's applet software in the Company's internet web page. A temporary restraining order granted on March 28, 1997 was partially vacated after a preliminary injunction hearing on May 2, 1997 in an order issued by the Court on May 7, 1997. In an order issued on June 5, 1997, the Court found that Creative agreed in its licensing agreement with Microsoft to allow its driver to be used with non-Creative hardware and that Creative cannot use trademark law as a means of restricting others' rights to use Creative drivers. However, the Court also found that if Creative provided Cyrix with a "de-labeled" driver that is "functionally equivalent" to the driver licensed by Microsoft, Cyrix should use that driver. On July 3, 1997, Creative filed its notice of appeal to the 9th Circuit Court of Appeals and Cyrix filed its notice on July 15, 1997 of cross-appeal. Due to deficiencies in Creative's motion to appeal, Creative subsequently filed a motion to dismiss its appeal without prejudice with the intent to re-file its appeal properly. On September 30, 1997, the Court of Appeals denied Creative's motion to dismiss its appeal without prejudice which effectively dismissed Creative's appeal. A hearing has been scheduled on December 5, 1997 in District Court to determine whether Creative and Cyrix have complied with the June 5th order regarding the use of a "de-labeled" driver. The Company has taken actions that it believes satisfy the requirements of the preliminary injunction order. The Company has also agreed to indemnify Tiger with regard to this action and Tiger has tendered its defense to the Company. The ultimate outcome of this litigation cannot presently be determined; however, the Company intends to defend the actions vigorously and believes the ultimate outcome will not have a material adverse effect on the financial condition or overall trends in the results of operations of the Company. INTEL LITIGATION On May 13, 1997, Cyrix filed in the United States District Court for the Eastern District of Texas, Sherman Division, CYRIX CORPORATION V. INTEL CORPORATION, seeking a judgment that Intel infringes U.S. Patents 5,630,143 entitled "Microprocessor With Externally Controllable power Management" and 5,560,149 entitled "Pipelined Processor With Register Renaming Hardware to Accommodate Multiple Size Registers", as well as a permanent injunction against further infringement and unspecified damages for Intel's infringement. Intel filed its answer July 3, 1997. The case is now in the early stages of discovery. The ultimate outcome of this litigation cannot presently be determined; however, the Company believes the ultimate outcome will not have a material adverse effect on the financial condition or overall trends in the results of operations of the Company. PENDING MERGER On July 28, 1997 Cyrix Corporation signed a definitive Agreement and Plan of Merger (the "Merger Agreement") with National Semiconductor Corporation ("National"). In addition to focusing on high performance microprocessors, the merger will allow the combined companies to develop system-on-a-chip technology for the rapidly growing entry-level PC, Net-PC and information-appliance markets. Under the terms of the Merger Agreement, each share of Cyrix common stock will be exchanged for .825 shares of National common stock. Based on the closing price of Cyrix's shares on November 6, 1997, the aggregate value of the transaction to Cyrix stockholders is approximately $586 million. The merger was approved by the Board of Directors of both companies and has cleared review by the U.S. Federal Trade Commission under the filing requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The companies' combined Proxy Statement and Prospectus cleared the review of the Securities and Exchange Commission on October 16, 1997 and was mailed to stockholders on October 17, 1997. The merger must still be approved by the stockholders of Cyrix Corporation and a special meeting of the stockholders has been scheduled for November 17, 1997. Upon approval by the stockholders, it is expected that the transaction will be completed immediately thereafter. The transaction is intended to be accounted for as a "pooling of interests" and to qualify as a tax-free exchange of shares. As part of the Merger Agreement, Cyrix has granted National an option to acquire up to 19.9 percent of the outstanding Cyrix common stock, exercisable in certain circumstances. In addition, certain Cyrix officers and directors have entered into an agreement with National, pursuant to which they have agreed to vote the Cyrix shares owned or controlled by them in favor of the merger. There can be no assurances that such merger will be approved. OTHER MATTERS The Company is a defendant in various other actions which arose in the normal course of business. In the opinion of management, the ultimate disposition of these other matters will not have a material adverse effect on the financial condition or overall trends in the results of operations of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth items from Cyrix's Consolidated Statements of Income as percentages of net revenues: FISCAL QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 1997 1996 ------------------ ------------------ ------------------ ----------------- Net product sales 98.9 % 95.2 % 98.9 % 94.6 % Royalty revenue 1.1 4.8 1.1 5.4 ------------- ------------- ------------- ------------ Net revenues 100.0 100.0 100.0 100.0 Cost of sales 75.7 65.9 66.0 66.7 Marketing, general and administrative 13.3 41.9 16.9 36.6 Research and development 10.8 24.4 14.9 22.0 ------------- ------------- ------------- ------------ Income (loss) from operations 0.2 (32.2) 2.2 (25.3) Net interest expense (1.4) (5.7) (1.8) (4.8) Income from litigation settlement 0.0 6.0 0.0 1.8 ------------- ------------- ------------- ------------ Income (loss) before provision for income taxes and extraordinary loss from early extinguishment of debt ( 1.2) (31.8) 0.4 (28.2) Provision (benefit) for income taxes (0.4) (10.8) 0.1 (10.0) ------------- ------------- ------------- ------------ Net income (loss) before extraordinary loss from early extinguishment of debt (0.8) (21.0) 0.3 (18.2) ------------- ------------- ------------- ------------ Extraordinary loss from early extinguishment of debt 0.0 0.0 0.0 (1.0) ============= ============= ============= ============ Net income (loss) (0.8) % (21.0) % 0.3 % (19.2) % ============= ============= ============= ============
RESULTS OF OPERATIONS NET REVENUES. Net product sales of $92.1 million for the third quarter of fiscal 1997 increased 192% compared with $31.5 million for the third quarter of fiscal 1996. Net product sales of $206.5 million for the nine months ended September 30, 1997 increased 95% compared with $105.8 million for the same period of fiscal 1996. Processor unit shipments for the quarter and nine months ended September 30, 1997 increased by 323% and 100%, respectively, compared with unit shipments of the same periods of fiscal 1996. During the nine months ended September 30, 1997, sales of MediaGXTM accounted for approximately 30% and sales of 6x86TM and 6x86MXTM microprocessors accounted for approximately 68% of the Company's net product sales; sales of 6x86TM and 5x86TM microprocessors represented over 90% of the Company's net product sales during the same period of 1996. During the nine months ended September 30, 1996, revenue from the sale of computer systems accounted for less than 10% of the revenue for the period. The Company discontinued the computer systems business in 1996. Net revenues for the quarter and nine months ended September 30, 1997 included $1.1 million and $2.3 million of royalty payments, respectively. Net revenues for the quarter and nine months ended September 30, 1996 included $1.6 million and $6.0 million of royalty payments, respectively. Royalties are received from Texas Instruments and SGS-Thomson based upon sales of products licensed to them by the Company. Sales of processors to international customers constituted 64% and 68% of processor product sales in the third quarters of fiscal 1997 and 1996, respectively. Sales of processors to international customer constituted 62% and 58% of processor product sales in the nine months ended September 30, 1997 and 1996, respectively. Sales of processors to international customers are made primarily to customers in Europe, Taiwan, Hong Kong, Korea and Japan. Revenues in the third quarter of fiscal 1997 increased compared to the second quarter of fiscal 1997 primarily due to increased demand for the 6x86MXTM and MediaGXTM products due to several factors: continued market acceptance for both the 6x86MXTM and MediaGXiTM products, increased product availability at higher speed grades than in the second quarter of 1997 as production ramped, as well as seasonal increase in demand as PC makers built inventory for "back to school" and other seasonal promotions. In addition, the 6x86TM non-MMX product contributed significantly to the increased revenues in the third fiscal quarter comprising approximately a third of the total revenue. Essentially all of the Company's older 6x86TM non-MMX product was sold in the third quarter of 1997. During the first fiscal quarter of 1997, Cyrix introduced its MediaGXTM processor, which incorporates many of the functions performed by peripheral components of traditional PCs into the processor and allows computer manufacturers to sell complete personal computers at retail prices under one thousand dollars. Since the MediaGXTM processor requires a motherboard that differs from the industry standard motherboard, the product's success is also dependent upon personal computer manufacturers who have the ability and desire to market a personal computer that uses such non-standard components. Although the Company has been able to sell significant quantities of its MediaGXTM product, continued revenue and margin growth will be dependent upon obtaining additional customers for the product and minimizing the declines in average sales prices over the remainder of the product's life cycle. GROSS MARGINS. The Company's gross margin increased to $22.6 million for the third fiscal quarter of 1997 from $11.3 million for the same period of 1996. The Company's gross margin increased to $70.9 million for the nine months ended September 30, 1997 from $37.2 million for the same period of 1996. The Company's gross margin decreased to 25% in the third quarter of fiscal 1997 from 37% in the second quarter of fiscal 1997 primarily due to the low margins realized on the 6x86TM non-MMX product in the third quarter of fiscal 1997 as the Company sold the bulk of the remaining older product. These lower margins offset the higher margins of the Company's other product lines. Quarterly growth, if any, in the Company's gross margin in the remainder of fiscal 1997 is dependent upon the continued market acceptance of its MediaGXTM and 6x86MXTM processors. Risks associated with enhancing the designs of, ramping production of, and obtaining sales orders for such microprocessors are discussed in NET REVENUES (above), RELIANCE ON THIRD-PARTY MANUFACTURERS (below) and PRODUCT TRANSITIONS (below). MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and administrative expenses for the third quarters of fiscal 1997 and 1996 were $12.4 million and $13.9 million, respectively. Marketing, general and administrative expenses for the nine months ended September 30, 1997 and 1996 were $35.3 million and $40.9 million, respectively. Marketing, general and administrative expenses for the quarter and nine months ended September 30, 1997 decreased compared with the same period of fiscal 1996 primarily due to a decline in sales and marketing expenses associated with the personal computer systems business from which the Company withdrew in 1996. RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and development expenses for the third fiscal quarters of 1997 and 1996 were $10.1 million and $8.1 million, respectively. The Company's research and development expenses for the nine months ended September 30, 1997 and 1996 were $31 million and $24.6 million, respectively. The increase of research and development expenses in the quarter and nine months ended September 30, 1997 compared with the same period of 1996 was attributable to the expansion of the Company's engineering staff, design equipment and prototype expenses to support the development of multiple microprocessor products. The Company intends to continue to increase its research and development expenses in an effort to enhance existing products and develop technologically advanced products. NET INTEREST EXPENSE. Interest expense for the fiscal quarter ended September 30, 1997 decreased to $2.5 million compared to $2.6 million for the same period of fiscal 1996. Interest expense for the nine months ended September 30, 1997 increased to $7.6 million compared to $6.9 million for the same fiscal period of fiscal 1996. Interest income for the fiscal quarter ended September 30, 1997 increased to $1.2 million compared to approximately $681 thousand for the same period of fiscal 1996. Interest income for the nine months ended September 30, 1997 increased to $3.9 million compared to approximately $1.5 million for the same period of fiscal 1996. The increase in interest expense for fiscal 1997 to date as compared to the similar period from 1996 is due primarily to higher loan balances partially offset by lower interest rates. The increase in interest income is due primarily to higher cash and investment balances in the first nine months of 1997, $97 million average cash balance for the nine months ended September 30, 1997, compared to the first nine months of 1996, $50 million average cash balance for the nine months ended September 30, 1996. PROVISION (BENEFIT) FOR INCOME TAXES. The Company's effective tax rate was 33% and 36% in the nine months ended September 30, 1997 and 1996, respectively. OTHER FACTORS AFFECTING RESULTS OF OPERATIONS. RELIANCE ON THIRD-PARTY MANUFACTURERS. All of the Company's processors produced in 1996 and the first nine months of 1997 were manufactured and sold to the Company by IBM. The Company's 6x86MXTM and MediaGXTM microprocessors are more complex than its earlier generation microprocessors and such microprocessors require more advanced manufacturing processes than those required for the Company's previous products. Further, there can be no assurance that Cyrix will be able to successfully ramp and sustain production of its MediaGXTM and 6x86MXTM products at IBM without experiencing yield problems or performance issues in the remainder of fiscal 1997 and beyond. The Company's reliance on third party manufacturers creates risks that the Company will not be able to obtain capacity to meet its manufacturing requirements, will not be able to obtain products with acceptable performance and cost, will not have access to necessary process technologies and the possible breakdown in the relationship with the third-party manufacturers. Further, the Company has licensed some of its intellectual property to SGS and IBM to obtain access to specified levels of manufacturing capacity, and the Company could be required to license more of its intellectual property and product rights and proprietary technology to obtain additional manufacturing capacity. Thus, the Company currently faces competition from IBM and may also face additional competition from SGS in the future. The Company's reliance on third party manufacturers could have a material adverse affect on the Company's revenues and operating results. SEASONALITY OF BUSINESS. In general, Cyrix's revenue would be expected to follow the seasonal trends of the personal computer and related industries, which reflect the lowest revenue in the second quarter, modest revenue growth in the third quarter as PC makers build inventory for "back to school" promotions, and strong revenues in the fourth and first quarters as PC makers build inventory for holiday and post-holiday promotions. This seasonal trend is expected to continue. Although Cyrix's revenues have been affected somewhat by the seasonal trends described above, other factors including the timing of new product introduction, product life cycles, product availability, and competitive factors have had a greater impact on revenues. PRODUCT TRANSITIONS. Once current microprocessor products have been in the market place for a period of time and begin to be replaced by higher performance microprocessors (whether of the Company's or a competitor's design), the Company expects the price of such earlier generation microprocessors to decline and net sales and gross margins of such microprocessors to decrease. In order to continue to maintain its then current gross margin and levels of revenue growth, if any, the Company will therefore be required to design, develop and successfully commercialize next generation microprocessors in a timely manner. Although the Company is committed to its product development efforts, there can be no assurance that the Company will be able to introduce new products quickly enough to avoid adverse revenue transition patterns during future product transitions. During the first and second quarters of 1997, respectively, Cyrix introduced its MediaGXTM processor and its 6x86MXTM processor, which contributed to the decline in prices and margins for its 6x86TM processors throughout the nine months ended September 30, 1997. If the MediaGXTM and 6x86MXTM products do not offer performance, features and pricing attractive to the personal computer industry, the Company may build excess inventory or experience net losses similar to those incurred in fiscal 1996. Additionally, Intel and several of the Company's other competitors have substantially greater financial, technical, manufacturing and marketing resources than the Company and they may introduce new microprocessor designs with features or performance that exceed those contained in the Company's new products. The success of future product transition will continue to be dependent upon several factors including, but not limited to, the following: Cyrix may experience performance difficulties with the new product designs; Cyrix may not be able to successfully ramp production of new products at IBM or other qualified foundries without yield problems or other performance issues; and personal computer manufacturers may not design the Company's new products into their notebook and desktop computers in a timely manner or purchase the Company's products in the volumes and at the prices necessary to offset the declining market, average selling prices and profit margins of the Company's microprocessors. PURCHASE COMMITMENTS. The Company has entered into two manufacturing agreements with IBM. The Company entered into the first of such agreements (the "original" agreement) on April 8, 1994. The original agreement provides for IBM's Microelectronics division to manufacture specified quantities of wafers of Cyrix-designed products for sale to Cyrix through December 1999 at defined prices. Cyrix is responsible for the total production costs (including equipment costs) of such specified quantities of products irrespective of the number of products actually ordered by the Company. Cyrix made a capital equipment investment of approximately $88 million in an IBM manufacturing facility pursuant to the original agreement. The depreciation expense associated with such capital equipment, which Cyrix owns, is reimbursed to the Company by IBM on a monthly basis. In the event of expiration or termination of the original agreement by either party, IBM has the option to purchase this capital equipment from Cyrix at its then net book value, if any. Also, Cyrix made prepayments for product purchases of approximately $30 million during fiscal 1994, $30 million during fiscal 1995, $10 million on January 1, 1996 and $10 million on April 1, 1997. One additional prepayment of $10 million is due on January 1, 1998. Such prepayments will be credited to Cyrix as it purchases wafers from IBM at defined prices during the period from July 1, 1995 through December 31, 1999. In addition to supplying microprocessors to Cyrix, IBM has the right to manufacture an equivalent amount of wafers of Cyrix-designed products for use internally or to sell on an OEM basis. The Company has submitted purchase orders to IBM for further purchases of wafers during the fourth fiscal quarter of 1997 and expects to continue to purchase wafers under this agreement through December 1999. The Company entered into a second agreement (the "foundry" agreement) with IBM on May 17, 1996. The foundry agreement specifies that IBM's Microelectronics division manufacture additional quantities of wafers of Cyrix-designed products for sale to Cyrix through December 1997 at defined prices. The foundry agreement originally provided that the Company purchase wafers totaling approximately $45 million during the second half of 1996. Although the foundry agreement specified significant penalties if the Company did not purchase the entire commitment under the foundry agreement, the Company negotiated a reduction in the commitment due to the lower than expected sales volume in 1996 without incurring significant penalties. At the end of fiscal 1996, the Company had outstanding purchase commitments for 1997; however, such commitments could be canceled without penalty within the terms of the foundry agreement. The Company continued to purchase wafers under the foundry agreement in first fiscal quarter 1997; however, the Company did not purchase wafers under the agreement in second and third fiscal quarters 1997 and has no current plans to purchase wafers under the agreement in the fourth fiscal quarter of 1997. GENERAL. The markets for the Company's products are characterized by a highly competitive and rapidly changing environment in which operating results are subject to the effects of frequent product introductions, manufacturing technology innovations and rapid fluctuations in product demand. While the Company attempts to identify and respond to these changes as soon as possible, prediction of and reaction to such events is difficult. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term investments totaled $105.5 million at September 30, 1997 compared with $87.7 million at December 31, 1996. The Company's primary source of cash in the nine months ended September 30, 1997 was an income tax refund received, net of payment, totaling approximately $18 million, as well as increases in accounts payable and other accruals. The primary uses of cash in the nine months ended September 30, 1997 consisted of a $10 million prepayment for product purchases to IBM and increases in receivables, inventories and deferred taxes. Cyrix's long-term debt and capitalized lease obligations totaled $136.9 million and $140.1 million at September 30, 1997 and September 30, 1996, respectively. Approximately $2.4 million of such debt is scheduled for payment during the next twelve months. Additionally, the Company is obligated to make an interest payment on the convertible subordinated bonds on December 1, 1997 totaling approximately $3.5 million dollars. Cyrix expects that its current cash, cash equivalents and investments will be sufficient to fund operations for the remainder of fiscal 1997; however, if future cash requirements exceed available cash resources, the Company may pursue additional financing. Due to the factors noted above and elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company's future earnings, if any, and stock price may be subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of the Company's common stock in any given period. Also, the Company participates in a highly dynamic industry which often results in volatility of the Company's common stock price. See PENDING MERGER in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (above) which, if completed, will have a significant impact on the Company's liquidity and capital resources. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATIO REFORM ACT OF 1995 This report contains forward looking statements. The forward looking statements with respect to the introduction, availability, cost, features, performance, customer acceptance and revenue contribution of current and future products, including the MediaGXTM and the 6x86MXTM, are subject to engineering, manufacturing and market acceptance risks. Engineering difficulties such as the failure to properly and timely design or debug such products could delay the introduction of such products or adversely impact their performance or customer acceptance. Manufacturing difficulties such as the failure to obtain required capacity, technical problems with the manufacture of these complex products or the inability to provide products at competitive cost to the Company could also delay the introduction of these products or adversely affect their availability, cost, features, performance or customer acceptance. Finally, the inability to achieve sufficient customer design wins for the products could adversely affect the Company's ability to market them in quantities sufficient to achieve its revenue goals. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS CURRENT LITIGATION See Note 6 to the Consolidated Financial Statements included in Part I, Item 1 for a description of material pending litigation and certain related settlements. The final outcome of one or more of the issues subject to litigation as described in Note 6 to the Consolidated Financial Statements could have a material adverse effect on the Company's results of operations during the remainder of fiscal 1997 or a subsequent period. POTENTIAL FUTURE LITIGATION The Company believes that Intel has a strategy of protecting its market share by filing intellectual property lawsuits against its competitors, and that Intel may assert additional patent infringement claims against the Company. Potential additional Intel litigation would likely involve different patents with new combination or system claims. In addition, new patent applications are continually being filed by Intel and by others. Since pending United States patent applications are confidential until patents are issued, it is impossible to ascertain all potential patent infringement claims. If the Company is alleged to infringe one or more patents, it may seek a license to the patent. However, there can be no assurance that a license will be available on reasonable terms. In such event, the Company may be forced to litigate the matter. The damages and legal and other expenses of any resulting litigation could have a material adverse effect on future operations. ITEM 5. OTHER INFORMATION On July 28, 1997 Cyrix Corporation signed a definitive Agreement and Plan of Merger (the "Merger Agreement") with National Semiconductor Corporation ("National"). The merger will allow the combined companies to develop system-on-a-chip technology for the rapidly growing entry-level PC, Net-PC and information-appliance markets. Under the terms of the Merger Agreement, each share of Cyrix common stock will be exchanged for .825 shares of National common stock. Based on the closing price of Cyrix's shares on November 6, 1997, the aggregate value of the transaction to Cyrix stockholders is approximately $586 million. The merger was approved by the Board of Directors of both companies and has cleared review by the U.S. Federal Trade Commission under the filing requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The companies' combined Proxy Statement and Prospectus cleared the review of the Securities and Exchange Commission on October 16, 1997 and was mailed to stockholders on October 17, 1997. The merger must still be approved by the stockholders of Cyrix Corporation and a special meeting of the stockholders has been scheduled for November 17, 1997. Upon approval by the stockholders, it is expected that the transaction will be completed immediately thereafter. The transaction is intended to be accounted for as a "pooling of interests" and to qualify as a tax-free exchange of shares. As part of the Merger Agreement, Cyrix has granted National an option to acquire up to 19.9 percent of the outstanding Cyrix common stock, exercisable in certain circumstances. In addition, certain Cyrix officers and directors have entered into an agreement with National, pursuant to which they have agreed to vote the Cyrix shares owned or controlled by them in favor of the merger. There can be no assurances that such merger will be approved. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibit 11. Earnings per Common and Common Equivalent Share b. On October 17, 1997, the Company filed a report on Form 8-K incorporating the October 16, 1997 press release announcing the Company's results for the quarterly period ended September 30, 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Cyrix Corporation Date: November 12, 1997 By: /s/ James W. Swent, III -------------------------- James W. Swent, III Senior Vice President of Finance and Administration (Principal Financial Officer) INDEX TO EXHIBITS Exhibit Number Description - ----------------------------------------------------------------------------- 11 Earnings per Common and Common Equivalent Share 27 FDS EX-11 2 EXHIBIT 11 EXHIBIT 11 CYRIX CORPORATION AND SUBSIDIARIES PRIMARY AND FULLY DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 1997 1996 ------------------------------------------------------------------------------- Weighted average common shares outstanding 19,796 19,463 19,683 19,376 Incremental shares related to assumed exercise of stock options ------ ------ 725 ------ ------------------------------------------------------------------------------- Weighted average common and common equivalent shares 19,796 19,463 20,408 19,376 =============================================================================== Income (loss) before extraordinary item ($737) ($6,946) $597 ($20,350) Extraordinary loss from early extinguishment of debt ------ ------ ------ ($1,062) ------------------------------------------------------------------------------- Net income (loss) ($737) ($6,946) $597 ($21,412) =============================================================================== Earnings (loss) per common and common equivalent share - primary: Income (loss) before extraordinary item ($0.04) ($0.36) $0.03 ($1.05) Extraordinary item ------ ------ ------ (0.06) =============================================================================== Net income (loss) ($0.04) ($0.36) $0.03 ($1.11) ===============================================================================
EX-27 3 FDS
5 1,000 9-MOS DEC-28-1997 DEC-30-1997 SEP-28-1997 104,460 1,000 60,981 11,801 27,461 229,295 156,707 82,068 318,047 51,565 136,870 0 0 81 128,938 318,047 206,496 208,824 137,891 66,321 0 6,596 7,587 891 294 597 0 0 0 597 .03 .03
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