UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the quarterly period ended March 1, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number: 1-6453
NATIONAL SEMICONDUCTOR CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2095071
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(State of incorporation) (I.R.S. Employer Identification Number)
2900 Semiconductor Drive, P.O. Box 58090
Santa Clara, California 95052-8090
------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 721-5000
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.
Title of Each Class Outstanding at March 1, 1998
------------------- ----------------------------
Common stock, par value $0.50 per share 164,840,534
NATIONAL SEMICONDUCTOR CORPORATION
INDEX
Part I. Financial Information Page No.
--------
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months and Nine Months
Ended March 1, 1998 and February 23, 1997 3
Condensed Consolidated Balance Sheets (Unaudited)
as of March 1, 1998 and May 25, 1997 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended
March 1, 1998 and February 23, 1997 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-11
Management's Discussion and Analysis of Results
of Operations and Financial Condition 12-19
Part II. Other Information
Legal Proceedings 20
Exhibits and Reports on Form 8-K 21-22
Signature 23
PART I. FINANCIAL INFORMATION
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
------------------ -------------------
March 1, Feb. 23, March 1, Feb. 23,
1998 1997 1998 1997
(Restated) (Restated)
-------- ------- -------- --------
Net sales $650.1 $712.0 $2,026.7 $2,013.9
Operating costs and expenses:
Cost of sales 414.0 419.9 1,246.7 1,279.9
Research and development 128.9 101.4 358.9 293.7
Selling, general and
administrative 90.9 125.3 274.7 352.8
Special items:
Merger costs - - 30.0 -
Restructuring of operations (192.0) 64.3
In-process R&D charge 5.2 - 7.7 10.6
------ ------ -------- -------
Total operating costs
and expenses 639.0 454.6 1,918.0 2,001.3
------ ------ -------- -------
Operating income 11.1 257.4 108.7 12.6
Interest income(expense), net 4.7 0.4 19.8 (2.4)
Other income, net 13.9 7.9 23.2 12.6
------ ------ -------- -------
Income before
income taxes 29.7 265.7 151.7 22.8
Income tax provision 7.4 65.5 37.9 2.2
------ ------ -------- -------
Net income $ 22.3 $200.2 $ 113.8 $ 20.6
====== ====== ======== =======
Earnings per share:
Basic $ .14 $1.28 $ .70 $ .13
Diluted $ .13 $1.20 $ .68 $ .13
Weighted average shares:
Basic 164.5 156.2 163.5 154.9
Diluted 167.3 168.6 167.7 157.6
Income used in basic
earnings per share
calculation $ 22.3 $200.2 $113.8 $ 20.6
Income used in diluted
earnings per share
(reflecting adjustment for
interest on convertible
notes when dilutive) $ 22.3 $202.8 $113.8 $ 20.6
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
March 1, May 25,
1998 1997
(Restated)
ASSETS -------- --------
Current assets:
Cash and cash equivalents $ 633.3 $ 897.8
Short-term marketable investments 113.1 79.6
Receivables, net 268.1 281.0
Inventories 300.0 205.8
Deferred tax assets 176.7 173.3
Other current assets 77.2 99.9
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Total current assets 1,568.4 1,737.4
Property, plant and equipment 2,882.5 2,420.4
Less accumulated depreciation (1,222.3) (1,071.4)
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Net property, plant and equipment 1,660.2 1,349.0
Other assets 116.8 124.4
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Total assets $3,345.4 $3,210.8
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt $ 54.0 $ 15.4
Accounts payable 257.0 265.5
Accrued expenses 291.0 306.8
Income taxes 240.6 238.1
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Total current liabilities 842.6 825.8
Long-term debt 383.8 460.5
Deferred income taxes 9.3 12.1
Other non-current liabilities 43.2 40.7
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Total liabilities 1,278.9 1,339.1
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Commitments and contingencies
Shareholders' equity:
Common stock 82.4 80.7
Additional paid-in capital 1,195.9 1,111.7
Retained earnings 788.2 679.3
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Total shareholders' equity 2,066.5 1,871.7
------- --------
Total liabilities and shareholders' equity $3,345.4 $3,210.8
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Nine Months Ended
--------------------
March 1, Feb. 23,
1998 1997
(Restated)
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Cash flows from operating activities:
Net income $ 113.8 $ 20.6
Adjustments to reconcile net income
with net cash provided by operations:
Depreciation and amortization 215.0 192.4
Gain on investments (8.9) (1.0)
Tax benefit associated with stock options 17.7 10.4
In-process research and development charge 7.7 10.6
Loss on disposal of equipment 9.4 3.4
Write-down of inventory - 5.1
Non-cash special charges 30.0 64.3
Other, net 3.6 (3.3)
Changes in certain assets and liabilities, net:
Receivables (3.9) (45.6)
Inventories (76.7) 29.5
Other current assets (3.7) 10.4
Accounts payable and accrued expenses (48.2) 10.6
Current and deferred income taxes 0.7 (14.2)
Other non-current liabilities 2.5 (1.4)
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Net cash provided by operating activities 259.0 291.8
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Cash flows from investing activities:
Purchase of property, plant and equipment (513.9) (456.1)
Sale and maturity of marketable investments 1,001.6 904.7
Purchase of marketable investments (1,034.9) (889.5)
Sale of investments 16.2 5.0
Business acquisition, net of cash acquired (8.3) (15.4)
Purchase of investments and other, net (22.3) (9.9)
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Net cash used by investing activities (561.6) (461.2)
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Cash flows from financing activities:
Issuance of 5.5% convertible subordinated notes,
less issuance costs - 126.5
Issuance of debt 100.4 57.7
Redemption of 5.5% convertible subordinated notes (126.4) -
Repayment of debt (10.8) (97.0)
Issuance of common stock, net 57.3 35.6
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Net cash provided by financing activities 20.5 122.8
------- -------
Net change in cash and cash equivalents (282.1) (46.6)
Adjustment to conform pooling of interests for
cash and cash equivalents at beginning of year 17.6 -
Cash and cash equivalents at beginning of period 897.8 486.7
------- -------
Cash and cash equivalents at end of period $ 633.3 $ 440.1
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments necessary to present fairly
the financial position and results of operations of National Semiconductor
Corporation and its subsidiaries ("National" or the "Company"). Interim
results of operations are not necessarily indicative of the results to be
expected for the full year. This report should be read in conjunction with
the consolidated financial statements and notes thereto included in the
annual report on Form 10-K for fiscal year ended May 25, 1997.
For the year ending May 31, 1998 the Company has a 53 week fiscal year. As
a result, the third quarter and first nine months ended March 1, 1998
include an additional week of operations. Operating results for this
additional week are considered immaterial to the Company's consolidated
results of operations for the third quarter and first nine months of fiscal
1998.
Earnings Per Share: Effective beginning the three months ended March 1,
1998, the Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires the
presentation of basic earnings per share and, for companies with complex
capital structures or potentially dilutive securities, such as convertible
debt, options and warrants, diluted earnings per share.
Basic earnings per common share are computed using the weighted average
number of common shares outstanding. Diluted earnings per common share are
computed using the weighted average common shares outstanding after giving
effect to common stock equivalents from stock options based on the treasury
stock method, plus other potentially dilutive securities outstanding which
are not common stock equivalents, such as the convertible subordinated
notes. If the result of assumed conversions is dilutive, net earnings are
adjusted for the interest expense on the convertible subordinated notes,
while the average shares of common stock outstanding are increased. For
the three and nine months ended March 1, 1998 and the nine months ended
February 23, 1997, the effect of the assumed conversion of the convertible
subordinated notes was antidilutive. Earnings per share for all prior
periods presented have been restated.
A reconciliation of the shares used in the computation for basic and
diluted earnings per share follows:
Three Months Ended Nine Months Ended
------------------ --------------------
(in millions) March 1, Feb. 23, March 1, Feb. 23,
1998 1997 1998 1997
-------- -------- -------- --------
Net income, as reported
and used for basic
earnings per share $ 22.3 $ 200.2 $ 113.8 $ 20.6
Adjustment for interest
on convertible notes $ - $ 2.6 $ - $ -
-------- -------- -------- --------
Net income used for
diluted earnings
per share $ 22.3 $ 202.8 $ 113.8 $ 20.6
======== ======== ======== ========
Number of shares:
Weighted average common and
common equivalent shares
for basic earnings per
share 164.5 156.2 163.5 154.9
Weighted average common
equivalent shares
assuming dilution 2.8 3.8 4.2 2.7
Shares issuable from
assumed conversion of
convertible notes when
dilutive - 8.6 - -
-------- ------- -------- --------
Weighted average common and
common equivalent shares
for diluted earnings
per share 167.3 168.6 167.7 157.6
======== ======= ======== ========
As of March 1, 1998 and February 23, 1997, there were 11,064,055 and
2,505,574 shares from options to acquire common stock with weighted-average
exercise prices of $31.03 and $28.06, respectively, which could potentially
dilute basic earnings per share in the future, but which were not included
in diluted earnings per share as their effect was antidilutive in the
periods presented. The Company also had outstanding as of March 31, 1998,
$258.8 million of convertible subordinated notes, which are convertible
into 6.0 million shares of common stock. These notes were not assumed to
be converted because they were antidilutive.
Financial Instruments: As more fully described on pages 33-37 in the
Company's 1997 Annual Report on Form 10-K for the fiscal year ended May 25,
1997, the Company utilizes various off-balance sheet financial instruments
to manage market risks associated with fluctuations in certain interest
rates and foreign currency exchange rates. The criteria the Company uses
for designating an instrument as a hedge include the instrument's
effectiveness in risk reduction and direct matching of the financial
instrument to the underlying transaction. Gains and losses on currency
forward and option contracts that are intended to hedge an identifiable
firm commitment are deferred and included in the measurement of the
underlying transaction. Gains and losses on hedges of anticipated revenue
transactions are deferred until such time as the underlying transactions
are recognized or recognized immediately if the transaction is terminated
earlier than initially anticipated. Gains and losses on any instruments
not meeting the above criteria would be recognized in income in the current
period. Subsequent gains or losses on the related financial instrument are
recognized in income in each period until the instrument matures, is
terminated or is sold. Income or expense on swaps is accrued as an
adjustment to the yield of the related investments or debt hedged by the
instrument. Cash flows associated with derivative transactions are
reported as arising from operating activities in the condensed consolidated
statements of cash flows.
Pooling Interests Business Combination: On November 17, 1997, pursuant to
an Agreement and Plan of Merger, dated as of July 28, 1997, by and among
National Semiconductor Corporation ("National" or the "Company"), Nova
Acquisition Corp., a wholly owed subsidiary of the Company ("Sub") and
Cyrix Corporation ("Cyrix"), the Company acquired all outstanding shares of
Cyrix common stock through the merger of Sub with and into Cyrix, which
thereby became a wholly owned subsidiary of the Company. Cyrix designs,
develops and markets X86 software-compatible microprocessors of original
design for the personal computer marketplace. Under the terms of the
agreement, each share of Cyrix common stock was exchanged for 0.825 of a
share of National common stock. A total of 16.4 million shares of National
common stock was issued to current holders of Cyrix common stock. In
addition, up to 2.7 million shares of National common stock were reserved
for issuance in the future upon exercise of Cyrix employee or director
stock options or pursuant to Cyrix employee benefit plans and up to 2.6
million shares of National common stock were reserved for issuance in the
future upon conversion of Cyrix 5.5% convertible subordinated notes due
June 1, 2001. Since the Company repurchased substantially all of the
outstanding Cyrix 5.5% convertible subordinated notes during January 1998
(see Note 6), conversion of the remaining outstanding notes will only
require issuance of up to 1.6 thousand shares of National common stock.
The merger was accounted for as a pooling of interests. Accordingly, the
consolidated balance sheets as of March 1, 1998 and May 25, 1997 and the
consolidated statements of operations for the three months and nine months
ended March 1, 1998 and February 23, 1997, respectively, and the
consolidated statements of cash flows for the nine months March 1, 1998 and
February 23, 1997, respectively, include Cyrix. Since the fiscal years for
National and Cyrix differ, Cyrix changed its fiscal year-end to coincide
with National's beginning in fiscal 1998. Prior year financial statements
have been restated to include Cyrix and combine National's fiscal 1997 with
Cyrix's calendar year 1996. The consolidated balance sheet as of May 25,
1997 combines National's consolidated balance sheet as of May 25, 1997 with
Cyrix's consolidated balance sheet as of December 31, 1996. The
consolidated statements of operations for the three months and nine months
ended February 23, 1997 and the consolidated statement of cash flows for
the nine months ended February 23, 1997 combine National's consolidated
statements of operations for the three months and nine months ended
February 23, 1997 and the consolidated statement of cash flows for the nine
months ended February 23, 1997 with Cyrix's consolidated statements of
operations for the three months and nine months ended September 30, 1996
and the consolidated statement of cash flows for the nine months ended
September 30, 1996. The results of operations for the period January 1,
1997 through May 25, 1997 for Cyrix, which included net sales of $84.6
million, total operating costs and expenses of $84.4 million, net loss of
$0.6 million and an increase in capital from the issuance of common stock
of $1.3 million, have been recorded as an adjustment to shareholders'
equity as of May 25, 1997.
The following table summarizes the results of operations previously
reported by the separate companies from the beginning of the fiscal year
through November 23, 1997 which represents the closest interim period to
the date the merger was consummated:
(in millions) Net Sales Net Income
--------- ----------
National $1,241.1 $ 120.1
Cyrix 135.6 (28.6)
--------- ----------
$1,376.7 $ 91.5
========= ==========
There were no transactions between Cyrix and National prior to the
combination, and no adjustments were necessary to conform the accounting
policies of the combining companies. Certain amounts for Cyrix have been
reclassified to conform with the financial statement presentation followed
by National.
In connection with the merger, the Company recorded a one-time charge of
$30.0 million related to certain merger and related expenses which is
included in the statement of operations for the nine months ended March 1,
1998. These expenses primarily include transaction fees for investment
bankers, attorneys, and accountants; financial printing costs; and costs
associated with the elimination of duplicate facilities and operations.
The Company also expects to pay approximately $10.1 million in retention
bonuses to certain Cyrix employees. These amounts are being expensed to
operations ratably over the employees' service period. The service period
varies by employee, but is generally 18 months following the consummation
of the merger.
Note 2. Components of Inventories
The components of inventories were:
(in millions) March 1, May 25,
1998 1997
(Restated)
------- -------
Raw materials $ 29.9 $ 25.0
Work in process 173.0 133.0
Finished goods 97.1 47.8
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Total inventories $ 300.0 $ 205.8
======= =======
Note 3. Other income, net
Components of other Three Months Ended Nine Months Ended
income, net were: ------------------ ------------------
(in millions) March 1, Feb. 23, March 1, Feb. 23,
1998 1997 1998 1997
(Restated) (Restated)
-------- -------- -------- --------
Net intellectual property income $ 11.7 $ 1.9 $ 14.3 $ 8.0
Gain on investments, net 1.8 4.0 10.3 1.0
Other 0.4 2.0 (1.4) 3.6
------- ------- ------- -------
Total other income, net $ 13.9 $ 7.9 $ 23.2 $ 12.6
======= ======= ======= =======
Note 4. Statement of Cash Flows Information
(in millions)
Nine Months Ended
------------------
March 1, Feb. 23,
1998 1997
(Restated)
-------- --------
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest $ 23.6 $ 17.7
Interest on tax settlements .1 .1
Income taxes 17.8 4.9
Supplemental schedule of non-cash investing
and financing activities:
Issuance of stock for employee benefit plans $ 2.5 $ 3.2
Tax benefit for employee stock option plans 17.7 10.4
Unrealized loss on available-for-sale
securities (4.3) (5.4)
Restricted stock cancellation .2 -
Amortization of unearned compensation charge 7.3 1.4
Note 5. Restructuring of Operations
In fiscal 1997, the Company formed Fairchild Semiconductor ("Fairchild") as
a separate organization and reorganized the operating structure of its
remaining core businesses to comprise the Analog Group, the Communications
and Consumer Group, and the Personal Systems Group. The reorganization
included certain actions to reduce the Company's infrastructure in its core
business areas, as well as Fairchild, which the Company disposed of in
March 1997. The Company also announced a planned comprehensive realignment
of its manufacturing facilities designed to accelerate its production
transition to manufacturing 8-inch wafers with 0.35-micron circuit
geometries, reduce costs and rationalize production flows. As a result of
these actions, the Company recorded a net $134.2 million of restructure
charges in fiscal 1997. Included in the Company's results of operations
for the nine months ended February 23, 1997 is a net $64.3 million charge
related to the reorganization of the Company operating structure, which
reflects a $192.0 million credit recorded for the three months ended
February 23, 1997 to release the valuation allowance originally recorded to
write down the assets of the Fairchild business to fair value as well as
excess reserves for severance and other related exit costs.
As part of the Company's planned realignment of its manufacturing
facilities, the Company also expects to pay approximately $7.2 million in
retention bonuses to certain Santa Clara, California, employees as a result
of the previously announced closure of the Santa Clara 5- and 6-inch wafer
fabrication facilities, which is expected to be completed by the end of
calendar 1998. These amounts are being expensed to operations ratably over
the employees' service period up through the close of the facilities.
Amounts paid as a result of work force reduction actions that occurred in
the first nine months of fiscal 1998 related to these restructuring
activities, as well as restructuring activities related to the Cyrix
merger, were $2.3 million of severance to approximately 29 terminated
employees. Included in accrued liabilities at March 1, 1998 is $67.8
million related to remaining costs, including severance for those
previously announced restructuring activities that are not yet completed.
Note 6 - Debt
Under the terms of the Indenture for the Cyrix 5.5% convertible
subordinated notes, the merger with Cyrix constituted a change of control.
As a result, each holder of the Cyrix convertible subordinated notes
("securities") had the right to require the Company to repurchase all of
the outstanding securities or any portion of the principal amount thereof
that is equal to $5,000 or any integral multiple of $1,000 in excess
thereof on January 12, 1998 at a purchase price to be paid in cash equal to
100% of the principal amount of the securities to be repurchased plus
interest accrued to the repurchase date. During January 1998, the Company
paid $126.4 million to repurchase substantially all of the outstanding
securities and there remains outstanding approximately $0.1 million of the
Cyrix subordinated notes.
Note 7. Contingencies
In fiscal 1997, the Company received notices of assessment totaling
approximately $59.2 million from the Malaysian Inland Revenue Department
relating to the Company's manufacturing operations in Malaysia. The issues
giving rise to the assessments relate to intercompany transfer pricing,
primarily for fiscal 1993. The Company believes the assessments are
without merit and has been contesting them administratively. The Company
believes that adequate accruals have been recorded for the years in
question.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview For the year ending May 31, 1998 the Company has a 53 week
fiscal year. As a result, the third quarter and first nine months ended
March 1, 1998 include an additional week of operations. Operating results
for this additional week are considered immaterial to the Company's
consolidated results of operations for the third quarter and first nine
months of fiscal 1998.
In November 1997, Nova Acquisition Corp., a subsidiary of National
Semiconductor Corporation ("National" or the "Company") merged with Cyrix
Corporation ("Cyrix")and Cyrix became a wholly owned subsidiary of the
Company. Cyrix designs, develops and markets X86 software-compatible
microprocessors of original design for the personal computer marketplace.
The Company believes that access to Cyrix's X86 microprocessor cores and
the combination of technologies resulting from the merger provide a
milestone in obtaining the technology required for achieving its system-on-
a-chip strategy to develop certain highly integrated, application specific
semiconductor products. The discussion that follows includes results for
Cyrix.
The Company recorded net sales of $650.1 million for the third quarter of
fiscal 1998, an 8.7 percent decrease from net sales of $712.0 million for
the same quarter of fiscal 1997 and net sales of $2,026.7 million for the
first nine months of fiscal 1998, a 0.6 percent increase from net sales of
$2,013.9 million for the same period of fiscal 1997. The absence of
Fairchild sales contributed to the decrease in sales for fiscal 1998.
During the third quarter, the Company experienced a significant slowdown in
new orders that were affected by economic uncertainties in the Asia Pacific
region as well as difficulties the Company encountered in ramping up
adequate volumes of the Cyrix Media GX processor product to the speed
levels the market was demanding. Increased competition and availability of
new higher speed processor products from competitors has also caused
significant price reductions on the Cyrix 6X86 line of processor products.
Net income was $22.3 million and $113.8 million for the third quarter and
first nine months of fiscal 1998, respectively, compared to net income of
$200.2 million and $20.6 million for the third quarter and first nine
months of fiscal 1997, respectively. Net income for the third quarter of
fiscal 1998 includes a one-time charge of $5.2 million for in-process
research and development ("R&D") related to the acquisition of certain
assets and liabilities of Gulbransen Corporation relating to its digital
audio technology business. The Company believes that Gulbransen's audio
compressor technology will expand its ability to provide digital audio
integrated circuits for system-on-a-chip solutions for the consumer and
personal computer markets. Net income for the third quarter of fiscal 1997
reflects a one-time credit of $202.0 million related to the disposition of
Fairchild. The one-time credit includes the release of $192.0 million for
the valuation allowance originally recorded to write down the assets of the
Fairchild business to fair value as well as excess reserves for severance
and other related exit costs. It also includes the reversal of $10.0
million of the original provision to write down Fairchild inventory to net
realizable value. For the first nine months of fiscal 1998, net income
also includes one-time charges of $2.5 million for in-process R&D related
to the acquisition of Future Integrated Systems, Inc. ("FIS"), a supplier
of graphics hardware and software products for the personal computer
market, and $30.0 million related to certain merger and related expenses in
connection with the Cyrix acquisition. The Cyrix merger and related
expenses primarily include transaction fees for investment bankers,
attorneys, and accountants; financial printing costs; and costs associated
with the elimination of duplicate facilities and operations. The Company
believes the FIS acquisition will accelerate its efforts towards providing
system-on-a-chip solutions for the personal computer market. The operating
results for the third quarter and first nine months of fiscal 1997 include
the Fairchild operations, which the Company divested in the fourth quarter
of fiscal 1997.
The Company has presented management's discussion and analysis results of
operations to also include comparison to fiscal 1997 of the Company's core
business without Fairchild. The Company's core business includes the
Analog Group, the Communications and Consumer Group, and the Personal
Systems Group, which includes Cyrix. The following selected financial
information is presented for such comparative purposes. All periods
presented below exclude Special Items and for the first nine months ended
February 23, 1997 also exclude the effect of certain one-time charges
included in cost of sales.
Three Months Ended
---------------------------------
(in millions, except per Total Special National
share amounts) Company Items Core
Incr(Decr) Business
--------- -------- ---------
March 1, 1998:
Net sales $ 650.1 $ 650.1
Gross profit $ 236.1 $ 236.1
Gross margin 36.3% 36.3%
Research & development $ 128.9 $ 128.9
Selling, gen. & admin. $ 90.9 $ 90.9
Special items-charge $ 5.2 $ (5.2) $ -
Net income $ 22.3 $ 3.9 $ 26.2
Earnings per share-
diluted: $ 0.13 $ 0.16
Three Months Ended
---------------------------------------------
(in millions, except per Total Special Fairchild National
share amounts) Company Items Core
Incr(Decr) Business
--------- -------- --------- ----------
February 23, 1997:
Net sales $ 712.0 $ (147.5) $ 564.5
Gross profit $ 292.1 $ (10.0) $ (52.9) $ 229.2
Gross margin 41.0% 40.6%
Research & development $ 101.4 $ (5.1) $ 96.3
Selling, gen. & admin. $ 125.3 $ (20.2) $ 105.1
Special item-credit $ (192.0) $ 192.0 $ -
Net income $ 200.2 $(151.5) $ (20.0) $ 28.7
Earnings per share-
diluted: $ 1.20 $ 0.18
Nine Months Ended
---------------------------------
(in millions, except per Total Special National
share amounts) Company Items Core
Incr(Decr) Business
--------- -------- ---------
March 1, 1998:
Net sales $2,026.7 $2,026.7
Gross profit $ 780.0 $ 780.0
Gross margin 38.5% 38.5%
Research & development $ 358.9 $ 358.9
Selling, gen. & admin. $ 274.7 $ 274.7
Special items-charges $ 37.7 $ (37.7) $ -
Net income $ 113.8 $ 28.3 $ 142.1
Earnings per share-
diluted: $ 0.68 $ 0.85
Nine Months Ended
---------------------------------------------
(in millions, except per Total Special Fairchild National
share amounts) Company Items Core
Incr(Decr) Business
--------- -------- --------- ----------
February 23, 1997:
Net sales $2,013.9 $ (434.1) $1,579.8
Gross profit $ 734.0 $ 8.7 $ (135.3) $ 607.4
Gross margin 36.4% 38.4%
Research & development $ 293.7 $ (14.0) $ 279.7
Selling, gen. & admin. $ 352.8 $ (59.4) $ 293.4
Special items-charges $ 74.9 $ (74.9) $ -
Net income $ 20.6 $ 62.7 $ (44.5) $ 38.8
Earnings per share-
diluted: $ 0.13 $ 0.25
The selected financial information presented above for the three months and
nine months ended February 23, 1997 is pro forma and includes certain
expenses for research and development, selling and marketing, and
headquarter functions which were allocated from central corporate cost
centers to National Core and Fairchild. The presentation of these separate
National core business earnings per share ("EPS") amounts is not in
accordance with generally accepted accounting principles. The Company
believes, however, that for analytical purposes, these EPS amounts
represent the contributions of the National core businesses and are an
appropriate basis for comparison with future financial results from the
National core businesses.
Sales Sales of $650.1 million and $2,026.7 million for the third
quarter and first nine months of fiscal 1998 for National's core business
described above increased 15.2 percent and 28.3 percent, respectively,
compared to sales of $564.5 million and $1,579.8 million for the same
periods of fiscal 1997 for the Company's core business, despite the decline
in sales of Cyrix 6X86 products caused by lower volume and price erosion as
well as the Company's inability to ramp adequate volumes of the Cyrix Media
GX product. This growth is led by sales for analog products, which grew
19.3 percent and 34.6 percent for the third quarter and first nine months
of fiscal 1998 over the same periods of fiscal 1997. The increase in sales
also reflects the continued growth in sales for wide area network products,
including wireless communication products and local area network ("LAN")
products, which grew 39.8 percent and 12.2 percent, respectively, for the
third quarter of fiscal 1998 over the comparable quarter of fiscal 1997 and
31.3 percent and 24.8 percent, respectively, year over year. Sales for
personal computer products, affected by the decline in new orders from
personal computer manufacturers, decreased 2.1 percent for the third
quarter of fiscal 1998 from the third quarter of fiscal 1997 but grew 15.6
percent for the first nine months of fiscal 1998 over the comparable period
of fiscal 1997. Sales increases for all of these product areas were the
result of increased unit shipments. Overall, increased unit shipments
resulted in increased sales despite some price declines, particularly in
the LAN Ethernet products.
Gross Margin Gross margin as a percentage of sales declined to 36.3
percent for the third quarter of fiscal 1998, compared to 41.0 percent for
the third quarter of fiscal 1997, while for the first nine months of fiscal
1998, gross margin as a percentage of sales was 38.5 percent compared to
36.4 percent for the same period of fiscal 1997. With respect to the
Company's core business, gross margin for the third quarter of fiscal 1998
declined compared to 40.6 percent for the third quarter of fiscal 1997 and
was relatively flat with gross margin of 38.4 percent for the first nine
months of fiscal 1997. The Company's core business results for fiscal 1997
exclude the effect of Fairchild in addition to certain one-time amounts
included in cost of sales, consisting of a $10.0 million credit in the
third quarter and a net $8.7 million charge for the first nine months
related to the Company's reorganization in fiscal 1997. The decline in
gross margin for the third quarter of fiscal 1998 was caused by significant
margin erosion in the Cyrix products combined with the start of
depreciation associated with the new 0.35/0.25 micron wafer fabrication
facility in Maine. Factory utilization also declined to 81.5 percent for
the third quarter and first nine months of fiscal 1998, reflecting the
slowdown in new orders.
Research and Development R&D expenses for the third quarter and first
nine months of fiscal 1998 increased by 32.2 percent and 20.5 percent,
respectively, from the comparable periods of fiscal 1997. For the
Company's core business, R&D expenses for the third quarter and first nine
months of fiscal 1998 increased by 33.9 percent and 28.3 percent over the
same periods of fiscal 1997. R&D expenses for the Company's core business
exclude the effect in fiscal 1998 of a $2.5 million in-process R&D charge
related to the acquisition of FIS in the second quarter and a $5.2 million
in-process R&D charge related to the acquisition of technology from
Gulbransen Corporation in the third quarter and exclude the effect of
Fairchild in fiscal 1997 and a $10.6 million special charge for in-process
R&D related to the acquisition of the PicoPower division of Cirrus Logic
Inc. in the first nine months of fiscal 1997. Overall, the increase in R&D
expenses reflects the Company's accelerated investment in advanced
submicron CMOS process technology that is part of the Company's focus on
state-of-the-art process technology, which has been set as one of the
Company's strategic imperatives. The increase also reflects the Company's
continuing investment in the development of new analog and mixed signal
technology based products for applications in the personal systems,
communications and consumer markets. R&D spending for fiscal 1998 for
process technology grew significantly over the fiscal 1997 spending levels,
while spending for product development grew quarter over quarter, but
remained relatively flat year to year. Most of the increased R&D spending
for product development was in the personal systems and communications and
consumer groups.
Selling, General and Administrative Selling, general and administrative
("SG&A") expenses for the third quarter and first nine months of fiscal
1998 decreased by 27.5 percent and 22.1 percent from the third quarter and
first nine months of fiscal 1997. The decrease reflects the effect of
centralization initiatives implemented in connection with the Company's
fiscal 1997 reorganization that have reduced the Company's infrastructure
and reduced spending. Excluding the effect of Fairchild SG&A expenses from
the third quarter and first nine months of fiscal 1997, SG&A expenses for
fiscal 1998 decreased by 13.5 percent and 6.4 percent for the third quarter
and first nine months, respectively, for the Company's core business.
Interest Income and Interest Expense Net interest income was $4.7
million and $19.8 million for the third quarter and first nine months of
fiscal 1998, respectively, compared to net interest income of $0.4 million
and net interest expense of $2.4 million for the third quarter and first
nine months of fiscal 1997, respectively. The increase in net interest
income was attributable to the combination of increased interest earned on
higher cash balances offset by less interest expense from lower debt
balances. In addition, the Company capitalized $5.4 million of interest
associated with capital expansion projects for fiscal 1998 of which all was
recorded in the first quarter, compared to $8.5 million for the first nine
months of fiscal 1997.
Other Income, Net Other income, net was $13.9 million and $23.2 million for
the third quarter and first nine months of fiscal 1998 compared to $7.9
million and $12.6 million for the third quarter and first nine months of
fiscal 1997. For the third quarter of fiscal 1998, other income, net
included $11.7 million of net intellectual property income related to a
significant licensing agreement with a Korean firm, as well as smaller
ongoing royalty receipts, a $1.8 million gain from investments primarily
arising from the sale of stock from the Company's investment holdings and a
$0.4 million gain from forward foreign currency exchange contracts. This
compares to $1.9 million of net intellectual property income, a $4.0
million gain from the sale of stock from the Company's investment holdings
and a $2.0 million receipt from the settlement of litigation in the third
quarter of fiscal 1997. Including the items previously described, other
income, net for the first nine months of fiscal 1998 included $14.3 million
of net intellectual property income and a $10.3 million net gain from the
sale of stock from the Company's investment holdings offset by a net loss
of $1.4 million from forward foreign currency exchange contracts. This
compares to $8.0 million of net intellectual property income, a $1.0
million net gain from investments from the sale of stock from the Company's
investment holdings, $1.6 million of dividend income from an investment
holding and a $2.0 million receipt from the settlement of litigation for
the first nine months of fiscal 1997. Net intellectual property income for
fiscal 1998 related to the licensing agreement with a Korean firm noted
above as well as other smaller ongoing royalty receipts. Net intellectual
property income for fiscal 1997 did not include any receipts from any
significant single licensing arrangement.
Income Tax Expense Income tax expense for fiscal 1998 is based on the
Company's expected effective tax rate of 25 percent.
Financial Condition During the first nine months of fiscal 1998, cash
and cash equivalents decreased $282.1 million compared to a $46.6 million
decrease for the first nine months of fiscal 1997. The decrease for fiscal
1998 was primarily the result of the Company's continued investment in
property, plant and equipment of $513.9 million, net purchases of
marketable investments of $33.3 million and the redemption of $126.4
million of 5.5% convertible subordinated notes that offset cash flows
generated from operating activities of $259.0 million and proceeds of
$146.9 million from financing activities. Proceeds from financing
activities for fiscal 1998 included $89.6 million from equipment loans, net
of repayments and $57.3 million from issuance of common stock. This
compares to $456.1 million of investment in property, plant and equipment
offset by $291.8 million of cash generated from operating activities and
$122.8 million of cash generated from financing activities for the first
nine months of fiscal 1997. Cash generated from financing activities for
fiscal 1997 included proceeds of $35.6 million from the issuance of common
stock and $126.5 million from convertible subordinated notes issued by
Cyrix offset by a net repayment of $39.3 million in general debt.
Management foresees continuing significant cash outlays for plant and
equipment throughout fiscal 1998. The capital expenditure level for fiscal
1998 is expected to be slightly higher than the fiscal 1997 level.
Existing cash and investment balances, together with existing lines of
credit, are expected to be sufficient to finance planned fiscal 1998
capital investments.
Outlook The statements contained in this Outlook and in the Financial
Condition section of Management's Discussion and Analysis are forward
looking based on current expectations and management's estimates. Actual
results may differ materially from those set forth in such forward looking
statements. In addition to the risk factors discussed in the Outlook and
Financial Condition sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages 23 through 25 of the
Company's 1997 Annual Report on Form 10-K for the fiscal year ended May 25,
1997 filed with the Securities and Exchange Commission, the following
factors may also affect the Company's operating results for fiscal 1998.
Business conditions for the semiconductor industry and the Company
significantly weakened in the third quarter of fiscal 1998, in part due to
the recent economic downturn in the Asia Pacific region. The Company
experienced a slowdown in order rates from both the prior year and the
prior quarter, in particular with manufacturers of wireless products who
ship into Southeast Asia and Korea, as well as with certain personal
computer manufacturers, where new orders were seasonally down after the
Christmas holidays. Although new orders improved in February over those in
December and January, the rate of new orders has not improved sufficiently
to a level that would enable revenue growth in the fourth quarter of fiscal
1998. New orders from customers in the personal computer industry continue
to be affected by their efforts to reduce inventory levels of their end
product. Further, while the Company continues to transition its LAN
products to a more integrated node solution, revenue for LAN products is
expected to decline significantly in the fourth quarter as revenue from the
previous generation LAN product declines. Although the Company expects the
LAN product transition to be successful, until the product transition is
completed and new products have received customer acceptance, revenue for
LAN products will remain below levels experienced in the first half of
fiscal 1998. The Company believes the direction in the personal computer
industry to accelerate product migration toward sub $1,000 personal
computers may, in the short run, unfavorably impact revenues for the
Company's other products in the area of chipset, super I/O (input/output)
and temperature sensors. As a result of these factors, the Company expects
fourth quarter revenues to be down sequentially from the third quarter, and
operating margin to deteriorate, resulting in a loss in the fourth quarter.
Although the Company has seen some signs of recovery in new orders in its
analog business and it believes it has resolved the production issues
related to the Cyrix Media GX processor product, the Company remains very
cautious about its future outlook, particularly with respect to the
personal computer business. The Company is reviewing potential cost
reduction actions and expects to complete its review and implement certain
actions in the fourth quarter of fiscal 1998. While these cost reduction
actions are expected to benefit the cost structure for future ongoing
operations, certain of these actions may result in one-time charges.
In November 1997, the Company completed the merger of its subsidiary with
Cyrix. The Company believes the technologies and capabilities of Cyrix and
National are complementary and the separate operations compatible. In
addition to lower volume and price erosion as already seen with the Cyrix
6X86 products and difficulties with ramping production of the Cyrix Media
GX product, the integration of the two companies' operations may have a
further unfavorable impact on future operating results if the Company
encounters additional unforeseen obstacles or is unable to successfully
complete its integration plan. Other factors related to the Cyrix business
that may affect the Company's results of operations include the following:
Cyrix is a small competitor in the personal computer market for socket-
seven compatible microprocessor products where other large competitors such
as Intel Corporation significantly influence the price of products. There
is also the risk that the Company will be unable to sell existing levels of
Cyrix product at a profit due to the current trend in product migration and
associated price pressure in the personal computer industry. Cyrix is
heavily dependent on "quarterly turns orders", which are orders that book
and bill in the same quarter. The Company is currently dependent on a
third-party wafer foundry to manufacture Cyrix products and this may result
in lack of control over the yield distribution of acceptable speed levels
on Cyrix microprocessor products that may unfavorably impact product
availability.
The Company expects to continue to pursue opportunities to acquire key
technology to augment its technical capability or to achieve faster time to
market as alternatives to internally developing such technology. In
addition to the Company's regular involvement in licensing arrangements
and joint venture relationships, these opportunities are expected to
include business acquisitions. With such acquisitions, there is the risk
that future operating performance may be unfavorably impacted due to
acquisition related costs, such as but not limited to, in-process R&D
charges, added R&D expenses, lower gross margins from acquired product
portfolios and restructure costs associated with duplicate facilities.
The Company has received notices of tax assessments from certain
governments of countries within which the Company operates. There can be
no assurance that these governments or other government entities will not
serve future notices of assessments on the Company, or that the amounts of
such assessments and the failure of the Company to favorably resolve such
assessments would not have a material adverse effect on the Company's
financial condition or results of operations. In addition, the Company is
engaged in administrative tax proceedings with the IRS and the Company's
tax returns for certain years are under examination in the U.S. and
Malaysia. There can be no assurance that the ultimate outcome of the tax
proceedings or tax examinations would not have a material adverse effect on
the Company's future financial condition or results of operations.
As part of a company wide program to address year 2000 issues, National has
launched a number of projects. Business applications and computer systems
that support its day to day operations are currently being tested to ensure
that they will be year 2000 compliant. The Company utilizes many third
party software packages that have already been rendered 2000 compliant and
implemented an internal date routine in 1985 which is used in the vast
majority of its in-house systems. This routine uses relative dates and
deals properly with year 2000 issues. The Company is examining and taking
steps to ensure that its manufacturing processes will not be interrupted
and that its facilities infrastructure will not experience any failures or
difficulties as a result of year 2000 issues. The Company has also
reviewed its current product portfolio to identify any year 2000 issues and
where appropriate, is communicating with its major customers and suppliers
to ensure that corrective actions are taken to address those issues. While
there can be no assurance that unforeseen problems will not be encountered,
the Company expects that all projects will be completed in a timely manner.
In connection with its year 2000 program, the Company expects to incur
staff costs as well as consulting and other expenses incremental to current
spending levels. The Company has not yet completed its assessment of the
total costs associated with each of these projects or its effect on the
Company's future results of operations, however, the Company expects the
incremental costs required to address year 2000 compliance will not be
significant with respect to its ongoing operating costs.
The forward looking statements discussed or incorporated by reference in
this outlook section involve a number of risks and uncertainties. Other
risks and uncertainties include, but are not limited to, the general
economy, regulatory and international economic conditions, the changing
environment of the semiconductor industry, competitive products and
pricing, growth in the personal computer and communications industries, the
effects of legal and administrative cases and proceedings, and such other
risks and uncertainties as may be detailed from time to time in the
Company's SEC reports and filings.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Except as noted below, there have been no material developments in the
legal proceedings reported in Item 3 in the Company's Annual Report on Form
10-K for the year ended May 27, 1997:
On March 20, 1998, the Appeals Office of the IRS issued a Notice of
Deficiency rejecting the Company's appeal of the IRS' Notice of Proposed
Adjustment for fiscal years 1986 through 1989. The Notice of Deficiency
seeks additional taxes of approximately $1.5 million (exclusive of
interest). The amount sought in the original Notice of Proposed Adjustment
issued in April 1995 was approximately $11 million (exclusive of interest).
The issues giving rise to the proposed deficiency relate primarily to the
Company's former Israeli operation and the allocation of the purchase price
paid in fiscal 1988 for Fairchild Semiconductor Corporation. The Company
has 90 days to file a petition with the United States Tax Court contesting
the deficiency or it can pay the deficiency and file a claim for refund
with the Federal District Court or Court of Federal claims. The IRS has
completed its examination of the Company's tax returns for fiscal years
1990 through 1993 and the Company expects the IRS to issue a Notice of
Proposed Adjustment relating to the same issues involved in the 1986
through 1989 fiscal years. The IRS has begun examination of the Company's
returns for fiscal years 1994 through 1996. The Company believes adequate
tax payments have been made or accrued for all years.
On November 12, 1997, a class action lawsuit was filed in California State
Court against the Company, Cyrix Corporation ("Cyrix"), Cyrix's Board of
Directors and Cyrix's Chief Executive Officer by Goodman Epstein,
individually and on behalf of Cyrix stockholders. The complaint alleges
that the named individual defendants breached their fiduciary duty to the
stockholders of Cyrix in connection with their approval of Cyrix's merger
with a subsidiary of the Company and that the Company further aided and
abetted the alleged breach of fiduciary duty. The complaint sought certain
declaratory and injunctive relief, an accounting to the plaintiff and
members of the class for the damages alleged to have been suffered, costs
and fees. An ex parte application filed by plaintiffs for a temporary
restraining order, preliminary injunction and an expedited discovery order
was scheduled to be heard on November 14, 1997, but was subsequently
dropped by plaintiffs and was not heard. In response to the demurrer filed
by the defendants, plaintiff has filed its first amended complaint, adding
as defendants the Company's directors, Donald Macleod, the Company's
Executive Vice President, Finance and Chief Financial Officer, and Richard
D. Crowley, Jr., the Company's Vice President and Controller. The amended
complaint alleges breach of fiduciary duty to the stockholders of Cyrix by
the Company, Cyrix and the Cyrix individual defendants and violations of
Sections 11 and 12(2) of the Securities Act of 1933 by all defendants and
seeks certain declaratory and injunctive relief, an accounting to the
plaintiff and class members for damages alleged to have been suffered,
costs and fees. The Company believes the action is without merit and
intends to contest it vigorously.
Item 6. Exhibits and Reports on Form 8-K
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3.1 Second Restated Certificate of Incorporation of the Company as
amended (incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-3 Registration No. 33-52775, which became
effective March 22, 1994); Certificate of Amendment of Certificate of
Incorporation dated September 30, 1994 (incorporated by reference from the
Exhibits to the Company's Registration Statement on Form S-8 Registration
No. 333-09957, which became effective August 12, 1996).
3.2 By Laws of the Company (incorporated by reference from the
Registration Statement on Form S-8 Registration No. 333-36733, which became
effective September 30, 1997).
4.1 Rights Agreement (incorporated by reference from the Exhibits to the
Company's Registration Form 8-A filed August 10, 1988). First Amendment to
the Rights Agreement (incorporated by reference from the Exhibits to the
Amendment No. 1 to the Company's Registration Statement on Form 8-A filed
December 11, 1995). Second Amendment to the Rights Agreement dated as of
December 17, 1996 (incorporated by reference from the Exhibits to the
Company's Amendment No. 2 to the Registration Statement on Form 8-A filed
January 17, 1997).
4.2 Form of Common Stock Certificate (incorporated by reference from the
Exhibits to the Company's Registration Statement on Form S-3 Registration
No. 33-48935, which became effective October 5, 1992).
4.3 Indenture dated as of September 15, 1995 (incorporated by reference
from the Exhibits to the Company's Registration Statement on Form S-3
Registration No. 33-63649, which became effective November 6, 1995).
4.4 Registration Rights Agreement dated as of September 21, 1995
(incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 Registration No. 33-63649, which became effective
November 6, 1995).
4.5 Form of Note (incorporated by reference from the Exhibits to the
Company's Registration Statement on Form S-3 Registration No. 33-63649,
which became effective November 6, 1995).
4.6 Indenture dated as of May 28, 1996 between Cyrix Corporation
("Cyrix") and Bank of Montreal Trust Company as Trustee (incorporated by
reference from the Exhibits to Cyrix's Registration Statement on Form S-3
Registration No. 333-10669, which became effective August 22, 1996).
4.7 Registration Rights Agreements dated as of May 28, 1996 between Cyrix
and Goldman, Sachs & Co. (incorporated by reference from the Exhibits to
Cyrix's Registration Statement on Form S-3 Registration No. 333-10669,
which became effective August 22, 1996).
10.1 Management Contract or Compensatory Plan or Agreement: Agreement with
Kevin C. McDonough
11.0 Computation of Earnings Per Share-Assuming Full Dilution.
27.0 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on November 24, 1997 reporting the merger on
November 17, 1997 of Nova Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of the Company ("Sub") and Cyrix Corporation, a
Delaware corporation ("Cyrix"). Under the terms of the merger, each share
of Cyrix Common Stock was exchanged for 0.825 of share of National Common
Stock and an additional 5.3 million shares of National Common Stock were
reserved for future issuances in connection with stock options, employee
benefit plans and conversion of certain Cyrix convertible subordinated
notes. No financial statements were included with the Form 8-K, although
it was noted that financial statements of Cyrix and pro-forma financial
information were included in the Company's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on October 16, 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.
NATIONAL SEMICONDUCTOR CORPORATION
Date: April 3, 1998 /s/ Richard D. Crowley, Jr.
----------------------------------
Richard D. Crowley, Jr.
Vice President and Controller
Signing on behalf of the registrant
and as principal accounting officer
EXHIBIT 10.1
National Semiconductor Corporation (408) 721-5000 Tel
2900 Semiconductor Drive
Santa Clara, CA 95052-8090
August 27, 1997
Mr. Kevin McDonough
Senior Vice President, Engineering
Cyrix Corporation
P.O. Box 853920
Richardson, Texas 75085-3920
Re: Employment with National Semiconductor Corporation
Dear Mr. McDonough:
National Semiconductor Corporation ("National") has determined
that because of your substantial management expertise and experience and
because of your knowledge of significant proprietary and confidential
business and technical information relating to the business of Cyrix
Corporation ("Cyrix") it is in the best interests of National and its
stockholders to secure the benefit of your continued employment following
the consummation of the merger between National and Cyrix (the "Merger").
National desires to obtain your employment based upon the following
employment package which we hope you will accept by signing this letter.
1. Compensation and Continued Employment. For the period
commencing on the effective closing date of the Merger (the "Closing")
under the Agreement and Plan of Merger by and among National, Acquisition
Corp. and Cyrix, dated July 28, 1997, through the end of the 18th month
following the Closing (the "Term"), National agrees to employ you at a base
salary at least equal to the base salary paid to you by Cyrix immediately
preceding July 25, 1997. During the Term, you shall perform such duties
and responsibilities of an executive nature as may be determined from time
to time by National's Chief Executive Officer or his designee. You will be
entitled to participate in all National benefit plans and programs
generally available for similarly situated employees, subject to the terms
and conditions of such plans and programs.
If you remain employed by National through the end of the Term,
in consideration for your activities and services supporting the
integration of Cyrix and National, you will be paid a retention bonus equal
to 400% of your annual base salary and bonus as of such date. Half of this
sum will be paid at the end of the Term, and half will be paid 12 months
thereafter. All payments under this letter agreement shall be subject to
all applicable federal, state and local income and other tax withholding
requirements.
At the end of the Term, your continued employment with National
shall be on an at-will basis.
2. Severance. In the event you voluntarily terminate your
employment, or your employment is terminated as a result of cause,
disability or upon your death, you will receive your base salary through
your date of termination and all other benefits to which you are entitled
pursuant to the plans and programs in which you participate. If your
employment is terminated by National prior to the end of the Term (other
than for cause or disability), in addition to the amounts described in the
preceding sentence National will pay you a lump sum severance amount equal
to 400% of your annual base salary and target bonus for such year of
termination, less the present value of any other severance amounts to which
you are entitled. Such payments will be made in two parts, half to be paid
at termination and half 12 months thereafter. In addition, National will
provide you and your spouse and dependents with continued medical coverage
(subject to your continued payment of the employee premium) until the first
to occur of (i) the end of the original Term, or (ii) your employment by an
entity providing health coverage. (If any payments or benefits provided to
you in connection with the Merger would be subject to the excise tax under
Section 4999 of the Internal Revenue Code, then the amounts payable under
this letter agreement shall be reduced to the maximum amount as will result
in no portion of such payments being subject to the excise tax.)
3. Cause and Disability. "Cause shall mean: (i) conduct on
your part which is dishonest, fraudulent or criminal and is injurious to
Cyrix or National (including without limitation the commission of a felony
offense), (ii) your willful and material breach of Section 4 of this letter
agreement or any other confidentiality or proprietary information agreement
between you and Cyrix or National or (iii) your willful and continued
failure to perform your duties of employment, after notice has been
provided to you. "Disability" shall mean your inability to perform your
duties as a result of physical or mental illness for a continuous period of
(3) months or an aggregate of (6) months during a 12 month period.
4. Proprietary Information and Inventions. You agree to hold
in a fiduciary capacity, maintain in confidence and use only for the
benefit of Cyrix or National all proprietary information and trade secrets
of Cyrix or National. You further agree that all inventions and
intellectual property developed from or in any way associated with your
employment with Cyrix have been properly assigned to Cyrix and you will
take appropriate steps to assure perfection of the ownership of Cyrix and
National of such property upon and after the Closing. You also agree to
execute as may be required from time to time agreements of Cyrix and
National to assign all inventions and intellectual property developed from
or in any way associated with your employment with Cyrix and National and
to protect proprietary information and intellectual property of Cyrix and
National. You agree that during your employment with National or Cyrix,
and for twelve (12) months thereafter, you will not yourself compete with,
nor will you serve as an employee, officer, director or consultant, or in
any other similar capacity, on behalf of any person, firm, corporation,
association or other entity that competes with, the microprocessor business
of National or Cyrix as then conducted or as then proposed to be conducted.
You further agree that during, and for twelve (12) months following the
termination of, your employment with National or Cyrix you will not,
directly or indirectly, solicit, recruit, or hire, or assist any person,
firm, corporation, association or other entity in the solicitation,
recruitment or hiring of, any person then engaged by National or Cyrix as
an employee, officer, director or consultant, or so engaged by National or
Cyrix within the then prior six (6) months, nor will you interfere in any
business relationship of National or Cyrix.
5. Specific Performance. You agree that any remedy at law for
a breach of the covenants in Section 4 above will not be adequate and that
Cyrix or National may apply for and have injunctive relief in any court of
competent jurisdiction to restrain the breach or threatened breach or
otherwise to enforce specifically any of the covenants of such Section.
You consent to jurisdiction and venue in the federal and state courts
located in Northern California for the purpose of enforcing the terms of
this letter agreement.
6. Assignment. Your rights under this letter agreement are
not assignable or transferable.
7. Entire Agreement. This letter agreement sets forth the
entire agreement between you and National and may not be modified, amended
or changed except by written instrument signed by duly authorized
representatives of all parties. This letter agreement replaces all prior
offers and agreements between you and Cyrix (as to the matters covered
herein), which are hereby terminated.
8. Governing Law. The rights and obligations of the parties
and all interpretations and performances of this letter agreement shall be
governed in all respects by the laws of the State of California.
9. Exclusive Remedy. The payments to you contemplated by this
letter agreement shall constitute your exclusive and sole remedy for any
termination of your employment by National during the Term, and you
covenant not to assert or pursue any remedies, other than an action to
enforce this letter agreement, at law or in equity, with respect to any
such termination of employment.
10. Severability of Provisions. If any covenant set forth in
this agreement is determined by any court to be unenforceable by reason of
its extending for too great a period of time or over too great a geographic
area, or by reason of its being too extensive in any other respect, such
covenant shall be interpreted to extend only for the longest period of time
and over the greatest geographic area, and to otherwise have the broadest
application as shall be enforceable. The invalidity or unenforceability of
any particular provision of this letter agreement shall not affect the
other provisions hereof, which shall continue in full force and effect.
Without limiting the foregoing, the covenants contained herein shall be
construed as separate covenants, covering their respective subject matters,
with respect to each of the separate cities, counties and states of the
United States, and each other country, and political subdivision thereof,
in which Cyrix or National transact any business.
Please indicate your agreement with the foregoing by executing
this letter agreement and the enclosed copy hereof in the space indicated
below. If you have any questions or concerns, please feel free to direct
those to National and, of course, if you feel it appropriate, please
consult with legal counsel regarding this letter agreement. Please note
terms of this letter agreement are confidential. If the Closing does not
occur this agreement shall be of no further force or effect.
Agreed to and Accepted:
By: //s//Kevin C. McDonough
-----------------------
Date: 9/11/97
-----------------------
Sincerely,
NATIONAL SEMICONDUCTOR CORPORATION
By: //s// Richard A. Wilson
-----------------------
Name: Richard A. Wilson
--------------------
Title: V.P. Human Resources
--------------------
Exhibit 11.0
NATIONAL SEMICONDUCTOR CORPORATION
ADDITIONAL FULLY DILUTED CALCULATION OF EARNINGS PER SHARE(1)
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
------------------ --------------------
March 1, Feb. 23, March 1, Feb. 23,
1998 1997 1998 1997
-------- -------- -------- --------
Net income, as reported
and used for basic
earnings per share $ 22.3 $ 200.2 $ 113.8 $ 20.6
Adjustment for interest
on convertible notes $ 3.9 $ 2.6 $ 12.9 $ 8.5
-------- -------- -------- --------
Net income used for
diluted earnings
per share $ 26.2 $ 202.8 $ 126.7 $ 29.1
======== ======== ======== ========
Number of shares:
Weighted average common and
common equivalent shares
for basic earnings per
share 164.5 156.2 163.5 154.9
Weighted average common
equivalent shares
assuming dilution 2.8 3.8 4.2 2.7
Shares issuable from
assumed conversion of
convertible notes 7.4 8.6 8.2 7.2
-------- ------- -------- --------
Weighted average common and
common equivalent shares
assuming diluted
earnings per share 174.7 168.6 175.9 164.8
======== ======= ======== ========
Earnings per share, assuming
dilution:
Net Income $ .15 $ 1.20 $ .72 $ .18
Earnings per common share,
as reported:
Basic $ .14 $ 1.28 $ .70 $ .13
======== ======== ======== ========
Diluted $ .13 $ 1.20 $ .68 $ .13
======== ======== ======== ========
(1) For the three and nine months ended March 1, 1998 and the nine months
ended February 23, 1997, this calculation is submitted in accordance
with Regulation S-K Item 601(b)(11) although it is contrary to
paragraph 40 of the APB Opinion No. 15 because it produces an
antidilutive result.
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAY-31-1998 MAY-31-1998
<PERIOD-END> MAR-01-1998 MAR-01-1998
<CASH> 633 633
<SECURITIES> 113 113
<RECEIVABLES> 268 268
<ALLOWANCES> 0 0
<INVENTORY> 300 300
<CURRENT-ASSETS> 1568 1568
<PP&E> 2882 2882
<DEPRECIATION> 1222 1222
<TOTAL-ASSETS> 3345 3345
<CURRENT-LIABILITIES> 843 843
<BONDS> 384 384
0 0
0 0
<COMMON> 82 82
<OTHER-SE> 1984 1984
<TOTAL-LIABILITY-AND-EQUITY> 3345 3345
<SALES> 650 2027
<TOTAL-REVENUES> 650 2027
<CGS> 414 1247
<TOTAL-COSTS> 414 1247
<OTHER-EXPENSES> 134 367
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (5) (20)
<INCOME-PRETAX> 30 152
<INCOME-TAX> 7 38
<INCOME-CONTINUING> 23 114
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23 114
<EPS-PRIMARY> .14 .70
<EPS-DILUTED> .13 .68
</TABLE>
