-----------------------------------------------
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 29, 1996
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)
(Zip Code)
214-968-8387
(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 19,506,577
(Title of Each Class) (Number of Shares Outstanding at
November 8, 1996)
-----------------------------------------------
<PAGE>
CYRIX CORPORATION
INDEX
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3-4
Consolidated Statements of Income
for the three months and six months
ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
six months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CYRIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
(In thousands)
September 30, December 31,
1996 1995
------------------ ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $56,300 $44,334
Trade accounts receivable, net of valuation allowances of $3,614 at
September 30, 1996 and $4,500 at December 31, 1995
33,998 44,727
Inventories:
Raw materials 18,779 1,330
Work in process 29,727 6,482
Finished goods 3,157 4,461
------------------ ----------------
Total inventories 51,663 12,273
Prepayment for product purchases (Note 5) 15,658 13,333
Income taxes receivable 15,749 3,089
Deferred taxes 7,418 10,845
Other assets 660 377
------------------ ----------------
Total current assets 181,446 128,978
Property and equipment
Land 4,964 4,964
Building and improvements 10,865 5,634
Machinery and equipment 131,076 125,050
------------------ ----------------
146,905 135,648
Accumulated depreciation (56,240) (37,341)
------------------ ----------------
90,665 98,307
Prepayment for product purchases, less current portion (Note 5) 34,979 40,698
Deferred taxes and other assets 4,061 802
------------------ ----------------
Total assets $311,151 $268,785
------------------ ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CYRIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
September 30, December 31,
1996 1995
------------------ ------------------
<S> <C> <C>
Current liabilities:
Accounts payable $21,959 $15,239
Accrued salaries and benefits 3,840 3,469
Deferred income and distributor reserves 7,126 15,526
Current maturities of long-term debt and capitalized lease
obligations (Note 4) 3,058 20,053
Other accrued expenses 8,949 6,180
------------------ ------------------
Total current liabilities 44,932 60,467
Long-term debt and capitalized lease obligations, less current
maturities (Note 4) 10,507 62,325
Deferred income taxes 2,189 --
5.5% convertible subordinated notes due June 1, 2001 (Note 4)
126,500 --
Commitments and contingencies (Notes 5 and 6)
Stockholders' equity:
Common stock, $.004 par value; authorized 60,000 shares, issued 20,228 at
September 30, 1996 and December 31, 1995
81 81
Additional capital 48,688 46,256
Retained earnings 78,300 99,712
Less treasury stock, at cost, 746 shares at September 30, 1996 and
991 shares at December 31, 1995
(46) (56)
------------------ ------------------
Total stockholders' equity 127,023 145,993
------------------ ------------------
Total liabilities and stockholders' equity $311,151 $268,785
------------------ ------------------
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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,
1996 1995 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net product sales $31,508 $53,498 $105,775 $173,880
Royalty revenue (Note 3) 1,598 74 5,992 15,074
--------------------------------------------------------------------------
Net revenues 33,106 53,572 111,767 188,954
Cost of sales 21,811 34,982 74,578 105,962
--------------------------------------------------------------------------
11,295 18,590 37,189 82,992
--------------------------------------------------------------------------
Expenses:
Marketing, general and administrative 13,870 8,755 40,852 29,135
Research and development 8,073 7,571 24,569 21,881
--------------------------------------------------------------------------
21,943 16,326 65,421 51,016
--------------------------------------------------------------------------
Income (loss) from operations (10,648) 2,264 (28,232) 31,976
Other income and expense:
Income from litigation settlement 2,000 -- 2,000 10,000
Interest income 681 627 1,522 2,025
Interest expense (2,557) (2,043) (6,850) (4,598)
--------------------------------------------------------------------------
124 (1,416) (3,328) 7,427
--------------------------------------------------------------------------
Income (loss) before provision for income taxes
and extraordinary item (10,524) 848 (31,560) 39,403
Provision (benefit) for income taxes (3,578) 291 (11,210) 13,868
--------------------------------------------------------------------------
Net income (loss) before extraordinary item (6,946) 557 (20,350) 25,535
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $598 -- -- (1,062) --
--------------------------------------------------------------------------
Net income (loss) (6,946) $ 557 ($21,412) $ 25,535
--------------------------------------------------------------------------
Net income (loss) per common and common equivalent share:
Income (loss) before extraordinary item ($0.36) $0.03 ($1.05) $1.28
Extraordinary item -- -- (0.06) --
--------------------------------------------------------------------------
Net income (loss) ($0.36) $0.03 ($1.11) $1.28
--------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 19,463 20,126 19,376 19,910
--------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CYRIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30,
1996 1995
---------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) ($21,412) $25,535
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 20,356 13,028
Provision for doubtful accounts and OEM
customer returns and pricing allowances 13,328 5,556
Income taxes (7,044) (1,058)
Amortization of debt issue costs 191 --
Changes in operating assets and liabilities:
Receivables (2,598) (4,102)
Inventories (39,389) 1,116
Other current assets (283) (16)
Accounts payable 6,720 (6,915)
Deferred litigation settlement -- (5,000)
Deferred income and distributor reserves (8,400) 4,201
Other accrued expenses 3,140 (1,447)
Other assets, excluding deferred taxes (3,451) 92
---------------------------------------
Net cash provided by (used in) operating activities (38,842) 30,990
Investing Activities
Prepayments for product purchases (10,000) (32,367)
Reduction in prepayments for product purchases 13,393 3,740
Purchases of property and equipment (9,535) (74,829)
Proceeds from redemption of investments -- 16,178
---------------------------------------
Net cash used in investing activities (6,142) (87,278)
Financing activities
Proceeds from issuance of 5.5% convertible subordinate notes 126,500 --
Proceeds from issuance of long term debt 5,500 68,019
Repayments of long-term debt and capitalized
lease obligations (77,492) (8,340)
Tax benefit from stock option exercises 382 917
Net proceeds from issuance of common stock 2,060 2,378
---------------------------------------
Net cash provided by financing activities 56,950 62,974
---------------------------------------
Increase in cash and cash equivalents 11,966 6,686
Cash and cash equivalents at beginning of period 44,334 43,064
---------------------------------------
Cash and cash equivalents at end of period $56,300 $49,750
---------------------------------------
Financing and Investing Activities Not Affecting Cash
Capital lease obligations incurred $3,179 --
See accompanying notes.
</TABLE>
<PAGE>
CYRIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
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, 1996. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the fiscal
year ended December 31, 1995, and notes thereto included in the Company's Form
10-K filed with the Securities and Exchange Commission ("SEC") on March 12,
1996.
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 1995
ended December 31, 1995, the third fiscal quarter of 1996 ended September 29,
1996, and the third fiscal quarter of 1995 ended October 1, 1995. The third
fiscal quarters of 1996 and 1995 were each 13 week fiscal quarters, and the nine
month periods ending September 30, 1996 and 1995 were each 39 week periods.
2. Earnings per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed by
dividing net income (loss) 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. Fully diluted earnings
per share is substantially the same as primary earnings per share.
3. Royalty Revenue
Royalty revenue based on the sale by third-party licensees of licensed
products is recognized by the Company upon fulfillment of its contractual
obligations and determination of a royalty amount based on units sold. Pursuant
to a November 1994 agreement which settled the contractual dispute with Texas
Instruments Incorporated ("TI"), on March 1, 1995 TI paid $15 million to the
Company for past royalties and a fully paid-up license related to the Company's
486DLC and 486SLC microprocessor products licensed to TI. Pursuant to the same
November 1994 agreement, during the fiscal quarter and nine months ended
September 30, 1996, the Company received royalty revenue in the amount of $1.6
million and $6 million, respectively, from TI based on the sale of 486DX
products.
<PAGE>
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. On August 22, 1996, the Company
filed a shelf registration statement with the SEC with respect to the resale of
the notes and the sale of the shares of common stock issuable upon conversion
thereof. The Company has agreed to use reasonable efforts to cause the
registration statement to become effective. The Company used approximately $66.6
million of the net proceeds of the offering to repay all of its outstanding
indebtedness to International Business Machines Credit Corporation and General
Electric Capital Corporation ("the equipment lenders"). The Company also used
approximately $1.7 million ($1.1 million net of tax benefit) of the net proceeds
of the offering to pay certain administrative fees and yield maintenance
premiums incurred in connection with the early extinguishment of the
indebtedness to the equipment lenders.
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 will be 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
On April 8, 1994, the Company and International Business Machines
Corporation ("IBM") signed an agreement whereby IBM's Microelectronics division
agreed 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. Pursuant to this agreement, Cyrix has made a capital equipment
investment of approximately $88 million in an IBM manufacturing facility. 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 this 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 and $10 million on
January 1, 1996. Under the original agreement, two additional product
prepayments of $10 million each would be due on January 1, 1997 and January 1,
1998. However, during September 1996, the Company reached an agreement with IBM
to postpone the $10 million dollar prepayment that was originally due on January
1, 1997 until April 1, 1997. 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 Cyrix-designed products
for use internally, to sell to original equipment manufacturers ("OEMs"), or to
other customers.
On May 17, 1996, the Company and IBM signed an additional agreement
("foundry agreement") whereby IBM's Microelectronics division agreed to
manufacture specified quantities of wafers of Cyrix-designed products for sale
to Cyrix through December 1997 at defined prices. The Company had commitments to
purchase a specified quantity of wafers from IBM for approximately $45 million
during the second half of 1996. However, during September 1996, the Company and
IBM agreed that the commitment to purchase such foundry wafers in the fourth
quarter of 1996 could be canceled without a penalty to the Company. Under the
modified agreement, IBM has the right to manufacture and sell the remaining 1996
foundry wafer commitment on its own behalf. Additionally, the Company can order
wafers under the foundry agreement with six months notice to IBM.
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 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.
<PAGE>
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.
Stockholders Class Action
In December 1994, eleven class actions were filed in the United States
District Court for the Northern District of Texas, purportedly on behalf of
purchasers of the Company's common stock, alleging that the Company and various
of its officers and directors violated sections of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder, by issuing false and misleading
statements concerning the introduction and production of the Company's Cx486DX2
40/80 MHz microprocessors. The complaints also allege that the conduct of the
Company and certain of its officers and directors constituted fraud and
negligent misrepresentation and that certain of such officers and directors sold
shares of the Company's common stock while in possession of material undisclosed
information.
In June 1995, all of the actions were consolidated into one complaint
in the federal district court in Dallas, Texas. The Company moved to dismiss the
consolidated amended class action complaint in July 1995. On August 20, 1996,
the United States District Court for the Northern District of Texas, Dallas
Division, entered an order dismissing plaintiffs' complaint for failure to
properly plead a cause of action. The court, however, dismissed plaintiffs'
complaint "without prejudice", and permitted plaintiffs leave to amend their
complaint by September 10, 1996 to cure its deficiencies. No such amendment was
filed and on September 26, 1996, the U.S. District Court in Dallas entered a
judgement dismissing the securities class action lawsuit against the Company and
various of its officers. However, there can be no assurance that lawsuits of
this nature will not be filed in the future against the Company. A decision
adverse to the Company in any matter of this nature could have a material
adverse effect on the Company, its financial condition, its results of
operations and its future prospects.
Gateway Trademark Litigation
By letter dated May 17, 1996, Gateway 2000, Inc. ("Gateway") alleged that
Cyrix "is infringing valuable trademark and trade dress rights of Gateway 2000"
in advertisements promoting Cyrix's 6x86(TM) personal computer systems. Gateway
asserts that Cyrix's "reproduction, copy and colorable imitation of Gateway's
registered trademark and trade dress in connection with advertising Cyrix's
goods is likely to cause confusion, mistake or deceive the public within the
meaning of the Lanham Act." The letter threatens Cyrix with actions for
trademark infringement, false advertising and trade disparagement, and unfair
competition. Finally, the letter suggests that Gateway might assert its rights
in other nations if the advertisements have been distributed on the
international market.
On May 24, 1996, Cyrix filed in the United States District Court for
the Northern District of Texas, Dallas Division, Cyrix Corporation v. Gateway
2000, Inc., seeking a declaratory judgment: (i) that none of Cyrix's actions or
omissions relating to its advertisements of the Cyrix 6x86 computers have
violated any provisions of the Lanham Act; (ii) that none of Cyrix's actions or
omissions relating to its advertisements of the Cyrix 6x86 computers have
violated the common law of the State of Texas or any provisions of the Texas
Trademark Act, Texas Business & Commerce Code Sections 16.01 et seq., including
but not limited to those provisions relating to trademark infringement, trade
dress infringement and dilution; (iii) that Cyrix has not engaged in any false
or unlawful advertising; (iv) that Cyrix has not engaged in any unfair
competition or trade disparagement; (v) that Cyrix's conduct relating to its
advertisements of the Cyrix 6x86 computers is speech protected by the U.S.
Constitution and the Texas Constitution of 1876; (vi) that none of Cyrix's
actions or omissions relating to its advertisements of the Cyrix 6x86 computers
has violated any state or federal laws; (vii) that Cyrix's acts are privileged
and/or excused by: (a) the defense of fair use; (b) the defense of opinion and
parody; and (c) the defense of truth; and (viii) that Cyrix is free to use
images of Holstein cows to signify Gateway (even in an unflattering fashion) in
advertising of personal computers that is not factually false, deceptive or
misleading. Gateway has filed motions to dismiss this case based on lack of
personal jurisdiction and lack of proper service of process.
Subsequently, in late June and early July Gateway filed actions in
state court in New York, New Jersey, Connecticut, Massachusetts and California.
The state court cases are essentially the same and allege that Cyrix has
violated anti-dilution laws, deceptive trade practices laws, trademark
infringement laws, and unfair competition laws. Cyrix believes that Gateway has
also made claims under the Federal Trademark Act and certain state law claims
preempted by the Federal Copyright law. Gateway has requested, among other
relief, preliminary and permanent injunctions, as well as actual and punitive
damages. In each of the five cases, Gateway is seeking actual damages (typically
asserting such amount is at least one million dollars) and punitive damages.
The trial of the New York State Supreme court case is tentatively set
for sometime in December 1996.
Cyrix believes that it has meritorious defenses to Gateway's claims and
intends to pursue the litigation vigorously. This litigation is now commencing
the discovery phase and the ultimate outcome of this dispute cannot presently be
determined. A decision adverse to the Company in this matter, if not covered by
the Company's insurance policies, could have a material adverse effect on the
Company, its financial condition, its results of operations and its future
prospects.
Other Matters
The Company is a defendant in various other minor 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.
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal Quarter Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net product sales 95.2 % 99.9 % 94.6 % 92.0 %
Royalty revenue 4.8 .1 5.4 8.0
-------------- ------------- -------------- -------------
Net revenues 100.0 100.0 100.0 100.0
Cost of sales 65.9 65.3 66.7 56.1
Marketing, general and administrative 41.9 16.3 36.6 15.4
Research and development 24.4 14.1 22.0 11.6
-------------- ------------- -------------- -------------
Income (loss) from operations (32.2) 4.3 (25.3) 16.9
Net interest expense (5.7) (2.7) (4.8) (1.4)
Income from litigation settlement 6.0 -- 1.8 5.3
-------------- ------------- -------------- -------------
Income (loss) before provision for income
taxes and extraordinary item (31.8) 1.6 (28.2) 20.8
Provision (benefit) for income taxes (10.8) .6 (10.0) 7.3
-------------- ------------- -------------- -------------
Net income (loss) before extraordinary item
(21.0) 1.0 (18.2) 13.5
Extraordinary loss from early extinguishment
of debt -- -- (1.0) --
-------------- ------------- -------------- -------------
Net income (loss) (21.0) % 1.0 % (19.2) % 13.5 %
-------------- ------------- -------------- -------------
</TABLE>
Results of Operations
Net Revenues. Net product sales of $31.5 million for the third quarter
of fiscal 1996 decreased 41% compared with net product sales of $53.5 million
for the third quarter of fiscal 1995. Net product sales of $105.8 million for
the nine months ended September 30, 1996 decreased 39% compared with net product
sales of $173.9 million for the same period of fiscal 1995. Processor unit
shipments for the quarter and nine months ended September 30, 1996 declined by
approximately 67% and 58%, respectively, compared with unit shipments of the
same periods of fiscal 1995. During the nine months ended September 30, 1996,
sales of 6x86(TM) and 5x86(TM) microprocessors represented over 90% of the
Company's net product sales; sales of its 486 microprocessors, which accounted
for over 87% of the Company's net product sales during the first nine months of
fiscal 1995, decreased substantially as their average selling prices and unit
shipments of such prior generation products declined. Competitive pressures also
resulted in signicant declines in average selling prices of the Company's 6x86
microprocessors during the third quarter. The Company began selling computer
systems during the second quarter of 1996; revenue from the sale of computer
systems accounted for less than 10% of the Company's net product sales for the
quarter and nine months ended September 30, 1996.
Sales of processors to international customers constituted 68% and 62%
of processor product sales in the third quarters of fiscal 1996 and 1995,
respectively. Sales of processors to international customers constituted 58% and
67% of processor product sales in the nine months ended September 30, 1996 and
1995, respectively. Sales of processors to international customers are made
primarily to customers in Europe, Taiwan, Hong Kong, Korea and Japan. The
Company currently sells its computer systems only to domestic customers.
Net revenues for the first nine months of fiscal 1995 included a
one-time royalty payment in the amount of $15 million received from TI for past
royalties and a fully paid-up license related to the Company's 486DLC and 486SLC
microprocessor products. Net revenues for the quarter and nine months ended
September 30, 1996 included royalty payments of $1.6 million and $6 million,
respectively, received from TI based on sales of 486DX products licensed by the
Company.
The outlook for the Company's revenue growth, if any, is dependent upon
the following factors among others: trends in the personal computer market,
product development, chip set, motherboard and BIOS infrastructure support for
the Company's products, verification of the Company's microprocessors'
compatibility with industry standard hardware and software, market acceptance,
product availability and competition. Since all of the Company's products are
used in personal computers, the Company's business is closely tied to the
performance of the personal computer industry. A reduced rate of growth in the
demand for microprocessors could adversely affect the market for the Company's
products. From time to time, the personal computer market and semiconductor
industries have experienced significant downturns, often in connection with, or
in anticipation of, declines in general economic conditions. These downturns
have been characterized by diminished product demand, production over-capacity
and subsequent accelerated erosion of average selling prices. The Company's
business could be materially and adversely affected by industry-wide
fluctuations in the future.
Further, the outlook for the Company's microprocessor products is
highly dependent on the timing of new product introductions by the Company and
its competitors and other microprocessor market conditions. Intel currently has
a dominant microprocessor market share, dictates the performance standards
required to compete in the microprocessor market and influences product life
cycles through frequent product introductions, product enhancements and price
competition. Intel's developments in semiconductor design and manufacturing
processes have allowed Intel to produce microprocessors that are smaller, faster
and less expensive to manufacture. Intel's financial strength and microprocessor
cost and performance have enabled it to reduce prices on its microprocessors
within a short period of time following their introduction. As long as Intel
remains in this dominant position, its product introduction schedule and pricing
strategy may have a material adverse effect on the Company's business, operating
results and financial condition.
In addition to its dominant microprocessor market share, Intel is also
beginning to dominate the entire personal computer platform. For example, Intel
has obtained a dominant market share in sales of 64-bit or Pentium-class core
logic chip sets and has emerged as one of the world's largest motherboard
manufacturers. Further, Intel manufactures personal computers, incorporating
Intel microprocessors, chip sets, motherboards and other Intel-designed
components, for resale by third-party OEMs under such OEMs' names. As Intel has
become the dominant competitor in these segments of the personal computer
industry, third-party designers and manufacturers of core logic chip sets,
motherboards, BIOS software and other components have lost market share to
Intel, which owns the microprocessor designs and enjoys significantly greater
financial, technical, manufacturing and marketing resources than such parties.
Further, as Intel expanded its role in designing and setting standards for
personal computer systems, many personal computer OEMs reduced their system
development expenditures and now require processor technologies to be provided
at various levels of integration.
To compete with Intel at higher levels of integration as required by
many personal computer OEMs and dealers, Cyrix is dependent upon the
infrastructure of third-party designers and manufacturers of core logic chip
sets, motherboards, BIOS software, and other components of personal computers.
Therefore, to compete with Intel and deliver the higher levels of integration
required by many OEMs and dealers in 1996 and beyond, the Company intends to
form closer relationships with third-party designers and manufacturers of core
logic chip sets, motherboards, BIOS software and other components, expand its
chip set and system design capabilities, and sell a portion of the Company's
processors at higher levels of integration incorporated into modules, boards and
systems. There can be no assurance that the infrastructure which supports
non-Intel personal computer platforms will be competitive with Intel or continue
to support the Company's products.
During fiscal 1996, the Company began volume production of its
6x86-P120, -P133, -P150 and -P166 microprocessors, which provide system-level
performance competitive with Intel Pentium microprocessors. The Company also
introduced its 6x86-P200 microprocessors in limited volume. However, to date,
the Company has experienced a lack of acceptance by large OEMs because, the
Company believes, the OEMs have more confidence in Intel's financial strength,
ability to access advanced process technologies, introduce microprocessors with
industry-leading performance in a timely manner, supply adequate volumes of
processors which meet such OEMs' performance requirements, and deliver core
logic chip sets, motherboards, BIOS software and other components which
compliment the microprocessor in a computer platform. Given Intel's dominance of
much of the personal computer platform and its efforts to consolidate its
dominant market position through an intensive advertising campaign designed to
strengthen brand loyalty to Intel by the personal computer end-user, there can
be no assurances that manufacturers of personal computers will design the 6x86
or future products into personal computers or purchase such 6x86 or future
products in volumes and at prices that will enable Cyrix to maintain or increase
its quarterly revenues.
The personal computer industry has been consolidating as the larger,
more established manufacturers have become more price aggressive and have been
gaining market share at the expense of other domestic and international
manufacturers. The majority of Cyrix's customer base consists of smaller
personal computer manufacturers and distributors who service such smaller OEMs
and dealers. The continued market share gains of the larger manufacturers, to
which the Company has been unable to sell significant quantities of its
microprocessors to date, could have the effect of subjecting the Company to
greater credit risks, reducing demand for the Company's products and adversely
affecting the Company's operating results.
The Company relies on third parties to manufacture its processors (see
risks relating to reliance on third-party manufactures in Other Factors
Affecting Results of Operations). Volume production of the 6x86 processors began
in the first quarter of fiscal 1996 at IBM. While performance and cost of 6x86
processors manufactured at IBM has been acceptable in fiscal 1996, the Company
is working on performance enhancements to the 6x86 processor design to remain
competitive with the leading performance processors in the market and ongoing
improvement in manufacturing yields by IBM. However, obtaining these objectives
will be difficult, and there can be no assurances that the Company and its
suppliers can successfully supply advanced microprocessors with competitive
performance and cost in commercial volumes in the remainder of fiscal 1996 and
thereafter. In addition to supplying microprocessors to Cyrix, IBM has the right
to manufacture specified quantities of Cyrix-designed products for use
internally, to sell to OEMs, or to sell to other customers. The Company has also
licensed certain product rights to SGS and may face competition from SGS during
the latter half of 1996 and thereafter if SGS is able to manufacture the 6x86
microprocessor with competitive performance. Thus, even after a Cyrix product
has been designed into an OEM's personal computer, the Company has recently and
may in the future face competition from IBM and SGS. Further, Intel and other
competitors are expected to employ more advanced manufacturing processes than
are available to the Company from IBM and SGS, potentially resulting in improved
product performance and decreased manufacturing costs as compared with the
Company. Given the financial strength and manufacturing advantages of Intel and
other competitors, the Company's future revenues and profits may be adversely
affected by price reductions by Intel, Advanced Micro Devices, Inc. ("AMD"),
IBM, SGS and other competitors.
On April 1, 1996, the Company introduced and began selling personal
computer systems integrated by Electronic Data Systems ("EDS") to demonstrate
the performance of Cyrix-designed microprocessors and systems and to strengthen
Cyrix brand awareness. To date, the Company has not sold a significant volume of
computer systems. The Company cannot predict the percentage of its processors
which will be sold in board-level or system-level products or the increase, if
any, in revenue which will result from the sales of such boards and systems
during the remainder of fiscal 1996 or thereafter.
Gross Margins. The Company's gross margin decreased to $11.3 million
for the third quarter of 1996 from $18.6 million for the same period of 1995.
The Company's gross margin decreased to $37.2 million for the nine months ended
September 30, 1996 from $83 million for the same period of 1995. During the nine
months ended September 30, 1996, the Company's gross margins declined compared
with the same period of fiscal 1995 due to a reduction in net product sales (see
Net Revenues above), a reduction in royalty revenue (see Net Revenues above) and
lower yield rates of the more complex 6X86 microprocessor as well as intense
pricing pressure of the microprocessors from the Company's competitors.
Substantially all of the Company's gross margin in the remainder of
fiscal 1996 will be generated from sales of the Company's 6x86 processors and
products integrating Cyrix's 6x86 processors. The Company's gross margin as a
percentage of net product sales in fiscal 1996 will be affected by the ratio of
the Company's sales of microprocessors in chip form to sales at higher levels of
integration such as modules, boards and systems. Quarterly growth, if any, in
the Company's gross margin in the remainder of fiscal 1996 is dependent upon
increasing the Company's net product sales and decreasing its processor cost per
unit. 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 1996 and 1995 were
$13.9 million and $8.8 million, respectively. Marketing, general and
administrative expenses for the nine months ended September 30, 1996 and 1995
were $40.9 million and $29.1 million, respectively. Marketing, general and
administrative expenses for the quarter and nine months ended September 30, 1996
increased compared with the same periods of fiscal 1995 primarily due to an
increase in advertising and marketing efforts related to the Company's 6x86
microprocessor and the introduction of Cyrix personal computer systems and due
to a $1.0 million write-off of capitalized software costs. In the remainder of
fiscal 1996, the Company intends to continue to assist its customers to
advertise products which contain Cyrix's 6x86 processors but intends to reduce
its personal computer systems advertising expenses.
Research and Development Expenses. The Company's research and
development expenses for the third quarters of fiscal 1996 and 1995 were $8.1
million and $7.6 million, respectively. The Company's research and development
expenses for the nine months ended September 30, 1996 and 1995 were $24.6
million and $21.9 million, respectively. The increase of research and
development expenses in the quarter and nine months ended September 30, 1996
compared with the same periods of fiscal 1995 was attributable to the expansion
of the Company's engineering staff, design equipment and prototype expenses to
support the development of 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;
however, there can be no assurance that the Company's design efforts will be
successful.
Interest Expense. Interest expense for the quarter and nine months
ended September 30, 1996 increased to $2.6 million and $6.9 million,
respectively, compared with $2.0 million and $4.6 million, respectively, for the
same periods of fiscal 1995 as long-term debt and capitalized lease obligations
increased when comparing the same periods.
Litigation Settlement. Other income for the third quarter of 1996
includes a settlement of $2 million from Intel related to litigation concerning
the Company's microprocessor products (see Note 6 to the Consolidated Financial
Statements). Other income for the nine months ended September 30, 1995 included
a one-time settlement of $10 million from Intel related to litigation concerning
the Company's microprocessor products also described in Note 6 to the
Consolidated Financial Statements.
The final outcome 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 fiscal 1996 or a subsequent
period. In addition, potential future litigation could have a material adverse
effect on the Company's results of operations in future periods.
Provision (Benefit) for Income Taxes. The Company's effective tax rate was
36% and 35% in the nine months ended September 30, 1996 and 1995, respectively.
<PAGE>
Other Factors Affecting Results of Operations.
Reliance on Third-Party Manufacturers. During the nine months ended
September 30, 1996, all of the Company's processors were manufactured and sold
to the Company by IBM and all of the company's computer systems were integrated
by EDS. The Company's 6x86 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 6x86 products at IBM without experiencing yield
problems or performance issues in the remainder of fiscal 1996 and beyond. If
IBM is unable to produce the committed quantities of 6x86 products at acceptable
yields, there would be a material adverse effect on the Company's revenues,
margins and operating results.
In summary, 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 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.
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.
While the Company believes that, during the remainder of fiscal 1996,
its 6x86 microprocessors will offer performance competitive with the leading
performance processors in the market at competitive prices for desktop personal
computers, there can be no assurance that the Company will be able to
successfully improve the performance of its microprocessors at the rate required
to remain competitive with the leading performance processors in the market or
compete against price decreases, since Intel and several of the Company's other
competitors have substantially greater financial, technical, manufacturing and
marketing resources than the Company. Further, Intel and other competitors are
expected to introduce microprocessors with enhanced multimedia functionality and
clock rates in excess of 200 MHz during fiscal 1996 or early 1997. There can be
no assurances that the Company will not experience delays in introducing and
ramping production of microprocessors with features and performance competitive
with such high performance, multimedia processors introduced by Intel and other
competitors. If the Company does experience such a delay in transitioning to
high performance, multimedia processors, the period of time and the impact on
profit margins during this product transition will 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 and SGS 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, declining average selling
prices and profit margins of previous generation processors. Further, Intel,
AMD, IBM, SGS and other competitors have in the past and could in the future
significantly decrease the price of products which compete with the Company's
products to protect or gain market share.
Purchase commitments. Under an April 1994 agreement with IBM, Cyrix is
responsible for the total production costs of specified quantities of products
during each calendar quarter until the end of fiscal 1999 irrespective of the
number of products actually ordered by the Company. At the end of 1995, the
Company anticipated a significant increase in the demand for its 6x86
processors, for which volume production began during the first quarter of 1996,
as the introduction of such products represented the first time that the
Company's microprocessors were able to provide system-level performance
competitive with Intel's high performance products. Therefore, on May 17, 1996,
the Company and IBM signed a foundry agreement whereby IBM's Microelectronics
division agreed to manufacture additional quantities of wafers of Cyrix-designed
products for sale to Cyrix through December 1997 at defined prices. Under the
May 1996 foundry agreement with IBM, the Company had a commitment to purchase a
specified quantity of wafers from IBM for approximately $45 million during the
second half of 1996. In June of 1996 and in subsequent months, demand for the
Company's microprocessors has not increased as rapidly as previously anticipated
by the Company. During the third quarter of fiscal 1996, the Company only sold
approximately 32% of the units it purchased from IBM during the same time
period. Therefore, the Company's processor inventory increased substantially by
September 30, 1996. Although the foundry agreement contains penalties for any
reduction in the quantities of wafers to be purchased under the agreement, the
Company reached an agreement with IBM in September 1996 to eliminate its
purchase commitments for the fourth quarter of 1996 without incurring such
penalties. The Company has no further purchase commitments under the foundry
agreement for fiscal 1997. However, the Company can still purchase product under
the foundry agreement with six months notice to IBM. Nevertheless, the Company's
commitment to purchase wafers under the April 1994 agreement has not been
reduced. The Company's risk of purchasing excess inventory is heightened because
the Company's customers place orders with short lead times and minimal, if any,
cancellation penalties. There can be no assurance that the Company will not
purchase excess inventories and incur product write-offs or write-downs in the
remainder of fiscal 1996 or subsequent periods. Further, there can be no
assurance that the Company will be able to forecast more accurately in the
future as Intel maintains its dominant market share, product life cycles become
shorter and more difficult to predict and price changes and transitions to new
products become more rapid.
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.
The Company offers warranties for all of its products, the terms of
which the Company believes are standard for the industry. Under such warranties,
the Company may be obligated to replace defective products or products that do
not perform to applicable industry standards or refund the purchase price of any
such products. The Company could be obligated to recall any product that does
not perform to applicable industry standards, and such a recall could have a
material adverse effect on the Company's results of operations and future
prospects.
International sales represent a significant portion of the Company's
net product sales. Further, many of the motherboards, chip sets and other
components required to manufacture personal computers are manufactured outside
of the United States. If the Company's overseas suppliers or customers were
disrupted, or shortages in the various essential materials were to occur due to
foreign political or economic factors, there could be a material adverse effect
on the Company's operations.
The Company's future results of operations and financial condition
could be impacted by the following factors, among others: trends in the personal
computer market, introduction of new products by competitors, delay in the
Company's introduction of higher performance products, chip set, motherboard and
BIOS infrastructure support for the Company's products, market acceptance of new
products introduced by the Company, intense price competition, interruption in
the supply of low-cost microprocessor products from third-party manufacturers,
adverse changes in general economic conditions in any of the countries in which
the Company does business and adverse decisions in legal disputes with Intel or
others.
Liquidity and Capital Resources
Cash and cash equivalents totaled $56.3 million at September 30, 1996
compared with $44.3 million at December 31, 1995. The Company's primary source
of cash in the nine months ended September 30, 1996 was the net proceeds of a
May 1996 issuance of $126.5 million of 5.5% convertible subordinated notes due
June 1, 2001. The Company's primary uses of cash in the nine months ended
September 30, 1996 consisted of principal payments and early extinguishment of
certain long-term debt and capitalized lease obligations, capital equipment
purchases, operating losses and an increase in inventories.
Under an April 1994 agreement with IBM, Cyrix is responsible for the
total production costs of specified quantities of products during each calendar
quarter until the end of fiscal 1999 irrespective of the number of products
actually ordered by the Company. During the second and third quarters of fiscal
1996, the Company purchased an excess supply of products from IBM. Therefore,
the Company's processor inventory increased substantially during that period.
The Company also has a commitment to continue to purchase wafers under the April
1994 agreement with IBM through December 1999. If demand for the Company's
products does not increase substantially during the remainder of 1996 and in the
future, a significant portion of the Company's current cash balances will be
used to fund an increase in inventories.
The Company's expenditures for capital equipment decreased
significantly in the nine months ended September 30, 1996 as compared with the
capital expenditures during the same period of fiscal 1995 as the Company
completed substantially all of the capital equipment investment required by the
agreement with IBM during 1995. While the Company intends to invest in
additional engineering design equipment, software and manufacturing test
equipment and has expanded its corporate headquarters in fiscal 1996, capital
expenditures are expected to be substantially lower during the remainder of
fiscal 1996 compared with fiscal 1995.
The Company's long-term debt and capitalized lease obligations,
excluding the 5.5% convertible subordinated notes due June 1, 2001, totaled
$13.6 million at September 30, 1996. Approximately $3.1 million of such debt is
scheduled for payment during the next twelve months. Such debt agreements,
excluding the 5.5% convertible subordinated notes due June 1, 2001, contain
provisions regarding the maintenance of certain net income per quarter, net
worth, working capital and other financial ratios. While the Company was in
compliance with the covenants contained in such agreements, as amended, at
September 30, 1996, there can be no assurance that the Company will maintain the
required net income per quarter, net worth, working capital and other financial
ratios in the future. If the Company's creditors were to accelerate the maturity
of the Company's long-term debt and capitalized lease obligations, excluding the
5.5% convertible subordinated notes due June 1, 2001, due to future
non-compliance with such covenants, the Company's cash and cash equivalents
would be reduced accordingly.
The Company has a bank line of credit for up to $37.5 million which
expires on January 3, 1997. Availability of the line of credit is subject to
borrowing base requirements, cash flow based borrowing restrictions and
compliance with loan covenants and restrictions which are similar to the
covenants and restrictions in the Company's equipment financing agreements.
There were no borrowings against this line of credit at September 30, 1996 nor
at any time during the quarter ended September 30, 1996. Currently, no
borrowings are available under this line of credit due to the cash flow based
borrowing restrictions.
Due to the anticipated use of cash for general operating purposes in
the remainder of fiscal 1996, the lack of availability under the Company's line
of credit and other factors, the Company will attempt to negotiate additional
financing arrangements during the next several months. However, there can be no
assurance that additional financing arrangements will be available to the
Company or will be available on reasonable terms.
The Company's current capital plan and estimated working capital
requirements are based on various product mix, selling price and unit demand
assumptions and are, therefore, subject to revision due to future market
conditions. If the Company is successful in achieving its business plan during
the remainder of fiscal 1996, the Company believes that cash flows from
operations, current cash balances, and anticipated available equipment financing
will be sufficient to fund operations, capital investments and research and
development projects currently planned. The Company's ability to achieve its
business plan in the remainder of fiscal 1996 is dependent upon increasing sales
of the Company's 6x86 microprocessors, ongoing performance enhancements to the
6x86 processor design to remain competitive with the leading performance
processors in the market, ongoing improvement in manufacturing yields by IBM,
pricing conditions and other factors. There can be no assurance, however, that
demand for the Company's products will increase sufficiently or that the Company
and its suppliers can accomplish these performance improvements and cost
reductions. Further, Intel, AMD and other competitors could introduce products
with better performance than the Company's products or significantly decrease
the price of products which are comparable to the Company's products to protect
or gain market share. Risks associated with enhancing the designs of, ramping
production of, and obtaining sales orders for the Company's microprocessors are
discussed in Results of Operations - Net Revenues, Reliance on Third-Party
Manufacturers and Product Transitions. If the Company's cash flows from
operations, current cash balances and potential additional financing
arrangements are not sufficient to fund operations, capital investments and
research and development projects currently planned, the Company may attempt to
sell additional equity securities or issue debt to meet any such requirements.
However, there can be no assurance that market conditions will make the sale of
additional equity securities or the issuance of debt financially attractive.
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.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
With the exception of historical information, the matters discussed in this
quarterly report are forward-looking statements that involve risks and
uncertainties including, but not limited to, economic conditions, trends in the
personal computer market, product acceptance and demand, competitive products
and pricing, new product development, availability of manufacturing capacity and
competitive process technologies, availability of competitive chipsets,
motherboards and software which support the company's products, the Company's
ability to access external sources of capital and other risks indicated in this
filing and prior filings with the Securities and Exchange Commission.
<PAGE>
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 1996 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 in
the future. Potential additional Intel litigation would likely involve different
patents with new combination or system claims. In addition, new patent
applications are continually being filed, and pending United States patent
applications are confidential until patents are issued. Thus, it is impossible
to ascertain all potential patent infringement claims. The damages and legal and
other expenses of any such litigation could materially and adversely affect the
Company's future operating results. There could be no assurance as to the
outcome of any such litigation, and an adverse decision could render the Company
insolvent or severely impair the Company's future business prospects.
In addition, there are many patents held by companies other than Intel
which relate to the design and manufacture of semiconductor components,
including microprocessors, and computer systems. Potential claims of
infringement could be asserted by other holders of patents relating to
semiconductor components or computer systems. Currently, the Company is a
licensee under a limited number of specified patents under an agreement with
Intel and is not a licensee under any patent license agreement with any other
party. 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 or available on reasonable terms. In such event, the Company may be
forced to litigate the matter. If litigation were to commence, a license is not
available on reasonable terms or if any other third party is found to have a
valid claim against the Company, it could have a material adverse effect on the
Company.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 11. Earnings per Common and Common Equivalent Share.
<PAGE>
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 13, 1996 By: James W. Swent III
----------------------
James W. Swent III
Senior Vice President of Finance
and Administration
(Principal Financial Officer)
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
- -----------------------------------------------------------------------------
11 Earnings per Common and Common Equivalent Share
<PAGE>
Exhibit 11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
CYRIX CORPORATION AND SUBSIDIARIES
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Quarters Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 19,463 19,113 19,376 18,999
Incremental shares related to assumed exercise
of stock options, if dilutive * 1,013 * 911
--------------- ---------------- ---------------- ----------------
Weighted average common and common equivalent
shares 19,463 20,126 19,376 19,910
=============== ================ ================ ================
Income (loss) before extraordinary item ($6,946) $557 ($20,350) $25,535
Extraordinary loss from early extinguishment of
debt -- -- (1,062) --
--------------- ---------------- ---------------- ----------------
Net income (loss) ($6,946) $557 ($21,412) $25,535
=============== ================ ================ ================
Earnings (loss) per common and common equivalent share:
Income (loss) before extraordinary item ($0.36) $0.03 ($1.05) $1.28
Extraordinary item -- -- (0.06) --
--------------- ---------------- ---------------- ----------------
Net income (loss) ($0.36) $0.03 ($1.11) $1.28
=============== ================ ================ ================
* The computations of earnings per share do not give effect to common stock
equivalents for any period in which their inclusion would have the effect of
decreasing the loss per share otherwise computed.
The computations of earnings per share on a fully diluted basis do not differ
significantly from the amounts calculated on a primary basis shown above.
</TABLE>
<TABLE> <S> <C>
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<NAME> Cyrix Corporation
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<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 56,300
<SECURITIES> 0
<RECEIVABLES> 33,998
<ALLOWANCES> 3,614
<INVENTORY> 51,663
<CURRENT-ASSETS> 181,446
<PP&E> 146,905
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0
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<INCOME-PRETAX> (31,560)
<INCOME-TAX> (11,210)
<INCOME-CONTINUING> (20,350)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,062)
<CHANGES> 0
<NET-INCOME> (21,412)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
